C&F Financial (CFFI) - 2020 Q2 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements The unaudited consolidated financial statements reflect significant changes driven by the Peoples Bankshares acquisition and the COVID-19 pandemic Consolidated Balance Sheets Total assets grew to $1.98 billion, driven by increases in loans and deposits following an acquisition Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,983,204 | $1,657,432 | | Loans, net | $1,292,896 | $1,082,318 | | Total Deposits | $1,645,789 | $1,291,250 | | Total Liabilities | $1,799,939 | $1,492,153 | | Total Equity | $183,265 | $165,279 | Consolidated Statements of Income Net income declined in Q2 and H1 2020 due to a significant increase in the provision for loan losses Key Income Statement Data (in thousands, except per share) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $20,254 | $20,625 | $40,857 | $40,272 | | Provision for Loan Losses | $3,600 | $1,810 | $6,250 | $4,205 | | Noninterest Income | $11,828 | $8,202 | $18,576 | $15,305 | | Noninterest Expenses | $23,792 | $19,549 | $43,877 | $39,226 | | Net Income (to Corp.) | $3,746 | $5,843 | $7,324 | $9,614 | | EPS (basic & diluted) | $1.03 | $1.69 | $2.01 | $2.77 | Consolidated Statements of Cash Flows Net cash used in operating and investing activities increased significantly, while financing activities provided substantial cash inflow Six Months Ended June 30 Cash Flow Summary (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(66,755) | $(27,512) | | Net Cash Used in Investing Activities | $(121,774) | $(17,395) | | Net Cash Provided by Financing Activities | $103,396 | $24,549 | | Net Decrease in Cash | $(85,133) | $(20,358) | Notes to Consolidated Financial Statements Key disclosures detail the financial impact of the COVID-19 pandemic and the acquisition of Peoples Bankshares - The COVID-19 pandemic has caused significant economic disruption, and estimates for the allowance for loan losses at June 30, 2020, include expected losses related to the pandemic[35] - On January 1, 2020, the Corporation completed the acquisition of Peoples Bankshares, Incorporated for an aggregate purchase price of $22.19 million in cash and stock, resulting in goodwill of $10.77 million[40][55][59] - Beginning in April 2020, the Corporation originated loans under the Paycheck Protection Program (PPP), which are fully guaranteed by the SBA[47] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income declined due to higher loan loss provisions and merger costs, partially offset by strong mortgage banking performance Overview Net income and EPS declined in Q2 and H1 2020, impacted by loan loss provisions and merger expenses Financial Performance Measures | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in millions) | $3.7 | $5.8 | $7.4 | $9.6 | | EPS | $1.03 | $1.69 | $2.01 | $2.77 | | Annualized ROE | 8.41% | 15.07% | 8.34% | 12.54% | | Annualized ROA | 0.77% | 1.51% | 0.78% | 1.26% | - Adjusted net income, excluding one-time items, was $4.0 million ($1.11/share) for Q2 2020 and $8.4 million ($2.30/share) for the first six months of 2020[176] Impact of and Response to the COVID-19 Pandemic The Corporation identifies key pandemic-related risks and outlines its response, including PPP loans and payment deferrals - The Corporation recorded additional provisions for loan losses of approximately $3.5 million in Q2 2020 and $5.5 million in H1 2020 due to expected asset quality deterioration from the pandemic[183] - As of June 30, 2020, the company originated 1,210 PPP loans with an aggregate principal of $88.9 million[190] - The company provided payment deferrals or interest-only periods on 200 loans with aggregate balances of $94.9 million as of June 30, 2020[190] Results of Operations Net interest margin decreased while noninterest income grew significantly, driven by record mortgage banking activity - Annualized net interest margin decreased by 114 basis points to 4.61% for Q2 2020 compared to Q2 2019, primarily due to lower average yields on loans[232] - Total noninterest income increased by $3.6 million (44.2%) in Q2 2020, largely due to higher gains on sales of loans and mortgage banking fee income from record loan production[246] - Total noninterest expenses increased by $4.2 million (21.7%) in Q2 2020, driven by merger-related expenses, assumption of operating costs from the Peoples acquisition, and higher compensation tied to mortgage volume[253] Asset Quality The provision for loan losses increased, and the allowance for loan losses grew to reflect pandemic-related economic impacts Allowance for Loan Losses Activity (in thousands) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Beginning Balance | $33,298 | $33,589 | $32,873 | $34,023 | | Provision for Loan Losses | $3,600 | $1,810 | $6,250 | $4,205 | | Net Charge-offs | $(804) | $(1,998) | $(3,029) | $(4,827) | | Ending Balance | $36,094 | $33,401 | $36,094 | $33,401 | - The consumer finance segment's allowance for loan losses as a percentage of loans increased to 7.52% at June 30, 2020, from 6.96% at December 31, 2019, reflecting probable losses from the COVID-19 pandemic[288] Financial Condition Total assets, loans, and deposits grew substantially, primarily due to the Peoples acquisition and PPP loan origination - Total assets increased by $325.8 million since December 31, 2019, to $2.0 billion, primarily due to the Peoples acquisition ($190.6 million in assets) and deposit growth[297] - Total loans held for investment grew to $1.33 billion, with commercial, financial, and agricultural loans making up 51% of the portfolio[300] - Deposits increased by $354.5 million to $1.65 billion, driven by the Peoples acquisition ($171.8 million) and organic growth influenced by PPP loans and government stimulus[318] Liquidity and Capital Resources The Corporation maintains a strong liquidity position and remains well-capitalized, with all ratios exceeding regulatory minimums - Liquid assets, including cash and non-pledged securities, totaled $204.85 million at June 30, 2020[331] Regulatory Capital Ratios (C&F Bank) - June 30, 2020 | Ratio | Actual | Minimum Requirement | | :--- | :--- | :--- | | Total Capital (to Risk-Weighted Assets) | 13.5% | 8.0% | | Tier 1 Capital (to Risk-Weighted Assets) | 12.3% | 6.0% | | Common Equity Tier 1 Capital | 12.3% | 4.5% | | Tier 1 Capital (to Average Assets) | 9.6% | 4.0% | Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk disclosures remain unchanged from the Annual Report on Form 10-K for the year ended December 31, 2019 - There have been no significant changes to the market risk disclosures since the 2019 Form 10-K[355] Item 4. Controls and Procedures Disclosure controls and procedures were deemed effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2020[356] - The integration of Peoples' legacy systems and the shift to remote work due to COVID-19 did not materially affect the company's internal control over financial reporting[359][360] PART II - Other Information Item 1A. Risk Factors A new risk factor details the significant adverse effects of the COVID-19 pandemic on the economy and financial markets - A new risk factor has been added detailing the actual and potential adverse effects of the COVID-19 pandemic on the Corporation's results of operations and financial condition[363] - Consequences of the pandemic may include market volatility, lower interest rates, increased unemployment, significant delinquencies and credit losses, and potential impairment of assets like securities and goodwill[365] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The $5.0 million share repurchase program expired in May 2020 and was not renewed, with no repurchases in Q2 2020 - The share repurchase program expired on May 31, 2020, and has not been renewed[370][371] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL data