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EX-10.35 - EX-10.35 - C & F FINANCIAL CORPcffi-20160331ex1035845aa.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


(Mark One)

 

 

 

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

 

For the quarterly period ended March 31, 2016

 

or

 

 

 

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

 

For the transition period from _________ to _________

 

Commission File Number 000-23423

 


 

C&F FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 


 

 

 

Virginia

54-1680165

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

802 Main Street West Point, VA

23181

(Address of principal executive offices)

(Zip Code)

 

(804) 843-2360

(Registrant’s telephone number, including area code)

 

 

 

N/A

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

 


 

 

 

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

 

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

 

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

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

 (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

 

At May 6, 2016, the latest practicable date for determination, 3,451,784 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 - March 31, 2016 (unaudited) and December 31, 2015

 

3

 

 

 

 

 

 

 

   Consolidated Statements of Income (unaudited) - Three months ended March 31, 2016 and 2015

 

4

 

 

 

 

 

 

 

   Consolidated Statements of Comprehensive Income (unaudited) - Three months ended March 31, 2016 and 2015

 

5

 

 

 

 

 

 

 

   Consolidated Statements of Shareholders' Equity (unaudited) - Three months ended    March 31, 2016 and 2015

 

6

 

 

 

 

 

 

 

   Consolidated Statements of Cash Flows (unaudited) - Three months ended   March 31, 2016 and 2015

 

7

 

 

 

 

 

 

 

   Notes to Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

 

Item 2. 

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

 

30

 

 

 

 

 

 

Item 3. 

   Quantitative and Qualitative Disclosures About Market Risk

 

52

 

 

 

 

 

 

Item 4. 

   Controls and Procedures

 

52

 

 

 

 

 

 

PART II - Other Information 

 

53

 

 

 

 

 

 

Item 1A. 

   Risk Factors

 

53

 

 

 

 

 

 

Item 2. 

   Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

 

 

 

 

Item 5. 

   Other Information

 

54

 

 

 

 

 

 

Item 6. 

   Exhibits

 

54

 

 

 

 

 

 

 

   Signatures

 

56

 

 

2


 

Part I – FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS

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

 

 

 

 

 

 

 

 

 

 

 

   March 31,    

 

December 31, 

 

 

    

2016

    

2015

  

Assets

 

 

(unaudited)

 

 

*

 

Cash and due from banks

 

$

10,429

 

$

9,679

 

Interest-bearing deposits in other banks

 

 

140,765

 

 

143,264

 

Total cash and cash equivalents

 

 

151,194

 

 

152,943

 

Securities—available for sale at fair value, amortized cost of $209,202 and $214,105, respectively

 

 

216,256

 

 

219,476

 

Loans held for sale, at fair value

 

 

25,426

 

 

44,000

 

Loans, net of allowance for loan losses of $35,838 and $35,569, respectively

 

 

889,172

 

 

865,892

 

Restricted stocks, at cost

 

 

3,403

 

 

3,345

 

Corporate premises and equipment, net

 

 

36,495

 

 

36,533

 

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

 

 

1,194

 

 

942

 

Accrued interest receivable

 

 

6,707

 

 

6,829

 

Goodwill

 

 

14,425

 

 

14,425

 

Core deposit intangible, net

 

 

1,411

 

 

1,618

 

Bank-owned life insurance

 

 

15,085

 

 

14,988

 

Other assets

 

 

44,056

 

 

44,085

 

Total assets

 

$

1,404,824

 

$

1,405,076

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

211,654

 

$

197,909

 

Savings and interest-bearing demand deposits

 

 

526,837

 

 

535,992

 

Time deposits

 

 

336,597

 

 

339,732

 

Total deposits

 

 

1,075,088

 

 

1,073,633

 

Short-term borrowings

 

 

12,538

 

 

12,093

 

Long-term borrowings

 

 

136,029

 

 

140,029

 

Trust preferred capital notes

 

 

25,148

 

 

25,139

 

Accrued interest payable

 

 

725

 

 

698

 

Other liabilities

 

 

21,952

 

 

22,425

 

Total liabilities

 

 

1,271,480

 

 

1,274,017

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,451,057 and 3,437,787 shares issued and outstanding, respectively, includes 145,700 and 137,200 of unvested shares, respectively)

 

 

3,305

 

 

3,301

 

Additional paid-in capital

 

 

10,622

 

 

10,420

 

Retained earnings

 

 

117,487

 

 

116,167

 

Accumulated other comprehensive income, net

 

 

1,930

 

 

1,171

 

Total shareholders’ equity

 

 

133,344

 

 

131,059

 

Total liabilities and shareholders’ equity

 

$

1,404,824

 

$

1,405,076

 


*     Derived from audited consolidated financial statements.

 

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

3


 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2016

    

2015

  

 

Interest income

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

20,206

 

$

19,018

 

 

Interest on interest-bearing deposits and federal funds sold

 

 

177

 

 

100

 

 

Interest and dividends on securities

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

 

101

 

 

128

 

 

Mortgage-backed securities

 

 

334

 

 

299

 

 

Tax-exempt obligations of states and political subdivisions

 

 

981

 

 

1,079

 

 

Taxable obligations of states and political subdivisions

 

 

46

 

 

42

 

 

Corporate bonds and other

 

 

120

 

 

137

 

 

Total interest income

 

 

21,965

 

 

20,803

 

 

Interest expense

 

 

 

 

 

 

 

 

Savings and interest-bearing deposits

 

 

292

 

 

275

 

 

Time deposits

 

 

809

 

 

681

 

 

Borrowings

 

 

878

 

 

786

 

 

Trust preferred capital notes

 

 

283

 

 

289

 

 

Total interest expense

 

 

2,262

 

 

2,031

 

 

Net interest income

 

 

19,703

 

 

18,772

 

 

Provision for loan losses

 

 

4,600

 

 

3,515

 

 

Net interest income after provision for loan losses

 

 

15,103

 

 

15,257

 

 

Noninterest income

 

 

 

 

 

 

 

 

Gains on sales of loans

 

 

1,730

 

 

1,645

 

 

Service charges on deposit accounts

 

 

963

 

 

1,015

 

 

Other service charges and fees

 

 

1,684

 

 

1,441

 

 

Net gains on calls and sales of available for sale securities

 

 

1

 

 

1

 

 

Investment services income

 

 

276

 

 

377

 

 

Other

 

 

509

 

 

622

 

 

Total noninterest income

 

 

5,163

 

 

5,101

 

 

Noninterest expenses

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,171

 

 

10,164

 

 

Occupancy

 

 

2,334

 

 

2,160

 

 

Other

 

 

4,585

 

 

4,426

 

 

Total noninterest expenses

 

 

17,090

 

 

16,750

 

 

Income before income taxes

 

 

3,176

 

 

3,608

 

 

Income tax expense

 

 

752

 

 

963

 

 

Net income

 

$

2,424

 

$

2,645

 

 

Net income per share - basic

 

$

0.70

 

$

0.77

 

 

Net income per share - assuming dilution

 

$

0.70

 

$

0.77

 

 

 

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

4


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2016

    

2015

  

Net income

 

$

2,424

 

$

2,645

 

Other comprehensive income:

 

 

 

 

 

 

 

Changes in defined benefit plan assets and benefit obligations

 

 

 

 

 

 

 

Changes in net (loss) gain arising during the period1

 

 

38

 

 

(29)

 

Tax effect

 

 

(13)

 

 

11

 

 

 

 

 

 

 

 

 

Amortization of prior service cost arising during the period1

 

 

(15)

 

 

14

 

Tax effect

 

 

5

 

 

(5)

 

Net of tax amount

 

 

15

 

 

(9)

 

 

 

 

 

 

 

 

 

Unrealized loss on cash flow hedging instruments

 

 

 

 

 

 

 

Unrealized holding loss arising during the period

 

 

(538)

 

 

(148)

 

Tax effect

 

 

188

 

 

52

 

Net of tax amount

 

 

(350)

 

 

(96)

 

 

 

 

 

 

 

 

 

Unrealized holding gains on securities

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

1,684

 

 

523

 

Tax effect

 

 

(589)

 

 

(183)

 

Reclassification adjustment for gains included in net income2

 

 

(1)

 

 

(1)

 

Tax effect

 

 

 —

 

 

 —

 

Net of tax amount

 

 

1,094

 

 

339

 

Other comprehensive income

 

 

759

 

 

234

 

Comprehensive income

 

$

3,183

 

$

2,879

 


1

These items are included in the computation of net periodic benefit cost. See Note 6, Employee Benefit Plans, for additional information.

2

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

 

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

5


 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated

   

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

Shareholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Balance December 31, 2015

 

$

3,301

 

$

10,420

 

$

116,167

 

$

1,171

 

$

131,059

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

2,424

 

 

 —

 

 

2,424

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

759

 

 

759

 

Share-based compensation

 

 

 —

 

 

305

 

 

 —

 

 

 —

 

 

305

 

Restricted stock vested

 

 

7

 

 

(7)

 

 

 —

 

 

 —

 

 

 —

 

Common stock issued

 

 

1

 

 

36

 

 

 —

 

 

 —

 

 

37

 

Common stock purchased

 

 

(4)

 

 

(132)

 

 

 —

 

 

 —

 

 

(136)

 

Cash dividends declared – common stock ($0.32 per share)

 

 

 —

 

 

 —

 

 

(1,104)

 

 

 —

 

 

(1,104)

 

Balance March 31, 2016

 

$

3,305

 

$

10,622

 

$

117,487

 

$

1,930

 

$

133,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

Additional

   

 

 

   

Accumulated Other

   

   

Total

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

 

Shareholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

 

Equity

 

Balance December 31, 2014

 

$

3,283

 

$

9,456

 

$

107,785

 

$

3,086

 

$

123,610

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

2,645

 

 

 —

 

 

2,645

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

234

 

 

234

 

Share-based compensation

 

 

 —

 

 

264

 

 

 —

 

 

 —

 

 

264

 

Restricted stock vested

 

 

7

 

 

(7)

 

 

 —

 

 

 —

 

 

 —

 

Common stock issued

 

 

1

 

 

32

 

 

 —

 

 

 —

 

 

33

 

Common stock purchased

 

 

(41)

 

 

(1,409)

 

 

 —

 

 

 —

 

 

(1,450)

 

Cash dividends declared – common stock ($0.30 per share)

 

 

 —

 

 

 —

 

 

(1,018)

 

 

 —

 

 

(1,018)

 

Balance March 31, 2015

 

$

3,250

 

$

8,336

 

$

109,412

 

$

3,320

 

$

124,318

 

 

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

 

6


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2016

    

2015

  

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

2,424

 

$

2,645

 

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

 

 

 

 

 

 

 

Depreciation

 

 

621

 

 

653

 

Provision for loan losses

 

 

4,600

 

 

3,515

 

Provision for indemnifications

 

 

52

 

 

58

 

Share-based compensation

 

 

305

 

 

264

 

Net accretion of certain acquisition-related fair value adjustments

 

 

(312)

 

 

(738)

 

Accretion of discounts and amortization of premiums on securities, net

 

 

423

 

 

372

 

Realized gains on sales and calls of securities

 

 

(1)

 

 

(1)

 

Net realized gains on sales of other real estate owned

 

 

(18)

 

 

 —

 

Net realized gains on sale of corporate premises and equipment

 

 

(46)

 

 

(3)

 

Increase in bank-owned life insurance cash surrender value

 

 

(86)

 

 

(88)

 

Origination of loans held for sale

 

 

(103,972)

 

 

(115,948)

 

Proceeds from sales of loans held for sale

 

 

124,276

 

 

104,395

 

Gains on sales of loans held for sale

 

 

(1,730)

 

 

(1,645)

 

Change in other assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

122

 

 

342

 

Other assets

 

 

(717)

 

 

(910)

 

Accrued interest payable

 

 

27

 

 

(10)

 

Other liabilities

 

 

(857)

 

 

387

 

Net cash provided by (used in) operating activities

 

 

25,111

 

 

(6,712)

 

Investing activities:

 

 

 

 

 

 

 

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

 

 

12,222

 

 

8,554

 

Purchases of securities available for sale

 

 

(7,649)

 

 

(7,220)

 

Net (redemptions) issuance of restricted stocks

 

 

(58)

 

 

97

 

Net increase in loans

 

 

(27,674)

 

 

(10,855)

 

Proceeds from sales of other real estate owned

 

 

160

 

 

46

 

Purchases of corporate premises and equipment, net

 

 

(558)

 

 

(305)

 

Net cash used in investing activities

 

 

(23,557)

 

 

(9,683)

 

Financing activities:

 

 

 

 

 

 

 

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

 

 

4,590

 

 

32,550

 

Net decrease in time deposits

 

 

(3,135)

 

 

(6,537)

 

Net decrease in borrowings

 

 

(3,555)

 

 

(1,364)

 

Issuance of common stock

 

 

37

 

 

33

 

Purchase of common stock 

 

 

(136)

 

 

(1,450)

 

Cash dividends

 

 

(1,104)

 

 

(1,018)

 

Net cash (used in) provided by financing activities

 

 

(3,303)

 

 

22,214

 

Net (decrease) increase in cash and cash equivalents

 

 

(1,749)

 

 

5,819

 

Cash and cash equivalents at beginning of period

 

 

152,943

 

 

167,616

 

Cash and cash equivalents at end of period

 

$

151,194

 

$

173,435

 

Supplemental disclosure

 

 

 

 

 

 

 

Interest paid

 

$

2,226

 

$

2,279

 

Income taxes paid

 

 

13

 

 

92

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

 

Unrealized gains on securities available for sale

 

$

1,684

 

$

523

 

Transfers between loans and other real estate owned

 

 

394

 

 

50

 

Pension adjustment

 

 

23

 

 

(15)

 

Unrealized losses on cash flow hedging instruments

 

 

(538)

 

 

(148)

 

 

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

 

7


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1: Summary of Significant Accounting Policies

 

Principles of Consolidation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission (the SEC). They do not include all of the information and notes required by U.S. GAAP for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2015.

 

The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation) and its wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or C&F Bank). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Corporation owns C&F Financial Statutory Trust I, C&F Financial Statutory Trust II and Central Virginia Bankshares Statutory Trust I, all of which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as a liability of the Corporation.

 

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

 

The Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation and Subsidiaries (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. and CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, was formed to originate and sell residential mortgages and through its subsidiary, Certified Appraisals LLC, provides ancillary mortgage loan production services for residential appraisals. C&F Finance, acquired on September 1, 2002, is a finance company providing automobile loans through indirect lending programs. C&F Wealth Management, organized in April 1995 as C&F Investment Services, Inc. and renamed in May 2015, is a full-service brokerage firm offering a comprehensive range of investment services and insurance products through an alliance with an independent broker/dealer. C&F Insurance Services, Inc., organized in July 1999, owns an equity interest in an insurance agency that sells insurance products to customers of C&F Bank, C&F Mortgage and other financial institutions that have an equity interest in the agency. CVB Title Services, Inc., was organized for the primary purpose of owning membership interests in two insurance-related limited liability companies. Business segment data is presented in Note 8.

 

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

 

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

 

Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet. The Corporation’s derivative financial instruments as of March 31, 2016 and December 31, 2015 consisted of (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will be sold in the secondary market on a best efforts basis and the related forward commitments to

8


 

sell mortgage loans and (2) interest rate swaps that qualified as cash flow hedges on the Corporation's trust preferred capital notes. Because the IRLCs and forward sales commitments are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of the Corporation's IRLCs and forward sales commitments and realized gains and losses upon ultimate sale of the loans are reported as noninterest income. The effective portion of the gain or loss on the Corporation's cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period or period(s) during which the hedged transactions affect earnings.

 

Share-Based Compensation: Shared-based compensation expense for the first quarter of 2016 included expense, net of forfeitures, of $305,000 ($189,000 after tax) for restricted stock granted during 2011 through 2016. As of March 31, 2016, there was $3.11 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 three months of 2016 and 2015 is presented below:

 

 

 

 

 

 

 

 

 

 

2016

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2015

 

137,200

 

$

36.50

 

Granted

 

16,150

 

 

38.16

 

Vested

 

(7,350)

 

 

23.20

 

Forfeitures

 

(300)

 

 

41.78

 

Unvested, March 31, 2016

 

145,700

 

$

37.34

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2014

 

135,600

 

$

34.34

 

Granted

 

16,650

 

 

37.72

 

Vested

 

(6,750)

 

 

20.21

 

Forfeitures

 

(1,100)

 

 

36.98

 

Unvested, March 31, 2015

 

144,400

 

$

35.37

 

 

There was no stock option activity during the three months ended March 31, 2016 and 2015.  Stock options outstanding at March 31, 2016 and 2015 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intrinsic

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

Unexercised

 

 

 

 

 

 

 

 

Remaining

 

In-The

 

 

 

 

 

 

 

 

Contractual

 

Money

 

 

 

 

Exercise

 

 

Life

 

Options

 

 

Shares

 

Price*

 

 

(in years)*

 

(in 000’s)

Options outstanding and exercisable at March 31, 2016

 

24,000

 

$

38.39

 

 

0.6

 

$

12

Options outstanding and exercisable at March 31, 2015

 

100,762

 

$

37.75

 

 

0.9

 

$

 —


*     Weighted average

 

9


 

Recent Significant Accounting Pronouncements:

 

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) – 1. Fully Benefit-Responsive Investment Contracts, 2. Plan Investment Disclosures, and 3. Measurement Date Practical Expedient.” The amendments within this ASU are in three parts. Among other things, Part I amendments designate contract value as the only required measure for fully benefit-responsive investment contracts; Part II amendments eliminate the requirement that plans disclose: (a) individual investments that represent five percent or more of net assets available for benefits; and (b) the net appreciation or depreciation for investments for both participant-directed investments and nonparticipant-directed investments; and Part III amendments provide a practical expedient to permit plans to measure investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end. The amendments in Parts I and II of this ASU are effective on a retrospective basis and Part III is effective on a prospective basis, for fiscal years beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2015-12 did not have a material effect on its financial statements. 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The adoption of ASU 2015-16 did not have a material effect on its financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  The amendments in ASU 2016-01 require, among other things, equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). It also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Corporation is currently assessing the effect that ASU 2016-01 may have on its financial statements.

 

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

10


 

apply a full retrospective transition approach. The Corporation is currently assessing the effect that ASU 2016-02 may have on its financial statements.

 

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

 

On March 30, 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to improve the accounting for employee share-based payments.  ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, such as accounting for income taxes, classification of excess tax benefits on the Statement of Cash Flows, accounting for forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the Statement of Cash Flows.  Additionally, ASU 2016-09 also simplifies two areas specific to entities other than public business entities, such as the practical expedient for expected term and the option to use intrinsic value for measuring awards.   For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Corporation is currently assessing the effect that ASU 2016-09 may have on its financial statements.

 

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

 

 

 

 

NOTE 2: Securities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. government agencies and corporations

 

$

16,159

 

$

22

 

$

(5)

 

$

16,176

 

Mortgage-backed securities

 

 

75,044

 

 

1,245

 

 

(11)

 

 

76,278

 

Obligations of states and political subdivisions

 

 

117,999

 

 

5,898

 

 

(95)

 

 

123,802

 

 

 

$

209,202

 

$

7,165

 

$

(111)

 

$

216,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. government agencies and corporations

 

$

18,759

 

$

 —

 

$

(258)

 

$

18,501

 

Mortgage-backed securities

 

 

76,957

 

 

513

 

 

(443)

 

 

77,027

 

Obligations of states and political subdivisions

 

 

118,389

 

 

5,640

 

 

(81)

 

 

123,948

 

 

 

$

214,105

 

$

6,153

 

$

(782)

 

$

219,476

 

 

11


 

The amortized cost and estimated fair value of securities at March 31, 2016, 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.

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

Amortized

    

 

 

(Dollars in thousands)

 

Cost

 

Fair Value

 

Due in one year or less

 

$

26,642

 

$

26,943

 

Due after one year through five years

 

 

133,804

 

 

138,273

 

Due after five years through ten years

 

 

35,801

 

 

37,102

 

Due after ten years

 

 

12,955

 

 

13,938

 

 

 

$

209,202

 

$

216,256

 

 

Proceeds from the maturities, calls and sales of securities available for sale for the three months ended March 31, 2016 and 2015 were $12.22 million and $8.55 million, respectively, resulting in gross realized gains of $1,000 for both the three months ended March 31, 2016 and 2015.

 

The Corporation pledges securities to primarily secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $90.16 million and an aggregate fair value of $93.88 million were pledged at March 31, 2016. Securities with an aggregate amortized cost of $91.93 million and an aggregate fair value of $95.13 million were pledged at December 31, 2015.

 

Securities in an unrealized loss position at March 31, 2016, by duration of the period of the unrealized loss, are shown below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollars in thousands)

 

Value

 

Loss

 

Value

 

Loss

 

   Value   

 

Loss

 

U.S. government agencies and corporations

 

$

 —

 

$

 —

 

$

994

 

$

5

 

$

994

 

$

5

 

Mortgage-backed securities

 

 

1,969

 

 

3

 

 

2,223

 

 

8

 

 

4,192

 

 

11

 

Obligations of states and political subdivisions

 

 

2,882

 

 

17

 

 

3,816

 

 

78

 

 

6,698

 

 

95

 

Total temporarily impaired securities

 

$

4,851

 

$

20

 

$

7,033

 

$

91

 

$

11,884

 

$

111

 

 

There were 25 debt securities totaling $11.88 million considered temporarily impaired at March 31, 2016. The primary cause of the temporary impairments in the Corporation's investments in debt securities was fluctuations in interest rates. Interest rates decreased during the first quarter of 2016, primarily in the middle and long-end of the United States Treasury yield curve, thereby decreasing unrealized losses on certain of the Corporation's debt securities as compared to December 31, 2015. Prices for debt securities were higher as interest rates declined, primarily due to the Federal Open Market Committee’s (FOMC) decision to reduce the number of anticipated increases in the Federal Funds rate in 2016, citing the weakness of the global economy as a reason for greater caution about the prospects for domestic growth.  Interest rates in the municipal bond sector, which includes the Corporation's obligations of states and political subdivisions, were also lower during the first quarter of 2016, driven by the same factors noted above that affected the overall interest rate environment, offset to some degree by an increase in the overall supply of municipal debt due to an increase in new issuance volume. At March 31, 2016, 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 or Moody's Investors Service. Of those in a net unrealized loss position, approximately 83 percent were rated “A” or better, as measured by market value, at  March 31, 2016.  For the approximately 17 percent not rated “A” or better, as measured by market value at March 31, 2016, the Corporation considers these to meet regulatory credit quality standards, such 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 March 31, 2016 and no other-than-temporary impairment has been recognized. 

12


 

 

Securities in an unrealized loss position at December 31, 2015, by duration of the period of the unrealized loss, are shown below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollars in thousands)

 

Value

 

Loss

 

Value

 

Loss

 

   Value   

 

Loss

 

U.S. government agencies and corporations

 

$

9,530

 

$

69

 

$

8,971

 

$

189

 

$

18,501

 

$

258

 

Mortgage-backed securities

 

 

27,085

 

 

397

 

 

2,252

 

 

46

 

 

29,337

 

 

443

 

Obligations of states and political subdivisions

 

 

5,157

 

 

32

 

 

4,666

 

 

49

 

 

9,823

 

 

81

 

Total temporarily impaired securities

 

$

41,772

 

$

498

 

$

15,889

 

$

284

 

$

57,661

 

$

782

 

 

The Corporation’s investment in restricted stocks totaled $3.40 million at March 31, 2016 and consisted of $3.26 million of Federal Home Loan Bank (FHLB) stock and $145,000 of Community Bankers Bank (CBB) stock.  Restricted stock is generally viewed as a long-term investment and as restricted investment securities, which are carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore, when evaluating restricted stock for impairment, their respective values are based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Corporation does not consider its investment in restricted stocks to be other-than-temporarily impaired at March 31, 2016 and no impairment has been recognized. Total restricted stocks is shown as a separate line item on the balance sheet and is not a part of the available-for-sale securities portfolio.  

NOTE 3: Loans

 

Major classifications of loans are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(Dollars in thousands)

    

2016

    

2015

 

Real estate – residential mortgage

 

$

184,860

 

$

186,763

 

Real estate – construction 1

 

 

27,214

 

 

7,759

 

Commercial, financial and agricultural 2

 

 

364,708

 

 

356,062

 

Equity lines

 

 

49,901

 

 

50,111

 

Consumer

 

 

9,139

 

 

9,011

 

Consumer finance

 

 

289,188

 

 

291,755

 

 

 

 

925,010

 

 

901,461

 

Less allowance for loan losses

 

 

(35,838)

 

 

(35,569)

 

Loans, net

 

$

889,172

 

$

865,892

 

 


1

Includes the Corporation's real estate construction lending and consumer real estate lot lending.

2

Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

 

Consumer loans included $243,000 and $266,000 of demand deposit overdrafts at March 31, 2016 and December 31, 2015, respectively.

 

13


 

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 (or acquired loans) that were recorded at fair value at the acquisition date and are included in the consolidated balance sheet at March 31, 2016 and December 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

  

December 31, 2015

 

 

 

Acquired Loans -

  

Acquired Loans -

  

 

 

  

Acquired Loans -

  

Acquired Loans -

  

 

 

 

 

 

Purchased

 

Purchased

 

Acquired Loans -

 

Purchased

 

Purchased

 

Acquired Loans -

 

(Dollars in thousands)

 

Credit Impaired

 

Performing

 

Total

 

Credit Impaired

 

Performing

 

Total

 

Outstanding principal balance

 

$

24,420

 

$

67,033

 

$

91,453

 

$

25,701

 

$

70,993

 

$

96,694

 

Carrying amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate – residential mortgage

 

$

1,188

 

$

15,055

 

$

16,243

 

$

1,305

 

$

15,478

 

$

16,783

 

Commercial, financial and agricultural1

 

 

11,304

 

 

34,315

 

 

45,619

 

 

12,317

 

 

37,287

 

 

49,604

 

Equity lines

 

 

278

 

 

13,765

 

 

14,043

 

 

286

 

 

13,969

 

 

14,255

 

Consumer

 

 

 —

 

 

227

 

 

227

 

 

 —

 

 

288

 

 

288

 

Total acquired loans

 

$

12,770

 

$

63,362

 

$

76,132

 

$

13,908

 

$

67,022

 

$

80,930

 

 


1

Includes acquired loans classified by the Corporation as commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

 

14


 

Loans on nonaccrual status were as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(Dollars in thousands)

    

2016

    

2015

 

Real estate – residential mortgage

 

$

2,293

 

$

2,297

 

Real estate – construction:

 

 

 

 

 

 

 

Construction lending

 

 

 —

 

 

 —

 

Consumer lot lending

 

 

 —

 

 

 —

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

Commercial real estate lending

 

 

2,446

 

 

2,515

 

Land acquisition and development lending

 

 

 —

 

 

 —

 

Builder line lending

 

 

 —

 

 

359

 

Commercial business lending

 

 

155

 

 

86

 

Equity lines

 

 

750

 

 

881

 

Consumer

 

 

4

 

 

19

 

Consumer finance

 

 

184

 

 

830

 

Total loans on nonaccrual status

 

$

5,832

 

$

6,987

 

 

The past due status of loans as of March 31, 2016 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

90+ Days

 

 

 

30 - 59 Days

 

60 - 89 Days

 

90+ Days

 

Total

 

 

 

 

 

 

 

 

 

 

Past Due and

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

PCI

 

Current1

 

Total Loans

 

Accruing 2

 

Real estate – residential mortgage

 

$

988

 

$

411

 

$

380

 

$

1,779

 

$

1,188

 

$

181,893

 

$

184,860

 

$

203

 

Real estate – construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction lending

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

22,915

 

 

22,915

 

 

 —

 

Consumer lot lending

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,299

 

 

4,299

 

 

 —

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending3

 

 

94

 

 

4,841

 

 

661

 

 

5,596

 

 

9,421

 

 

195,872

 

 

210,889

 

 

32

 

Land acquisition and development lending

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

49,918

 

 

49,918

 

 

 —

 

Builder line lending

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

25,900

 

 

25,900

 

 

 —

 

Commercial business lending

 

 

14

 

 

82

 

 

 —

 

 

96

 

 

1,883

 

 

76,021

 

 

78,001

 

 

 —

 

Equity lines

 

 

133

 

 

 —

 

 

 —

 

 

133

 

 

278

 

 

49,490

 

 

49,901

 

 

 —

 

Consumer

 

 

26

 

 

5

 

 

4

 

 

35

 

 

 —

 

 

9,104

 

 

9,139

 

 

2

 

Consumer finance

 

 

7,293

 

 

699

 

 

184

 

 

8,176

 

 

 —

 

 

281,012

 

 

289,188

 

 

 —

 

Total

 

$

8,548

 

$

6,038

 

$

1,229

 

$

15,815

 

$

12,770

 

$

896,424

 

$

925,010

 

$

237

 

 


1

For the purposes of the table above, “Current” includes loans that are 1-29 days past due.

2

Includes purchased credit impaired (PCI) loans of $235,000.

3

Commercial real estate loans past due 60-89 days at March 31, 2016 consist of loans to one borrower which were 60 days past due. 

 

The table above includes the following:

·

nonaccrual loans that are current of $3.82 million, 30-59 days past due of $288,000, 60-89 days past due of $493,000 and 90+ days past due of $1.23 million.

·

performing loans purchased in the acquisition of CVB that are current of $62.95 million, 30-59 days past due of $165,000, 60-89 past dues of $155,000 and 90+ days past due of $89,000.

15


 

 

The past due status of loans as of December 31, 2015 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

90+ Days

 

 

 

30 - 59 Days

 

60 - 89 Days

 

90+ Days

 

Total

 

 

 

 

 

 

 

 

 

 

Past Due and

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

PCI

 

Current1

 

Total Loans

 

Accruing2

 

Real estate – residential mortgage

 

$

737

 

$

146

 

$

574

 

$

1,457

 

$

1,305

 

$

184,001

 

$

186,763

 

$

268

 

Real estate – construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction lending

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,996

 

 

5,996

 

 

 —

 

Consumer lot lending

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,763

 

 

1,763

 

 

 —

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending

 

 

1,475

 

 

1,280

 

 

423

 

 

3,178

 

 

10,359

 

 

204,079

 

 

217,616

 

 

172

 

Land acquisition and development lending

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

46,311

 

 

46,311

 

 

 —

 

Builder line lending

 

 

 —

 

 

 —

 

 

359

 

 

359

 

 

 —

 

 

20,612

 

 

20,971

 

 

 —

 

Commercial business lending

 

 

20

 

 

86

 

 

321

 

 

427

 

 

1,958

 

 

68,779

 

 

71,164

 

 

321

 

Equity lines

 

 

378

 

 

 —

 

 

612

 

 

990

 

 

286

 

 

48,835

 

 

50,111

 

 

 —

 

Consumer

 

 

84

 

 

2

 

 

19

 

 

105

 

 

 —

 

 

8,906

 

 

9,011

 

 

 —

 

Consumer finance

 

 

15,046

 

 

2,264

 

 

830

 

 

18,140

 

 

 —

 

 

273,615

 

 

291,755

 

 

 —

 

Total

 

$

17,740

 

$

3,778

 

$

3,138

 

$

24,656

 

$

13,908

 

$

862,897

 

$

901,461

 

$

761

 

 


1

For the purposes of the table above, “Current” includes loans that are 1-29 days past due.

2

Includes PCI loans of $172,000.

 

The table above includes the following:

·

nonaccrual loans that are current of $3.17 million, 30-59 days past due of $377,000, 60‑89 days past due of $887,000 and 90+ days past due of $2.55 million.

·

performing loans purchased in the acquisition of CVB that are current of $66.37 million, 30-59 days past due of $270,000, 60-89 days past due of $0 and 90+ days past due of $378,000.

 

Loan modifications that were classified as TDRs during the three months ended March 31, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2016

 

2015

 

 

    

 

    

Pre-

    

Post-

    

 

    

Pre-

    

Post-

 

 

 

 

 

Modification

 

Modification

 

 

 

Modification

 

Modification

 

 

 

Number of

 

Recorded

 

Recorded

 

Number of

 

Recorded

 

Recorded

 

(Dollars in thousands)

 

Loans

 

Investment

 

Investment

 

Loans

 

Investment

 

Investment

 

Real estate – residential mortgage – interest rate concession

 

1

 

$

57

 

$

57

 

1

 

$

239

 

$

239

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending – interest rate concession

 

 —

 

 

 —

 

 

 —

 

1

 

 

15

 

 

15

 

Commercial business lending – interest rate concession

 

1

 

 

100

 

 

100

 

1

 

 

17

 

 

17

 

Consumer – interest rate concession

 

1

 

 

291

 

 

291

 

 —

 

 

 —

 

 

 —

 

Total

 

3

 

$

448

 

$

448

 

3

 

$

271

 

$

271

 

 

 

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. There were no TDR defaults during the three months ended March 31, 2016 or 2015. 

 

16


 

Impaired loans, which consisted solely of TDRs, and the related allowance at March 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

Recorded

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

Investment

 

 

 

 

Average

 

 

 

 

 

 

Unpaid

 

in Loans

 

in Loans

 

 

 

 

Balance-

 

Interest

 

 

 

Principal

 

without

 

with

 

Related

 

Impaired

 

Income

 

(Dollars in thousands)

 

Balance

 

Specific Reserve

 

Specific Reserve

 

Allowance

 

Loans

 

Recognized

 

Real estate – residential mortgage

 

$

2,811

 

$

172

 

$

2,528

 

$

344

 

$

2,708

 

$

26

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending

 

 

2,475

 

 

58

 

 

2,190

 

 

435

 

 

2,265

 

 

8

 

Commercial business lending

 

 

189

 

 

 —

 

 

186

 

 

39

 

 

191

 

 

2

 

Equity lines

 

 

32

 

 

30

 

 

 —

 

 

 —

 

 

30

 

 

 —

 

Consumer

 

 

498

 

 

 —

 

 

498

 

 

74

 

 

498

 

 

4

 

Total

 

$

6,005

 

$

260

 

$

5,402

 

$

892

 

$

5,692

 

$

40

 

 

Impaired loans, which consisted solely of TDRs, and the related allowance at December 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

Recorded

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

Investment

 

 

 

 

Average

 

 

 

 

 

 

Unpaid

 

in Loans

 

in Loans

 

 

 

 

Balance-

 

Interest

 

 

 

Principal

 

without

 

with

 

Related

 

Impaired

 

Income

 

(Dollars in thousands)

 

Balance

 

Specific Reserve

 

Specific Reserve

 

Allowance

 

Loans

 

Recognized

 

Real estate – residential mortgage

 

$

2,828

 

$

173

 

$

2,516

 

$

360

 

$

2,718

 

$

97

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending

 

 

2,522

 

 

61

 

 

2,258

 

 

438

 

 

2,361

 

 

35

 

Commercial business lending

 

 

99

 

 

 —

 

 

99

 

 

28

 

 

108

 

 

1

 

Equity lines

 

 

32

 

 

30

 

 

 —

 

 

 —

 

 

30

 

 

1

 

Consumer

 

 

207

 

 

 —

 

 

207

 

 

23

 

 

208

 

 

7

 

Total

 

$

5,688

 

$

264

 

$

5,080

 

$

849

 

$

5,425

 

$

141

 

 

PCI loans had an unpaid principal balance of $24.4 million and a carrying value of $12.8 million at March 31, 2016. Determining the fair value of purchased credit impaired loans required the Corporation to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of the cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the effect of estimated credit losses and is called the nonaccretable difference, and is not recorded. In accordance with U.S. GAAP, there was no carry-over of previously established allowance for loan losses for acquired loans.

 

The following table presents a summary of the change in the accretable yield of the PCI loan portfolio for the three months ended March 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

(Dollars in thousands)

    

2016

 

2015

 

Accretable yield, balance at beginning of period

 

$

10,419

 

$

13,488

 

Accretion

 

 

(462)

 

 

(753)

 

Reclassification of nonaccretable difference due to improvement in expected cash flows

 

 

441

 

 

3

 

Other changes, net

 

 

(263)

 

 

(362)

 

Accretable yield, balance at end of period

 

$

10,135

 

$

12,376

 

 

 

17


 

NOTE 4: Allowance for Loan Losses

 

The following table presents the changes in the allowance for loan losses by major classification during the three months ended March 31, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Real Estate

  

 

 

  

Commercial,

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

Residential

 

Real Estate

 

Financial &

 

Equity

 

 

 

 

Consumer

 

 

 

 

(Dollars in thousands)

 

Mortgage

 

Construction

 

Agricultural

 

  Lines  

 

Consumer

 

   Finance   

 

   Total   

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

$

2,471

 

$

94

 

$

7,755

 

$

1,052

 

$

243

 

$

23,954

 

$

35,569

 

Provision charged to operations

 

 

(10)

 

 

192

 

 

(226)

 

 

91

 

 

(47)

 

 

4,600

 

 

4,600

 

Loans charged off

 

 

 —

 

 

 —

 

 

(35)

 

 

(55)

 

 

(71)

 

 

(5,601)

 

 

(5,762)

 

Recoveries of loans previously charged off

 

 

26

 

 

 —

 

 

160

 

 

 —

 

 

127

 

 

1,118

 

 

1,431

 

Balance at March 31, 2016

 

$

2,487

 

$

286

 

$

7,654

 

$

1,088

 

$

252

 

$

24,071

 

$

35,838

 

 

 

The following table presents the changes in the allowance for loan losses by major classification during the three months ended March 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Real Estate

  

 

 

  

Commercial,

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

Residential

 

Real Estate

 

Financial &

 

Equity

 

 

 

 

Consumer

 

 

 

 

(Dollars in thousands)

 

Mortgage

 

Construction

 

Agricultural

 

  Lines  

 

Consumer

 

   Finance   

 

   Total   

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

2,313

 

$

434

 

$

7,744

 

$

812

 

$

211

 

$

24,092

 

$

35,606

 

Provision charged to operations

 

 

15

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,500

 

 

3,515

 

Loans charged off

 

 

(20)

 

 

 —

 

 

(13)

 

 

 —

 

 

(59)

 

 

(4,690)

 

 

(4,782)

 

Recoveries of loans previously charged off

 

 

162

 

 

 —

 

 

8

 

 

 —

 

 

41

 

 

1,147

 

 

1,358

 

Balance at March 31, 2015

 

$

2,470

 

$

434

 

$

7,739

 

$

812

 

$

193

 

$

24,049

 

$

35,697

 

 

The following table presents, as of March 31, 2016, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment, collectively evaluated for impairment or PCI loans), the total loans and loans by impairment methodology (individually evaluated for impairment, collectively evaluated for impairment or PCI loans).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Real Estate

  

 

 

  

Commercial,

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

Residential

 

Real Estate

 

Financial &

 

Equity

 

 

 

 

Consumer

 

 

 

 

(Dollars in thousands)

 

Mortgage

 

Construction

 

Agricultural

 

Lines

 

Consumer

 

Finance

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2016

 

$

2,487

 

$

286

 

$

7,654

 

$

1,088

 

$

252

 

$

24,071

 

$

35,838

 

Ending balance: individually evaluated for impairment

 

$

344

 

$

 —

 

$

474

 

$

 —

 

$

74

 

$

 —

 

$

892

 

Ending balance: collectively evaluated for impairment

 

$

2,143

 

$

286

 

$

7,145

 

$

1,088

 

$

178

 

$

24,071

 

$

34,911

 

Ending balance: acquired loans - PCI

 

$

 —

 

$

 —

 

$

35

 

$

 —

 

$

 —

 

$

 —

 

$

35

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2016

 

$

184,860

 

$

27,214

 

$

364,708

 

$

49,901

 

$

9,139

 

$

289,188

 

$

925,010

 

Ending balance: individually evaluated for impairment

 

$

2,700

 

$

 —

 

$

2,434

 

$

30

 

$

498

 

$

 —

 

$

5,662

 

Ending balance: collectively evaluated for impairment

 

$

180,972

 

$

27,214

 

$

350,970

 

$

49,593

 

$

8,641

 

$

289,188

 

$

906,578

 

Ending balance: acquired loans - PCI

 

$

1,188

 

$

 —

 

$

11,304

 

$

278

 

$

 —

 

$

 —

 

$

12,770

 

 

18


 

The following table presents, as of December 31, 2015, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Real Estate

  

 

 

  

Commercial,

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

Residential

 

Real Estate

 

Financial &

 

Equity

 

 

 

 

Consumer

 

 

 

 

(Dollars in thousands)

 

Mortgage

 

Construction

 

Agricultural

 

Lines

 

Consumer

 

Finance

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

2,471

 

$

94

 

$

7,755

 

$

1,052

 

$

243

 

$

23,954

 

$

35,569

 

Ending balance: individually evaluated for impairment

 

$

360

 

$

 —

 

$

466

 

$

 —

 

$

23

 

$

 —

 

$

849

 

Ending balance: collectively evaluated for impairment

 

$

2,111

 

$

94

 

$

7,254

 

$

1,052

 

$

220

 

$

23,954

 

$

34,685

 

Ending balance: acquired loans - PCI

 

$

 —

 

$

 —

 

$

35

 

$

 —

 

$

 —

 

$

 —

 

$

35

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

186,763

 

$

7,759

 

$

356,062

 

$

50,111

 

$

9,011

 

$

291,755

 

$

901,461

 

Ending balance: individually evaluated for impairment

 

$

2,689

 

$

 —

 

$

2,418

 

$

30

 

$

207

 

$

 —

 

$

5,344

 

Ending balance: collectively evaluated for impairment

 

$

182,769

 

$

7,759

 

$

341,327

 

$

49,795

 

$

8,804

 

$

291,755

 

$

882,209

 

Ending balance: acquired loans - PCI

 

$

1,305

 

$

 —

 

$

12,317

 

$

286

 

$

 —

 

$

 —

 

$

13,908

 

 

Loans by credit quality indicators as of March 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Special

   

 

 

   

Substandard

   

 

 

 

(Dollars in thousands)

 

Pass

 

 Mention 

 

Substandard

 

Nonaccrual

 

Total1

 

Real estate – residential mortgage

 

$

179,137

 

$

1,275

 

$

2,155

 

$

2,293

 

$

184,860

 

Real estate – construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction lending

 

 

22,827

 

 

 —

 

 

88

 

 

 —

 

 

22,915

 

Consumer lot lending

 

 

4,299

 

 

 —

 

 

 —

 

 

 —

 

 

4,299

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending

 

 

190,200

 

 

4,866

 

 

13,377

 

 

2,446

 

 

210,889

 

Land acquisition and development lending

 

 

48,456

 

 

710

 

 

752

 

 

 —

 

 

49,918

 

Builder line lending

 

 

24,819

 

 

718

 

 

363

 

 

 —

 

 

25,900

 

Commercial business lending

 

 

67,009

 

 

164

 

 

10,673

 

 

155

 

 

78,001

 

Equity lines

 

 

48,351

 

 

588

 

 

212

 

 

750

 

 

49,901

 

Consumer

 

 

8,614

 

 

31

 

 

490

 

 

4

 

 

9,139

 

 

 

$

593,712

 

$

8,352

 

$

28,110

 

$

5,648

 

$

635,822

 

 


1

At March 31, 2016, the Corporation did not have any loans classified as Doubtful or Loss.

 

Included in the table above are loans purchased in connection with the acquisition of CVB of $68.11 million pass rated, $2.96 million special mention, $4.82 million substandard and $248,000 substandard nonaccrual.

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

Performing

    

Non-Performing

    

      Total      

 

Consumer finance

 

$

289,004

 

$

184

 

$

289,188

 

 

19


 

Loans by credit quality indicators as of December 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

   

Special

   

 

 

   

Substandard

   

 

 

 

(Dollars in thousands)

 

Pass

 

 Mention 

 

Substandard

 

Nonaccrual

 

Total1

 

Real estate – residential mortgage

 

$

181,107

 

$

1,276

 

$

2,083

 

$

2,297

 

$

186,763

 

Real estate – construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction lending

 

 

5,924

 

 

72

 

 

 —

 

 

 —

 

 

5,996

 

Consumer lot lending

 

 

1,763

 

 

 —

 

 

 —

 

 

 —

 

 

1,763

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending

 

 

195,479

 

 

6,089

 

 

13,533

 

 

2,515

 

 

217,616

 

Land acquisition and development lending

 

 

45,061

 

 

856

 

 

394

 

 

 —

 

 

46,311

 

Builder line lending

 

 

19,252

 

 

829

 

 

531

 

 

359

 

 

20,971

 

Commercial business lending

 

 

57,928

 

 

1,306

 

 

11,844

 

 

86

 

 

71,164

 

Equity lines

 

 

48,392

 

 

617

 

 

221

 

 

881

 

 

50,111

 

Consumer

 

 

8,760

 

 

116

 

 

116

 

 

19

 

 

9,011

 

 

 

$

563,666

 

$

11,161

 

$

28,722

 

$

6,157

 

$

609,706

 

 


1

At December 31, 2015, the Corporation did not have any loans classified as Doubtful or Loss.

 

Included in the table above are loans purchased in connection with the acquisition of CVB of $71.14 million pass rated, $4.09 million special mention, $5.15 million substandard and $542,000 substandard nonaccrual.

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

Performing

    

Non-Performing

    

      Total      

 

Consumer finance

 

$

290,925

 

$

830

 

$

291,755

 

 

 

NOTE 5: Shareholders’ Equity and Earnings Per Common Share

 

Accumulated Other Comprehensive Income

 

The following table presents the cumulative balances of the components of accumulated other comprehensive income, net of deferred taxes of $1.03 million and $620,000 as of March 31, 2016 and December 31, 2015, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(Dollars in thousands)

    

2016

    

2015

 

Net unrealized gains on securities

 

$

4,584

 

$

3,491

 

Net unrecognized loss on cash flow hedges

 

 

(456)

 

 

(107)

 

Net unrecognized losses on defined benefit plan

 

 

(2,198)

 

 

(2,213)

 

Total accumulated other comprehensive income

 

$

1,930

 

$

1,171

 

 

Common Shares

 

The Corporation purchased 3,525 and 2,445 shares of its common stock from employees to satisfy tax withholding obligations arising upon the vesting of restricted shares during the first three months of 2016 and 2015, respectively.  During the first three months of 2015, 38,759 shares were purchased under a share repurchase program authorized by the Corporation’s Board of Directors; whereas, no such shares were purchased during the first three months of 2016. 

 

20


 

Earnings Per Common Share (EPS)

 

The components of the Corporation’s EPS calculations are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(Dollars in thousands)

    

2016

    

2015

 

Net income

 

$

2,424

 

$

2,645

 

 

 

 

 

 

 

 

 

Weighted average number of common shares used in earnings per common share—basic

 

 

3,448,630

 

 

3,414,172

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock option awards

 

 

1,109

 

 

367

 

Weighted average number of common shares used in earnings per common share—assuming dilution

 

 

3,449,739

 

 

3,414,539

 

 

 

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.  Accordingly, the weighted average number of common shares used in the calculation of basic and diluted EPS includes both vested and unvested common shares outstanding.

Potential common shares that may be issued by the Corporation for its stock option awards are determined using the treasury stock method. Approximately 12,000 shares and 88,762 shares issuable upon exercise of options were not included in computing diluted earnings per common share for the three months ended March 31, 2016 and 2015, respectively, because they were anti-dilutive.

NOTE 6: Employee Benefit Plans

 

The Bank has a non-contributory cash balance pension plan  for which the components of net periodic benefit cost are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(Dollars in thousands)

    

2016

    

2015

    

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

Service cost

 

$

262

 

$

267

 

 

Interest cost

 

 

130

 

 

117

 

 

Expected return on plan assets

 

 

(261)

 

 

(253)

 

 

Amortization of prior service cost

 

 

(15)

 

 

(14)

 

 

Recognized net actuarial loss

 

 

38

 

 

29

 

 

Net periodic benefit cost

 

$

154

 

$

146

 

 

 

NOTE 7: 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 and equity securities traded in an active exchange market, as well as U.S. Treasury securities.

 

21


 

·

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 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 March 31, 2016 and December 31, 2015, 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 Standard & Poor's Securities Evaluations Inc. (SPSE), Thomson Reuters Pricing Service (TRPS), and Interactive Data Pricing and Reference Data LLC (IDC).  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. SPSE and IDC provide evaluated prices for the Corporation's obligations of states and political subdivisions category of securities.  Both sources use 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 and IDC provide 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.  Fixed-rate securities issued by the Small Business Association in the U.S. government agencies and corporations category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics. Pass-through mortgage-backed securities (or 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 a relative mortgage-backed to-be-announced (TBA) or other benchmark price. TBA 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.

 

Loans held for sale. 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 (liability) - 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.

22


 

 

Derivative asset (liability) - cash flow hedges. 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.

 

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

Fair Value Measurements Using

 

Assets/Liabilities at

 

(Dollars in thousands)

  

Level 1

    

Level 2

    

Level 3

    

 Fair Value 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

$

 —

 

$

16,176

 

$

 —

 

$

16,176

 

Mortgage-backed securities

 

 

 —

 

 

76,278

 

 

 —

 

 

76,278

 

Obligations of states and political subdivisions

 

 

 —

 

 

123,802

 

 

 —

 

 

123,802

 

Total securities available for sale

 

 

 —

 

 

216,256

 

 

 —

 

 

216,256

 

Loans held for sale

 

 

 —

 

 

25,426

 

 

 —

 

 

25,426

 

Derivative asset - IRLC

 

 

 —

 

 

1,096

 

 

 —

 

 

1,096

 

Total assets

 

$

 —

 

$

242,778

 

$

 —

 

$

242,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability - cash flow hedges

 

$

 —

 

$

713

 

$

 —

 

$

713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Fair Value Measurements Using

 

Assets/Liabilities at

 

(Dollars in thousands)

  

Level 1

    

Level 2

    

Level 3

    

 Fair Value 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

$

 —

 

$

18,501

 

$

 —

 

$

18,501

 

Mortgage-backed securities

 

 

 —

 

 

77,027

 

 

 —

 

 

77,027

 

Obligations of states and political subdivisions

 

 

 —

 

 

123,948

 

 

 —

 

 

123,948

 

Total securities available for sale

 

 

 —

 

 

219,476

 

 

 —

 

 

219,476

 

Loans held for sale

 

 

 —

 

 

44,000

 

 

 —

 

 

44,000

 

Derivative asset - IRLC

 

 

 —

 

 

744

 

 

 —

 

 

744

 

Total assets

 

$

 —

 

$

264,220

 

$

 —

 

$

264,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability - cash flow hedges

 

$

 —

 

$

175

 

$

 —

 

$

175

 

 

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. A loan is considered impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. All TDRs are considered impaired loans. The Corporation measures impairment on a loan-by-loan basis for commercial, construction and residential loans in excess of $500,000 by 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. Additionally, management reviews current market conditions, borrower history, past experience with similar loans and economic conditions. Based on management's review, additional write-

23


 

downs to fair value may be incurred. The Corporation maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. When the fair value of an impaired loan is based solely on observable cash flows, market price or a current appraisal, the Corporation records the impaired loan as nonrecurring Level 2. However, if based on management's review, additional write-downs to fair value are required or if the impaired loan otherwise does not meet the standards for Level 2 classification, the Corporation records the impaired loan as nonrecurring Level 3.

 

The measurement of impaired loans of less than $500,000, with the exception of Commercial loan TDRs, is based on each loan's future cash flows discounted at the loan's effective interest rate rather than the market rate of interest, which is not a fair value measurement and is therefore excluded from fair value disclosure requirements.

 

Other real estate owned (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less 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 costs to sell if valuations indicate a further deterioration in market conditions. As such, we record OREO as nonrecurring Level 3.

 

The following table presents the balances of financial assets measured at fair value on a non-recurring basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

Fair Value Measurements Using

 

Assets at Fair

 

(Dollars in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Value

 

Impaired loans, net

 

$

 —

 

$

 —

 

$

1,959

 

$

1,959

 

Other real estate owned, net

 

 

 —

 

 

 —

 

 

1,194

 

 

1,194

 

Total

 

$

 —

 

$

 —

 

$

3,153

 

$

3,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2015

 

 

 

Fair Value Measurements Using

 

Assets at Fair

 

(Dollars in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Value

 

Impaired loans, net

 

$

 —

 

$

 —

 

$

1,953

 

$

1,953

 

Other real estate owned, net

 

 

 —

 

 

 —

 

 

942

 

 

942

 

Total

 

$

 —

 

$

 —

 

$

2,895

 

$

2,895

 

 

The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a non-recurring basis as of March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2016

 

(Dollars in thousands)

    

Fair Value

    

Valuation Technique(s)

    

Unobservable Inputs

    

Range of Inputs

 

Impaired loans, net

 

$

1,959

 

Appraisals

 

Discount to reflect current market conditions and estimated selling costs

 

10% - 50%

 

Other real estate owned, net

 

 

1,194

 

Appraisals

 

Discount to reflect current market conditions and estimated selling costs

 

0% - 65%

 

Total

 

$

3,153

 

 

 

 

 

 

 

 

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

24


 

requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

 

The following describes the valuation techniques used by the Corporation to measure certain of its financial instruments at fair value as of March 31, 2016 and December 31, 2015.

 

Cash and short-term investments. The nature of these instruments and their relatively short maturities provide for the reporting of fair value equal to the historical cost.

 

Loans, net. The fair value of performing loans is estimated using a discounted expected future cash flows analysis based on current rates being offered on similar products in the market. An overall valuation adjustment is made for specific credit risks as well as general portfolio risks. Based on the valuation methodologies used in assessing the fair value of loans and the associated valuation allowance, these loans are considered Level 3.

 

Loan totals, as listed in the table below, include impaired loans. For valuation techniques used in relation to impaired loans, see the Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis section in this Note 7.

 

Loans held for sale, net. As described in Assets and Liabilities Measured at Fair Value on a Recurring Basis section in this Note 7, the Corporation has elected to carry its portfolio of loans held for sale at fair value, measured on a recurring basis.

 

Accrued interest receivable. The carrying amount of accrued interest receivable approximates fair value.

 

Bank-owned life insurance (BOLI).  The fair value of BOLI is estimated using information provided by insurance carriers.  These policies are carried at their cash surrender value, which approximates the fair value. 

 

Deposits. The fair value of all demand deposit accounts is the amount payable at the report date. For all other deposits, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products in active markets (Level 2).

 

Borrowings. The fair value of borrowings is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products in active markets (Level 2).

 

Accrued interest payable. The carrying amount of accrued interest payable approximates fair value.

 

Letters of credit. The estimated fair value of letters of credit is based on estimated fees the Corporation would pay to have another entity assume its obligation under the outstanding arrangements. These fees are not considered material.

 

Unused portions of lines of credit. The estimated fair value of unused portions of lines of credit is based on estimated fees the Corporation would pay to have another entity assume its obligation under the outstanding arrangements. These fees are not considered material.

 

25


 

The following tables reflect the carrying amounts and estimated fair values of the Corporation's financial instruments whether or not recognized on the balance sheet at fair value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Carrying

  

   Fair Value Measurements at March 31, 2016 Using   

  

 Total Fair 

 

(Dollars in thousands)

 

      Value      

 

Level 1

 

Level 2

 

Level 3

 

      Value      

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

151,194

 

$

151,194

 

$

 —

 

$

 —

 

$

151,194

 

Securities available for sale

 

 

216,256

 

 

 —

 

 

216,256

 

 

 —

 

 

216,256

 

Loans, net

 

 

889,172

 

 

 —

 

 

 —

 

 

899,155

 

 

899,155

 

Loans held for sale

 

 

25,426

 

 

 —

 

 

25,426

 

 

 —

 

 

25,426

 

Derivative asset - IRLC

 

 

1,096

 

 

 —

 

 

1,096

 

 

 —

 

 

1,096

 

Bank-owned life insurance

 

 

15,085

 

 

 —

 

 

15,085

 

 

 —

 

 

15,085

 

Accrued interest receivable

 

 

6,707

 

 

6,707

 

 

 —

 

 

 —

 

 

6,707

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

738,491

 

$

738,491

 

$

 —

 

$

 —

 

$

738,491

 

Time deposits

 

 

336,597

 

 

 —

 

 

338,986

 

 

 —

 

 

338,986

 

Borrowings

 

 

173,715

 

 

 —

 

 

170,901

 

 

 —

 

 

170,901

 

Derivative liability - cash flow hedges

 

 

713

 

 

 —

 

 

713

 

 

 —

 

 

713

 

Accrued interest payable

 

 

725

 

 

725

 

 

 —

 

 

 —

 

 

725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 Carrying 

  

Fair Value Measurements at December 31, 2015 Using

  

 Total Fair 

 

(Dollars in thousands)

 

      Value      

 

Level 1

 

Level 2

 

Level 3

 

      Value      

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

152,943

 

$

152,943

 

$

 —

 

$

 —

 

$

152,943

 

Securities available for sale

 

 

219,476

 

 

 —

 

 

219,476

 

 

 —

 

 

219,476

 

Loans, net

 

 

865,892

 

 

 —

 

 

 —

 

 

875,341

 

 

875,341

 

Loans held for sale

 

 

44,000

 

 

 —

 

 

44,000

 

 

 —

 

 

44,000

 

Derivative asset - IRLC

 

 

744

 

 

 —

 

 

744

 

 

 —

 

 

744

 

Bank-owned life insurance

 

 

14,988

 

 

 —

 

 

14,988

 

 

 —

 

 

14,988

 

Accrued interest receivable

 

 

6,829

 

 

6,829

 

 

 —

 

 

 —

 

 

6,829

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

733,901

 

$

733,901

 

$

 —

 

$

 —

 

$

733,901

 

Time deposits

 

 

339,732

 

 

 —

 

 

342,275

 

 

 —

 

 

342,275

 

Borrowings

 

 

177,261

 

 

 —

 

 

174,032

 

 

 —

 

 

174,032

 

Derivative liability - cash flow hedges

 

 

175

 

 

 —

 

 

175

 

 

 —

 

 

175

 

Accrued interest payable

 

 

698

 

 

698

 

 

 —

 

 

 —

 

 

698

 

 

The Corporation assumes interest rate risk (the risk that general interest rate levels will change) in the normal course of operations. As a result, the fair values of the Corporation’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to balance minimizing interest rate risk and increasing net interest income in current market conditions. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors interest rates, maturities and repricing dates of assets and liabilities and attempts to manage interest rate risk by adjusting terms of new loans, deposits and borrowings and by investing in securities with terms that mitigate the Corporation’s overall interest rate risk.

 

NOTE 8: 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

26


 

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 automobile retail installment sales contracts.

 

The Corporation’s other segment includes a full-service brokerage firm that derives revenues from offering investment services and insurance products through an alliance with an independent broker/dealer and an insurance company that derives revenues from insurance 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 March 31, 2016

 

 

    

Retail

    

Mortgage

    

Consumer

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

 

Banking

 

Banking

 

Finance

 

Other

 

Eliminations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

11,083

 

$

310

 

$

11,811

 

$

1

 

$

(1,240)

 

$

21,965

 

Gains on sales of loans

 

 

 —

 

 

1,730

 

 

 —

 

 

 —

 

 

 —

 

 

1,730

 

Other noninterest income

 

 

2,162

 

 

743

 

 

232

 

 

296

 

 

 —

 

 

3,433

 

Total operating income

 

 

13,245

 

 

2,783

 

 

12,043

 

 

297

 

 

(1,240)

 

 

27,128

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

 —

 

 

 —

 

 

4,600

 

 

 —

 

 

 —

 

 

4,600

 

Interest expense

 

 

1,454

 

 

62

 

 

1,703

 

 

283

 

 

(1,240)

 

 

2,262

 

Salaries and employee benefits

 

 

6,008

 

 

1,184

 

 

2,627

 

 

352

 

 

 —

 

 

10,171

 

Other noninterest expenses

 

 

4,432

 

 

1,001

 

 

1,328

 

 

158

 

 

 —

 

 

6,919

 

Total operating expenses

 

 

11,894

 

 

2,247

 

 

10,258

 

 

793

 

 

(1,240)

 

 

23,952

 

Income (loss) before income taxes

 

 

1,351

 

 

536

 

 

1,785

 

 

(496)

 

 

 —

 

 

3,176

 

Income tax expense (benefit)

 

 

22

 

 

214

 

 

703

 

 

(187)

 

 

 —

 

 

752

 

Net income (loss)

 

$

1,329

 

$

322

 

$

1,082

 

$

(309)

 

$

 —

 

$

2,424

 

Total assets

 

$

1,237,374

 

$

39,924

 

$

292,075

 

$

5,186

 

$

(169,735)

 

$

1,404,824

 

Goodwill

 

$

3,702

 

$

 —

 

$

10,723

 

$

 —

 

$

 —

 

$

14,425

 

Capital expenditures

 

$

297

 

$

169

 

$

147

 

$

 —

 

$

 —

 

$

613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

 

    

Retail

    

Mortgage

    

Consumer

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

 

Banking

 

Banking

 

Finance

 

Other

 

Eliminations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

10,549

 

$

294

 

$

11,119

 

$

 —

 

$

(1,159)

 

$

20,803

 

Gains on sales of loans

 

 

 —

 

 

1,645

 

 

 —

 

 

 —

 

 

 —

 

 

1,645

 

Other noninterest income

 

 

2,181

 

 

596

 

 

287

 

 

392

 

 

 —

 

 

3,456

 

Total operating income

 

 

12,730

 

 

2,535

 

 

11,406

 

 

392

 

 

(1,159)

 

 

25,904

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

 —

 

 

15

 

 

3,500

 

 

 —

 

 

 —

 

 

3,515

 

Interest expense

 

 

1,332

 

 

48

 

 

1,521

 

 

289

 

 

(1,159)

 

 

2,031

 

Salaries and employee benefits

 

 

5,937

 

 

1,389

 

 

2,439

 

 

399

 

 

 —

 

 

10,164

 

Other noninterest expenses

 

 

4,256

 

 

1,004

 

 

1,180

 

 

146

 

 

 —

 

 

6,586

 

Total operating expenses

 

 

11,525

 

 

2,456

 

 

8,640

 

 

834

 

 

(1,159)

 

 

22,296

 

Income (loss) before income taxes

 

 

1,205

 

 

79

 

 

2,766

 

 

(442)

 

 

 —

 

 

3,608

 

Income tax expense (benefit)

 

 

20

 

 

32

 

 

1,079

 

 

(168)

 

 

 —

 

 

963

 

Net income (loss)

 

$

1,185

 

$

47

 

$

1,687

 

$

(274)

 

$

 —

 

$

2,645

 

Total assets

 

$

1,203,194

 

$

55,406

 

$

277,160

 

$

4,302

 

$

(176,237)

 

$

1,363,825

 

Goodwill

 

$

3,702

 

$

 —

 

$

10,723

 

$

 —

 

$

 —

 

$

14,425

 

Capital expenditures

 

$

241

 

$

31

 

$

35

 

$

1

 

$

 —

 

$

308

 

 

 

27


 

The Retail Banking segment extends a warehouse line 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 50 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 rates ranging from 3.8 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 9: Commitments and Financial Instruments with Off-Balance-Sheet Risk

 

C&F Mortgage enters into IRLCs with customers and will sell the underlying loans to investors on either a best efforts or a mandatory delivery basis. C&F Mortgage mitigates interest rate risk on IRLCs and loans held for sale by (a) entering into forward loan sales contracts with investors for loans to be delivered on a best efforts basis or (b) entering into forward sales contracts of MBS for loans to be delivered on a mandatory basis. Both the IRLCs with customers and the forward sales contracts are considered derivative financial instruments. At March 31, 2016, the Corporation had best efforts forward sales contracts with a notional value of $101.2 million, and each loan held for sale by C&F Mortgage was subject to a forward sales agreement. The fair value of these derivative instruments at March 31, 2016 was $1.1 million, which was included in other assets.  The Corporation had no mandatory forward sales contracts at March 31, 2016.

 

C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party counterparties. 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 indemnification reserve for potential claims made under these recourse provisions.  The following table presents the changes in the allowance for indemnification losses for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(Dollars in thousands)

  

2016

    

2015

 

Allowance, beginning of period

 

$

2,363

 

$

2,089

 

Provision for indemnification losses

 

 

52

 

 

58

 

Payments

 

 

 —

 

 

 —

 

Allowance, end of period

 

$

2,415

 

$

2,147

 

 

NOTE 10: Interest Rate Swaps

 

The Corporation uses interest rate swaps to manage exposure of its trust preferred capital notes to interest rate risk. 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’s interest rate swaps qualify 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 $10.00 million and $15.00 million of the Corporation’s trust preferred capital notes to fixed rates of interest until September 2020 and December 2019, respectively.

 

The cash flow hedges’ total notional amount is $25.00 million. At March 31, 2016, the cash flow hedges had a fair value of ($713,000), which is recorded in other liabilities,. The cash flow hedges were fully effective at March 31, 2016 and therefore the net loss on the cash flow hedges was recognized as a component of other comprehensive income (loss), net of deferred income taxes.

 

28


 

NOTE 11: Other Noninterest Expenses

 

The following table presents the significant components in the statements of income line “Noninterest Expenses-Other.”

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(Dollars in thousands)

    

2016

    

2015

 

Data processing fees

 

$

955

 

$

882

 

Professional fees

 

 

511

 

 

498

 

Marketing and advertising expenses

 

 

376

 

 

252

 

Travel and educational expenses

 

 

273

 

 

248

 

Telecommunication expenses

 

 

234

 

 

345

 

Amortization of core deposit intangible

 

 

206

 

 

263

 

All other noninterest expenses

 

 

2,030

 

 

1,938

 

Total other noninterest expenses

 

$

4,585

 

$

4,426

 

 

 

29


 

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 future financial performance, liquidity, strategic business initiatives, the effect of future market and industry trends including competitive trends in the nonprime consumer finance markets, the Corporation’s and each business segment’s loan portfolio and business prospects related to each segment’s loan portfolio, allowance for loan losses, trends regarding the provision for loan losses, trends regarding net loan charge-offs, trends regarding levels of nonperforming assets and troubled debt restructurings and expenses associated with nonperforming assets, 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), allowance for indemnification losses, levels of noninterest income and expense, interest rates and yields including possible future rising interest rate environments, 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. These statements may address issues that involve estimates and assumptions made by management and risks and uncertainties. Actual results could differ materially from historical results or those anticipated or implied by such statements. 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 volatility in yields on U.S. Treasury bonds and increases or volatility in mortgage rates

 

·

general business conditions, as well as conditions within the financial markets

 

·

general economic conditions, including unemployment levels

 

·

the legislative/regulatory climate, including the Dodd-Frank Act and regulations promulgated thereunder, the Consumer Financial Protection Bureau (CFPB) and the regulatory and enforcement activities of the CFPB and the application of the Basel III capital standards to the Corporation and the Bank

 

·

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 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

30


 

 

·

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 expansion and technology initiatives

 

·

reliance on third parties for key services

 

·

accounting principles, policies and guidelines and elections by the Corporation thereunder

 

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, and other institutions. As a result, defaults by, or even rumors or questions about defaults by, one or more financial services institutions, or the financial services industry generally, could create another market-wide liquidity crisis similar to that experienced in late 2008 and early 2009 and could lead to losses or defaults by us or by other institutions. There is no assurance that any such losses would not materially adversely affect the Corporation’s results of operations.

 

There can be no assurance that the actions taken by the federal government and regulatory agencies will alleviate the industry or economic factors that may adversely affect the Corporation’s business and financial performance. Further, certain aspects of the Dodd-Frank Act remain subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall effect on the Corporation’s business and financial performance.

 

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, 2015, should be considered in evaluating the forward-looking statements contained herein. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report.

 

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 our 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, 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.  For more information see the section titled “Asset Quality” within Part I, Item 2.

 

31


 

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 under certain conditions when a purchaser of a loan (investor) sold by C&F Mortgage incurs a 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 arising from indemnification requests. 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 for commercial, construction and residential loans in excess of $500,000 by 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. Troubled debt restructurings (TDRs) are also considered impaired loans, even if the loan balance is less than $500,000. 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:  Loans acquired in a business combination, such as the Corporation's acquisition of CVB in October 2013, are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses. Purchased credit-impaired (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 were 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," is not recorded and is available to absorb future credit losses on those loans. 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.

 

Subsequent to acquisition, we evaluate on a quarterly basis our estimate of cash flows expected to be collected. 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 acquisition and quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

 

Purchased performing loans are recorded at fair value as of the acquisition 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 in future periods for any deterioration in these loans subsequent to the acquisition.

 

32


 

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. For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. We regularly review each investment security for other-than-temporary impairment based on criteria that includes the extent to which cost exceeds market price, 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, loan foreclosure are held for sale and are initially recorded at the fair value less 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 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 2013 and C&F Bank's acquisition of C&F Finance Company in September 2002. With the adoption of ASU 2011-08, Intangible-Goodwill and Other-Testing Goodwill for Impairment, in 2012, the Corporation may first assess qualitative factors to determine if it is more likely than not that the fair value of goodwill is less than the carrying amount, which determines if the two-step goodwill impairment test is necessary. If the likelihood of impairment is more than 50 percent, the Corporation must perform a test for impairment and we may be required to record impairment charges. In assessing the recoverability of the Corporation’s goodwill, major assumptions used in determining impairment are increases in future income, sales multiples in determining terminal value and the discount rate applied to future cash flows. If an impairment test is performed, we will prepare a sensitivity analysis by increasing the discount rate, lowering sales multiples and reducing increases in future income.

 

Retirement Plan: C&F Bank maintains a non-contributory, cash balance 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 valued using market quotations. C&F Bank’s actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the interest crediting rate, the estimated future return on plan assets and the anticipated rate of future salary increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.

 

Derivative Financial Instruments:  The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet. The Corporation's derivative financial instruments consist of (1) IRLCs on mortgage loans that will be held for sale and related forward sales commitments and (2) interest rate swaps that qualify as cash flow hedges of the Corporation's trust preferred capital notes. Because the IRLCs and forward sale commitments are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of the Corporation's IRLCs and forward sales commitments and realized gains and losses upon ultimate sale of the loans are reported as noninterest income. The effective portion of the gain or loss on the Corporation's cash flow hedges is reported as a component of other comprehensive income, net of deferred taxes, and reclassified into earnings in the same periods during which the hedged transactions affect earnings.

 

33


 

Accounting for Income Taxes: Determining the Corporation’s effective tax rate requires judgment. In the ordinary course of business, there are transactions and calculations for which the ultimate tax outcomes are uncertain. In addition, the Corporation’s tax returns are subject to audit by various tax authorities. Although we believe that the estimates are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the income tax provision and accrual.

 

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, 2015.

 

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: (i) return on average assets (ROA), (ii) return on average common equity (ROE), and (iii) 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 regulatory capital position.

 

Financial Performance Measures

 

Net income for the Corporation was $2.4 million for the first quarter of 2016, or $0.70 per common share assuming dilution, compared with net income of $2.6 million for the first quarter of 2015, or $0.77 per common share assuming dilution. The decrease in net income for the first quarter of 2016, as compared to the first quarter of 2015, resulted from lower earnings at the Consumer Finance segment, offset in part by higher earnings at the Retail Banking and Mortgage Banking segments.

 

The Corporation’s annualized ROE and ROA were 7.33 percent and 0.69 percent, respectively, for the first quarter of 2016, compared to 8.52 percent and 0.79 percent, respectively, for the first quarter of 2015.  The decline in ROE and ROA for the first quarter of 2016, compared to the first quarter of 2015, resulted from the decrease in earnings and growth in average equity and assets.

 

Principal Business Activities. 

 

An overview of the financial results for each of the Corporation’s principal business segments is presented below. A more detailed discussion is included in “Results of Operations.”

 

Retail Banking: The Retail Banking segment reported net income of $1.3 million for the first quarter of 2016, compared to net income of $1.2 million for the first quarter of 2015.  The improvement in net income of the Retail Banking segment for the first quarter of 2016 resulted from (1) the effect of loan growth on interest income, as average loans for the first quarter of 2016 at C&F Bank increased $65.6 million or 11.8 percent over the first quarter of 2015, (2) the benefit of consistent loan credit quality with historically low charge-offs, increased recoveries of previously charged-off loans and decreased expenses associated with nonperforming loans, and (3) a lower cost of borrowings resulting from the maturity of a portion of C&F Bank’s higher-rate FHLB advances, which occurred in the third quarter of 2015. Partially offsetting these positive factors were the effects of (1) a decline in the yield on C&F Bank’s investment and loan portfolios due to the effects of the low interest rate environment, (2) a decline in the net accretion attributable to acqusition accounting adjustments, as discussed below and (3) higher operating expenses associated with strengthening C&F Bank’s technology infrastructure, expanding its product offerings and promoting brand awareness.

 

The results for the first quarter of 2016 for the Retail Banking segment include the affect of the acquisition accounting adjustments recorded in connection with the 2013 acquisition of CVB. The net accretion attributable to these adjustments recognized in the first quarter of 2016 was $206,000, net of taxes ($312,000 before taxes), compared to $487,000, net of taxes ($738,000 before taxes) recognized in the first quarter of 2015.

 

34


 

C&F Bank’s total nonperforming assets were $6.8 million at March 31, 2016, compared to $7.1 million at December 31, 2015. Nonperforming assets at March 31, 2016 included $5.6 million in nonaccrual loans, compared to $6.2 million at December 31, 2015, and $1.2 million in OREO, compared to $942,000 at December 31, 2015. The OREO increase during the first quarter of 2016 primarily consisted of one newly-constructed residential property, which was sold subsequent to March 31, 2016.

 

Mortgage Banking:  The Mortgage Banking segment reported net income of $322,000 for the first quarter of 2016, compared to net income of $47,000 for the first quarter of 2015. The improvement in net income of the Mortgage Banking segment resulted from an increase in the mortgage loan pipeline and mortgage loans sold during the first quarter of 2016, compared to the first quarter of 2015, which resulted in higher gains on sale of loans, coupled with higher ancillary fees.   In addition, total compensation expense declined due to the closing of two loan production offices during 2015; however, the decline was reduced by compensation associated with additional staffing in the compliance, underwriting and closing departments.  These staff increases, which began in 2015, were part of the Mortgage Banking segment’s efforts to comply with the new mortgage disclosure regulations that took effect in October 2015.  In addition, compensation expense during 2016 includes the personnel costs of participants in the C&F Mortgage loan officer training program that lauched in the second quarter of 2015. Loan origination volume for the first quarter of 2016 was $104.0 million, compared to $115.9 million for the first quarter of 2015.  The amount of loan originations during the first quarter of 2016 for refinancings and home purchases were $21.8 million and $82.1 million, respectively, compared to $37.1 million and $78.8 million, respectively, during the first quarter of 2015.

 

Increasing future profitability at the Mortgage Banking segment is dependent on growth in loan originations due to the fixed costs of maintaining the personnel, compliance and technology infrastructure required to support mortgage banking activities.  Our goal is to increase origination volume at the Mortgage Banking segment through internal growth in existing markets.

 

Consumer Finance:  The Consumer Finance segment reported net income of $1.1 million for the first quarter of 2016, compared to net income of $1.7 million for the first quarter of 2015.  The decline in net income for the first quarter of 2016, compared to the first quarter of 2015, was due to a $1.1 million increase in the segment’s provision for loan losses.  Partially offsetting the effect of the higher provision for loan losses, was a $9.6 million increase in average loans and a 15 basis point increase in loan yield during the first quarter of 2016, compared to the first quarter of 2015.  These increases in average loans and yield were attributable to the purchase of a consumer finance loan portfolio at the end of the second quarter of 2015.

 

The results of the Consumer Finance segment included a $4.6 million provision for loan losses for first quarter of 2016, compared to $3.5 million for the first quarter of 2015. The annualized net charge-off ratio for the first quarter of 2016 was 6.19 percent, compared to 5.05 percent for the first quarter of 2015. Loan charge-offs increased for the first quarter of 2016 due to (1) net charge-offs related to the consumer finance loans purchased during the second quarter of 2015, which had the effect of increasing this ratio 55 basis points for the first quarter of 2016, and (2) economic and competitive factors affecting the non-prime consumer finance customers.  The allowance for loan losses to total loans increased to 8.32 percent at March 31, 2016, compared to 8.21 percent at December 31, 2015. Management believes that the current allowance for loan losses is adequate to absorb probable losses inherent in the consumer finance loan portfolio. If factors influencing the Consumer Finance segment result in a higher net charge-off ratio in the future, C&F Finance may need to increase the level of its allowance for loan losses, which could negatively affect future earnings.

 

Capital Management. Total shareholders' equity was $133.3 million at March 31, 2016, compared to $131.1 million at December 31, 2015. Capital growth resulted from earnings for the first three months of 2016 and an increase in unrealized holding gains on securities available for sale, which is a component of accumulated other comprehensive income.  The increases were offset in part by dividends declared of 32 cents per share during the first quarter of 2016. The first quarter dividend was paid on April 1, 2016 and equated to a payout ratio of 45.7 percent of first quarter earnings per share. 

 

The Corporation’s Board of Directors has authorized a share repurchase program for the Corporation’s outstanding common stock (the Repurchase Program).  For more information about the Repurchase Program, see Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” under the heading “Issuer Purchases of Equity Securities” in this Quarterly Report on Form 10-Q.

35


 

 

RESULTS OF OPERATIONS

 

The following table presents 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 months ended March 31, 2016 and 2015.  Loans include loans held for sale. Loans placed on 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 deposits and borrowings acquired in connection with the purchase of CVB and the Consumer Finance segment’s acquired loan portfolio. 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 34 percent).

 

TABLE 1: Average Balances, Income and Expense, Yields and Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

   

2016

    

2015

    

 

 

Average

    

Income/

    

Yield/

 

Average

    

Income/

    

Yield/

 

(Dollars in thousands)

 

Balance

   

Expense

   

Rate

 

Balance

   

Expense

   

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

102,250

 

$

602

 

2.36

%  

$

97,351

 

$

607

 

2.49

%  

Tax-exempt

 

 

112,707

 

 

1,485

 

5.27

 

 

118,341

 

 

1,633

 

5.52

 

Total securities

 

 

214,957

 

 

2,087

 

3.88

 

 

215,692

 

 

2,240

 

4.15

 

Total loans

 

 

942,143

 

 

20,230

 

8.64

 

 

867,143

 

 

19,027

 

8.90

 

Interest-bearing deposits in other banks

 

 

140,038

 

 

177

 

0.51

 

 

165,507

 

 

100

 

0.25

 

Total earning assets

 

 

1,297,138

 

 

22,494

 

6.97

 

 

1,248,342

 

 

21,367

 

6.93

 

Allowance for loan losses

 

 

(35,485)

 

 

 

 

 

 

 

(35,585)

 

 

 

 

 

 

Total non-earning assets

 

 

135,803

 

 

 

 

 

 

 

131,006

 

 

 

 

 

 

Total assets

 

$

1,397,456

 

 

 

 

 

 

$

1,343,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time and savings deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

 

219,107

 

 

130

 

0.24

 

 

204,917

 

 

123

 

0.24

 

Money market deposit accounts

 

 

210,181

 

 

142

 

0.27

 

 

196,729

 

 

133

 

0.27

 

Savings accounts

 

 

101,078

 

 

20

 

0.08

 

 

97,725

 

 

19

 

0.08

 

Certificates of deposit, $100 or more

 

 

138,468

 

 

358

 

1.04

 

 

145,537

 

 

254

 

0.71

 

Other certificates of deposit

 

 

199,060

 

 

451

 

0.91

 

 

217,224

 

 

427

 

0.80

 

Total time and savings deposits

 

 

867,894

 

 

1,101

 

0.51

 

 

862,132

 

 

956

 

0.45

 

Borrowings

 

 

175,563

 

 

1,161

 

2.62

 

 

166,085

 

 

1,075

 

2.59

 

Total interest-bearing liabilities

 

 

1,043,457

 

 

2,262

 

0.86

 

 

1,028,217

 

 

2,031

 

0.80

 

Demand deposits

 

 

198,424

 

 

 

 

 

 

 

171,465

 

 

 

 

 

 

Other liabilities

 

 

23,248

 

 

 

 

 

 

 

19,973

 

 

 

 

 

 

Total liabilities

 

 

1,265,129

 

 

 

 

 

 

 

1,219,655

 

 

 

 

 

 

Shareholders’ equity

 

 

132,327

 

 

 

 

 

 

 

124,108

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,397,456

 

 

 

 

 

 

$

1,343,763

 

 

 

 

 

 

Net interest income

 

 

 

 

$

20,232

 

 

 

 

 

 

$

19,336

 

 

 

Interest rate spread

 

 

 

 

 

 

 

6.11

%  

 

 

 

 

 

 

6.13

%  

Interest expense to average earning assets (annualized)

 

 

 

 

 

 

 

0.70

%  

 

 

 

 

 

 

0.66

%  

Net interest margin (annualized)

 

 

 

 

 

 

 

6.28

%  

 

 

 

 

 

 

6.22

%  

 

 

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 presents 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 relationship of the absolute dollar amounts of the change in each. Loans include both nonaccrual loans and loans held for sale.

36


 

 

TABLE 2: Rate-Volume Recap

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016 from 2015

 

 

Increase (Decrease)

 

Total

 

 

Due to

 

Increase

(Dollars in thousands)

    

Rate

    

Volume

    

(Decrease)

Interest income:

 

 

 

 

 

 

 

 

 

Loans

 

$

(3,090)

 

$

4,293

 

$

1,203

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

 

(131)

 

 

126

 

 

(5)

Tax-exempt

 

 

(72)

 

 

(76)

 

 

(148)

Interest-bearing deposits in other banks

 

 

177

 

 

(100)

 

 

77

Total interest income

 

 

(3,116)

 

 

4,243

 

 

1,127

Interest expense:

 

 

 

 

 

 

 

 

 

Time and savings deposits:

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

 

(14)

 

 

21

 

 

7

Money market deposit accounts

 

 

(7)

 

 

16

 

 

9

Savings accounts

 

 

 —

 

 

1

 

 

1

Certificates of deposit, $100 or more

 

 

164

 

 

(60)

 

 

104

Other certificates of deposit

 

 

209

 

 

(185)

 

 

24

Total time and savings deposits

 

 

352

 

 

(207)

 

 

145

Borrowings

 

 

13

 

 

73

 

 

86

Total interest expense

 

 

365

 

 

(134)

 

 

231

Change in net interest income

 

$

(3,481)

 

$

4,377

 

$

896

 

 

Net interest income, on a taxable-equivalent basis, for the three months ended March 31, 2016 was $20.2 million, compared to $19.3 million for the three months ended March 31, 2015. Annualized net interest margin increased 6 basis points to 6.28 percent for the first quarter of 2016 relative to the same period for 2015. The increase in net interest margin during the first quarter of 2016 was a result of (1) a shift in the composition of earning assets, as average loans increased $75.0 million and interest-bearing deposits in other banks decreased $25.5 million, and (2) the increase in yield on interest bearing deposits in other banks. These increases were partially offset by a decrease in the yield on the investment and loan portfolios and an increase in the cost of total interest-bearing liabilities. Net interest income was also affected during the first quarter of 2016 by the fair value accounting adjustments related to the 2013 acquisition of CVB, as discussed below.

 

Average loans, which includes both loans held for investment and loans held for sale, increased $75.0 million to $942.1 million for the first quarter of 2016 compared to the same period of 2015. Average loans held for investment for the Retail Banking segment increased $65.6 million, or 11.8 percent, for the first quarter of 2016.  Average loans at the Retail Banking segment increased for the quarter due to a new lending team in the Peninsula region and strengthening of the Richmond lending team. Average loans held for investment at the Consumer Finance segment increased $9.6 million, or 3.4 percent, for the first quarter of 2016 due primarily to the purchase of a consumer finance portfolio in the second quarter of 2015. Average loans held for sale at the Mortgage Banking segment decreased $304,000 or 1.1 percent, for the first quarter of 2016, compared to the same period of 2015.

 

The overall yield on average loans decreased 26 basis points to 8.64 percent for the first quarter of 2016 compared to the same period of 2015. The decrease in the average loan yield was due to the decline in the average yield at the Retail Banking segment offset in part by an increase in yield at the Consumer Finance segment. The Bank’s average yields have declined due to the effects of new originations and fixed rate loans renewing in the low interest rate environment.  In addition, in the first quarter of 2016 there was $455,000 of accretion related to the acquisition adjustments to CVB’s loan portfolio, compared to $666,000 in the first quarter of 2015.  The accretion contributed approximately 19 basis points to the yield on loans and 14 basis points to the yield on interest earning assets and the net interest margin for the first quarter of 2016 and contributed approximately 31 basis points to the yield on loans and 22 basis points to the yield on interest earning assets and the net interest margin for the first quarter of 2015.  The Consumer Finance segment’s increase in average yield is due to the incremental income from the segment’s higher-yielding purchased loan portfolio that was

37


 

acquired late in the second quarter of 2015, offset in part by a decline in the average yield on the originated Consumer Finance loan portfolio due to increased competition and loan pricing strategies that competitors have used to grow market share. 

 

Average securities available for sale decreased $735,000 for the first quarter of 2016, compared to the same period of 2015. The average yield on the securities portfolio decreased 27 basis points for the first quarter of 2016 compared to the same period of 2015 due to (1) the purchase of lower-yielding, shorter-term securities, to replace calls and maturities of longer-term, higher yielding securities and (2) the current interest rate environment. The Corporation has limited the security portfolio’s duration by investing in lower-yielding, shorter-term securities, including mortgage-backed securities, in order to limit exposure to a potential future rising interest rate environment.

 

Average interest-bearing deposits in other banks decreased $25.5 million for the first quarter of 2016, compared to the same period of 2015. This decrease occurred as the Corporation used these deposits to partially fund loan growth at the Retail Banking segment during the first quarter of 2016. The average yield on these overnight funds increased 26 basis points for the first quarter of 2016 compared to the same period in 2015 due to the Federal Reserve Bank’s increase in the interest rate on excess reserve balances from 0.25 percent to 0.50 percent in December 2015.

 

Average interest-bearing time and savings deposits increased $3.8 million for the first quarter of 2016, compared to the same period in 2015 and the average cost of interest-bearing deposits increased 6 basis points during the first quarter of 2016, as compared to the same period of 2015.  The average cost of interest-bearing deposits increased due to the 44 basis point increase in the average yield on certficiates of deposit for the first quarter of 2016, compared to the first quarter of 2015. The accretion associated with the acquisition adjustment on the CVB certificates of deposit was fully accreted in the second quarter of 2015 and therefore had no effect on the average cost of interest-bearing deposits during the first quarter of 2016. Such accretion reduced the cost of interest-bearing deposits by 12 basis points for the first quarter of 2015. The increase in the cost of interest-bearing time and savings deposits has been offset in part by the shift in deposit composition from time deposits to non-interest bearing demand deposits and non-term savings, money market and interest-bearing demand deposits, which pay interest at lower rates.

 

Average borrowings increased $9.5 million for the first quarter of 2016, compared to the same period of 2015. The increase resulted from borrowings related to the purchase of a consumer finance loan portfolio at the end of the second quarter of 2015. The average cost of borrowings increased 3 basis points during the first quarter of 2016, as compared to the same period of 2015, as a result of increases in one-month LIBOR to which variable rate borrowing is indexed, offset in part by the maturity during the third quarter of 2015 of higher interest rate FHLB advances, which were replaced with lower rate FHLB advances.

 

The continuing challenge at the Retail Banking segment will be the deployment of excess cash into earning assets as we expect continued significant competition for loans in our markets and the low interest rate environment to continue to suppress yields on loans and investment securities.  The yield on loans at the Consumer Finance segment will be most affected by increased competition and loan pricing strategies that competitors have used to grow market share in automobile financing. This increased competition may result in continued lower yields and lower loan growth as the Consumer Finance segment responds to competitive pricing pressures and fewer purchases of automobile retail installment sales contracts.

 

38


 

Noninterest Income

 

TABLE 3: Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

    

Retail

    

Mortgage

    

Consumer

    

Other and

    

 

 

(Dollars in thousands)

 

Banking

 

Banking

 

Finance

 

Eliminations

 

Total

 

Gains on sales of loans

 

$

 —

 

$

1,730

 

$

 —

 

$

 —

 

$

1,730

 

Service charges on deposit accounts

 

 

963

 

 

 —

 

 

 —

 

 

 —

 

 

963

 

Other service charges and fees

 

 

1,051

 

 

630

 

 

3

 

 

 —

 

 

1,684

 

Net gains on calls of available for sale securities

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

Investment services income

 

 

 —

 

 

 —

 

 

 —

 

 

276

 

 

276

 

Other income

 

 

147

 

 

113

 

 

229

 

 

20

 

 

509

 

Total noninterest income

 

$

2,162

 

$

2,473

 

$

232

 

$

296

 

$

5,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

 

    

Retail

    

Mortgage

    

Consumer

    

Other and

    

 

 

 

(Dollars in thousands)

 

Banking

 

Banking

 

Finance

 

Eliminations

 

Total

 

Gains on sales of loans

 

$

 —

 

$

1,645

 

$

 —

 

$

 —

 

$

1,645

 

Service charges on deposit accounts

 

 

1,015

 

 

 —

 

 

 —

 

 

 —

 

 

1,015

 

Other service charges and fees

 

 

945

 

 

493

 

 

3

 

 

 —

 

 

1,441

 

Net gains on calls of available for sale securities

 

 

1

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

Investment services income

 

 

 —

 

 

 —

 

 

 —

 

 

377

 

 

377

 

Other income

 

 

221

 

 

102

 

 

284

 

 

15

 

 

622

 

Total noninterest income

 

$

2,182

 

$

2,240

 

$

287

 

$

392

 

$

5,101

 

 

 

 

 

Total noninterest income increased $62,000, or 1.2 percent, in the first quarter of 2016 compared to the same period in 2015. The increase in total noninterest income for the first quarter of 2016 was due to (1) an increase in gains on sales of loan and ancillary loan origination fees at the Mortgage Banking segment and (2) an increase in branch fee income and check card interchange income at the Retail Banking segment.  These increases were partially offset by (1) declines in overdraft charges and in the net unrealized appreciation of the non-qualified deferred compensation plan at the Retail Banking segment for the first quarter of 2016, compared to the same period in 2015, (2) a decrease in the net fees collected at the Consumer Finance segment for loan payments made via credit card, and (3) a decrease in investment services income attributed to C&F Wealth Management due to stock market performance in the first quarter of 2016, compared to the first quarter of 2015.

 

 

Noninterest Expense

 

TABLE 4: Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

    

Retail

    

Mortgage

    

Consumer

    

Other and

    

 

 

 

(Dollars in thousands)

 

Banking

 

Banking

 

Finance

 

Eliminations

 

Total

 

Salaries and employee benefits

    

$

6,008

    

$

1,184

    

$

2,627

    

$

352

    

$

10,171

 

Occupancy expense

 

 

1,727

 

 

413

 

 

192

 

 

2

 

 

2,334

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OREO expenses

 

 

56

 

 

 —

 

 

 —

 

 

 —

 

 

56

 

Provision for indemnification losses

 

 

 —

 

 

52

 

 

 —

 

 

 —

 

 

52

 

Other expenses

 

 

2,649

 

 

536

 

 

1,136

 

 

156

 

 

4,477

 

Total other expenses

 

 

2,705

 

 

588

 

 

1,136

 

 

156

 

 

4,585

 

Total noninterest expense

 

$

10,440

 

$

2,185

 

$

3,955

 

$

510

 

$

17,090

 

39


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

 

 

Retail

 

Mortgage

 

Consumer

 

Other and

 

 

 

 

(Dollars in thousands)

    

Banking

    

Banking

    

Finance

    

Eliminations

    

Total

 

Salaries and employee benefits

    

$

5,937

    

$

1,389

    

$

2,439

    

$

399

    

$

10,164

 

Occupancy expense

 

 

1,564

 

 

427

 

 

167

 

 

2

 

 

2,160

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OREO expenses

 

 

70

 

 

 —

 

 

 —

 

 

 —

 

 

70

 

Provision for indemnification losses

 

 

 —

 

 

58

 

 

 —

 

 

 —

 

 

58

 

Other expenses

 

 

2,622

 

 

519

 

 

1,013

 

 

144

 

 

4,298

 

Total other expenses

 

 

2,692

 

 

577

 

 

1,013

 

 

144

 

 

4,426

 

Total noninterest expense

 

$

10,193

 

$

2,393

 

$

3,619

 

$

545

 

$

16,750

 

 

 

 

 

Total noninterest expenses increased $340,000, or 2.0 percent, in the first quarter 2016, compared to the same period in 2015. The increase in noninterest expenses resulted primarily from higher general and occupancy costs during the first quarter of 2016, compared to the same period in 2015.  Personnel costs were higher at the Consumer Finance segment due to staffing increases related to servicing the loan portfolio purchased in the second quarter of 2015. Occupancy expense at Retail Banking segment increased due to expenses associated with strengthening the Bank’s technology infrastructure. Occupancy and general operating expenses at the Consumer Finance segment increased due to higher (1) rent expense for each location, (2) collection, recovery and repossession expenses, and (3) application expenses driven by an increase in loan applications in the first quarter of 2016, compared to the same period in 2015.These increases at the Retail Banking and Consumer Finance segments were offset in part by a decrease in personnel and other expenses at the Mortgage Banking segment for the first quarter of 2016, compared to the first quarter of 2015, due to the closing of two loan production offices. 

 

Income Taxes

 

Income tax expense for the first quarter of 2016 amounted to $752,000 resulting in an effective tax rate of 23.7 percent, compared with $963,000, or 26.7 percent, for the first quarter of 2015.  The decline in the effective tax rate in the first quarter of 2016, compared to the first quarter of 2015, resulted from higher earnings at the Retail Banking segment, which is not subject to state income taxes, coupled with higher tax credits and lower amortization associated with its investment in qualified affordable housing projects.

 

ASSET QUALITY

 

Allowance for Loan Losses

 

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. 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:

40


 

 

TABLE 5: Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(Dollars in thousands)

    

2016

    

2015

 

Allowance, beginning of period

 

$

35,569

 

$

35,606

 

Provision for loan losses:

 

 

 

 

 

 

 

Retail Banking segment

 

 

 —

 

 

 —

 

Mortgage Banking segment

 

 

 —

 

 

15

 

Consumer Finance segment

 

 

4,600

 

 

3,500

 

Total provision for loan losses

 

 

4,600

 

 

3,515

 

Loans charged off:

 

 

 

 

 

 

 

Real estate—residential mortgage

 

 

 —

 

 

(20)

 

Real estate—construction1

 

 

 —

 

 

 —

 

Commercial, financial and agricultural2

 

 

(35)

 

 

(13)

 

Equity lines

 

 

(55)

 

 

 —

 

Consumer

 

 

(71)

 

 

(59)

 

Consumer finance

 

 

(5,601)

 

 

(4,690)

 

Total loans charged off

 

 

(5,762)

 

 

(4,782)

 

Recoveries of loans previously charged off:

 

 

 

 

 

 

 

Real estate—residential mortgage

 

 

26

 

 

162

 

Real estate—construction1

 

 

 —

 

 

 —

 

Commercial, financial and agricultural2

 

 

160

 

 

8

 

Equity lines

 

 

 —

 

 

 —

 

Consumer

 

 

127

 

 

41

 

Consumer finance

 

 

1,118

 

 

1,147

 

Total recoveries

 

 

1,431

 

 

1,358

 

Net loans charged off

 

 

(4,331)

 

 

(3,424)

 

Allowance, end of period

 

$

35,838

 

$

35,697

 

Ratio of annualized net recoveries to average total loans outstanding during period for Retail Banking

 

 

(0.10)

%  

 

(0.09)

Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance3

 

 

6.19

%  

 

5.05

 


1Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

2Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

3The consumer finance loan portfolio purchased during the second quarter of 2015 had the effect of increasing the annualized net charge-off ratio by 55 basis points for the quarter ended March 31, 2016.

 

41


 

Table 6 presents the allocation of the allowance for loan losses at March 31, 2016 and December 31, 2015.

 

TABLE 6: Allocation of Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

(Dollars in thousands)

    

2016

    

    

2015

 

Allocation of allowance for loan losses:

 

 

 

 

 

 

 

 

Real estate—residential mortgage

 

$

2,487

 

 

$

2,471

 

Real estate—construction 1

 

 

286

 

 

 

94

 

Commercial, financial and agricultural 2

 

 

7,654

 

 

 

7,755

 

Equity lines

 

 

1,088

 

 

 

1,052

 

Consumer

 

 

252

 

 

 

243

 

Consumer finance

 

 

24,071

 

 

 

23,954

 

Total allowance for loan losses

 

$

35,838

 

 

$

35,569

 

 


1

Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

2

Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

 

Credit Quality

 

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 is 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

42


 

due. All substandard commercial, construction and residential loans in excess of $500,000 and all trouble debt restructurings are individually evaluated for impairment.

·

Doubtful 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 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

 

Loans by credit quality indicators as of March 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Special

 

 

 

 

Substandard

 

 

 

 

(Dollars in thousands)

 

Pass

 

Mention

 

Substandard

 

Nonaccrual

 

Total1

 

Real estate – residential mortgage

 

$

179,137

 

$

1,275

 

$

2,155

 

$

2,293

 

$

184,860

 

Real estate – construction 2

 

 

27,126

 

 

 —

 

 

88

 

 

 —

 

 

27,214

 

Commercial, financial and agricultural 3

 

 

330,484

 

 

6,458

 

 

25,165

 

 

2,601

 

 

364,708

 

Equity lines

 

 

48,351

 

 

588

 

 

212

 

 

750

 

 

49,901

 

Consumer

 

 

8,614

 

 

31

 

 

490

 

 

4

 

 

9,139

 

 

 

$

593,712

 

$

8,352

 

$

28,110

 

$

5,648

 

$

635,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

Performing

    

Non-Performing

    

      Total      

 

Consumer finance

 

$

289,004

 

$

184

 

$

289,188

 

 


1

At March 31, 2016, the Corporation did not have any loans classified as Doubtful or Loss.

2

Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

3

Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

 

Included in the table above are loans purchased in connection with the acquisition of CVB of $68.1 million pass rated, $3.0 million special mention, $4.8 million substandard and $248,000 substandard nonaccrual.

 

Loans by credit quality indicators as of December 31, 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Special

 

 

 

 

Substandard

 

 

 

 

(Dollars in thousands)

 

Pass

 

Mention

 

Substandard

 

Nonaccrual

 

Total1

 

Real estate – residential mortgage

 

$

181,107

 

$

1,276

 

$

2,083

 

$

2,297

 

$

186,763

 

Real estate – construction 2

 

 

7,687

 

 

72

 

 

 —

 

 

 —

 

 

7,759

 

Commercial, financial and agricultural 3

 

 

317,720

 

 

9,080

 

 

26,302

 

 

2,960

 

 

356,062

 

Equity lines

 

 

48,392

 

 

617

 

 

221

 

 

881

 

 

50,111

 

Consumer

 

 

8,760

 

 

116

 

 

116

 

 

19

 

 

9,011

 

 

 

$

563,666

 

$

11,161

 

$

28,722

 

$

6,157

 

$

609,706

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

    

Performing

    

Non-Performing

    

      Total      

 

Consumer finance

 

$

290,925

 

$

830

 

$

291,755

 

 


1

At December 31, 2015, the Corporation did not have any loans classified as Doubtful or Loss.

2

Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

3

Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

43


 

 

Included in the table above are loans purchased in connection with the acquisition of CVB of $71.1 million pass rated, $4.1 million special mention, $5.2 million substandard and $542,000 substandard nonaccrual.

 

 

The Retail Banking segment's allowance for loan losses as of March 31, 2016 increased $152,000 since December 31, 2015 as a result of net recoveries during the first three months of 2016. There was no provision for loan losses at the Retail Banking segment during the first three months of 2016 because of a decline in historical losses and the overall improvement in the credit quality of the loan portfolio as indicated by the $612,000 decline in substandard loans and the $509,000 decline in substandard nonaccrual loans. The ratio of the allowance for loan losses to total loans, excluding purchased credit impaired loans, declined to 1.80 percent at March 31, 2016, compared to 1.86 percent at December 31, 2015, because of loan growth during the first quarter of 2016. We believe that the current level of the allowance for loan losses at C&F Bank 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 Bank’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.

 

The Consumer Finance segment’s allowance for loan losses increased $116,000 to $24.1 million at March 31, 2016 from $24.0 million at December 31, 2015, and its provision for loan losses increased $1.1 million for the first three months of 2016, compared to the same period in 2015. The allowance for loan losses as a percentage of loans increased to 8.32 percent at March 31, 2016, compared to 8.21 percent at December 31, 2015. Despite the increase in charge-offs for the first quarter of 2016, compared to the first quarter of 2015, 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. At March 31, 2016 total delinquent loans as a percentage of total loans declined to 2.83 percent from 6.22 percent at December 31, 2015 and 2.90 percent at March 31, 2015.  At March 31, 2016, repossessed assets totaled $1.9 million, compared to $2.1 million at December 31, 2015, and $1.6 million at March 31, 2015. If factors influencing the Consumer Finance segment result in higher net charge-off ratios in future periods, the Consumer Finance segment may need to recognize higher provisions for loan losses to increase the level of its allowance for loan losses, which could negatively affect future earnings of the Consumer Finance segment.

 

44


 

Nonperforming Assets

 

Table 8 summarizes nonperforming assets at March 31, 2016 and December 31, 2015.

 

TABLE 8: Nonperforming Assets

 

Retail Banking Segment

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(Dollars in thousands)

    

2016

    

2015

    

Loans, excluding purchased loans

 

$

556,220

 

$

525,283

 

Purchased performing loans1

 

 

63,362

 

 

67,022

 

Purchased credit impaired loans1

 

 

12,770

 

 

13,908

 

Total loans

 

$

632,352

 

$

606,213

 

 

 

 

 

 

 

 

 

Nonaccrual loans2

 

$

5,359

 

$

5,615

 

Purchased performing-nonaccrual loans3

 

 

248

 

 

542

 

Total nonaccrual loans

 

 

5,607

 

 

6,157

 

OREO4

 

 

1,194

 

 

942

 

Total nonperforming assets5

 

$

6,801

 

$

7,099

 

 

 

 

 

 

 

 

 

Accruing loans past due for 90 days or more6

 

$

237

 

$

761

 

Troubled debt restructurings (TDRs)2

 

$

5,402

 

$

5,080

 

Purchased performing TDRs7

 

$

260

 

$

264

 

Allowance for loan losses (ALL)

 

$

11,169

 

$

11,017

 

Nonperforming assets to total loans and OREO

 

 

1.07

%  

 

1.17

%  

ALL to total loans, excluding purchased credit impaired loans8

 

 

1.80

 

 

1.86

 

ALL to total nonaccrual loans

 

 

199.19

 

 

178.93

 

 


1

The loans acquired from CVB are tracked in two separate categories - "purchased performing" and "purchased credit impaired." The fair value adjustments for the purchased performing loans are (1) $834,000 at March 31, 2016 and $932,000 at December 31, 2015 for interest and (2) $2.8 million at March 31, 2016 and $3.0 million at December 31, 2015 for credit. The fair value adjustments for the purchased credit impaired loans are (1) $3.9 million at March 31, 2016 and $4.0 million at December 31, 2015 for interest and (2) $7.8 million at March 31, 2016 and $7.8 million at December 31, 2015 for credit.

2

Nonaccrual loans include nonaccrual TDRs of $2.4 million at March 31, 2016 and $2.5 million at December 31, 2015.

3

Purchased performing-nonaccrual loans are presented net of fair value interest and credit marks totaling $238,000 at March 31, 2016 and $247,000 at December 31, 2015.

4

OREO is recorded at its estimated fair market value less cost to sell.

5

As required by acquisition accounting, purchased credit impaired loans that were considered nonaccrual and TDRs prior to the acquisition lose these designations and are not included in post-acquistion nonperforming assets as presented in this table.

6

Accruing loans past due for 90 days or more include purchased credit impaired loans of $235,000 as of March 31, 2016 and $172,000 as of December 31, 2015.

7

Purchased performing TDRs are accruing and are presented net of fair value interest and credit marks totaling $8,300 at March 31, 2016 and $8,300 at December 31, 2015.

8

For the purpose of calculating this ratio, purchased performing loans are included in total loans. Purchased performing loans were marked to fair value on acquisition date; therefore, no allowance for loan losses was recorded for these loans.

 

45


 

Mortgage Banking Segment

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

(Dollars in thousands)

    

2016

 

2015

    

Nonaccrual loans

 

$

41

 

$

 —

 

Total loans

 

$

3,470

 

$

3,493

 

ALL

 

$

598

 

$

598

 

Nonaccrual loans to total loans

 

 

1.18

%

 

 —

%

ALL to loans

 

 

17.23

 

 

17.12

 

ALL to nonaccrual loans

 

 

1,458.54

 

 

 —

 

 

 

Consumer Finance Segment

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(Dollars in thousands)

    

2016

    

2015

    

Nonaccrual loans

 

$

184

 

$

830

 

Total loans

 

$

289,188

 

$

291,755

 

ALL

 

$

24,071

 

$

23,954

 

Nonaccrual consumer finance loans to total consumer finance loans

 

 

0.06

%  

 

0.28

%  

ALL to total consumer finance loans1

 

 

8.32

 

 

8.21

 


1

The consumer finance loan portfolio purchased during the second quarter of 2015 had the effect of decreasing the allowance to total loans ratio by 27 basis points at March 31, 2016 and 32 basis points at December 31, 2015.

 

 

Nonperforming assets of the Retail Banking segment totaled $6.8 million at March 31, 2016, compared to $7.1 million at December 31, 2015, a 4.2 percent decrease during the first three months of 2016. The Retail Banking Segment's nonperforming assets included $5.6 million of nonaccrual loans at March 31, 2016, compared to $6.2 million at December 31, 2015, and $1.2 million of OREO at March 31, 2016, compared to $942,000 at December 31, 2015. The OREO increase during the first quarter of 2016 primarily consisted of one newly-constructed residential property, which was sold subsequent to March 31, 2016.  We believe we have provided adequate loan loss reserves based on our evaluations of collectibiliy of loans, which considers trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current econcomic conditions that may affect borrowers’ ability to repay and collateral values, overall portfolio quality and review of specific potential losses.

 

Nonaccrual loans at the Consumer Finance segment were $184,000 at March 31, 2016, compared to $830,000 at December 31, 2015. The ratio of the allowance for loan losses to total loans increased to 8.32 percent at March 31, 2016 from 8.21 percent at December 31, 2015 due to the increased provision for loan losses in the first quarter of 2016, which was a result of increased charge-offs.  Nonaccrual consumer finance loans remain relatively low compared 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 is 60 days or more past due but before the loan reaches 90 days or more past due and is evaluated for nonaccrual status.  Repossessed assets at March 31, 2016 were $1.9 million, compared to $2.1 million at December 31, 2015.

 

Impaired Loans

 

We measure impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. 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

46


 

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 consisted solely of TDRs, and the related allowance at March 31, 2016, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

Recorded

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

Investment

 

 

 

 

Average

 

 

 

 

 

 

Unpaid

 

in Loans

 

in Loans

 

 

 

 

Balance-

 

Interest

 

 

 

Principal

 

without

 

with

 

Related

 

Impaired

 

Income

 

(Dollars in thousands)

 

Balance

 

Specific Reserve

 

Specific Reserve

 

Allowance

 

Loans

 

Recognized

 

Real estate – residential mortgage

 

$

2,811

 

$

172

 

$

2,528

 

$

344

 

$

2,708

 

$

26

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending

 

 

2,475

 

 

58

 

 

2,190

 

 

435

 

 

2,265

 

 

8

 

Commercial business lending

 

 

189

 

 

 —

 

 

186

 

 

39

 

 

191

 

 

2

 

Equity lines

 

 

32

 

 

30

 

 

 —

 

 

 —

 

 

30

 

 

 —

 

Consumer

 

 

498

 

 

 —

 

 

498

 

 

74

 

 

498

 

 

4

 

Total

 

$

6,005

 

$

260

 

$

5,402

 

$

892

 

$

5,692

 

$

40

 

 

 

 

 

Impaired loans, which consisted solely of TDRs, and the related allowance at December 31, 2015, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

Recorded

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

Investment

 

 

 

 

Average

 

 

 

 

 

 

Unpaid

 

in Loans

 

in Loans

 

 

 

 

Balance-

 

Interest

 

 

 

Principal

 

without

 

with

 

Related

 

Impaired

 

Income

 

(Dollars in thousands)

 

Balance

 

Specific Reserve

 

Specific Reserve

 

Allowance

 

Loans

 

Recognized

 

Real estate – residential mortgage

 

$

2,828

 

$

173

 

$

2,516

 

$

360

 

$

2,718

 

$

97

 

Commercial, financial and agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate lending

 

 

2,522

 

 

61

 

 

2,258

 

 

438

 

 

2,361

 

 

35

 

Commercial business lending

 

 

99

 

 

 —

 

 

99

 

 

28

 

 

108

 

 

1

 

Equity lines

 

 

32

 

 

30

 

 

 —

 

 

 —

 

 

30

 

 

1

 

Consumer

 

 

207

 

 

 —

 

 

207

 

 

23

 

 

208

 

 

7

 

Total

 

$

5,688

 

$

264

 

$

5,080

 

$

849

 

$

5,425

 

$

141

 

 

 

 

 

 

 

TDRs at March 31, 2016 and December 31, 2015 were as follows:

 

TABLE 10: Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

(Dollars in thousands)

    

2016

    

2015

 

Accruing TDRs

 

$

3,282

 

$

2,810

 

Nonaccrual TDRs1

 

 

2,380

 

 

2,534

 

Total TDRs2

 

$

5,662

 

$

5,344

 


1

Included in nonaccrual loans in Table 8: Nonperforming Assets.

2

Included in impaired loans in Table 9: Impaired Loans.

 

47


 

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 the Corporation concludes that the borrower is able to make such modified payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the TDR will remain on an accruing status.

 

FINANCIAL CONDITION

 

At March 31, 2016, the Corporation had total assets of $1.40 billion, which was a decrease of $267,000 since December 31, 2015. The decrease resulted primarily from decreases of $18.6 million in loans held for sale at C&F Mortgage, $3.2 million in securities, and $1.7 million in cash and cash equivalents.  Offsetting these decreases was a $23.3 million increase in loans held for investment.

 

Loan Portfolio

 

The following table sets forth the composition of the Corporation’s loans held for investment in dollar amounts and as a percentage of the Corporation’s total loans held for investment at the dates indicated.

 

TABLE 11: Summary of Loans Held for Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

December 31, 2015

 

(Dollars in thousands)

    

Amount

 

Percent

  

    

Amount

    

Percent

 

 

Real estate—residential mortgage

 

$

184,860

 

20

 

$

186,763

 

21

 

Real estate—construction 1

 

 

27,214

 

3

 

 

 

7,759

 

1

 

 

Commercial, financial, and agricultural 2

 

 

364,708

 

39

 

 

 

356,062

 

39

 

 

Equity lines

 

 

49,901

 

6

 

 

 

50,111

 

6

 

 

Consumer

 

 

9,139

 

1

 

 

 

9,011

 

1

 

 

Consumer finance

 

 

289,188

 

31

 

 

 

291,755

 

32

 

 

Total loans

 

 

925,010

 

100

 

 

901,461

 

100

 

Less allowance for loan losses

 

 

(35,838)

 

 

 

 

 

(35,569)

 

 

 

 

Total loans, net

 

$

889,172

 

 

 

 

$

865,892

 

 

 

 

 


1

Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

2

Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

 

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 March 31, 2016 and December 31, 2015, all securities in the Corporation’s investment portfolio were classified as available for sale.

 

48


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

(Dollars in thousands)

    

Amount

    

Percent

    

Amount

    

Percent

 

U.S. government agencies and corporations

 

$

16,176

 

8

%  

$

18,501

 

9

%

Mortgage-backed securities

 

 

76,278

 

35

 

 

77,027

 

35

 

Obligations of states and political subdivisions

 

 

123,802

 

57

 

 

123,948

 

56

 

Total available for sale securities at fair value

 

$

216,256

 

100

%  

$

219,476

 

100

%

 

For more information about the Corporation's securities available for sale, including a description of securities in an unrealized loss position at March 31, 2016 and December 31, 2015, see Part I, Item 1, "Financial Statements" under the heading "Note 2: Securities" in this Quarterly Report on Form 10-Q.

Deposits

 

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.

 

During the first quarter of 2016 deposits increased $1.5 million to $1.08 billion at March 31, 2016, compared to $1.07 billion at December 31, 2015. This increase resulted primarily from a $13.7 million increase in non-interest bearing demand deposits of individuals and corporations, partially offset by a $9.2 million decrease in savings and interest-bearing demand deposits and a $3.1 million decrease in time deposits.

 

The Corporation had $2.9 million in brokered money market deposits outstanding at March 31, 2016 and December 31, 2015. 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

 

Borrowings decreased to $173.7 million at March 31, 2016 from $177.3 million at December 31, 2015 as a result of paydowns on our long-term borrowings.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2016, 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, 2015.

 

Contractual Obligations

 

As of March 31, 2016, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in Part I, Item 7, "Management's Discussion and Analysis," under the heading "Contractual Obligations" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2015.

 

49


 

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’s interest rate swaps qualify 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 $15.0 million and $10.0 million of the Corporation’s trust preferred capital notes to fixed rates of interest until December 2019 and September 2020, respectively. The cash flow hedges’ total notional amount is $25.0 million. At March 31, 2016, the cash flow hedges had a fair value of ($713,000), which is recorded in other liabilities. The cash flow hedges were fully effective at March 31, 2016.

 

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, federal funds sold and nonpledged securities available for sale, totaled $273.5 million at March 31, 2016, compared to $277.3 million at December 31, 2015. The Corporation’s funding sources at March 31, 2016 are presented in Table 13.

 

TABLE 13: Funding Sources

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

(Dollars in thousands)

  

Capacity

    

Outstanding

    

Available

 

Unsecured federal funds agreements

 

$

65,000

 

$

 —

 

$

65,000

 

Repurchase agreements

 

 

5,000

 

 

5,000

 

 

 —

 

Repurchase lines of credit

 

 

50,000

 

 

 —

 

 

50,000

 

Borrowings from FHLB

 

 

151,486

 

 

47,000

 

 

104,486

 

Borrowings from Federal Reserve Bank

 

 

14,834

 

 

 —

 

 

14,834

 

Revolving line of credit

 

 

120,000

 

 

84,029

 

 

35,971

 

Total

 

$

406,320

 

$

136,029

 

$

270,291

 

 

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.

 

50


 

Capital Resources

 

The Corporation’s and the Bank’s actual regulatory capital amounts and ratios under currently applicable regulatory capital standards are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum To Be

 

 

 

 

 

 

 

 

 

 

 

 

 

Well Capitalized

 

 

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

 

 

Minimum Capital

 

Corrective Action

 

 

 

Actual

 

Requirements

 

Provisions

 

(Dollars in thousands)

 

   Amount   

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

As of March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

$

149,522

 

14.6

%

$

82,027

 

8.0

%

 

N/A

 

N/A

 

C&F Bank

 

 

150,006

 

14.6

 

 

82,380

 

8.0

 

$

102,976

 

10.0

%

Tier 1 Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

136,319

 

13.3

 

 

61,520

 

6.0

 

 

N/A

 

N/A

 

C&F Bank

 

 

136,798

 

13.3

 

 

61,785

 

6.0

 

 

82,380

 

8.0

 

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

111,601

 

10.9

 

 

46,140

 

4.5

 

 

N/A

 

N/A

 

C&F Bank

 

 

136,798

 

13.3

 

 

46,339

 

4.5

 

 

66,934

 

6.5

 

Tier 1 Capital (to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

136,319

 

9.9

 

 

55,199

 

4.0

 

 

N/A

 

N/A

 

C&F Bank

 

 

136,798

 

9.9

 

 

55,195

 

4.0

 

 

68,994

 

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

$

150,102

 

15.0

%

$

80,216

 

8.0

%

 

N/A

 

N/A

 

C&F Bank

 

 

150,711

 

15.0

 

 

80,560

 

8.0

 

$

100,700

 

10.0

%

Tier 1 Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

137,210

 

13.7

 

 

60,162

 

6.0

 

 

N/A

 

N/A

 

C&F Bank

 

 

137,815

 

13.7

 

 

60,420

 

6.0

 

 

80,560

 

8.0

 

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

112,633

 

11.2

 

 

45,121

 

4.5

 

 

N/A

 

N/A

 

C&F Bank

 

 

137,815

 

13.7

 

 

45,315

 

4.5

 

 

65,455

 

6.5

 

Tier 1 Capital (to Average Tangible Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

137,210

 

10.0

 

 

54,756

 

4.0

 

 

N/A

 

N/A

 

C&F Bank

 

 

137,815

 

10.1

 

 

54,792

 

4.0

 

 

68,491

 

5.0

 

 

Changes to the regulatory capital framework that were approved on July 9, 2013 by the federal banking agencies (the Basel III Final Rule) began applying to the Corporation and the Bank on January 1, 2015.  The regulatory risk-based capital amounts presented above for March 31, 2016 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.  The table above also reflects the minimum regulatory and certain prompt corrective action capital levels that began applying January 1, 2015.  For additional information about the Basel III Final Rules, see “Item 1. Business” under the heading “Regulation and Supervision” and

51


 

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, 2015.

 

In addition to the regulatory risk-based capital amounts presented above, the Corporation and the Bank must maintain a capital conservation buffer of additional CET1 as required by the Basel III Final Rule.  The buffer began applying to the Corporation and the Bank on January 1, 2016, and is subject to phase-in from 2016 to 2019 in equal annual installments of 0.625%.  At March 31, 2016 the Corporation and the Bank were required to maintain a capital conservation buffer of 0.625%.  At March 31, 2016, the Corporation exceeded the capital conservation buffer by 576 basis points and the Bank exceeded the capital conservation buffer by 816 basis points.

 

The Corporation's capital resources may be further affected by the Corporation's share repurchase program, which was reauthorized by the Corporation's Board of Directors during the second quarter of 2015. Under this 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 in its 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 share repurchase program is authorized through May 2016. As of March 31, 2016, $5.0 million of the Corporation's common stock may be purchased under the Corporation's share repurchase program.

 

Effects of Inflation and Changing Prices

 

The Corporation's financial statements included herein have been prepared in accordance with 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, 2015.

 

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 March 31, 2016 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 the 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.

 

52


 

Management of the Corporation is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). There were no changes in the Corporation’s internal control over financial reporting during the Corporation’s first quarter ended March 31, 2016 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, 2015.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

Issuer Purchases of Equity Securities

 

The Corporation’s Board of Directors authorized a share repurchase program for the Corporation’s outstanding common stock (the Repurchase Program) in May 2014, which initially expired in May 2015.  In May 2015, the Corporation’s Board of Directors reauthorized the Repurchase Program to authorize repurchases of up to $5.0 million of the Corporation’s common stock through May 2016.  Repurchases under the Repurchase Program may 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.  As of March 31, 2016, $5.0 million of the Corporation’s common stock may be purchased under the Repurchase Program.

 

The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended March 31, 2016. 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

    

Maximum Number

 

 

 

 

 

 

 

 

 

 

(or Approximate

 

 

 

 

 

 

 

 

Total Number of

 

Dollar Value) of

 

 

 

 

 

 

 

 

Shares Purchased as

 

Shares that May Yet

 

 

 

 

 

 

 

 

Part of Publicly

 

Be Purchased

 

 

 

Total Number of

 

Average Price Paid

 

Announced Plans or

 

Under the Plans or

 

(Dollars in thousands, except for per share amounts)

 

Shares Purchased 

 

per Share

 

Programs

 

Programs

 

January 1, 2016 - January 31, 2016 1

 

3,525

 

$

38.58

 

 —

 

$

5,000

 

February 1, 2016 - February 29, 2016 

 

 —

 

 

 —

 

 —

 

 

5,000

 

March 1, 2016 - March 31, 2016

 

 —

 

 

 —

 

 —

 

 

5,000

 

Total

 

3,525

 

$

38.58

 

 —

 

$

5,000

 

 


1

These shares were withheld from employees to satisfy tax withholding obligations arising upon the vesting of restricted shares.  Accordingly, these shares are not included in the calculation of approximate dollar value of shares that may yet be purchased under the Repurchase Program.

 

 

53


 

 

ITEM 5.OTHER INFORMATION

 

In connection with the Corporation promoting Jason E. Long to the position of Senior Vice President and Chief Financial Officer of the Corporation and the Bank, the Board of Directors of the Corporation authorized the Corporation to enter into a change in control agreement (the “CIC Agreement”) with Jason E. Long.  Pursuant to such authorization, the Corporation entered into the CIC Agreement with Mr. Long on May 5, 2016.

 

The CIC Agreement provides certain payments and benefits in the event of a termination of his employment by the Corporation without cause (as defined in the CIC Agreement), or by Mr. Long for good reason (as defined in the CIC Agreement) within the period of coverage following a change in control (as defined in the CIC Agreement). The CIC Agreement provides for the payments and benefits described below in the event of a covered termination during the period beginning on the occurrence of a change in control and ending 61 days after the second anniversary of the change in control date. In such event, Mr. Long would be entitled (i) to receive in a lump sum, an amount equal to one times the sum of (X) his highest annual base salary during the 24-month period preceding the change in control date and (Y) his highest annual bonus payable for the three fiscal years preceding the year of the change in control, and (ii) for a period of one year following termination, to receive continuing health insurance, life insurance, and similar benefits under the Corporation’s welfare benefit plans and to have the one-year period credited as service towards completion of any service requirement for retiree coverage under the Corporation’s welfare benefit plans. In certain cases, some or all of the payments and benefits provided on termination of employment may be delayed for six months following termination to comply with the requirements of  Section 409A of the Internal Revenue Code.

 

Under the CIC Agreement following a change in control, Mr. Long may voluntarily terminate his employment for good reason and become entitled to these payments and benefits under certain circumstances. These circumstances include, but are not limited to, a material adverse change in position, authority or responsibilities, or a reduction in rate of annual base salary, benefits (including incentives, bonuses, stock compensation, and retirement and welfare plan coverage) or other perquisites as in effect immediately prior to the change in control date, as well as a right to terminate voluntarily during the 60-day periods after the change in control date, the first anniversary of the change in control date and the second anniversary of the change in control date.

 

The foregoing description of the material terms of the CIC Agreement is qualified in its entirety by reference to the CIC Agreement, a copy of which is filed herewith as Exhibit 10.35 and incorporated herein by reference.

 

 

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

Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit 3.1 to Form 10-KSB filed March 29, 1996)

   

   

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)

 

 

*10.35

Change in Control Agreement dated May 5, 2016 between C&F Financial Corporation and Jason E. Long

 

 

 

 

31.1

Certification of CEO pursuant to Rule 13a-14(a)

54


 

   

   

31.2

Certification of CFO pursuant to Rule 13a-14(a)

   

   

32

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

 

 

__________

*Indicates management contract

 

55


 

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.

 

 

 

 

 

 

 

 

 

C&F FINANCIAL CORPORATION

 

 

 

 

(Registrant)

 

 

 

 

 

Date:

May 9, 2016

 

By:

/s/ Larry G. Dillon

 

 

 

 

Larry G. Dillon

 

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

Date:

May 9, 2016

 

 

/s/ Jason E. Long

 

 

 

 

Jason E. Long

 

 

 

 

Chief Financial Officer

 

 

 

 

(Principal Financial and Accounting Officer)

 

56