(Mark One)
000-23423 Commission file number
(Issuer's telephone number) (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.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
CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands)
There were no reclassification adjustments for the six months ended June 30, 2001.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands) (Unaudited)
Disclosure of Reclassification Amount:
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
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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.
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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.
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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
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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.
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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
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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.
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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.
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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:
Investment Securities
At June 30, 2002, total investment securities were $62,865,000 compared to $53,953,000 for December 31, 2001. Mortgage backed securities represent 11.2% of the total securities portfolio, obligations of state and political subdivisions were 79.2%, and preferred stocks were 9.6% at June 30, 2002. Mortgage backed securities represented 3.6% of the total securities portfolio, obligations of states and political subdivisions were 86.3%, and preferred stocks were 10.1% at December 31, 2001.
Deposits
Deposits totaled $346.4 million at June 30, 2002 compared to $323.9 at December 31, 2001. Non-interest bearing deposits totaled $47.6 million at June 30, 2002 compared to $38.5 million at December 31, 2001. The increase in deposits is a result of an increase in deposits at branches that were opened in the last quarter of 2001 and the result of investors moving funds from stocks and mutual funds to banks.
Other Borrowings
Short-term borrowings consist of securities sold under agreements to repurchase which are secured transactions with customers and generally mature the day following the date sold. Short-term borrowings also include advances from the FHLB, which are secured by a blanket floating lien on all real estate mortgage loans secured by one-to-four family residential properties. The balance outstanding under advances from the FHLB totaled $5,000,000 as of June 30, 2002.
Liquidity
At June 30, 2002, cash, securities classified as available for sale and interest-bearing deposits were 24.8% of total earning assets. Asset liquidity is also provided by managing the investment maturities.
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Additional sources of liquidity available to the Company include its subsidiary bank's capacity to borrow additional funds through an established federal funds line of $10,000,000 with a regional correspondent bank that had no outstanding balance as of June 30, 2002 and through an established line with the Federal Home Loan Bank that had $5,000,000 outstanding under a total line of $121,000,000.
Capital Resources
The Company's and the Bank's actual capital amounts and ratios are presented in the table
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 constitute "forward-looking statements" as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the company include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory
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changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements, and readers are cautioned not to place undue reliance on such 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, 2001 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
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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.