10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2000 ------------------------------------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ____________________________to__________________ Commission file number 000-23423 --------------------------------------------------------- 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: 3,590,784 as of August 8, 2000. ------------------------------- TABLE OF CONTENTS Part I - Financial Information Page ------------------------------ ----
Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2000 and December 31, 1999.......................... 1 Consolidated Statements of Income - Three months and six months ended June 30, 2000 and 1999..... 2 Consolidated Statements of Shareholders' Equity Six months ended June 30, 2000 and 1999...................... 3 Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and 1999...................... 5 Notes to Consolidated Financial Statements................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation..................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk...14 Part II - Other Information ----------------------------- Item 1. Legal Proceedings............................................14 Item 2. Changes in Securities........................................14 Item 3. Defaults Upon Senior Securities..............................14 Item 4. Submission of Matters to a Vote of Security Holders..........14 Item 5. Other Information............................................15 Item 6. Exhibits and Reports on Form 8-K.............................15 Signatures................................................................16
PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
ASSETS June 30, 2000 December 31, 1999 --------------------------------------------------------- -------------- ------------------ (Unaudited) Cash and due from banks $ 10,196 $ 13,424 Interest -bearing deposits in other banks 3,660 2,062 -------- -------- Total cash and cash equivalents 13,856 15,486 Securities -available for sale at fair value, amortized cost of $32,435 and $32,112, respectively 30,553 30,208 Securities-held to maturity at amortized cost, fair value of $34,371 and $34,976, respectively 34,158 34,791 Loans held for sale, net 20,977 24,886 Loans, net 224,415 206,116 Federal Home Loan Bank stock 1,585 1,585 Corporate premises and equipment, net of accumulated depreciation 8,988 8,404 Accrued interest receivable 2,212 2,136 Other assets 6,279 5,629 -------- -------- Total assets $343,023 $329,241 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits Non-interest-bearing demand deposits $ 36,997 $ 34,827 Savings and interest-bearing demand deposits 113,841 121,646 Time deposits 119,512 104,381 -------- -------- Total deposits 270,350 260,854 Borrowings 33,104 30,035 Accrued interest payable 718 566 Other liabilities 2,766 2,656 -------- -------- Total liabilities 306,938 294,111 -------- -------- Shareholders' Equity Preferred stock ($1.00 par value, 3,000,000 shares authorized) -- -- Common stock ($1.00 par value, 8,000,000 shares authorized, 3,590,784 and 3,644,456 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively) 3,591 3,645 Additional paid-in capital - 14 Retained earnings 33,737 32,728 Accumulated other comprehensive loss net of tax of $640 and $647, respectively (1,243) (1,257) -------- -------- Total shareholders' equity 36,085 35,130 -------- -------- Total liabilities and shareholders' equity $343,023 $329,241 ======== ========
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 Six Months Ended ---------------------- ---------------------- June 30, June 30, ---------------------- ---------------------- Interest Income 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Interest and fees on loans $ 5,437 $ 4,505 $ 10,538 $ 9,509 Interest on other market investments and fed funds 36 173 80 404 Interest on investment securities U.S. Treasury Securities 20 20 40 69 U.S. Government agencies and corporations 239 200 477 363 Tax-exempt obligations of states and political subdivisions 616 587 1,238 1,116 Corporate bonds and other 113 107 235 221 ---------- ---------- ---------- ---------- Total interest income 6,461 5,592 12,608 11,682 Interest Expense Savings and interest-bearing deposits 798 744 1,613 1,443 Certificates of deposit, $100,000 or more 304 216 531 438 Other time deposits 1,193 1,116 2,272 2,253 Short-term borrowings and other 404 131 736 313 ---------- ---------- ---------- ---------- Total interest expense 2,699 2,207 5,152 4,447 Net interest income 3,762 3,385 7,456 7,235 Provision for loan losses 100 75 175 250 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 3,662 3,310 7,281 6,985 Other Operating Income Gain on sale of loans 1,214 1,719 2,287 3,883 Service charges on deposit accounts 323 273 630 542 Other service charges and fees 534 625 927 1,110 Other income 235 328 529 588 ---------- ---------- ---------- ---------- Total other operating income 2,306 2,945 4,373 6,123 Other Operating Expenses Salaries and employee benefits 2,417 2,403 4,748 4,663 Occupancy expenses 624 521 1,208 997 Goodwill amortization 69 69 137 138 Other expenses 1,039 1,099 1,977 2,101 ---------- ---------- ---------- ---------- Total other operating expenses 4,149 4,092 8,070 7,899 Income before income taxes 1,819 2,163 3,584 5,209 Income tax expense 421 529 817 1,429 ---------- ---------- ---------- ---------- Net Income $ 1,398 $ 1,634 $ 2,767 $ 3,780 ========== ========== ========== ========== Per Share Data Net Income - Basic $ .38 $ .45 $ .76 $ 1.02 Net Income - Assuming Dilution .38 $ .44 .75 $ 1.00 Cash Dividends Paid and Declared .13 $ .12 .26 $ .24 Weighted average number of shares and common stock equivalents outstanding 3,652,452 3,698,418 3,665,231 3,780,164
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 Paid-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 $3,780 3,780 3,780 Other comprehensive income, net of tax Unrealized gain on securities, net of reclassification adjustment1 (527) (527) (527) -------- Comprehensive income $3,253 ======== Stock options exercised 15 129 144 Repurchase of Common Stock (235) (482) (3,971) (4,688) Cash dividends (886) (886) ------ ----- ------- ----- -------- Balance June 30, 1999 $3,647 $ 123 $30,662 $ 38 $34,470 ====== ===== ======= ===== ========
--------------------------- 1 There were no reclassification adjustments for the six months ended June 30, 1999. The Company's notes are an integral part of the consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Amounts in thousands of dollars) (Unaudited)
Accumulated Additional Other Common Paid-In Comprehensive Retained Comprehensive Stock Capital Income Earnings Income Total ----- ------- ------- -------- ------ ----- Balance January 1, 2000 $3,645 $ 14 $32,728 $(1,257) $35,130 Comprehensive Income Net income $2,767 2,767 2,767 Other comprehensive income, net of tax Unrealized gain on securities, net of reclassification adjustment (See disclosure below) 14 14 14 ------ Comprehensive income $2,781 ====== Stock options exercised 7 64 71 Repurchase of common stock (61) (78) (814) (953) Cash dividends (944) (944) ------ ------ -------- -------- -------- Balance June 30, 2000 $3,591 $ -- $33,737 $(1,243) $36,085 ====== ====== ======= ======== ======== ---------------------------- Disclosure of Reclassification Amount: Unrealized net holding gains arising during period $ 87 Less: reclassification adjustment for gains Included in net income (73) ------ Net unrealized gains on securities $ 14 ======
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)
Six Months Ended June 30, ------------------------- 2000 1999 --------- --------- Cash flows from operating activities: Net income $ 2,767 $ 3,780 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 509 455 Amortization of goodwill 137 138 Provision for loan losses 175 250 Accretion of discounts and amortization of premiums on investment securities, net (23) (41) Proceeds from sale of loans 146,402 285,138 Origination of loans held for sale (142,493) (257,722) Change in other assets and liabilities: Accrued interest receivable (76) 435 Other assets (836) (379) Accrued interest payable 152 11 Other liabilities 151 (3,289) --------- --------- Net cash provided by operating activities 6,865 28,776 --------- --------- Cash flows from investing activities: Proceeds from maturities and calls of investments held to maturity 650 1,227 Proceeds from sales, maturities, and calls of investments available for sale 372 10,185 Purchase of investments available for sale (690) (16,155) Net increase in customer loans (18,473) (11,974) Purchase of corporate premises and equipment (1,093) (1,282) Sale of Federal Home Loan Bank stock -- 121 --------- --------- Net cash used in investing activities (19,234) (17,878) --------- --------- Cash flows from financing activities: Net(decrease) increase in demand, interest-bearing demand and savings deposits (5,635) 5,871 Net (decrease) increase in time deposits 15,131 (864) Net (decrease) increase in other borrowings 3,069 (12,625) Proceeds from exercise of stock options 71 144 Repurchase of common stock (953) (4,688) Cash dividends (944) (886) --------- --------- Net cash provided by (used in) financing activities 10,739 (13,048) --------- --------- Net (decrease) in cash and cash equivalents (1,630) (2,150) Cash and cash equivalents at beginning of period 15,486 8,473 --------- --------- Cash and cash equivalents at end of period $ 13,856 $ 6,323 ========= ========= Supplemental disclosure Interest paid $ 5,001 $ 4,436 Income taxes paid $ 545 $ 1,457
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 June 30, 2000, the results of operations for the three and six months ended June 30, 2000 and 1999, and cash flows for the six months ended June 30, 2000 and 1999 have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Annual Report on Form 10-K for the year ended December 31, 1999. The consolidated financial statements include the accounts of C&F Financial Corporation ("the Company") and its subsidiary, Citizens and Farmers Bank ("the Bank") with all significant intercompany transactions and accounts being eliminated in consolidation. Note 2 Net income per share assuming dilution has been calculated on the basis of the weighted average number of shares of common stock and common stock equivalents outstanding for the applicable periods. Weighted average number of shares of common stock and common stock equivalents was 3,652,452 and 3,698,418 for the three months ended June 30, 2000 and 1999, respectively, and 3,665,231 and 3,780,164 for the six months ended June 30, 2000 and 1999, respectively. Note 3 During the first quarter of 2000 the board of directors of C&F Financial Corporation authorized management to buy up to 10% of the Company's outstanding common stock in the open market at prices that management and the board of directors determine are prudent. The Company will consider current market conditions and the Company's current capital level, in addition to other factors, when deciding whether to repurchase stock. During the first quarter of 2000 the Company repurchased 3,000 shares of its common stock in the open market at prices between $14.625 and $16.50 per share. The Company repurchased 58,000 shares of its common stock in the open market during the second quarter of 2000 at prices between $12.375 and $17.00 per share. 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. 6 Note 4 The Company operates in a decentralized fashion in two principal business activities, retail banking and mortgage banking. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities. Mortgage banking operating revenues consist mainly of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market and loan origination fee income. The Company also has an investment company and a title company subsidiary which derive revenues from brokerage and title insurance services, respectively. The results of these subsidiaries are not significant to the Company as a whole and have been included in "Other." The following table presents segment information for the periods ended June 30, 2000 and 1999.
Three Months Ended June 30, 2000 Retail Mortgage Banking Banking Other Eliminations Consolidated -------- -------- ----- ------------- ------------ Revenues: Interest income $ 6,347 $ 313 $ -- $ (199) $ 6,461 Gain on sale of loans -- 1,214 -- -- 1,214 Other 566 315 211 -- 1,092 ------------------------------------------------------------------------------------------- Total operating income 6,913 1,842 211 (199) 8,767 ------------------------------------------------------------------------------------------- Expenses: Interest expense 2,699 199 -- (199) 2,699 Salaries and employee benefits 1,461 842 114 -- 2,417 Other 1,215 580 37 -- 1,832 ------------------------------------------------------------------------------------------- Total operating expenses 5,375 1,621 151 (199) 6,948 ------------------------------------------------------------------------------------------- Income before income taxes 1,538 221 60 -- 1,819 ------------------------------------------------------------------------------------------- Total assets 337,609 22,268 48 (16,902) 343,023 Capital expenditures $ 340 $ 43 $ -- $ -- $ 383 Three Months Ended June 30, 1999 Retail Mortgage Banking Banking Other Eliminations Consolidated -------- -------- ----- ------------ ------------ Revenues: Interest income $ 5,498 $ 435 $ -- $ (341) $ 5,592 Gain on sale of loans -- 1,719 -- -- 1,719 Other 468 530 228 -- 1,226 ------------------------------------------------------------------------------------------- Total operating income 5,966 2,684 228 (341) 8,537 ------------------------------------------------------------------------------------------- Expenses: Interest expense 2,207 341 -- (341) 2,207 Salaries and employee benefits 1,291 1,033 79 -- 2,403 Other 1,052 667 45 -- 1,764 ------------------------------------------------------------------------------------------- Total operating expenses 4,550 2,041 124 (341) 6,374 ------------------------------------------------------------------------------------------- Income before income taxes 1,416 643 104 -- 2,163 ------------------------------------------------------------------------------------------- Total assets 303,859 39,287 54 (35,493) 307,707 Capital expenditures $ 847 $ 65 $ -- $ -- $ 912
7
Six Months Ended June 30, 2000 Retail Mortgage Banking Banking Other Eliminations Consolidated -------- -------- ----- ------------- ------------ Revenues: Interest income $ 12,386 $ 578 $ -- $ (356) $ 12,608 Gain on sale of loans -- 2,287 -- -- 2,287 Other 1,151 573 362 -- 2,086 ----------------------------------------------------------------------------------------- Total operating income 13,537 3,438 362 (356) 16,981 ----------------------------------------------------------------------------------------- Expenses: Interest expense 5,152 356 -- (356) 5,152 Salaries and employee benefits 2,928 1,622 198 -- 4,748 Other 2,298 1,133 66 -- 3,497 ----------------------------------------------------------------------------------------- Total operating expenses 10,378 3,111 264 (356) 13,397 ----------------------------------------------------------------------------------------- Income before income taxes 3,159 327 98 -- 3,584 ----------------------------------------------------------------------------------------- Total assets 337,609 22,268 48 (16,902) 343,023 Capital expenditures $ 1,021 $ 72 $ -- $ -- $ 1,093 Six Months Ended June 30, 1999 Retail Mortgage Banking Banking Other Eliminations Consolidated -------- -------- ----- ------------ ------------ Revenues: Interest income $ 11,425 $ 1,013 $ -- $ (756) $ 11,682 Gain on sale of loans -- 3,883 -- -- 3,883 Other 909 924 407 -- 2,240 ----------------------------------------------------------------------------------------- Total operating income 12,334 5,820 407 (756) 17,805 ----------------------------------------------------------------------------------------- Expenses: Interest expense 4,447 756 -- (756) 4,447 Salaries and employee benefits 2,443 2,072 148 -- 4,663 Other 2,077 1,329 80 -- 3,486 ----------------------------------------------------------------------------------------- Total operating expenses 8,967 4,157 228 (756) 12,596 ----------------------------------------------------------------------------------------- Income before income taxes 3,367 1,663 179 -- 5,209 -------------------------------------------------------------------------------- -------- Total assets 303,859 39,287 54 (35,493) 307,707 Capital expenditures $ 1,147 $ 135 $ -- $ -- $ 1,282
The retail banking segment provides the mortgage banking segment with the funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest at the daily FHLB advance rate plus 50 basis points. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the retail banking segment are not allocated to the mortgage banking and other segments. 8 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 decreased 14.4% to $1,398,000 for the three months ended June 30, 2000 compared to $1,634,000 for the same period of 1999. Earnings per share were $.38 for the three month period, down 13.6% from $.44 per share for the three months ended June 30, 1999. Net income for the first six months ended June 30, 2000 was $2,767,000 compared to $3,780,000 for the same period of 1999. Included in earnings for the first six months of 1999 is $370,000 in interest income (after taxes) which was collected in February 1999 resulting from the payoff of a non-accrual loan which had been on the Bank's books for the past several years. Excluding this interest income, net income decreased 18.9% and earnings per share decreased 16.7% over the six months ended June 30, 1999. Profitability as measured by the Company's annualized return on average assets (ROA) was 1.72% for the three months ended June 30, 2000 compared to 2.15% for the same period of 1999. For the first six months of 2000 ROA was 1.72% compared to 2.23%, excluding the one-time interest income, for the first six months of 1999. Another key indicator of performance, the annualized return on average equity (ROE) for the three months ended June 30, 2000 was 15.52% compared to 19.09% for the three months ended June 30, 1999. For the first six months of 2000 ROE was 15.48% compared to 19.38%, excluding the one-time interest income, for the first six months of 1999. RESULTS OF OPERATIONS Net Interest Income Net interest income for the three months ended June 30, 2000 was $3.8 million, an increase of $377,000, or 11%, from $3.4 million for the three months ended June 30, 1999. The increase in net interest income is a result of an increase in the average balance of interest earning assets to $308.5 million for the three months ended June 30, 2000 compared to $286.7 million for the same period in 1999 and an increase in the net interest margin on a taxable equivalent basis to 5.33% for the quarter ended June 30, 2000 from 5.18% for the same quarter in 1999. The increase in average earning assets is a result of the increase in the average balance of loans held in the Bank's portfolio and an increase in the average balance of investment securities offset by a decrease in the average balance of loans held for sale by C&F Mortgage Corporation, a decrease in interest bearing deposits in other institutions and a decrease in fed funds sold. The increase in the Bank's loan portfolio is a result of increased loan demand resulting from an increased emphasis on commercial and consumer lending. The increase in the average balance of the securities portfolio and the decrease in interest bearing balances in other institutions and fed funds sold was a result of those excess funds being invested in loans and securities during the second and third quarters of 1999. During the fourth quarter of 1998 and the 9 first quarter of 1999 interest rates were at the lowest levels in years. As a result, numerous securities were called and the excess funds were deposited in interest bearing accounts at the Federal Home Loan Bank or sold as fed funds. When rates began to rise during the second and third quarters of 1999, those funds that were not used to support growth in the loan portfolio were invested in securities. 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 first half of 2000. Loans closed at C&F Mortgage Corporation for the three months ended June 30, 2000 were $84,072,000 compared to $141,618,000 for the comparable period in 1999. Loans sold during the second quarter of 2000 were $75,953,000 compared to $128,511,000 for the second quarter of 1999. The increase in the company's net interest margin on a taxable equivalent basis for the three months ended June 30, 2000 compared to the same period in 1999 was a result of an increase in the yield on interest earning assets to 8.83% for the second quarter of 2000 from 8.26% for the same period in 1999 offset by an increase in the cost of funds to 4.21% for the second quarter of 2000 compared to 3.89% for the same period in 1999. The increase in the yield on interest earning assets is a result of an increase in the yield on loans held by the Bank, a decrease in the average balance of lower yielding loans held for sale at C&F Mortgage corporation and a decrease in the significantly lower yielding, deposits at the Federal Home Loan Bank (FHLB) offset by a small decrease in the yield on the securities portfolio. The increase in the yield on loans held by the Bank is a result of the rising interest rate environment. The decrease in the yield on the securities portfolio is a result of the fact that the investments that were purchased during 1999 yielded less than those securities which were called during 1999. The increase in the cost of funds is a result of an increase in rates paid on certificates of deposit and an increase in the rates paid and average balance of higher cost borrowings from the FHLB. Net interest income for the six months ended June 30, 2000 was $7.5 million, an increase of $781,000, or 11.7%, from $6.7 million, excluding the one-time interest income of approximately $560,000 before taxes, for the six months ended June 30, 1999. 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 5.38% for the six months ended June 30, 2000 from 5.08% for the first six months of 1999. The average balance of interest earning assets increased $15.3 million to $303.2 million for the first six months of 2000 from $287.9 million for the first six months of 1999. The increase in average earning assets is a result of an increase in the average balance of the Bank's loan portfolio and securities portfolio 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 in interest earning deposits in other banks and fed funds sold. The increase in the Bank's loan portfolio is the 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 first half of 2000. Loans closed at C&F Mortgage Corporation for the six months ended June 30, 2000 were $142,493,000 compared to $257,722,000 for the comparable period in 1999. Loans sold during the first half of 2000 were $146,402,000 compared to $285,138,000 for the first half of 1999. The increase in the company's net interest margin on a taxable equivalent basis for the six months ended June 30, 2000 compared to the same period in 1999 was a result of an increase in the yield on interest earning assets to 8.78% for the first half of 2000 from 8.17% for the same period in 1999 offset by an increase in the cost of funds to 4.08% for the first half of 2000 compared to 3.93% for the same period in 1999. The increase in the yield on interest earning assets is a result of an increase in the yield on loans held by the Bank, a decrease in the average balance of lower yielding loans held for sale at C&F Mortgage Corporation and a decrease in the significantly lower yielding 10 deposits at the Federal Home Loan Bank (FHLB) offset by a small decrease in the yield on the securities portfolio. The increase in the yield on loans held by the Bank is a result of the rising interest rate environment. The decrease in the yield on the securities portfolio is a result of the fact that the investments that were purchased during 1999 yielded less than those securities which were called during 1999. The increase in the cost of funds is a result of an increase in rates paid on certificates of deposit and an increase in the rates paid and average balance of higher cost borrowings from the FHLB. Non-Interest Income Other operating income decreased $639,000, or 21.7%, to $2,306,000 for the second quarter of 2000 from $2,945,000 for the second quarter of 1999. Other operating income decreased $1,750,000, or 28.6%, to $4,373,000 for the first six months of 2000 from $6,123,000 for the first six months of 1999. The decrease in other income is mainly attributed to a decrease in gain on sale of loans resulting from decrease in volume of loans sold by C&F Mortgage Corporation Non-Interest Expense Other operating expenses increased $57,000, or 1.4%, to $4,149,000 for the second quarter of 2000 from $4,092,000 for the second quarter of 1999. Other operating expenses increased $171,000, or 2.2%, to $8,070,000 for the first six months of 2000 from $7,899,000 for the first six months of 1999. This increase is mainly attributable to an additional branch office at the Bank, during the first half of 2000, the creation of Citizens and Commerce Bank, a division of the Bank, in the fourth quarter of 1999 and the overall growth of the Bank offset by a decrease in salaries expense at C&F Mortgage Corporation. Year 2000 Issue The Y2K issue involved the risk that computer programs and computer systems would not be able to perform without interruption into the year 2000. If computer systems did 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. All computer programs and systems at the Company operated without problems when the date changed from December 31, 1999 to January 2000. While the Company will continue to monitor computer programs and systems, no problems are expected. The Company, to date, has expensed $150,000 related to the Year 2000 issue. Remaining expenditures are not expected to have a material effect on the Company's consolidated financial statements. Income Taxes Income tax expense for the three months ended June 30, 2000 amounted to $421,000, resulting in an effective tax rate of 23.1% compared to $529,000, or 24.5%, for the three months ended June 30, 1999. Income tax expense for the six months ended June 30, 2000 amounted to $817,000, resulting in an effective tax rate of 22.8% compared to $1,429,000, or 27.4%, for the six months ended June 30, 1999. The decrease in the effective tax rate for the quarter and for the six months is a result of the increase in earnings subject to no taxes, such as loans to municipalities or investment obligations of state and political subdivisions, as a percentage of total income. This increase in earnings 11 subject to no taxes as a percentage of total income is primarily a result of the decrease in income at C&F Mortgage Corporation. 12 Asset Quality-Allowance /Provision For Loan Losses The Company had $175,000 in provision expense for the first six months of 2000 and $250,000 for the first six months of 1999. Loans charged off amounted to $26,000 for the six months ended June 30, 2000 and $6,000 for the same period in 1999. Recoveries amounted to $2,000 and $18,000 for the six months ended June 30, 2000 and 1999, respectively. The allowance for loan losses was $3.5 million at June 30, 2000 and $3.3 million at December 31, 1999. The allowance approximates 1.51% and 1.57% of total loans outstanding at June 30, 2000 and December 31, 1999. 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 $288,000 at June 30, 2000 compared to $49,000 at December 31, 1999. FINANCIAL CONDITION Summary At June 30, 2000, the Company had total assets of $343.0 million compared to $329.2 million at December 31, 1999. Interest-Bearing Deposits in Other Banks and Fed Funds At June 30, 2000, interest-bearing deposits in other banks and fed funds amounted to $3,660,000 compared to $2,062,000 at December 31, 1999. Loan Portfolio At June 30, 2000, loans held for sale amounted to $20.9 million compared to $24.9 million held at December 31, 1999. The decrease is a result of the continued increase in interest rates for the first half of 2000. 13 The following table sets forth the composition of the Company's loans in dollar amounts and as a percentage of the Company's total gross loans held for investment at the dates indicated:
June 30, 2000 December 31, 1999 (Dollars in Thousands) Amount Percent Amount Percent --------- -------- ---------- -------- Real estate - mortgage $ 91,591 40% $ 90,947 43% Real estate - construction 10,370 4 7,980 4 Commercial, financial and agricultural 103,017 45 89,139 42 Equity lines 11,007 5 10,272 5 Consumer 12,913 6 12,091 6 -------- --- -------- --- Total loans 228,898 100% 210,429 100% === === Less unearned loan fees (1,030) (1,011) Less allowance for possible loan losses (3,453) (3,302) -------- -------- Total loans, net $224,415 $206,116 ======== ========
Investment Securities At June 30, 2000, total investment securities were $64,711,000 compared to $64.999,000 for December 31, 1999. Securities of U.S. Government agencies and corporations represent 22.1% of the total securities portfolio, obligations of state and political subdivisions were 68.3%, U.S. Treasury securities were 1.5%, and preferred stocks were 8.1% at June 30, 2000. Deposits Deposits totaled $270.4 million at June 30, 2000 compared to $260.9 at December 31, 1999. Non-interest bearing deposits totaled $36.9 million at June 30, 2000 compared to $34.8 million at December 31, 1999. Liquidity At June 30, 2000, cash, securities classified as available for sale and interest-bearing deposits were 14.1% 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 Tier I capital ratio was 13.6% at June 30, 2000 compared to 14.0% at December 31, 1999. The total risk-based capital ratio was 14.9% at June 30, 2000 compared to 15.2% at December 31, 1999. These ratios are in excess of the mandated minimum requirements. The decrease in the Tier I capital 14 ratio and the total risked based capital ratio was a result of the repurchase of stock throughout the year and the increase in total assets. Shareholders' equity was $36.1 million at the end of the second quarter of 2000 compared to $35.1 million at December 31, 1999. The leverage ratio consists of Tier I capital divided by quarterly average assets. At June 30, 2000, the Company's leverage ratio was 10.3% compared to 11.3% at December 31, 1999. Each of these exceeds the required minimum leverage ratio of 4%. The decrease in the leverage ratio is a result of the repurchase of stock throughout the year and the increase in total assets. New Accounting Pronouncements There have been no significant pronouncements since the December 31, 1999 10K was filed. Effects of Inflation The effect of changing prices on financial institutions is typically different from other industries as the Company's assets and liabilities are monetary in nature. Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes are directly related to price level indices. Impacts of inflation on interest rates, loan demands, and deposits are reflected in the consolidated financial statements. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 The statements contained in this report that are not historical facts may be forward looking statements. The forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results or those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no significant changes from the quantitative and qualitative disclosures made in the December 31, 1999 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 15 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. 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 -------------------------------------------------------------------------------- (Registrant) Date August 8, 2000 /s/ Larry G. Dillon -------------- ------------------------------------------------------ Larry G. Dillon, President and Chief Executive Officer Date August 8, 2000 /s/ Thomas F. Cherry ------------- ------------------------------------------------------- Thomas F. Cherry, Chief Financial Officer