UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 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: 3,523,326 as of November 6, --------------------------- 2001. - ----
TABLE OF CONTENTS <TABLE> <CAPTION> Part I - Financial Information Page - ------------------------------ ---- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2001 and December 31, 2000..................................... 1 Consolidated Statements of Income - Three months and nine months ended September 30, 2001 and 2000............... 2 Consolidated Statements of Shareholders' Equity Nine months ended September 30, 2001 and 2000 ............................... 3 Consolidated Statements of Cash Flows - Nine months ended September 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....................... 15 Part II - Other Information - --------------------------- Item 1. Legal Proceedings ............................................................... 15 Item 2. Changes in Securities ........................................................... 15 Item 3. Defaults Upon Senior Securities.................................................. 15 Item 4. Submission of Matters to a Vote of Security Holders ............................. 15 Item 5. Other Information ............................................................... 15 Item 6. Exhibits and Reports on Form 8-K................................................. 15 Signatures................................................................................. 16 </TABLE>
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (Dollars in thousands) <TABLE> <CAPTION> ASSETS September 30, 2001 December 31, 2000 - ------ ------------------ ----------------- (Unaudited) <S> <C> <C> Cash and due from banks $ 8,756 $ 8,923 Interest-bearing deposits in other banks 12,409 5,915 ----------- ----------- Total cash and cash equivalents 21,165 14,838 Securities -available for sale at fair value, amortized cost of $51,540 and $32,419, respectively 53,411 31,913 Securities-held to maturity at amortized cost, fair value of $0 and $34,976, respectively -- 33,770 Loans held for sale, net 50,342 17,600 Loans, net 244,751 229,944 Federal Home Loan Bank stock 1,595 1,595 Corporate premises and equipment, net of accumulated depreciation 13,673 9,890 Accrued interest receivable 2,116 2,404 Other assets 5,023 5,518 ----------- ----------- Total assets $ 392,076 $ 347,472 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Deposits Non-interest-bearing demand deposits $ 47,562 $ 35,735 Savings and interest-bearing demand deposits 120,995 117,566 Time deposits 159,413 137,387 ----------- ----------- Total deposits 327,970 290,688 Borrowings 9,812 13,969 Accrued interest payable 1,078 993 Other liabilities 9,843 3,041 ----------- ----------- Total liabilities 348,703 308,691 ----------- ----------- 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, 3,522,658 and 3,571,039 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively) 3,523 3,571 Additional paid-in capital - 20 Retained earnings 38,616 35,523 Accumulated other comprehensive income (loss) net of tax of $637 and ($172), respectively 1,234 (333) ----------- ------------ Total shareholders' equity 43,373 38,781 ----------- ----------- Total liabilities and shareholders' equity $ 392,076 $ 347,472 =========== =========== </TABLE> The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands of dollars, except for per share amounts) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- Interest Income 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Interest and fees on loans $ 6,294 $ 5,792 $ 18,556 $ 16,331 Interest on other market investments and fed funds 33 53 63 133 Interest on investment securities U.S. Treasury Securities - 20 30 60 U.S. Government agencies and corporations 73 239 438 715 Tax-exempt obligations of states and political subdivisions 584 609 1,803 1,848 Corporate bonds and other 111 117 343 352 ---------- ---------- ----------- ---------- Total interest income 7,095 6,830 21,233 19,439 Interest Expense Savings and interest-bearing deposits 697 812 2,211 2,425 Certificates of deposit, $100,000 or more 442 349 1,343 880 Other time deposits 1,698 1,358 5,145 3,630 Short-term borrowings and other 144 482 629 1,218 ---------- ---------- ----------- ---------- Total interest expense 2,981 3,001 9,328 8,153 Net interest income 4,114 3,829 11,905 11,286 Provision for loan losses 100 75 300 250 ---------- ---------- ----------- ---------- Net interest income after provision for loan losses 4,014 3,754 11,605 11,036 Other Operating Income Gain on sale of loans 2,951 1,374 7,070 3,661 Service charges on deposit accounts 337 347 1,079 977 Other service charges and fees 817 469 2,277 1,272 Other income 331 217 850 746 ---------- ---------- ----------- ---------- Total other operating income 4,436 2,407 11,276 6,656 Other Operating Expenses Salaries and employee benefits 3,499 2,507 9,635 7,255 Occupancy expenses 682 552 1,963 1,761 Goodwill amortization 69 69 206 206 Other expenses 1,210 886 3,478 2,739 ---------- ---------- ----------- ---------- Total other operating expenses 5,460 4,014 15,282 11,961 Income before income taxes 2,990 2,147 7,599 5,731 Income tax expense 900 532 2,146 1,349 ---------- ---------- ----------- ---------- Net Income $ 2,090 $ 1,615 $ 5,453 $ 4,382 ========== ========== =========== ========== Per Share Data Net Income - Basic $ .59 $ .45 $ 1.53 $ 1.21 Net Income - Assuming Dilution .58 $ .45 1.52 $ 1.20 Cash Dividends Paid and Declared .15 $ .13 .43 $ .39 Weighted average number of shares - basic 3,541,136 3,589,584 3,555,632 3,618,363 Weighted average number of shares - assuming dilution 3,582,276 3,621,786 3,589,101 3,650,749 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Amounts in thousands of dollars) (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 $ 4,382 4,382 4,382 Other comprehensive income, net of tax Unrealized gain on securities, net of reclassification adjustment (See disclosure below) 346 346 346 --------- Comprehensive income $ 4,728 ========= Stock options exercised 7 68 75 Repurchase of common stock (65) (79) (873) (1,017) Cash dividends (1,410) ______ (1,410) ------- ------- --------- ----------- Balance September 30, 2000 $ 3,587 $ 3 $ 34,827 $ (911) $ 37,506 ======= ======= ========= ========= ========= </TABLE> - ---------------------------- Disclosure of Reclassification Amount: Unrealized net holding gains arising during period $ 412 Less: reclassification adjustment for gains Included in net income (66) ------ Net unrealized gains on securities $ 346 ====== 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> <C> <C> <C> <C> <C> Balance January 1, 2001 $ 3,571 $ 20 $ 35,523 $ (333) $ 38,781 Comprehensive Income Net income -- -- $ 5,453 5,453 -- 5,453 Other comprehensive income, net of tax Unrealized gain on securities, net of reclassification adjustment/1/ -- -- 1,567 -- 1,567 1,567 --------- Comprehensive income $ 7,020 ========= Stock options exercised 12 101 -- -- 113 Repurchase of common stock (60) (121) (833) -- (1,014) Cash dividends -- -- (1,527) -- (1,527) --------- --------- --------- ---------- --------- Balance September 30, 2001 $ 3,523 $ -- $ 38,616 $ 1,234 $ 43,373 ========= ========= ========= ========== ========= </TABLE> - ---------------------------- Disclosure of Reclassification Amount: Unrealized net holding gains arising during period $ 1,573 Less: reclassification adjustment for gains Included in net income (6) ------- Net unrealized gains on securities $ 1,567 ======= The accompanying notes are an integral part of the consolidated financial statements. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands of dollars) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2001 2000 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 5,453 $ 4,382 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 976 741 Amortization of goodwill 206 206 Provision for loan losses 300 250 Accretion of discounts and amortization of premiums on investment securities, net (43) (34) Net realized gain on securities (6) (100) Proceeds from sale of loans 396,162 226,443 Origination of loans held for sale (428,904) (222,654) Change in other assets and liabilities: Accrued interest receivable 288 (61) Other assets (519) (158) Accrued interest payable 85 360 Other liabilities 6,799 395 ---------- ---------- Net cash provided by (used in) operating activities (19,203) 9,770 ---------- ---------- Cash flows from investing activities: Proceeds from maturities and calls of investments held to maturity -- 906 Proceeds from sales, maturities, and calls of investments available for sale 16,696 1,010 Purchase of investments available for sale (1,997) (1,028) Net increase in customer loans (15,107) (25,527) Purchase of corporate premises and equipment (4,759) (1,628) Purchase of Federal Home Loan Bank stock -- (10) ---------- ---------- Net cash used in investing activities (5,167) (26,277) ---------- ---------- Cash flows from financing activities: Net increase in demand, interest bearing demand and savings deposits 15,256 643 Net increase in time deposits 22,026 20,750 Net decrease in other borrowings (4,157) (214) Proceeds from exercise of stock options 113 75 Repurchase of common stock (1,014) (1,017) Cash dividends (1,527) (1,410) ---------- ---------- Net cash provided by financing activities 30,697 18,827 ---------- ---------- Net increase in cash and cash equivalents 6,327 2,320 Cash and cash equivalents at beginning of period 14,838 15,486 ---------- ---------- Cash and cash equivalents at end of period $ 21,165 $ 17,806 ========== ========== Supplemental disclosure Interest paid $ 9,243 $ 7,793 Income taxes paid $ 1,812 $ 1,084 </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 September 30, 2001, the results of operations for the three and nine months ended September 30, 2001 and 2000, and cash flows for the nine months ended September 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 3,582,276 and 3,621,786 for the three months ended September 30, 2001 and 2000, respectively, and 3,589,101 and 3,650,749 for the nine months ended September 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 nine months of 2001 the Company repurchased 59,981 shares of its common stock in the open market at prices between $14.88 and $18.00 per share. During the first nine months of 2000 the Company repurchased 65,000 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 not use 6
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 middle of November 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 September 30, 2001 and 2000. <TABLE> <CAPTION> =============================================================================================== Three Months Ended September 30, 2001 Retail Mortgage Banking Banking Other Eliminations Consolidated - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenues: Interest income $ 6,707 $ 798 $ -- $ (410) $ 7,095 Gain on sale of loans -- 2,951 -- -- 2,951 Other 544 681 260 -- 1,485 - ------------------------------------------------------------------------------------------ Total operating income 7,251 4,430 260 (410) 11,531 - ------------------------------------------------------------------------------------------ Expenses: Interest expense 2,981 410 -- (410) 2,981 Salaries and employee benefits 1,554 1,850 95 -- 3,499 Other 1,271 755 35 -- 2,061 - ------------------------------------------------------------------------------------------ Total operating expenses 5,806 3,015 130 (410) 8,541 - ------------------------------------------------------------------------------------------ Income before income taxes 1,445 1,415 130 -- 2,990 - ------------------------------------------------------------------------------------------ Total assets 375,960 54,857 45 (38,786) 392,076 Capital expenditures $ 1,345 $ 40 $ -- $ -- $ 1,385 ========================================================================================= </TABLE> 7
<TABLE> <CAPTION> =================================================================================================== Three Months Ended September 30, 2000 Retail Mortgage Banking Banking Other Eliminations Consolidated - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenues: Interest income $ 6,708 $ 370 $ -- $ (248) $ 6,830 Gain on sale of loans -- 1,374 -- -- 1,374 Other 505 341 188 -- 1,034 - ---------------------------------------------------------------------------------------------------- Total operating income 7,213 2,085 188 (248) 9,238 - ---------------------------------------------------------------------------------------------------- Expenses: Interest expense 3,001 248 -- (248) 3,001 Salaries and employee benefits 1,499 905 103 -- 2,507 Other 981 573 29 -- 1,583 - ---------------------------------------------------------------------------------------------------- Total operating expenses 5,481 1,726 132 (248) 7,091 - ---------------------------------------------------------------------------------------------------- Income before income taxes 1,732 359 56 -- 2,147 - ---------------------------------------------------------------------------------------------------- Total assets 346,063 23,838 11 (16,379) 353,533 Capital expenditures $ 533 $ 5 $ -- $ -- $ 538 ==================================================================================================== </TABLE> <TABLE> <CAPTION> =================================================================================================== Nine Months Ended September 30, 2001 Retail Mortgage Banking Banking Other Eliminations Consolidated - --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenues: Interest income $ 20,466 $ 1,956 $ -- $ (1,189) $ 21,233 Gain on sale of loans -- 7,070 -- -- 7,070 Other 1,621 1,886 699 -- 4,206 - -------------------------------------------------------------------------------------- Total operating income 22,087 10,912 699 (1,189) 32,509 - -------------------------------------------------------------------------------------- Expenses: Interest expense 9,328 1,189 -- (1,189) 9,328 Salaries and employee benefits 4,704 4,647 284 -- 9,635 Other 3,696 2,138 113 -- 5,947 - -------------------------------------------------------------------------------------- Total operating expenses 17,728 7,974 397 (1,189) 24,910 - -------------------------------------------------------------------------------------- Income before income taxes 4,359 2,938 302 -- 7,599 - -------------------------------------------------------------------------------------- Total assets 375,960 54,857 45 (38,786) 392,076 Capital expenditures $ 4,599 $ 160 $ -- $ -- $ 4,759 ====================================================================================== </TABLE> 8
<TABLE> <CAPTION> ====================================================================================================================== Nine Months Ended September 30, 2000 Retail Mortgage Banking Banking Other Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenues: Interest income $ 19,095 $ 949 $ -- $ (605) $ 19,439 Gain on sale of loans -- 3,661 -- -- 3,661 Other 1,531 914 550 -- 2,995 - ------------------------------------------------------------------------------------------------ Total operating income 20,626 5,524 550 (605) 26,095 - ------------------------------------------------------------------------------------------------ Expenses: Interest expense 8,153 605 -- (605) 8,153 Salaries and employee benefits 4,427 2,528 300 -- 7,255 Other 3,154 1,706 96 -- 4,956 - ------------------------------------------------------------------------------------------------ Total operating expenses 15,734 4,839 396 (605) 20,364 - ------------------------------------------------------------------------------------------------ Income before income taxes 4,892 685 154 -- 5,731 - ------------------------------------------------------------------------------------------------ Total assets 346,063 23,838 11 (16,379) 353,533 Capital expenditures $ 1,553 $ 77 $ -- $ -- $ 1,630 ================================================================================================ </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 29.4% to $2,090,000 for the three months ended September 30, 2001 compared to $1,615,000 for the same period of 2000. Earnings per diluted share were $.58 for the three month period, up 30.7% from $.45 per diluted share for the three months ended September 30, 2000. Net income for the nine months ended September 30, 2001 increased 24.4% to $5,453,000 compared to $4,382,000 for the same period of 2000. Earnings per diluted share increased 26.6% to $1.52 per diluted share for the nine months ended September 30, 2001 compared to $1.20 per diluted share for the same period in 2000. Profitability as measured by the Company's annualized return on average assets (ROA) was 2.17% for the three months ended September 30, 2001 compared to 1.91% for the same period of 2000. For the first nine months of 2001 ROA was 1.93% compared to 1.78% for the first nine months of 2000. Another key indicator of performance, the annualized return on average equity (ROE) for the three months ended September 30, 2001 was 19.53% compared to 17.45% for the three months ended September 30, 2000. For the first nine months of 2001 ROE was 17.54% compared to 16.16% for the 9
first nine months of 2000. The increase in income is 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 September 30, 2001 was $4.1 million, an increase of $285,000, or 7.4% from $3.8 million for the three months ended September 30, 2000. The increase in net interest income is a result of an increase in the average balance of interest earning assets to $358.8 million for the three months ended September 30, 2001 compared to $319.4 million for the same period in 2000 offset by a decrease in the net interest margin on a taxable equivalent basis to 4.93% for the quarter ended September 30, 2001 from 5.23% 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 nine months 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 nine months of 2001. Loans closed at C&F Mortgage Corporation for the three months ended September 30, 2001 were $156,123,000 compared to $80,474,000 for the comparable period in 2000. Loans sold during the third quarter of 2001 were $160,157,000 compared to $80,420,000 for the third quarter of 2000. The decrease in the company's net interest margin on a taxable equivalent basis for the three months ended September 30, 2001 compared to the same period in 2000 was a result of a decrease in the yield on interest earning assets to 8.28% for the third quarter of 2001 from 8.99% for the same period in 2000 which was partially offset by a decrease in the cost of funds to 4.11% for the third quarter of 2001 compared to 4.47% 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 decrease in the cost of funds is a result of a decrease in rates paid on certificates of deposit, interest checking, money market and savings accounts and a decrease in rates paid on borrowings from the FHLB due to the lower interest rate environment during 2001. Net interest income for the nine months ended September 30, 2001 was $11.9 million, an increase of $619,000, or 5.5%, from $11.3 million for the nine months ended September 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 4.90% for the nine months ended September 30, 2001 from 5.31% for the first nine months of 2000. The average balance of interest earning assets increased $41.7 million to $350.3 million for the first nine months of 2001 from $308.6 million for the first nine 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 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 is the result of maturities and calls due to the sharp 10
decline in interest rates during the first nine months 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 nine months of 2001. Loans closed at C&F Mortgage Corporation for the nine months ended September 30, 2001 were $428,904,000 compared to $222,654,000 for the comparable period in 2000. Loans sold during the first nine months of 2001 were $396,162,000 compared to $226,443,000 for the first nine months of 2000. The decrease in the company's net interest margin on a taxable equivalent basis for the nine months ended September 30, 2001 compared to the same period in 2000 was a result of a decrease in the yield on interest earning assets to 8.47% for the first nine months of 2001 from 8.83% for the same period in 2000 and an increase in the cost of funds to 4.34% for the first nine months of 2001 compared to 4.22% 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 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 $2,029,000, or 84.3%, to $4,436,000 for the third quarter of 2001 from $2,407,000 for the third quarter of 2000. Other operating income increased $4,620,000, or 69.4%, to $11,276,000 for the first nine months of 2001 from $6,656,000 for the first nine 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 $1,446,000, or 36.0%, to $5,460,000 for the third quarter of 2001 from $4,014,000 for the third quarter of 2000. Other operating expenses increased $3,321,000, or 27.8%, to $15,282,000 for the first nine months of 2001 from $11,961,000 for the first nine 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 September 30, 2001 amounted to $900,000, resulting in an effective tax rate of 30.1% compared to $532,000, or 24.8%, for the three months ended September 30, 2000. Income tax expense for the nine months ended September 30, 2001 amounted to $2,146,000, resulting in an effective tax rate of 28.2% compared to $1,349,000, or 23.5%, for the nine months ended September 30, 2000. The increase in the effective tax rate for the quarter and for the nine 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 $300,000 in provision for loan losses for the first nine months of 2001 and $250,000 for the first nine months of 2000. Loans charged off amounted to $149,000 for the nine months ended September 30, 2001 and $56,000 for the same period in 2000. Recoveries amounted to $18,000 and $6,000 for the nine months ended September 30, 2001 and 2000, respectively. The allowance for loan losses was $3.8 million at September 30, 2001 and $3.6 million at December 31, 2000. The allowance approximates 1.51% and 1.55% of total loans outstanding at September 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 $395,000 at September 30, 2001 compared to $520,000 at December 31, 2000. FINANCIAL CONDITION At September 30, 2001, the Company had total assets of $392.1 million compared to $347.5 million at December 31, 2000. Loan Portfolio At September 30, 2001, loans held for sale amounted to $50.3 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 throughout 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> September 30, 2001 December 31, 2000 (Dollars in Thousands) Amount Percent Amount Percent <S> <C> <C> <C> <C> Real estate - mortgage $ 82,799 33% $ 87,428 37% Real estate - construction 10,388 4 9,109 4 Commercial, financial and agricultural 132,707 53 113,571 48 Equity lines 10,634 4 11,616 5 Consumer 13,012 6 12,815 6 ------------- --- ----------- ----- Total loans 249,540 100% 234,539 100% ==== ==== Less unearned loan fees (1,011) (986) Less allowance for possible loan losses (3,778) (3,609) -------------- ------------ Total loans, net $ 244,751 $ 229,944 ============== ============ </TABLE> Investment Securities At September 30, 2001, total investment securities were $53,411,000 compared to $65,683,000 for December 31, 2000. Securities of U.S. Government agencies and corporations represent 0.97% of the total securities portfolio, obligations of state and political subdivisions were 88.03%, and preferred stocks were 11.00% at September 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 $327.9 million at September 30, 2001 compared to $290.7 at December 31, 2000. Non-interest bearing deposits totaled $47.5 million at September 30, 2001 compared to $35.7 million at December 31, 2000. Liquidity At September 30, 2001, cash, securities classified as available for sale and interest-bearing deposits were 19.0% of total earning assets. Asset liquidity is also provided by managing the investment maturities. Additional sources of liquidity available to the Company include its subsidiary bank's capacity to borrow additional funds through an established federal funds line with a regional correspondent bank and through an established line with the Federal Home Loan Bank. Capital Resources The Company's Tier I capital ratio was 12.9% at September 30, 2001 compared to 14.4% at December 31, 2000. The total risk-based capital ratio was 14.2% at September 30, 2001 compared to 15.6% at December 31, 2000. These ratios are in excess of the mandated minimum requirements. The 13
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 $43.4 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 September 30, 2001, the Company's leverage ratio was 10.6% 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. New Accounting Pronouncements In July, 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, which will potentially impact the accounting for goodwill and other intangible assets. Statement 141 eliminates the pooling method of accounting for business combinations and requires that intangible assets that meet certain criteria be reported separately from goodwill. The Statement also requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142 eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. Upon adoption of these Statements, an organization is required to re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If the recorded other intangibles assets do not meet the criteria for recognition, they should be classified as goodwill. Similarly, if there are other intangible assets that meet the criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill. An organization also must reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. Any negative goodwill must be written-off. The standards generally are required to be implemented by the Bank in its 2002 financial statements. The adoption of these standards will not have a material impact on the financial statements. 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. 14
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 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 November 6, 2001 /s/ Larry G. Dillon ---------------------------- ----------------------------------------- Larry G. Dillon, President and Chief Executive Officer Date November 6, 2001 /s/ Thomas F. Cherry ---------------------------- ----------------------------------------- Thomas F. Cherry, Chief Financial Officer