UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1999
--------------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from__________________to______________________
Commission file number 000-23423
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C&F Financial Corporation
- --------------------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Virginia 54-1680165
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Eighth and Main Streets West Point VA 23181
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (804) 843-2360
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(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 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. [x] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 3,650,276 as of
August 12, 1999.
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TABLE OF CONTENTS
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998............................................................1
Consolidated Statements of Income -
Three months and six months ended June 30, 1999 and 1998.......................................2
Consolidated Statements of Shareholders' Equity
Six months ended June 30, 1999 and 1998 .......................................................3
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998........................................................5
Notes to Consolidated Financial Statements.........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation ......................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................14
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings ................................................................................14
Item 2. Changes in Securities ............................................................................14
Item 3. Defaults Upon Senior Securities...................................................................14
Item 4. Submission of Matters to a Vote of Security Holders ..............................................14
Item 5. Other Information ................................................................................15
Item 6. Exhibits and Reports on Form 8-K..................................................................15
Signatures ..................................................................................................16
</TABLE>
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<TABLE>
PART I - FINANCIAL STATEMENTS
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS June 30, 1999 December 31, 1998
- ------ ------------- -----------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 5,891 $ 8,140
Interest -bearing deposits in other banks
and fed funds 432 333
----------- -----------
Total cash and cash equivalents 6,323 8,473
Investment securities
Available for sale securities at fair value,
amortized cost of $27,458 and $21,481,
respectively 27,095 21,888
Held to maturity at amortized cost,
fair value of $38,638 and $40,865,
respectively 37,589 38,810
Loans held for sale, net 39,578 66,993
Loans, net 181,642 169,918
Federal Home Loan Bank stock 1,585 1,706
Corporate premises and equipment,
net of accumulated depreciation 7,293 6,466
Accrued interest receivable 1,939 2,374
Other assets 4,663 4,235
----------- -----------
Total assets $ 307,707 $ 320,863
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest-bearing demand deposits $ 40,742 $ 40,908
Savings and interest-bearing demand deposits 107,668 101,631
Time deposits 108,270 109,134
----------- -----------
Total deposits 256,680 251,673
Other borrowings 12,036 24,661
Accrued interest payable 609 598
Other liabilities 3,912 7,284
----------- -----------
Total liabilities 273,237 284,216
----------- -----------
Shareholders' Equity
Preferred stock ($1.00 par value,
3,000,000 shares authorized) -- --
Common stock ($1.00 par value, 8,000,000
shares authorized, 3,646,976 and 3,866,888
shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively) 3,647 3,867
Additional paid-in capital 123 476
Retained earnings 30,662 31,739
Accumulated other comprehensive
income, net of tax of
$20 and $291, respectively 38 565
----------- -----------
Total shareholders' equity 34,470 36,647
----------- -----------
Total liabilities and
shareholders' equity $ 307,707 $ 320,863
=========== ===========
The Company's notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of dollars, except for per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30,
June 30,
Interest Income 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and fees on loans $ 4,505 $ 4,570 $ 9,509 $ 8,575
Interest on other market investments
and fed funds 173 7 404 17
Interest on investment securities
U.S. Treasury Securities 20 49 69 99
U.S. Government agencies and corporations 200 620 363 1,257
Tax-exempt obligations of states and political
subdivisions 587 525 1,116 1,033
Corporate bonds and other 107 94 221 197
------------ ----------- ------------- -----------
Total interest income 5,592 5,865 11,682 11,178
Interest Expense
Savings and interest-bearing deposits 744 675 1,443 1,358
Certificates of deposit, $100,000 or more 216 186 438 386
Other time deposits 1,116 1,141 2,253 2,251
Short-term borrowings and other 131 544 313 739
------------ ----------- ------------- -----------
Total interest expense 2,207 2,546 4,447 4,734
Net interest income 3,385 3,319 7,235 6,444
Provision for loan losses 75 175 250 250
------------ ----------- ------------- -----------
Net interest income after provision for loan losses 3,310 3,144 6,985 6,194
Other Operating Income
Gain on sale of loans 1,719 1,865 3,883 3,143
Service charges on deposit accounts 273 256 542 518
Other service charges and fees 625 461 1,110 825
Other income 328 259 588 494
------------ ----------- ------------- -----------
Total other operating income 2,945 2,841 6,123 4,980
Other Operating Expenses
Salaries and employee benefits 2,403 1,987 4,663 3,783
Occupancy expenses 521 515 997 1,005
Goodwill amortization 69 69 138 138
Other expenses 1,099 1,201 2,101 2,081
------------ ----------- ------------- -----------
Total other operating expenses 4,092 3,772 7,899 7,007
Income before income taxes 2,163 2,213 5,209 4,167
Income tax expense 529 596 1,429 1,115
------------ ----------- ------------- -----------
Net Income $ 1,634 $ 1,617 $ 3,780 $ 3,052
============ =========== ============= ===========
Per Share Data
Net Income - Basic $ .45 $ .42 $ 1.02 $ .78
Net Income - Assuming Dilution $ .44 $ .41 $ 1.00 $ .78
Cash Dividends Paid and Declared $ .12 $ .11 $ .24 .21
Weighted average number of shares and
common stock equivalents outstanding 3,698,418 3,929,502 3,780,164 3,912,197
The Company's notes are an integral part of the consolidated financial statements.
</TABLE>
2
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<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands of dollars)
<CAPTION>
Accumulated
Additional Other
Common Paid-In Comprehensive Retained Comprehensive
Stock Capital Income Earnings Income Total
----- ------- ------ -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 $ 1,916 $ 118 $ 29,236 $ 530 $ 31,800
Comprehensive Income
Net income $ 3,052 3,052 3,052
Other comprehensive
income, net of tax
Unrealized gain on
securities, net of
reclassification
adjustment(1) 54 54 54
---------
Comprehensive income $ 3,106
=========
Stock options exercised 15 266 281
Stock dividends 1,932 (1,932)
Cash dividends (810) (810)
-------- ------ --------- ------- ---------
Balance June 30, 1998 $ 3,863 $ 384 $ 29,546 $ 584 $ 34,377
======== ====== ========= ======= =========
---------------------------
(1) There were no reclassification adjustments for the six months ended June 30, 1998.
The Company's notes are an integral part of the consolidated financial statements.
</TABLE>
3
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<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands of dollars)
Accumulated
Additional Other
Common Paid-In Comprehensive Retained Comprehensive
Stock Capital Income Earnings Income Total
----- ------- ------ -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 $ 3,867 $ 476 $ 31,739 $ 565 $ 36,647
Comprehensive Income
Net income $ 3,780 3,780 3,780
Other comprehensive
income, net of tax
Unrealized gain on
securities, net of
reclassification
adjustment(1) (527) (527) (527)
---------
Comprehensive income $ 3,253
=========
Stock options exercised 15 129 144
Repurchase of
Common Stock (235) (482) (3,971) (4,688)
Cash dividends (886) (886)
-------- ------ --------- ------ ---------
Balance June 30, 1999 $ 3,647 $ 123 $ 30,662 $ 38 $ 34,470
======== ====== ========= ====== =========
---------------------------
(1) There were no reclassification adjustments for the six months ended June 30, 1999.
The Company's notes are an integral part of the consolidated financial statements.
</TABLE>
4
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands of dollars)
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 3,780 $ 3,052
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 455 505
Amortization of goodwill 138 138
Provision for loan losses 250 250
Accretion of discounts and amortization of
premiums on investment securities, net (41) (25)
Proceeds from sale of loans 285,138 210,258
Origination of loans held for sale (257,722) (236,763)
Change in other assets and liabilities:
Accrued interest receivable 435 (465)
Other assets (379) 206
Accrued interest payable 11 7
Other liabilities (3,289) (259)
----------- -----------
Net cash provided by (used in) operating activities 28,776 (23,096)
---------- -----------
Cash flows from investing activities:
Proceeds from maturities of investments
held to maturity 1,227 6,363
Proceeds from sales and maturities of
investments available for sale 10,185 4,036
Purchase of investment securities -- (2,573)
Purchase of investments available for sale (16,155) (11,577)
Net increase in customer loans (11,974) (8,574)
Purchase of corporate premises and equipment (1,282) (352)
Sale (purchase) of Federal Home Loan Bank stock 121 (1,308)
---------- ----------
Net cash used in investing activities (17,878) (13,985)
----------- -----------
Cash flows from financing activities:
Net increase in demand,
interest-bearing demand and savings deposits 5,871 3,181
Net (decrease) increase in time deposits (864) 1,911
Net (decrease) increase in other borrowings (12,625) 33,404
Proceeds from exercise of stock options 144 281
Repurchase of common stock (4,688) --
Cash dividends (886) (810)
----------- -----------
Net cash (used in) provided by financing activities (13,048) 37,967
----------- ----------
Net increase (decrease) in cash and cash equivalents (2,150) 886
Cash and cash equivalents at beginning of period 8,473 8,871
---------- ----------
Cash and cash equivalents at end of period $ 6,323 $ 9,757
========== ==========
Supplemental disclosure
Interest paid $ 4,436 $ 4,727
Income taxes paid $ 1,457 $ 1,221
The Company's notes are an integral part of the consolidated financial statements.
</TABLE>
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all of the disclosures and notes required by generally accepted
accounting principles. In the opinion of C&F Financial Corporation's management,
all adjustments, consisting only of normal recurring accruals, necessary to
present fairly the financial position as of June 30, 1999, the results of
operations for the three and six months ended June 30, 1999 and 1998, and cash
flows for the six months ended June 30, 1999 and 1998 have been made. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the C&F
Financial Annual Report on Form 10-K for the year ended December 31, 1998.
The consolidated financial statements include the accounts of C&F
Financial Corporation ("the Company") and its subsidiary, Citizens and Farmers
Bank ("the Bank") with all significant intercompany transactions and accounts
being eliminated in consolidation.
Note 2
Net income per share assuming dilution has been calculated on the basis
of the weighted average number of shares of common stock and common stock
equivalents outstanding for the applicable periods. Weighted average number of
shares of common stock and common stock equivalents was 3,698,418 and 3,929,502
for the three months ended June 30, 1999 and 1998, respectively, and 3,780,164
and 3,912,197 for the six months ended June 30, 1999 and 1998, respectively.
Note 3
During March of 1999 the Company repurchased 235,000 shares of its common
stock from six shareholders at prices between $19.88 and $20.00 per share in
privately negotiated transactions.
Note 4
During April of 1999 Citizens and Farmers Bank announced that it had
signed a contract to purchase a piece of land in Williamsburg, Virginia. The
site will house the Bank's tenth office, the third in the James City
County/Williamsburg market. The Bank plans to open this office by late 1999 or
early 2000.
Also during the first quarter of 1999, the Company announced the
formation of a bank in Hanover County which would be operated as a division of
Citizens and Farmers Bank with the first branch being located in the
Mechanicsville area of Hanover County. As a result of a change in its strategic
vision, Citizens and Farmers Bank has decided to currently forego the Hanover
market and instead concentrate its initial efforts on the market more central to
Richmond proper. The Bank recently announced the formation of Citizens &
Commerce Bank ("CCB") which will be operated as a division of the Bank. CCB will
have an Area President and a Regional Board of Directors with local
decision-making responsibilities. CCB plans to open its first full-service
branch banking facility in November of 1999 at 8001 W. Broad Street in Richmond,
Virginia. The opening of multiple branch banking facilities in the greater
Richmond area is anticipated over the next several years.
6
<PAGE>
Note 5
The Company operates in a decentralized fashion in two principal business
activities, retail banking and mortgage banking. Revenues from retail banking
operations consist primarily of interest earned on loans and investment
securities. Mortgage banking operating revenues consist mainly of interest
earned on mortgage loans held for sale, gains on sales of loans in the secondary
mortgage market, and loan origination fee income. The Company also has an
investment company and a title company subsidiary which derive revenues from
brokerage and title insurance services, respectively. The results of these
subsidiaries are not significant to the Company as a whole and have been
included in "Other." The following table presents segment information for the
periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1999
Retail Mortgage
Banking Banking Other Eliminations Consolidated
------- ------- ----- ------------ ------------
Revenues:
<S> <C> <C> <C> <C> <C>
Interest income $ 5,498 $ 435 $ -- $ (341) $ 5,592
Gain on sale of loans -- 1,719 -- -- 1,719
Other 468 530 228 -- 1,226
Total operating income 5,966 2,684 228 (341) 8,537
Expenses:
Interest expense 2,207 341 -- (341) 2,207
Salaries and employee benefits 1,291 1,033 79 -- 2,403
Other 1,052 667 45 -- 1,764
Total operating expenses 4,550 2,041 124 (341) 6,374
Income before income taxes 1,416 643 104 -- 2,163
Total assets 303,859 39,287 54 (35,493) 307,707
Capital expenditures $ 847 $ 65 $ -- $ -- $ 912
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1998
Retail Mortgage
Banking Banking Other Eliminations Consolidated
------- ------- ----- ------------ ------------
Revenues:
Interest income $ 5,743 $ 779 $ -- $ (657) $ 5,865
Gain on sale of loans -- 1,865 -- -- 1,865
Other 424 371 181 -- 976
Total operating income 6,167 3,015 181 (657) 8,706
Expenses:
Interest expense 2,546 657 -- (657) 2,546
Salaries and employee benefits 1,041 886 60 -- 1,987
Other 1,103 825 32 -- 1,960
Total operating expenses 4,690 2,368 92 (657) 6,493
Income before income taxes 1,477 647 89 -- 2,213
Total assets 317,039 50,546 43 (48,672) 318,956
Capital expenditures $ 90 $ 52 $ -- $ -- $ 142
7
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1999
Retail Mortgage
Banking Banking Other Eliminations Consolidated
------- ------- ----- ------------ ------------
Revenues:
Interest income $ 11,425 $ 1,013 $ -- $ (756) $ 11,682
Gain on sale of loans -- 3,883 -- -- 3,883
Other 909 924 407 -- 2,240
Total operating income 12,334 5,820 407 (756) 17,805
Expenses:
Interest expense 4,447 756 -- (756) 4,447
Salaries and employee benefits 2,443 2,072 148 -- 4,663
Other 2,077 1,329 80 -- 3,486
Total operating expenses 8,967 4,157 228 (756) 12,596
Income before income taxes 3,367 1,663 179 -- 5,209
Total assets 303,859 39,287 54 (35,493) 307,707
Capital expenditures $ 1,147 $ 135 $ -- $ -- $ 1,282
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998
Retail Mortgage
Banking Banking Other Eliminations Consolidated
------- ------- ----- ------------ ------------
Revenues:
Interest income $ 10,996 $ 1,187 $ -- $ (1,005) $ 11,178
Gain on sale of loans -- 3,143 -- -- 3,143
Other 827 672 338 -- 1,837
Total operating income 11,823 5,002 338 (1,005) 16,158
Expenses:
Interest expense 4,734 1,005 -- (1,005) 4,734
Salaries and employee benefits 2,121 1,549 113 -- 3,783
Other 2,080 1,334 60 -- 3,474
Total operating expenses 8,935 3,888 173 (1,005) 11,991
Income before income taxes 2,888 1,114 165 -- 4,167
Total assets 317,039 50,546 43 (48,672) 318,956
Capital expenditures $ 276 $ 76 $ -- $ -- $ 352
</TABLE>
The retail banking segment provides the mortgage banking segment with the funds
needed to originate mortgage loans through a warehouse line of credit and
charges the mortgage banking segment interest at the daily FHLB advance rate
plus 50 basis points. 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 and other segments.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion supplements and provides information about the
major components of the results of operations and financial condition, liquidity
and capital resources of C&F Financial Corporation (the "Company"). This
discussion and analysis should be read in conjunction with the Consolidated
Financial Statements, and supplemental financial data.
Overview
Net income increased 1% to $1,634,000 for the three months ended June
30, 1999 compared to $1,617,000 for the same period of 1998. Earnings per share
were $.44 for the three month period, up 7% from $.41 per share for the three
months ended June 30, 1998. Net income for the first six months ended June 30,
1999 was $3,780,000 compared to $3,052,000 for the same period of 1998. Included
in earnings for the first six months of 1999 is $370,000 in interest income
(after taxes) which was collected in February 1999 resulting from the payoff of
a non-accrual loan which has been on the Bank's books for the past several
years. Excluding this interest income, net income increased 12% and earnings per
share increased 15% over the six months ended June 30, 1998.
Profitability as measured by the Company's annualized return on average
assets (ROA) was 2.15% for the three months ended June 30, 1999 compared to
2.08% for the same period of 1998. For the first six months of 1999, ROA,
excluding the one-time interest income, was 2.23% compared to 2.06% for the
first six months of 1998. Another key indicator of performance, the annualized
return on average equity (ROE) for the three months ended June 30, 1999 was
19.09% compared to 19.12% for the three months ended June 30, 1998. For the
first six months of 1999, excluding the one-time interest income, ROE was 19.38%
compared to 18.40% for the first six months of 1998.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three months ended June 30, 1999 was $3.4
million, an increase of $66,000, or 2%, from $3.3 million for the three months
ended June 30, 1998. For the quarter ended June 30, 1999, the net interest
margin on a taxable equivalent basis increased to 5.18% from 4.94% for the
quarter ended June 30, 1998. This increase was offset by a decrease in the
balance of average earning assets to $286.7 million for the quarter ended June
30, 1999 from $292.4 million for the quarter ended June 30, 1998. The decrease
in average earning assets is a result of an approximate $20.8 million decrease
in the securities' portfolio which was a result of securities being called due
to the lower interest rate environment experienced during the second half of
1998 and the first quarter of 1999. The excess funds resulting from the
securities being called was used to pay off borrowings from the Federal Home
Loan Bank (FHLB). The Bank borrows from the FHLB to fund loans originated and
subsequently sold by C&F Mortgage Corporation. For the three months ended June
30, 1999, the yield on interest earning assets decreased to 8.26% from 8.43% for
the three months ended June 30, 1998. The decrease in the yield is mainly
attributed to a decrease in the yield on the Bank's loan portfolio resulting
from the overall lower interest rate environment in the second quarter of 1999
as compared to the second quarter of 1998. The decrease in the yield on interest
earning assets was offset by a decrease in the Company's cost of funds to 3.89%
for the second quarter of 1999 from 4.35% for the same period in 1998. The
decrease was a result of the overall lower interest rate environment and a
decrease in higher cost borrowings from the FHLB.
9
<PAGE>
Net interest income for the six months ended June 30, 1999, excluding
the one-time intrest income of approximately $560,000 before taxes, was $6.7
million, an increase of $231,000, or 4%, from $6.4 million for the six months
ended June 30, 1998. The net interest margin on a taxable equivalent basis for
the six months ended June 30, 1999 was relatively flat at 5.08% compared to
5.05% for the first six months of 1998. The average balance of interest earning
assets increased $9.4 million to $287.9 million for the first six months of 1999
from $278.5 million for the first six months of 1998. The increase in average
earning assets is a result of an increase in the average balance of the Bank's
loan portfolio, interest earning deposits in other banks and fed funds offset by
a decrease in the average balance in securities portfolio. The increase in
interest earning deposits in other banks and fed funds is a result of excess
funds generated from an increase in deposits and funds generated from securities
being called. While the Bank's loan portfolio continues to grow, excess funds
cannot be deployed into loans fast enough. The yield on interest earning assets
decreased to 8.17% for the six months ended June 30, 1999 from 8.45% for the
same period in 1998. This decrease was more than offset by a decrease in the
cost of funds to 3.93% for the first half of 1999 from 4.26% for the first half
of 1998. The decrease in the yield on interest earning assets is the result of
the overall lower interest rate environment and the increase in the average
balances held in lower yielding interest deposits in other banks and fed funds.
The decrease in the cost of funds is a result of the overall lower interest rate
environment and the decrease in the average balance of higher cost borrowings
from the FHLB.
Non-Interest Income
Other operating income increased $104,000, or 4%, to $2,945,000 for the
second quarter of 1999 from $2,841,000 for the second quarter of 1998. Other
operating income increased $1,143,000, or 23%, to $6,123,000 for the first six
months of 1999 from $4,980,000 for the first six months of 1998. The increase in
other income is mainly attributed to an increase in gain on sale of loans
resulting from increased production at C&F Mortgage Corporation. Loans closed at
C&F Mortgage Corporation for the quarter ended June 30, 1999 and 1998 was
$141,078,000 and $132,705,000, respectively. Loans sold were $128,004,000 and
$124,190,000 for the quarters ended June 30, 1999 and 1998, respectively. Loans
closed for the six months ended June 30, 1999 and 1998 were $257,722,000 and
$236,798,000, respectively, while loans sold were $285,005,000 and $208,163,000
for the six months ended June 30, 1999 and 1998, respectively.
Non-Interest Expense
Other operating expenses increased $320,000, or 8%, to $4,092,000 for
the second quarter of 1999 from $3,772,000 for the second quarter of 1998. Other
operating expenses increased $892,000, or 13%, to $7,899,000 for the first six
months of 1999 from $7,007,000 for the first six months of 1998. The increase in
other expenses is mainly attributed to increases in salaries and employee
benefits due to increased production at C&F Mortgage Corporation.
Year 2000 Issue
The Y2K issue involves the risk that computer programs and computer
systems may not be able to perform without interruption into the year 2000. If
computer systems do not correctly recognize the date change from December 31,
1999 to January 1, 2000, computer applications that rely on the date field could
fail or create erroneous results. Such erroneous results could affect interest
payments or due dates and could cause the temporary inability to process
10
<PAGE>
transactions and to engage in ordinary business activities. The failure of the
Company, its suppliers, and its borrowers to address the Y2K issue could have a
material adverse effect on the Company's financial condition, results of
operations, or liquidity.
In 1997, the Company initiated a review and assessment of all hardware
and software to confirm that it will function properly in the year 2000. Based
on this assessment, we believe the Company's mainframe hardware and banking
software are currently Y2K compliant. However, testing is required to confirm
this. Testing began in the first quarter of 1998 and was substantially complete
by June 30, 1999. For certain other systems, the Company has determined that it
will have to replace or modify certain pieces of hardware and/or software so
that the systems will properly function in the year 2000. For systems that the
Company relies on third-party vendors, these vendors have been contacted and
have indicated that the hardware and/or software will be Y2K compliant.
The Company has also initiated formal communications with all
significant loan and deposit customers to determine the extent to which the
Company is vulnerable to those third-parties' failure to remedy their own Y2K
issue. The Company believes that exposure to customers' not being Y2K compliant
is minimal.
The Company plans to complete the majority of the Year 2000 project by
September 30, 1999. To date, the Company has expensed $150,000 related to the
assessment of and efforts in connection with the Year 2000 issue. Remaining
expenditures are not expected to have a material effect on the Company's
consolidated financial statements.
The Company continues to assess its risk from other environmental
factors over which it has little direct control, such as electrical power
supply, and voice and data transmission. Because of the nature of these external
factors, the Company is not actively engaged in any repair, replacement, or
testing efforts for these services. Based on its current assessments and
remediation plans, which are based in part on certain representations of
third-party services, the Company does not expect that it will experience a
significant disruption of its operations as a result of the change in the new
millennium. Although the Company has no reason to conclude that a failure will
occur, the most likely worst-case Y2K scenario would entail a disruption or
failure of the Company's power suppliers' or voice and data transmission
suppliers' capability to provide power to data transmission services to a
computer system or a facility. If such a failure were to occur, the Company
would implement a contingency plan as described below. While it is impossible to
quantify the impact of such a scenario, the most likely worst-case scenario
would entail diminishment of service levels, some customer inconvenience, and
additional, as yet not understood, costs associated with the implementation of
the contingency plan.
For the computer systems and facilities that it has determined to be
most critical, the Company expects to complete development, testing, and
adoption and testing of business contingency plans by September 30, 1999. These
plans will conform to recently issued guidelines from the FFIEC on business
contingency planning for Y2K readiness. Contingency plans will include, among
other actions, manual workarounds and identification of resource requirements
and alternative solutions for resuming critical business processes in the event
of a Y2K-related failure. While the Company will have contingency plans in place
to address a temporary disruption in these services, there can be no assurance
that any disruption or failure will be only temporary, that the Company's
contingency plans will function as anticipated, or that the results of
operations, financial condition, or liquidity of the Company will not be
adversely affected in the event of a prolonged disruption or failure.
Additionally, there can be no assurance that the FFIEC or other federal
or state regulators will not issue new regulatory requirements that require
additional work by the Company and, if issued, that new regulatory requirements
will not increase the cost or delay the completion of the Company's Y2K project.
The costs of the project and the date on which the Company plans to
complete the Y2K modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans, and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans. Specific
11
<PAGE>
factors that might cause such material differences include, but are not limited
to, the availability of personnel trained in this area, the ability of
third-party vendors to correct their software and hardware, the ability of
significant customers to remedy their Year 2000 issues, and similar
uncertainties.
Income Taxes
Income tax expense for the three months ended June 30, 1999 amounted to
$529,000, resulting in an effective tax rate of 24.5% compared to $596,000, or
26.9%, for the three months ended June 30, 1998. Income tax expense for the six
months ended June 30, 1999 amounted to $1,429,000, resulting in an effective tax
rate of 27.4% compared to $1,115,000, or 26.7%, for the six months ended June
30, 1998. The increase in the effective tax rate for the quarter and for the
year is a result of the increase in earnings subject to a 34% tax rate versus
earnings subject to no taxes such as certain loans to municipalities or
investment obligations of state and political subdivisions.
Asset Quality-Allowance /Provision For Loan Losses
The Company had $250,000 in provision expense for the first six months
of 1999 and for the first six months of 1998. Loans charged off amounted to
$6,000 and $46,000 for the six months ended June 30, 1999 and 1998,
respectively. Recoveries amounted to $18,000 and $25,000 for the six months
ended June 30, 1999 and 1998, respectively. The allowance for loan losses was
$3.0 million at June 30, 1999 and $2.8 million at December 31, 1998. The
allowance approximates 1.6% of total loans outstanding at June 30, 1999 and
December 31, 1998. Management feels that the reserve is adequate to absorb any
losses on existing loans which may become uncollectible.
Nonperforming Assets
Total non-performing assets, which consist of the Company's non-accrual
loans and other real estate owned was $627,000 at June 30, 1999 compared to
$463,000 at December 31, 1998.
FINANCIAL CONDITION
Summary
At June 30, 1999, the Company had total assets of $307.7 million
compared to $320.9 million at December 31, 1998.
Interest-Bearing Deposits in Other Banks and Fed Funds
At June 30, 1999, interest-bearing deposits in other banks and fed
funds amounted to $432,000 compared to $333,000 at December 31, 1998.
Loan Portfolio
At June 30, 1999, loans held for sale amounted to $39.6 million
compared to $67.0 million held at December 31, 1998. The decrease in the balance
from December 31, 1998 is a result of a decrease in loan originations from
12
<PAGE>
$154,000,000 for the fourth quarter of 1998 to $141,000,000 for the second
quarter of 1999. The decrease in originations for the second quarter of 1999 is
a result of an increase in the interest rates for the second quarter of 1999 as
compared to the fourth quarter of 1998.
The following table sets forth the composition of the Company's loans
in dollar amounts and as a percentage of the Company's total gross loans held
for investment at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real estate - mortgage $ 86,936 47% $ 86,311 50%
Real estate - construction 4,740 3 5,359 3
Commercial, financial and
agricultural 72,183 39 62,885 36
Equity lines 9,703 5 8,580 5
Consumer 11,102 6 9,544 6
------------- --- ----------- ---
Total loans 184,664 100% 172,679 100%
Less unearned discount (1) (1)
Less allowance for possible
loan losses (3,021) (2,760)
------------- -----------
Total loans, net $ 181,642 $ 169,918
</TABLE>
Investment Securities
At June 30, 1999, total investment securities were $64.7 million
compared to $60.7 for December 31, 1998. Securities of U.S. Government agencies
and corporations represent 21.2% of the total securities portfolio, obligations
of state and political subdivisions were 69.4%, U.S. Treasury securities were
1.6%, and preferred stocks were 7.8% at June 30, 1999.
Deposits
Deposits totaled $256.7 million at June 30, 1999 compared to $251.7 at
December 31, 1998. Non-interest bearing deposits totaled $40.7 million at June
30, 1999 compared to $40.9 million at December 31, 1998.
Liquidity
At June 30, 1999, cash, securities classified as available for sale and
interest-bearing deposits were 11.6% of total earning assets. Asset liquidity is
also provided by managing the investment maturities.
Additional sources of liquidity available to the Company include its
subsidiary bank's capacity to borrow additional funds through an established
federal funds line with a regional correspondent bank and through an established
line with the Federal Home Loan Bank.
Capital Resources
The Company's capital position continues to exceed regulatory
requirements. The Company's Tier I capital ratio was 13.5% at June 30, 1999
13
<PAGE>
compared to 12.5% at December 31, 1998. The total risk-based capital ratio was
14.7% at June 30, 1999 compared to 13.4% at December 31, 1998. These ratios are
in excess of the mandated minimum requirements.
Shareholders' equity was $34.5 million at the end of the second quarter of
1999 compared to $36.6 million at December 31, 1998. The leverage ratio consists
of Tier I capital divided by average assets. At June 30, 1999, the Company's
leverage ratio was 10.8% compared to 11.5% at December 31, 1997. Each of these
exceeds the required minimum leverage ratio of 3%.
New Accounting Pronouncements
There have been no significant pronouncements since the December 31, 1998
10K was filed.
Effects of Inflation
The effect of changing prices on financial institutions is typically
different from other industries as the Company's assets and liabilities are
monetary in nature. Interest rates are significantly impacted by inflation, but
neither the timing nor the magnitude of the changes are directly related to
price level indices. Impacts of inflation on interest rates, loan demands, and
deposits are reflected in the consolidated financial statements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The statements contained in this report that are not historical facts may
be forward looking statements. The forward-looking statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from historical results or those anticipated. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes from the quantitative and
qualitative disclosures made in the December 31, 1998 Form 10K.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party of or which property of the Company is subject.
ITEM 2 - CHANGES IN SECURITIES - Inapplicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - Inapplicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
14
<PAGE>
ITEM 5 - OTHER INFORMATION - Inapplicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
C&F FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Registrant)
Date August 12, 1999 /s/ Larry G. Dillon
------------------------------ ----------------------------------
Larry G. Dillon, President and
Chief Executive Officer
Date August 12, 1999 /s/ Thomas F. Cherry
------------------------------ ----------------------------------
Thomas F. Cherry, Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,891
<INT-BEARING-DEPOSITS> 432
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,095
<INVESTMENTS-CARRYING> 37,589
<INVESTMENTS-MARKET> 38,638
<LOANS> 181,642
<ALLOWANCE> 3,022
<TOTAL-ASSETS> 307,707
<DEPOSITS> 256,680
<SHORT-TERM> 12,036
<LIABILITIES-OTHER> 4,521
<LONG-TERM> 0
0
0
<COMMON> 3,647
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 307,707
<INTEREST-LOAN> 9,509
<INTEREST-INVEST> 2,173
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,682
<INTEREST-DEPOSIT> 4,134
<INTEREST-EXPENSE> 4,447
<INTEREST-INCOME-NET> 7,235
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,899
<INCOME-PRETAX> 5,209
<INCOME-PRE-EXTRAORDINARY> 5,209
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,780
<EPS-BASIC> 1.02
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 8.17
<LOANS-NON> 627
<LOANS-PAST> 612
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,760
<CHARGE-OFFS> 6
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 3,022
<ALLOWANCE-DOMESTIC> 3,022
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
