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 June 30, 2019
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, 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 August 2, 2019, the latest practicable date for determination, 3,432,322 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, 2019 (unaudited) and December 31, 2018
Consolidated Statements of Income (unaudited) – Three and six months ended June 30, 2019 and 2018
4
Consolidated Statements of Comprehensive Income (unaudited) – Three and six months ended June 30, 2019 and 2018
5
Consolidated Statements of Equity (unaudited) – Three months ended June 30, 2019 and 2018
Consolidated Statements of Equity (unaudited) – Six months ended June 30, 2019 and 2018
Consolidated Statements of Cash Flows (unaudited) – Six months ended June 30, 2019 and 2018
Notes to Consolidated Financial Statements (unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
57
Item 4.
Controls and Procedures
PART II - Other Information
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
58
Item 6.
Exhibits
Signatures
60
2
Part I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for per share amounts)
June 30,
December 31,
2019
2018
Assets
(unaudited)
*
Cash and due from banks
$
10,418
14,138
Interest-bearing deposits in other banks
84,237
100,875
Total cash and cash equivalents
94,655
115,013
Securities—available for sale at fair value, amortized cost of $198,799 and $216,650, respectively
200,427
214,910
Loans held for sale, at fair value
89,185
41,895
Loans, net of allowance for loan losses of $33,401 and $34,023, respectively
1,056,934
1,028,097
Restricted stock, at cost
3,257
3,247
Corporate premises and equipment, net
36,716
37,100
Other real estate owned, net of valuation allowance of $88 and $57, respectively
268
246
Accrued interest receivable
7,229
7,436
Goodwill
14,425
Core deposit and other amortizable intangible assets, net
1,001
1,142
Bank-owned life insurance
16,256
16,065
Net deferred tax asset
11,540
12,193
Other assets
36,103
29,642
Total assets
1,567,996
1,521,411
Liabilities
Deposits
Noninterest-bearing demand deposits
282,663
271,360
Savings and interest-bearing demand deposits
531,029
563,741
Time deposits
396,517
346,560
Total deposits
1,210,209
1,181,661
Short-term borrowings
16,844
14,917
Long-term borrowings
119,529
Trust preferred capital notes
25,263
25,245
Accrued interest payable
1,276
920
Other liabilities
35,524
27,181
Total liabilities
1,408,645
1,369,453
Commitments and contingent liabilities (Note 10)
Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,444,172 and 3,497,122 shares issued and outstanding, respectively, includes 138,855 and 139,455 of unvested shares, respectively)
3,305
3,358
Additional paid-in capital
10,107
12,752
Retained earnings
147,570
140,520
Accumulated other comprehensive loss, net
(2,120)
(4,672)
Equity attributable to C&F Financial Corporation
158,862
151,958
Noncontrolling interest
489
—
Total equity
159,351
Total liabilities and equity
* Derived from audited consolidated financial statements.
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
Interest income
Interest and fees on loans
22,323
20,626
43,243
41,443
Interest on interest-bearing deposits and federal funds sold
582
553
1,171
1,017
Interest and dividends on securities
U.S. government agencies and corporations
101
88
202
175
Mortgage-backed securities
567
566
1,178
1,111
Tax-exempt obligations of states and political subdivisions
556
696
1,139
1,411
Taxable obligations of states and political subdivisions
93
74
186
145
Other
54
48
108
Total interest income
24,276
22,651
47,227
45,395
Interest expense
Savings and interest-bearing deposits
597
348
1,199
712
1,624
981
2,930
1,937
Borrowings
1,120
1,048
2,231
2,021
310
287
595
570
Total interest expense
3,651
2,664
6,955
5,240
Net interest income
20,625
19,987
40,272
40,155
Provision for loan losses
1,810
2,000
4,205
5,300
Net interest income after provision for loan losses
18,815
17,987
36,067
34,855
Noninterest income
Gains on sales of loans
2,955
2,408
5,091
4,647
Service charges on deposit accounts
944
1,041
1,862
2,090
Other service charges and fees
1,684
1,544
2,752
2,604
Net gains (losses) on maturities and calls of available for sale securities
1
(1)
Wealth management services income, net
475
459
924
884
Interchange income
1,071
2,029
1,887
1,072
809
2,642
1,571
Total noninterest income
8,202
7,241
15,305
13,687
Noninterest expenses
Salaries and employee benefits
11,495
11,073
23,402
21,806
Occupancy
2,148
2,024
4,338
4,055
5,906
5,664
11,486
11,439
Total noninterest expenses
19,549
18,761
39,226
37,300
Income before income taxes
7,468
6,467
12,146
11,242
Income tax expense
1,626
1,397
2,533
2,280
Net income
5,842
5,070
9,613
8,962
Less net income (loss) attributable to noncontrolling interest
Net income attributable to C&F Financial Corporation
5,843
9,614
Net income per share - basic and diluted
1.69
1.45
2.77
2.56
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive income (loss):
Defined benefit plan:
Reclassification of recognized net actuarial losses into net income1
52
31
94
Related income tax effects
(11)
(6)
(20)
(12)
Amortization of prior service credit into net income1
(17)
(15)
(34)
(30)
7
6
Defined benefit plan, net of tax
27
13
47
24
Cash flow hedges:
Unrealized holding (losses) gains arising during the period
(102)
38
(210)
250
26
(9)
(64)
Cash flow hedges, net of tax
(76)
29
(156)
Securities available for sale:
Unrealized holding gains (losses) arising during the period
1,547
(648)
3,373
(3,186)
(325)
136
(708)
669
Reclassification of net realized (gains) losses into net income2
(5)
(4)
Securities available for sale, net of tax
1,221
(511)
2,661
(2,520)
Other comprehensive income (loss), net of tax
1,172
(469)
2,552
(2,310)
Comprehensive income
7,014
4,601
12,165
6,652
Less comprehensive income (loss) attributable to noncontrolling interest
Comprehensive income attributable to C&F Financial Corporation
7,015
12,166
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 7: Employee Benefit Plans,” for additional information.
These items are included in “Net gains on maturities and calls of available for sale securities” on the Consolidated Statements of Income.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018
Attributable to C&F Financial Corporation
Accumulated
Additional
Common
Paid - In
Retained
Comprehensive
Noncontrolling
Total
Stock
Capital
Earnings
Income (Loss)
Interest
Balance March 31, 2019
3,337
11,362
143,003
(3,292)
490
154,900
Comprehensive income:
Net income (loss)
Other comprehensive income
Share-based compensation
Restricted stock vested
Common stock issued
34
Common stock purchased
(33)
(1,598)
(1,631)
Cash dividends declared ($0.37 per share)
(1,276)
Balance June 30, 2019
Loss
Balance March 31, 2018
3,369
12,925
130,133
(3,728)
142,699
Other comprehensive loss
321
36
(13)
Cash dividends declared ($0.34 per share)
(1,191)
Balance June 30, 2018
3,370
13,268
134,012
(4,197)
146,453
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Balance December 31, 2018
Issuance of noncontrolling interest
767
16
(16)
69
70
(70)
(3,465)
(3,535)
Cash dividends declared ($0.74 per share)
(2,564)
Balance December 31, 2017
12,800
127,431
(1,887)
141,702
640
15
71
72
(228)
(232)
Cash dividends declared ($0.68 per share)
(2,381)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation
1,826
1,533
Provision for indemnifications
Provision for other real estate owned losses
Pension expense
324
224
Pension contribution
(3,000)
Net accretion of certain acquisition-related discounts
(1,638)
(1,366)
Accretion of discounts and amortization of premiums on securities, net
811
895
Amortization of intangible assets
141
253
Net realized gains on maturities and calls of securities available for sale
Net realized gains on sales of other real estate owned
(8)
Net realized losses (gains) on sale of corporate premises and equipment
11
(37)
Income from bank-owned life insurance
(168)
(164)
Origination of loans held for sale
(385,581)
(347,642)
Proceeds from sales of loans held for sale
342,531
352,619
Gains on sales of loans held for sale
(5,091)
(4,647)
Change in other assets and liabilities:
207
337
(369)
304
356
44
2,425
1,232
Net cash (used in) provided by operating activities
(29,612)
15,535
Investing activities:
Proceeds from maturities and calls of securities available for sale and payments on mortgage-backed securities
33,639
22,402
Purchases of securities available for sale
(16,594)
(29,375)
Net purchases of restricted stock
(10)
(55)
Purchases of loans held for investment by non-bank affiliates
(77,356)
(64,792)
Repayments on loans held for investment by non-bank affiliates
60,675
55,365
Net (increase) decrease in retail banking loans held for investment
(15,207)
1,161
Proceeds from sales of other real estate owned
521
Purchases of corporate premises and equipment
(1,471)
(1,688)
Proceeds from sales of corporate premises and equipment
18
10
Net cash used in investing activities
(15,785)
(16,972)
Financing activities:
Net (decrease) increase in demand and savings deposits
(21,409)
18,889
Net increase in time deposits
49,957
3,113
Net increase (decrease) in short-term borrowings
1,927
(1,792)
Issuance of common stock
Purchase of common stock, excluding shares withheld to pay taxes
(3,288)
Cash dividends paid
Other financing activities
(144)
Net cash provided by financing activities
25,039
17,757
Net (decrease) increase in cash and cash equivalents
(20,358)
16,320
Cash and cash equivalents at beginning of period
119,423
Cash and cash equivalents at end of period
135,743
Supplemental cash flow disclosures:
Interest paid
6,581
5,178
Income taxes paid
546
762
Supplemental disclosure of noncash investing and financing activities:
Value of shares withheld at vesting for employee taxes
247
232
Transfers from loans to other real estate owned
496
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018.
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 liabilities of the Corporation. The accounting and reporting policies of C&F Financial Corporation and Subsidiary 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 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, impairment of securities, the valuation of other real estate owned (OREO), the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes 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 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
9
(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 activites, 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 11.
Leases: The Corporation recognizes a lease liability and a right-of-use asset in connection with leases in which it is a lessee, except for leases with a term of twelve months or less. A lease liability represents the Corporation’s obligation to make future payments under lease contracts, and a right-of-use asset represents the Corporation’s right to control the use of the underlying property during the lease term. Lease liabilities and right-of-use assets are recognized upon commencement of a lease and measured as the present value of lease payments over the lease term, discounted at the incremental borrowing rate of the lessee. The Corporation has elected not to separate lease and nonlease components within the same contract and instead to account for the entire contract as a lease.
Share-Based Compensation: Share-based compensation expense, net of forfeitures, for the second quarter of 2019 and the first six months of 2019 was $310,000 ($213,000 after tax) and $767,000 ($503,000 after tax), respectively, for restricted stock granted during 2014 through 2019. As of June 30, 2019, there was $2.98 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 2019 and 2018 is presented below:
Weighted-
Average
Grant Date
Shares
Fair Value
Unvested, December 31, 2018
139,455
45.75
Granted
16,100
51.73
Vested
(16,290)
41.08
Forfeited
(410)
53.28
Unvested, June 30, 2019
138,855
46.97
Unvested, December 31, 2017
137,880
43.52
11,510
58.26
(14,625)
40.47
(1,960)
43.26
Unvested, June 30, 2018
132,805
45.13
Recently Adopted Accounting Pronouncements:
On January 1, 2019, the Corporation adopted Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)” and related amendments (collectively, ASC 842), which resulted in recognition of a lease liability and right-of-use asset in connection with leases in which the Corporation is the lessee. Under ASC 842, lessor accounting is largely unchanged. The Corporation elected an optional transition method to apply ASC 842 as of the adoption date on a modified retrospective basis. Periods prior to January 1, 2019 have not been restated. Upon adoption, the Corporation recorded a lease liability
of approximately $3.14 million for its remaining payment obligations as of January 1, 2019 for leases in effect at that time, excluding leases with an original term of twelve months or less, and a corresponding right-of-use asset. All of the Corporation’s existing leases upon adoption of ASC 842 were classified as operating leases based on the classification of each lease under previous GAAP; classification of these leases was not reconsidered upon adoption of ASC 842. Refer to Note 5 for further information about the Corporation’s leases.
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” and ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” (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. 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. At its July 17, 2019 meeting, the FASB voted to propose a deferral of the effective date of ASC 326 for many entities, including some entities that are SEC filers. The Corporation expects that the proposed deferral, upon issuance by the FASB in the second half of 2019, will delay the timing of the Corporation’s adoption of the new standard.
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. 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 shareholders’ 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 January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public business entities that are SEC filers for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2017-04 to have a material effect on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains 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. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted.
The Corporation does not expect the adoption of ASU 2018-13 to have a material effect on its consolidated financial statements.
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.
NOTE 2: Securities
The Corporation’s debt securities, all of which are classified as available for sale, are summarized as follows:
June 30, 2019
Gross
Amortized
Unrealized
Cost
Gains
Losses
17,264
(68)
17,197
95,079
739
(183)
95,635
Obligations of states and political subdivisions
86,456
1,169
87,595
198,799
1,909
(281)
December 31, 2018
18,008
(536)
17,473
106,787
85
(1,889)
104,983
91,855
840
(241)
92,454
216,650
926
(2,666)
12
The amortized cost and estimated fair value of securities at June 30, 2019, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
Due in one year or less
42,920
43,031
Due after one year through five years
140,007
141,051
Due after five years through ten years
12,132
12,341
Due after ten years
3,740
4,004
The following table presents the gross realized gains and losses on and the proceeds from the maturities, calls and paydowns of securities. There were no sales of securities during the periods presented.
Realized gains from maturities and calls of securities:
Gross realized gains
Gross realized losses
Net realized gains
Proceeds from maturities, calls and paydowns of securities
17,982
9,668
The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $96.20 million and aggregate fair value of $96.86 million were pledged at June 30, 2019. Securities with an aggregate amortized cost of $110.81 million and an aggregate fair value of $109.83 million were pledged at December 31, 2018.
Securities in an unrealized loss position at June 30, 2019, by duration of the period of the unrealized loss, are shown below.
Less Than 12 Months
12 Months or More
Fair
Value
15,693
68
32,742
182
32,750
183
417
10,685
28
11,102
30
Total temporarily impaired securities
425
59,120
278
59,545
281
There were 102 debt securities totaling $59.55 million considered temporarily impaired at June 30, 2019. The primary cause of the temporary impairments in the Corporation's investments in debt securities was fluctuations in interest rates as debt securities, especially those purchased prior to 2018, have declined in value as interest rates have risen. The Corporation’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments. At June 30, 2019, approximately 97 percent of the Corporation's obligations of states and political subdivisions, as measured by market value, were rated “A” or better by Standard & Poor's (S&P) or Moody's Investors Service (Moody’s). Of those in an unrealized loss position, approximately 99 percent were rated “A” or better by S&P or Moody’s, as measured by market value, at June 30, 2019. For the approximately one percent not rated “A” or better, as measured by market value at June 30, 2019, the Corporation considers these to meet regulatory credit quality standards, meaning that the securities have low risk of default by the obligor and the full and timely repayment of principal and interest is expected over the expected life of the investment. Because the Corporation intends to hold these investments
in debt securities to maturity and it is more-likely-than-not that the Corporation will not be required to sell these investments before a recovery of unrealized losses, the Corporation does not consider these investments to be other-than-temporarily impaired at June 30, 2019 and no other-than-temporary impairment loss has been recognized in net income.
Securities in an unrealized loss position at December 31, 2018, by duration of the period of the unrealized loss, are shown below.
997
15,725
535
16,722
536
17,934
132
72,830
1,757
90,764
1,889
9,492
20,555
212
30,047
241
28,423
162
109,110
2,504
137,533
2,666
The Corporation’s investment in restricted stock totaled $3.26 million at June 30, 2019 and consisted of Federal Home Loan Bank (FHLB) stock. Restricted stock is generally viewed as a long-term investment, which is carried at cost because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value. The Corporation did not consider its investment in restricted stock to be other-than-temporarily impaired at June 30, 2019 and no impairment has been recognized.
NOTE 3: Loans
Major classifications of loans are summarized as follows:
Real estate – residential mortgage
182,981
184,901
Real estate – construction 1
58,372
54,461
Commercial, financial and agricultural 2
474,087
455,935
Equity lines
53,741
55,660
Consumer
13,145
15,009
Consumer finance
308,009
296,154
1,090,335
1,062,120
Less allowance for loan losses
(33,401)
(34,023)
Loans, net
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.
Consumer loans included $232,000 and $275,000 of demand deposit overdrafts at June 30, 2019 and December 31, 2018, respectively.
14
The outstanding principal balance and the carrying amount of loans acquired pursuant to the Corporation's acquisition of Central Virginia Bank (CVB) on October 1, 2013 that were recorded at fair value at the acquisition date in the Consolidated Balance Sheets are as follows:
Acquired Loans -
Purchased
Credit Impaired
Performing
Outstanding principal balance
7,126
35,570
42,696
9,734
38,768
48,502
Carrying amount
115
7,856
7,971
284
8,823
9,107
Commercial, financial and agricultural1
460
17,070
17,530
1,461
18,982
20,443
35
8,938
8,973
90
9,063
9,153
Total acquired loans
610
33,868
34,478
1,835
36,874
38,709
Includes acquired loans classified by the Corporation as commercial real estate lending and commercial business lending.
The following table presents a summary of the change in the accretable yield of loans classified as purchased credit impaired (PCI):
Accretable yield, balance at beginning of period
5,987
7,304
Accretion
(1,760)
(1,423)
Reclassification of nonaccretable difference due to improvement in expected cash flows
727
1,217
Other changes, net
349
(422)
Accretable yield, balance at end of period
5,303
6,676
Loans on nonaccrual status were as follows:
585
594
Commercial, financial and agricultural:
Commercial business lending
322
883
121
305
Total loans on nonaccrual status
1,333
2,213
The past due status of loans as of June 30, 2019 was as follows:
90+ Days
30 - 59 Days
60 - 89 Days
Past Due and
Past Due
PCI
Current1
Total Loans
Accruing
1,231
276
37
181,322
Real estate – construction:
Construction lending
46,324
Consumer lot lending
12,048
Commercial real estate lending
379
314,930
315,769
Land acquisition and development lending
43,515
Builder line lending
34,348
80,455
142
195
53,369
13,130
1,472
10,750
297,259
10,356
1,753
916
13,025
1,076,700
389
For the purposes of the table above, “Current” includes loans that are 1-29 days past due.
The table above includes nonaccrual loans that are current of $721,000, 30-59 days past due of $74,000, 60-89 days past due of $10,000 and 90+ days past due of $528,000.
The past due status of loans as of December 31, 2018 was as follows:
1,258
183,359
42,051
12,410
315
309,057
310,833
43,404
31,201
163
19
206
70,291
70,497
46
584
325
955
54,615
14,978
11,419
1,965
14,096
282,058
12,880
2,568
1,413
16,861
1,043,424
The table above includes nonaccrual loans that are current of $458,000, 30-59 days past due of $97,000, 60‑89 days past due of $560,000 and 90+ days past due of $1.10 million.
There was one loan modification during the three and six months ended June 30, 2019 that was classified as a troubled debt restructuring (TDR). This TDR was a consumer loan with a recorded investment of $121,000 at the time of its modification and included a modification of the loan’s interest rate. There were no loan modifications that were classified as TDRs during the first six months of 2018.
All TDRs are considered impaired loans and are individually evaluated in the determination of the allowance for loan losses. A TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due. The specific reserve associated with a TDR is reevaluated when a TDR payment default occurs. There were no TDR payment defaults during the first six months of 2019 or 2018.
Impaired loans, which included TDRs of $4.45 million, and the related allowance at June 30, 2019 were as follows:
Recorded
Investment
Unpaid
in Loans
Balance-
Principal
without
with
Related
Impaired
Income
Balance
Specific Reserve
Allowance
Loans
Recognized
2,824
1,264
1,463
81
2,798
66
1,596
1,556
1,608
42
225
187
218
131
125
126
4,776
1,307
3,331
4,750
109
Impaired loans, which included TDRs of $5.45 million, and the related allowance at December 31, 2018 were as follows:
3,057
1,288
1,677
92
3,056
2,468
1,498
927
2,653
33
25
365
326
359
5,928
2,842
2,935
428
6,099
NOTE 4: Allowance for Loan Losses
The following table presents the changes in the allowance for loan losses by major classification during the six months ended June 30, 2019:
Real Estate
Commercial,
Residential
Financial &
Mortgage
Construction
Agricultural
Lines
Finance
Allowance for loan losses:
Balance at December 31, 2018
2,246
6,688
1,106
257
22,999
34,023
Provision charged (credited) to operations
23
(225)
4,095
Loans charged off
(45)
(29)
(162)
(6,966)
(7,202)
Recoveries of loans previously charged off
2,248
2,375
Balance at June 30, 2019
2,142
750
6,880
881
372
22,376
33,401
The following table presents the changes in the allowance for loan losses by major classification during the six months ended June 30, 2018:
Balance at December 31, 2017
2,371
605
7,478
688
231
24,353
35,726
(108)
340
(520)
229
59
(2)
(133)
(7,948)
(8,083)
22
95
2,298
2,450
Balance at June 30, 2018
945
6,978
917
252
24,003
35,393
17
The following table presents, as of June 30, 2019, the balance of the allowance for loan losses and the balance of loans by impairment methodology.
Allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
2,061
6,810
694
251
32,942
Acquired loans - PCI
Total allowance
Loans:
2,727
1,569
217
4,638
180,139
472,058
53,489
13,020
1,085,087
Total loans
The following table presents, as of December 31, 2018, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology.
2,154
6,678
780
33,595
2,965
357
5,777
181,652
452,024
55,213
15,004
1,054,508
Loans by credit quality indicators as of June 30, 2019 were as follows:
Special
Substandard
Pass
Mention
Nonaccrual
Total1
179,536
1,654
1,206
312,591
2,756
422
34,040
9,475
79,759
53,069
320
13,008
764,723
14,909
1,666
1,028
782,326
At June 30, 2019, the Corporation did not have any loans classified as Doubtful or Loss.
Non-
307,704
Loans by credit quality indicators as of December 31, 2018 were as follows:
180,232
2,832
1,243
306,578
3,801
454
33,156
10,248
69,897
576
54,289
99
14,998
744,812
17,851
1,802
1,501
765,966
At December 31, 2018, the Corporation did not have any loans classified as Doubtful or Loss.
295,442
NOTE 5: Leases
The Corporation’s leases comprise primarily leases of real estate and office equipment in which the Corporation is the lessee, and all of which are classified as operating leases. Lease cost for the three and six months ended June 30, 2019 is set forth in the table below.
Three Months Ended
Six Months Ended
Operating lease cost
420
834
Short-term lease cost
Variable lease cost
Total lease cost
453
Variable lease payments primarily represent payments for common area maintenance related to real estate leases and taxes and fees related to equipment leases.
Cash paid for amounts included in the measurement of lease liabilities during the three and six months ended June 30, 2019 were $428,000 and $734,000, respectively. As of June 30, the weighted average remaining lease term and discount rate for the Corporation’s leases were 3.0 years and 3.3%, respectively. Right-of-use assets of $3.49 million were included in other assets and lease liabilities of $3.50 million were included in other liabilities as of June 30, 2019. During the three and six months ended June 30, 2019, the Corporation obtained right-of-use assets in exchange for lease liabilities of $227,000 and $1.05 million, respectively.
The Corporation adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Corporation measured lease expense in accordance with FASB Accounting Standards Codification (ASC) Topic 840. During the three and six months ended June 30, 2018, the Corporation recognized lease expense of $500,000 and $939,000, respectively.
Certain of the Corporation’s leases contain options to extend the lease term beyond the initial term. Options to extend the lease term are recognized as part of the Corporation’s lease liabilities and right-of-use assets at the commencement of a lease to the extent the Corporation is reasonably certain to exercise such options.
Maturities of the Corporation’s lease liabilities are set forth in the table below.
As of
703
2020
1,479
2021
2022
270
2023
113
Thereafter
223
3,671
Imputed interest
(173)
Lease liabilities
3,498
The table above excludes payments of $4.94 million related to two lease agreements that have been executed where the Corporation has not obtained control of the real estate properties under lease as of June 30, 2019 and has therefore not recognized a lease liability or right-of-use asset.
NOTE 6: Equity, Other Comprehensive Income and Earnings Per Share
Equity and Noncontrolling Interest
During the second quarter and first six months of 2019, the Corporation repurchased 32,779 and 65,186 shares of its common stock, respectively, for an aggregate cost of $1.62 million and $3.29 million, respectively, under share repurchase programs authorized by its Board of Directors. Additionally during the first six months of 2019 and 2018, the Corporation withheld 4,842 shares and 3,947 shares of its common stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock.
In the first quarter of 2019, C&F Select LLC, a subsidiary of C&F Mortgage, issued a 49 percent ownership interest to an unrelated third party in exchange for $490,000. The holder of this noncontrolling interest financed the investment through a loan obtained from C&F Bank.
Accumulated Other Comprehensive Loss
The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of deferred taxes of $559,000 and $1.23 million as of June 30, 2019 and December 31, 2018, respectively.
Net unrealized gains (losses) on securities
1,287
(1,375)
Net unrecognized gains on cash flow hedges
215
Net unrecognized losses on defined benefit plan
(3,512)
Total accumulated other comprehensive loss
Earnings Per Share (EPS)
The components of the Corporation’s EPS calculations are as follows:
Weighted average shares outstanding—basic and diluted
3,463,277
3,503,114
20
Weighted average shares outstanding - basic and diluted
3,473,875
3,502,139
The Corporation has applied the two-class method of computing basic and diluted EPS for each period presented because the Corporation’s unvested restricted shares outstanding contain rights to nonforfeitable dividends equal to dividends on the Corporation’s common stock. Accordingly, the weighted average number of shares used in the calculation of basic and diluted EPS includes both vested and unvested shares outstanding.
NOTE 7: Employee Benefit Plans
The following table summarizes the components of net periodic benefit cost for the Bank’s non-contributory cash balance pension plan.
Components of net periodic benefit cost:
Service cost, included in salaries and employee benefits
316
308
609
614
Other components of net periodic benefit cost:
Interest cost
151
Expected return on plan assets
(319)
(348)
(649)
(666)
Amortization of prior service credit
Recognized net actuarial losses
Other components of net periodic benefit cost, included in other noninterest income
(219)
(285)
(390)
Net periodic benefit cost
89
NOTE 8: Fair Value of Assets and Liabilities
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
·
Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt securities traded in an active exchange market, as well as U.S. Treasury securities.
Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Valuation is determined using model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Corporation’s estimates of assumptions that
21
market participants would use in pricing the respective asset or liability. Valuation techniques may include the use of pricing models, discounted cash flow models and similar techniques.
U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected to use fair value accounting for its entire portfolio of loans held for sale (LHFS).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a recurring basis in the financial statements.
Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At June 30, 2019 and December 31, 2018, the Corporation’s entire investment securities portfolio was comprised of securities available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security valuation are ICE Data Services (ICE) and Thomson Reuters Pricing Service (TRPS). Each source provides opinions, known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are partially based on available market data, including prices for similar instruments in active markets and prices for identical assets in markets that are not active. ICE provides evaluated prices for the Corporation’s obligations of states and political subdivisions category of securities. ICE uses proprietary pricing models and pricing systems, mathematical tools and judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that security or securities with similar characteristics. TRPS provides evaluated prices for the Corporation’s U.S. government agencies and corporations and mortgage-backed categories of securities. Fixed-rate callable securities of the U.S. government agencies and corporations category are individually evaluated on an option adjusted spread basis for callable issues or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark curve for non-callable issues. Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity. Each aggregate is benchmarked to relative to-be-announced mortgage-backed securities (TBA securities) or other benchmark prices. TBA securities prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics. Each evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables. Fixed-rate securities issued by the Small Business Association in the mortgage backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.
Loans held for sale (LHFS). Fair value of the Corporation’s LHFS is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Corporation conducts business. The Corporation’s portfolio of LHFS is classified as Level 2.
Derivative asset - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Corporation’s IRLCs are classified as Level 2.
Derivative asset/liability – interest rate swaps on loans. The Corporation recognizes interest rate swaps at fair value. The Corporation has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques. All of the Corporation’s interest rate swaps on loans are classified as Level 2.
Derivative asset/liability – cash flow hedges. The Corporation recognizes cash flow hedges at fair value. The fair value of the Corporation’s cash flow hedges is determined using the discounted cash flow method. All of the Corporation’s cash flow hedges are classified as Level 2.
Derivative asset/liability – forward sales of TBA securities. The Corporation recognizes forward sales of TBA securities at fair value. The fair value of forward sales of TBA securities is based on prices obtained from market makers and live trading systems for TBA securities of similar issuer programs, coupons and maturities. All of the Corporation’s forward sales of TBA securities are classified as Level 2.
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis.
Fair Value Measurements Using
Assets/Liabilities at
Level 1
Level 2
Level 3
Assets:
Securities available for sale
Total securities available for sale
Loans held for sale
Derivatives
IRLC
1,693
Interest rate swaps on loans
2,083
Cash flow hedges
293,394
Liabilities:
Forward sales of TBA securities
219
2,338
636
1,607
289
259,337
Derivatives - interest rate swaps on loans
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Corporation may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the financial statements.
Impaired loans. The Corporation does not record loans held for investment at fair value on a recurring basis. However, there are instances when a loan is considered impaired and an allowance for loan losses is established. The Corporation measures impairment either based on the fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. The Corporation maintains a valuation allowance to the extent that this measure of the impaired loan is less than the recorded investment in the loan. When an impaired loan is measured at fair value based solely on observable market prices or a current appraisal without further adjustment for unobservable inputs, the Corporation records the impaired loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to observed market prices or appraisals are required or if observable inputs are not available, the Corporation records the impaired loan as a nonrecurring fair value measurement classified as Level 3.
Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest, are not recorded at fair value and are therefore excluded from fair value disclosure requirements.
OREO. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Corporation obtains from independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intent with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Corporation records OREO as a nonrecurring fair value measurement classified as Level 3.
The following table presents the balances of assets measured at fair value on a nonrecurring basis.
Assets at Fair
Impaired loans, net
102
Other real estate owned, net
370
The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a nonrecurring basis:
Fair Value Measurements at June 30, 2019
Valuation Technique(s)
Unobservable Inputs
Range of Inputs
Appraisals
Discount to reflect current market conditions and estimated selling costs
30%
33%-75%
Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation. The Corporation uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
The following tables reflect the carrying amounts and estimated fair values of the Corporation’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.
Carrying
Fair Value Measurements at June 30, 2019 Using
Total Fair
Financial assets:
Cash and short-term investments
1,061,710
Financial liabilities:
Demand deposits
813,692
395,641
161,636
154,259
Fair Value Measurements at December 31, 2018 Using
1,021,145
835,101
343,507
159,691
152,015
NOTE 9: Business Segments
The Corporation operates in a decentralized fashion in three principal business segments: retail banking, mortgage banking and consumer finance. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest earned on mortgage loans held for sale. Revenues from consumer finance consist primarily of interest earned on purchased retail installment sales contracts.
The Corporation’s other segment includes a full-service brokerage firm that derives revenues from offering wealth management services and insurance products through third-party service providers and an insurance company that derives revenues from owning an equity interest in an insurance agency that offers insurance products and services. The results of the other segment are not significant to the Corporation as a whole and have been included in “Other.” Revenue and expenses of the Corporation are also included in “Other,” and consist primarily of interest expense associated with the Corporation’s trust preferred capital notes and other general corporate expenses.
Three Months Ended June 30, 2019
Retail
Banking
Eliminations
Consolidated
Revenues:
15,419
10,365
(2,179)
Other noninterest income
3,090
1,488
137
532
5,247
Total operating income
18,509
5,112
10,502
534
32,478
Expenses:
110
1,700
2,493
409
2,618
7,070
1,764
2,096
565
Other noninterest expenses
5,140
1,335
168
8,054
Total operating expenses
14,813
3,508
7,825
1,043
25,010
Income (loss) before income taxes
3,696
1,604
2,677
(509)
Income tax expense (benefit)
625
728
(149)
3,071
1,182
1,949
(360)
1,393,186
106,608
310,538
(249,291)
3,702
10,723
Capital expenditures
67
717
Three Months Ended June 30, 2018
13,209
499
10,731
(1,788)
2,896
1,246
529
4,833
16,105
4,153
10,893
29,892
1,631
2,317
6,754
1,560
2,228
531
4,837
1,318
1,388
7,688
13,222
3,095
7,933
963
23,425
2,883
1,058
2,960
(434)
439
279
804
(125)
2,444
779
2,156
(309)
1,366,671
69,916
295,678
5,038
(201,660)
1,535,643
1,022
1,067
Six Months Ended June 30, 2019
29,743
1,019
20,510
(4,049)
6,025
2,806
333
1,050
10,214
35,768
8,916
20,843
1,054
62,532
4,668
572
5,169
14,545
3,391
4,348
1,118
10,043
2,579
2,786
416
15,824
29,366
6,542
16,398
2,129
50,386
6,402
2,374
4,445
(1,075)
1,211
(344)
5,361
1,749
3,234
(731)
76
40
1,471
Six Months Ended June 30, 2018
26,369
866
21,580
(3,420)
5,515
2,103
410
1,012
9,040
31,884
7,616
21,990
59,082
3,248
360
4,482
13,240
3,003
4,493
1,070
9,818
2,593
2,695
388
15,494
26,306
5,956
16,970
2,028
47,840
5,578
1,660
5,020
(1,016)
822
446
1,366
(354)
4,756
1,214
3,654
(662)
1,594
1,688
The retail banking segment extends two warehouse lines of credit to the mortgage banking segment, providing a portion of the funds needed to originate mortgage loans. The retail banking segment charges the mortgage banking segment interest at the daily FHLB advance rate plus a spread ranging from 50 basis points to 175 basis points. The retail banking segment also provides the consumer finance segment with a portion of the funds needed to purchase loan contracts by means of variable rate notes that carry interest at one-month LIBOR plus 200 basis points and fixed rate notes that carry interest at rates ranging from 2.0 percent to 8.0 percent. The retail banking segment acquires certain residential real estate loans from the mortgage banking segment at prices similar to those paid by third-party investors. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the retail banking segment are not allocated to the mortgage banking, consumer finance and other segments.
NOTE 10: Commitments and Contingent Liabilities
The Corporation enters into commitments to extend credit in the normal course of business to meet the financing needs of its customers, including loan commitments and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amounts recorded on the Consolidated Balance Sheets. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral is obtained based on management’s credit assessment of the customer.
Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of loan commitments was $253.06 million at June 30, 2019 and $244.17 million at December 31, 2018.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $19.12 million at June 30, 2019 and $19.34 million at December 31, 2018.
C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party counterparties (i.e., investors). As is customary in the industry, the agreements with these counterparties require C&F Mortgage to extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the agreements, the counterparties are entitled to make loss claims and repurchase requests of C&F Mortgage for loans that contain covered deficiencies. C&F Mortgage has obtained early payment default recourse waivers for a significant portion of its business. Recourse periods for early payment default for the remaining counterparties vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. C&F Mortgage maintains an allowance for indemnifications that represents management’s estimate of losses that are probable of arising under these recourse provisions. As performance data for loans that have been sold is not made available to C&F Mortgage by the counterparties, the evaluation of potential losses is inherently subjective. A schedule of expected losses on loans with claims or indemnifications is maintained to ensure the reserve is adequate to cover estimated losses.
NOTE 11: Derivative Financial Instruments
The Corporation uses derivative financial instruments primarily to manage risks to the Corporation associated with changing interest rates, and to assist customers with their risk management objectives. The Corporation designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income. Derivative contracts that are not designated in a qualifying hedging relationship include customer accommodation loan swaps and contracts related to mortgage banking activities.
Cash flow hedges. The Corporation designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes. These interest rate swaps are derivative financial instruments that mange the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Corporation’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Corporation assesses the effectiveness of each hedging relationship quarterly. If the Corporation determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of June 30, 2019, the Corporation has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2024 and June 2029.
All interest rate swaps were entered into with counterparties that met the Corporation’s credit standards and the agreements contain collateral provisions protecting the at-risk party. The Corporation believes that the credit risk inherent in these derivative contracts is not significant.
Unrealized gains or losses recorded in other comprehensive income related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Corporation does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.
Loan swaps. The Bank also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest expense and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties.
Mortgage banking. C&F Mortgage enters into IRLCs with customers to originate loans for which the interest rates are determined (or “locked”) prior to funding. C&F Mortgage is exposed to interest rate risk by holding fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans are sold in the secondary market. C&F Mortgage mitigates this interest rate risk by either (1) entering into forward sales contracts with investors at the time that interest rates are locked for mortgage loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for unspecified mortgage backed securities (TBA securities) until it can enter into forward sales contracts with investors for mortgage loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets. Changes in the fair value of mortgage banking derivatives are recorded as a component of gains on sales of loans.
At June 30, 2019, C&F Mortgage had best-efforts forward sales contracts for $70.29 million of its mortgage loans held for sale and $95.12 million of IRLCs offered to customers, and it had mandatory-delivery forward sales contracts for $4.84 million of its mortgage loans held for sale. At December 31, 2018, C&F Mortgage had best-efforts forward sales contracts for all of its mortgage loans held for sale and IRLCs.
The following tables summarize key elements of the Corporation’s derivative instruments other than forward sales of mortgage loans. The fair values of forward sales of mortgage loans were not material to the consolidated financial statements of the Corporation at June 30, 2019 or December 31, 2018.
Notional
Collateral
Amount
Pledged1
Interest rate swap contracts
25,000
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower
62,786
2,034
49
Matched interest rate swaps with counterparty
Mortgage banking contracts:
IRLCs
111,489
24,250
45,961
216
1,391
44,324
Collateral pledged may be comprised of cash or securities.
NOTE 12: Other Noninterest Expenses
The following table presents the significant components in the Consolidated Statements of Income line “Noninterest Expenses-Other.”
Data processing fees
1,974
1,818
3,896
3,645
Professional fees
789
1,353
1,517
Marketing and advertising expenses
435
383
808
843
Travel and educational expenses
300
706
671
Telecommunication expenses
330
648
679
All other noninterest expenses
2,074
2,051
4,075
4,084
Total other noninterest expenses
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This report contains statements concerning the Corporation’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws and may include, but are not limited to: statements regarding expected future financial performance; strategic business initiatives and the anticipated effects thereof, including personnel additions and the expansion of the indirect lending program to include marine and recreational vehicles (RVs); technology initiatives; liquidity and capital levels; net interest margin compression; the effect of future market and industry trends, including competitive trends in the non-prime consumer finance markets, the Corporation’s and each business segment’s loan portfolio, and business prospects related to each segment’s loan portfolio, including future lending and growth in loans outstanding; asset quality and adequacy of the allowance for loan losses and the level of future charge-offs; trends regarding the provision for loan losses, net loan charge-offs, levels of nonperforming assets and troubled debt restructurings (TDRs); expenses associated with nonperforming assets; the utilization of scorecard models and the performance of loans purchased using those models; the effects of future interest rate levels and fluctuations; the amount and timing of accretion associated with the fair value accounting adjustments recorded in connection with the 2013 acquisition of Central Virginia Bankshares, Inc. (CVBK); adequacy of the allowance for indemnification losses; levels of noninterest income and expense; interest rates and yields including possible future interest rate changes; the deposit portfolio including trends in deposit maturities and rates; interest rate sensitivity; market risk; regulatory developments; monetary policy implemented by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) including changes to the Federal Funds rate; capital requirements; growth strategy; hedging strategy; and, financial and other goals. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in:
interest rates, such as increases or volatility in the Federal Funds rate, yields on U.S. Treasury securities or mortgage rates
general business conditions, as well as conditions within the financial markets
general economic conditions, including unemployment levels and slowdowns in economic growth
the legislative/regulatory climate with respect to financial institutions, including the Dodd-Frank Act and regulations promulgated thereunder, the Consumer Financial Protection Bureau (CFPB) and the regulatory and enforcement activities of the CFPB, the application of the Basel III capital standards to the Corporation and C&F Bank and the Economic Growth, Regulatory Relief and Consumer Protection of 2018 and regulations promulgated thereunder
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve Board, and the effect of these policies on interest rates and business in our markets
the value of securities held in the Corporation’s investment portfolios
demand for loan products
the quality or composition of the loan portfolios and the value of the collateral securing those loans
the commercial and residential real estate markets
the inventory level and pricing of new and used automobiles, including sales prices of repossessed vehicles
the level of net charge-offs on loans and the adequacy of our allowance for loan losses
deposit flows
demand in the secondary residential mortgage loan markets
the level of indemnification losses related to mortgage loans sold
the strength of the Corporation’s counterparties and the economy in general
competition from both banks and non-banks, including competition in the non-prime automobile finance markets
demand for financial services in the Corporation’s market area
the Corporation's branch and market expansions, technology initiatives and other strategic initiatives
cyber threats, attacks or events
reliance on third parties for key services
C&F Bank’s product offerings
accounting principles, policies and guidelines, and elections made by the Corporation thereunder
These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018, should be considered in evaluating the forward-looking statements contained herein.
Forward-looking statements are inherently uncertain. Forward-looking statements are based on management’s beliefs, assumptions and expectations as of the date of this report regarding future events or performance, taking into account all information currently available, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions. There can be no assurance that the underlying beliefs, assumptions or expectations will be proven to be accurate. We caution readers not to place undue reliance on those forward-looking statements. Actual results may differ materially from historical results or those expressed in or implied by such forward-looking statements. We undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which the statement was made, except as otherwise required by law.
The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Corporation. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require management’s most difficult, subjective or complex judgments affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.
Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Our judgment in determining the level of the allowance is based on evaluations of the collectibility of loans
while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available.
Allowance for Indemnifications: The allowance for indemnifications is established through charges to earnings in the form of a provision for indemnifications, which is included in other noninterest expenses. A loss is charged against the allowance for indemnifications when a purchaser (investor) of a loan sold by C&F Mortgage incurs a validated indemnified loss due to borrower misrepresentation, fraud, early default, or underwriting error. The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses that are probable of arising from valid indemnification requests for loans that have been sold by C&F Mortgage. Management’s judgment in determining the level of the allowance is based on the volume of loans sold, historical experience, current economic conditions and information provided by investors. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
Impairment of Loans: We consider a loan impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during a period of delay in payment if we expect the ultimate collection of all amounts due. We measure impairment on a loan-by-loan basis based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment in the loan. All TDRs are also considered impaired loans and are evaluated individually. A TDR occurs when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower.
Loans Acquired in a Business Combination: Acquired loans are classified as either (i) purchased credit-impaired (PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.
PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Corporation will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.
On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan or pool(s) of loans. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.
The Corporation's PCI loans currently consist of loans acquired in connection with the acquisition of CVB. PCI loans that were classified as nonperforming loans by CVB are no longer classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.
The Corporation accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the
loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.
Impairment of Securities: Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it is not more-likely-than-not that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.
We regularly review unrealized losses in our investments in securities based on criteria including the extent to which market value is below amortized cost, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.
Other Real Estate Owned (OREO): Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the fair value less estimated costs to sell at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions.
Goodwill: The Corporation's goodwill was recognized in connection with the Corporation's acquisition of CVBK in October 2013 and C&F Bank's acquisition of C&F Finance Company in September 2002. The Corporation reviews the carrying value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Corporation may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Corporation elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill at the retail banking segment and the consumer finance segment, which was the annual evaluation in the fourth quarter of 2018, the Corporation concluded that no impairment existed based on an assessment of qualitative factors.
Retirement Plan: C&F Bank maintains a non-contributory, defined benefit pension plan for eligible full-time employees as specified by the plan. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are measured at fair value. The projected benefit obligation and net periodic pension cost or income are actuarially determined using a number of key assumptions, which may include discount rates, rates of return on plan assets, employee compensation and mortality and interest crediting rates. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may affect the projected benefit obligation in the year of the change, and may affect net periodic pension cost or income in the year of the change or in future periods.
Derivative Financial Instruments: The Corporation uses derivatives primarily to manage risk associated with changing interest rates and to assist customers with their risk management objectives. The Corporation’s derivative financial instruments may 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 activites, 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 in the Consolidated Statements of Income.
Income Taxes: Determining the Corporation’s effective tax rate requires judgment. The Corporation’s net deferred tax asset is determined annually based on temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. In addition, there may be transactions and calculations for which the ultimate tax outcomes are uncertain and the Corporation’s tax returns are subject to audit by various tax authorities. Although we believe that estimates related to income taxes are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the consolidated financial statements.
For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.
OVERVIEW
Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth initiatives that will enhance long-term shareholder value. We track three primary financial performance measures in order to assess the level of success in achieving these goals: (1) return on average assets (ROA), (2) return on average equity (ROE), and (3) growth in earnings. In addition to these financial performance measures, we track the performance of the Corporation’s three principal business segments: retail banking, mortgage banking, and consumer finance. We also actively manage our capital through growth, dividends and share repurchases, while considering the need to maintain a strong capital position.
Financial Performance Measures
Net income for the Corporation was $5.8 million for the second quarter of 2019, or $1.69 per share, compared with net income of $5.1 million for the second quarter of 2018, or $1.45 per share. Net income for the Corporation was $9.6 million for the first half of 2019, or $2.77 per share, compared with net income of $9.0 million for the first half of 2018, or $2.56 per share. The Corporation’s annualized ROE and ROA were 15.07 percent and 1.51 percent, respectively, for the second quarter of 2019, compared to 14.16 percent and 1.34 percent, respectively, for the second quarter of 2018. The Corporation’s annualized ROE and ROA were 12.54 percent and 1.26 percent, respectively, for the first half of 2019, compared to 12.62 percent and 1.19 percent, respectively, for the first half of 2018.
Principal Business Segments
An overview of the financial results for each of the Corporation’s principal segments is presented below. A more detailed discussion is included in the section “Results of Operations.”
Retail Banking: The retail banking segment reported net income of $3.1 million for the second quarter of 2019, compared to net income of $2.4 million for the second quarter of 2018. For the first six months of 2019, the retail banking segment reported net income of $5.4 million, compared to $4.8 million for the first six months of 2018.
The increase in net income of C&F Bank for the second quarter and first half of 2019 compared to the same periods in 2018 was primarily due to higher interest income, which resulted from (1) improvement in the performance of certain purchased loans, as discussed below, (2) higher loan yields, especially on variable rate loans and (3) higher average loans outstanding. These factors were partially offset by (1) an increase in average rates on interest-bearing customer deposits, (2) higher operating expenses associated with C&F Bank (a) strengthening its technology infrastructure and (b) expanding
its lending capabilities and administrative and compliance functions, and (3) lower service charges on deposit accounts resulting from fewer overdraft fees charged.
The recognition of interest income on purchased credit impaired (PCI) loans is based on management’s expectation of future payments of principal and interest. Certain PCI loans have paid off earlier than expected in the first six months of 2019, resulting in the recognition of additional interest income in 2019 compared to 2018. Interest income recognized on PCI loans was $1.3 million and $1.8 million for the second quarter and first six months of 2019, respectively, compared to $446,000 and $1.4 million for the second quarter and first six months of 2018, respectively.
Average loans increased $42.3 million or 5.8 percent for the second quarter of 2019 and $42.0 million or 5.7 percent for the first half of 2019, compared to the same periods in 2018, primarily due to growth in the commercial business lending, commercial real estate, and land acquisition and development segments of the loan portfolio. C&F Bank’s total nonperforming assets were $1.3 million at June 30, 2019, compared to $1.7 million at December 31, 2018. Nonperforming assets at June 30, 2019 consisted primarily of $991,000 in nonaccrual loans, compared to $1.5 million at December 31, 2018.
Mortgage Banking: The mortgage banking segment reported net income of $1.2 million for the second quarter of 2019, compared to net income of $779,000 for the second quarter of 2018. For the first six months of 2019, the mortgage banking segment reported net income of $1.7 million, compared to net income of $1.2 million for the first six months of 2018.
The increase in net income of the mortgage banking segment for the second quarter and first half of 2019 compared to the same periods in 2018 was due primarily to higher gains on sales of loans, resulting from higher loan production. Mortgage loan originations for the mortgage banking segment were $246.9 million and $385.6 million in the second quarter and first six months of 2019, compared to $203.7 million and $347.6 million for the same periods in 2018, respectively. Loan production for the second quarter of 2019 was the highest reported by the mortgage banking segment for any fiscal quarter since the second quarter of 2009 when home sales were supported by the federal first-time home buyers’ tax credit. Lower interest rates on mortgage loans have contributed to an increase in volume in the mortgage industry in the second quarter and first six months of 2019 compared to the same periods in 2018. Mortgage loan originations during the second quarter of 2019 for refinancings and home purchases were $32.1 million and $214.8 million, respectively, compared to $18.3 million and $185.4 million, respectively, during the second quarter of 2018. Mortgage loan originations during the first six months of 2019 for refinancings and home purchases were $54.0 million and $331.6 million, respectively, compared to $45.2 million and $302.4 million, respectively, during the first six months of 2018.
Consumer Finance: The consumer finance segment reported net income of $1.9 million for the second quarter of 2019, compared to net income of $2.2 million for the second quarter of 2018. For the first six months of 2019, the consumer finance segment reported net income of $3.2 million, compared to net income of $3.7 million for the first six months of 2018.
Factors contributing to the decrease in net income of C&F Finance Company for the second quarter and first half of 2019 compared to the same periods in 2018 included (1) lower loan yields resulting from competition in the non-prime automobile loan business and the acquisition of automobile loan contracts with higher credit metrics, as well as relatively lower yields on prime marine and recreational vehicle (RV) loans, and (2) higher-cost variable-rate borrowings resulting from increases in short-term interest rates since the first quarter of 2018. Partially offsetting these factors were a decline in the provision for loan losses of $300,000 and $1.2 million for the second quarter and first six months of 2019, respectively, compared to the same periods in 2018, as a result of lower charge-offs and improving credit quality of the portfolio, as discussed below.
The annualized net charge-off ratio for the first half of 2019 decreased to 3.15 percent from 3.85 percent for the first half of 2018. The decline reflects a lower number of charge-offs during 2019 as a result of C&F Finance Company’s purchasing automobile loan contracts with higher credit metrics beginning in 2016. At June 30, 2019, total delinquent loans as a percentage of total loans was 3.49 percent, compared to 4.76 percent at December 31, 2018 and 4.18 percent at June 30, 2018. The allowance for loan losses was $22.4 million, or 7.26 percent of total loans at June 30, 2019, compared to $23.0 million, or 7.77 percent of total loans at December 31, 2018. The decrease in the level of the allowance for loan losses as a percentage of total loans was primarily due to lower net charge-offs on non-prime automobile loans. Also, at June 30,
2019, compared to December 31, 2018, the higher composition within the consumer finance segment’s loan portfolio of prime marine and RV loans accounted for approximately 10 basis points of the 51 basis points decrease in the ratio of the allowance for loan losses to total loans.
Capital Management. Total equity was $159.4 million at June 30, 2019, compared to $152.0 million at December 31, 2018. Capital growth resulted primarily from earnings for the first half of 2019, which was offset in part by dividends declared of 74 cents per share during the first half of 2019. For the second quarter of 2019, the Corporation paid a cash dividend on July 1, 2019 of 37 cents per share, which equated to a payout ratio of 21.9 percent of second quarter earnings per share. The dividend payout ratio was 26.8 percent for the first six months of 2019. The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital requirements and expected future earnings.
On May 21, 2019, the Board of Directors authorized a program, effective June 1, 2019, to repurchase up to $5.0 million of the Corporation’s common stock through May 31, 2020 (the Repurchase Program). As of June 30, 2019, the Corporation had repurchased 12,100 shares of its common stock at an aggregate cost of $604,000, and remained authorized to purchase up to $4.4 million of the Corporation’s common stock under the Repurchase Program. Under the previous share repurchase program, which was last authorized by the Board of Directors in April 2018 and which expired on May 31, 2019, the Corporation made aggregate repurchases of its common stock of $3.8 million between November 2018 and May 2019.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three and six months ended June 30, 2019 and 2018. Loans include loans held for sale. Loans placed on a nonaccrual status are included in the balances and are included in the computation of yields, but had no material effect. Accretion and amortization of fair value purchase adjustments are included in the computation of yields on loans and investments and on the cost of borrowings acquired in connection with the purchase of CVB. The CVB accretion contributed approximately 45 basis points to the yield on loans and 36 basis points to both the yield on interest earning assets and the net interest margin for the second quarter of 2019, compared to approximately 17 basis points to the yield on loans and 12 basis points to both the yield on interest earning assets and the net interest margin for the second quarter of 2018. The CVB accretion contributed approximately 31 basis points to the yield on loans and 24 basis points to both the yield on interest earning assets the net interest margin for the first six months of 2019, compared to approximately 25 basis points to the yield on loans and 19 basis points to both the yield on interest earning assets and the net interest margin for the first six months of 2018. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis, which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.
TABLE 1: Average Balances, Income and Expense, Yields and Rates
Income/
Yield/
Expense
Rate
Securities:
Taxable
134,098
815
2.43
%
136,185
776
2.28
Tax-exempt
74,408
704
3.78
88,452
880
3.98
Total securities
208,506
1,519
2.91
224,637
1,656
2.95
1,138,382
22,328
7.87
1,068,305
20,632
7.75
103,153
2.26
129,698
1.71
Total earning assets
1,450,041
24,429
6.76
1,422,640
22,841
6.44
Allowance for loan losses
(33,819)
(35,649)
Total non-earning assets
129,564
125,912
1,545,786
1,512,903
Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits
217,215
307
0.57
225,460
174
0.31
Money market deposit accounts
197,395
261
0.53
215,502
150
0.28
Savings accounts
120,847
0.10
117,995
0.08
Certificates of deposit, $100 or more
205,026
929
1.82
175,819
1.21
Other certificates of deposit
183,488
695
1.52
177,767
452
1.02
Interest-bearing deposits
923,971
2,221
0.96
912,543
1,329
0.58
159,558
1,430
3.58
167,228
3.19
Total interest-bearing liabilities
1,083,529
1.35
1,079,771
0.99
276,341
263,234
30,861
26,723
1,390,731
1,369,728
155,055
143,175
20,778
20,177
Interest rate spread
5.41
5.45
Interest expense to average earning assets (annualized)
1.01
0.75
Net interest margin (annualized)
5.75
5.69
39
136,980
1,674
2.44
134,994
1,524
75,356
1,442
3.83
89,110
1,786
4.01
212,336
3,116
2.93
224,104
3,310
1,119,116
43,254
7.79
1,063,744
41,456
7.86
103,478
128,869
1.59
1,434,930
47,541
6.68
1,416,717
45,783
6.51
(33,966)
(35,715)
128,767
126,737
1,529,731
1,507,739
221,122
619
0.56
227,330
0.32
201,405
0.52
219,708
120,690
116,025
193,584
1,646
174,167
1.22
180,089
1,284
1.44
178,680
887
1.00
916,890
4,129
0.91
915,910
2,649
159,771
2,826
3.54
167,001
2,591
3.10
1,076,661
1.30
1,082,911
0.97
269,708
256,167
30,065
26,632
1,376,434
1,365,710
153,297
142,029
40,586
40,543
5.38
5.54
0.74
5.71
5.77
Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the period-to-period changes in the components of net interest income on a taxable-equivalent basis. The Corporation calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.
TABLE 2: Rate-Volume Recap
Three Months Ended June 30, 2019 from 2018
Increase (Decrease)
Due to
Increase
Volume
(Decrease)
Interest income:
1,372
1,696
51
(42)
(134)
(176)
156
(127)
1,099
1,588
Interest expense:
139
133
(14)
111
301
400
228
243
Total interest-bearing deposits
797
892
158
(63)
987
Change in net interest income
(466)
601
Six Months Ended June 30, 2019 from 2018
(497)
2,295
1,798
127
(77)
(267)
381
(227)
154
(66)
1,824
1,758
260
(27)
214
467
129
596
390
397
1,379
1,480
352
(117)
235
1,731
1,715
(1,797)
1,840
43
Net interest income, on a taxable-equivalent basis, for the three months ended June 30, 2019 was $20.8 million, compared to $20.2 million for the three months ended June 30, 2018. Net interest income, on a taxable-equivalent basis, for the first half of 2019 was $40.6 million, compared to $40.5 million for the first half of 2018. Annualized net interest margin increased six basis points to 5.75 percent for the second quarter of 2019 and decreased six basis points to 5.71 percent for the first half of 2019, relative to the same periods in 2018, as both yields on earning assets and costs of interest-bearing liabilities increased. For the second quarter of 2019, the yield on interest-earning assets increased by 32 basis points compared to the second quarter of 2018 due to a higher composition of loans as a percentage of earning assets and a higher average yield on loans. For the first six months of 2019, the yield on interest-earning assets increased by 17 basis points compared to the first six months of 2018 due to a higher composition of loans as a percentage of earning assets. Average earning assets grew by $27.4 million and $18.2 million for the second quarter and first half of 2019, respectively, compared to the same periods in 2018. The cost of interest-bearing liabilities increased by 36 and 33 basis points for the second quarter and first half of 2019, respectively, compared to the same periods in 2018, resulting from higher costs of deposits and borrowings.
41
Average loans, which includes both loans held for investment and loans held for sale, increased $70.1 million to $1.1 billion for the second quarter of 2019, compared to the same period in 2018, and increased $55.4 million to $1.1 billion for the first half of 2019, compared to the same periods in 2018. Average loans held for investment at the retail banking segment increased $42.3 million, or 5.8 percent, for the second quarter of 2019, and increased $42.0 million, or 5.7 percent, for the first half of 2019, compared to the same periods in 2018, primarily due to growth in the commercial business lending, commercial real estate and land acquisition and development segments of the loan portfolio. Average loans held for investment at the consumer finance segment increased $9.7 million, or 3.3 percent for the second quarter of 2019, and increased $6.7 million, or 2.3 percent for the first half of 2019, compared to the same periods of 2018, as a result of the consumer finance segment’s continued expansion into purchases of marine and RV loan contracts. Average loans held for sale increased $17.9 million, or 44.1 percent for the second quarter of 2019, and increased $6.6 million or 18.1 percent for the first half of 2019, compared to the same periods in 2018, due to higher loan production.
The overall yield on average loans increased 12 basis points to 7.87 percent for the second quarter of 2019 and decreased 7 basis points to 7.79 percent for the first half of 2019, compared to the same periods in 2018. Positive factors affecting the average loan yield in 2019 compared to 2018 were (1) higher interest income on PCI loans in the second quarter, which includes accretion of purchase accounting adjustments, due to repayments of certain loans earlier than expected and (2) higher yields on loans at the retail banking segment for the second quarter and first six months resulting from increases in interest rates. Negative factors affecting average loan yield in the second quarter and first six months of 2019 compared to the same periods in 2018 were (1) the increased composition within the loan portfolio of lower-yielding loans at the retail banking segment and mortgage banking segment relative to the higher-yielding loans of the consumer finance segment and (2) the decline in the average yield on loans at the consumer finance segment due primarily to continued competition in the non-prime automobile loan business and the acquisition of loan contracts with higher credit metrics, as well as relatively lower yields on marine and recreational vehicle loans as a result of higher credit quality.
Average securities available for sale decreased $16.1 million and $11.8 million for the second quarter and first half of 2019, compared to the same periods in 2018, due to lower purchases in the second quarter and first six months of 2019, as yields were generally lower, and higher calls and maturities of obligations of states and political subdivisions during the second quarter of 2019. The average yield on the securities portfolio decreased four basis points and two basis points for the second quarter and first half of 2019, respectively, compared to the same periods in 2018.
Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $26.5 million and $25.4 million during the second quarter and first half of 2019, respectively, compared to the same periods in 2018. The decrease during the second quarter and first half of 2019 resulted primarily from loan growth at all three primary business segments. The average yield on these overnight funds increased 55 basis points and 69 basis points for the second quarter and first half of 2019 compared to the same periods in 2018, as the Federal Reserve Bank increased the interest rate on excess cash reserve balances from 1.50 percent in December 2017 to 2.40 percent by the second quarter of 2019. The Federal Reserve Bank then decreased the interest rate on excess cash reserve balances to 2.35 percent by the end of the second quarter of 2019.
Average savings and interest-bearing demand deposits decreased $23.5 million and $19.8 million for the second quarter and first half of 2019, respectively, and average time deposits increased $34.9 million and $20.8 million for the second quarter and first half of 2019, respectively, compared to the same periods in 2018. The average cost of interest-bearing deposits increased 38 basis points and 33 basis points for the second quarter and first half of 2019, respectively, compared to the same periods in 2018, due to increases in interest rates on time deposits, interest-bearing demand deposits, and money market deposits driven by changes in market interest rates.
Average borrowings decreased $7.7 million and $7.2 million for the second quarter and first half of 2019, respectively compared to the same periods in 2018. The decrease resulted from maturities during 2018 of a $5.0 million repurchase agreement with a third-party correspondent bank and a $2.5 million advance from the Federal Home Loan Bank (FHLB). The average cost of borrowings increased 39 basis points and 44 basis points during the second quarter and first half of 2019, compared to the same periods in 2018, because of increases in short-term interest rates, to which variable-rate borrowings at the consumer finance segment are indexed.
The Corporation believes that it may be challenging to maintain net interest margin at its current level, even with the projected loan growth at the Bank during 2019, because of (1) repricing of maturing time deposits at current market rates, (2) lower yields on consumer finance segment loans resulting from continued market competition and growth in lower-yielding higher-quality loans (including marine and RV loans), and (3) lower accretion of purchase discounts on PCI loans, which is included in yields on loans.
Noninterest Income
TABLE 3: Noninterest Income
Other and
415
1,268
Net gains on calls of available for sale securities
Other income
659
220
4,443
451
1,092
Net losses on calls of available for sale securities
424
161
713
2,037
1,416
769
331
7,897
758
1,843
407
128
6,750
Total noninterest income increased $961,000, or 13.3 percent, in the second quarter of 2019, compared to the second quarter of 2018, and increased $1.6 million, or 11.8 percent, in the first half of 2019, compared to the first half of 2018. The increase in noninterest income was primarily due to (1) an increase in gains on sales of loans and other service charges and fees at the mortgage banking segment as a result of higher mortgage loan production for the second quarter and first six months of 2019 compared to the same periods in 2018, as lower mortgage loan interest rates contributed to an increase in volume in the mortgage industry and (2) net unrealized gains of $1.4 million in the first half of 2019 included primarily in other income of the retail banking and mortgage banking segments related to the Corporation’s non-qualified deferred compensation plan compared to $156,000 in the first half of 2018. These increases were partially offset by decreased service charges on deposit accounts at the retail banking segment in the first six months of 2019 compared to the first six months of 2018 resulting from fewer overdraft fees charged.
Noninterest Expense
TABLE 4: Noninterest Expense
Occupancy expense
1,435
537
167
Other expenses:
Data processing
1,599
1,975
Other expenses
2,106
784
904
3,931
Total other expenses
3,705
798
1,244
159
Total noninterest expense
12,210
3,099
3,507
733
1,311
208
317
2,046
817
863
120
3,846
3,526
829
1,180
11,591
2,878
3,616
676
2,921
1,016
3,183
649
3,939
1,539
1,767
345
7,590
7,122
1,563
2,416
385
24,588
5,970
7,134
1,534
960
411
2,971
627
4,194
1,606
1,657
7,794
7,165
1,633
2,284
23,058
5,596
7,188
1,458
Total noninterest expenses increased $788,000, or 4.2 percent, in the second quarter of 2019, compared to the same period in 2018, and increased $1.9 million, or 5.2 percent in the first half of 2019, compared to the first half of 2018. This increase in noninterest expenses resulted primarily from (1) an increase in salaries and employee benefits expense associated with the Corporation’s nonqualified deferred compensation plan, primarily at the retail banking and mortgage banking segments and (2) higher operating costs at the retail banking segment attributable to (a) increased personnel costs associated with expanding the Bank’s lending capabilities and administrative and compliance functions and (b) higher data processing and occupancy expenses associated with enhancing the technology infrastructure and expanding our digital product offerings. Compensation expense related to the Corporation’s nonqualified deferred compensation plan is recorded based in part on changes in the fair value of assets held in trust for the plan, which are allocated to participants. As a result of unrealized gains related to the nonqualified plan, additional compensation expense of $1.4 million was recorded in the first half of 2019 compared to the same period in 2018, and was offset by gains recorded in noninterest income, as discussed above.
Income Taxes
Income tax expense for the second quarter of 2019 was $1.6 million resulting in an effective tax rate of 21.8 percent, compared with $1.4 million, or an effective tax rate of 21.6 percent, for the second quarter of 2018. Income tax expense for the first half of 2019 was $2.5 million resulting in an effective tax rate of 20.9 percent, compared with $2.3 million, or an effective tax rate of 20.3 percent for the first half of 2018. The higher effective tax rate in the second quarter and first half of 2019 compared to the same periods of 2018 resulted primarily from lower tax benefits of tax-exempt investment securities income and share-based compensation.
45
ASSET QUALITY
The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. Table 5 summarizes the allowance activity for the periods indicated:
TABLE 5: Allowance for Loan Losses
Balance, beginning of period
33,589
35,600
Provision for loan losses:
Retail Banking
Consumer Finance
Total provision for loan losses
Loans charged off:
Real estate—residential mortgage
(86)
(62)
(3,076)
(3,365)
Total loans charged off
(3,236)
(3,427)
Recoveries of loans previously charged off:
73
1,159
1,143
Total recoveries
1,238
1,220
Net loans charged off
(1,998)
(2,207)
Balance, end of period
Ratio of annualized net charge-offs to average total loans outstanding during period for Retail Banking
0.04
Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance
2.52
3.02
(4,827)
(5,633)
0.03
3.15
3.85
1Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.
Table 6 presents the allocation of the allowance for loan losses as of the dates indicated.
TABLE 6: Allocation of Allowance for Loan Losses
Allocation of allowance for loan losses:
Real estate—construction 1
Total allowance for loan losses
Ratio of loans to total period-end loans:
100
Loans by credit quality indicators are presented in Table 7 below. The characteristics of these loan ratings are as follows:
Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.
Special mention loans have a specific identified weakness in the borrower’s operations and in the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Corporation’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.
Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Corporation’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Corporation. There is a distinct possibility that the Corporation will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet the Corporation’s definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Corporation will be unable to collect all amounts due.
Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a nonaccrual classification because it is probable that the Corporation will not be able to collect all amounts due.
Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.
Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
TABLE 7: Credit Quality Indicators
Real estate – construction 2
Commercial, financial and agricultural 3
460,738
12,927
440,832
14,625
Table 8 summarizes nonperforming assets as of the dates indicated.
TABLE 8: Nonperforming Assets
Retail Banking Segment
Loans, excluding purchased loans
744,318
723,778
Purchased performing loans1
Purchased credit impaired loans1
778,796
762,487
Nonaccrual loans
991
1,464
OREO
Total nonperforming assets
1,259
1,710
Accruing loans past due for 90 days or more
Troubled debt restructurings (TDRs)2
4,452
5,451
Allowance for loan losses (ALL)
10,427
10,426
Nonperforming assets to total loans and OREO
0.16
0.22
ALL to total loans, excluding purchased credit impaired loans
1.34
1.37
ALL to total nonaccrual loans
1,052.17
712.16
Annualized net charge-offs to average total loans
0.01
0.06
Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The remaining discount for the purchased performing loans was $1.7 million at June 30, 2019 and $1.9 million at December 31, 2018. The remaining discount for the purchased credit impaired loans was $6.5 million at June 30, 2019 and $7.9 million at December 31, 2018.
Nonaccrual loans include nonaccrual TDRs of $259,000 at June 30, 2019 and $166,000 at December 31, 2018.
Mortgage Banking Segment
3,530
3,479
ALL
598
Nonaccrual loans to total loans
1.05
1.06
ALL to total loans
16.94
17.19
Consumer Finance Segment
Repossessed assets
484
371
Nonaccrual consumer finance loans to total consumer finance loans
0.24
ALL to total consumer finance loans
7.26
7.77
4.14
50
Nonperforming assets of the retail banking segment totaled $1.3 million at June 30, 2019, compared to $1.7 million at December 31, 2018. Nonperforming assets at June 30, 2019 consisted primarily of $991,000 in nonaccrual loans, compared to $1.5 million at December 31, 2018.
The allowance for loan losses as a percentage of total loans, excluding PCI loans, at June 30, 2019 decreased to 1.34 percent, compared to 1.37 at December 31, 2018. We believe that the current level of the allowance for loan losses at the retail banking segment is adequate to absorb probable losses inherent in the loan portfolio, based on the relevant history of charge-offs and recoveries, current economic conditions, overall portfolio quality and review of specifically criticized loans. If loan concentrations within the retail banking segment’s loan portfolio result in higher credit risk or if economic conditions deteriorate in future periods, a higher level of nonperforming loans may be experienced, which may then require a higher provision for loan losses.
Nonaccrual loans at the consumer finance segment were $305,000 at June 30, 2019, compared to $712,000 at December 31, 2018. Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent. Repossessed vehicles of the consumer finance segment are classified as other assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the deficiency) is charged against the allowance for loan losses. At June 30, 2019, repossessed vehicles available for sale totaled $484,000, compared to $371,000 at December 31, 2018.
The consumer finance segment’s allowance for loan losses decreased $623,000 to $22.4 million at June 30, 2019 from $23.0 million at December 31, 2018, and its provision for loan losses decreased $300,000 and $1.2 million for the second quarter and first six months of 2019, compared to the same periods in 2018. The decrease in the allowance and the lower provision resulted from lower charge-offs and an overall improvement in the credit quality of the portfolio in the first half of 2019. Delinquent loans as a percentage of total loans decreased to 3.49 percent at June 30, 2019 compared to 4.76 percent at December 31, 2018 and 4.18 percent at June 30, 2018. The annualized net charge-off ratio for the first half of 2019 decreased to 3.15 percent from 3.85 percent for the first half of 2018 because of the lower number of charge-offs during the first half of 2019. The allowance for loan losses as a percentage of loans decreased to 7.26 percent at June 30, 2019, compared to 7.77 percent at December 31, 2018. The decrease in the level of the allowance for loan losses as a percentage of total loans was primarily due to lower charge-offs on non-prime automobile loans. Also, at June 30, 2019, compared to December 31, 2018, the higher composition within the consumer finance segment’s loan portfolio of prime marine and RV loans accounted for approximately 10 basis points of the 51 basis points decrease in the ratio of the allowance for loan losses to total loans. We believe that the current level of the allowance for loan losses at the consumer finance segment is adequate to absorb probable losses inherent in the loan portfolio.
Impaired Loans
We measure impaired loans either based on fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment in the loan. TDRs occur when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions typically are made for loss mitigation purposes and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired loans.
TABLE 9: Impaired Loans
Impaired loans, which included TDRs of $4.5 million, and the related allowance at June 30, 2019, were as follows:
Impaired loans, which included TDRs of $5.5 million, and the related allowance at December 31, 2018, were as follows:
TDRs at June 30, 2019 and December 31, 2018 were as follows:
TABLE 10: Troubled Debt Restructurings
Accruing TDRs
4,193
5,285
Nonaccrual TDRs1
259
166
Total TDRs2
Included in nonaccrual loans in Table 8: Nonperforming Assets.
Included in impaired loans in Table 9: Impaired Loans.
While TDRs are considered impaired loans, not all TDRs are on nonaccrual status. If a loan was on nonaccrual status at the time of the TDR modification, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on the Corporation’s policy for returning loans to accrual status. If a loan was accruing prior to being modified as a TDR and if management concludes that the borrower is able to make such modified payments, and there are no other factors or circumstances that would cause management to conclude otherwise, the TDR will remain on an accruing status.
FINANCIAL CONDITION
At June 30, 2019, the Corporation had total assets of $1.6 billion, which was an increase of $46.6 million since December 31, 2018. The increase resulted primarily from an increase in loans held for sale and loans held for investment funded in part by excess funds at the Federal Reserve Bank.
Loan Portfolio
Table 11 presents information pertaining to the composition of loans held for investment.
TABLE 11: Summary of Loans Held for Investment
Percent
Commercial, financial, and agricultural 2
Total loans, net
Investment Securities
The investment portfolio plays a primary role in the management of the Corporation’s interest rate sensitivity. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The investment portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. At June 30, 2019 and December 31, 2018, all securities in the Corporation’s investment portfolio were classified as available for sale.
The following table sets forth the composition of the Corporation’s securities available for sale in dollar amounts at fair value and as a percentage of the Corporation’s total securities available for sale at the dates indicated.
TABLE 12: Securities Available for Sale
Total available for sale securities at fair value
For more information about the Corporation's securities available for sale, including information about securities in an unrealized loss position at June 30, 2019 and December 31, 2018, see Part I, Item 1, “Financial Statements” under the heading “Note 2: Securities” in this Quarterly Report on Form 10-Q.
The Corporation’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings and money market accounts and time deposits. The Corporation’s deposits are principally provided by individuals and businesses located within the communities served.
53
During the first half of 2019, deposits increased $28.5 million to $1.21 billion at June 30, 2019, compared to $1.18 billion at December 31, 2018. This increase resulted primarily from a $50.0 million increase in time deposits and a $11.3 million increase in noninterest-bearing demand deposits. Partially offsetting this increase was a $32.7 million decrease in savings and interest-bearing demand deposits.
The Corporation had $1.5 million in brokered money market deposits outstanding at June 30, 2019. The source of these brokered deposits is uninvested cash balances held in third-party brokerage sweep accounts. The Corporation uses brokered deposits as a means of diversifying liquidity sources, as opposed to a long-term deposit gathering strategy.
Borrowings increased to $161.6 million at June 30, 2019 from $159.7 million at December 31, 2018 due to fluctuations in repurchase agreements with commercial deposit customers.
Off-Balance Sheet Arrangements
As of June 30, 2019, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance-Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.
At June 30, 2019, C&F Mortgage had aggregate interest rate lock commitments (IRLCs) to originate mortgage loans of $111.5 million and loans held for sale of $89.2 million. C&F Mortgage manages interest rate risk arising from these fixed-rate IRLCs and mortgage loans by either (1) entering into forward sales contracts with investors at the time that interest rates are locked for loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for unspecified mortgage backed securities (TBA securities) until it can enter into forward sales contracts with investors for loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments. At June 30, 2019, C&F Mortgage had best-efforts forward sales contracts for $70.3 million of its mortgage loans held for sale and $95.1 million of IRLCs offered to customers, and it had mandatory-delivery forward sales contracts for $4.8 million of its mortgage loans held for sale.
The Corporation uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts.
The Corporation has interest rate swaps that qualify and are designated as cash flow hedges. The Corporation’s cash flow hedges effectively modify the Corporation’s exposure to interest rate risk by converting variable rates of interest on $25.0 million of the Corporation’s trust preferred capital notes to fixed rates of interest for periods that end between June 2024 and June 2029. The cash flow hedges’ total notional amount is $25.0 million. At June 30, 2019, the cash flow hedges had a fair value of $(30,000), which is recorded in other liabilities. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive income.
Pursuant to a program the Corporation initiated during 2016, the Corporation also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net effect of these interest rate swaps and the related loans is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. At June 30, 2019, the total notional amount of the interest rate swaps related to these loans was $125.6 million and the interest rate swaps had a net fair value of zero, with $2.1 million recognized in other assets and $2.1 million recognized in other liabilities. These swaps are not designated as hedging instruments; therefore, changes in fair value are recorded in other noninterest expense.
Contractual Obligations
As of June 30, 2019, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in Part II, Item 7, “Management's Discussion and Analysis," under the heading “Table 20: Contractual Obligations” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.
Liquidity
The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to satisfy the credit needs of our customers and the demands of our depositors, creditors and investors. Stable core deposits and a strong capital position are the components of a solid foundation for the Corporation’s liquidity position. Additional sources of liquidity available to the Corporation include cash flows from operations, loan payments and payoffs, deposit growth, sales of securities, the issuance of brokered certificates of deposit and the capacity to borrow additional funds.
Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled $198.22 million at June 30, 2019, compared to $220.1 million at December 31, 2018. The decrease since December 31, 2018 was primarily the result of a decrease in cash and cash equivalents and securities due to loan growth exceeding deposit growth. The Corporation’s funding sources, including capacity, amount outstanding and amount available at June 30, 2019 are presented in Table 13.
TABLE 13: Funding Sources
Capacity
Outstanding
Available
Unsecured federal funds agreements
65,000
Repurchase lines of credit
50,000
Borrowings from FHLB
163,959
44,500
119,459
Borrowings from Federal Reserve Bank
18,271
Revolving bank line of credit
120,000
75,029
44,971
417,230
297,701
We have no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank or the FHLB above the current lendable collateral value. Our ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets. Depending on our liquidity levels, our capital position, conditions in the capital markets, our business operations and initiatives, and other factors, we may from time to time consider the issuance of debt, equity or other securities or other possible capital market transactions, the proceeds of which could provide additional liquidity for our operations.
As a result of the Corporation’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Corporation maintains overall liquidity sufficient to satisfy its operational requirements and contractual obligations.
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Capital Resources
The table below presents the Bank’s actual regulatory capital amounts and ratios under currently applicable regulatory capital standards. Under the small bank holding company policy statement of the Federal Reserve Board, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Corporation is not subject to regulatory capital requirements. The table below reflects the Corporation’s consolidated capital as determined under regulations that apply to bank holding companies that are not small bank holding companies and minimum capital requirements that would apply to the Corporation if it were not a small bank holding company.
Minimum To Be
Well Capitalized
Under Prompt
Minimum Capital
Corrective Action
Actual
Requirements
Provisions
Ratio
As of June 30, 2019:
Total Capital (to Risk-Weighted Assets)
Corporation
189,219
14.8
102,433
8.0
C&F Bank
184,152
14.4
102,138
127,673
10.0
Tier 1 Capital (to Risk-Weighted Assets)
172,999
13.5
76,824
6.0
167,978
13.2
76,604
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
147,999
11.6
57,618
4.5
57,453
82,987
6.5
Tier 1 Capital (to Average Assets)
11.3
61,429
4.0
11.0
61,310
76,637
5.0
As of December 31, 2018:
183,781
15.3
96,274
181,685
15.1
96,088
120,110
168,504
14.0
72,205
166,437
13.9
72,066
143,590
11.9
54,154
54,050
78,072
Tier 1 Capital (to Average Tangible Assets)
59,759
11.2
59,666
74,582
The regulatory risk-based capital amounts presented above include: (1) common equity tier 1 capital (CET1) which consists principally of common stock (including surplus) and retained earnings with adjustments for goodwill, intangible assets and deferred tax assets; (2) Tier 1 capital which consists principally of CET1 plus the Corporation’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for loan losses. In addition, the Corporation has made the one-time irrevocable election to continue treating accumulated other comprehensive income (AOCI) under regulatory standards that were in place prior to the Basel III Final Rule in order to eliminate volatility of regulatory capital that can result from fluctuations in AOCI and the inclusion of AOCI in regulatory capital, as would otherwise be required under the Basel III Capital Rule. For additional information
56
about the Basel III Final Rules, see “Item 1. Business” under the heading “Regulation and Supervision” and “Item 8. Financial Statements and Supplementary Data,” under the heading “Note 15: Regulatory Requirements and Restrictions” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.
In addition to the regulatory risk-based capital amounts presented above, the Bank must maintain a capital conservation buffer of additional total capital and CET1 as required by the Basel III Final Rule. The capital conservation buffer requirement was phased in from January 1, 2016 until January 1, 2019 in equal annual installments of 0.625 percent. Accordingly, at June 30, 2019, the Bank was required to maintain a capital conservation buffer of 2.5 percent and exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by 392 basis points and 466 basis points, respectively. At December 31, 2018, the Bank was required to maintain a capital conservation buffer of 1.875 percent and exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by 525 and 598 basis points, respectively.
The Corporation's capital resources may be affected by the Corporation's Repurchase Program, which was authorized by the Corporation's Board of Directors during the second quarter of 2019. Under the Repurchase Program the Corporation is authorized to purchase up to $5.0 million of its common stock. Repurchases under the program may be made through privately-negotiated transactions or open-market transactions, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares repurchased under the program will be determined by management and the Board of Directors in their discretion and will depend on a number of factors, including the market price of the shares, general market and economic conditions, applicable legal requirements and other conditions. The Repurchase Program is authorized through May 31, 2020. As of June 30, 2019, $4.4 million of the Corporation's common stock may be purchased under the Corporation's Repurchase Program.
Effects of Inflation and Changing Prices
The Corporation’s financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). U.S. GAAP presently requires the Corporation to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Corporation is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Corporation, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes from the quantitative and qualitative disclosures about market risk made in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 4.CONTROLS AND PROCEDURES
The Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2019 to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure
controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation or its subsidiary to disclose material information required to be set forth in the Corporation’s periodic reports.
There were no changes in the Corporation’s internal control over financial reporting during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1A.RISK FACTORS
There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The Corporation’s Board of Directors authorized programs to repurchase the Corporation’s common stock in May 2014 (which was subsequently reauthorized, most recently in April 2018), for repurchases of up to $5.0 million of the Corporation’s common stock through May 31, 2019, and in May 2019 for repurchases of up to $5.0 million of the Corporation’s common stock from June 1, 2019 through May 31, 2020. Repurchases under either program could be made through privately-negotiated transactions, or open-market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 of the Exchange Act and/or Rule 10b-18 of the Exchange Act. Under the repurchase program last reauthorized in April 2018, the Corporation made aggregate common stock repurchases of $3.8 million between November 2018 and May 2019. As of June 30, 2019, the Corporation has made aggregate common stock repurchases of $604,000 under the repurchase program authorized in May 2019.
The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended June 30, 2019.
Maximum Number
(or Approximate
Total Number of
Dollar Value) of
Shares Purchased as
Shares that May Yet
Part of Publicly
Be Purchased
Average Price Paid
Announced Plans or
Under the Plans or
Shares Purchased1
per Share
Programs
April 1, 2019 - April 30, 2019
6,262
50.74
May 1, 2019 - May 31, 2019
14,618
48.41
14,417
June 1, 2019 - June 30, 2019
12,100
49.93
4,396
32,980
49.41
32,779
During the three months ended June 30, 2019, 201 shares were withheld upon the vesting of restricted shares granted to employees of the Corporation and its subsidiaries in order to satisfy tax withholding obligations.
ITEM 6.EXHIBITS
2.1
Agreement and Plan of Merger dated as of June 10, 2013 by and among C&F Financial Corporation, Special Purpose Sub, Inc. and Central Virginia Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K filed June 14, 2013)
3.1
Amended and Restated Articles of Incorporation of C&F Financial Corporation, effective March 7, 1994 (incorporated by reference to Exhibit 3.1 to Form 10-Q filed November 8, 2017)
3.1.1
Amendment to Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed January 14, 2009)
3.2
Amended and Restated Bylaws of C&F Financial Corporation, as adopted February 23, 2016 (incorporated by reference to Exhibit 3.1 to Form 8-K filed February 29, 2016)
10.9
C&F Financial Corporation Management Incentive Plan dated June 13, 2019 (incorporated by reference to Exhibit 10.9 to Form 8-K filed June 14, 2019)
10.19.8
Eighth Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A., various financial institutions and C&F Finance Company dated as of April 30, 2019 (incorporated by reference to Exhibit 10.19.8 to Form 10-Q filed May 8, 2019)
10.36
Incentive Compensation Opportunity for 2019 for Larry G. Dillon (incorporated by reference to Item 5.02 of Form 8-K filed June 14, 2019)
31.1
Certification of CEO pursuant to Rule 13a-14(a)
31.2
Certification of CFO pursuant to Rule 13a-14(a)
Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Presentation Linkbase Document
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date:
August 5, 2019
By:
/s/ Thomas F. Cherry
Thomas F. Cherry
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jason E. Long
Jason E. Long
Senior Vice President, Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)