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, 1997 ------------------------------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to Commission file number 33-70184 --------------------------------------------------------- C&F Financial Corporation - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Virginia 54-1680165 - ------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) Eighth and Main Streets West Point VA 23181 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Issuer's telephone number) (804) 843-2360 ---------------------------------------------------- - -------------------------------------------------------------------------------- (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 May 9, 1997.
TABLE OF CONTENTS Part I - Financial Information Page ---- Item 1. Financial Statements Consolidated Balance Sheets - March 31, 1997 and December 31, 1996.............1 Consolidated Statements of Income - Three months ended March 31, 1997 and 1996........2 Consolidated Statements of Shareholders' Equity Three months ended March 31, 1997 ................3 Consolidated Statements of Cash Flows - Three months ended March 31, 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 <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS March 31, 1997 December 31, 1996 - ------ -------------- ----------------- (Unaudited) <S> <C> Cash and due from banks $ 5,837 $ 8,254 Interest -bearing deposits in other banks 635 545 --------------- --------------- Total cash and cash equivalents 6,472 8,799 Investment securities Available for sale securities at fair value, amortized cost of $16,199 and $19,022, respectively 15,830 18,918 Held to maturity at amortized cost, fair value of $63,644 and $67,687, respectively 63,231 66,651 Loans held for sale, net 14,440 12,285 Loans, net 140,208 136,732 Federal Home Loan Bank stock 1,062 857 Corporate premises and equipment, net of accumulated depreciation 6,043 6,011 Accrued interest receivable 2,079 2,270 Other assets 4,310 4,148 --------------- --------------- Total assets $ 253,675 $ 256,671 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest-bearing demand deposits $ 28,738 $ 30,829 Savings and interest-bearing demand deposits 89,302 91,828 Time deposits 94,044 93,765 --------------- --------------- Total deposits 212,084 216,422 Other borrowings 5,300 5,055 Accrued interest payable 656 541 Other liabilities 2,769 2,438 --------------- --------------- Total liabilities 220,809 224,456 Shareholders' Equity Preferred stock ($1.00 par value, 3,000,000 shares authorized) -- -- Common stock ($1.00 par value, 8,000,000 shares authorized, 2,113,041 shares issued and outstanding at March 31, 1997 and December 31, 1996, respectively) 2,113 2,113 Additional paid-in capital -- -- Retained earnings 30,632 29,796 Net unrealized gain on securities available for sale, net of tax of $62 and $157, respectively 121 306 --------------- --------------- Total shareholders' equity 32,866 32,215 --------------- --------------- Total liabilities and shareholders' equity $ 253,675 $ 256,671 =============== =============== </TABLE> THE COMPANY'S NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 1
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands of dollars, except for per share amounts) Three Months Ended March 31, Interest Income 1997 1996 ----- ---- <S> <C> Interest and fees on loans $ 3,358 $ 2,759 Interest on other market investments 28 41 Interest on investment securities U.S. Treasury Securities 49 123 U.S. Government agencies and corporations 684 852 Tax-exempt obligations of states and political subdivisions 529 499 Corporate bonds and other 102 101 ------------ ----------- Total interest income 4,750 4,375 Interest Expense Savings and interest-bearing deposits 667 623 Certificates of deposit, $100,000 or more 112 126 Other time deposits 1,055 1,131 Short-term borrowings and other 45 14 ------------ ------------- Total interest expense 1,879 1,894 Net interest income 2,871 2,481 Provision for loan losses 30 -- ------------ ------------ Net interest income after provision for loan losses 2,841 2,481 Other Operating Income Gain on sale of loans 600 304 Service charges on deposit accounts 237 215 Other service charges and fees 190 166 Other income 118 48 ------------ ------------- Total other operating income 1,145 733 Other Operating Expenses Salaries and employee benefits 1,404 1,444 Occupancy expenses 420 420 Goodwill amortization 69 42 Other expenses 611 441 ------------ ------------- Total other operating expenses 2,504 2,347 Income before income taxes 1,482 867 Income tax expense 308 138 ------------ ------------- Net Income $ 1,174 $ 729 ============ ============= Per Share Data Net Income $ .55 $ .33 Cash Dividends Paid and Declared $ .16 $ .15 Weighted average number of shares and common stock equivalents outstanding 2,117,783 2,232,844 </TABLE> THE COMPANY'S NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 2
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Amounts in thousands of dollars) Net Unrealized Additional Gain (Loss) Common Paid-In Retained on Securities Stock Capital Earnings Available for Sale Total ----- ------- -------- ------------------ ----- <S> <C> Balance January 1, 1997 $ 2,113 $ -- $ 29,796 $ 306 $ 32,215 Net income 1,174 1,174 Cash dividends (338) (338) Change in unrealized gains and losses on securities available for sale (185) (185) -------- ------------ --------- ------- --------- Balance March 31, 1997 $ 2,113 $ -- $ 30,632 $ 121 $ 32,866 ======== ============ ========= ======= ========= </TABLE> 3
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS ON CASH FLOWS (Unaudited) (Amounts in thousands of dollars) Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- <S> <C> Cash flows from operating activities: Net income $ 1,174 $ 729 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 192 164 Amortization of goodwill 69 42 Provision for loan losses 30 Accretion of discounts and amortization of premiums on investment securities, net (22) (25) Net realized (gain) loss on securities (11) 17 Proceeds from sale of loans 41,633 17,687 Origination of loans held for sale (43,188) (31,576) Gain on sale of loans (600) 426 Change in other assets and liabilities: Accrued interest receivable 191 107 Other assets (130) (394) Accrued interest payable 115 121 Other liabilities 311 1,431 ------------- ------------- Net cash provided by (used in) operating activities (236) (11,271) -------------- -------------- Cash flows from investing activities: Proceeds from maturities of investments held to maturity 3,168 5,057 Proceeds from sales and maturities of investments available for sale 5,442 8,850 Purchase of investment securities (2,000) (1,391) Purchase of investments available for sale (335) (2,479) Net decrease (increase) in customer loans (3,506) (7,699) Purchase of corporate premises and equipment (224) (366) Purchase of Federal Home Loan Bank stock (205) (52) -------------- ------------- Net cash used in investing activities 2,340 1,920 ------------- ------------- Cash flows from financing activities: Net increase(decrease) in demand, interest-bearing demand and savings deposits (4,617) 2,311 Net increase in time deposits 279 1,448 Assumption of deposit liabilities in branch acquisition, net of premium paid -- 7,837 Net increase in other borrowings 245 Proceeds from exercise of stock options -- 13 Cash dividends (338) (335) -------------- ------------- Net cash provided by (used in) financing activities (4,431) 11,274 -------------- ------------- Net increase (decrease) in cash and cash equivalents (2,327) 1,923 Cash and cash equivalents at beginning of period 8,799 13,450 ------------- ------------- Cash and cash equivalents at end of period $ 6,472 $ 15,373 ============= ============= Supplemental disclosure Interest paid $ 1,764 $ 2,015 Income taxes paid 69 $ -- </TABLE> 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, 1997, the results of operations for the three months ended March 31, 1997 and 1996, and cash flows for the three months ended March 31, 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. 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 2,117,783 and 2,232,844 for the three months ended March 31, 1997 and 1996, respectively. There is no material difference between primary and fully-diluted earnings per share. NOTE 3 On April 4, 1997, the Corporation tendered 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 61.0% for the three months ended March 31, 1997 compared to the same period of 1996. Net income for the three months ended March 31, 1997 was $1,174,000 compared to $729,000 for the same period of 1996. Earnings per share were $.55 for the three month period, up 66.7% from $.33 per share for the three months ended March 31, 1996. Profitability as measured by the Company's annualized return on average assets (ROA) increased to 1.87% for the three months ended March 31, 1997, up from 1.23% for the same period of 1996. Another key indicator of performance, the annualized return on average equity (ROE) for the three months ended March 31, 1997 was 14.44%, compared to 9.30% for the three months ended March 31, 1996. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income represents the principal source of earnings for the Company. Net interest income equals the amount by which interest income exceeds interest expense. Changes in the volume and mix of earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. Net interest income for the three months ended March 31, 1997 was $2.9 million, an increase of $390,000, or 15.7% from $2.5 million for the three months ended March 31, 1996. The increase in net interest income is a result of an increase in the average balance of interest earning assets to $234.8 million for the three months ended March 31, 1997 compared to $221.9 million for the same period in 1996 and the increase in the Corporation's interest rate spread on a taxable equivalent basis to 4.57% for the three months ended March 31, 1997 from 4.09% for the same period in 1996. In addition, the Corporation's net interest margin on taxable equivalent basis increased to 5.36% for the three months ended March 31, 1997 from 4.94% for the same period in 1996. The increase in the Corporation's interest rate spread and net interest margin was a result of the Corporation's effort in reallocating a substantial portion of lower yielding investments into higher yielding loans. NON-INTEREST INCOME Non-interest income increased $412,000 or 56.2% for the three months ended March 31, 1997 from the same period of 1996. The majority of this increase was a result of a $296,000 increase in the gain on sale of loans. This is a result of the increase in volume of loans sold by C&F Mortgage Corporation, a subsidiary of the Bank. C&F Mortgage Corporation began originating and selling 6
residential mortgages in December 31, 1995. The first quarter of 1996 was the first full quarter of operations. 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., a subsidiary of the Bank. NON-INTEREST EXPENSE Non-interest expense increased $157,000, or 6.7%, for the three month period ended March 31, 1997 from the same period in 1996. This increase is mainly attributable to increases in the volume of activity at C&F Mortgage Corporation, an increase in goodwill amortization which was a result of deposits purchased in February of 1996, and the overall growth in the Corporation. INCOME TAXES Income tax expense for the three months ended March 31, 1997 amounted to $308,000, compared to $138,000 for the three months ended March 31, 1996. ASSET QUALITY-ALLOWANCE /PROVISION FOR LOAN LOSSES The allowance is to provide for potential losses inherent in the loan portfolio. Among other factors, management considers the Company's historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits, and current and anticipated economic conditions. There are additional risks of future loan losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Since those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. The Company had $30,000 in provision expense for the first three months of 1997 compared to $0 for the same period in 1996. Loans charged off amounted to $7,000 for the three months ended March 31, 1997 and $2,000 for the same period of 1996. Recoveries amounted to $4,000 and $1,000 for the three months ended March 31, 1997 and 1996, respectively. The ratio of net charge-offs to average outstanding loans was .005% for the three months ended March 31, 1997. The allowance for loan losses was $1.9 million at March 31, 1997 and December 31, 1996. The allowance approximates 1.2% and 1.4% of total loans outstanding at March 31, 1997 and December 31, 1996, 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 was $935,000 at March 31, 1997, an increase of $410,000 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. The Company places a loan on non-accrual status when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of both principal and interest is doubtful. Corporate policy is to place loans on 7
non-accrual status if principal or interest is past due for 90 days or more unless the debt is both well secured and in the process of being collected. FINANCIAL CONDITION SUMMARY A financial institution's primary sources of revenue are generated by its earning assets, while its major expenses are produced by the funding of those assets with interest-bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's maximum profitability while maintaining a minimum amount of risk. At March 31, 1997, the Company had total assets of $253.7 million compared to $256.7 million at December 31, 1996. LOAN PORTFOLIO At March 31, 1997, loans held for sale amounted to $14.4 million, an increase over the $12.2 million held at December 31, 1996. At March 31, 1997, the Bank's loans net of unearned income and reserve for loan losses, totals $140.2 million, an increase of 2.6% over the 1996 year-end total of $136.7 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, 1997 December 31, 1996 (Dollars in Thousands) Amount Percent Amount Percent ------ ------- ------ ------- Real estate - mortgage $ 87,115 61.3% $ 86,324 62.3% Real estate - construction 5,060 3.6 3,415 2.5 Commercial, financial and agricultural 37,881 26.6 36,385 26.2 Equity lines 6,260 4.4 6,180 4.4 Consumer 5,849 4.1 6,360 4.6 ----------- ------ --------- ------ Total loans 142,165 100.0% 138,664 100.0% ====== ====== Less unearned income (4) (5) Less allowance for possible loan losses (1,953) (1,927) ----------- --------- Total loans, net $ 140,208 $ 136,732 =========== ========= INVESTMENT SECURITIES The investment securities portfolio plays a primary role in the management of interest rate sensitivity of the Company and generates substantial interest income. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The securities portfolio consists of two components, investment securities held to maturity and securities available for sale. Securities are classified as investment securities based on management's intent and the Company's ability, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost. Securities which may be sold in response to changes in market interest rates, changes in the securities' 8
prepayment risk, increases in loan demand, general liquidity needs, and other similar factors are classified as available for sale and are carried at estimated fair value. At March 31, 1997, total investment securities were $79.1 million compared to $85.6 for December 31, 1996. This decrease is a result of securities not being reinvested as they mature. Securities of U.S. Government agencies and corporations represent 44.4% of the total securities portfolio, obligations of state and political subdivisions were 46.8%, U.S. Treasury securities were 3.8%, investment-grade corporate bonds totaled .4% and preferred stocks were 4.6% at March 31, 1997. DEPOSITS The Company's predominate source of funds is depository accounts. The Company's deposit base is comprised of demand deposits, savings and money market accounts, and time deposits. The Company's deposits are provided by individuals and businesses located within the communities served. Deposits totaled $212.1 million at March 31, 1997 compared to $216.4 at December 31, 1996. Non-interest bearing deposits totaled $28.7 million at March 31, 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 March 31, 1997, cash, securities classified as available for sale and interest-bearing deposits were 9.5% 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 assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company's capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The Company's capital position continues to exceed regulatory requirements. The primary indicators relied on by bank regulators in measuring the capital position are the Tier I capital, total risk-based capital, and leverage ratios. Tier I capital consist of common and qualifying preferred shareholders' equity less goodwill. Total capital consist of Tier I risk-based capital, qualifying subordinated debt, and a portion of the allowance for loan losses. Risk-based capital ratios are calculated with reference to risk-weighted assets. The Company's Tier I capital ratio was 16.2% at March 31, 1997 compared to 20.8% at December 31, 1996. The total risk-based capital ratio was 17.3% at March 31, 1997 compared to 22.1% at December 31, 1996. These ratios are in excess of the mandated minimum requirements. 9
Shareholders' equity reached $32.9 million at the end of the first quarter of 1997 compared to $32.2 million at December 31, 1996. The leverage ratio consists of Tier I capital divided by quarterly average assets. At March 31, 1997, the Company's leverage ratio was 12.3% compared to 12.2% at December 31, 1996. Each of these exceeds the required minimum leverage ratio of 3%. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 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. 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 C&F Financial Corporation's Annual Shareholders Meeting was held on April 15, 1997. (a) William E. O'Connell, Jr. was elected as a Class III Director to the Board of Directors until the 1999 Annual Meeting of Shareholders. Larry G. Dillon and D. N. Sutton, Jr. were elected as Class I Directors to the Board of Directors until the 2000 Annual Meeting of Shareholders. (b) Deloitte & Touche LLP was appointed as independent auditors of the Company for 1997. 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 Corporation filed a Form 8-K on February 18, 1997 and April 1, 1997. The February 18, 1997 8-K related to the first quarter dividend which was declared in February. An 8-K was filed because the first quarter dividend was usually declared in March. The April 1, 1997 Form 8-K stated the approximate results of the Corporation's tender offer which expired on March 28, 1997. 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 - -------------------------------------------------------------------------------- (Registrant) Date May 9, 1997 /s/ Larry G. Dillon ----------------- ------------------------------------------------------ Larry G. Dillon, President and Chief Executive Officer Date May 9, 1997 /s/ Thomas F. Cherry ----------------- ------------------------------------------------------ Thomas F. Cherry, Chief Accounting Officer 12