C&F Financial (CFFI) - 2019 Q2 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements for C&F Financial Corporation as of and for the periods ended June 30, 2019, and December 31, 2018 Consolidated Balance Sheets Total assets increased to $1.568 billion at June 30, 2019, primarily due to loan growth, with corresponding increases in liabilities and equity Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,567,996 | $1,521,411 | | Total cash and cash equivalents | $94,655 | $115,013 | | Loans held for sale, at fair value | $89,185 | $41,895 | | Loans, net | $1,056,934 | $1,028,097 | | Total Liabilities | $1,408,645 | $1,369,453 | | Total deposits | $1,210,209 | $1,181,661 | | Total Equity | $159,351 | $151,958 | Consolidated Statements of Income Net income attributable to the Corporation increased to $9.61 million for H1 2019, driven by higher net interest and noninterest income Statement of Income Highlights (in thousands, except per share data) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net Interest Income | $40,272 | $40,155 | | Provision for loan losses | $4,205 | $5,300 | | Noninterest Income | $15,305 | $13,687 | | Noninterest Expenses | $39,226 | $37,300 | | Net Income Attributable to C&F | $9,614 | $8,962 | | Net income per share - diluted | $2.77 | $2.56 | Consolidated Statements of Comprehensive Income Comprehensive income attributable to the Corporation significantly increased to $12.17 million for H1 2019, driven by positive other comprehensive income Comprehensive Income Highlights (in thousands) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net Income | $9,613 | $8,962 | | Other comprehensive income (loss), net of tax | $2,552 | $(2,310) | | Comprehensive income attributable to C&F | $12,166 | $6,652 | Consolidated Statements of Equity Total equity increased to $159.4 million by June 30, 2019, driven by net income and comprehensive income, partially offset by dividends and repurchases - Key changes in equity for the six months ended June 30, 2019 include: net income of $9.6 million, other comprehensive income of $2.6 million, cash dividends of $2.6 million ($0.74 per share), and common stock repurchases of $3.5 million[23] Consolidated Statements of Cash Flows Net cash and cash equivalents decreased by $20.4 million for H1 2019, primarily due to cash used in operating and investing activities Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(29,612) | $15,535 | | Net cash used in investing activities | $(15,785) | $(16,972) | | Net cash provided by financing activities | $25,039 | $17,757 | | Net (decrease) increase in cash | $(20,358) | $16,320 | Notes to Consolidated Financial Statements This section details accounting policies, financial statement components, and the impact of new accounting standards like ASC 842 and the upcoming ASC 326 - On January 1, 2019, the Corporation adopted ASC 842, "Leases," resulting in the recognition of a lease liability of approximately $3.14 million and a corresponding right-of-use asset[38][42] - The Corporation is preparing for the adoption of ASC 326, "Financial Instruments – Credit Losses," which will introduce an expected loss model and is anticipated to significantly change the allowance for credit losses and potentially reduce shareholders' equity[43][44] - The Corporation operates in three principal business segments: retail banking, mortgage banking, and consumer finance, with inter-segment transactions eliminated in consolidation[132][137] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Corporation's financial performance, condition, and key business trends, highlighting net income growth driven by mortgage and retail banking segments Overview Net income increased to $9.6 million for H1 2019, driven by retail and mortgage banking, despite a decline in consumer finance segment income Key Financial Performance Measures (H1 2019 vs H1 2018) | Metric | H1 2019 | H1 2018 | | :--- | :--- | :--- | | Net Income | $9.6 million | $9.0 million | | Diluted EPS | $2.77 | $2.56 | | Annualized ROE | 12.54% | 12.62% | | Annualized ROA | 1.26% | 1.19% | - Retail Banking net income rose to $5.4 million in H1 2019 from $4.8 million in H1 2018, driven by higher interest income from improved PCI loan performance and higher average loans[187][188] - Mortgage Banking net income increased to $1.7 million in H1 2019 from $1.2 million in H1 2018, fueled by a surge in mortgage loan originations to $385.6 million from $347.6 million[193][194] - Consumer Finance net income decreased to $3.2 million in H1 2019 from $3.7 million in H1 2018, due to lower loan yields and higher borrowing costs, partially offset by a $1.2 million decline in the provision for loan losses[195][196] Results of Operations Net interest income remained stable at $40.6 million for H1 2019, while noninterest income grew 11.8% and noninterest expenses rose 5.2% Net Interest Margin Analysis (Annualized) | Period | Net Interest Margin | Yield on Earning Assets | Cost of Interest-Bearing Liabilities | | :--- | :--- | :--- | :--- | | Q2 2019 | 5.75% | 6.76% | 1.35% | | Q2 2018 | 5.69% | 6.44% | 0.99% | | H1 2019 | 5.71% | 6.68% | 1.30% | | H1 2018 | 5.77% | 6.51% | 0.97% | - Total noninterest income increased by $1.6 million (11.8%) in H1 2019 compared to H1 2018, mainly due to higher gains on sales of loans at the mortgage banking segment and unrealized gains related to the non-qualified deferred compensation plan[222] - Total noninterest expenses increased by $1.9 million (5.2%) in H1 2019, primarily from higher salaries and benefits expense linked to the deferred compensation plan and increased operating costs at the retail banking segment for technology and personnel[225] Asset Quality Asset quality remained strong with the allowance for loan losses decreasing to $33.4 million and improved net charge-off ratios in consumer finance Allowance for Loan Losses Activity (in thousands) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Beginning Balance | $34,023 | $35,726 | | Provision for loan losses | $4,205 | $5,300 | | Net loans charged off | $(4,827) | $(5,633) | | Ending Balance | $33,401 | $35,393 | - The consumer finance segment's annualized net charge-off ratio improved to 3.15% in H1 2019 from 3.85% in H1 2018, due to purchasing automobile loan contracts with higher credit metrics since 2016[197][231] - Retail banking nonperforming assets decreased to $1.3 million at June 30, 2019, from $1.7 million at December 31, 2018, consisting mainly of $991,000 in nonaccrual loans[248][251] - Total Troubled Debt Restructurings (TDRs) decreased to $4.45 million at June 30, 2019, from $5.45 million at December 31, 2018[258][260] Financial Condition Total assets grew to $1.6 billion by June 30, 2019, driven by loan growth, while deposits increased and investment securities decreased - Total loans held for investment grew to $1.09 billion at June 30, 2019, from $1.06 billion at year-end 2018, with the commercial, financial, and agricultural category making up 44% of the portfolio[266] - Total deposits increased by $28.5 million in the first half of 2019, primarily due to a $50.0 million increase in time deposits, partially offset by a $32.7 million decrease in savings and interest-bearing demand deposits[273] - The Corporation uses interest rate swaps to manage risk, including cash flow hedges on $25.0 million of trust preferred capital notes and back-to-back swaps with commercial loan customers with a total notional amount of $125.6 million[279][280] Liquidity and Capital Resources The Corporation maintains strong liquidity and capital, with C&F Bank exceeding regulatory capital ratios and continuing its share repurchase program C&F Bank Regulatory Capital Ratios (June 30, 2019) | Ratio | Actual | Minimum Requirement | To Be Well Capitalized | | :--- | :--- | :--- | :--- | | Total Capital (to Risk-Weighted Assets) | 14.4% | 8.0% | 10.0% | | Tier 1 Capital (to Risk-Weighted Assets) | 13.2% | 6.0% | 8.0% | | Common Equity Tier 1 Capital | 13.2% | 4.5% | 6.5% | | Tier 1 Capital (to Average Assets) | 11.0% | 4.0% | 5.0% | - At June 30, 2019, the Corporation had total available funding capacity of $297.7 million from sources including FHLB, the Federal Reserve Bank, and a revolving bank line of credit[287][288] - A new $5.0 million share repurchase program was authorized effective June 1, 2019, through May 31, 2020, with $4.4 million remaining available as of June 30, 2019[201][295] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes in the Corporation's quantitative and qualitative market risk disclosures since the 2018 Annual Report on Form 10-K - There have been no significant changes in market risk disclosures since the 2018 Form 10-K[297] Item 4. Controls and Procedures Management concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2019[298] - There were no material changes to the Corporation's internal control over financial reporting during the second quarter of 2019[301] PART II - Other Information Item 1A. Risk Factors There have been no material changes in the Corporation's risk factors since those disclosed in the 2018 Annual Report on Form 10-K - There have been no material changes in risk factors since the 2018 Form 10-K[303] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2019, the Corporation repurchased 32,980 shares of common stock at an average price of $49.41, with $4.4 million remaining for future repurchases Issuer Purchases of Equity Securities (Q2 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | 6,262 | $50.74 | | May 2019 | 14,618 | $48.41 | | June 2019 | 12,100 | $49.93 | | Total Q2 | 32,980 | $49.41 | - The Corporation has an authorized repurchase program for up to $5.0 million of its common stock, effective from June 1, 2019, to May 31, 2020[304] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files, incorporating previously filed documents by reference - Exhibits filed include CEO/CFO certifications (31.1, 31.2, 32) and XBRL interactive data files (101 series)[307]