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 September 30, 1999
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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
------------------------------- ----------------
(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:
3,643,456 as of November 5, 1999.
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TABLE OF CONTENTS
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998.......................................................1
Consolidated Statements of Income -
Three months and nine months ended September 30, 1999 and 1998.................................2
Consolidated Statements of Shareholders' Equity
Nine months ended September 30, 1999 and 1998 .................................................3
Consolidated Statements of Cash Flows -
Nine months ended September 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.........................................15
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings ................................................................................15
Item 2. Changes in Securities ............................................................................15
Item 3. Defaults Upon Senior Securities...................................................................15
Item 4. Submission of Matters to a Vote of Security Holders ..............................................15
Item 5. Other Information ................................................................................15
Item 6. Exhibits and Reports on Form 8-K..................................................................15
Signatures ..................................................................................................16
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 November 5, 1999 /s/ Larry G. Dillon
------------------------------------ ---------------------------------------------------------------
Larry G. Dillon, President and Chief Executive Officer
Date November 5, 1999 /s/ Thomas F. Cherry
------------------------------------ ---------------------------------------------------------------
Thomas F. Cherry, Chief Financial Officer
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS September 30, 1999 December 31, 1998
- ------ ------------------ -----------------
(Unaudited)
Cash and due from banks $ 7,885 $ 8,140
Interest -bearing deposits in other banks
and fed funds 2,001 333
----------- -----------
Total cash and cash equivalents 9,886 8,473
Investment securities
Available for sale securities at fair value,
amortized cost of $30,801 and $21,481,
respectively 29,618 21,888
Held to maturity at amortized cost,
fair value of $37,553 and $40,865,
respectively 37,036 38,810
Loans held for sale, net 23,342 66,993
Loans, net 196,726 169,918
Federal Home Loan Bank stock 1,585 1,706
Corporate premises and equipment,
net of accumulated depreciation 8,063 6,466
Accrued interest receivable 2,097 2,374
Other assets 5,009 4,235
----------- -----------
Total assets $ 313,362 $ 320,863
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits
Non-interest-bearing demand deposits $ 39,600 $ 40,908
Savings and interest-bearing demand deposits 115,997 101,631
Time deposits 105,861 109,134
----------- -----------
Total deposits 261,458 251,673
Other borrowings 13,105 24,661
Accrued interest payable 693 598
Other liabilities 2,953 7,284
----------- -----------
Total liabilities 278,209 284,216
----------- -----------
Shareholders' Equity
Preferred stock ($1.00 par value,
3,000,000 shares authorized) -- --
Common stock ($1.00 par value, 8,000,000 shares
authorized, 3,643,691 and 3,866,888 shares
issued and outstanding at September 30, 1999
and December 31, 1998, respectively) 3,644 3,867
Additional paid-in capital 33 476
Retained earnings 31,990 31,739
Accumulated other comprehensive
income, (loss) net of tax benefit of ($265)
and tax of $291, respectively (514) 565
------------ -----------
Total shareholders' equity 35,153 36,647
----------- -----------
Total liabilities and
shareholders' equity $ 313,362 $ 320,863
=========== ===========
THE COMPANY'S NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of dollars, except for per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
Interest Income 1999 1998 1999 1998
---- ---- ---- ----
Interest and fees on loans $ 4,886 $ 4,539 $ 14,394 $ 13,114
Interest on other market investments
and fed funds 42 28 446 45
Interest on investment securities
U.S. Treasury Securities 20 50 89 149
U.S. Government agencies and corporations 253 490 617 1,747
Tax-exempt obligations of states and political
subdivisions 612 529 1,728 1,562
Corporate bonds and other 111 120 333 317
---------- ---------- ---------- ----------
Total interest income 5,924 5,756 17,607 16,934
Interest Expense
Savings and interest-bearing deposits 786 683 2,229 2,041
Certificates of deposit, $100,000 or more 213 205 651 591
Other time deposits 1,099 1,178 3,352 3,429
Short-term borrowings and other 166 442 480 1,181
---------- ---------- ---------- ----------
Total interest expense 2,264 2,508 6,712 7,242
Net interest income 3,660 3,248 10,895 9,692
Provision for loan losses 105 175 355 425
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,555 3,073 10,540 9,267
Other Operating Income
Gain on sale of loans 1,629 2,108 5,513 5,250
Service charges on deposit accounts 310 250 851 767
Other service charges and fees 579 485 1,689 1,310
Other income 384 282 972 777
---------- ---------- ---------- ----------
Total other operating income 2,902 3,125 9,025 8,104
Other Operating Expenses
Salaries and employee benefits 2,440 2,180 7,104 5,964
Occupancy expenses 499 504 1,496 1,509
Goodwill amortization 69 69 206 206
Other expenses 1,065 1,085 3,166 3,166
---------- ---------- ---------- ----------
Total other operating expenses 4,073 3,838 11,972 10,845
Income before income taxes 2,384 2,360 7,593 6,526
Income tax expense 619 687 2,048 1,802
---------- ---------- ---------- ----------
Net Income $ 1,765 $ 1,673 $ 5,545 $ 4,724
========== ========== ========== ==========
Per Share Data
Net Income - Basic $ .48 $ .43 $ 1.50 $ 1.23
Net Income - Assuming Dilution $ .48 $ .43 $ 1.48 $ 1.21
Cash Dividends Paid and Declared $ .12 $ .11 $ .36 .32
Weighted average number of shares and
common stock equivalents outstanding 3,694,020 3,929,414 3,751,449 3,917,936
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, 1999 $ 3,867 $ 476 $ 31,739 $ 565 $ 36,647
Comprehensive Income
Net income $ 5,545 5,545 5,545
Other comprehensive
income (loss), net of tax
Unrealized loss on
securities, net of
reclassification
adjustment
(see disclosure below) (1,079) (1,079) (1,079)
----------
Comprehensive income $ 4,466
==========
Stock options exercised 20 167 187
Repurchase of
Common Stock (243) (610) (3,971) (4,824)
Cash dividends _______ _____ (1,323) ______ (1,323)
------------- -----------
Balance September 30, 1999 $ 3,644 $ 33 $ 31,990 $ (514) $ 35,153
======== ===== ========= ========= =========
---------------------------
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized net holding losses arising during period $ (999)
Less: reclassification adjustment for gains
Included in net income (80)
------
Net unrealized losses on securities $(1,079)
=======
THE COMPANY'S NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
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 $ 4,724 4,724 4,724
Other comprehensive
income, net of tax
Unrealized gain on
securities, net of
reclassification
adjustment(1) 164 164 164
---------
Comprehensive income $ 4,888
==========
Stock options exercised 16 267 283
Stock dividends 1,932 (1,932)
Cash dividends (1,234) (1,234)
-------- ------ ------------- -------- ------------
Balance September 30, 1998 $ 3,864 $ 385 $ 30,794 $ 694 $ 35,737
======== ====== ========= ======= =========
---------------------------
(1)There were no reclassification adjustments for the nine months ended
September 30, 1998.
THE COMPANY'S NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands of dollars)
Nine Months Ended September 30,
--------------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 5,545 $ 4,724
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 669 718
Amortization of goodwill 203 206
Provision for loan losses 355 425
Accretion of discounts and amortization of
premiums on investment securities, net (57) (33)
Net realized gain on securities (115) --
Proceeds from sale of loans 415,393 346,981
Origination of loans held for sale (371,742) (370,000)
Change in other assets and liabilities:
Accrued interest receivable 277 (22)
Other assets (601) 20
Accrued interest payable 95 124
Other liabilities (4,152) 1,005
----------- ----------
Net cash provided by (used in) operating activities 45,870 (15,852)
----------- -----------
Cash flows from investing activities:
Proceeds from maturities of investments
held to maturity 10,545 14,758
Proceeds from sales and maturities of
investments available for sale 1,893 9,113
Purchase of investment securities -- (2,573)
Purchase of investments available for sale (19,856) (13,303)
Net increase in customer loans (27,163) (5,496)
Purchase of corporate premises and equipment (2,266) (599)
Proceeds from sale of corporate premises and equipment -- --
Proceeds (purchase) of Federal Home Loan Bank stock 121 (644)
----------- ----------
Net cash provided by (used in) investing activities (36,726) 1,256
------------ ----------
Cash flows from financing activities:
Net increase in demand, interest-bearing
demand and savings deposits 13,058 8,613
Net increase (decrease) in time deposits (3,273) 6,268
Net increase (decrease) in other borrowings (11,556) 2,734
Proceeds from exercise of stock options 187 283
Repurchase of common stock (4,824) --
Cash dividends (1,323) (1,234)
----------- -----------
Net cash provided by (used in) financing activities (7,731) 16,664
----------- ----------
Net increase in cash and cash equivalents 1,413 2,068
Cash and cash equivalents at beginning of period 8,473 8,871
---------- ----------
Cash and cash equivalents at end of period $ 9,886 $ 10,939
========== ==========
Supplemental disclosure
Interest paid $ 6,617 $ 7,118
Income taxes paid $ 2,098 $ 2,005
THE COMPANY'S NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
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 September 30, 1999, the results of
operations for the three and nine months ended September 30, 1999 and 1998, and
cash flows for the nine months ended September 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 Corporation Annual Report on Form 10-K for the year ended December 31,
1998.
The consolidated financial statements include the accounts of the 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 3,694,020 and 3,929,414
for the three months ended September 30, 1999 and 1998, respectively, and
3,751,449 and 3,917,936 for the nine months ended September 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. In August and September of 1999 the Company
repurchased a further 7,600 shares of its common stock in the open market at
prices between $17.25 and $18.00 per share.
NOTE 4
During April of 1999 the 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 March 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
the Bank. As a result of a change in its strategic vision, the 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 on November 15,
1999 at 8001 W. Broad Street in Richmond, Virginia. The
6
opening of multiple branch banking facilities in the greater Richmond area is
anticipated over the next several years.
7
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 September 30, 1999 and 1998.
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THREE MONTHS ENDED SEPTEMBER 30, 1999
Retail Mortgage
Banking Banking Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------
REVENUES:
Interest income $ 5,765 $ 517 $ -- $ (358) $ 5,924
Gain on sale of loans -- 1,629 -- -- 1,629
Other 649 367 257 -- 1,273
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Total operating income 6,414 2,513 257 (358) 8,826
- ---------------------------------------------------------------------------------------------
EXPENSES:
Interest expense 2,264 358 -- (358) 2,264
Salaries and employee benefits 1,368 970 102 -- 2,440
Other 1,042 663 33 -- 1,738
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Total operating expenses 4,674 1,991 135 (358) 6,442
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Income before income taxes 1,740 522 122 -- 2,384
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Total assets 309,460 23,141 50 (19,289) 313,362
Capital expenditures $ 963 $ 21 $ -- $ -- $ 984
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- ---------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1998
Retail Mortgage
Banking Banking Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------
REVENUES:
Interest income $ 5,678 $ 757 $-- $ (679) $ 5,756
Gain on sale of loans -- 2,108 -- -- 2,108
Other 444 375 198 -- 1,017
- ---------------------------------------------------------------------------------------------
Total operating income 6,122 3,240 198 (679) 8,881
- ---------------------------------------------------------------------------------------------
EXPENSES:
Interest expense 2,508 679 -- (679) 2,508
Salaries and employee benefits 1,122 985 73 -- 2,180
Other 1,117 686 30 -- 1,833
- ---------------------------------------------------------------------------------------------
Total operating expenses 4,747 2,350 103 (679) 6,521
- ---------------------------------------------------------------------------------------------
Income before income taxes 1,375 890 95 -- 2,360
- ---------------------------------------------------------------------------------------------
Total assets 297,951 47,063 51 (44,229) 300,836
Capital expenditures $ 226 $ 21 $ -- $ -- $ 247
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8
- ---------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Retail Mortgage
Banking Banking Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------
REVENUES:
Interest income $ 17,190 $ 1,530 $ -- $ (1,114) $ 17,607
Gain on sale of loans -- 5,513 -- -- 5,513
Other 1,558 1,291 663 -- 3,512
- ---------------------------------------------------------------------------------------------
Total operating income 18,748 8,334 664 (1,114) 26,632
- ---------------------------------------------------------------------------------------------
EXPENSES:
Interest expense 6,712 1,114 -- (1,114) 6,712
Salaries and employee benefits 3,812 3,042 250 -- 7,104
Other 3,119 1,991 113 -- 5,223
- ---------------------------------------------------------------------------------------------
Total operating expenses 13,643 6,147 363 (1,114) 19,039
- ---------------------------------------------------------------------------------------------
Income before income taxes 5,105 2,187 301 -- 7,593
- ---------------------------------------------------------------------------------------------
Total assets 309,460 23,141 50 (19,289) 313,362
Capital expenditures $ 2,110 $ 156 $ -- $ -- $ 2,266
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998
Retail Mortgage
Banking Banking Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------
REVENUES:
Interest income $ 16,673 $ 1,945 $-- $ (1,684) $ 16,934
Gain on sale of loans -- 5,250 -- -- 5,250
Other 1,271 1,047 536 -- 2,854
- ---------------------------------------------------------------------------------------------
Total operating income 17,944 8,242 536 (1,684) 25,038
- ---------------------------------------------------------------------------------------------
EXPENSES:
Interest expense 7,242 1,684 -- (1,684) 7,242
Salaries and employee benefits 3,243 2,535 186 -- 5,964
Other 3,197 2,019 90 -- 5,306
- ---------------------------------------------------------------------------------------------
Total operating expenses 13,682 6,238 276 (1,684) 18,512
- ---------------------------------------------------------------------------------------------
Income before income taxes 4,262 2,004 260 -- 6,526
- ---------------------------------------------------------------------------------------------
Total assets 297,951 47,063 51 (44,229) 300,836
Capital expenditures $ 502 $ 97 $ -- $ -- $ 599
- ---------------------------------------------------------------------------------------------
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.
9
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 6% to $1,765,000 for the three months ended
September 30, 1999 compared to $1,673,000 for the same period of 1998. Earnings
per share were $.48 for the three month period, up 12% from $.43 per share for
the three months ended September 30, 1998. Net income for the nine months ended
September 30, 1999 increased to $5,545,000 compared to $4,724,000 for the same
period of 1998. Included in earnings for the first nine months of 1999 is
$370,000 in interest income (after taxes) 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 10% and
earnings per share increased 14% over the nine months ended September 30, 1998.
Profitability, as measured by the Company's annualized return on
average assets (ROA), increased to 2.29% for the three months ended September
30, 1999, up from 2.19% for the same period of 1998. For the first nine months
of 1999, ROA, excluding the one-time interest income, was 2.25%, up from 2.10%
for the first nine months of 1998. Another key indicator of performance, the
annualized return on average equity (ROE) for the three months ended September
30, 1999 was 20.22%, compared to 19.10% for the three months ended September 30,
1998. For the first nine months of 1999, excluding the one-time interest income,
ROE was 19.66% compared to 18.63% for the first nine months of 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income for the three months ended September 30, 1999 was
$3.7 million, an increase of $412,000, or 12.7%, from $3.2 million for the three
months ended September 30, 1998. The increase in net interest income is a result
of a slight increase in the average balance of interest earning assets and an
increase in the net interest margin on a taxable equivalent basis to 5.36% for
the three months ended September 30, 1999 from 4.93% for the same period in
1998.
For the three months ended September 30, 1999 the average balance of
interest earning assets increased to $291.0 million from $288.1 million for the
same period in 1998. The increase in average earning assets is a result of an
increase in the average balance of loans held in the Bank's loan portfolio which
was partially offset by a decrease in the average balance of loans held for sale
by C&F Mortgage Corporation and a decrease in the average balance of the
securities portfolio. The increase in the Bank's loan portfolio is a result of
increased loan demand. The decrease in loans held for sale is a result of
decreased production at C&F Mortgage Corporation due to increasing interest
rates during the third quarter of 1999. Loans closed at C&F Mortgage Corporation
for the three months ended September 30, 1999 were
10
$114,020,000 compared to $133,237,000 for the comparable period in 1998. Loans
sold during the third quarter of 1999 were $130,014,000 compared to $135,800,000
for the third quarter of 1998. The decrease in the average balance of the
securities portfolio is 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 increase in the net interest margin is a result of an increase in
the yield on interest earning assets to 8.48% for the third quarter of 1999 from
8.41% for the same period in 1998 and a decrease in the cost of funds to 3.89%
for the three months ended September 30, 1999 from 4.39% for the same period in
1998. The increase in the yield on interest earning assets is mainly a result of
an increase in the yield on loans resulting from the increase in interest rates
during the third quarter of 1999 and a decrease in the average balance of lower
yielding loans held for sale at C&F Mortgage Corporation. The decrease in the
cost of funds is attributed to an overall lower cost of deposits resulting from
the lower interest rate environment during the first half of 1999 and a decrease
in higher cost 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.
Net interest income for the nine months ended September 30, 1999,
excluding the interest income collected on a non-accrual loan mentioned above,
was $10.3 million, an increase of $647,000 or 6.7%, from $9.7 million for the
nine months ended September 30, 1998. The increase in net interest income is a
result of an increase in the average balance of interest earning assets and an
increase in the net interest margin on a taxable equivalent basis to 5.21% for
the nine months ended September 30, 1999 from 5.01% for the same period in 1998.
For the nine months ended September 30, 1999 the average balance of
interest earning assets increased to $288.9 million from $281.7 million for the
same period in 1998. The increase in average earning assets is a result of an
increase in the average balance of loans held in the Bank's loan portfolio which
was partially offset by a decrease in the average balance of loans held for sale
by C&F Mortgage Corporation and a decrease in the average balance of the
securities portfolio. The increase in the Bank's loan portfolio is a result of
increased loan demand. The decrease in loans held for sale is a result of
relatively flat loan closings with an increase in loans sold. Loans closed at
C&F Mortgage Corporation for the nine months ended September 30, 1999 were
$371,742,000 compared to $370,000,000 for the comparable period in 1998. Loans
sold for the first nine months of 1999 were $415,018,000 compared to
$343,900,000 for the first nine months of 1998. The decrease in the securities
portfolio is 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 increase in the net interest margin is a result of a decrease in
the cost of funds to 3.90% for the nine months ended September 30, 1999 from
4.30% for the same period in 1998 offset by a decrease in the yield on interest
earning assets to 8.30% for the nine months ended September 30, 1999 from 8.44%
for the same period in 1998. The decrease in the cost of funds is attributed to
the overall lower cost of deposits resulting from the lower interest rate
environment experienced during the second half of 1998 and the first half of
1999 and a decrease in higher cost borrowings from the FHLB. The decrease in the
yield on interest earning assets is a result of the decrease in the yield on
loans resulting from the overall lower rate environment during the first half of
1999 offset by the decrease in lower yielding loans held for sale and the
increase in the average balance of lower yielding fed funds and deposits in
other banks. Excess liquidity created by securities being called and the
decrease in loans held for sale during the first half of 1999 was invested in
fed funds and deposits in other banks.
NON-INTEREST INCOME
11
Other operating income decreased $233,000, or 7%, to $2,902,000 for the
third quarter of 1999 from $3,125,000 for the third quarter of 1998. The
decrease in non-interest income during the third quarter of 1999 is mainly
attributed to a decrease in loans sold at C&F Mortgage Corporation. Other
operating income increased $921,000, or 11%, to $9,025,000 for the first nine
months of 1999 from $8,104,000 for the first nine months of 1998. The increase
in non-interest income is mainly attributed to an increase in loans sold at C&F
Mortgage Corporation during the first nine months of 1999.
NON-INTEREST EXPENSE
Other operating expenses increased $235,000, or 6%, to $4,073,000 for
the third quarter of 1999 from $3,838,000 for the third quarter of 1998. The
increase in noninterest expense during the third quarter of 1999 is a result of
the overall growth of the Company including expenses associated with the start
up of Citizens and Commerce Bank. Other operating expenses increased $1,127,000,
or 10%, to $11,972,000 for the first nine months of 1999 from $10,845,000 for
the first nine 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 and the overall growth of the Company.
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
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 was required to confirm
this. Testing began in the first quarter of 1998 and was completed during the
third quarter of 1999. For certain other systems, the Company determined that it
would have to replace or modify certain pieces of hardware and/or software so
that the systems will properly function in the year 2000. These systems have
been replaced. 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.
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
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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 during the fourth quarter of
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
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 September 30, 1999
amounted to $619,000, resulting in an effective tax rate of 25.8% compared to
$687,000, or 29.1%, for the three months ended September 30, 1998. Income tax
expense for the nine months ended September 30, 1999 amounted to $2,048,000,
resulting in an effective tax rate of 26.9% compared to $1,802,000, or 27.6%,
for the nine months ended September 30, 1998. The decrease in the effective tax
rate for the quarter and for the year is a result of the increase in 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
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The Company had $355,000 in provision expense for the first nine months
of 1999 compared to $425,000 for the same period in 1998. Loans charged off
amounted to $26,000 and $61,000 for the nine months ended September 30, 1999 and
1998, respectively. Recoveries amounted to $18,000 and $25,000 for the nine
months ended September 30, 1999 and 1998, respectively. The ratio of net
charge-offs to average outstanding loans was .01% for the nine months ended
September 30, 1999. The allowance for loan losses was $3.1 million at September
30, 1999 and $2.8 million at December 31, 1998. The allowance approximates 1.6%
of total loans outstanding at September 30, 1999 and December 31, 1998,
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 $20,000 at September 30, 1999 compared to
$463,000 at December 31, 1998.
FINANCIAL CONDITION
SUMMARY
At September 30, 1999, the Company had total assets of $313.4
million compared to $320.9 million at December 31, 1998.
LOANS
At September 30, 1999, loans held for sale amounted to $23.3 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
$154,000,000 for the fourth quarter of 1998 to $114,000,000 for the third
quarter of 1999. The decrease in originations for the third quarter of 1999 is a
result of an increase in the interest rates for the third 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:
September 30, 1999 December 31, 1998
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Real estate - mortgage $ 89,573 45% $ 86,311 50%
Real estate - construction 5,582 3 5,359 3
Commercial, financial and
agricultural 83,398 41 62,885 36
Equity lines 9,723 5 8,580 5
Consumer 11,558 6 9,544 6
------------- - ----------- ----
Total loans 199,834 100% 172,679 100%
==== ====
Less unearned discount (1) (1)
Less allowance for possible
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loan losses (3,107) (2,760)
------------- ----------
Total loans, net $ 196,726 $ 169,918
============= ==========
INVESTMENT SECURITIES
At September 30, 1999, total investment securities were $68.2 million
compared to $60.7 for December 31, 1998. Securities of U.S. Government agencies
and corporations represent 22.8% of the total securities portfolio, obligations
of state and political subdivisions were 68.4%, U.S. Treasury securities were
1.5%, and preferred stocks were 7.3% at September 30, 1999
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DEPOSITS
Deposits totaled $261.5 million at September 30, 1999 compared to
$251.7 at December 31, 1998. Non-interest bearing deposits totaled $39.6 million
at September 30, 1999 compared to $40.9 million at December 31, 1998.
BORROWINGS
Borrowings totaled $13.1 million at September 30, 1999 compared to
$24.7 million at December 31, 1998. The decrease in borrowings is a result of a
decrease in production at C&F Mortgage Corporation in the third quarter of 1999
as compared to the fourth quarter of 1998. Borrowings from the FHLB are used to
fund loans originated and subsequently sold by C&F Mortgage Corporation.
LIQUIDITY
At September 30, 1999, cash, securities classified as available for
sale and interest-bearing deposits were 12.0% 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 13.8% at September 30, 1999
compared to 12.5% at December 31, 1998. The total risk-based capital ratio was
15.1% at September 30, 1999 compared to 13.4% at December 31, 1998. These ratios
are in excess of the mandated minimum requirements.
Shareholders' equity was $35.2 million at the end of the third 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 September 30, 1999, the
Company's leverage ratio was 11.2% 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 is directly related to price
level indices. Impacts of inflation on interest rates, loan demands, and
deposits are reflected in the consolidated financial statements.
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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
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.
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