Back to GetFilings.com

Table of Contents

(Mark One)

000-23423
Commission file number

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.Yesx No o

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: 3,539,793 as of August 6, 2002.

Table of Contents

TABLE OF CONTENTS

Table of Contents

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

The accompanying notes are an integral part of the consolidated financial statements.

2

Table of Contents

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)

There were no reclassification adjustments for the six months ended June 30, 2001.

The accompanying notes are an integral part of the consolidated financial statements.

3

Table of Contents

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)

Disclosure of Reclassification Amount:

The accompanying notes are an integral part of the consolidated financial statements.

4

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

5

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 United States of America. 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, 2002, the results of operations for the three and six months ended June 30, 2002 and 2001, and cash flows for the six months ended June 30, 2002 and 2001 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, 2001.

        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 3,626,289 and 3,589,145 for the three months ended June 30, 2002 and 2001, respectively, and 3,611,056 and 3,592,513 for the six months ended June 30, 2002 and 2001, respectively.

Note 3

        During the first six months of 2001, the Company repurchased 22,000 shares of its common stock in the open market at prices between $14.88 and $15.50 per share. During the first six months of 2002 the Company did not repurchase any shares of its common stock.

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, 2002 and 2001.

6

Table of Contents

7

Table of Contents

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

Table of Contents

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 accompanying Consolidated Financial Statements, and supplemental financial data.

Critical Accounting Policies

        Reserve for Loan Losses: The reserve for loan losses is established through a provision for loan losses charged to expense. The reserve represents an amount which, in management's judgment, will be adequate to absorb any losses on existing loans which may become uncollectible. Management's judgment in determining the adequacy of the reserve is based on evaluations of the collectibility of loans while taking into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions which may affect a borrower's ability to repay, overall portfolio quality, and review of specific potential losses. Loans are charged against the reserve for loan losses when management believes that the collectibility of the principal is unlikely. Actual future losses may differ from estimates as a result of unforeseen events.

        Impaired Loans: Impaired loans are measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan (or, as a practical expedient, at the loan's observable market price) or the fair value of the collateral if the loan is collateral dependent. The Company considers a loan impaired when it is probable that the Company will be unable to collect all interest and principal payments as scheduled in the loan agreement. A loan is not considered impaired during a period of delay in payment if the ultimate collectibility of all amounts due is expected. A valuation allowance is maintained to the extent that the measure of the impaired loan is less than the recorded investment.

        Valuation of Derivatives: The Company does not hold any derivative instruments in its securities portfolio nor has it entered into any derivative hedging transactions.

Overview

        Net income increased 23.6% to $2,307,000 for the three months ended June 30, 2002 compared to $1,866,000 for the same period of 2001. Earnings per diluted share were $.64 for the three month period, up 23.1% from $.52 per diluted share for the three months ended June 30, 2001. Net income for the first six months ended June 30, 2002 increased 22.4% to $4,117,000 compared to $3,363,000 for the same period of 2001. Earnings per diluted share increased 21.3% to $1.14 per diluted share for the six months ended June 30, 2002 compared to $.94 per diluted share for the same period in 2001. Included in net income for both the quarter and six months ended June 30, 2002 was a non-recurring insurance benefit of $277,000. Excluding this insurance benefit, net income increased 8.8% and earnings per diluted share increased 7.7% for the three months ended June 30, 2002 compared to the three months ended June 30, 2001 and net income increased 14.2% and earnings per diluted share increased 12.8% for the six months ended June 30, 2002 compared to the same period of 2001.

        The increase in net income for the quarter and the six months ended June 30, 2002 continues to be the result of an increase in income at C&F Mortgage Corporation. This increase is the result of the decrease in interest rates that started in January 2001 and continued strong home sales. From January 2001 through December 2001 the prime interest rate charged by banks decreased from 9.50% to 4.75%. The prime rate has remained steady at 4.75% through June 2002. While interest rates on mortgage

9

Table of Contents

loans are not directly tied to the prime rate, mortgage interest rates have generally followed the decline in the prime interest rate. The lower interest rates and strong home sales have resulted in strong demand for both mortgage loans to refinance existing loans as well as mortgage loans for new and resale home purchases. Income at C&F Mortgage Corporation is generally correlated to changes in interest rates and new and resale home purchases. A decrease in interest rates usually results in an increase in loan volume. For the first six months of 2002, the amount of loan originations at C&F Mortgage resulting from refinancing was $94,000,000 compared to $93,000,000 for the first six months of 2001. Loans for new and resale home purchases for these two time periods were $199,000,000 and $180,000,000, respectively. For the three months ended June 30, 2002, the amount of refinancing and new and resale home loans were $39,000,000 and $116,000,000, respectively, compared to $51,000,000 and $115,000,000, respectively for the three months ended June 30, 2001. While loan originations were down for the second quarter, loans sold during the second quarter of 2002 increased to $157,812,000 from $151,499,000 for the second quarter of 2001. Loans sold are a function of loans originated during the current quarter and the previous quarter. Loans originated in the first quarter of 2002 exceeded originations for the first quarter of 2001. C&F Mortgage Corporation would expect that future loan volume will be affected by changes in interest rates and demand for new and resale home sales.

        Performance as measured by the Company's annualized return on average assets (ROA), excluding the non-recurring insurance benefit, was 1.98% for the three months ended June 30, 2002 compared to 1.95% for the same period of 2001. For the first six months of 2002 ROA, excluding the non-recurring insurance benefit, was 1.90% compared to 1.82% for the first six months of 2001. Another key indicator of performance, the annualized return on average equity (ROE), excluding the non-recurring insurance benefit, for the three months ended June 30, 2002 was 17.10% compared to 18.03% for the three months ended June 30, 2001. For the first six months of 2002 ROE, excluding the non-recurring insurance benefit, was 16.44% compared to 16.55% for the first six months of 2001

RESULTS OF OPERATIONS

Net Interest Income

        Net interest income for the three months ended June 30, 2002 was $4.3 million, an increase of $322,000, or 8.0% from $4.0 million for the three months ended June 30, 2001. 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 (this converts interest income on loans and investments for which no taxes are paid to the equivalent yield if taxes were paid) to 4.93% for the quarter ended June 30, 2002 from 4.85% for the same quarter in 2001.

        The average balance of interest earning assets increased $22.5 million to $380.9 million for the three months ended June 30, 2002 from $358.5 million for the three months ended June 30, 2001. The increase in average earning assets is a result of a large increase in the average balance of interest bearing deposits at other banks (primarily at the Federal Home Loan Bank) offset by a decrease in the average balance of loans held for sale by C&F Mortgage Corporation. The large increase in the average balance of interest bearing deposits at other banks was a result of an increase in liquidity caused by an increase in deposits, as investors moved funds from stocks and mutual funds to banks, that was greater than the increase in the loan portfolio. While the Company continues to deploy funds into higher yielding loans and investments, the increase in deposits have outpaced the demand for loans and the flow of quality investment securities.

        The decrease in average balance of loans held for sale is a result of a decrease in originations at C&F Mortgage Corporation of mortgages resulting from refinancing due to the stability of the interest rate environment since the beginning of 2002. Loans closed at C&F Mortgage Corporation for the three months ended June 30, 2002 were $155,104,000 compared to $166,096,000 for the comparable period in 2001. Loans sold during the second quarter of 2002 were $157,812,000 compared to $151,499,000 for the second quarter of 2001.

10

Table of Contents

        The increase in the Company's net interest margin on a taxable equivalent basis was a result of a decrease in the cost of funds for the second quarter of 2002 to 2.66% from 4.37% for the second quarter of 2001 offset by a decrease in the yield on interest earning assets to 7.09% for the second quarter of 2002 from 8.44% for the same period in 2001. The decrease in the yield on interest earning assets was a result of a decrease in the yield on loans held by the Bank resulting from the lower interest rate environment, an increase in the average balance of lower yielding interest bearing deposits at other banks offset by a decrease in the average balance of lower yielding loans held for sale at C&F Mortgage Corporation. Also, the yield on the Company's securities portfolio declined to 7.50% for the second quarter of 2002 compared to 7.86% for the same period in 2001 as a result of the maturities and calls of higher yielding securities. The decrease in the cost of funds for the Company was a result of the falling interest rate environment and the repricing of maturing certificates of deposit at lower rates.

        Net interest income for the six months ended June 30, 2002 was $8.6 million, an increase of $779,000, or 9.9%, from $7.8 million for the six months ended June 30, 2001. 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 4.95% for the six months ended June 30, 2002 from 4.86% for the first six months of 2001.

        The average balance of interest earning assets increased $30.3 million to $376.2 million for the first six months of 2002 from $345.9 million for the first six months of 2001. The increase in average earning assets is a result of a slight increase in the average balance of the Bank's loan portfolio and in the average balance of loans held for sale by C&F Mortgage Corporation, a large increase in the average balance of lower yielding interest bearing deposits at other banks, offset by a decrease in the Bank's securities portfolio. The increase in the Bank's loan portfolio is a result of increased loan demand resulting from a continuing emphasis on commercial and consumer lending. The decrease in the average balance of the securities portfolio was the result of maturities and calls due to the decline in interest rates during 2001. The large increase in the average balance of interest bearing deposits at other banks was a result of an increase in liquidity caused by an increase in deposits, as investors moved funds from stocks and mutual funds to banks, that was greater than the increase in the loan portfolio.

        The increase in the average balance of loans held for sale is a result of increased production at C&F Mortgage Corporation due to the lower interest rate environment during the first half of 2002 as compared to the first half of 2001. Loans closed at C&F Mortgage Corporation for the six months ended June 30, 2002 were $292,693,000 compared to $273,237,000 for the comparable period in 2001. Loans sold during the first half of 2002 were $314,299,000 compared to $236,005,000 for the first half of 2001.

        The increase in the Company's net interest margin on a taxable equivalent basis was a result of a decrease in the cost of funds for the first six months of 2002 to 2.88% from 4.47% for the same period in 2001 offset by a decrease in the yield on interest earning assets to 7.30% for the first six months of 2002 from 8.55% for the same period in 2001. The decrease in the yield on interest earning assets was a result of a decrease in the yield on loans held by the Bank resulting from the lower interest rate environment, an increase in the average balance of lower yielding loans held for sale at C&F Mortgage Corporation and an increase in the average balance of lower yielding interest bearing deposits at other banks. Also, the yield on the Company's securities portfolio declined to 7.55% for the first six months of 2002 compared to 7.76% for the same period in 2001 as a result of the maturities and calls of higher yielding securities. The decrease in the cost of funds for the Company was a result of the falling interest rate environment and the repricing of maturing certificates of deposit at lower rates.

Non-Interest Income

         Other operating income increased $1,099,000, or 28.3%, to $4,981,000 for the second quarter of 2002 from $3,882,000 for the second quarter of 2001. Other operating income increased $2,222,000, or 32.5%, to $9,062,000 for the first six months of 2002 from $6,840,000 for the first six months of 2001. The increase in other operating income is attributed to an increase in gain on sale of loans resulting  

11

Table of Contents

Non-Interest Expense

         Other operating expenses increased $873,000, or 16.8%, to $6,069,000 for the second quarter of 2002 from $5,196,000 for the second quarter of 2001. Other operating expenses increased $1,967,000, or 20.0%, to $11,789,000 for the first six months of 2002 from $9,822,000 for the first six months of 2001. This increase is mainly attributable to the opening of two additional branch offices at the Bank during the fourth quarter of 2001, the overall growth in the Company and an increase in salaries and employee benefits expense and other operating expenses at C&F Mortgage Corporation resulting from the increase in the origination of loans due to the lower interest rate environment and strong new and resale home purchases.

Income Taxes

        Income tax expense for the three months ended June 30, 2002 amounted to $826,000, resulting in an effective tax rate of 26.4% compared to $744,000, or 28.5%, for the three months ended June 30, 2001. Income tax expense for the six months ended June 30, 2002 amounted to $1,526,000, resulting in an effective tax rate of 27.0% compared to $1,246,000, or 27.0%, for the six months ended June 30, 2001. The decrease in the effective tax rate for the quarter is a result of the non-recurring insurance benefit which is not subject to income taxes. The effective tax rate for the first six months of 2002 did not change when compared to the same period in 2001. The increase in earnings subject to taxes, because of the increase in income at C&F Mortgage, as a percentage of total income was offset by the non-recurring insurance benefit subject to no taxes.

Asset Quality-Allowance /Provision For Loan Losses

        The allowance for loan losses is to provide for potential losses 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 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 provided $200,000 in loan loss expense for the first six months of 2002 and 2001. Loans charged off amounted to $56,000 for the six months ended June 30, 2002 and $72,000 for the same period in 2001. Recoveries amounted to $46,000 and $4,000 for the six months ended June 30, 2002 and 2001, respectively. Nonperforming assets, as shown in the following table under the section titled "Nonperforming Assets," increased to $1,679,000 at June 30, 2002 from $1,026,000 at December 31, 2001. The allowance for loan losses was $3.9 million at June 30, 2002 and $3.7 million at December 31, 2001. The allowance approximates 1.54% and 1.47% of total loans outstanding at June 30, 2002 and December 31, 2001, respectively. Over the past several years, the Corporation has substantially increased its portfolio of commercial, financial, and agricultural loans. While the Corporation continues to increase its commercial, financial and agricultural loan portfolio, the portfolio also continues to become ''more seasoned'' allowing management to better assess the risk associated with the portfolio. Management believes that the reserve is adequate to absorb any losses on existing loans, which may become uncollectible.

12

Table of Contents

Nonperforming Assets

        Loans are generally placed on non-accrual status when the collection of principal or interest is ninety days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than ninety days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans which are carried on non-accrual status, interest is recognized on the cash basis. Management believes that the collateral and current reserves are adequate to cover any potential losses associated with nonperforming assets.

FINANCIAL CONDITION

        At June 30, 2002, the Company had total assets of $413.3 million compared to $404.1 million at December 31, 2001.

Loan Portfolio

        At June 30, 2002, loans held for sale amounted to $47.7 million compared to $69.3 million held at December 31, 2001. This balance fluctuates based on originations and loan sales at C&F Mortgage Corporation. While the volume at C&F Mortgage remains strong, timing of originations and subsequent sales of loans can result in fluctuations of the balance in loans held for sale.

13

Table of Contents

        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: