SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number: 33-9686
CENTRAL VIRGINIA BANKSHARES, INC.
(Name of small business issuer in its charter)
Virginia 54-1467806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
U.S. Route 60 at Flat Rock, Post Office Box 39, Powhatan, Virginia 23139
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (804) 794-6266
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $2.50 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $11.0 million
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant was approximately $19,069,300 computed by reference to the
last sales price of $21.375 per share as of March 14, 1997, on The Nasdaq
SmallCap Market, as reported in published financial sources.
At March 14, 1997, there were 949,140 shares of the Registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one)
Yes ___ No _X_
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Document of the Registrant Form 10-KSB Reference Location
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1997 Proxy Statement Part III
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Company and the Bank. Central Virginia Bankshares, Inc. (the
"Company") was incorporated as a Virginia corporation on March 7, 1986, solely
to acquire all of the issued and outstanding shares of Central Virginia Bank's
(the "Bank") capital stock. The Bank was incorporated on June 1, 1972 under the
laws of Virginia and, since opening for business on September 17, 1973, its main
and administrative office has been located on U.S. Route 60 at Flat Rock, in
Powhatan County, Virginia. In May 1996, the administrative offices were
relocated to the Corporate Center in the Powhatan Commercial Center located off
Route 60 near the main office. The Company does plan to open one new branch in
Cumberland County in 1997 and expects to continue to provide the banking
services described herein.
Principal Market Area. The Bank's primary service area is Powhatan
County and extends into Chesterfield and Cumberland counties which had
populations of 15,328, 209,274 and 7,825, respectively, according to the 1990
census. Both Powhatan and Chesterfield counties' populations are projected by
the Virginia Department of Planning and Budget to grow faster than the State's
average through the year 2000. The Bank's main office is located in the Village
of Flat Rock in Powhatan County which is on U.S. Route 60, eight miles west of
the Village of Midlothian in Chesterfield County. Flat Rock is the commercial
hub of Powhatan County. The Bank's branch offices are located in the Village
Marketplace Shopping Center in the Village of Midlothian and the Market Square
Shopping Center in Brandermill, both in Chesterfield County, and in the
Cartersville community in Cumberland County. The Bank's present intention is to
continue concentrating its activities in its current service area, which the
Bank believes is an attractive area in which to operate.
Banking Services. The principal business of the Bank is to attract
deposits and to loan or invest those deposits on profitable terms. The Bank
offers a wide range of services, including checking and savings accounts,
certificates of deposits, as well as credit cards, installment loans,
construction and permanent residential mortgage loans and other consumer lending
services. The Bank also makes seasonal and term loans, both alone and in
conjunction with other banks or governmental agencies. The Bank also offers
other related services, such as travelers' checks, safe deposit boxes, deposit
transfer, customer note payment, annuities, collections, notary public, escrow,
drive-in facility and other customary banking services. The Bank's lending
policies, deposit products and related services are intended to meet the needs
of individuals and businesses in its market area. The Bank provides trust
services to its customers through an affiliation with The Trust Company of
Virginia.
The Bank's plan of operation for future periods is to continue to
operate as a community bank and to focus its lending and deposit activities in
its primary service area. As the Bank's primary service area shifts from rural
to suburban in nature, the Bank will compete aggressively for customers through
its traditional personal service and extended hours of operation. The Bank will
also emphasize the origination of residential mortgages and construction loans
as the area becomes more developed. Consistent with its focus on providing
community based financial services, the Bank does not plan to diversify its loan
portfolio geographically by making significant loans outside of its primary
service area. While the Bank and its borrowers will be directly affected by the
economic conditions and the real estate market prevailing in the area, the Bank
is better able to monitor the financial condition of its borrowers by
concentrating its lending activities in its primary service area. At the present
time, the Bank does not anticipate extending operations beyond Powhatan County,
the western portion of Chesterfield County and Cumberland County. The Bank is
planning to establish an additional branch in Cumberland County and may
establish additional branches in locations if attractive sites become available.
<PAGE>
Lending Activities
Loan Portfolio. The Company is an active residential mortgage and
residential construction lender and also extends consumer loans and commercial
loans to small and medium sized businesses within its primary service area. The
Company's commercial lending activity extends across its primary service area of
Powhatan, Cumberland and western Chesterfield Counties. Consistent with its
focus on providing community-based financial services, the Company does not
attempt to diversify its loan portfolio geographically by making significant
amounts of loans to borrowers outside of its primary service area. The principal
economic risk associated with each of the categories of loans in the Company's
portfolio is the creditworthiness of its borrowers. Within each category, such
risk is increased or decreased depending on prevailing economic conditions. In
an effort to manage this risk, the Bank's policy gives loan amount approval
limits to individual loan officers based on their level of experience. All
unsecured loans in excess of $100,000 and all secured loans in excess of
$500,000 must be approved by the Board of Directors. The risk associated with
the real estate mortgage loans and installment loans to individuals varies based
upon employment levels, consumer confidence, fluctuations in value of
residential real estate and other conditions that affect the ability of
consumers to repay indebtedness. The risk associated with commercial, financial
and agricultural loans varies based upon the strength and activity of the local
economies of the Company's market areas. The risk associated with real estate
construction loans varies based upon the supply of and demand for the type of
real estate under construction. Most of the Bank's real estate construction
loans are for pre-sold or contract homes.
Residential Mortgage Loans. Residential mortgage loans are made in
amounts up to 80.0% of the appraised value of the security property. Residential
mortgage loans are underwritten using specific qualification guidelines which
are intended to assure that such loans are eligible for sale into the secondary
mortgage market. The Bank requires that the borrower obtain title, fire and
casualty insurance coverage in an amount equal to the loan amount and in a form
acceptable to the Bank. The Bank originates residential mortgage loans that are
sold in the secondary market. These loans are generally either one-year
adjustable rate mortgages ("ARMs") or fifteen to thirty year fixed rate
mortgages. All permanent residential mortgages made for the Bank's own portfolio
are made as three-year ARMs.
The Bank's ARMs are subject to limitations of 2.0% per three year
period on interest rate increases and decreases. In addition, ARMs currently
originated by the Bank provide for a lifetime cap of 6.0% or less from the
borrower's initial interest rate. All changes in the interest rate must be based
on the movement of an index agreed to by the Bank and the borrower.
There are risks resulting from increased costs to a borrower as a
result of the periodic repricing mechanisms of these loans. Despite the benefits
of ARMs to an institution's asset/liability management, they pose additional
risks, primarily because as interest rates rise, the underlying payments by the
borrowers rise, increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates.
The Bank charges origination fees on its residential mortgage loans.
These fees vary among loan products and with market conditions. Generally such
fees amount to 1.0% to 3.0% of the loan principal amount. In addition, the Bank
charges fees to its borrowers to cover the cost of appraisals, credit reports
and certain expenses related to the documentation and closing of loans.
Commercial Mortgage Loans. The Bank does not actively seek commercial
permanent mortgage loans on income-producing properties such as apartments,
shopping centers, hotels and office buildings. Such requests from Bank customers
and concerning properties in the Bank's established trade area would be
considered.
Real Estate Construction Lending. In general, the Bank does not
actively originate construction loans on income-producing properties such as
apartments, shopping centers, hotels and office buildings.
In order to promote its permanent mortgage lending business and because
of the attractive adjustable interest rates available, the Bank makes
construction and small development loans for residential purposes. The large
majority of the Bank's construction loans are to experienced builders. Such
loans normally carry an interest rate of 1.0% to 3.0% over the prime bank
lending rate, adjusted daily. Construction lending entails significant risk as
compared with residential mortgage lending. Construction loans typically involve
larger loan balances concentrated with single borrowers or groups of related
borrowers. Construction loans involve additional risks attributable to the fact
that loan funds are advanced upon the security of the home under construction,
which is of uncertain value prior to the completion of construction. Thus, it is
more difficult to evaluate accurately the total
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loan funds required to complete a project and related loan-to-value ratios. To
minimize risks associated with construction lending, the Bank limits loan
amounts to 75.0% of appraised value on unsold homes and 80.0% of appraised value
on pre-sold homes, in addition to its usual credit analysis of its borrowers.
The Bank always obtains a first lien on the property as security for its
construction loans.
Consumer Lending. The Bank currently offers most types of consumer
demand, time and installment loans for a variety of purposes, including
automobile loans and home equity lines of credit.
Commercial Business Lending. As a full-service community bank, the Bank
makes commercial loans to qualified small businesses in the Bank's market area.
At December 31, 1996, commercial business loans were $15.3 million or 19% of the
Bank's total loan portfolio, a majority of which were secured by real estate.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans but have commensurately higher yields. To manage
these risks, the Bank secures appropriate collateral and carefully monitors the
financial condition of its business borrowers and the concentration of such
loans in the Bank's portfolio. Residential mortgage loans generally are made on
the basis of the borrower's ability to make repayment from his employment and
other income and are secured by real property whose value tends to be easily
ascertainable. In contrast, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from the cash flow of its
business and are either unsecured or secured by business assets, such as
accounts receivable, equipment and inventory. As a result, the availability of
funds for the repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the collateral for
secured commercial business loans may depreciate over time, and cannot be
appraised with as much precision as residential real estate. At December 31,
1996, the majority of the Bank's nonperforming loans were commercial loans.
Competition
The Bank encounters strong competition for its banking services within
its primary service area. In Powhatan and Cumberland Counties, the bank competes
with Jefferson National Bank, which is the only bank that has branches within
these two markets other than the Bank. The Bank is the only community bank in
the two counties. In Chesterfield County there are several community banks that
compete with the Bank. The Bank also competes with many large banks in nearby
Richmond to where many residents in the Bank's primary service area commute.
Financial companies, mortgage companies, credit unions and savings and loan
associations also compete with the Bank for loans and deposits. In addition, in
some instances, the Bank must compete for deposits with money market mutual
funds that are marketed nationally. Most of the Bank's competitors have
substantially greater resources than the Bank.
Employees
The Bank had 58 officers and full-time employees at December 31, 1996.
Employee relations have been good. The Bank sponsors a Profit Sharing/Retirement
Plan for its employees.
Regulation and Supervision
Bank holding companies and banks are extensively regulated under both
federal and state law. The following is a summary of certain federal laws and
regulations that govern the Company and the Bank. However, to the extent that
the following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable law or regulation may have a
material effect on the business and prospects of the Company and the Bank.
Bank Holding Companies. The Company is registered as a bank holding
company under the Bank Holding Company Act of 1956 (the "BHCA") and as such is
subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). As a bank holding company, the Company is
required to file with the Federal Reserve Board an annual report and such
additional information as the Federal Reserve Board may require pursuant to the
BHCA. The Federal Reserve Board may also make examinations of the Company.
The BHCA requires the prior approval of the Federal Reserve Board in
any case where a bank holding company proposes to acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank (unless it
owns a majority of such bank's voting shares) or otherwise to control a bank or
to merge or consolidate with any other bank holding company. The BHCA would
prohibit the Federal Reserve Board from approving an application from the
Company to acquire shares of a bank located outside of Virginia, unless such an
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acquisition is specifically authorized by statute of the state in which the bank
whose shares are to be acquired is located. However, under recently enacted
federal legislation, the restriction on interstate acquisitions will be
abolished effective September 1995, and thereafter, bank holding companies from
any state will be able to acquire banks and bank holding companies located in
any other state, subject to certain conditions, including nationwide and state
imposed concentration limits. Banks also will be able to branch across state
lines by acquisition, merger or de novo, effective June 1, 1997 (unless state
law would permit such interstate branching at an earlier date), providing
certain conditions are met, including the applicable state law must expressly
permit such interstate branching.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. The Federal Reserve Board has by regulation determined that
certain activities are closely related to banking within the meaning of the
BHCA.
Banks. The Bank is supervised and regularly examined by the Federal
Reserve Board and the Bureau of Financial Institutions of Virginia's State
Corporation Commission. The various laws and regulations administered by the
regulatory agencies affect corporate practices, such as payment of dividends,
incurring debt and acquisition of financial institutions and other companies,
and affect business practices, such as payment of interest on deposits, the
charging of interest on loans, types of business conducted and location of
offices.
FDIC Insurance Assessments. The Bank is subject to FDIC deposit
insurance assessments. It is possible that insurance assessments could increase
in future years, and it is possible that there may be special additional
assessments. Additional assessments could have an adverse impact on the
Company's results of operations.
Governmental Policies. The operations of the Company and the Bank are
affected not only by general economic conditions, but also by the policies of
various regulatory authorities. In particular, the Federal Reserve Board
regulates money and credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
Board monetary policies have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to do so in the
future.
Limits on Dividends and Other Payments. The Company is a legal entity
separate and distinct from the Bank. Most of the Company's revenues result from
dividends paid to the Company by the Bank. The right of the Company, and
consequently the right of creditors and shareholders of the Company, to
participate in any distribution of the assets or earnings of the Bank through
the payment of such dividends or otherwise is necessarily subject to the prior
claims of creditors of the Bank, except to the extent that claims of the Company
in its capacity as a creditor may be recognized.
The amount of dividends payable by the Bank to the Company depends upon
the Bank's earnings and capital position, and is limited by federal and state
law, regulations and policies.
As a state member bank subject to the regulations of the Federal
Reserve Board, the Bank must obtain the approval of the Federal Reserve Board
for any dividend if the total of all dividends declared in any calendar year
would exceed the total of its net profits, as defined by the Federal Reserve
Board, for that year, combined with its retained net profits for the preceding
two years. In addition, the Bank may not pay a dividend in an amount greater
than its undivided profits then on hand after deducting its losses and bad
debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, the Bank is not permitted
to add the balance in its allowance for loan losses account to its undivided
profits then on hand; however, it may net the sum of its bad debts as so defined
against the balance in its allowance for loan losses account and deduct from
undivided profits only bad debts as so defined in excess of that account. At
December 31, 1996, the Bank had $3.4 million of retained earnings legally
available for the payment of dividends.
In addition, the Federal Reserve Board is authorized to determine under
certain circumstances relating to the financial condition of a national bank, a
state member bank or a bank holding company that the payment of
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dividends would be an unsafe or unsound practice and to prohibit payment
thereof. The payment of dividends that deplete a bank's capital base could be
deemed to constitute such an unsafe or unsound practice. The Federal Reserve
Board has indicated that banking organizations should generally pay dividends
only out of current operating earnings.
Borrowings by the Company. There are various legal restrictions on the
extent to which the Company can borrow or otherwise obtain credit from the Bank.
In general, these restrictions require that any such extensions of credit must
be secured by designated amounts of specified collateral and are limited, as to
the Company, to 10% of the Bank's capital stock and surplus, and as to the
Company and any nonbanking subsidiaries in the aggregate, to 20% of the Bank's
capital stock and surplus. Federal law also requires that transactions between
the Bank and the Company or any nonbanking subsidiaries, including extensions of
credit, sales of securities or assets and the provision of services, be
conducted on terms at least as favorable to the Bank as those that apply or
would apply to comparable transactions with unaffiliated parties.
Capital Requirements. The Federal Reserve Board has published
risk-based capital guidelines which are applicable to bank holding companies.
The Federal Reserve Board guidelines redefine the components of capital,
categorize assets into different risk classes and include certain off-balance
sheet items in the calculation of risk-weighted assets. The minimum ratio of
qualified total capital to risk-weighted assets (including certain off balance
sheet items, such as standby letters of credit) is 8.00%. At least half of the
total capital must be comprised of common equity, retained earnings and a
limited amount of permanent preferred stock, less goodwill ("Tier 1 capital").
The remainder ("Tier 2 capital") may consist of a limited amount of subordinated
debt, other preferred stock, certain other instruments and a limited amount of
loan and lease losses reserves. The Company's Tier 1 and Total Capital ratios as
of December 31, 1996 were 16.4% and 17.7%, respectively.
In addition, the Federal Reserve Board has established minimum Leverage
ratio (Tier 1 capital to quarterly average assets less goodwill) guidelines for
bank holding companies. These guidelines provide for a minimum ratio of 3.00%
for bank holding companies that meet certain specified criteria, including that
they have the highest regulatory rating. All other bank holding companies are
required to maintain a Leverage ratio of 3.00% plus an additional cushion of at
least 100 to 200 basis points. The Company's Leverage ratio as of December 31,
1996 was 11.2%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
The Bank is subject to capital requirements adopted by the Federal
Reserve Board that are the same as those that apply to the Company. At December
31, 1996 the Bank's total capital, Tier 1 capital and leverage ratios were
16.4%, 17.7% and 11.2%, respectively.
Each federal regulatory agency is required to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risk of non-traditional
activities, as well as to reflect the actual performance and expected risk of
loss on multi-family mortgages. The Federal Reserve Board and the FDIC have
jointly solicited comments on a proposed framework for implementing the interest
rate risk component of the risk-based capital guidelines. Under the proposal, an
institution's assets, liabilities, and off-balance sheet positions would be
weighted by risk factors that approximate the instruments' price sensitivity to
a one hundred basis point change in interest rates. Institutions with interest
rate risk exposure in excess of the threshold level would be required to hold
additional capital proportional to that risk. In 1994, the Federal Reserve
Board, FDIC, and related agencies solicited comments on a proposed revision to
the risk-based capital guidelines to take account of concentration of credit
risk and the risk of non-traditional activities. The revision proposed to amend
each agency's risk-based capital standards by explicitly identifying
concentration of credit risk and the risk arising from non-traditional
activities, as well as an institution's ability to manage those risks, as
important factors to be taken into account by the agency in assessing an
institution's overall capital adequacy. The proposal was adopted as a final rule
by the Federal Reserve Board and the FDIC and subsequently became effective on
January 17, 1995. The Company and the Bank do not expect the final rule to have
a material impact on their respective capital requirements.
Under Federal Reserve Board policy, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that, in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks. This support may be required during periods of financial stress or
adversity, in circumstances where the Company might not do so absent such
policy. A bank holding company is expected to maintain the financial flexibility
and capital-raising capacity to obtain additional resources for assisting its
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subsidiary banks. The failure of a bank holding company to serve as a source of
strength to its subsidiary banks would generally be considered by the Federal
Reserve Board to be an unsafe and unsound banking practice, a violation of
Federal Reserve Board regulations, or both.
ITEM 2. DESCRIPTION OF PROPERTIES
The main office of the Company and the Bank was built in 1978 and is a
two-story building of brick construction, with approximately 8,500 square feet
of floor space. It is located on Route 60 in the Village of Flat Rock in
Powhatan County. On March 6, 1992, the Bank purchased the deposits of the
Powhatan office of the former Coreast Federal Savings Bank from the Resolution
Trust Corporation assuming approximately $9.0 million in deposit liabilities.
The Bank also negotiated the purchase of that branch site and its furniture and
equipment at a price at or slightly below market value. The branch facility is
located in the Village of Flat Rock across Route 60 from the Bank's main office.
This facility allows the Bank to service westbound traffic on Route 60 with its
drive-in teller facility, and also houses the Bank's secondary mortgage market
loan origination operation. In April 1993, the Bank acquired the branch facility
of the former Investors Federal Savings Bank located in the Market Square
Shopping Center in Chesterfield County, through the Resolution Trust
Corporation. This one-story building contains approximately 1,600 square feet
and opened for business on November 1, 1993. The Bank's two other branches are
located in the Village of Midlothian in Chesterfield County and in Cartersville,
Cumberland County. The Midlothian branch is a one and one-half story building
with approximately 3,000 square feet. The Cartersville location, which was
originally opened in 1985, was replaced in mid-1994 with a one-story brick
building with approximately 1,600 square feet.
In May 1996 the Company moved its administrative staff to a 15,000
square foot two-story Corporate Center in the Powhatan Commercial Center located
off U.S. Route 60 near the main office. The Corporate Center houses the computer
operations, loan administration and bookkeeping departments all of which were
formerly located in the main office.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending at this time involving
either the Company or the Bank as a party or affecting any property of the
Company of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock
The common Stock commenced listing on the NASDAQ Small Cap system under
the symbol "CVBK" on April 14, 1993. Effective May 10, 1995, the common stock
was listed on the Nasdaq National Market also under the symbol "CVBK". As of
March 14, 1997, the Company had approximately 1,736 shareholders of record.
The following table show dividends paid and the high and low trade
prices by quarter for the past two years according to the National Association
of Securities Dealers, Inc.:
<TABLE>
1996 1995
------------------------------------------- -------------------------------------------
Dividends Dividends
High Trade Low Trade Paid High Trade Low Trade Paid
<S> <C> <C> <C> <C> <C> <C>
First Quarter $21.25 $18.00 $.165 $16.50 $13.50 $.15
Second Quarter 20.75 18.25 .165 17.50 15.00 .15
Third Quarter 20.75 18.75 .18 18.50 16.00 .165
Fourth Quarter 20.75 19.00 .18 19.50 17.25 .165
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
The Company's net income totaled $1,710,797 in 1996, a decrease of 9%
from 1995. These results reflect a decrease in the net interest yield for the
year caused primarily by an increase in the average balance of lower-yielding
federal funds sold and an increase in other operating expenses as a result of
the opening of our new $1.05 million Corporate Center. Net income per common
share was $1.81 in 1996 compared to $2.00 in 1995. The computation of earnings
per share is based on weighted-average shares outstanding of 946,077 in 1996 and
940,071 in 1995.
In 1995, the Company earned $1,880,160, an increase of 14% over 1994.
This increase was primarily attributable to an improvement in net interest
income, which increased 9% from 1994, as well as a modest increase of 3% in
non-interest expenses. Earnings per share increased $.24 from 1994 to $2.00 per
share. Weighted-average shares outstanding in 1994 were 937,890.
The Company's return on average equity was 12.5% in 1996, compared to
15.1% and 14.5% in 1995 and 1994, respectively. Return on average assets
amounted to 1.37%, 1.65% and 1.58% for these same years.
Net Interest Income. The Company's net interest income was $5,498,547
in 1996, compared to $5,443,510 and $5,013,036, for 1995 and 1994, respectively.
The following table sets forth the Company's average interest earning
assets (on a tax equivalent basis) and average interest bearing liabilities, the
average yields earned on such assets and rates paid on such liabilities, and the
net interest margin, all for the periods indicates.
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<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $15,862 $848 5.35% $6,171 $354 5.74% $4,775 $185 3.87%
------- ---- ------ ---- ------ ----
Securities: (5)
Obligations of other
U.S. governmental
agencies and corporations 6,812 473 6.94 9,280 640 6.90 10,116 690 6.82
Obligations of states
and political
subdivisions(3) 9,747 553 8.60 8,777 514 8.87 8,055 487 9.16
Other securities 227 11 4.85 227 11 4.85 227 11 4.85
------ ----- ------ ----- ------ -----
Total securities (3) 16,786 1,037 7.88 18,284 1,165 7.82 18,398 1,188 7.82
------ ----- ------ ----- ------ -----
Loans (1)(2)(4) 83,323 8,207 9.85 82,855 8,278 9.99 74,268 6,943 9.35
------ ----- ------ ----- ------ -----
Total interest-earning
assets $115,971 $10,092 8.70% $107,310 $9,797 9.13% $97,441 $8,316 8.53%
======== ======= ======== ====== ======= ======
Interest bearing liabilities:
Deposits:
Interest bearing demand $20,630 $611 2.96% $20,600 $649 3.15% $23,329 $701 3.00%
Savings 12,189 394 3.23 11,001 355 3.23 12,012 387 3.22
Other time 61,985 3,544 5.72 57,085 3,306 5.79 45,063 2,186 4.85
------ ----- ------ ----- ------ -----
Total deposits 94,804 4,549 4.80 88,686 4,310 4.86 80,404 3,274 4.07
Securities sold under
repurchase agreements 815 39 4.79 571 30 5.25 699 23 3.29
Short-term borrowings - - - 135 8 5.93 - - -
Long-term debt 56 5 8.93 65 5 7.69 74 6 8.11
------ ----- ------ ----- ------ -----
Total interest-bearing
liabilities $95,675 $4,593 4.80% $89,457 $4,353 4.87% $81,177 $3,303 4.07%
======= ====== ======= ====== ======= ======
Net interest margin $5,499 3.90% $5,444 4.26% $5,013 4.46%
====== ====== ======
Net interest yield 4.99% 5.32% 5.40%
</TABLE>
- --------------------
(1) Installment loans are stated net of unearned income.
(2) Average loan balances include non-accrual loans.
(3) Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34%.
(4) Interest income on loans includes loan fees of $425,320 in 1996,
$406,251 in 1995, and $574,064 in 1994.
(5) Includes investment securities and securities available for sale.
The increase in net interest income in 1996 and 1995 was attributable
primarily to an increase in the volume of the Company's interest earning assets
as shown in the previous table. Average interest earning assets rose 8% to
$116.0 million in 1996 and 10% to $107.3 million in 1995. The increase in
average loans was primarily the result of an increase in consumer installment
loans and mortgage loans.
The net interest margin is a measure of net interest income
performance. It represents the difference between interest income, including net
loan fees earned, and interest expense, reflected as a percentage of average
interest earning assets. The Company's net interest margin was 3.90% in 1996,
compared to 4.26% during 1995 and 4.46% in 1994. The net interest margin
decreased in 1996 due to the 157% increase in the average balance of
lower-yielding federal funds sold. In addition to the increase in average
balance of federal funds sold to 13.7% of total interest-earning assets in 1996
from 5.8% in 1995, the yield on these funds decreased 7% to 5.35% in 1996. In
1995, the net interest margin decreased due to the 26% increase in the average
balance of higher-yielding time deposits.
Net interest income is affected by changes in both average interest
rates and average volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth the amounts of the total change in
interest income that can be attributed to rate (change in rate multiplied by old
volume) and volume (change in volume multiplied by old rate) for the periods
indicated. The amount of change not solely due to rate or volume changes was
allocated between the change due to rate and the change due to volume based on
the relative size of the rate and volume changes.
-8-
<PAGE>
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
--------------------------------- -----------------------------
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold $556 $(62) $494 $54 $115 $169
Securities: (1)
Obligations of other U.S. government agencies
and corporations (170) 3 (167) (57) 7 (50)
Obligations of states and political subdivisions 57 (18) 39 44 (17) 27
Other - - - - - -
----- ---- ----- ---- ---- ----
Total securities (113) (15) (128) (13) (10) (23)
----- ---- ----- ---- ---- ----
Loans 47 (118) (71) 805 530 1,335
-- ----- ---- --- --- -----
Total interest income $490 $(195) $295 $846 $635 $1,481
==== ====== ==== ==== ==== ======
Interest Bearing Liabilities:
Deposits:
Interest bearing demand $1 $(39) $(38) $(82) $31 $(51)
Savings 39 0 39 (33) 1 (32)
Other time 283 (45) 238 583 537 1,120
--- ---- --- --- --- -----
Total deposits 323 (84) 239 468 569 1,037
Securities sold under repurchase agreements 13 (4) 9 (4) 11 7
Short-term borrowing (8) 0 (8) 8 0 8
Long-term debt (1) 1 0 (1) 0 (1)
----- ---- ----- ---- ---- ----
Total interest expense $327 $(87) $240 $471 $579 $1,051
==== ===== ==== ==== ==== ======
Increase(decrease) in net interest income $163 $(108) $55 $375 $55 $430
==== ====== === ==== === ====
</TABLE>
- --------------------
(1) Includes securities available for sale and securities held to maturity.
Non-Interest Income. In 1996 the Company's total non-interest income
increased 12.8% without the effect of a $25,000 gain on sale of a security
available for sale and 16.2% given the effect of the security gain. This
increase is primarily the result of an increase in service charges collected on
checking accounts for overdrafts. In 1995, non-interest income decreased
slightly by 1.2% despite a 6% increase in service charges and other banking
fees.
Non-Interest Expenses. In 1996 the Company's total non-interest
expenses increased $456,048, or 13.6%, compared to 1995. Expenses related to
employee salaries and benefits increased 9.9% reflecting normal salary increases
as well as a small increase in the number of personnel. Occupancy and equipment
expenses increased 31.2% in 1996 primarily due the opening of the $1.05 million
Corporate Center in May 1996.
In 1995, the Company's total non-interest expenses increased $97,689 or
3%, compared to 1994. Expenses related to salaries and employee benefits
increased 8.8%. Federal insurance premiums decreased $80,743 or 41% primarily
due to a premium refund of approximately $54,000 received in September 1995.
Income Taxes. The Company reported income taxes of $684,917 for 1996,
compared to $796,166 in 1995, and $711,154 in 1994. These amounts yielded
effective tax rates of 28.6%, 29.7%, and 30.1%, respectively.
Financial Condition
Loan Portfolio. The Company is an active residential mortgage and
residential construction lender and generally extends commercial loans to small
and medium sized businesses within its primary service area. The Company's
commercial lending activity extends across its primary service area of Powhatan,
Cumberland and western Chesterfield Counties. Consistent with its focus on
providing community-based financial services, the Company does not attempt to
diversify its loan portfolio geographically by making significant amounts of
loans to borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of
loans in the Company's portfolio is the creditworthiness of its borrowers.
Within each category, such risk is increased or decreased depending on
prevailing economic conditions. The risk associated with the real estate
mortgage loans and installment loans to individuals varies based upon employment
levels, consumer confidence, fluctuations in value of residential real
-9-
<PAGE>
estate and other conditions that affect the ability of consumers to repay
indebtedness. The risk associated with commercial, financial and agricultural
loans varies based upon the strength and activity of the local economies of the
Company's market areas. The risk associated with real estate construction loans
varies based upon the supply of and demand for the type of real estate under
construction. Most of the Bank's real estate construction loans are for pre-sold
or contract homes.
Loans increased $1.3 million, or 1.5% from year-end 1995 to year-end
1996, compared to an increase of $3.5 million or 4.4% from year-end 1994 to
year-end 1995. The loan to deposit ratio was 76.8% at December 31, 1996,
compared to 77.1% at December 31, 1995 and 84.6% at December 31, 1994.
The following table summarizes the Company's loan portfolio, net of
unearned income:
<TABLE>
<CAPTION>
At December 31
-----------------------------------------------
1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C>
Real Estate:
Mortgage $37,884 $35,979 $33,454
Home equity 6,315 6,477 5,959
Construction 10,078 9,768 7,381
------ ----- -----
Total Real Estate $54,237 $52,224 $46,794
Commercial 15,314 15,914 17,802
Installment 16,400 16,592 16,677
------ ------ ------
$85,951 $84,730 $81,273
Less unearned discount (401) (528) (640)
----- ----- -----
85,550 84,202 80,633
Allowance for loan losses (1,212) (1,127) (1,066)
------- ------- -------
Loans, net $84,338 $83,075 $79,567
======= ======= =======
</TABLE>
As shown in the above table, the total amount of outstanding real
estate loans increased by $2.0 million in 1996 and increased by $5.4 million in
1995. During 1996, the amount of outstanding installment loans to individuals
decreased by $192,000, compared to a decrease of $85,000 in 1995 compared to
1994. Commercial, financial and agricultural loans decreased by $600,000 in 1996
and by $1.8 million in 1995.
At December 31, 1996, no concentrations of loans exceeding 10.0% of
total loans existed which were not disclosed as a separate category of loans.
The following table shows the maturity of loans outstanding as of
December 31, 1996. Also provided are the amounts due classified according to the
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------
After One
Within One but Within After Five
Year Five Years Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate mortgage $10,610 $18,757 $8,477 $37,844
Installment 5,269 10,053 1,078 16,400
Other (1) 31,707 - - 31,707
------ ------- ------ -------
$47,586 $28,810 $9,555 $85,951
======= ======= ====== =======
Loans maturing with:
Fixed interest rates $19,543
Variable interest rates 66,408
------
$85,951
=======
</TABLE>
- ---------------------
(1) Includes home equity, real estate construction and commercial loans.
Asset Quality. Non-performing loans include non-accrual loans, loans 90
days or more past due and restructured loans. Non-accrual loans are loans on
which interest accruals have been discontinued. Loans which reach non-accrual
status may not be restored to accrual status until all delinquent principal and
interest has been paid, or the loan becomes both well secured and in the process
of collection. Restructured loans are loans with
-10-
<PAGE>
respect to which a borrower has been granted a concession on the interest rate
or the original repayment terms because of financial difficulties.
Non-performing loans totaled $1,643,000 at December 31, 1996, compared
to $1,126,000 at December 31, 1995, and $569,000 at December 31, 1994. The
increase in non-performing loans reflects a number of loans 90 days past due at
December 31, 1996.
Management forecloses on delinquent real estate loans when all other
repayment possibilities have been exhausted. Real estate acquired through
foreclosure (OREO) was $372,546 at December 31, 1996, compared to $284,466 and
$370,933 at December 31 1995 and 1994, respectively. All foreclosed property
held at December 31, 1996 was in the Company's primary service area and
consisted of two residential properties. The Bank has not incurred significant
current period expenses related to carrying OREO on its books. The Bank's
practice is to value real estate acquired through foreclosure at the lower of
(i) an independent current appraisal or market analysis less anticipated costs
of disposal, or (ii) the existing loan balance. The Bank is actively marketing
all foreclosed real estate and does not anticipate material write-downs in value
before disposition.
Management does not believe that the level of non-performing loans in
1996 reflects any systematic problem in the Company's loan portfolio. At
December 31, 1996, non-accrual loans totaled $708,000 compared to $648,000 at
December 31, 1995 and $569,000 at December 31, 1994. Management does not
anticipate a material increase in non-performing assets, although it may move to
foreclose on borrowers whose loans were on a non-accrual status at December 31,
1996.
The following table summarizes non-performing loans:
<TABLE>
<CAPTION>
At December 31
---------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis $708 $648 $569
Loans contractually past due 90 days or more as to interest or principal
payments (not included in non-accrual loans above) 935 478 -
Loans restructured and in compliance with modified terms (not included in
non-accrual loans or loans contractually past due 90 days or more above) - - -
------ ------ ----
Total $1,643 $1,126 $569
====== ====== ====
</TABLE>
Since 1992, loans 90 days or more past due were placed on non-accrual
status unless well secured and in the process of collection. In 1996, $3,502 of
interest income was reversed when loans were placed on non-accrual status or
upon foreclosure. In 1995 and 1994, $269 and $4,200 of interest income was
reversed under the same circumstances, respectively. Since the Company operates
in a rural to suburban area, it has generally been well acquainted with its
principal borrowers and has not had such a large number of problem credits that
management has not been able to stay well informed about, and in contact with,
troubled borrowers. Additionally, because the Company generally requires
collateral for loans, the Company has been able to recover a sufficient amount
of loans previously charged off so that the provision for loan losses each year
exceeds net charge-offs. However, with the continued growth of the Company, the
decision was made in 1992 that a loan not well secured and in the process of
collection should be placed on a non-accrual status when it is 90 days or more
delinquent, rather than after 180 days, as had been the practice before 1992.
The following table sets forth the amounts of contracted interest
income and interest income reflected in income on loans accounted for on a
non-accrual basis and loans restructured and in compliance with modified terms:
<TABLE>
<CAPTION>
For the Year Ended December 31
--------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Gross interest income that would have been recorded if the loans had been current
and in accordance with their original terms $56 $63 $39
Interest income included in income on the loans - - -
</TABLE>
-11-
<PAGE>
Management is not aware of any other loans at December 31, 1996 which
involve serious doubts as to the ability of such borrowers to comply with the
existing payment terms.
Management has analyzed the potential risk of loss on the Company's
loan portfolio, given the loan balances and the value of the underlying
collateral, and has recognized losses where appropriate. Non-performing loans
are closely monitored on an ongoing basis as part of the Company's loan review
process. Management reviews the loan loss allowance at the end of each month.
Based primarily on the Company's loan classification system, which classifies
problem credits as substandard, doubtful, or loss, additional provisions for
losses are made monthly. Furthermore, past experiences led management to
conclude that as a general matter it is prudent to operate with a higher level
of reserves than the Company has maintained in the past. The ratio of the
allowance for loan losses to total loans was 1.42% at December 31, 1996,
compared to 1.34% at December 31, 1995 and 1.32% at December 31, 1994. At
December 31, 1996 the ratio of the allowance for loan losses to non-performing
loans was 73.8%, compared to 100.08% and 187.3% at December 31, 1995 and 1994,
respectively. The decrease in the ratio for 1996 is due to the amount of 90 day
past due loans previously discussed. Management evaluates non-performing loans
relative to their collateral value and makes appropriate reductions in the
carrying value of those loans based on that review. Management believes, based
on its review, that the Company has adequate reserves to cover any future
write-down that may be required on these loans.
The following table summarizes changes in the allowance for loan
losses:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $1,127 $1,066 $926
------ ------ ----
Charge-offs:
Commercial, financial and agricultural 8 - -
Real estate mortgage 30 53 -
Installment loans to individuals 64 100 45
---- ---- ----
Total $102 $153 $45
---- ---- ---
Recoveries on previous loan losses:
Commercial, financial and agricultural $ - $21 $ 3
Installment loans to individuals 22 28 23
-- -- --
Total $22 $49 $26
--- --- ---
Net charge-offs $(80) $(104) $(19)
Provision charged to operations 165 165 159
---- ---- ---
Balance at end of period $1,212 $1,127 $1,066
====== ====== ======
Ratio of net loan losses to average net loans outstanding:
Net charge-offs $80 $104 $19
Average net loans 81,701 81,725 73,276
------ ------ ------
0.09% 0.13% 0.03%
Ratio of allowance for loan losses to total loans, net of unearned income:
Allowance for loan losses $1,212 $1,127 $1,066
Total loans at period end 85,550 84,202 80,632
------ ------ ------
1.42% 1.34% 1.32%
Ratio of allowance for loan losses to non-performing loans:
Allowance for loan losses $1,212 $1,127 $1,066
Non-performing loans 1,643 1,126 569
----- ------ ------
73.77% 100.08% 187.35%
</TABLE>
For each period presented, the provision for loan losses charged to
operations, is based on management's judgment after taking into consideration
all factors connected with the collectibility of the existing portfolio.
Management evaluates the loan portfolio in light of economic conditions, changes
in the nature and value of the portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operations include internally generated loan review reports, previous
loan loss experience with the borrower, the status of past due interest and
principal payments on the loan, the quality of financial information supplied by
the borrower and the general financial condition of the borrower.
The provision for loan losses totaled $165,000 for the years ended
December 31, 1996 and 1995, and $158,786 for 1994. In the opinion of management,
the provision charged to operations has been sufficient to absorb the current
year's net loan losses while continuing to increase the allowance for future
loan losses.
-12-
<PAGE>
The following table shows the balance and percentage of the Company's
allowance for loan losses allocated to each category of loans:
<TABLE>
<CAPTION>
At December 31
-------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
in in in
Percent category Percent category Percent category
of to of to of to
Allow- Total Allow- Total Allow- Total
Amount ance Loans Amount ance Loans Amount ance Loans
------ ---- ----- ------ ---- ----- ------ ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $212 18% 19% $219 20% 19% $267 25% 22%
Real estate construction 125 10 12 99 9 12 61 6 9
Real estate mortgage (1) 660 54 47 623 55 50 590 55 48
Installment 215 18 22 186 16 19 148 14 21
--- --- ---
$1,212 100% 100% $1,127 100% 100% $1,066 100% 100%
====== ====== ======
</TABLE>
- --------------
(1) Includes home-equity loans.
The Company has allocated the allowance according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within each of the above categories of loans. The allocation of the
allowance as shown in the table above should not be interpreted as an indication
that loan losses in future years will occur in the same proportions or that the
allocation indicates future loss trends. Furthermore, the portion allocated to
each loan category is not the total amount available for future losses that
might occur within such categories since the total allowance is a general
allowance applicable to the entire portfolio.
Securities
The Company's securities portfolio serves several purposes. Portions of
the portfolio secure certain public and trust deposits. The remaining portions
are held as investments or used to assist the Company in liquidity and asset
liability management. During 1996, total securities increased to $17.9 million,
or 14.2% of total assets at December 31, 1996. During 1995, total securities
decreased to $14.9 million, or 12.1% of assets at December 31, 1995.
The securities portfolio consists of two components, securities
available for sale and securities held to maturity. Securities are classified as
held to maturity when management has the intent and the Company has the ability
at the time of purchase to hold the securities to maturity. Securities are
carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as available for sale and accounted for at the lower of cost or market value.
Securities available for sale include securities that may be sold in response to
changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, general liquidity needs and other similar factors. The
Company's recent purchases of securities have generally been limited to
securities of high credit quality with short to medium term maturities.
The following table summarizes the book value of the Company's
securities held to maturity at the date indicated:
-13-
<PAGE>
<TABLE>
<CAPTION>
Book Value at December 31
-----------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
U. S. government agencies and corporations $ - $ - $ -
Obligations of states and political subdivisions 10,208 10,009 8,225
Mortgage-backed securities - - -
Other - - -
--------- --------- ---------
$10,208 $10,009 $8,225
======= ======= ======
</TABLE>
The following table summarizes the book value of the Company's
securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
Book Value at December 31
-----------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
U. S. government agencies and corporations $6,717 $1,999 $8,428
Mortgage-backed securities 962 2,902 2,203
----- ----- -----
$7,679 $4,901 $10,631
====== ====== =======
</TABLE>
The book value and average yield of the Company's securities, including
securities available for sale, at December 31, 1996, by contractual maturity,
are reflected in the following table. Actual maturities will differ from
contractual maturities because certain borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Obligations of state and U. S. government agencies
political subdivisions and corporations
---------------------------------- -----------------------------------
Weighted Weighted
Amount Average Yield Amount Average Yield
(Dollars in Thousands)
<S> <C> <C> <C>
Due in one year or less $ 440 5.15% $ - -
Due after one year through five years 4,096 5.67% 2,194 6.83%
Due after five years through ten years 4,102 5.57% 2,540 7.54%
Due after ten years 1,570 6.15% 2,945 7.73%
----- -----
$10,208 5.68% $7,679 7.41%
======= ======
</TABLE>
As shown in the table above, approximately $440,000 or 2.5% of the
total portfolio will mature in one year or less while $6.3 million or 35.2% will
mature after one year but within five years. The fully taxable equivalent
average yield on the entire portfolio was 7.88% for 1996, compared to 7.82% for
1995 and 7.82% for 1994. The market value of the portfolio exceeded the book
value by $174,630 at December 31, 1996.
Deposits and Short-Term Borrowings
The Company's predominate source of funds is depository accounts. The
Company's deposit base is comprised of demand deposits, savings and money market
accounts and other time deposits. The Company's deposits are provided by
individuals and businesses located within the communities served.
As shown in the following table, average total deposits grew by 8.9% in
1996 and 9.4% in 1995. The average aggregate interest rate paid on deposits was
4.13% in 1996, compared to 4.26% for 1995 and 3.54% in 1994. The majority of the
Company's deposits are higher yielding time deposits because most of its
customers are individuals who seek higher yields than those offered on savings
and demand accounts.
-14-
<PAGE>
The following table is a summary of average deposits and average rates
paid:
<TABLE>
<CAPTION>
For the Year Ended December 31
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ -------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $15,371 $ - -% $12,462 $ - -% $12,060 $ - -%
Interest bearing demand
deposits 20,630 611 2.96% 20,600 649 3.15% 23,329 701 3.00%
Savings deposits 12,189 394 3.23% 11,001 355 3.23% 12,012 387 3.22%
Time deposits 61,985 3,544 5.72% 57,085 3,306 5.79% 45,063 2,186 4.85%
------ ----- ------ ----- ------ -----
Total $110,175 $4,549 4.13% $101,148 $4,310 4.26% $92,464 $3,274 3.54%
======== ====== ======== ====== ======= ======
</TABLE>
The following table is a summary of time deposits of $100,000 or
more by remaining maturities at December 31, 1996:
Time Deposits >$100,000
(in Thousands)
Three months or less $1,262
Three to six months 2,019
Six to twelve months 2,552
Over twelve months 4,378
--------
$10,211
Capital Resources
The assessment of capital adequacy depends on a number of factors such
as asset quality, liquidity, earnings performance and changing competitive
conditions and economic forces. The Company seeks to maintain a strong capital
base to support its growth and expansion activities, to provide stability to
current operations and to promote public confidence.
The Bank's capital position continues to exceed regulatory
requirements. The primary indicators relied on by the Federal Reserve Board and
other bank regulators in measuring strength of capital position are the Tier 1
Capital, Total Capital, and Leverage ratios. Tier 1 Capital consists of common
and qualifying preferred stockholders' equity less goodwill. Total Capital
consists of Tier 1 Capital, qualifying subordinated debt and a portion of the
allowance for loan losses. Risk-based capital ratios are calculated with
reference to risk-weighted assets which consist of both on and off-balance sheet
risks. The Company's Tier 1 Capital ratio was 16.4% at December 31, 1996,
compared to 14.4% at December 31, 1995, and 13.5% at December 31, 1994. The
Total Capital ratio was 17.7% at December 31, 1996, compared to 15.6% and 14.7%
at December 31, 1995 and 1994, respectively. These ratios are in excess of the
mandated minimum requirements of 4.00% and 8.00%, respectively. The Leverage
ratio consists of Tier 1 capital divided by quarterly average assets. At
December 31, 1996, the Bank's Leverage ratio was 11.2% compared to 10.7% at
December 31, 1995 and 11.0% at December 31, 1994. Each of these exceed the
required minimum leverage ratio of 3.00%.
The following table shows risk based capital ratios and stockholders
equity to total assets:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------
Regulatory
Minimum 1996 1995 1994
------- ---- ---- ----
<S> <C> <C> <C> <C>
Tier 1 risk-based capital 4.0% 16.4% 14.4% 13.5%
Total risk-based capital 8.0% 17.7% 15.6% 14.7%
Leverage ratio 3.0% 11.2% 10.7% 11.0%
Stockholders' equity to total assets N/A 11.4% 10.8% 11.1%
</TABLE>
-15-
<PAGE>
The capital management function is an ongoing process. Central to this
process is internal equity generation accomplished by earnings retention. During
1996, total stockholders' equity increased by $1,130,113, primarily as a result
of earnings retention. Total stockholders' equity increased by $1,599,723 in
1995 also due to earnings retention. The return on average equity was 12.5% in
1996, compared to 15.1% in 1995 and 14.5% in 1994. Total cash dividends were
paid representing 38% of net income for 1996, compared to 31% of net income for
1995 and 33% for 1994. Book value per share was $15.22 at December 31, 1996,
compared to $14.11 at December 31, 1995, and $12.49 at December 31, 1994.
The Company's principal source of cash income is dividend payments from
the Bank. Certain limitations exist under applicable law and regulation by
regulatory agencies regarding dividend payments to a parent by its subsidiaries.
As of December 31, 1996, the Bank had $3.4 million of retained earnings
available for distribution to the Company as dividends without prior regulatory
approval.
Liquidity and Interest Rate Sensitivity
Liquidity. Liquidity is the ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest bearing deposits with banks, federal funds sold,
investments, and loans maturing within one year. The Company's ability to obtain
deposits and purchase funds at favorable rates determines its liability
liquidity. As a result of the Company's management of liquid assets and the
ability to generate liquidity through liability funding, management believes
that the Company maintains overall liquidity sufficient to satisfy its
depositors' requirements and meet its customers' credit needs.
Additional sources of liquidity available to the Company include, but
are not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the company also has access to the Federal Reserve
System. In the past, growth in deposits and proceeds from the maturity of
investment securities have been sufficient to fund the net increase in loans.
Interest Rate Sensitivity. In conjunction with maintaining a
satisfactory level of liquidity, management must also control the degree of
interest rate risk assumed on the balance sheet. Managing this risk involves
regular monitoring of the interest sensitive assets relative to interest
sensitive liabilities over specific time interval.
At December 31, 1996, the Company had a positive gap position. Since
the largest amount of interest sensitive assets and liabilities reprice within
12 months, the Company monitors this area closely. The Company does not
emphasize interest sensitivity analysis beyond this time frame because it
believes various unpredictable factors could result in erroneous
interpretations. Early withdrawal of deposits, prepayments of loans and loan
delinquencies are some of the factors that could have such and effect. In
addition, changes in rates on interest sensitive assets and liabilities may not
be equal, which could result in a change in net interest margin. While the
Company does not match each of its interest sensitive assets against specific
interest sensitive liabilities, it does seek to enhance the net interest margin
while minimizing exposure to interest rate fluctuations.
Effects of Inflation
Inflation significantly affects industries having high proportions of
fixed assets or high levels of inventories. Although the Company is not
significantly affected in these areas, inflation does have an impact on the
growth of assets. As assets grow rapidly, it becomes necessary to increase
equity capital at proportionate levels to maintain the appropriate equity to
asset ratios. Traditionally, the Company's earnings and high capital retention
levels have enabled the Company to meet these needs.
The Company's reported earnings results have been affected by
inflation, but isolating the effect is difficult. The different types of income
and expense are affected in various ways. Interest rates are affected by
inflation, but the timing and magnitude of the changes may not coincide with
changes in the consumer price index. Management actively monitors interest rate
sensitivity, as illustrated by the Gap Analysis, in order to minimize the
effects of inflationary trends on interest rates. Other areas of non-interest
expenses may be more directly affected by inflation.
-16-
<PAGE>
The following table summarizes the contractual repayment terms or
nearest repricing dates of the Company's interest earning assets and interest
bearing liabilities at December 31, 1996:
<TABLE>
<CAPTION>
Maturing or Repricing In:
-------------------------------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-------- ------ ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal funds sold $12,287 $ - $ - $ - $12,287
Securities available for sale - - 2,141 5,545 7,686
Securities held to maturity - 440 4,097 5,671 10,208
Loans 32,364 3,762 45,616 2,596 84,338
------ ----- ------ ----- ------
Total interest-earning assets $44,651 $4,202 $51,854 $13,812 $114,519
======= ====== ======= ======= ========
Interest Bearing Liabilities
Deposits:
Interest bearing demand $20,937 $ - $ - $ - $20,937
Savings 13,065 - - - 13,065
Time deposits, $100,000 and over 1,262 4,571 4,378 - 10,211
Other time deposits 8,990 22,705 18,268 2 49,965
Long-term debt - 9 36 9 54
------- ------- ------ ------ ------
Total interest-bearing liabilities $44,254 $27,285 $22,682 $11 $94,232
======= ======= ======= === =======
Period gap $397 $(23,083) $29,172 $13,801 $20,287
==== ========= ======= ======= =======
Cumulative gap $397 $(22,686) $6,486 $20,287
==== ========= ====== =======
Ratio of cumulative gap to total earning
assets .35% (19.81%) 5.66% 17.71%
</TABLE>
Of the amount of loans due after 12 months, $34.2 million had floating
or adjustable rates of interest and $14.0 million had fixed rates of interest.
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements and independent
auditors' report thereon are filed as a part of this report following Item 13:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure as defined by Item 304 of Regulation S-B.
-17-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information set forth under the caption "ELECTION OF DIRECTORS;
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS" on pages 2
through 6 of the definitive 1997 Proxy Statement of the Registrant furnished to
shareholders in connection with its Annual Meeting to be held on April 22, 1996
(the "1997 Proxy Statement") is hereby incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information set forth under the heading "Remuneration" on pages 6
through 8 of the 1997 Proxy Statement is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information set forth under the heading "Security Ownership of
Management" and "Security Ownership of Certain Beneficial Owners" on pages 4 and
5, respectively, of the 1997 Proxy Statement, is hereby incorporated by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth under the heading "Certain Transactions" on
page 7 of the 1997 Proxy Statement is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are attached hereto or incorporated herein by
reference as Exhibits:
3.1 Articles of Incorporation, including amendments thereto
(incorporated herein by reference to Exhibit 2 to the
Registrant's Form 8-A filed with the SEC on May 2, 1994).
3.2 Bylaws (incorporated herein by reference to Exhibit 3 to the
Registrant's Form 8-A filed with the SEC on May 2, 1994).
4.1 Specimen of Registrant's Common Stock Certificate
(incorporated herein by reference to Exhibit 1 to the
Registrant's Form 8-A filed with the SEC on May 2, 1994).
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Mitchell, Wiggins & Company, LLP (filed herewith)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
With the exception of the information herein expressly incorporated by
reference, the 1997 Proxy Statement of the Registrant is not to be deemed filed
as part of this Annual Report on Form 10-KSB.
-18-
<PAGE>
CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996
<PAGE>
C O N T E N T S
-------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT F-1
-------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-2 - F-3
Consolidated statements of income F-4 - F-5
Consolidated statements of stockholders' equity F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-25
-------------------------------------------------------------------------
<PAGE>
[GRAPHIC OMITTED]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Central Virginia Bankshares, Inc.
Powhatan, Virginia
We have audited the accompanying consolidated balance sheets of Central Virginia
Bankshares, Inc., and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Virginia
Bankshares, Inc., and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Mitchell, Wiggins & Company LLP
Richmond, Virginia
January 17, 1997
F-1
<PAGE>
CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 5,418,921 $ 4,252,555
Federal funds sold 12,287,000 15,810,000
--------------------------------------
Total cash and cash equivalents 17,705,921 20,062,555
Securities available for sale 7,685,684 4,961,659
Securities held to maturity
(approximate market value 1996
$10,375,793; 1995 $10,247,942) 10,207,765 10,008,592
Mortgage loans held for sale 201,798 868,594
Loans, net 84,337,859 83,075,152
Bank premises and equipment, net 3,560,609 2,118,801
Accrued interest receivable 803,191 787,544
Other assets 1,812,689 1,111,654
--------------------------------------
$126,315,516 $ 122,994,551
--------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Deposits:
Demand deposits $ 15,703,040 $ 14,024,208
Interest bearing demand deposits
and NOW accounts 20,936,589 19,159,338
Savings deposits 13,065,401 11,321,484
Time deposits, $100,000 and over 10,210,956 12,016,094
Other time deposits 49,964,954 51,285,081
--------------------------------------
109,880,940 107,806,205
Securities sold under repurchase agreements 1,534,479 1,435,307
Note payable 54,000 63,000
Accrued interest payable 232,946 263,420
Other liabilities 169,544 113,125
--------------------------------------
111,871,909 109,681,057
--------------------------------------
Commitments and Contingencies (Note 10)
Stockholders' Equity
Common stock, $2.50 par value;
3,000,000 shares authorized; 949,140
and 943,733 shares issued and out-
standing in 1996 and 1995, respectively 2,372,850 2,359,332
Surplus 4,091,019 3,996,803
Retained earnings 7,975,381 6,917,211
Net unrealized gain on securities
available for sale, net of tax 4,357 40,148
--------------------------------------
14,443,607 13,313,494
--------------------------------------
$126,315,516 $ 122,994,551
--------------------------------------
</TABLE>
F-3
<PAGE>
CENTRAL VIRGINIA BANKSHARES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $8,206,531 $ 8,277,868 $ 6,942,852
Interest on securities:
U. S. government agencies and corporations 473,056 639,748 690,172
States and political subdivisions 553,370 514,364 486,770
Other 10,916 10,888 10,809
Interest on federal funds sold 847,727 353,977 185,361
---------------------------------------------------
10,091,600 9,796,845 8,315,964
---------------------------------------------------
Interest expense:
Interest on deposits 4,549,567 4,309,812 3,274,240
Interest on securities sold under
repurchase agreements 38,986 30,207 16,457
Interest, other - 8,096 6,144
Interest on note payable 4,500 5,220 6,087
---------------------------------------------------
4,593,053 4,353,335 3,302,928
---------------------------------------------------
Net interest income 5,498,547 5,443,510 5,013,036
Provision for loan losses 165,000 165,000 158,786
---------------------------------------------------
Net interest income after
provision for loan losses 5,333,547 5,278,510 4,854,250
---------------------------------------------------
Other income:
Service charges 598,981 552,278 521,479
Realized gain on sale of security
available for sale 25,000 - -
Other 239,427 190,731 230,600
---------------------------------------------------
863,408 743,009 752,079
---------------------------------------------------
Other expenses:
Salaries and wages 1,434,644 1,309,833 1,195,312
Pensions and other employee benefits 386,712 347,066 327,693
Occupancy expense 219,579 158,455 160,730
Equipment depreciation 258,635 190,707 196,454
Equipment repairs and maintenance 165,222 141,002 128,409
Advertising and public relations 140,841 127,305 120,597
Federal insurance premiums 69,869 118,177 198,920
Office supplies, telephone, and postage 310,174 252,244 229,542
Taxes and licenses 119,408 103,652 105,481
Other operating expenses 696,157 596,752 584,366
---------------------------------------------------
3,801,241 3,345,193 3,247,504
---------------------------------------------------
</TABLE>
(Continued)
F-4
<PAGE>
CENTRAL VIRGINIA BANKSHARES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes 2,395,714 2,676,326 2,358,825
Income taxes 684,917 796,166 711,154
----------------------------------------------------
Net income $1,710,797 $ 1,880,160 $ 1,647,671
----------------------------------------------------
Net income per share of common stock $ 1.81 $ 2.00 $ 1.76
----------------------------------------------------
Average shares outstanding 946,077 940,071 937,890
----------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) On
Securities
Common Retained Available for
Stock Surplus Earnings Sale, Net of Tax Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 2,344,725 $ 3,930,215 $ 4,525,595 $ -- $ 10,800,535
Net income -- -- 1,647,671 -- 1,647,671
Cash dividends declared, $.58 per share -- -- (543,976) -- (543,976)
Net unrealized loss on securities
available for sale, net of tax -- -- -- (190,459) (190,459)
--------------------------------------------------------------------------
Balance, December 31, 1994 2,344,725 3,930,215 5,629,290 (190,459) 11,713,771
Issuance of common stock:
2,699 shares pursuant to exercise
of stock options 6,747 17,543 -- -- 24,290
60 shares in employee bonuses 150 870 -- -- 1,020
3,084 shares pursuant to dividend
reinvestment plan 7,710 48,175 -- -- 55,885
Net income -- -- 1,880,160 -- 1,880,160
Cash dividends declared, $.63 per share -- -- (592,239) -- (592,239)
Change in unrealized gain on securities
available for sale, net of tax -- -- -- 230,607 230,607
--------------------------------------------------------------------------
Balance, December 31, 1995 2,359,332 3,996,803 6,917,211 40,148 13,313,494
Issuance of common stock:
9 shares in employee bonuses 23 153 -- -- 176
5,398 shares pursuant to dividend
reinvestment plan 13,495 94,063 -- -- 107,558
Net income -- -- 1,710,797 -- 1,710,797
Cash dividends declared, $.69 per share -- -- (652,627) -- (652,627)
Change in unrealized gain on securities
available for sale, net of tax -- -- -- (35,791) (35,791)
--------------------------------------------------------------------------
Balance, December 31, 1996 $ 2,372,850 $ 4,091,019 $ 7,975,381 $ 4,357 $ 14,443,607
--------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,710,797 $ 1,880,160 $ 1,647,671
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 330,092 242,581 249,117
Amortization 16,600 16,600 16,600
Deferred income taxes (28,623) 3,437 (27,202)
Provision for loan losses 165,000 165,000 158,786
Amortization and accretion on securities (2,093) (31,645) (21,654)
Realized gain on sale of security
available for sale (25,000) -- --
Loss on sale of foreclosed
real estate 16,211 9,041 2,572
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Mortgage loans held for sale 666,796 (769,000) 974,576
Accrued interest receivable (15,647) (14,860) (172,834)
Other assets (592,763) 22,540 (107,058)
Increase (decrease) in liabilities:
Accrued interest payable (30,474) 84,941 24,473
Other liabilities 56,419 (107,836) 83,183
-------------------------------------------
Net cash provided by
operating activities 2,267,315 1,500,959 2,828,230
-------------------------------------------
Cash Flows From Investing Activities
Proceeds from maturities of
securities held to maturity 910,000 475,000 220,000
Purchase of securities held to maturity (1,104,736) (2,240,000) (1,205,000)
Proceeds from sales and maturities of
securities available for sale 3,031,996 6,708,356 1,133,630
Purchase of securities available for sale (5,787,595) (965,859) (2,246,475)
Net increase in loans made to customers (1,796,896) (3,921,415) (12,735,634)
Net purchases of premises and equipment (1,771,900) (201,553) (592,304)
Proceeds from sale of foreclosed real estate 291,233 324,212 27,428
Net expenditures on foreclosed real estate (22,978) (8,438) --
Proceeds received from cancellation
of life insurance policies 19,564 29,120 --
Increase in cash value, life insurance (12,651) (10,729) (3,270)
-------------------------------------------
Net cash provided by (used in)
investing activities (6,243,963) 188,694 (15,401,625)
-------------------------------------------
</TABLE>
(Continued)
F-7
<PAGE>
CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits 2,074,735 13,791,379 5,485,256
Net increase (decrease) in securities sold
under repurchase agreements 99,172 587,631 (2,086,614)
Repayment of note payable (9,000) (9,000) (9,000)
Net proceeds from issuance
of common stock 107,734 81,195 --
Dividends paid (652,627) (592,239) (543,976)
-------------------------------------------
Net cash provided by financing
activities 1,620,014 13,858,966 2,845,666
-------------------------------------------
Increase (decrease) in cash
and cash equivalents (2,356,634) 15,548,619 (9,727,729)
Cash and cash equivalents, beginning 20,062,555 4,513,936 14,241,665
-------------------------------------------
Cash and cash equivalents, ending $ 17,705,921 $ 20,062,555 $ 4,513,936
-------------------------------------------
Supplemental Disclosures Of
Cash Flow Information
Interest paid $ 4,623,527 $ 4,268,394 $ 3,278,455
Income taxes paid 692,356 813,748 775,187
Supplemental Schedule Of Noncash
Investing Activities
Other real estate, equipment
and investments acquired
in settlement of loans 369,189 247,810 138,150
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
VIRGINIA BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Operations: Central Virginia Bankshares, Inc., is a one bank holding
company headquartered in Powhatan County, Virginia. The Corporation's
subsidiary, Central Virginia Bank provides a variety of financial services to
individuals and corporate customers through its five branches located in the
Virginia counties of Powhatan, Chesterfield, and Cumberland. The Bank's primary
deposit products are checking accounts, savings accounts, and certificates of
deposit. Its primary lending products are residential mortgage, construction,
installment and commercial business loans.
Central Virginia Bank's subsidiary, CVB Title Services, Inc., is a corporation
organized under the laws of the State of Virginia. The Corporation's primary
purpose is to own a partnership interest in a title insurance company.
Basis of consolidation: The accompanying consolidated financial statements
include the accounts of Central Virginia Bankshares, Inc., and its subsidiary,
Central Virginia Bank, including its subsidiary, CVB Title Services, Inc. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Cash and cash equivalents: For purposes of reporting the consolidated statements
of cash flows, the Corporation includes cash on hand, amounts due from banks,
federal funds sold and all highly liquid debt instruments purchased with a
maturity of three months or less as cash and cash equivalents on the
accompanying consolidated balance sheets. Cash flows from deposits and loans are
reported net.
The Bank maintains amounts due from banks which, at times, may exceed federally
insured limits. The Bank has not experienced any losses in such accounts.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
A majority of the Bank's loan portfolio consist of single-family residential
loans in the Virginia counties of Powhatan, Chesterfield, and Cumberland. There
is also a significant concentration of loans to builders and developers in the
region. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
Accounting Change and Securities: Effective January 1, 1994, the Corporation
adopted FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities. This statement establishes accounting and reporting standards
for investments in debt securities and investments in equity securities that
have readily determinable fair values. Statement 115 requires that securities be
classified as either Held to Maturity, Available for Sale, or Trading.
Securities are classified as held to maturity when management has the intent and
the Bank has the ability at the time of purchase to hold them until maturity or
on a long-term basis. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives. Gains and losses on the sale of such
securities are determined by the specific identification method.
Securities to be held for indefinite periods of time and not intended to be held
to maturity or on a long-term basis are classified as available for sale and
accounted for at market value on an aggregate basis. These include securities
used as part of the Bank's asset/liability management strategy and may be sold
in response to changes in interest rates, prepayment risk, the need or desire to
increase capital, to satisfy regulatory requirements and other similar factors.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. Realized gains and
losses of securities available for sale are included in net securities gains
(losses) based on the specific identification method.
Trading securities, which are generally held for the short term in anticipation
of market gains, are carried at fair value. Realized and unrealized gains and
losses on trading account assets are included in interest income on trading
account securities. The Corporation held no trading securities during the years
ended December 31, 1996, 1995, and 1994.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Mortgage loans held for sale: Mortgage loans originated and held for sale in the
secondary market are reported at the lower of cost or market value determined on
an aggregate basis.
Accounting change and loans and allowance for loan losses: Effective January 1,
1995, the Corporation adopted FASB Statement No. 114, Accounting by Creditors
for Impairment of a Loan. This statement as amended by FASB Statement No. 118,
establishes accounting and reporting standards for impaired loans. A loan is
impaired when it is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Loans are stated at the amount of unpaid principal, reduced
by unearned discount and fees and an allowance for possible loan losses.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing loans that may become uncollectible, based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries.
Unearned interest on discounted loans is amortized to income over the life of
the loans, using the interest method. For all other loans, interest is accrued
daily on the outstanding balances. Accrual of interest is discontinued on a loan
when payments of interest and/or principal have remained delinquent for a period
of 90 days or more and are not well secured and in the process of collection.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loan's yield. The Bank is generally amortizing these amounts over the average
contractual life.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Bank premises and equipment: Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the following estimated useful lives.
Years
-----
Buildings and improvements 5 - 39
Furniture and equipment 3 - 10
Foreclosed real estate: Foreclosed real estate represents properties acquired
through foreclosure or other proceedings. Foreclosed real estate is held for
sale and is recorded at the lower of the recorded amount of the loan or fair
value of the properties less estimated costs of disposal. Any write-down to fair
value at the time of transfer to foreclosed real estate is charged to the
allowance for loan losses. Property is evaluated regularly to ensure the
recorded amount is supported by its current fair value and valuation allowances
to reduce the carrying amount to fair value less estimated costs to dispose are
recorded as necessary. Foreclosed real estate is included with other assets on
the accompanying consolidated balance sheets.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Earnings per share: Earnings per share are based on the weighted average number
of shares outstanding. The stock options mentioned in Note 12 have not been
included in the computation because they would not have a materially dilutive
effect.
Current accounting developments: In June 1996, the Financial Accounting
Standards Board issued its Statement of Financial Accounting Standards No. 125
(SFAS 125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. After a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. In addition, a transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in exchange. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Management does not expect the application of this pronouncement
to have a material effect on the financial statements of the Bank.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Restrictions on Cash and Cash Equivalents
The Bank is required to maintain average reserve and clearing balances in cash
with the Federal Reserve Bank. The total of these balances, after receiving
credit for vault cash on hand, was approximately $50,000 at December 31, 1996
and 1995.
Note 3. Securities
Carrying amounts and approximate market values of securities available for sale
are as follows:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. government agencies
and corporations $ 6,717,452 $ 70,579 $ 43,574 $ 6,744,457
Mortgage-backed securities 961,630 - 20,403 941,227
---------------------------------------------------------------
$ 7,679,082 $ 70,579 $ 63,977 $ 7,685,684
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. government agencies
and corporations $ 1,998,787 $ 9,940 $ 10,990 $ 1,997,737
Mortgage-backed securities 2,902,041 61,881 - 2,963,922
---------------------------------------------------------------
$ 4,900,828 $ 71,821 $ 10,990 $ 4,961,659
---------------------------------------------------------------
</TABLE>
The amortized cost and approximate market value of securities available for sale
at December 31, 1996, by contractual maturity, are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary.
Approximate
Amortized Market
Cost Value
----------------------------------
Due in one year or less $ - $ -
Due after one year through five years 2,193,709 2,185,959
Due after five years through ten years 1,578,353 1,608,369
Due after ten years 2,945,390 2,950,129
Mortgage-backed securities 961,630 941,227
----------------------------------
$ 7,679,082 $ 7,685,684
----------------------------------
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Securities (Continued)
Securities available for sale with a carrying amount of $941,227 and $2,570,47
at December 31, 1996 and 1995, respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.
Carrying amounts and approximate market values of securities being held to
maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
States and political subdivisions $ 10,207,765 $ 211,044 $ 43,016 $ 10,375,793
--------------------------------------------------------------------------
December 31, 1995
--------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------
States and political subdivisions $ 10,008,592 $ 286,029 $ 46,679 $ 10,247,942
--------------------------------------------------------------------------
</TABLE>
The amortized cost and approximate market value of securities being held to
maturity at December 31, 1996, by contractual maturity, are shown below.
Approximate
Amortized Market
Cost Value
------------------------------------
Due in one year or less $ 440,000 $ 441,371
Due after one year through five years 4,096,331 4,162,795
Due after five years through ten years 4,101,159 4,151,954
Due after ten years 1,570,275 1,619,673
------------------------------------
$ 10,207,765 $ 10,375,793
------------------------------------
Securities being held to maturity with a carrying amount of $1,480,000 and
$2,120,047 at December 31, 1996 and 1995, respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted by
law.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans
Major classifications of loans are summarized as follows:
December 31,
-------------------------------------
1996 1995
-------------------------------------
Commercial $ 15,314,303 $ 15,914,163
Real estate:
Mortgage 44,157,608 42,456,232
Construction 10,078,318 9,767,735
Installment 16,399,849 16,592,126
-------------------------------------
85,950,078 84,730,256
Less unearned discount (400,544) (528,232)
-------------------------------------
85,549,534 84,202,024
Allowance for loan losses (1,211,675) (1,126,872)
-------------------------------------
Loans, net $ 84,337,859 $ 83,075,152
-------------------------------------
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,126,872 $ 1,065,754 $ 926,425
Provision charged to operations 165,000 165,000 158,786
Loans charged off (101,558) (152,655) (44,857)
Recoveries 21,361 48,773 25,400
-------------------------------------------------
Balance, end of year $ 1,211,675 $ 1,126,872 $ 1,065,754
-------------------------------------------------
</TABLE>
At December 31, 1996, the Bank had loans amounting to $577,034 that were
specifically classified as impaired. The average balance of these loans amounted
to approximately $609,232 for the year ended December 31, 1996. The allowance
for loan losses related to impaired loans amounted to $252,733 at December 31,
1996. The following is a summary of cash receipts on these loans and how they
were applied in 1996:
Cash receipts applied to reduce
principal balance $ 422,283
Cash receipts recognized as
interest income -
--------------
Total cash receipts $ 422,283
--------------
Nonaccruing loans (principally commercial and mortgage loans) totaled $708,476,
$647,732, and $569,042 at December 31, 1996, 1995, and 1994, respectively, which
had the effect of reducing net income $55,518 ($.06 per common share), $62,711
($.07 per common share), and $39,484 ($.04 per common share) for the years then
ended, respectively.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Bank Premises and Equipment
Major classifications of bank premises and equipment and the total accumulated
depreciation are summarized as follows:
December 31,
--------------------------------
1996 1995
--------------------------------
Land $ 502,859 $ 447,754
Buildings and improvements 2,577,809 1,564,737
Furniture and equipment 2,870,470 2,180,455
--------------------------------
Totals 5,951,138 4,192,946
Less accumulated depreciation 2,390,529 2,074,145
--------------------------------
$ 3,560,609 $ 2,118,801
--------------------------------
Note 6. Maturities of Certificates of Deposits
The scheduled maturities of certificates of deposits at December 31, 1996, are
as follows:
Year Ended December 31,
1997 $ 37,543,940
1998 13,030,651
1999 4,601,530
2000 3,655,341
2001 and later 1,344,448
-----------------
$ 60,175,910
-----------------
Note 7. Note Payable
The Corporation's subsidiary, Central Virginia Bank, has a note payable which is
secured by a first deed of trust on the bank building in Powhatan and is due in
annual principal installments of $9,000 plus interest at the rate of 8% per
annum through the year 2002. At December 31, 1996 and 1995, the balance of the
note was $54,000 and $63,000, respectively.
Note 8. Income Tax Matters
The Corporation and Subsidiary file a consolidated federal income tax return.
The consolidated provision for income taxes for the years ended December 31,
1996, 1995, and 1994, are as follows:
1995 1996 1994
------------------------------------------
Currently payable $ 713,540 $ 792,729 $ 738,356
Deferred (28,623) 3,437 (27,202)
------------------------------------------
$ 684,917 $ 796,166 $ 711,154
------------------------------------------
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Tax Matters (Continued)
A reconciliation of the expected income tax expense computed at 34% to the
income tax expense included in the consolidated statements of income is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 814,543 $ 909,951 $ 802,001
Tax-exempt interest (148,044) (136,610) (127,135)
Disallowance of interest expense
deduction for the portion attributable
to carrying tax-exempt obligations 20,001 19,130 14,460
Other (1,583) 3,695 21,828
------------------------------------------
$ 684,917 $ 796,166 $ 711,154
------------------------------------------
</TABLE>
The deferred income tax provision consists of the following items:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Difference between loan loss provision
charged to operating expense and the
bad debt deduction taken for income
tax purposes $ (19,223) $ (24,844) $ (22,264)
Interest income on nonaccrual loans
recognized for federal income tax pur-
poses, but not recognized for financial
statements until received (10,458) 7,802 (26,289)
Accretion of discount recognized for
financial statements, but not recognized
for income tax purposes until realized (689) 1,060 2,428
Difference between the depreciation methods
used for financial statements and for income
tax purposes 1,747 19,419 18,923
-------------------------------------------
$ (28,623) $ 3,437 $ (27,202)
-------------------------------------------
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Tax Matters (Continued)
The component of the net deferred tax asset included in other assets is as
follows at December 31:
1996 1995
---------------------------
Deferred tax assets:
Allowance for loan losses $ 354,732 $ 325,899
Less valuation allowance (118,232) (108,622)
-----------------------------
236,500 217,277
Interest income on nonaccrual loans 28,944 18,486
-----------------------------
265,444 235,763
-----------------------------
Deferred tax liabilities:
Property and equipment 72,982 71,235
Securities 2,245 8,189
Unrealized gain on securities
available for sale 7,500 20,682
-----------------------------
82,727 100,106
-----------------------------
Net deferred tax asset $ 182,717 $ 135,657
-----------------------------
Note 9. Profit-Sharing Plan
The Bank has a profit-sharing plan for those employees who meet the eligibility
requirements set forth in the Plan. Substantially all the full-time employees
are covered. Contributions to the Trust fund are determined each year by the
Board of Directors. The plan may be amended or terminated by the Board of
Directors at any time. The contributions for the years ended December 31, 1996,
1995, and 1994, were $118,824, $103,626, and $96,027, respectively.
Note 10. Commitments and Contingencies
Financial instruments with off-balance-sheet risk: The Bank is party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the consolidated balance sheets.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments and Contingencies (Continued)
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as they do for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31, 1996 and 1995, is as follows:
1996 1995
-----------------------------------
Commitments to extend credit $ 22,664,435 $ 21,749,280
Standby letters of credit 3,077,256 3,490,959
-----------------------------------
$ 25,741,691 $ 25,240,239
-----------------------------------
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's credit-worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party. Collateral held
varies, but may include accounts receivable, crops, livestock, inventory,
property and equipment, residential real estate and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems necessary.
Concentrations of credit risk: All of the Bank's loans, commitments to extend
credit, and standby letters of credit have been granted to customers within the
state and, more specifically, the area surrounding Richmond, Virginia. The
concentrations of credit by type of loan are set forth in Note 4. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the agribusiness and
construction sectors of the economy.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Related Party Transactions
The Corporation's subsidiary, Central Virginia Bank, has had, and may be
expected to have in the future, banking transactions in the ordinary course of
business with directors, principal officers, their immediate families and
affiliated companies in which they are principal stockholders (commonly referred
to as related parties), all of which have been, in the opinion of management, on
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with others.
Aggregate loan transactions with related parties were as follows:
Years Ended December 31,
1996 1995
----------------------------------
Balance, beginning $ 1,361,547 $ 1,320,816
New loans 2,006,810 335,992
Repayments (1,882,546) (295,261)
----------------------------------
Balance, ending $ 1,485,811 $ 1,361,547
----------------------------------
Note 12. Stock Option Plan
The Corporation has a stock option plan which authorizes the granting of stock
options to key employees and directors up to a maximum of 7,500 shares of common
stock. The options are exercisable at the date of grant and expire ten years
thereafter. On July 14, 1987, 7,500 options were granted at an option price of
$9 per share.
During the year ended December 31, 1996, no options were exercised for the
purchase of common stock. Options were exercised for the purchase of 2,669
shares of common stock at $9 per share during the year ended December 31, 1995.
At December 31, 1996, unexercised options had been granted for 3,111 shares at
$9 per share.
The Corporation did not grant any options during the years ended December 31,
1996 and 1995. Therefore, the transition provisions of FASB Statement 123 would
not be applicable.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Reserve Bank. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly, additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
table below of total and Tier I capital as defined in the regulations to
risk-weighted assets as defined, and of Tier I capital as defined to average
assets as defined. Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $15,247 17.68% $ 6,842 8.00% $ 8,553 10.00%
Tier I Capital
(to Risk Weighted Assets) 14,176 16.43% 3,421 4.00% 5,132 6.00%
Tier I Capital
(to Average Assets) 14,176 11.33% 5,005 4.00% 6,256 5.00%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) 14,228 15.59% 7,301 8.00% 9,126 10.00%
Tier I Capital
(to Risk Weighted Assets) 13,101 14.36% 3,651 4.00% 5,476 6.00%
Tier I Capital
(to Average Assets) 13,101 11.36% 4,614 4.00% 5,768 5.00%
</TABLE>
Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency. Under that limitation,
the Bank could have declared additional dividends of approximately $3,449,786 in
1996 without regulatory approval.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate their fair values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for other loans are determined using estimated future cash flows,
discounted at the interest rates currently being offered for loans with similar
terms to borrowers with similar credit quality. The carrying amount of accrued
interest receivable approximates it fair value.
Deposit liabilities: The fair values of demand deposits equal their carrying
amounts which represents the amount payable on demand. The carrying amounts for
variable-rate fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected maturities on time deposits. The carrying amount
of accrued interest payable approximates its fair value.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Fair Value of Financial Instruments (Continued)
Note payable: The carrying amount of note payable approximates its fair value.
The following is a summary of the carrying amounts and estimated fair values of
the Bank's financial assets and liabilities at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 17,705,921 $ 17,705,921 $20,062,555 $20,062,555
Securities available for sale 7,685,684 7,685,684 4,961,659 4,961,659
Securities held to maturity 10,207,765 10,375,793 10,008,592 10,247,942
Mortgage loans held for sale 201,798 201,798 868,594 868,594
Loans, net 84,337,859 86,182,000 83,075,152 85,494,000
Accrued interest receivable 803,191 803,191 787,544 787,544
Financial liabilities:
Demand and variable rate deposits $ 49,705,030 $ 49,705,030 $44,505,030 $44,505,030
Fixed-rate certificates of deposits 60,175,910 60,408,000 63,301,175 64,146,000
Securities sold under repurchase
agreements 1,534,479 1,534,479 1,435,307 1,435,307
Note payable 54,000 54,000 63,000 63,000
Accrued interest payable 232,946 232,946 263,420 263,420
</TABLE>
At December 31, 1996 and 1995, the Corporation had outstanding
standby letters of credit and commitments to extend credit. These off-balance
sheet financial instruments are generally exercisable at the market rate
prevailing at the date the underlying transaction will be completed, and,
therefore, they were deemed to have no current fair market value.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Condensed Parent-Only Financial Statements
Financial statements for Central Virginia Bankshares, Inc., (not consolidated)
are presented below.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------------
Assets 1996 1995
------------------------------------
<S> <C> <C>
Cash $ 173,005 $ 101,692
Investment in subsidiary 14,183,162 13,160,782
Other assets 87,440 51,020
------------------------------------
$ 14,443,607 $ 13,313,494
------------------------------------
Stockholders' Equity
Common stock, $2.50 par value;
3,000,000 shares authorized;
949,140 and 943,733 shares
issued and outstanding in 1996
and 1995, respectively $ 2,372,850 $ 2,359,332
Surplus 4,091,019 3,996,803
Retained earnings 7,975,381 6,917,211
Net unrealized gain on
securities available for sale
held by subsidiary, net of tax 4,357 40,148
------------------------------------
$ 14,443,607 $ 13,313,494
------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
Income:
<S> <C> <C> <C>
Management fees $ 46,456 $ 66,260 $ 24,000
Dividends received from subsidiary 652,627 592,239 588,976
Equity in undistributed earnings of subsidiary 1,058,170 1,287,921 1,068,046
Interest income - - 58
-------------------------------------------------
1,757,253 1,946,420 1,681,080
Expenses:
Operating expenses 46,456 66,260 38,227
-------------------------------------------------
Income before income taxes 1,710,797 1,880,160 1,642,853
Income taxes (benefit) - - (4,818)
-------------------------------------------------
Net income $ 1,710,797 $ 1,880,160 $ 1,647,671
-------------------------------------------------
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Condensed Parent-Only Financial Statements (Continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,710,797 $ 1,880,160 $ 1,647,671
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of subsidiary (1,058,170) (1,287,921) (1,068,046)
Changes in operating assets and liabilities:
(Increase) decrease in other assets (36,420) 3,798 (53,163)
-------------------------------------------------
Net cash provided by operating activities 616,207 596,037 526,462
-------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from issuance of common stock 107,733 81,195 -
Dividends paid (652,627) (592,239) (543,976)
-------------------------------------------------
Net cash (used in) financing activities (544,894) (511,044) (543,976)
-------------------------------------------------
Increase (decrease) in cash 71,313 84,993 (17,514)
Cash, beginning 101,692 16,699 34,213
-------------------------------------------------
Cash, ending $ 173,005 $ 101,692 $ 16,699
-------------------------------------------------
</TABLE>
F-25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENTRAL VIRGINIA BANKSHARES, INC.
Date: March 28, 1997 By: /s/ Ralph Larry Lyons
----------------------
Ralph Larry Lyons
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 28, 1997 /s/ Ralph Larry Lyons
---------------------
Ralph Larry Lyons
President and Chief Executive Officer; Director
(Chief Financial Officer)
March 28, 1997 /s/ F. William Kidd
-------------------
F. William Kidd
Vice President and Cashier
(Chief Accounting Officer)
March 28, 1997 /s/ John B. Larus
-----------------
John B. Larus
Chairman of the Board of Directors
March 28, 1997 /s/ Fleming V. Austin
---------------------
Fleming V. Austin
Director
March 28, 1997 /s/ Charles W. Binford
----------------------
Charles W. Binford
Director
March __, 1997 ----------------------
Garland L. Blanton, Jr.
Director
March 28, 1997 /s/ Charles B. Goodman
----------------------
Charles B. Goodman
Director
March 28, 1997 /s/ Elwood C. May
-----------------
Elwood C. May
Director
<PAGE>
EXHIBITS INDEX
Item No. Description
- -------- -----------
3.1 Articles of Incorporation, including amendments thereto
(incorporated herein by reference to Exhibit 2 to the Registrant's
Form 8-A filed with the SEC on May 2, 1994)
3.2 Bylaws (incorporated herein by reference to Exhibit 3 to the
Registrant's Form 8-A filed with the SEC on May 2, 1994)
4.1 Specimen of Registrant's Common Stock Certificate (incorporated
herein by reference to Exhibit 1 to the Registrant's Form 8-A
filed with the SEC on May 2, 1994)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Mitchell, Wiggins & Company, LLP (filed herewith)
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Central Virginia Bank
Exhibit 23.1
[GRAPHIC OMITTED]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Central Virginia Bankshares, Inc.
We consent to incorporation by reference in the December 31, 1996, annual report
on Form 10-KSB of Central Virginia Bankshares, Inc., of our report dated January
17, 1997, relating to the consolidated balance sheets of Central Virginia
Bankshares, Inc., and subsidiary, as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996.
/s/ Mitchell, Wiggins & Company LLP
Richmond, Virginia
January 17, 1997
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