C&F Financial (CFFI) - 2021 Q2 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements and detailed notes for C&F Financial Corporation Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | June 30, 2021 | December 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Assets | | | | | Total cash and cash equivalents | $169,465 | $86,669 | 95.5% | | Securities—available for sale | $356,886 | $286,389 | 24.6% | | Loans held for sale | $119,038 | $214,266 | -44.5% | | Loans, net | $1,348,293 | $1,313,250 | 2.7% | | Total assets | $2,168,644 | $2,086,310 | 3.9% | | Liabilities | | | | | Total deposits | $1,831,562 | $1,752,173 | 4.5% | | Total liabilities | $1,966,846 | $1,891,839 | 4.0% | | Equity | | | | | Total equity | $201,798 | $194,471 | 3.8% | Consolidated Statements of Income Consolidated Statements of Income Highlights (Dollars in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total interest income | $23,866 | $23,584 | $46,942 | $48,362 | | Total interest expense | $2,138 | $3,330 | $4,538 | $7,505 | | Net interest income | $21,728 | $20,254 | $42,404 | $40,857 | | Provision for loan losses | $(600) | $3,600 | $(320) | $6,250 | | Total noninterest income | $13,100 | $11,828 | $27,456 | $18,576 | | Total noninterest expenses | $24,902 | $23,792 | $50,202 | $43,877 | | Net income attributable to C&F Financial Corporation | $8,008 | $3,746 | $15,069 | $7,324 | | Net income per share - basic and diluted | $2.19 | $1.03 | $4.11 | $2.01 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income Highlights (Dollars in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $8,090 | $3,743 | $15,255 | $7,382 | | Other comprehensive income (loss), net of tax | $636 | $1,317 | $(969) | $1,611 | | Comprehensive income attributable to C&F Financial Corporation | $8,644 | $5,063 | $14,100 | $8,935 | Consolidated Statements of Equity Consolidated Statements of Equity Highlights (Dollars in thousands) | Metric | Balance March 31, 2021 | Balance June 30, 2021 | Balance December 31, 2020 | Balance June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Common Stock | $3,526 | $3,439 | $3,514 | $3,510 | | Additional Paid-In Capital | $21,622 | $17,643 | $21,427 | $21,055 | | Retained Earnings | $176,481 | $183,043 | $170,819 | $158,799 | | Accumulated Other Comprehensive Loss, Net | $(3,560) | $(2,924) | $(1,955) | $(638) | | Total Equity | $198,692 | $201,798 | $194,471 | $183,265 | | Common stock purchased (3 months) | N/A | $(4,536) | N/A | N/A | | Common stock purchased (6 months) | N/A | $(4,765) | N/A | $(618) | | Cash dividends declared (3 months) | N/A | $(1,446) | N/A | $(1,385) | | Cash dividends declared (6 months) | N/A | $(2,845) | N/A | $(2,773) | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Dollars in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $105,661 | $(66,492) | | Net cash used in investing activities | $(97,489) | $(121,774) | | Net cash provided by financing activities | $74,624 | $103,133 | | Net increase (decrease) in cash and cash equivalents | $82,796 | $(85,133) | | Cash and cash equivalents at end of period | $169,465 | $80,300 | Notes to Consolidated Interim Financial Statements NOTE 1: Summary of Significant Accounting Policies This note outlines the Corporation's accounting policies, consolidation principles, and the upcoming adoption of ASC 326 (CECL) - The Corporation is a bank holding company with wholly-owned subsidiaries including C&F Bank, C&F Mortgage Corporation, C&F Finance Company, and C&F Wealth Management Corporation, engaged in commercial banking, residential mortgages, automobile/marine/RV loans, and wealth management services[33][34] - Estimates for the allowance for loan losses at June 30, 2021, include probable losses related to the COVID-19 pandemic, with significant uncertainty remaining regarding its ultimate financial impact[36] Share-Based Compensation Expense (Dollars in thousands) | Period | 2021 (After Tax) | 2020 (After Tax) | | :--- | :--- | :--- | | Three months ended June 30 | $304 | $217 | | Six months ended June 30 | $592 | $435 | - ASC 326 (CECL) will be effective for the Corporation on January 1, 2023, introducing an expected loss approach for credit losses, which is anticipated to result in significant changes to financial statements, including the allowance for credit losses, a reduction in total equity and regulatory capital, and expanded disclosures[46][47] NOTE 2: Business Combination This note details the acquisition of Peoples Bankshares, Incorporated, including the purchase price, goodwill, and acquired loans - On January 1, 2020, the Corporation acquired Peoples Bankshares, Incorporated for an aggregate purchase price of $22.19 million (cash: $10.58 million, common stock: $11.61 million)[49][53] - The acquisition resulted in the recognition of $10.77 million in goodwill and $1.71 million in core deposit intangible assets, which will be amortized over 15 years[53] - Loans acquired from Peoples had an aggregate outstanding principal of $131.92 million and an estimated fair value of $124.20 million, with the discount representing expected credit losses and market interest rate adjustments[55] NOTE 3: Securities This note provides a breakdown of the Corporation's debt securities, all classified as available for sale, by type and maturity Securities Available for Sale (Dollars in thousands) | Category | June 30, 2021 Fair Value | December 31, 2020 Fair Value | | :--- | :--- | :--- | | U.S. government agencies and corporations | $60,898 | $48,282 | | Mortgage-backed securities | $180,222 | $123,714 | | Obligations of states and political subdivisions | $100,284 | $102,805 | | Corporate and other debt securities | $15,482 | $11,588 | | Total | $356,886 | $286,389 | - At June 30, 2021, 104 debt securities with an aggregate fair value of $143.42 million were considered temporarily impaired, primarily due to fluctuations in interest rates[68][69] - Securities with an aggregate fair value of $153.39 million were pledged at June 30, 2021, primarily to secure public deposits and repurchase agreements[67] NOTE 4: Loans This note details the Corporation's loan portfolio, including major classifications, acquired loans, and impaired loans Major Loan Classifications (Dollars in thousands) | Loan Type | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Real estate – residential mortgage | $218,189 | $218,298 | | Commercial, financial and agricultural | $730,177 | $700,215 | | Consumer finance | $332,873 | $312,252 | | Total loans | $1,387,244 | $1,352,406 | Acquired Loans (Dollars in thousands) | Category | June 30, 2021 Carrying Amount | December 31, 2020 Carrying Amount | | :--- | :--- | :--- | | Purchased Credit Impaired (PCI) | $5,370 | $6,359 | | Purchased Performing | $67,529 | $87,096 | | Total acquired loans | $72,899 | $93,455 | - Accretable yield for PCI loans decreased from $4.05 million at the beginning of 2021 to $3.34 million at June 30, 2021, primarily due to accretion of $1.54 million, partially offset by reclassification of nonaccretable difference[76] Impaired Loans and Related Allowance (Dollars in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Impaired Loans (Recorded Investment) | $5,495 | $6,278 | | Related Allowance | $827 | $879 | | Total TDRs | $2,898 | $3,575 | NOTE 5: Allowance for Loan Losses This note details changes in the allowance for loan losses by major loan classification and impairment methodology Allowance for Loan Losses Activity (Six Months Ended June 30, Dollars in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Balance at December 31 | $39,156 | $32,873 | | Provision (credited) charged to operations | $(320) | $6,250 | | Loans charged off | $(2,523) | $(5,577) | | Recoveries of loans previously charged off | $2,638 | $2,548 | | Balance at June 30 | $38,951 | $36,094 | Allowance for Loan Losses by Impairment Methodology (June 30, 2021, Dollars in thousands) | Category | Individually Evaluated | Collectively Evaluated | Acquired Loans - PCI | Total | | :--- | :--- | :--- | :--- | :--- | | Allowance balance attributable to loans | $827 | $38,124 | $0 | $38,951 | | Loans | $5,495 | $1,376,379 | $5,370 | $1,387,244 | Loans by Credit Quality Indicators (June 30, 2021, Dollars in thousands) | Category | Pass | Special Mention | Substandard | Substandard Nonaccrual | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Real estate – residential mortgage | $216,599 | $864 | $455 | $271 | $218,189 | | Commercial, financial and agricultural | $703,539 | $16,793 | $7,496 | $2,349 | $730,177 | | Consumer finance | $332,735 (Performing) | N/A | N/A | $138 (Non-Performing) | $332,873 | | Total (excluding Consumer Finance breakdown) | $1,025,632 | $17,874 | $7,952 | $2,913 | $1,054,371 | NOTE 6: Goodwill and Other Intangible Assets This note reports the carrying amount of goodwill and other intangible assets, which decreased slightly due to amortization - The carrying amount of goodwill was $25.19 million at June 30, 2021, and December 31, 2020, with no changes during the first six months of 2021[93] Other Intangible Assets (Dollars in thousands) | Category | Gross Carrying Amount (June 30, 2021) | Accumulated Amortization (June 30, 2021) | Net (June 30, 2021) | | :--- | :--- | :--- | :--- | | Core deposit intangibles | $1,711 | $(248) | $1,463 | | Other amortizable intangibles | $1,405 | $(734) | $671 | | Total | $3,116 | $(982) | $2,134 | - Amortization expense for other intangible assets was $157,000 for the six months ended June 30, 2021, down from $166,000 in the prior year period[94] NOTE 7: Equity, Other Comprehensive Income and Earnings Per Share This note details changes in equity, including share repurchases, AOCI components, and EPS calculations - The Corporation repurchased 97,714 shares for an aggregate cost of $4.74 million under its share repurchase program by June 30, 2021[96] Accumulated Other Comprehensive Loss, Net (Dollars in thousands) | Component | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Net unrealized gains on securities | $2,801 | $4,397 | | Net unrecognized losses on cash flow hedges | $(809) | $(1,367) | | Net unrecognized losses on defined benefit plan | $(4,916) | $(4,985) | | Total accumulated other comprehensive loss, net | $(2,924) | $(1,955) | Earnings Per Share (EPS) Calculation | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to C&F Financial Corporation | $8,008 | $3,746 | $15,069 | $7,324 | | Weighted average shares outstanding | 3,653,568 | 3,647,707 | 3,664,752 | 3,646,161 | | Net income per share - basic and diluted | $2.19 | $1.03 | $4.11 | $2.01 | NOTE 8: Employee Benefit Plans This note summarizes the components of net periodic benefit cost for the Bank's noncontributory cash balance pension plan Net Periodic Benefit Cost (Dollars in thousands) | Component | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Service cost | $498 | $415 | $985 | $801 | | Other components of net periodic benefit cost | $(270) | $(191) | $(551) | $(405) | | Net periodic benefit cost | $228 | $224 | $434 | $396 | NOTE 9: Fair Value of Assets and Liabilities This note defines the three-level fair value hierarchy and details valuation techniques for assets and liabilities - The Corporation primarily uses Level 2 fair value measurements for its investment portfolio, loans held for sale, and derivative financial instruments (IRLCs, interest rate swaps, cash flow hedges, forward sales of TBA securities)[113][115][116][117][118] Financial Assets Measured at Fair Value on a Recurring Basis (June 30, 2021, Dollars in thousands) | Asset Category | Level 1 | Level 2 | Level 3 | Total Fair Value | | :--- | :--- | :--- | :--- | :--- | | Securities available for sale | $0 | $356,886 | $0 | $356,886 | | Loans held for sale | $0 | $119,038 | $0 | $119,038 | | Derivatives (IRLC, Interest rate swaps) | $0 | $8,929 | $0 | $8,929 | | Total Assets | $0 | $484,853 | $0 | $484,853 | - Other Real Estate Owned (OREO) is measured at fair value on a nonrecurring basis and classified as Level 3, with a fair value of $22,000 at June 30, 2021, based on appraisals and a 75% discount to reflect market conditions and selling costs[131][133][135] NOTE 10: Business Segments This note outlines the operating results for the Corporation's three business segments and details inter-segment transactions - The Corporation operates in three business segments: community banking (C&F Bank and C&F Wealth Management), mortgage banking (C&F Mortgage Corporation), and consumer finance (C&F Finance Company)[142][143] Net Income by Business Segment (Dollars in thousands) | Segment | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Community Banking | $3,925 | $294 | $6,718 | $951 | | Mortgage Banking | $1,968 | $2,321 | $4,513 | $3,864 | | Consumer Finance | $2,875 | $1,638 | $5,402 | $3,568 | | Other (Loss) | $(657) | $(510) | $(1,309) | $(1,001) | | Eliminations (Loss) | $(21) | $0 | $(69) | $0 | | Consolidated Net Income | $8,090 | $3,743 | $15,255 | $7,382 | - The community banking segment provides funding to the mortgage banking and consumer finance segments through warehouse lines of credit and variable/fixed rate notes, with these inter-segment transactions eliminated in consolidated totals[148] NOTE 11: Commitments and Contingent Liabilities This note details the Corporation's off-balance sheet commitments and contingent liabilities related to mortgage banking - Loan commitments totaled $321.72 million at June 30, 2021, and standby letters of credit totaled $17.61 million, representing potential future credit exposure[150][151] - The mortgage banking segment has contingent liabilities from representations and warranties on sold residential mortgage loans, with an allowance for indemnifications of $3.39 million at June 30, 2021[152][154] - Provision for indemnifications decreased significantly to $32,000 for the six months ended June 30, 2021, from $163,000 in the prior year period[152][154] NOTE 12: Derivative Financial Instruments This note describes the Corporation's use of derivative financial instruments to manage interest rate risk - The Corporation uses interest rate swaps as cash flow hedges to manage variability in cash flows on $25.0 million of trust preferred capital notes, with a fair value of $1.13 million in other liabilities at June 30, 2021[156][164] - Customer-related interest rate swaps (matched with dealer counterparties) had a total notional amount of $84.13 million at June 30, 2021, with a net fair value of zero[159][164] - Mortgage banking derivatives, including IRLCs ($154.74 million notional) and forward sales of TBA securities ($15.25 million notional), are used to mitigate interest rate risk on mortgage loans held for sale[160][164] - Cash collateral of $6.44 million was maintained with dealer counterparties for derivative instruments in a loss position at June 30, 2021[164] NOTE 13: Other Noninterest Expenses This note provides a detailed breakdown of the significant components within the 'Other' category of noninterest expenses Other Noninterest Expenses (Six Months Ended June 30, Dollars in thousands) | Expense Category | 2021 | 2020 | | :--- | :--- | :--- | | Data processing fees | $5,728 | $5,535 | | Mortgage banking loan processing expenses | $1,761 | $1,264 | | Professional fees | $1,484 | $1,718 | | All other noninterest expenses | $3,832 | $3,817 | | Total other noninterest expenses | $14,325 | $14,505 | - Merger-related expenses, which totaled $898,000 for the six months ended June 30, 2020, were not incurred during the first six months of 2021[167] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides its perspective on financial condition, results of operations, key metrics, and critical accounting policies OVERVIEW Consolidated net income significantly increased in 2021, driven by community banking and consumer finance segment performance Consolidated Financial Performance Highlights | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in millions) | $8.1 | $3.7 | $15.3 | $7.4 | | EPS | $2.19 | $1.03 | $4.11 | $2.01 | | Annualized ROE | 16.49% | 8.41% | 15.83% | 8.34% | | Annualized ROA | 1.50% | 0.77% | 1.43% | 0.78% | | Adjusted Net Income (in millions) | $8.1 | $4.0 | $15.3 | $8.4 | | Adjusted EPS | $2.19 | $1.11 | $4.11 | $2.30 | | Adjusted Annualized ROE | 16.49% | 9.00% | 15.83% | 9.53% | | Adjusted Annualized ROA | 1.50% | 0.82% | 1.43% | 0.89% | - Consolidated net income increased 116% for Q2 2021 and 107% for H1 2021 YoY, primarily due to higher net income in the community banking and consumer finance segments[173][175] - The Corporation recorded a net reversal of provision for loan losses of $600,000 for Q2 2021 and $320,000 for H1 2021, as credit deterioration from COVID-19 was less than anticipated, leading to a release of reserves[177] - Total equity increased to $201.8 million at June 30, 2021, from $194.5 million at December 31, 2020, driven by earnings, partially offset by $4.8 million in share repurchases and $0.78 per share in cash dividends[178][180] CRITICAL ACCOUNTING POLICIES This section highlights critical accounting policies requiring significant management judgment, such as the ALL and goodwill - The allowance for loan losses (ALL) is a critical estimate, inherently subjective, based on factors like delinquencies, charge-offs, portfolio changes, economic conditions, and collateral values, susceptible to significant revision[183][185] - Loans acquired in business combinations are classified as either purchased credit-impaired (PCI) or purchased performing and are recorded at fair value[187][188][190] - Goodwill is reviewed at least annually for impairment, with the last evaluation in Q4 2020 concluding no impairment[192][194][195] RESULTS OF OPERATIONS This section analyzes changes in net interest income, noninterest income and expense, and segment performance NET INTEREST INCOME Net interest income increased due to higher average interest-earning assets, though the net interest margin decreased Net Interest Income (Taxable-Equivalent Basis, Dollars in thousands) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $21,869 | $20,420 | $42,689 | $41,185 | | Annualized Net Interest Margin | 4.37% | 4.61% | 4.35% | 4.76% | | Yield on interest-earning assets | 4.80% | 5.36% | 4.81% | 5.63% | | Cost of interest-bearing liabilities | 0.63% | 1.03% | 0.68% | 1.16% | - Average interest-earning assets grew by $225.4 million for Q2 2021 and $238.8 million for H1 2021 YoY, primarily from growth in loans (including PPP loans) and securities, funded by deposit growth[206] - The overall yield on average loans decreased by 19 basis points to 6.00% for Q2 2021 and 72 basis points to 5.89% for H1 2021 YoY, mainly due to lower average yields at the consumer finance segment and changes in portfolio composition[210] - Net PPP origination fees recognized were $1.2 million for Q2 2021 and $2.1 million for H1 2021, significantly higher than the prior year, contributing to loan interest income[210] - Average cost of interest-bearing deposits decreased by 42 basis points for Q2 2021 and 45 basis points for H1 2021 YoY, due to lower rates on time deposits and a shift towards non-time deposits[214] Noninterest Income Noninterest income grew, driven by higher gains on loan sales, interchange income, and mortgage lender services income Total Noninterest Income (Dollars in thousands) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Gains on sales of loans | $5,947 | $4,605 | $13,005 | $8,281 | | Mortgage banking fee income | $1,648 | $1,986 | $3,504 | $3,291 | | Interchange income | $1,471 | $1,141 | $2,789 | $2,230 | | Other income, net | $1,487 | $1,912 | $2,891 | $382 | | Total noninterest income | $13,100 | $11,828 | $27,456 | $18,576 | - Total noninterest income increased by $1.3 million (10.8%) in Q2 2021 and $8.9 million (47.8%) in H1 2021 YoY[219] - Higher gains on sales of loans were primarily due to higher margins on loans originated for resale, despite lower mortgage loan production volume in Q2 2021[219] Noninterest Expense Noninterest expenses increased due to higher salaries and mortgage-related costs, partially offset by lower merger expenses Total Noninterest Expenses (Dollars in thousands) | Expense Category | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Salaries and employee benefits | $15,714 | $14,354 | $31,327 | $25,171 | | Occupancy expense | $2,190 | $2,154 | $4,550 | $4,201 | | Other expenses | $6,998 | $7,284 | $14,325 | $14,505 | | Total noninterest expense | $24,902 | $23,792 | $50,202 | $43,877 | - Total noninterest expenses increased by $1.1 million (4.7%) in Q2 2021 and $6.3 million (14.4%) in H1 2021 YoY[221] - Merger-related expenses, which were $439,000 in Q2 2020 and $1.4 million in H1 2020, were not incurred in the first six months of 2021[222] Income Taxes The consolidated effective income tax rate increased in 2021 compared to 2020, which included a one-time tax benefit - The consolidated effective income tax rate was 23.6% for H1 2021, compared to 20.7% for H1 2020[223] - A $303,000 income tax benefit was recognized in Q2 and H1 2020 due to a change in tax law related to net operating losses from the Peoples acquisition[223] Business Segments Community Banking and Consumer Finance reported significant net income increases, while Mortgage Banking results were mixed Community Banking The Community Banking segment's net income increased substantially due to higher net interest income and lower loan loss provisions Community Banking Segment Net Income (Dollars in thousands) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $3,925 | $294 | $6,718 | $951 | | Adjusted net income | $3,925 | $560 | $6,718 | $1,902 | | Net interest income | $14,479 | $12,176 | $27,931 | $24,947 | | Provision for loan losses | $(200) | $1,400 | $(200) | $2,400 | - Net PPP origination fees recognized were $1.2 million for Q2 2021 and $2.1 million for H1 2021, significantly impacting loan interest income[233] - Merger-related expenses of $439,000 in Q2 2020 and $1.3 million in H1 2020 were not incurred in 2021, contributing to improved net income[235] Mortgage Banking The Mortgage Banking segment's net income was influenced by loan origination volumes, margins, and higher operating expenses Mortgage Banking Segment Net Income (Dollars in thousands) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $1,968 | $2,321 | $4,513 | $3,864 | | Gains on sales of loans | $5,957 | $4,605 | $13,062 | $8,281 | | Mortgage loan originations | $381,308 | $448,281 | $803,811 | $708,631 | | Mortgage loans sold | $437,554 | $395,494 | $895,737 | $621,532 | - Mortgage loan originations decreased 14.9% in Q2 2021 but increased 13.4% in H1 2021 YoY[247] - Locked loan commitments decreased by $37.7 million in Q2 2021 and $43.9 million in H1 2021, indicating a moderation in production[247] Consumer Finance The Consumer Finance segment's net income increased, driven by a significant decrease in provision for loan losses Consumer Finance Segment Net Income (Dollars in thousands) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $2,875 | $1,638 | $5,402 | $3,568 | | Interest income | $9,421 | $9,689 | $18,670 | $19,790 | | Provision for loan losses | $(430) | $2,200 | $(180) | $3,850 | - Provision for loan losses decreased by $2.6 million for Q2 2021 and $4.0 million for H1 2021 YoY, due to lower net charge-offs and a release of COVID-19 related reserves[253] - Interest income decreased due to lower average loan yields, as the segment focused on higher credit quality loans (marine and RV) and experienced lower interest rates for non-prime auto loans[253] ASSET QUALITY This section details the allowance for loan losses, nonperforming assets, and impaired loans, showing improved credit quality Allowance for Loan Losses The allowance for loan losses decreased slightly, reflecting a net reversal of provision and improved credit quality indicators Allowance for Loan Losses Activity (Six Months Ended June 30, Dollars in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Balance, beginning of period | $39,156 | $32,873 | | Total provision for loan losses | $(320) | $6,250 | | Net loans charged off | $115 | $(3,029) | | Balance, end of period | $38,951 | $36,094 | Allocation of Allowance for Loan Losses (Dollars in thousands) | Loan Type | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Real estate—residential mortgage | $2,814 | $2,914 | | Commercial, financial and agricultural | $11,028 | $10,696 | | Consumer finance | $23,449 | $23,513 | | Total allowance for loan losses | $38,951 | $39,156 | - The consumer finance segment experienced annualized net recoveries of 0.07% of average total loans for H1 2021, compared to net charge-offs of 1.99% for H1 2020, reflecting improved loan performance and a strong used car market[282][284] Nonperforming Assets Nonperforming assets decreased across both the community banking and consumer finance segments, reflecting improved credit quality Community Banking Segment Nonperforming Assets (Dollars in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Nonaccrual loans | $2,883 | $2,971 | | OREO | $857 | $907 | | Total nonperforming assets | $3,740 | $3,878 | | ALL to total nonaccrual loans | 514.53% | 506.06% | Consumer Finance Segment Nonperforming Assets (Dollars in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Nonaccrual loans | $138 | $402 | | Repossessed assets | $151 | $291 | | ALL to total consumer finance loans | 7.04% | 7.53% | - Total delinquent loans as a percentage of total loans for the consumer finance segment decreased to 1.77% at June 30, 2021, from 3.08% at December 31, 2020[282] Impaired Loans Impaired loans, including TDRs, decreased, and most COVID-19 modified loans are performing as per their modified terms Impaired Loans and Related Allowance (Dollars in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Impaired Loans (Unpaid Principal Balance) | $5,684 | $6,420 | | Related Allowance | $827 | $879 | | Total TDRs | $2,898 | $3,575 | - The Corporation granted COVID-19 related loan modifications on aggregate balances of $103.6 million since the pandemic began[292] FINANCIAL CONDITION Total assets increased, driven by growth in cash, securities, and loans, funded primarily by an increase in deposits Loan Portfolio The total loan portfolio increased, driven by growth in commercial and consumer finance loans, including PPP loans Summary of Loans Held for Investment (Dollars in thousands) | Loan Type | June 30, 2021 Amount | June 30, 2021 Percent | December 31, 2020 Amount | December 31, 2020 Percent | | :--- | :--- | :--- | :--- | :--- | | Real estate—residential mortgage | $218,189 | 16% | $218,298 | 16% | | Commercial, financial, and agricultural | $730,177 | 52% | $700,215 | 52% | | Consumer finance | $332,873 | 24% | $312,252 | 23% | | Total loans | $1,387,244 | 100% | $1,352,406 | 100% | Paycheck Protection Program Loans (Dollars in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Outstanding principal | $64,666 | $78,684 | | Unrecognized deferred fees, net | $(2,637) | $(2,157) | | Net balance | $62,029 | $76,527 | Exposure to Sensitive Industries (June 30, 2021, Dollars in thousands) | Industry | Balance | Exposure | | :--- | :--- | :--- | | Apartments | $86,046 | $96,281 | | Health care | $64,859 | $65,702 | | Commercial real estate - retail | $43,987 | $47,770 | | Hospitality | $11,061 | $31,741 | Investment Securities The investment portfolio increased, primarily due to purchases of mortgage-backed and U.S. government agency securities Securities Available for Sale (Dollars in thousands) | Category | June 30, 2021 Amount | June 30, 2021 Percent | December 31, 2020 Amount | December 31, 2020 Percent | | :--- | :--- | :--- | :--- | :--- | | U.S. government agencies and corporations | $60,898 | 17% | $48,282 | 17% | | Mortgage-backed securities | $180,222 | 51% | $123,714 | 43% | | Obligations of states and political subdivisions | $100,284 | 28% | $102,805 | 36% | | Corporate and other debt securities | $15,482 | 4% | $11,588 | 4% | | Total | $356,886 | 100% | $286,389 | 100% | - Securities available for sale increased by $70.5 million to $356.9 million at June 30, 2021, from $286.4 million at December 31, 2020, primarily due to purchases of mortgage-backed securities and U.S. government agency debt securities[310] Deposits Total deposits increased, driven by growth in non-time deposits, while time deposits and brokered deposits decreased - Deposits increased by $79.4 million to $1.83 billion at June 30, 2021, from $1.75 billion at December 31, 2020[314] - Non-time deposits increased by $99.0 million, while time deposits decreased by $19.6 million, influenced by PPP loans, government payments, and lower interest rates[314] - Brokered deposits significantly decreased to $4,000 at June 30, 2021, from $6.1 million at December 31, 2020, as the Corporation uses them for liquidity diversification rather than long-term strategy[315] Borrowings Total borrowings increased slightly due to fluctuations in short-term borrowings with commercial customers - Borrowings increased to $79.4 million at June 30, 2021, from $76.2 million at December 31, 2020, mainly due to fluctuations in short-term borrowings[316] Off-Balance Sheet Arrangements The Corporation utilizes derivative financial instruments to manage interest rate risk in its mortgage banking operations - At June 30, 2021, the mortgage banking segment managed interest rate risk for $143.9 million of IRLCs and $104.4 million of loans held for sale using $248.3 million in best-efforts forward sales contracts[318] - The Corporation uses interest rate swaps as cash flow hedges to convert variable rates on $25.0 million of trust preferred capital notes to fixed rates, with a fair value of $1.1 million in other liabilities at June 30, 2021[321] - Cash collateral of $6.4 million was maintained with dealer counterparties for derivative instruments in a loss position at June 30, 2021[324] Contractual Obligations There have been no material changes to contractual obligations since the 2020 Annual Report on Form 10-K - No material changes to contractual obligations have occurred since December 31, 2020[325] Liquidity The Corporation maintains sufficient liquidity, supported by stable core deposits, strong capital, and various funding sources - Liquid assets, including cash, interest-bearing deposits, and nonpledged securities, totaled $373.0 million at June 30, 2021, an increase from $227.9 million at December 31, 2020[327] Available Funding Sources (June 30, 2021, Dollars in thousands) | Funding Source | Capacity | Outstanding | Available | | :--- | :--- | :--- | :--- | | Unsecured federal funds agreements | $95,000 | $0 | $95,000 | | Repurchase lines of credit | $35,000 | $0 | $35,000 | | Borrowings from FHLB | $187,380 | $0 | $187,380 | | Borrowings from Federal Reserve Bank | $115,851 | $0 | $115,851 | | Revolving bank line of credit | $50,000 | $0 | $50,000 | | Total | $483,231 | $0 | $483,231 | - The Corporation pledged additional loans as collateral to increase available liquidity at the FHLB during the first six months of 2021[328] Capital Resources The Corporation and its Bank maintain strong regulatory capital ratios, exceeding all minimum and well-capitalized requirements Regulatory Capital Ratios (June 30, 2021) | Metric | Corporation Actual Ratio | Bank Actual Ratio | | :--- | :--- | :--- | | Total risk-based capital ratio | 15.8% | 14.6% | | Tier 1 risk-based capital ratio | 13.0% | 13.3% | | Common Equity Tier 1 capital ratio | 11.4% | 13.3% | | Tier 1 leverage ratio | 9.6% | 9.8% | - The Corporation's total capital includes $24.0 million in subordinated notes, with $20.0 million issued in Q3 2020 to support general corporate purposes and future growth[342] - The Corporation repurchased $4.5 million of its common stock during the first six months of 2021 under its program authorized in November 2020[343] Effects of Inflation and Changing Prices Management believes changes in interest rates have a greater effect on financial condition than inflation - The primary effect of inflation on the Corporation's operations is reflected in increased operating costs[344] - Changes in interest rates are considered to affect the Corporation's financial condition to a far greater degree than changes in the inflation rate, influenced by economic conditions and government policies[344] USE OF CERTAIN NON-GAAP FINANCIAL MEASURES This section explains the use of non-GAAP measures to provide meaningful information about operating performance - Non-GAAP measures like adjusted net income, adjusted EPS, adjusted ROE, adjusted ROA, tangible book value per share, and FTE net interest income are used to provide meaningful information about operating performance by excluding non-recurring items, intangible assets, and inconsistent tax benefits[345][346] Reconciliation of Non-GAAP Financial Measures (Dollars in thousands except for per share data) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income, as reported | $8,090 | $3,743 | $15,255 | $7,382 | | Adjusted net income | $8,090 | $4,009 | $15,255 | $8,433 | | Earnings per share - basic and diluted, as reported | $2.19 | $1.03 | $4.11 | $2.01 | | Adjusted earnings per share - basic and diluted | $2.19 | $1.11 | $4.11 | $2.30 | | Annualized ROE, as reported | 16.49% | 8.41% | 15.83% | 8.34% | | Adjusted annualized ROE | 16.49% | 9.00% | 15.83% | 9.53% | | Annualized ROA, as reported | 1.50% | 0.77% | 1.43% | 0.78% | | Adjusted annualized ROA | 1.50% | 0.82% | 1.43% | 0.89% | | FTE net interest income | $21,869 | $20,423 | $42,689 | $41,188 | Tangible Book Value Per Share (Dollars in thousands except for per share data) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Equity attributable to C&F Financial Corporation | $201,201 | $193,805 | | Less goodwill | $25,191 | $25,191 | | Less other intangible assets | $2,134 | $2,291 | | Tangible equity attributable to C&F Financial Corporation | $173,876 | $166,323 | | Shares outstanding | 3,591,902 | 3,670,301 | | Book value per share | $56.02 | $52.80 | | Tangible book value per share | $48.41 | $45.32 | Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Corporation's market risk disclosures since its 2020 Annual Report - No material changes in quantitative and qualitative disclosures about market risk from the 2020 Annual Report on Form 10-K[358] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control - Disclosure controls and procedures were effective as of June 30, 2021[359] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2021[360] PART II - Other Information Item 1A. Risk Factors There have been no material changes in risk factors from those disclosed in the 2020 Annual Report on Form 10-K - No material changes in risk factors from the 2020 Annual Report on Form 10-K[363] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Corporation's share repurchase program activity during the second quarter of 2021 - The Corporation's Board authorized a program to repurchase up to 365,000 shares of common stock through November 30, 2021[364] Issuer Purchases of Equity Securities (Q2 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1, 2021 - April 30, 2021 | 525 | $43.60 | | May 1, 2021 - May 31, 2021 | 52,641 | $47.85 | | June 1, 2021 - June 30, 2021 | 38,767 | $51.40 | | Total (Q2 2021) | 91,933 | $49.34 | - As of June 30, 2021, the Corporation repurchased 97,714 shares for an aggregate cost of $4.7 million under the program[364] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL data - Exhibits include the Agreement and Plan of Reorganization, corporate governance documents, CEO/CFO certifications (Rule 13a-14(a) and 18 U.S.C. Section 1350), and Inline XBRL financial statements[367] Signatures This section contains the duly authorized signatures of the Corporation's CEO and CFO, affirming the report filing - The report is signed by Thomas F. Cherry, President and Chief Executive Officer, and Jason E. Long, Executive Vice President, Chief Financial Officer and Secretary, on August 3, 2021[371]