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C & F FINANCIAL CORP - Quarter Report: 2002 June (Form 10-Q)

Prepared by R.R. Donnelley Financial -- QUARTERLY REPORT
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q


(Mark One)

  x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
   
  o
TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
    For the transition period from ___________to_____________

000-23423
Commission file number

C&F Financial Corporation

(Exact name of small business issuer as specified in its charter)
 
Virginia
54-1680165


(State or other jurisdiction of incorporation of organization)
(I.R.S. Employer Identification No.)
Eighth and Main Streets
West Point VA
23181



(Address of principal executive offices)
(Zip Code)

(804) 843-2360

(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

TABLE OF CONTENTS

Part I-Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 1
Consolidated Statements of Income - Three months ended June 30, 2002 and 2001 2
Consolidated Statements of Shareholders' Equity Three months ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows - Three months ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II-Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17

 


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

ASSETS
June 30, 2002
December 31, 2001

 

(Unaudited)
Cash and due from banks $ 9,859 $ 10,127
Interest -bearing deposits in other banks 22,006 930
 
   
 
         Total cash and cash equivalents 31,865 11,057
Securities -available for sale at fair value, amortized cost of $60,779 and $53,123, respectively 62,865 53,953
Loans held for sale, net 47,657 69,263
Loans, net 247,611 246,112
Federal Home Loan Bank stock 1,690 1,595
Corporate premises and equipment, net of accumulated depreciation 14,382 14,639
Accrued interest receivable 2,023 2,134
Other assets 5,255 5,323
 
   
 
         Total assets $ 413,348 $ 404,076
 
   
 
LIABILITIES AND SHAREHOLDERS' EQUITY

 
Deposits
      Non-interest-bearing demand deposits $ 47,578   $ 38,489  
      Savings and interest-bearing demand deposits 143,593 131,509  
 
 
 
      Time deposits 155,183 153,914  
            Total deposits 346,354 323,912  
Borrowings 11,927 27,204  
Accrued interest payable 673 811  
Other liabilities 5,585 7,406  
 
 
 
            Total liabilities 364,539 359,333  
 
 
 
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, 3,539,793 and 3,526,126
      shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively) 3,540 3,526  
Additional paid-in capital   213 47  
Retained earnings   43,679 40,622  
Accumulated other comprehensive income net of tax of $709 and $282, respectively 1,377 548  


               Total shareholders' equity   48,809 44,743  
 
 
 
               Total liabilities and shareholders' equity $ 413,348     $ 404,076  
 
 
 
 

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


Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except for per share amounts)


 
Three Months Ended
Six Months Ended
 
 

 
  June 30, June 30,  
 

 
Interest Income   2002 2001 2002 2001  
 
 
   
 
 
       Interest and fees on loans $ 5,451   $ 6,333   $ 11,220   $ 12,262  
       Interest on other investments and fed funds   148     12     217     30  
Interest on investment securities    
       U.S. treasury securities       10         30  
       U.S. government agencies and corporations       149         365  
       Tax-exempt obligations of states and political subdivisions 607     600     1,185     1,219  
        Corporate bonds and other   199     118     335     232  
 
 
 
 
 
       Total interest income   6,405     7,222     12,957     14,138  
Interest expense    
       Savings and interest-bearing deposits   516     713     1,126     1,514  
       Certificates of deposit, $100 or more   304     453     667     901  
       Other time deposits   1,155     1,757     2,405     3,447  
       Short-term borrowings and other   84     275     189     485  
 
 
 
 
 
              Total interest expense   2,059     3,198     4,387     6,347  
Net interest income   4,346     4,024     8,570     7,791  
Provision for loan losses   125     100     200     200  



 
Net interest income after provision for loan losses   4,221     3,924     8,370     7,591  
Other operating income    
       Gain on sale of loans   3,045     2,424     5,639     4,119  
       Service charges on deposit accounts   471     364     884     742  
       Other service charges and fees   820     849     1,551     1,460  
       Gain on maturities and calls of available for sale securities 20         35      
       Other income   625     245     953     519  
 
 
 
 
 
              Total other operating income   4,981     3,882     9,062     6,840  
Other operating expenses    
       Salaries and employee benefits   3,921     3,192     7,656     6,136  
       Occupancy expenses   796     679     1,571     1,281  
       Goodwill amortization   47     69     94     137  
       Other expenses   1,305     1,256     2,468     2,268  
 
 
 
 
 
              Total other operating expenses   6,069     5,196     11,789     9,822  
Income before income taxes   3,133     2,610     5,643     4,609  
Income tax expense   826     744     1,526     1,246  
 
 
 
 
 
Net income $ 2,307   $ 1,866   $ 4,117   $ 3,363  
 


 
Per share data    
       Net income - basic $ .65   $ .52   $ 1.17   $ .94  
       Net income - assuming dilution   .64   $ .52     1.14   $ .94  
Cash dividends paid and declared   .15   $ .14     .30   $ .28  
Weighted average number of shares - basic   3,534,200     3,556,639     3,531,734     3,562,880  
Weighted average number of shares - assuming dilution 3,626,289     3,589,145     3,611,056     3,592,513  
                       


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)

Accumulated
Additional Other
Common Paid-In Comprehensive Retained Comprehensive
Stock Capital Income Earnings Income (Loss) Total  
 
 
 
 
 
 
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
               adjustment1 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






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.

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

Accumulated  
Additional
Other  
Common Paid-In
Comprehensive
Retained Comprehensive  
Stock Capital
Income
Earnings Income  
Total
 
 
 
 
 

Balance January 1, 2002 $ 3,526 $ 47 $
40,622
$ 548 $ 44,743  
 
Comprehensive income
 
     Net income $
4,117
4,117   4,117 
     Other comprehensive  income, net of tax
 
        Unrealized gain on  securities, net of reclassification
 
           adjustment    (See disclosure below)
829
829   829 

 
Comprehensive income   $
4,946
 

 
Stock options exercised 14 166
  180  
 
Cash dividends  
  (1,060 )     (1,060)
   
   
     
   
   
     
Balance June 30, 2002 $ 3,540 $ 213  
$ 43,679

$ 1,377   $ 48,809
   
   
     
   
   
     

Disclosure of Reclassification Amount:

Unrealized net holding gains arising during period $ 852 
Less: reclassification adjustment for gains included in net income (23)  

Net unrealized gains on securities $ 829 

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Dollars in thousands)

  Six Months Ended June 30,
   
 
  2002 2001
   
   
 
Cash flows from operating activities:
       Net income $
4,117 
$ 3,363 
       Adjustments to reconcile net income to net cash provided by (used in) operating activities:
       Depreciation
815 
648 
       Amortization of goodwill
94 
137 
       Provision for loan losses
200 
200 
       Accretion of discounts and amortization of premiums on investment securities, net
16 
(33)  
       Net realized gain on securities
(35)
 
       Proceeds from sale of loans
314,299 
236,005 
       Origination of loans held for sale
(292,693)
  (273,237)  
       Change in other assets and liabilities: Accrued interest receivable
111 
(14)  
       Other assets
(454)
  (1,467)  
       Accrued interest payable
(138)
  25 
       Other liabilities
(1,821)
  3,716 
   
   
 
              Net cash provided by (used in) operating activities 24,511  (30,657)  


Cash flows from investing activities:
       Proceeds from maturities, and calls of securities available for sale 2,562  10,908 
       Purchase of securities available for sale (10,198)   (691)  
       Net increase in customer loans (1,699)   (20,635)  
       Purchase of corporate premises and equipment (574)   (3,375)  
       Sale of corporate premises and equipment 16  — 
       Purchase of Federal Home Loan Bank Stock (95)   — 
   
   
 
                     Net cash used in investing activities (9,988)   (13,793)  


Cash flows from financing activities:
       Net increase in demand, interest-bearing demand and savings deposits 21,173  12,346 
       Net increase in time deposits 1,269  16,771
       Net increase (decrease) in other borrowings (15,277)   13,022 
       Proceeds from exercise of stock options 180  74 
       Repurchase of common stock —  (337)  
       Cash dividends (1,060)   (997)  


                     Net cash provided by financing activities 6,285  40,879 


Net increase (decrease) in cash and cash equivalents 20,808  (3,571)  
Cash and cash equivalents at beginning of period 11,057  14,838 
   
   
 
Cash and cash equivalents at end of period $ 31,865  $ 11,267 
   
   
 
Supplemental disclosure                
       Interest paid   $ 4,525  $ 6,322   
       Income taxes paid   $ 1,727  $ 939   
 

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

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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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    Three Months Ended June 30, 2002
      Retail
Banking
Mortgage
Banking
Other Eliminations Consolidated

 
 
 
 
 
Revenues:                                
Interest income   $ 5,992 $ 570 $ $ (157 ) $ 6,405
Gain on sale of loans   3,045 3,045
Other   989 657 290 1,936

 
 
 
 
 
Total operating income 6,981 4,272 290 (157 ) 11,386

 
 
 
 
 
Expenses:  
Interest expense   2,059 157 (157 ) 2,059
Salaries and employee benefits   1,762 2,050 109 3,921
Other   1,494 733 46 2,273

 
 
 
 
 
Total operating expenses   5,315 2,940 155 (157 ) 8,253

 
 
 
 
 
Income before income taxes   1,666 1,332 135 3,133

 
 
 
 
 
Total assets   399,048 52,683 33 (38,416 ) 413,348
Capital expenditures   $ 145 $ 4 $ $ $ 149

 
 
 
 
 

 

    Three Months Ended June 30, 2001
      Retail
Banking
Mortgage
Banking
Other Eliminations Consolidated

 
 
 
 
 
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

 
 
 
 
 

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    Six Months Ended June 30, 2002
      Retail
Banking
Mortgage
Banking
Other Eliminations Consolidated

 
 
 
 
 
Revenues:                                
Interest income   $ 12,027 $ 1,329 $ $ (399 ) $ 12,957
Gain on sale of loans   5,639 5,639
Other   1,577 1,310 536 3,423

 
 
 
 
 
Total operating income 13,604 8,278 536 (399 ) 22,019

 
 
 
 
 
Expenses:  
Interest expense   4,387 399 (399 ) 4,387
Salaries and employee benefits   3,486 3,959 211 7,656
Other   2,803 1,440 90 4,333

 
 
 
 
 
Total operating expenses   10,676 5,798 301 (399 ) 16,376

 
 
 
 
 
Income before income taxes   2,928 2,480 235 5,643

 
 
 
 
 
Total assets   399,048 52,683 33 (38,416 ) 413,348
Capital expenditures   $ 441 $ 133 $ $ $ 574

 
 
 
 
 

 

    Six Months Ended June 30, 2001
      Retail
Banking
Mortgage
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

 
 
 
 
 

 

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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from an increase in volume of loans sold by C&F Mortgage Corporation and to the receipt of a non-recurring insurance benefit by the Bank.

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

(Dollars in thousands) June 30,
2002
December 31,
2001
Non-accrual loans $ 1,679 $ 1,026
Real estate owned
     Total non-performing assets 1,679 1,026
Principal and/or interest past due for 90 days or more $ 672 $ 913
Non-performing loans to total loans .67 % .41 %
Allowance for loan losses to total loans 1.54 1.47
Allowance for loan losses to non-performing loans 230.7 359.06
Non-performing assets to total assets .41 % .25 %

        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:

June 30, 2002 December 31, 2001
(Dollars in Thousands)
Amount
Percent
Amount
Percent




Real estate - mortgage $ 78,592 31 % $ 81,924 32 %
Real estate - construction 9,274 4 8,830 4
Commercial, financial and agricultural 140,821 56 137,374 55
Equity lines 11,703 4 11,284 4
Consumer 12,014 5 11,342 5




Total loans 252,404 100 % 250,754 100 %
         
         
Less unearned loan fees (919 ) (958 )
Less allowance for possible loan losses (3,874 ) (3,684 )


Total loans, net $ 247,611 $ 246,112


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

  Actual Minimum Capital
Requirements
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
 
 

(Dollars in thousands) Amount   Ratio Amount   Ratio Amount Ratio
 

 


 
As of June 30, 2002:
Total Capital (to Risk-Weighted Assets)
    Company $ 50,393   15.2 % $ 26,611   8.0 % N/A N/A
    Bank 42,194   13.0 25,957   8.0   $ 32,446 10.0 %
Tier I Capital (to Risk-Weighted Assets)
    Company 46,519   14.0 13,305   4.0 N/A N/A
    Bank 38,350   11.8 12,978   4.0 19,468 6.0
Tier I Capital (to Average Assets)
    Company 46,519   11.4 16,349   4.0 N/A N/A
    Bank 38,350   9.6 16,003   4.0 20,003 5.0
As of December 31, 2001:
Total Capital (to Risk-Weighted Assets)
    Company $ 46,793   14.4 % $ 26,030   8.0 % N/A N/A
    Bank 38,999   12.3 25,376   8.0   $ 31,720 10.0 %
Tier I Capital (to Risk-Weighted Assets)
    Company 43,110   13.3 13,015   4.0 N/A N/A
    Bank 35,346   11.1 12,688   4.0 19,032 6.0
Tier I Capital (to Average Assets)
    Company 43,110   10.8 16,027   4.0 N/A N/A
    Bank 35,346   9.0 15,716   4.0 19,645 5.0

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

                    None

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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 6, 2002   /s/ Larry G. Dillon  

 
 
  Larry G. Dillon, Chairman and President  
         
         
Date      August 6, 2002   /s/ Thomas F. Cherry  

 
 
  Thomas F. Cherry, Chief Financial Officer and Chief Accounting Officer  
   
         
         

 
(Certification of CEO/CFO under Section 906 of the Sarbanes-Oxley Act of 2002
enclosed separately as correspondence with this filing.)