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, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 33-70184
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C&F Financial Corporation
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(Exact name of small business issuer as
specified in its charter)
Virginia 54-1680165
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Eighth and Main Streets West Point VA 23181
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(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: 1,908,358 as of August 8, 1997.
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TABLE OF CONTENTS
Part I - Financial Information
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996..............................1
Consolidated Statements of Income -
Three months and six months ended June 30, 1997 and 1996.........2
Consolidated Statements of Shareholders' Equity
Six months ended June 30, 1997 ..................................3
Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and 1996..........................4
Notes to Consolidated Financial Statements...........................5
Item 2. Management's Discussion and Analysis ................................6
Part II - Other Information
Item 1. Legal Proceedings ..................................................11
Item 2. Changes in Securities ..............................................11
Item 3. Defaults Upon Senior Securities.....................................11
Item 4. Submission of Matters to a Vote of Security Holders ................11
Item 5. Other Information ..................................................11
Item 6. Exhibits and Reports on Form 8-K....................................11
Signatures ...............................................................12
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS June 30, 1997 December 31, 1996
- ------ ------------- -----------------
(Unaudited)
Cash and due from banks $ 7,914 $ 8,254
Interest -bearing deposits in other banks 1,011 545
----------- -----------
Total cash and cash equivalents 8,925 8,799
Investment securities
Available for sale securities at fair value,
amortized cost of $15,691 and $19,022,
respectively 15,640 18,918
Held to maturity at amortized cost,
fair value of $60,934 and $67,687,
respectively 59,803 66,651
Loans held for sale, net 21,337 12,285
Loans, net 144,457 136,732
Federal Home Loan Bank stock 1,062 857
Corporate premises and equipment,
net of accumulated depreciation 6,020 6,011
Accrued interest receivable 2,193 2,270
Other assets 4,224 4,148
----------- -----------
Total assets $ 263,661 $ 256,671
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest-bearing demand deposits $ 35,990 $ 30,829
Savings and interest-bearing demand deposits 88,723 91,828
Time deposits 97,267 93,765
----------- -----------
Total deposits 221,980 216,422
Other borrowings 9,297 5,055
Accrued interest payable 560 541
Other liabilities 2,210 2,438
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Total liabilities 234,047 224,456
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Shareholders' Equity
Preferred stock ($1.00 par value,
3,000,000 shares authorized) -- --
Common stock ($1.00 par value, 8,000,000
shares authorized, 1,908,358 and 2,113,041
shares issued and outstanding at June 30, 1997
and December 31, 1996, respectively) 1,908 2,113
Additional paid-in capital -- --
Retained earnings 27,385 29,796
Net unrealized gain on securities
available for sale, net of tax of
$165 and $157, respectively 321 306
----------- -----------
Total shareholders' equity 29,614 32,215
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Total liabilities and
shareholders' equity $ 263,661 $ 256,671
=========== ===========
The Company's notes are an integral part of the consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of dollars, except for per share amounts)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
Interest Income 1997 1996 1997 1996
---- ---- ---- ----
Interest and fees on loans $ 3,534 $ 3,012 $ 6,892 $ 5,771
Interest on other market investments 18 24 46 65
Interest on investment securities
U.S. Treasury Securities 50 99 99 222
U.S. Government agencies and corporations 613 781 1,297 1,633
Tax-exempt obligations of states and political
subdivisions 517 525 1,046 1,024
Corporate bonds and other 112 100 214 201
------------ ----------- ------------- -----------
Total interest income 4,844 4,541 9,594 8,916
Interest Expense
Savings and interest-bearing deposits 653 623 1,320 1,245
Certificates of deposit, $100,000 or more 105 126 217 253
Other time deposits 1,107 1,120 2,162 2,251
Short-term borrowings and other 135 63 179 77
------------ ----------- ------------- -----------
Total interest expense 2,000 1,932 3,878 3,826
Net interest income 2,844 2,609 5,716 5,090
Provision for loan losses 60 -- 90 --
------------ ----------- ------------- -----------
Net interest income after provision for loan losses 2,784 2,609 5,626 5,090
Other Operating Income
Gain on sale of loans 771 788 1,371 1,091
Service charges on deposit accounts 263 243 500 458
Other service charges and fees 234 185 424 351
Other income 152 108 270 156
------------ ----------- ------------- -----------
Total other operating income 1,420 1,324 2,565 2,056
Other Operating Expenses
Salaries and employee benefits 1,421 1,428 2,825 2,873
Occupancy expenses 420 422 841 842
Goodwill amortization 69 80 138 122
Other expenses 725 612 1,336 1,052
------------ ----------- ------------- -----------
Total other operating expenses 2,635 2,542 5,140 4,889
Income before income taxes 1,569 1,391 3,051 2,257
Income tax expense 346 255 654 392
------------ ----------- ------------- -----------
Net Income $ 1,223 $ 1,136 $ 2,397 $ 1,865
============ =========== ============= ===========
Per Share Data
Net Income $ .63 $ .51 $ 1.18 $ .84
Dividends per common share $ .18 $ .15 $ .34 .30
Weighted average number of shares and
common stock equivalents outstanding 1,938,273 2,232,844 2,028,028 2,232,844
The Company's notes are an integral part of the consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands of dollars)
Net Unrealized
Additional Gain (Loss)
Common Pain-In Retained on Securities
Stock Capital Earnings Available for Sale Total
----- ------- -------- ------------------ -----
Balance January 1, 1997 $ 2,113 $ -- $ 29,796 $ 306 $ 32,215
Repurchase of common stock (205) -- (4,126) -- (4,331)
Net income 2,397 2,397
Cash dividends (682) (682)
Change in unrealized gains
and losses on securities
available for sale 15 15
-------- --------- ---------- ------- --------
Balance June 30, 1997 $ 1,908 $ -- $ 27,385 $ 321 $ 29,614
======== ========= ========= ======== =========
3
CONSOLIDATED STATEMENTS ON CASH FLOWS
(Unaudited)
(Amounts in thousands of dollars)
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 2,397 $ 1,865
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 389 340
Amortization of goodwill 138 122
Provision for loan losses 90
Accretion of discounts and amortization of
premiums on investment securities, net (39) (49)
Net realized (gain) loss on securities 7 (13)
Proceeds from sale of loans 105,946 63,028
Origination of loans held for sale (113,627) (75,252)
Gain on sale of loans (1,371) (1,091)
Change in other assets and liabilities:
Accrued interest receivable 77 87
Other assets (214) (912)
Accrued interest payable 19 (10)
Other liabilities (236) 2,228
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Net cash provided by (used in) operating activities (6,424) (9,657)
---------- ----------
Cash flows from investing activities:
Proceeds from maturities of investments
held to maturity 8,857 11,156
Proceeds from sales and maturities of
investments available for sale 4,077 8,850
Purchase of investment securities (2,000) (5,519)
Purchase of investments available for sale (753) (2,521)
Net decrease (increase) in customer loans (7,815) (14,411)
Purchase of corporate premises and equipment (398) (579)
Purchase of Federal Home Loan Bank stock (205) (52)
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Net cash used in investing activities 1,763 (3,076)
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Cash flows from financing activities:
Net increase (decrease) in demand,
interest-bearing demand and savings deposits 2,056 (8,945)
Net increase in time deposits 3,502 4,073
Assumption of deposit liabilities in
branch acquisition, net of premium paid -- 7,837
Net increase in other borrowings 4,242 7,500
Proceeds from exercise of stock options -- 13
Repurchase of common stock (4,331) --
Cash dividends (682) (670)
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Net cash provided by (used in) financing activities 4,787 9,808
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Net increase (decrease) in cash and cash equivalents 126 (2,925)
Cash and cash equivalents at beginning of period 8,799 13,450
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Cash and cash equivalents at end of period $ 8,925 $ 10,525
========== ==========
Supplemental disclosure
Interest paid $ 3,859 $ 3,827
Income taxes paid $ 686 $ 129
The Company's notes are an integral part of the consolidated financial statements.
4
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, 1997, the results of
operations for the three and six months ended June 30, 1997 and 1996, and cash
flows for the six months ended June 30, 1997 and 1996. 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-KSB for the year ended December 31, 1996.
Certain previously reported amounts have been reclassified to agree with the
current presentation.
The consolidated financial statements include the accounts of the Company
and its subsidiary, with all significant intercompany transactions and accounts
being eliminated in consolidation.
Note 2
Net income per share 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 1,938,273 and 2,232,844 for the
three months ended June 30, 1997 and 1996, respectively and 2,028,028 and
2,232,844 for the six months ended June 30, 1997 and 1996, respectively. There
is no material difference between primary and fully-diluted earnings per share.
Note 3
On April 4, 1997, the Company repurchased 204,683 shares of its common
stock at a price of $21.00 per share.
5
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 7.7% to $1,223,000 for the three months ended June
30, 1997 compared to $1,136,000 for the same period of 1996. Earnings per share
were $.63 for the three month period, up 23.5% from $.51 per share for the three
months ended June 30, 1996. Net income for the first six months ended June 30,
1997 increased 28.5% to $2,397,000 compared to $1,865,000 for the same period of
1996. Earnings per share were $1.18 for the six month period, up 40.5% from $.84
per share for the six months ended June 30, 1996.
Profitability as measured by the Company's annualized return on average
assets (ROA) increased to 1.92% for the three months ended June 30, 1997, up
from 1.84% for the same period of 1996. For the first six months of 1997, ROA
increased to 1.89%, up from 1.52% for the first six months of 1996. Another key
indicator of performance, the annualized return on average equity (ROE) for the
three months ended June 30, 1997 was 16.26%, compared to 14.11% for the three
months ended June 30, 1996. For the first six months of 1997, ROE was 15.32%
compared to 11.48% for the first six months of 1996.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three months ended June 30, 1997 was
$2,844,000, an increase of $235,000, or 9.0% from $2,609,000 for the three
months ended June 30, 1996. The increase in net interest income is a result of
an increase in the average balance of interest earning assets to $237.9 million
for the three months ended June 30, 1997 compared to $229.4 million for the same
period in 1996 and the increase in the Company's interest rate spread on a
taxable equivalent basis to 4.44% for the three months ended June 30, 1997 from
4.21% for the same period in 1996. In addition, the Company's net interest
margin on a tax equivalent basis increased to 5.23% for the three months ended
June 30, 1997 from 5.02% for the same period in 1996. The increase in the
Company's interest rate spread and net interest margin was a result of the
Company's continued effort in reallocating a portion of lower yielding
investments into higher yielding loans and the overall increase in the loan
portfolio, particularly in higher yielding commercial and consumer loans.
Net interest income for the first six months of 1997 was $5,716,000, an
increase of $626,000, or 12.3% from $5,090,000 for the first six months of 1996.
The increase in net interest income is a result of an increase in the average
balance of interest earning assets to $236.4 million for the six months ended
June 30, 1997 compared to $225.7 million for the same period in 1996 and the
increase in the Company's interest rate spread on a taxable equivalent basis to
4.51% for the six months ended June 30, 1997 from 4.15% for the same period in
6
1996. In addition, the Company's net interest margin on a tax equivalent basis
increased to 5.29% for the six months ended June 30, 1997 from 4.98% for the
same period in 1996. As was the case for the three months ended June 30, 1997,
the increase in the Company's interest rate spread and net interest margin was a
result of an increase in the average balance of loans and a change in the
overall mix of loans.
Non-Interest Income
Non-interest income increased $96,000 or 7.3% for the three months
ended June 30, 1997 from the same period of 1996. Non-interest income for the
six months ended June 30, 1997 increased $509,000, or 24.8% to $2,565,000 from
$2,056,000 for the same period in 1996. The majority of the increase is a result
of increased loan production at C&F Mortgage Corporation, a subsidiary of the
Bank. This increase is also a result of the Company's continued effort to
generate and increase other sources of non-interest income, including fees
generated from the sale of investments by C&F Investment Services, Inc., a
subsidiary of the Bank.
Non-Interest Expense
Non-interest expense increased $93,000, or 3.7%, for the three month
period ended June 30, 1997 from the same period in 1996. Non-interest expense
increased $251,000, or 5.1% for the six month period ended June 30, 1997 from
the same period in 1996. These increases are mainly attributable to increases in
the volume of activity at C&F Mortgage Corporation.
Income Taxes
Income tax expense for the three months ended June 30, 1997 amounted to
$346,000, compared to $255,000 for the three months ended June 30, 1996. Income
tax expense for the six months ended June 30, 1997 amounted to $654,000 compared
to $392,000 for the six months ended June 30, 1996.
Asset Quality-Allowance /Provision For Loan Losses
The Company had $90,000 in provision expense for the first six months
of 1997 compared to $0 for the same period in 1996. Loans charged off amounted
to $10,000 for the six months ended June 30, 1997 and 1996. Recoveries amounted
to $4,000 and $1,000 for the six months ended June 30, 1997 and 1996,
respectively. The ratio of net charge-offs to average outstanding loans was
.004% for the six months ended June 30, 1997. The allowance for loan losses was
$2.0 million at June 30, 1997 and $1.9 million at December 31, 1996. The
allowance approximates 1.4% of total loans outstanding at June 30, 1997 and
December 31, 1996. 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 was $933,000 at June 30, 1997, an increase of $408,000 from December 31,
1996. This increase is a result of a $435,000 non-accrual loan which is
currently held by C&F Mortgage Corporation that was not held at December 31,
1996. The loan is adequately collateralized and no significant loss is
anticipated.
7
FINANCIAL CONDITION
Summary
At June 30, 1997, the Company had total assets of $263.7 million
compared to $256.7 million at December 31, 1996.
Loan Portfolio
At June 30, 1997, loans held for sale amounted to $21.3 million, an
increase over the $12.3 million held at December 31, 1996. This increase is a
result of increased loan production at C&F Mortgage Corporation. At June 30,
1997, the Bank's loans net of unearned income and reserve for loan losses,
totals $144.5 million, an increase of 5.7% over the 1996 year-end total of
$136.7 million.
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:
June 30, 1997 December 31, 1996
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real estate - mortgage $ 87,556 59.8% $ 86,324 62.3%
Real estate - construction 6,428 4.4 3,415 2.5
Commercial, financial and
agricultural 39,468 26.9 36,385 26.2
Equity lines 6,487 4.4 6,180 4.4
Consumer 6,531 4.5 6,360 4.6
------------- ----- ---------- -----
Total loans 146,470 100.0% 138,664 100.0%
===== =====
Less unearned discount (3) (5)
Less allowance for possible
loan losses (2,010) (1,927)
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Total loans, net $ 144,457 $ 136,732
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Investment Securities
At June 30, 1997, total investment securities were $75.4 million
compared to $85.6 for December 31, 1996. This decrease is a result of securities
not being fully reinvested as they are called or mature. Securities of U.S.
Government agencies and corporations represent 44.1% of the total securities
portfolio, obligations of state and political subdivisions were 47.1%, U.S.
Treasury securities were 4.0%, investment-grade corporate bonds totaled .4% and
preferred stocks were 4.4% at June 30, 1997.
8
Deposits
Deposits totaled $222.0 million at June 30, 1997 compared to $216.4 at
December 31, 1996. Non-interest bearing deposits totaled $36.0 million at June
30, 1997 compared to $30.8 million at December 31, 1996.
Liquidity
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest bearing deposits with banks, federal funds
sold, investments and loans maturing within one year. The Company's ability to
obtain deposits and purchase funds at favorable rates determines its liability
liquidity. As a result of the Company's management of liquid assets and the
ability to generate liquidity through liability funding, management believes
that the Company maintains overall liquidity which is sufficient to satisfy its
depositors' requirements and to meet customers' credit needs.
At June 30, 1997, cash, securities classified as available for sale and
interest-bearing deposits were 9.8% 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.
Capital Resources
The Company's capital position continues to exceed regulatory
requirements. The Company's Tier I capital ratio was 15.3% at June 30, 1997
compared to 20.8% at December 31, 1996. The total risk-based capital ratio was
16.4% at June 30, 1997 compared to 22.1% at December 31, 1996. These ratios are
in excess of the mandated minimum requirements.
Shareholders' equity was $29.6 million at the end of the second quarter of
1997 compared to $32.2 million at December 31, 1996. The leverage ratio consists
of Tier I capital divided by average assets. At June 30, 1997, the Company's
leverage ratio was 10.9% compared to 12.2% at December 31, 1996. Each of these
exceeds the required minimum leverage ratio of 3%. The decrease in shareholders'
equity and all of the capital ratios is a result of the repurchase of 204,683
shares of the Company's common stock in April of 1997.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings per
Share." This new standard requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the earnings statement and requires a
reconciliation of numerators and denominators of basic and diluted EPS
calculations. The statement is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Early adoption of the
statement is not permitted. The Corporation has determined that the adoption of
this statement will not have a material impact on earnings per share.
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income"
and FAS 131, "Disclosures about Segments of an Enterprise and Related
Information." FAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement requires that an enterprise (a) classify
9
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This statement is effective for fiscal years
beginning after December 15, 1997. This statement will require the Company to
report changes in unrealized gains or losses on securities available for sale as
part of comprehensive income.
FAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. It requires
that a public business enterprise report a measure of segment profit or loss,
certain specific revenue and expense items, and segment assets. This statement
is effective for fiscal years beginning after December 15, 1997. Management is
currently reviewing this statement to determine the impact it will have on the
Company.
Effects of Inflation
The effect of changing prices and 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.
10
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or of 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
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
The Company filed a Form 8-K on July 17, 1997 to announce a change
in the Board of Directors.
11
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
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(Registrant)
Date August 8, 1997 /s/ Larry G. Dillon
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Larry G. Dillon, President and Chief
Executive Officer
Date August 8, 1997 /s/ Thomas F. Cherry
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Thomas F. Cherry, Chief Accounting Officer