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 March 31, 1998
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[ ] 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
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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: 1,930,060 as of May 11, 1998.
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TABLE OF CONTENTS
Part I - Financial Information Page
- - ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997...........................................................1
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997.....................................................2
Consolidated Statements of Shareholders' Equity
Three months ended March 31, 1998 .............................................................3
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997.....................................................4
Notes to Consolidated Financial Statements.........................................................5
Item 2. Management's Discussion and Analysis ............................................................. 6
Item 3.. Quantitative and Qualitative Disclosures About Market Risk........................................ 9
Part II - Other Information
Item 1. Legal Proceedings ................................................................................10
Item 2. Changes in Securities ............................................................................10
Item 3. Defaults Upon Senior Securities...................................................................10
Item 4. Submission of Matters to a Vote of Security Holders ..............................................10
Item 5. Other Information ................................................................................10
Item 6. Exhibits and Reports on Form 8-K..................................................................10
Signatures ..................................................................................................11
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS March 31, 1998 December 31, 1997
- - ------ -------------- -----------------
(Unaudited)
Cash and due from banks $ 6,773 $ 7,844
Interest-bearing deposits in other banks 8 1,027
----------- -----------
Total cash and cash equivalents 6,781 8,871
Investment securities
Available for sale securities at fair value,
amortized cost of $36,854 and $29,498
respectively 37,012 29,793
Held to maturity at amortized cost,
fair value of $46,171 and $47,686,
respectively 44,569 45,927
Loans held for sale, net 43,427 24,479
Loans, net 157,818 154,745
Federal Home Loan Bank stock 1,353 1,062
Corporate premises and equipment,
net of accumulated depreciation 6,544 6,581
Accrued interest receivable 2,269 2,196
Other assets 4,686 4,452
----------- -----------
Total assets $ 304,459 $ 278.106
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest-bearing demand deposits $ 41,129 $ 35,295
Savings and interest-bearing demand deposits 93,648 95,105
Time deposits 103,101 101,113
----------- -----------
Total deposits 237,878 231,513
Other borrowings 27,307 9,336
Accrued interest payable 695 592
Other liabilities 5,642 4,865
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Total liabilities 271,522 246,306
----------- -----------
Shareholders' Equity
Preferred stock ($1.00 par value,
3,000,000 shares authorized) -- --
Common stock ($1.00 par value, 8,000,000
shares authorized, 1,926,559 and 1,916,190
shares issued and outstanding at March 31,
1998 and December 31, 1997, respectively) 1,927 1,916
Additional paid-in capital 294 118
Retained earnings 30,286 29,236
Accumulated other comprehensive,
net of tax of $222 and $273, respectively 430 530
----------- -----------
Total shareholders' equity 32,937 31,800
----------- -----------
Total liabilities and
shareholders' equity $ 304,459 $ 278,106
=========== ===========
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 March 31,
-------------------------------------
Interest Income 1998 1997
---- ----
Interest and fees on loans $ 4,006 $ 3,358
Interest on other market investments 10 28
Interest on investment securities
U.S. Treasury Securities 49 49
U.S. Government agencies and corporations 637 684
Tax-exempt obligations of states and political
subdivisions 508 529
Corporate bonds and other 104 102
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Total interest income 5,314 4,750
Interest Expense
Savings and interest-bearing deposits 683 667
Certificates of deposit, $100,000 or more 200 112
Other time deposits 1,110 1,055
Short-term borrowings and other 196 45
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Total interest expense 2,189 1,879
Net interest income 3,125 2,871
Provision for loan losses 75 30
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Net interest income after provision for loan losses 3,050 2,841
Other Operating Income
Gain on sale of loans 1,277 600
Service charges on deposit accounts 261 237
Other service charges and fees 365 190
Other income 236 118
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Total other operating income 2,139 1,145
Other Operating Expenses
Salaries and employee benefits 1,797 1,404
Occupancy expenses 490 420
Goodwill amortization 69 69
Other expenses 880 611
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Total other operating expenses 3,236 2,504
Income before income taxes 1,953 1,482
Income tax expense 518 308
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Net Income $ 1,435 $ 1,174
============= =============
Per Share Data
Net Income - assuming dilution $ .74 $ .55
Cash Dividends Paid and Declared $ .20 $ .16
Weighted average number of shares and
common stock equivalents outstanding 1,947,446 2,117,783
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)
Accumulated
Additional Other
Common Pain-In Comprehensive Retained Comprehensive
Stock Capital Income Earnings Income Total
----- ------- ------ -------- ------ -----
Balance January 1, 1998 $ 1,916 $ 118 $ 29,236 $ 530 $ 31,800
Comprehensive Income
Net income $ 1,435 1,435 1,435
Other comprehensive
income, net of tax
Unrealized gain on
securities, net of
reclassification
adjustment(1) (100) (100) (100)
---------
Comprehensive income $ 1,335
=========
Stock options exercised 11 176 187
Cash dividends (385) (385)
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Balance March 31, 1998 $ 1,927 $ 294 $ 30,286 $ 430 $ 32,937
======== ====== ========= ======= =========
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(1) There were no reclassification adjustments for the three months ended March
31, 1998.
The Company's notes are an integral part of the consolidated financial
statements.
3
CONSOLIDATED STATEMENTS ON CASH FLOWS
(Unaudited)
(Amounts in thousands of dollars)
Three Months Ended March 31,
-------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 1,435 $ 1,174
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 248 192
Amortization of goodwill 69 69
Provision for loan losses 75 30
Accretion of discounts and amortization of
premiums on investment securities, net (10) (22)
Net realized (gain) loss on securities -- (11)
Proceeds from sale of loans 85,144 41,033
Origination of loans held for sale (104,092) (43,188)
Change in other assets and liabilities:
Accrued interest receivable (73) 191
Other assets (249) (130)
Accrued interest payable 103 115
Other liabilities 775 311
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Net cash provided by (used in) operating activities (16,575) (236)
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Cash flows from investing activities:
Proceeds from maturities of investments
held to maturity 3,306 3,168
Proceeds from sales and maturities of
investments available for sale 3,000 5,442
Purchase of investment securities (1,954) (2,000)
Purchase of investments available for sale (10,354) (335)
Net decrease (increase) in customer loans (3,149) (3,506)
Purchase of corporate premises and equipment (210) (224)
Purchase of Federal Home Loan Bank stock (291) (205)
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Net cash (used in) provided by investing activities (9,652) 2,340
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Cash flows from financing activities:
Net increase(decrease) in demand,
interest-bearing demand and savings deposits 4,377 (4,617)
Net increase in time deposits 1,988 279
Net increase in other borrowings 17,971 245
Proceeds from exercise of stock options 186 --
Cash dividends (385) (338)
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Net cash provided by (used in) financing activities 24,137 (4,431)
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Net (decrease) in cash and cash equivalents (2,090) (2,327)
Cash and cash equivalents at beginning of period 8,871 8,799
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Cash and cash equivalents at end of period $ 6,781 $ 6,472
========== ==========
Supplemental disclosure
Interest paid $ 2,086 $ 1,764
Income taxes paid $ 79 $ 69
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 March 31, 1998, the results of
operations for the three months ended March 31, 1998 and 1997, and cash flows
for the three months ended March 31, 1998 and 1997. 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, 1997.
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 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 1,947,446 and 2,117,783
for the three months ended March 31, 1998 and 1997, respectively.
Note 3
During the first quarter of 1998 the Corporation adopted Financial
Accounting Standards (FAS) 130, "Reporting Comprehensive Income". Adoption of
this Standard did not impact the Corporation's consolidated financial position,
results of operations or cash flow. The consolidated statement of shareholders'
equity has been changed to include columns for comprehensive income and
accumulated other comprehensive income. Comprehensive income for the Corporation
includes net income plus the change in the unrealized gain or loss on securities
available for sale. Accumulated other comprehensive income includes the
cumulative changes in unrealized gain or loss on securities available for sale.
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 22% for the three months ended March 31, 1998
compared to the same period of 1997. Net income for the three months ended March
31, 1998 was $1,435,000 compared to $1,174,000 for the same period of 1997.
Earnings per diluted share were $.74 for the three month period, up 35% from
$.55 per diluted share for the three months ended March 31, 1997.
Profitability as measured by the Company's annualized return on average
assets (ROA) increased to 2.03% for the three months ended March 31, 1998, up
from 1.87% for the same period of 1997. Another key indicator of performance,
the annualized return on average equity (ROE) for the three months ended March
31, 1998 was 17.65%, compared to 14.44% for the three months ended March 31,
1997.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three months ended March 31, 1998 was $3.1
million, an increase of $254,000, or 9%, from $2.9 million for the three months
ended March 31, 1997. The increase in net interest income is a result of an
increase in the average balance of interest earning assets to $264.3 million for
the three months ended March 31, 1998 compared to $234.8 million for the same
period in 1997. The increase in average earning assets is a result of a 13%
increase in the average balance of loans held in Citizens and Farmers Bank's
loan portfolio and a 138% increase in the average balance of loans held for sale
by C&F Mortgage Corporation (a wholly owned subsidiary of Citizens and Farmers
Bank). The increase in the average balance of loans held for sale is a result of
increased production at C&F Mortgage Corporation. Loan originations at C&F
Mortgage Corporation increased to $104,092,000 for the quarter ended March 31,
1998 compared to $43,124,000 for the first quarter of 1997. The increase in
production at C&F Mortgage is a result of overall growth and an increase in
refinancings attributed to the lower interest rate environment. The increase in
the average balance of interest earning assets was offset by a decrease in the
Corporation's interest rate spread on a taxable equivalent basis to 4.33% for
the three months ended March 31, 1998 from 4.57% for the same period in 1997,
and a decrease in the Corporation's net interest margin on a taxable equivalent
basis to 5.17% for the first three months of 1998 from 5.36% for the same period
in 1997. The decrease in the interest margin is a result of a decrease in the
yield on interest earning assets to 8.48% for the first quarter of 1998 from
8.56% for the same period in 1997 and an increase in the cost of funds to 4.15%
for the three months ended March 31, 1998 compared to 3.98% for the same period
in 1997. The decrease in the yield in interest earning assets is a result of the
overall lower interest rate environment and the increase in the average balance
of loans held for sale which has a lower yield than the Citizens and Farmers
Bank's loan portfolio. The increase in the cost of funds is mainly attributed to
increased borrowings from the Federal Home Loan Bank (FHLB). Borrowings from the
FHLB are used to fund loans originated and subsequently sold by C&F Mortgage
Corporation.
7
Non-Interest Income
Non-interest income increased $994,000, or 87%, for the three months
ended March 31, 1998 from the same period of 1997. The majority of this increase
was a result of a $677,000 increase in the gain on sale of loans due to the
increase in volume of loans sold by C&F Mortgage Corporation. Increases were
also seen in service charges on deposit accounts, other service charges and fees
and other income. This increase is a result of the Company's continued effort to
generate and increase other sources of non-interest income, including fees
generated by C&F Investment Services, Inc., C&F Mortgage Corporation and C&F
Title Agency, Inc., subsidiaries of Citizens and Farmers Bank.
Non-Interest Expense
Non-interest expense increased $732,000, or 29%, for the three month
period ended March 31, 1998 from the same period in 1997. This increase is
mainly attributable to increased production at C&F Mortgage Corporation and the
overall growth in the Corporation.
Income Taxes
Applicable income taxes on earnings for the first three months of 1998
amounted to $518,000 resulting in an effective tax rate of 26.5% compared to
$308,000, or 20.8%, for the same period in 1997. The increase in the effective
tax rate 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 $75,000 in provision expense for the first three months
of 1998 compared to $30,000 for the same period in 1997. Loans charged off
amounted to $35,000 for the three months ended March 31, 1998 and $7,000 for the
same period of 1997. Recoveries amounted to $25,000 and $4,000 for the three
months ended March 31, 1998 and 1997, respectively. The ratio of net charge-offs
to average outstanding loans was .01% for the three months ended March 31, 1998.
The allowance for loan losses was $2.3 million and $2.2 million at March 31,
1998 and December 31, 1997, respectively. The allowance approximates 1.44% and
1.42% of total loans outstanding at March 31, 1998 and December 31, 1997,
respectively. 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 $956,000 at March 31, 1998 compared to
$941,000 at December 31, 1997.
FINANCIAL CONDITION
Summary
At March 31, 1998, the Company had total assets of $304.5 million
compared to $278.1 million at December 31, 1997.
7
Loan Portfolio
At March 31, 1998, loans held for sale amounted to $43.4 million, an
increase of 77% over the $24.5 million held at December 31, 1997. At March 31,
1998, the Bank's loans net of unearned income and reserve for loan losses,
totals $157.8 million, an increase of 2% over the 1997 year-end total of $154.7
million.
The following table sets forth the composition of the Corporation's
loans in dollar amounts and as a percentage of the Corporation's total gross
loans held for investment at the dates indicated:
March 31, 1998 December 31, 1997
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real estate - mortgage $ 89,117 55.6% $ 88,974 56.7%
Real estate - construction 3,170 2.1 4,454 2.8
Commercial, financial and
agricultural 52,415 32.7 48,737 31.1
Equity lines 7,309 4.6 7,131 4.5
Consumer 8,107 5.0 7,683 4.9
------------- ------ ----------- ------
Total loans 160,118 100.0% 156,979 100.0%
====== ======
Less unearned discount (2) (1)
Less allowance for possible
loan losses (2,298) (2,233)
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Total loans, net $ 157,818 $ 154,745
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Investment Securities
At March 31, 1998, total investment securities were $81.6 million
compared to $75.7 at December 31, 1997. Securities of U.S. Government agencies
and corporations represent 43.9% of the total securities portfolio, obligations
of state and political subdivisions were 46.3%, U.S. Treasury securities were
3.7%, investment-grade corporate bonds totaled .4% and preferred stocks were
5.7% at March 31, 1998.
Deposits
Deposits totaled $237.9 million at March 31, 1998 compared to $231.5 at
December 31, 1997. Non-interest bearing deposits totaled $41.1 million at March
31, 1998 compared to $35.3 million at December 31, 1997.
Liquidity
At March 31, 1998, cash, securities classified as available for sale
and interest-bearing deposits were 15.4% 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.
8
Capital Resources
The Company's Tier I capital ratio was 13.3% at March 31, 1998 compared to
14.1% at December 31, 1997. The total risk-based capital ratio was 14.3% at
March 31, 1998 compared to 15.2% at December 31, 1997. These ratios are in
excess of the mandated minimum requirements.
Shareholders' equity reached $32.9 million at the end of the first quarter
of 1998 compared to $31.8 million at December 31, 1997. The leverage ratio
consists of Tier I capital divided by quarterly average assets. At March 31,
1998, the Company's leverage ratio was 10.9% compared to 11.4% at December 31,
1997. Each of these exceeds the required minimum leverage ratio of 3%.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards (FAS) 131, "Disclosures about Segments of an
Enterprise and Related Information". FAS 131 requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. It also requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. FAS 131 is effective for fiscal years beginning after
December 15, 1997. Adoption of this statement will not impact the Corporation's
consolidated financial position, results of operations or cash flow, and any
effect will be limited to the form and content of its disclosures.
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.
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, 1997 Form 10K.
9
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
C&F Financial Corporation's Annual Shareholders Meeting was held on
April 21, 1998.
(a) James H. Hudson, III was elected as a Class I Director to the Board of
Directors until the 2000 Annual Meeting of Shareholders. Sture G. Olsson
and W. T. Robinson were elected as Class II Directors to the Board of
Directors until the 2001 Annual Meeting of Shareholders.
(b) Yount, Hyde & Barbour, P.C. was appointed as independent auditors of the
Company for 1998.
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
None.
The Company's notes are an integral part of the consolidated financial
statements.
10
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 May 11, 1998 /s/ Larry G. Dillon
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Larry G. Dillon, Chairman and President
Date May 11, 1998 /s/ Thomas F. Cherry
---------------------- --------------------
Thomas F. Cherry, Chief Accounting Officer
11