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, 2001 ------------- [ ] 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: 3,536,639 as of August 7, 2001. -------------------------------
TABLE OF CONTENTS Part I - Financial Information Page - ------------------------------ ---- Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2001 and December 31, 2000........................ 1 Consolidated Statements of Income - Three months and six months ended June 30, 2001 and 2000... 2 Consolidated Statements of Shareholders' Equity Six months ended June 30, 2001 and 2000.................... 3 Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2000.................... 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............................................. 14 Item 6. Exhibits and Reports on Form 8-K.............................. 15 Signatures.............................................................. 16
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (Dollars in thousands) <TABLE> <CAPTION> ASSETS June 30, 2001 December 31, 2000 - ------ ------------- ------------------ (Unaudited) <S> <C> <C> Cash and due from banks $ 9,822 $ 8,923 Interest -bearing deposits in other banks 1,445 5,915 -------- -------- Total cash and cash equivalents 11,267 14,838 Securities -available for sale at fair value, amortized cost of $56,006 and $32,419, respectively 57,297 31,913 Securities-held to maturity at amortized cost, fair value of $0 and $34,976, respectively -- 33,770 Loans held for sale, net 54,832 17,600 Loans, net 250,378 229,944 Federal Home Loan Bank stock 1,595 1,595 Corporate premises and equipment, net of accumulated depreciation 12,618 9,890 Accrued interest receivable 2,417 2,404 Other assets 6,237 5,518 -------- -------- Total assets $396,641 $347,472 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Deposits Non-interest-bearing demand deposits $ 47,336 $ 35,735 Savings and interest-bearing demand deposits 118,311 117,566 Time deposits 154,159 137,387 -------- -------- Total deposits 319,806 290,688 Borrowings 26,991 13,969 Accrued interest payable 1,018 993 Other liabilities 6,757 3,041 -------- -------- Total liabilities 354,572 308,691 -------- -------- Commitments and contingent liabilities Shareholders' Equity Preferred stock ($1.00 par value, 3,000,000 shares authorized) -- -- Common stock ($1.00 par value, 8,000,000 shares authorized, 3,556,639 and 3,571,039 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively) 3,557 3,571 Additional paid-in capital - 20 Retained earnings 37,660 35,523 Accumulated other comprehensive income (loss) net of tax of $439 and ($172), respectively 852 (333) -------- -------- Total shareholders' equity 42,069 38,781 -------- -------- Total liabilities and shareholders' equity $396,641 $347,472 ======== ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except for per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended ---------------------- ---------------------- June 30, June 30, ---------------------- ---------------------- Interest Income 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> Interest and fees on loans $ 6,333 $ 5,437 $ 12,262 $ 10,538 Interest on other investments and fed funds 12 36 30 80 Interest on investment securities U.S. Treasury Securities 10 20 30 40 U.S. Government agencies and corporations 149 239 365 477 Tax-exempt obligations of states and political subdivisions 600 616 1,219 1,238 Corporate bonds and other 118 113 232 235 ---------- ---------- ---------- ---------- Total interest income 7,222 6,461 14,138 12,608 Interest expense Savings and interest-bearing deposits 713 798 1,514 1,613 Certificates of deposit, $100,000 or more 453 304 901 531 Other time deposits 1,757 1,193 3,447 2,272 Short-term borrowings and other 275 404 485 736 ---------- ---------- ---------- ---------- Total interest expense 3,198 2,699 6,347 5,152 Net interest income 4,024 3,762 7,791 7,456 Provision for loan losses 100 100 200 175 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 3,924 3,662 7,591 7,281 Other operating income Gain on sale of loans 2,424 1,214 4,119 2,287 Service charges on deposit accounts 364 323 742 630 Other service charges and fees 849 534 1,460 927 Other income 245 235 519 529 ---------- ---------- ---------- ---------- Total other operating income 3,882 2,306 6,840 4,373 Other operating expenses Salaries and employee benefits 3,192 2,417 6,136 4,748 Occupancy expenses 679 624 1,281 1,208 Goodwill amortization 69 69 137 137 Other expenses 1,256 1,039 2,268 1,977 ---------- ---------- ---------- ---------- Total other operating expenses 5,196 4,149 9,822 8,070 Income before income taxes 2,610 1,819 4,609 3,584 Income tax expense 744 421 1,246 817 ---------- ---------- ---------- ---------- Net income $ 1,866 $ 1,398 $ 3,363 $ 2,767 ========== ========== ========== ========== Per share data Net income - basic $ .52 $ .38 $ .94 $ .76 Net income - assuming dilution .52 $ .38 .94 $ .75 Cash dividends paid and declared .14 $ .13 .28 $ .26 Weighted average number of shares - basic 3,556,639 3,620,468 3,562,880 3,632,752 Weighted average number of shares - assuming dilution 3,589,145 3,652,452 3,592,513 3,665,231 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Accumulated Additional Other Common Paid-In Comprehensive Retained Comprehensive Stock Capital Income Earnings Income (Loss) Total ----- ------- ------------- -------- ------------- ----- <S> <C> <C> <C> <C> <C> <C> 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 ====== ==== ======== ======== ======== </TABLE> - ---------------------------- 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 accompanying notes are an integral part of the consolidated financial statements. 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> Accumulated Additional Other Common Paid-In Comprehensive Retained Comprehensive Stock Capital Income Earnings Income (Loss) Total ----- ------- ------------ -------- ------------- -------- <S> <C> Balance January 1, 2001 $3,571 $ 20 $35,523 $ (333) $38,781 Comprehensive Income Net income -- -- $3,363 3,363 -- 3,363 Other comprehensive income, net of tax Unrealized gain on securities, net of reclassification adjustment(1) -- -- 1,185 -- 1,185 1,185 ------ Comprehensive income $4,548 ====== Stock options exercised 8 66 -- -- 74 Repurchase of common stock (22) (86) (229) -- (337) Cash dividends -- -- (997) -- (997) ------ ------- -------- ------ -------- Balance June 30, 2001 $3,557 $ -- $37,660 $ 852 $42,069 ====== ======= ======== ====== ======== </TABLE> ____________________________ (1) 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. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30, ---------------------------- 2001 2000 --------- --------- <S> <C> Cash flows from operating activities: Net income $ 3,363 $ 2,767 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 648 509 Amortization of goodwill 137 137 Provision for loan losses 200 175 Accretion of discounts and amortization of premiums on investment securities, net (33) (23) Proceeds from sale of loans 236,005 146,402 Origination of loans held for sale (273,237) (142,493) Change in other assets and liabilities: Accrued interest receivable (14) (76) Other assets (1,467) (836) Accrued interest payable 25 152 Other liabilities 3,716 151 --------- --------- Net cash provided by (used in) operating activities (30,657) 6,865 --------- --------- Cash flows from investing activities: Proceeds from maturities and calls of investments held to maturity -- 650 Proceeds from sales, maturities, and calls of investments available for sale 10,908 372 Purchase of investments available for sale (691) (690) Net increase in customer loans (20,635) (18,473) Purchase of corporate premises and equipment (3,375) (1,093) --------- --------- Net cash used in investing activities (13,793) (19,234) --------- --------- Cash flows from financing activities: Net increase (decrease) in demand, interest-bearing demand and savings deposits 12,346 (5,635) Net increase in time deposits 16,771 15,131 Net increase in other borrowings 13,022 3,069 Proceeds from exercise of stock options 74 71 Repurchase of common stock (337) (953) Cash dividends (997) (944) --------- --------- Net cash provided by financing activities 40,879 10,739 --------- --------- Net (decrease) in cash and cash equivalents (3,571) (1,630) Cash and cash equivalents at beginning of period 14,838 15,486 --------- --------- Cash and cash equivalents at end of period $ 11,267 $ 13,856 ========= ========= Supplemental disclosure Interest paid $ 6,322 $ 5,001 Income taxes paid $ 939 $ 545 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 5
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 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, 2001, the results of operations for the three and six months ended June 30, 2001 and 2000, and cash flows for the six months ended June 30, 2001 and 2000 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, 2000. 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 3,589,145 and 3,652,452 for the three months ended June 30, 2001 and 2000, respectively, and 3,592,513 and 3,665,231 for the six months ended June 30, 2001 and 2000, respectively. Note 3 During the first quarter of 2001 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 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 2000 the Company repurchased 61,000 shares of its common stock in the open market at prices between $12.375 and $17.00 per share Note 4 In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. This Statement establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and requires that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. The Company adopted this Statement effective January 1, 2001 and, as permitted by the Statement, transferred securities with a book value of $33,770,000 and a market value of $34,836,000 to the available-for-sale category. Since the Company does 6
not use derivative instruments and strategies, the adoption of the Statement did not have any effect on earnings or financial position. Note 5 On August 6, 2001, the Company signed an agreement with Northern Neck State Bank for the sale of its Tappahannock Branch Office. The transaction includes approximately $16 million in deposits and $3.0 million in loans. The sale will result in a gain based on the amount of deposits held by the branch at the date of closing, which is expected by the end of October 2001, subject to regulatory approval. Note 6 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, 2001 and 2000. <TABLE> <CAPTION> Three Months Ended June 30, 2001 Retail Mortgage Banking Banking Other Eliminations Consolidated -------- -------- ----- ------------- ------------ <S> <C> <C> <C> <C> <C> Revenues: Interest income $ 6,949 $ 750 $ -- $ (477) $ 7,222 Gain on sale of loans -- 2,424 -- -- 2,424 Other 548 690 220 -- 1,458 - -------------------------------- -------- ------- ---- -------- -------- Total operating income 7,497 3,864 220 (477) 11,104 - -------------------------------- -------- ------- ---- -------- -------- Expenses: Interest expense 3,198 477 -- (477) 3,198 Salaries and employee benefits 1,557 1,546 89 -- 3,192 Other 1,310 751 43 -- 2,104 - -------------------------------- -------- ------- ---- -------- -------- Total operating expenses 6,065 2,774 132 (477) 8,494 - -------------------------------- -------- ------- ---- -------- -------- Income before income taxes 1,432 1,090 88 -- 2,610 - -------------------------------- -------- ------- ---- -------- -------- Total assets 384,319 59,044 38 (46,760) 396,641 Capital expenditures $ 1,329 $ 49 $ -- $ -- $ 1,378 </TABLE> 7
<TABLE> <CAPTION> Three Months Ended June 30, 2000 Retail Mortgage Banking Banking Other Eliminations Consolidated -------- -------- ----- ------------- ------------ <S> <C> <C> <C> <C> <C> 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 ========================================================================================= Six Months Ended June 30, 2001 Retail Mortgage Banking Banking Other Eliminations Consolidated -------- -------- ----- ------------ ------------ Revenues: Interest income $ 13,758 $ 1,159 $ -- $ (779) $ 14,138 Gain on sale of loans -- 4,119 -- -- 4,119 Other 1,078 1,205 438 -- 2,721 - --------------------------------- -------- ------- ---- -------- -------- Total operating income 14,836 6,483 438 (779) 20,978 - --------------------------------- -------- ------- ---- -------- -------- Expenses: Interest expense 6,347 779 -- (779) 6,347 Salaries and employee benefits 3,150 2,796 190 -- 6,136 Other 2,427 1,383 76 -- 3,886 - --------------------------------- -------- ------- ---- -------- -------- Total operating expenses 11,924 4,958 266 (779) 16,369 - --------------------------------- -------- ------- ---- -------- -------- Income before income taxes 2,912 1,525 172 -- 4,609 - --------------------------------- -------- ------- ---- -------- -------- Total assets 384,319 59,044 38 (46,760) 396,641 Capital expenditures $ 3,255 $ 120 $ -- $ -- $ 3,375 </TABLE> 8
<TABLE> <CAPTION> Six Months Ended June 30, 2000 Retail Mortgage Banking Banking Other Eliminations Consolidated -------- -------- ----- ------------- ------------ <S> <C> <C> <C> <C> <C> 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 </TABLE> 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. 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. Overview Net income increased 33.5% to $1,866,000 for the three months ended June 30, 2001 compared to $1,398,000 for the same period of 2000. Earnings per diluted share were $.52 for the three month period, up 36.8% from $.38 per diluted share for the three months ended June 30, 2000. Net income for the first six months ended June 30, 2001 increased 21.5% to $3,363,000 compared to $2,767,000 for the same period of 2000. Earnings per diluted share increased 25.3% to $.94 per diluted share for the six months ended June 30, 2001 compared to $.75 per diluted share for the same period in 2000. Profitability as measured by the Company's annualized return on average assets (ROA) was 1.95% for the three months ended June 30, 2001 compared to 1.72% for the same period of 2000. For the first six months of 2001 ROA was 1.82% compared to 1.72% for the first six months of 2000. Another key indicator of performance, the annualized return on average equity (ROE) for the three months ended June 30, 2001 was 18.03% compared to 15.52% for the three months ended June 30, 2000. For the first six months of 2001 ROE was 16.55% compared to 15.48% for the first six months of 2000. The increase in income is 9
attributed to an increase in profitability at C&F Mortgage Corporation resulting from the lower interest rate environment. RESULTS OF OPERATIONS Net Interest Income Net interest income for the three months ended June 30, 2001 was $4.0 million, an increase of $262,000, or 6.9% from $3.8 million for the three months ended June 30, 2000. The increase in net interest income is a result of an increase in the average balance of interest earning assets to $358.5 million for the three months ended June 30, 2001 compared to $308.5 million for the same period in 2000 offset by a decrease in the net interest margin on a taxable equivalent basis to 4.85% for the quarter ended June 30, 2001 from 5.33% for the same quarter in 2000. 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 loans held for sale by C&F Mortgage Corporation offset by a decrease in the average balance of investment securities. 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 sharp decline in interest rates during the first half of 2001. The funds from these calls and maturities were used to support growth in the loan portfolio. The increase in loans held for sale is a result of increased production at C&F Mortgage Corporation due to declining interest rates during the first half of 2001. Loans closed at C&F Mortgage Corporation for the three months ended June 30, 2001 were $166,096,000 compared to $84,072,000 for the comparable period in 2000. Loans sold during the second quarter of 2001 were $151,499,000 compared to $75,953,000 for the second quarter of 2000. The decrease in the company's net interest margin on a taxable equivalent basis for the three months ended June 30, 2001 compared to the same period in 2000 was a result of a decrease in the yield on interest earning assets to 8.44% for the second quarter of 2001 from 8.83% for the same period in 2000 and an increase in the cost of funds to 4.37% for the second quarter of 2001 compared to 4.21% for the same period in 2000. The decrease in the yield on interest earning assets is a result of a decrease in the yield on loans held by the Bank and an increase in the average balance of lower yielding loans held for sale at C&F Mortgage Corporation. The decrease in the yield on loans held by the Bank is a result of the declining interest rate environment. The increase in the cost of funds is a result of an increase in rates paid on certificates of deposit, offset by a decrease in rates paid on interest checking, money market and savings accounts and a decrease in rates paid on borrowings from the FHLB. The increase in the rates paid on certificates of deposit was a result of the higher interest rate environment during 2000. As the majority of these certificates mature in 2001, the rates paid on certificates of deposit will continue to decline. The decrease in rates paid on interest checking, money market and savings accounts and rates paid on borrowings from the FHLB is due to the lower interest rate environment during 2001. Net interest income for the six months ended June 30, 2001 was $7.8 million, an increase of $335,000, or 4.5%, from $7.5 million for the six months ended June 30, 2000. The increase in net interest income is a result of an increase in the average balance of interest earning assets offset by a decrease in the net interest margin on a taxable equivalent basis to 4.86% for the six months ended June 30, 2001 from 5.38% for the first six months of 2000. The average balance of interest earning assets increased $42.7 million to $345.9 million for the first six months of 2001 from $303.2 million for the first six months of 2000. The increase in average earning assets is a result of an increase in the average balance of the Bank's loan portfolio and in the 10
average balance of loans held for sale by C&F Mortgage Corporation 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 sharp decline in interest rates during the first half of 2001. The funds from these calls and maturities were used to support growth in the loan portfolio. The increase in loans held for sale is a result of increased production at C&F Mortgage Corporation due to decreasing interest rates during the first half of 2001. Loans closed at C&F Mortgage Corporation for the six months ended June 30, 2001 were $273,237,000 compared to $142,493,000 for the comparable period in 2000. Loans sold during the first half of 2001 were $236,005,000 compared to $146,402,000 for the first half of 2000. The decrease in the company's net interest margin on a taxable equivalent basis for the six months ended June 30, 2001 compared to the same period in 2000 was a result of a decrease in the yield on interest earning assets to 8.55% for the first half of 2001 from 8.78% for the same period in 2000 and a increase in the cost of funds to 4.47% for the first half of 2001 compared to 4.08% for the same period in 2000. The decrease in the yield on interest earning assets is a result of a decrease in the yield on loans held by the Bank, an increase in the average balance of lower yielding loans held for sale at C&F Mortgage Corporation and a decrease in the yield on the securities portfolio. The decrease in the yield on loans held by the Bank is a result of the declining interest rate environment. The decrease in the yield on the securities portfolio is a result of the calls and maturities of higher yielding securities during the first six months of 2001. The increase in the cost of funds is a result of an increase in rates paid on certificates of deposit, offset by a decrease in rates paid on interest checking, money market and savings accounts and a decrease in rates paid on borrowings from the FHLB. The increase in the rates paid on certificates of deposit was a result of the high interest rate environment during 2000. As the majority of these certificates mature in 2001, the rates paid on certificates of deposit will continue to decline. The decrease in rates paid on interest checking, money market and savings accounts and rates paid on borrowings from the FHLB was due to the lower interest rate environment during 2001. Non-Interest Income Other operating income increased $1,576,000, or 68.3%, to $3,882,000 for the second quarter of 2001 from $2,306,000 for the second quarter of 2000. Other operating income increased $2,466,000, or 56.4%, to $6,840,000 for the first six months of 2001 from $4,373,000 for the first six months of 2000. The increase in other operating income is mainly attributed to an increase in gain on sale of loans resulting from an increase in volume of loans sold by C&F Mortgage Corporation. Non-Interest Expense Other operating expenses increased $1,047,000, or 25.2%, to $5,196,000 for the second quarter of 2001 from $4,149,000 for the second quarter of 2000. Other operating expenses increased $1,752,000, or 21.4%, to $9,822,000 for the first six months of 2001 from $8,070,000 for the first six months of 2000. This increase is mainly attributable to the opening of an additional branch office at the Bank during the second quarter of 2000, 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 origination of loans due to the lower interest rate environment. 11
Income Taxes Income tax expense for the three months ended June 30, 2001 amounted to $744,000, resulting in an effective tax rate of 28.5% compared to $421,000, or 23.1%, for the three months ended June 30, 2000. Income tax expense for the six months ended June 30, 2001 amounted to $1,246,000, resulting in an effective tax rate of 27.0% compared to $817,000, or 22.8%, for the six months ended June 30, 2000. The increase in the effective tax rate for the quarter and for the six months is a result of the decrease in earnings subject to no taxes, such as certain loans to municipalities or investment obligations of state and political subdivisions, as a percentage of total income. This increase in earnings subject to taxes as a percentage of total income is primarily a result of the increase in income at C&F Mortgage Corporation. Asset Quality-Allowance /Provision For Loan Losses The Company had $200,000 in provision expense for the first six months of 2001 and $175,000 for the first six months of 2000. Loans charged off amounted to $72,000 for the six months ended June 30, 2001 and $26,000 for the same period in 2000. Recoveries amounted to $4,000 and $2,000 for the six months ended June 30, 2001 and 2000, respectively. The allowance for loan losses was $3.7 million at June 30, 2001 and $3.6 million at December 31, 2000. The allowance approximates 1.47% and 1.54% of total loans outstanding at June 30, 2001 and December 31, 2000. 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 $339,000 at June 30, 2001 compared to $473,000 at December 31, 2000. FINANCIAL CONDITION At June 30, 2001, the Company had total assets of $396.6 million compared to $347.5 million at December 31, 2000. Loan Portfolio At June 30, 2001, loans held for sale amounted to $54.8 million compared to $17.6 million held at December 31, 2000. The increase is a result of increased originations at C&F Mortgage Corporation resulting from the decrease in interest rates during the first half of this year. 12
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: <TABLE> <CAPTION> June 30, 2001 December 31, 2000 (Dollars in Thousands) Amount Percent Amount Percent --------- -------- ---------- -------- <S> <C> <C> <C> <C> Real estate - mortgage $ 85,847 34% $ 87,428 37% Real estate - construction 9,835 4 9,109 4 Commercial, financial and agricultural 135,175 53 113,571 48 Equity lines 11,046 4 11,616 5 Consumer 13,249 5 12,815 6 -------- --- -------- --- Total loans 255,152 100% 234,539 100% === === Less unearned loan fees (1,033) (986) Less allowance for possible loan losses (3,741) (3,609) -------- -------- Total loans, net $250,378 $229,944 ======== ======== </TABLE> Investment Securities At June 30, 2001, total investment securities were $57,297,000 compared to $66,889,000 for December 31, 2000. Securities of U.S. Government agencies and corporations represent 8.04% of the total securities portfolio, obligations of state and political subdivisions were 82.04%, and preferred stocks were 9.92% at June 30, 2001. The decrease in investment securities is a result of numerous investment securities being called as a result of the lower interest rate environment. Deposits Deposits totaled $319.8 million at June 30, 2001 compared to $290.7 at December 31, 2000. Non-interest bearing deposits totaled $47.3 million at June 30, 2001 compared to $35.7 million at December 31, 2000. Liquidity At June 30, 2001, cash, securities classified as available for sale and interest-bearing deposits were 17.3% 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 12.8% at June 30, 2001 compared to 14.4% at December 31, 2000. The total risk-based capital ratio was 13.9% at June 30, 2001 compared to 15.6% at December 31, 2000. These ratios are in 13
excess of the mandated minimum requirements. The decrease in the Tier I capital ratio and the total risked based capital ratio was a result of the shares repurchased as a part of the Company's stock repurchase plan and an increase in total assets mainly attributed to an increase in the Company's loan portfolio and in loans held for sale by C&F Mortgage Corporation. Shareholders' equity was $42.1 million at the end of the second quarter of 2000 compared to $38.8 million at December 31, 2000. The leverage ratio consists of Tier I capital divided by quarterly average assets. At June 30, 2001, the Company's leverage ratio was 10.4% compared to 10.9% at December 31, 2000. Each of these exceeds the required minimum leverage ratio of 4%. The decrease in the leverage ratio is a result of the shares repurchased as a part of the Company's stock repurchase plan and the increase in total assets. 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, 2000 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 14
ITEM 5 - OTHER INFORMATION - Inapplicable ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K On August 7, 2001 a report on Form 8-K was filed to announce the Company's signing of an agreement to sell its Tappahannock Branch Office. 15
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 7, 2001 /s/ Larry G. Dillon --------------- ------------------------------------------------------ Larry G. Dillon, President and Chief Executive Officer Date August 7, 2001 /s/ Thomas F. Cherry -------------- ------------------------------------------------------- Thomas F. Cherry, Chief Financial Officer