UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
---------------------------------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________________________ to __________________
Commission file number 33-70184
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C&F FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 54-1680165
--------------------------------- -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Eighth and Main Streets West Point VA 23181
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 843-2360
--------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $1.00 Par
- ------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. ( X ) Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not 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. ( )
Registrant's revenues were $23,011,913 for fiscal year ended December
31, 1996.
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant was approximately $39,091,259 as of February 18, 1997.
The number of shares outstanding of the registrant's common stock,
$1.00 par value was 2,113,041 at February 18, 1997.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-KSB Incorporated Document
PART II
Item 6 - Management's Discussion and The Company's 1996 Annual Report
Analysis of Financial Conditions to Shareholders for the fiscal
and Results of Operations years ended December 31, 1996,
Management's Discussion and
Analysis of Financial Condition
and Results of Operations, pages
9 through 18.
Item 7 - Financial Statements The Company's 1996 Annual Report
to Shareholders for fiscal years
ended December 31, 1996,
Consolidated Financial
Statements, Notes to
Consolidated Financial
Statements, and Independent
Auditors' Report pages 19
through 35.
PART III
Item 9 - Directors and Executive The Company's 1997 Proxy
Officers of the Registrant Statement, Election of
Directors, pages 2 through 4.
Item 10 - Executive Compensation The Company's 1997 Proxy
Statement, Executive
Compensation, page 5.
Item 11 - Security Ownership of Certain The Company's 1997 Proxy
Beneficial Owners and Management Statement, Principal Holders of
Capital Stock, page 2.
Item 12 - Certain Relationships and The Company's 1997 Proxy
Related Transactions Statement, Interest of
Management in Certain
Transactions, pages 4 through 5.
<PAGE>
TABLE OF CONTENTS
PART 1
ITEM 1. BUSINESS...........................................page 1
ITEM 2. PROPERTIES.........................................page 2
ITEM 3. LEGAL PROCEEDINGS..................................page 3
ITEM 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS....................page 3
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..................page 4
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.....page 4
ITEM 7. FINANCIAL STATEMENTS ..............................page 4
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...........page 4
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT...............................page 5
ITEM 10. EXECUTIVE COMPENSATION.............................page 5
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................page 5
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.....................................page 5
ITEM 13. EXHIBITS...........................................page 6
<PAGE>
PART I
Item 1. BUSINESS
General
C&F Financial Corporation (the "Company") is a bank holding company which
was incorporated under the laws of the Commonwealth of Virginia in March, 1994.
The Company owns all of the stock of its sole subsidiary, Citizens and Farmers
Bank (the "Bank"), which is an independent commercial bank chartered under the
laws of the Commonwealth of Virginia. The Bank has a total of nine branches. The
Bank has its main office at Eighth and Main Streets, West Point, Virginia, and
has branch offices in the locations of Norge, Middlesex, Providence Forge,
Quinton, Tappahannock, Varina, Williamsburg and West Point (2 branches). The
Bank was originally opened for business under the name Farmers and Mechanics
Bank on January 22, 1927.
The local community served by the Bank is defined as those portions of
King William County, King and Queen County, Hanover County and Henrico County
which are east of Route 360; Essex, Middlesex, New Kent, Charles City, and James
City Counties; that portion of York County which is directly north of James City
County; and that portion of Gloucester County surrounded by Routes 14 and 17.
The Company, through its subsidiaries, offers a wide range of banking
services available to both individuals and small businesses. These services
include various types of checking and savings deposit accounts, and the making
of business, real estate, development, mortgage, home equity, automobile and
other installment, demand and term loans. Also, the Bank offers ATMs at all
locations, credit card services, trust services, travelers' checks, money
orders, safe deposit rentals, collections, notary public, wire services and
other customary bank services to its customers.
The Bank has three wholly-owned subsidiaries, C & F Title Agency, Inc.,
C&F Investment Services, Inc., and C&F Mortgage Corporation, all incorporated
under the laws of the Commonwealth of Virginia. C&F Title Agency, Inc. sells
title insurance to the mortgage loan customers of the Company. C&F Investment
Services, Inc., organized April, 1995, is a full-service brokerage firm offering
a comprehensive range of investment options including stocks, bonds, annuities
and mutual funds. C&F Mortgage Corporation, organized in September, 1995,
originates and sells residential mortgages.
C&F Mortgage Corporation provides mortgage services through five
locations in Virginia and two in Maryland. The Virginia offices are in Richmond
(two locations), Williamsburg, Newport News, and Chester. The Maryland offices
are in Crofton and Bel Aire.
As of December 31, 1996, a total of 202 persons were employed by the
Company, of whom 25 were part-time. The Company considers relations with its
employees to be excellent.
<PAGE>
Competition
The Bank is subject to competition from various financial institutions
and other companies or firms that offer financial services. The Bank's principal
competition in its market area consists of all the major statewide banks. The
Bank also competes for deposits with savings and loan associations, credit
unions and money-market funds. In making loans, the Bank competes with consumer
finance companies, credit unions, leasing companies and other lenders.
C&F Mortgage Corporation competes for mortgage loans in its market
areas with other mortgage companies, commercial banks and other financial
institutions.
C&F Investment Services competes with other investment companies,
brokerage firms, and insurance companies to provide these services.
Regulation and Supervision
The Company is subject to regulation by the Federal Reserve Bank under
the Bank Holding Company Act of 1956. The Company is also under the jurisdiction
of the Securities and Exchange Commission and certain state securities
commissions with respect to matters relating to the offer and sale of its
securities. In addition, the Bank is subject to regulation and examination by
the State Corporation Commission and the Federal Deposit Insurance Corporation.
ITEM 2. PROPERTIES
The following describes the location and general character of the
principal offices and other materially important physical properties of the
Company and its subsidiary.
The Company owns the headquarters located at Eighth and Main Streets in
the business district of West Point, Virginia. The building, originally
constructed in 1923, has three floors totaling 15,000 square feet. This building
houses the Citizens and Farmers Bank Main Office branch, C&F Investment
Services, Inc. offices, and office space for the Company's administrative
personnel.
The Company also owns a building located at Seventh and Main Streets in
West Point, Virginia. The building provides space for Citizens and Farmers Bank
operations functions and staff. The building was originally constructed prior to
1935 and remodeled by the Company in 1991. The two-story building has 20,000
square feet.
Citizens and Farmers Bank owns eight other branch locations in
Virginia. Also, the Bank owns several lots in West Point, Virginia and one other
lot in New Kent County, Virginia.
C&F Mortgage Corporation has seven leased offices, five in Virginia and
two in Maryland. Rental expense for these locations totaled $191,000 for the
year ended December 31, 1996.
All of the Company's properties are in good operating condition and are
adequate for the Company's present and anticipated future needs.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which the property of the Company is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company through a
solicitation of proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock is not listed for trading on a registered exchange or
quoted on the National Association of Securities Dealers Automated Quotation
(NASDAQ) System, and trades in the Company's stock occur infrequently on a local
basis. Accordingly, there is no established public trading market for shares of
the Company's stock, and quotations set forth below do not necessarily reflect
the price that would be paid in an active and liquid market. The Company from
time to time on an informal basis attempts to match or pair persons who desire
to buy and sell the Company's stock. As of February 18, 1997, the Company had
1,095 shareholders of record and the number of outstanding shares of common
stock was 2,113,041.
To the best knowledge of management, the most recent trade in Company
stock was on February 4, 1997, at a sales price of $18.50 per share.
Trading in the common stock of the Company has been minimal, therefore,
quarterly high and low bid prices are not available. The following table
represents two year quarterly stock price information based on actual trades.
Two Year Quarterly
Stock Price Information
Quarter Ended 1996 1995
------------- ---- ----
March 31 $19.75 $21.25
June 30 19.00 21.25
September 30 19.00 21.00
December 31 18.75 20.00
Each share of common stock is entitled to participate equally in
dividends, which are payable as and when determined by the Board of Directors
after consideration of the earnings, general economic conditions, the financial
condition of the business and other factors as might be appropriate.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information contained on pages 9 through 18 of the 1996 Annual Report
to Shareholders, which is attached hereto as Exhibit 13, under the caption,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation", is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The information contained on pages 19 through 35 of the 1996 Annual
Report to Shareholders, which is attached hereto as Exhibit 13, under the
captions, "Consolidated Financial Statements", "Notes to Consolidated Financial
Statements", and "Independent Auditors' Report", is incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 9 with respect to the Directors of the
Registrant is contained on pages 2 through 4 of the 1997 Proxy Statement, which
is attached hereto as Exhibit 99, under the caption, "Election of Directors", is
incorporated herein by reference.
The information in the following table pertains to the executive officers
of the Company.
Executive Officers of C&F Financial Corporation
<TABLE>
<CAPTION>
Name (Age) Business Experience Number of Shares Beneficially
Present Position During Past Five Years Owned as of February 26, 1997
- ---------------------- ------------------------------------- -----------------------------------
<S> <C>
Larry G. Dillon (43) President of the Bank since 1989; 21,010 (1)
President and Chief Senior Vice President of the Bank
Executive Officer prior to 1989
Gari B. Sullivan (59) Senior Vice President of the Bank since 1990; 5,491 (1)
Secretary Vice President of the Bank from 1989 to 1990;
President on the Middlesex Region of First
Virginia Bank prior to 1989
Brad E. Schwartz (34) Vice President of the Bank since 1991; 4,731 (1)
Treasurer Administrative Officer of the Bank from 1989
to 1991; Senior Financial Institutions Examiner
with the Bureau of Financial Institutions of the
Virginia State Corporation Commission prior to 1989
</TABLE>
(1) Includes exercisable options of 10,033, 5,201 and 4,401 shares presently
held by Mr. Dillon, Mr. Sullivan and Mr. Schwartz, respectively.
ITEM 10. EXECUTIVE COMPENSATION
The information contained on page 5 of the 1997 Proxy Statement, which is
attached hereto as Exhibit 99, under the caption, "Executive Compensation", is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP ON CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on page 2 of the 1997 Proxy Statement, which is
attached hereto as Exhibit 99, under the caption, "Principal Holders of Capital
Stock", is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on pages 4 through 5 of the 1997 Proxy
Statement, which is attached hereto as Exhibit 99, under the caption, "Interest
of Management In Certain Transactions", is incorporated herein by reference.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
13 (a) Exhibits
Exhibit No. 3: Articles of Incorporation and Bylaws
Articles of Incorporation and Bylaws of C&F Financial
Corporation filed as Exhibit No. 3 to Form 10KSB filed March
29, 1996, of C&F Financial Corporation is incorporated
herein by reference.
Exhibit No. 13: C&F Financial Corporation 1996 Annual Report to
Shareholders
Exhibit No. 21: Subsidiaries of the Registrant
Citizens and Farmers Bank, incorporated in the Commonwealth
of Virginia (100% owned)
Exhibit No. 23: Consents of experts and counsel
Consent of Deloitte & Touche LLP
Exhibit No. 27: Financial Data Schedule
Exhibit No. 99: Additional Exhibits
C&F Financial Corporation 1997 Proxy Statement
13 (b) Reports on Form 8-K filed in the fourth quarter of 1996:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, C&F Financial Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized:
C&F FINANCIAL CORPORATION
/s/ Larry G. Dillon /s/ Brad E. Schwartz
- ------------------------------------ --------------------
Larry G. Dillon Brad E. Schwartz
President and Chief Executive Officer Treasurer
Date: February 26, 1997. Date: February 26, 1997
- ------------------------------------ --------------------------
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:
/s/ W.T. Robinson, Date: February 26, 1997
- ------------------------------------ -------------------------
W. T. Robinson, Director
/s/ J.P. Causey Jr. Date: February 26, 1997
- ------------------------------------ -------------------------
J. P. Causey Jr., Director
/s/ D.N. Sutton, Jr., Date: February 26, 1997
- ------------------------------------ -------------------------
D.N. Sutton, Jr., Director
/s/ Larry G. Dillon Date: February 26, 1997
- ------------------------------------ -------------------------
Larry G. Dillon, Director
C&F FINANCIAL CORPORATION
ANNUAL REPORT
<PAGE>
CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . 4
Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . 5
Five Year Financial Summary . . . . . . . . . . . . . . . . . . . . 9
Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 9
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Income . . . . . . . . . . . . . . . . . 20
Consolidated Statements
of Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements
of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .23
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . .35
Directors and Advisers . . . . . . . . . . . . . . . . . . . . . . .36
Officers and Locations . . . . . . . . . . . . . . . inside back cover
<PAGE>
OUR MISSION
It is the mission of the directors, officers and staff to maximize the long-term
wealth of the shareholders of C&F Financial Corporation through Citizens and
Farmers Bank and its other subsidiaries.
We believe we provide a superior value when we balance long-term objectives to
achieve both a competitive return on investment and a consistent increase in the
market value of the Corporation's stock.
This must be achieved while maintaining adequate liquidity and safety standards
for the protection of all of the Corporation's interested parties, especially
its depositors and shareholders.
This mission will be accomplished by providing our customers with distinctive
service and quality financial products which are responsive to their needs,
fairly priced, and delivered promptly, efficiently and with the highest degree
of accuracy and professionalism.
1
<PAGE>
OUR VALUES AND BELIEFS
We believe...
Excellence is the standard for all we do, achieved by encouraging and
nourishing:
respect for others; honest, open communication; individual development and
satisfaction; a sense of ownership and responsibility for Citizens and
Farmers Bank's success; participation, cooperation, and teamwork; creativity,
innovation, and initiative; prudent risk-taking; and, recognition and rewards
for achievement.
We must conduct ourselves morally and ethically at all times and in all
relationships.
We have an obligation to the well-being of all the communities we serve.
That our officers and staff are our most important assets, making the critical
difference in how Citizens and Farmers Bank performs; and, through their work
and effort, separate the Bank from all competitors.
2
<PAGE>
DESCRIPTION OF BUSINESS
C&F Financial Corporation (the "Corporation") is a one-bank holding company with
administrative offices in West Point, Virginia. Its wholly-owned subsidiary,
Citizens and Farmers Bank, offers quality general banking services to
individuals, professionals and small businesses through nine branch offices
serving the surrounding towns and counties. Citizens and Farmers Bank has three
wholly-owned subsidiaries. C&F Mortgage Corporation originates and sells
residential mortgages. These mortgage services are provided through five offices
in Virginia and two offices in Maryland. Brokerage services are offered through
C&F Investment Services, Inc. C&F Title Agency, Inc. offers title insurance
services. Trust services are provided in association with The Trust Company of
Virginia.
TRADING MARKET
Trading in the common stock of the Corporation has been minimal, therefore,
quarterly high and low bid prices are not available. The Corporation is aware of
three securities dealers, Advest, Inc., Scott & Stringfellow, Inc. and Davenport
& Company of Virginia, which make a market in the Corporation's stock traded
over the counter.
American Stock Transfer & Trust Company serves as transfer agent for the
Corporation. You may write them at 40 Wall Street, New York, NY 10005 or
telephone them toll-free at 1-800-937-5449.
3
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
For the Year 1996 1995 Change
- ---------------------------------------------------------------------------------------------------
<S> <C>
Operating income $ 23,011,913 $ 16,920,164 $ 6,091,749
Operating expenses 17,991,839 12,653,602 5,338,237
Income tax expense 958,900 890,630 68,270
- ---------------------------------------------------------------------------------------------------
Net income $ 4,061,174 $ 3,375,932 $ 685,242
- ---------------------------------------------------------------------------------------------------
At December 31,
Total assets $ 256,671,312 $ 238,995,329 $ 17,675,983
Deposits 216,422,556 204,001,334 12,421,222
Loans, net of unearned discount 139,654,749 112,749,927 26,904,822
Reserve for loan losses 1,926,775 1,914,195 12,580
Shareholders' equity 32,214,509 31,818,296 396,213
Book value per share outstanding $ 15.25 $ 14.26 $ .99
- ---------------------------------------------------------------------------------------------------
Per Common Share
Earnings per common share $ 1.84 $ 1.51 $ .33
Dividends .61 .59 .02
Dividends $ 1,365,187 $ 1,315,525 $ 49,662
Weighted average number of shares
and common stock equivalents 2,213,000 2,236,478 (23,478)
- ---------------------------------------------------------------------------------------------------
Dividends Paid Per Share
Quarter Ended 1996 1995 Date Paid
March 31 $ . 15 $ .14 April 1, 1996
June 30 .15 .15 July 1, 1996
September 30 .15 .15 October 1, 1996
December 31 .16 .15 January 2, 1997
- ---------------------------------------------------------------------------------------------------
$ .61 $ .59
- ---------------------------------------------------------------------------------------------------
</TABLE>
Dividends of $.16 per share, declared on December 17, 1996, were paid on
January 2, 1997, to shareholders of record as of December 17, 1996.
4
<PAGE>
LETTER OF SHAREHOLDERS
Dear Fellow Shareholders:
It is very much a pleasure to present this annual report and inform you of the
positive developments taking place within C&F Financial Corporation. In last
year's report, we informed you that our income for the year was down; in fact,
it was down $362,462, or 9.70%, from 1994. This decline in earnings was due to
the various investments that had been made throughout 1995 and the accompanying
startup costs involved with those investments. That "trend" has been reversed.
In 1996, we began to see returns on those investments made in 1995. Net income
increased to its highest level ever at $4,061,174 versus $3,375,932, in 1995, a
20.3% increase. This resulted in return on equity increasing to 12.66% and
return on assets increasing to 1.65% for 1996 versus 11.08% and 1.60% in 1995,
respectively. Earnings per share increased from $1.51 in 1995 to $1.84 for 1996.
The Corporation's assets increased from $238,995,329 to $256,671,312 while its
deposits increased from $204,001,334 to $216,422,556. As will be discussed
throughout this report, loans increased by $27 million as management
strategically decided to put more emphasis on lending and shift some of the
Corporation's assets into higher-yielding loans. This was a primary reason for
the increase in 1996 earnings.
The Corporation's equity position remains extremely strong with a year-end
leverage (capital) ratio of 12.2% and a risk-based capital ratio of 22.1%, both
of which are well above the federal guidelines for highly capitalized
institutions which are 5% and 10%, respectively. These ratios are also well
above the averages of our peers, which as of September 30th were 9.23% for the
leverage ratio and 14.39% for the risk-based capital ratio.
In September, your board established a Capital Plan Committee, which retained
the services of Alex Sheshunoff Management Services, Inc. and Mays & Valentine
to assist in the establishment of a capital plan to review the options and set
strategy for dealing with our high level of capital. The first phase was
implemented in October with the repurchase of over 100,000 shares of our
outstanding stock. The development of the plan is still ongoing so you should
expect to see other steps taken in 1997.
5
<PAGE>
Also, in September your Board of Directors elected William E. O'Connell Jr. to
serve on the Board of C&F Financial Corporation. Mr. O'Connell, Professor of
Business at the College of William and Mary, has served as a director of
Citizens and Farmers Bank since 1994. With his extensive knowledge of banking
and other financial areas, he brings tremendous insight and understanding to the
Board.
During 1996, we took steps to enhance and refine 1995's investments. Those 1995
investments include the branches in Middlesex and Tappahannock, which we
purchased from First Union, our new branch in Varina and the establishment of
our brokerage and mortgage subsidiaries.
Our investment subsidiary, C&F Investment Services, Inc., profitable in its
first year, saw a reduction in earnings in 1996 due to the additional overhead
associated with the employment of a second investment advisor. Mark Davis, who
works out of our Varina branch, serves our customers in that area as well as
those in New Kent County with the purchases and sales of stocks, bonds, mutual
funds, annuities and other financial services. The expansion of our investment
services subsidiary was deemed necessary due to demand and our desire to give
exceptional service.
The 1996 results for our mortgage subsidiary, C&F Mortgage Corporation, were
very satisfying. This subsidiary reached profitability two months ahead of
projections and remained profitable for each month thereafter. C&F Mortgage
Corporation has opened three new production offices in the past year; in Chester
and Williamsburg, Virginia, and Bel Air, Maryland, and has been able to attract
among the best loan origination talent in each of the areas it serves. Despite
having to absorb start-up cost for the three new branches, we are projecting a
very positive contribution to the Corporation's bottom line for 1997.
We have also made changes to enhance our management structure. Deborah R.
Nichols was promoted to Vice President and now
6
<PAGE>
oversees the administration of our branch network. Debby previously served as
Compliance Officer and Auditor and handled that position with such efficiency we
desired to expand her experience and better utilize her talents. Due to the
increasing complexity of our organization and therefore its accounting function,
in December we employed Thomas F. Cherry as Vice President & Chief Accounting
Officer. Tom, a graduate of Old Dominion University, is a certified public
accountant and has seven years of experience with Price Waterhouse where he was
an Audit Manager. Tom will oversee the entire accounting function as well as
regulatory reporting.
During this past year, we continued our quest to provide our customers with the
best services and products possible. Included in this list of new service
offerings was our new VISA Debit Card, which gives our customers the ability to
access their checking account funds through the universally accepted VISA card.
Customers may now use this card anywhere they like and rather than the
transaction being posted to a "charge" account, it is posted, with an
explanatory description, directly to their checking account. This new product
has been widely accepted by our customer base and as its use increases will
begin to reduce the number of checks we must process.
We also initiated a new 24-hour loan application service. This new service,
called "Loan Connection", allows a customer to use his/her phone to apply for
a loan rather than be required to take time away from work to come into one
of our branches to apply. With this new additional service, our customers are
now able to use their telephones to apply for loans, receive their balances
in either their checking or savings accounts, inquire as to which of their
checks have cleared, transfer funds between accounts and inquire about loan
and deposit rates. This telephonic service allows our customers to perform
all these types of inquires 24 hours a day and with complete confidentiality.
We also made other technological advances during the year. We installed a new
mainframe computer, which greatly increases our inquiry response times for
customers, as well as the nightly updating of customers' accounts. We recently
completed an extensive upgrade to our ATM network by changing all of our ATMs to
newer models and moving to an enhanced software system. These changes will
7
<PAGE>
greatly reduce our ATM "down time" and provide our customers with superior ATM
service.
A major thrust this past year has been on loans. In conjunction with our "Loan
Connection", we also initiated a marketing campaign that "Our Loan Officers Want
to Say 'Yes'". This campaign continues as we strive to emphasize consumer as
well as commercial loans. This refocus is effectively changing the mix of our
balance sheet and was directly responsible for a major portion of our increase
in earnings. We expect this positive impact on earnings to continue in 1997.
During 1997, we will continue to seek better ways for us to serve our customers
and expand our income potential. As new opportunities present themselves, we
will strive to take every advantage of them. We currently foresee several areas
of future potential as we move into this new year. We recently opened a new
title insurance business within the offices of our mortgage company and
anticipate this being a profitable venture. The Planning Commission of Henrico
County recently approved a plan of development that would have a Food Lion and
several other stores opening directly behind our Varina office. The new horse
racing track and surrounding developments in New Kent County offer significant
promise. There is much to be excited about, and we are!
We are very confident that the investments we have made over the last few years
will continue to show increasingly positive results and contribute to the
Corporation's income growth. Thank you for your continued confidence in C&F
Financial Corporation. We will always work hard to keep C&F Financial
Corporation strong and highly profitable.
/s/ LARRY G. DILLON /s/ W. T. ROBINSON
Larry G. Dillon W. T. Robinson
President & CEO Chairman
8
<PAGE>
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
========================================================================================================================
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
SELECTED YEAR-END BALANCES:
Total assets $ 256,671,312 $ 238,995,329 $ 189,672,758 $ 181,803,801 $ 173,159,089
Total capital 32,214,509 31,818,296 28,809,166 26,724,571 24,334,314
Total loans (net) 136,732,017 110,012,320 102,649,919 101,687,193 93,371,763
Total deposits 216,422,556 204,001,334 158,811,959 153,751,531 147,512,636
- ------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS:
Interest income 18,332,998 15,686,897 13,649,428 13,631,633 14,082,411
Interest expense 7,667,619 6,526,880 4,861,516 4,693,360 5,386,977
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 10,665,379 9,160,017 8,787,912 8,938,273 8,695,434
Provision for loan losses 30,000 7,831 500,000 900,000
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 10,635,379 9,160,017 8,780,081 8,438,273 7,795,434
Other income 4,678,915 1,233,267 996,654 805,208 766,094
Operating expenses 10,294,220 6,126,722 4,867,502 4,776,934 4,415,873
- ------------------------------------------------------------------------------------------------------------------------
Income before taxes 5,020,074 4,266,562 4,909,233 4,466,547 4,145,655
Income tax expense 958,900 890,630 1,170,839 1,020,335 912,229
- ------------------------------------------------------------------------------------------------------------------------
Net Income $ 4,061,174 $ 3,375,932 $ 3,738,394 $ 3,446,212 $ 3,233,426
========================================================================================================================
PER SHARE (1)
Earnings per share and common
stock equivalents 1.84 1.51 1.67 1.55 1.45
Dividends .61 .59 .55 .49 .45
========================================================================================================================
Weighted average number of
shares and common stock
equivalents 2,213,000 2,236,478 2,233,953 2,231,540 2,229,958
========================================================================================================================
</TABLE>
(1) Per share data has been restated to reflect the two-for-one stock split in
March, 1994.
<TABLE>
<CAPTION>
SIGNIFICANT RATIOS
========================================================================================================================
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Return on average assets 1.65% 1.60% 2.04%
Return on average equity 12.66 11.08 13.46
Dividend payout ratio 33.62 38.97 32.76
Average equity to average assets 13.06 14.44 15.15
========================================================================================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION PROVIDES INFORMATION ABOUT THE MAJOR COMPONENTS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
OF C&F FINANCIAL CORPORATION AND SUBSIDIARY (THE "CORPORATION"). THIS DISCUSSION
AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
OVERVIEW
Net income totaled $4.1 million in 1996, an increase of 20.3% over 1995. In
1995, net income totaled $3.4 million, a 9.7% decrease over 1994. Earnings per
share were $1.84, $1.51 and $1.67 in 1996, 1995 and 1994, respectively.
Profitability as measured by the Corporation's return on average assets (ROA)
was 1.65% in 1996, up from 1.60% in 1995, and down from 2.04% in 1994. Another
key indicator of performance, the return on average equity (ROE) for 1996 was
12.66%, compared to 11.08% and 13.46% for 1995 and 1994, respectively.
9
<PAGE>
TABLE 1. AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
The following table shows the average balance sheets for each of the years ended
December 31, 1996, 1995 and 1994. In addition, the amounts of interest earned on
earning assets, with related yields and interest on interest-bearing
liabilities, together with the rates, are shown. Loans placed on a non-accrual
status are included in the balances and were included in the computation of
yields, upon which they had an immaterial effect. Interest on tax-exempt
securities is on a taxable equivalent basis, which was computed using the
federal corporate income tax rate of 34% for all three years.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------- ------------------------------ ------------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Securities:
Taxable $ 53,431 $ 3,912 7.32% $ 54,858 $ 3,940 7.18% $ 45,275 $ 3,372 7.45%
Tax-exempt 36,686 3,198 8.72 28,967 2,658 9.18 26,213 2,465 9.40
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 90,117 7,110 7.89 83,825 6,598 7.87 71,488 5,837 8.17
Loans, net 136,089 12,139 8.92 107,422 9,640 8.97 99,089 8,530 8.61
Interest-bearing deposits
in other banks 3,178 172 5.41 3,660 214 5.85
Federal funds sold 2,423 139 5.74 2,933 120 4.09
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 229,384 $ 19,421 8.47 197,330 $16,591 8.41 173,510 $ 14,487 8.35
Reserve for loan losses (1,915) (1,912) (1,899)
Total non-earning assets 18,384 15,419 11,697
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $245,853 $210,837 $183,308
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Time and savings deposits:
Interest-bearing deposits $ 33,256 $ 891 2.68% $ 31,369 $ 902 2.88% $ 28,878 $ 819 2.84%
Money market deposits 20,468 671 3.28 18,946 639 3.37 18,969 614 3.24
Savings accounts 31,550 986 3.13 28,266 898 3.18 30,915 979 3.17
Certificates of deposit,
$100M or more 13,774 488 3.54 10,227 392 3.83 8,396 293 3.49
Other certificates of deposit 80,412 4,418 5.49 67,391 3,668 5.44 49,651 2,152 4.33
- ------------------------------------------------------------------------------------------------------------------------------------
Total time and savings deposits 179,460 7,454 4.15 156,199 6,499 4.16 136,809 4,857 3.55
- ------------------------------------------------------------------------------------------------------------------------------------
Other borrowings 4,505 214 4.75 848 28 3.30 134 4 2.99
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 183,965 7,668 4.17 157,047 6,527 4.16 136,943 4,861 3.55
- ------------------------------------------------------------------------------------------------------------------------------------
Demand deposits 26,741 20,749 16,287
Other liabilities 3,046 2,586 2,304
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 213,752 180,382 155,534
Shareholders' equity 32,101 30,455 27,774
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $245,853 $210,837 $183,308
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 11,753 $10,064 $ 9,626
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 4.30 4.25 4.80
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense to average earning assets 3.34 3.31 2.80
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.12% 5.10% 5.55%
====================================================================================================================================
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
During 1996, on a tax equivalent basis, net interest income increased 16.8% to
$11.8 million from $10.1 million in 1995. This was a result of a $2.8 million
increase in interest income which exceeded a $1.1 million increase in interest
expense. This was largely due to an approximate 16% increase in average earning
assets and an increase in the yield on average earning assets to 8.47% in 1996
from 8.41% in 1995. The rate paid on interest-bearing liabilities increased
slightly in 1996 to 4.17% from 4.16% in 1995. The increase in average earning
assets was funded by the approximate 15% growth and the purchase of deposits
during 1996. The increase in the yield on average earning assets was a result of
the investment of the majority of the deposit growth and the proceeds from
investment securities maturities and sales into higher yielding loans rather
than lower yielding securities.
The Corporation's net interest margin increased slightly in 1996 to 5.12% from
5.10% in 1995. This was a result of the slight increase in the interest rate
spread of .05%. As mentioned above, the increase in the interest rate spread is
a result of management's efforts to invest available funds into higher yielding
loans rather than securities.
10
<PAGE>
TABLE 2. RATE-VOLUME RECAP
Interest income and expense are affected by fluctuations in interest rates, by
changes in the volumes of earning assets and interest-bearing liabilities and by
the interaction of rate and volume factors. The following analysis shows the
direct causes of the year-to-year changes in the components of net interest
earnings on a taxable equivalent basis. The rate and volume variances are
calculated by a formula prescribed by the Securities and Exchange Commission.
Rate/volume variances, the third element in the calculation, are not shown
separately, but are allocated to the rate and volume variances in proportion to
the relationship of the absolute dollar amounts of the change in each. Loans
include both non-accrual loans and loans held for sale.
<TABLE>
<CAPTION>
=======================================================================================================================
1996 FROM 1995 1995 from 1994
------------------------------------ ------------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO TOTAL Due to Total
--------------------- INCREASE --------------------- Increase
(Dollars in thousands) VOLUME RATE (DECREASE) Volume Rate (Decrease)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
INTEREST INCOME:
Loans $ 2,557 $ (58) $ 2,499 $ 738 $ 372 $ 1,110
Investment securities:
Taxable (104) 76 (28) 692 (124) 568
Tax-exempt 678 (138) 540 254 (61) 193
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities 574 (62) 512 946 (185) 761
- -----------------------------------------------------------------------------------------------------------------------
Federal funds sold (69) (70) (139) (23) 42 19
Interest-bearing deposits in other banks (27) (15) (42) 214 214
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 3,035 (205) 2,830 1,875 229 2,104
- -----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Time and savings deposits:
Interest-bearing deposits 53 (64) (11) 71 12 83
Money market deposit accounts 50 (18) 32 (1) 26 25
Savings accounts 102 (14) 88 (84) 3 (81)
Certificates of deposit, $100M or more 128 (32) 96 68 31 99
Other certificates of deposit 715 35 750 884 632 1,516
- -----------------------------------------------------------------------------------------------------------------------
Total time and savings deposits 1,048 (93) 955 938 704 1,642
Other borrowings 169 17 186 24 24
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 1,217 (76) 1,141 962 704 1,666
=======================================================================================================================
Change in net interest income $ 1,818 $(129) $ 1,689 $ 913 $(475) $ 438
=======================================================================================================================
</TABLE>
Net interest income in 1995, on a tax equivalent basis, increased 4.5% to $10.1
from $9.6 million in 1994. This was a result of a $2.1 million increase in
interest income which exceeded the $1.7 million increase in interest expense.
This was attributed to an approximate 14% increase in average earning
assets and an increase on the yield of interest earning assets to 8.41% in 1995
from 8.35% in 1994. However, these increases were largely offset by an
increase in the rates paid on interest-bearing liabilities to 4.16% in 1996
from 3.55% in 1995. This increase in interest-bearing liabilities was from the
acquisition of deposits in 1995 which paid higher rates and higher rates paid
on certificates of deposit during 1995.
The Corporation's net interest margin decreased in 1995 to 5.10% from 5.55% in
1994. This was a result of a decrease in the interest rate spread to 4.25% in
1995 from 4.80% in 1994. The decrease in the interest rate spread was largely
due to the increase in interest paid on interest-bearing liabilities to 4.16% in
1995 from 3.55% in 1994. As mentioned above, the increase in the rate paid on
interest-bearing liabilities was a result of the acquisition of higher cost
deposits during 1995 and an increase in the rates paid on certificates of
deposit.
INTEREST SENSITIVITY
An important element of earnings performance and the maintenance of sufficient
liquidity is proper management of the interest sensitivity position ("GAP").
The interest sensitivity GAP is the difference between interest sensitive
assets and interest sensitive liabilities in a specific time interval.
This GAP can be managed by repricing assets and liabilities, which can
be affected by replacing an asset or liability at maturity or by
adjusting the interest rate during the life of the asset or liability.
Matching the amounts of assets and liabilities maturing in the same interval
helps to hedge interest risk and to minimize the impact on net interest income
in periods of rising or falling rates.
The Corporation's interest rate sensitivity at December 31, 1996, reflects that
the Corporation is positioned more favorably for a lower interest rate
environment. At December 31, 1996, the net interest earning assets and
interest-bearing liabilities repricing in a one-year period as a percent of
earning assets was a cumulative net liability sensitivity of 33.3%. In other
words, based on the December 31, 1996, balance sheet, the amount of liabilities
repricing in 1997 in excess of the amount of assets repricing in 1997, will be
$77.3 million, or 33.3% of all earning assets.
11
<PAGE>
TABLE 3. INTEREST SENSITIVITY ANALYSIS
The interest sensitivity position is indicated by the volume of rate sensitive
assets, less rate sensitive liabilities. This difference is generally referred
to as the interest sensitivity gap. The nature of the gap indicates how future
interest rate changes may affect net interest income. The table below shows the
Corporation's interest sensitivity position at December 31, 1996. Loans placed
on a non-accrual status are not included in the balances. Repricing dates may
differ from maturity dates for certain assets due to prepayment assumptions.
<TABLE>
<CAPTION>
==========================================================================================================================
Interest Sensitive Periods
Within 91-365 1-5 Over
(DOLLARS IN THOUSANDS) 90 Days Days Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
DECEMBER 31, 1996
EARNING ASSETS:
Loans, net of unearned income $ 41,531 $ 9,662 $ 40,362 $ 58,863 $ 150,418
Securities 2,636 889 19,426 58,192 81,143
Federal funds sold and other short-term investments 545 545
- --------------------------------------------------------------------------------------------------------------------------
Total earning assets 44,712 10,551 59,788 117,055 232,106
- --------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction accounts 7,556 15,114 15,114 37,784
Savings accounts 6,328 12,657 12,657 31,642
Money market deposit accounts 4,481 8,961 8,961 22,403
Certificates of deposit, $100M or more 3,844 8,395 2,274 14,513
Other certificates of deposit 21,813 38,357 19,082 79,252
Other borrowings 5,055 5,055
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 49,077 83,484 58,088 190,649
- --------------------------------------------------------------------------------------------------------------------------
Period gap (4,365) (72,933) 1,700 117,055
Cumulative gap $ (4,365) $(77,298) $ (75,598) $ 41,457
Ratio of cumulative gap to total earning assets (1.88%) (33.30%) (32.57%) 17.86%
==========================================================================================================================
</TABLE>
The Corporation's Asset Liability Committee (the "ALM Committee") reviews
financial data and sets asset-liability management goals and objectives. The
ALM Committee uses computer simulations to measure the effect of various
interest rate scenarios on net interest income. This modeling reflects
interest rate changes and the related impact on net income over specified
time horizons.
NON-INTEREST INCOME
1996 VS. 1995
Non-interest income increased by $3.4 million, or 279.4%, over 1995. Gain on the
sale of loans increased by $2.7 million or 100% over 1995. C&F Mortgage
Corporation started business in December of 1995. As such, 1996 was the first
full year of operations. Loan closings at the mortgage corporation totaled $174
million in 1996 compared to $2 million in 1995. No loans were sold in 1995.
Service charges on deposit accounts increased $146,000, or 17.5%, over 1995
which was largely due to an increase in overdraft fee income which was a result
of overall deposit growth. Other service charges and fees increased $433,000, or
186.1%, over 1995. This increase can be attributed to fees charged in connection
with the origination of loans at C&F Mortgage Corporation which increased by
$356,000 during 1996. Other income increased by $179,000, or 109.0%, over 1995.
This increase, among other things, was a result of an increase in title
insurance fees and in fees generated by C&F Investment Services, Inc.
1995 VS. 1994
Non-interest income increased $237,000, or 23.7%, in 1995 over 1994. Service
charges on deposit accounts increased 20.1% in 1995 over 1994. The majority of
this increase is attributed to a decision to change procedures by which
insufficient funds checks are paid. This change resulted in a substantial
increase in overdraft fee income. Other service charges and fees reflected an
increase of $93,000, or 67.3%, in 1995 over 1994. The major portion of this
increase is attributed to merchant bank card fee income. The Corporation started
offering merchant bank card services in January, 1995. The Corporation also
experienced steady growth in other sources of non-interest income, including
title insurance fees and C&F Investment Services, Inc. income.
NON-INTEREST EXPENSE
1996 VS. 1995
Non-interest expense increased $4.2 million or 68.0%, in 1996 over 1995. $2.7
million of this increase resulted from salaries and employee benefits with $2.1
million of this increase related to C&F Mortgage Corporation. As previously
mentioned, 1996 was the first full year of operations at the mortgage
corporation.
12
<PAGE>
Another $300,000 of this increase is a result of the new branches opened and
acquired during 1995. The Corporation opened one new branch and acquired
two branches during 1995. 1996 was the first full year of operation for these
branches. The remaining increase is attributed to general pay increases and
continued growth of the Corporation.
Occupancy expense increased $741,000 or 69.9% over 1995. Occupancy expenses at
C&F Mortgage Corporation increased $454,000. The majority of the remainder of
the increase is attributed to increases in depreciation expense and expenses
associated with computer hardware and software maintenance contracts. As
previously mentioned, two branches were acquired and one new branch was opened
during 1995. 1996 was the first full year of depreciation associated with these
branches. In addition, the Bank purchased a new mainframe computer and installed
five new ATMs during 1996. This attributed to both higher depreciation and
maintenance costs.
Goodwill amortization increased $221,000, or 359.3%, over 1995. This was a
result of a full year's amortization of the goodwill associated with the two
branches acquired in 1995 and the additional amortization of goodwill associated
with the West Point Crestar Branch deposits purchased during 1996.
Bank stock tax decreased $163,000, or 44.3%, over 1995. The bank stock tax in
1996 is more in line with the 1994 expense. In 1995, the bank stock tax
increased due to a recalculation of the previous three years' state returns
resulting in taxes due. FDIC premiums decreased $183,000, or 98.9%, over 1995 as
a result of premium rate reductions.
Other expenses increased $812,000, or 66.6%, over 1995. $591,000 of this
increase is attributed to C&F Mortgage Corporation. The remaining increase can
be attributed to an increase in marketing expense and overall growth of the
Corporation. The Corporation engaged in a major advertising campaign during 1996
in an effort to attain new customers in its current trade areas.
1995 VS. 1994
Non-interest expense increased $1.3 million, or 25.9%, in 1995 over 1994. The
increase in non-interest expense was attributed to overall growth of the
Corporation during 1995. In April, 1995, the subsidiary C&F Investment Services,
Inc. was organized to offer full-service brokerage services, and the Corporation
opened a Citizens and Farmers Bank branch in Varina, Virginia. In June, 1995,
the Bank acquired two additional branches in Middlesex and Tappahannock,
Virginia. C&F Mortgage Corporation, a subsidiary of the Bank, was organized in
September, and opened for business on December 1, 1995, to originate and sell
residential mortgages. The growth of the Corporation increased salaries and
employee benefits by $677,000, or 26.5%, in 1995 compared to 1994. Also related
to growth in 1995, occupancy expenses increased $148,000, or 16.3%, compared to
1994. Bank stock tax increased $201,000, or 120.7% in 1995 compared to 1994.
Bank stock tax increased due to a recalculation of the previous three years'
state returns resulting in taxes due. In 1995, FDIC Insurance premiums decreased
$153,000, or 45.2%, compared to 1994, as a result of a premium rate decrease.
INCOME TAXES
Applicable income taxes on 1996 earnings amounted to $959,000, resulting in an
effective tax rate of 19.1% compared to $891,000, or 20.9%, in 1995, and $1.17
million, or 23.8% in 1994.
TABLE 4. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
============================================================================================================
Year Ended December 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Reserve, beginning of period $ 1,914 $ 1,895 $ 1,895 $ 1,441 $ 613
Provision for loan losses 30 8 500 900
Loans charged off:
Real estate - mortgage 18 5 89
Real estate - construction
Commercial, financial and agricultural 4 4 7 14
Consumer 25 4 1 33 10
- ------------------------------------------------------------------------------------------------------------
Total loans charged off 29 8 26 52 99
Recoveries of loans previously charged off:
Real estate - mortgage 1 19 19
Real estate - construction
Commercial, financial and agricultural 11 8
Consumer 8 10 6 8
- ------------------------------------------------------------------------------------------------------------
Total recoveries 12 27 18 6 27
Net loans charged off 17 (19) 8 46 72
- ------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,927 $ 1,914 $ 1,895 $ 1,895 $ 1,441
- ------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average total loans
outstanding during period .01% .01% .01% .05% .08%
============================================================================================================
</TABLE>
13
<PAGE>
TABLE 5. ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for loan losses is a general allowance applicable to all loan
categories; however, management has allocated the allowance to provide an
indication of the relative risk characteristics of the loan portfolio. The
allocation is an estimate and should not be interpreted as an indication that
charge-offs in 1997 will occur in these amounts, or that the allocation
indicates future trends. The allocation of the allowance at December 31 for the
years indicated and the ratio of related outstanding loan balances to total
loans are as follows:
<TABLE>
<CAPTION>
==================================================================================================================
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Allocation of allowance for possible loan losses,
end of year:
- ------------------------------------------------------------------------------------------------------------------
Real estate - mortgage $ 873 $ 786 $ 751 $ 698 $ 661
Real estate - construction 69 34 26 51 38
Commercial, financial and agricultural 733 352 260 236 276
Equity Lines 62 60 62 65 67
Consumer 160 93 69 51 67
Unallocated 30 589 727 794 332
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 1,927 $ 1,914 $ 1,895 $ 1,895 $ 1,441
- ------------------------------------------------------------------------------------------------------------------
Ratio of loans to total year-end loans:
Real estate - mortgage 62% 70% 71% 68% 71%
Real estate - construction 2 2 1 3 2
Commercial, financial and agricultural 26 19 19 20 16
Equity Lines 5 5 6 6 7
Consumer 5 4 3 3 4
- ------------------------------------------------------------------------------------------------------------------
100% 100% 100% 100% 100%
==================================================================================================================
</TABLE>
ASSET QUALITY-ALLOWANCE/PROVISION FOR LOAN LOSSES
The allowance is to provide for potential losses inherent in the loan
portfolio. Among other factors, management considers the Corporation's
historical loss experience, the size and composition of the loan portfolio,
the value and adequacy of collateral and guarantors, non-performing credits
and current and anticipated economic conditions. There are additional
risks of future loan losses which cannot be precisely quantified or attributed
to particular loans or classes of loans. Since those risks include general
economic trends as well as conditions affecting individual borrowers, the
allowance for loan losses is an estimate. The allowance is also subject to
regulatory examinations and determination as to adequacy, which may take into
account such factors as the methodology used to calculate the allowance and
the size of the allowance in comparison to peer banks identified by regulatory
agencies.
In 1996, the Corporation had $30,000 in provision expense compared to no
provision expense in 1995 and $8,000 in 1994. Loans charged off during 1996
amounted to $29,000 compared to $8,000 in 1995 and $26,000 in 1994. Recoveries
amounted to $12,000, $27,000 and $18,000 in 1996, 1995 and 1994, respectively.
The ratio of net charge-offs to average outstanding loans was .01% in 1996, .01%
in 1995 and .01% in 1994. Management feels that the reserve is adequate to
absorb any losses on existing loans which may become uncollectible. TABLE 4
presents the Corporation's loan loss and recovery experience for the past five
years.
NON-PERFORMING ASSETS
Total non-performing assets, which consist of the Corporation's non-accrual
loans were $525,000 at December 31, 1996, a decrease of $382,000 from December
31, 1995. Despite the fact that the Corporation has more non-performing loans
than preferred, management believes that losses will be minimal.
The Corporation places a loan on non-accrual status when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of both principal and
interest is doubtful. Corporate policy is to place loans on non-accrual status
if principal or interest is past due for 90 days or more unless the debt is both
well secured and in the process of being collected. For 1996, $56,000 in gross
interest income would have been recorded if non-accrual loans had been current
throughout the period outstanding. For the period ended December 31, 1996,
interest income received on non-accrual loans was $20,000. TABLE 6 summarizes
non-performing loans for the past five years.
14
<PAGE>
TABLE 6. NON-PERFORMING ASSET ACTIVITY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Non-accrual loans $ 525 $ 907 $ 1,331 $ 1,567 $ 45
- ---------------------------------------------------------------------------------------------------------
Total non-performing assets 525 907 1,331 1,567 45
- ---------------------------------------------------------------------------------------------------------
Principal and/or interest past due
for 90 days or more $ 260 $ 180 $ 412 $ 1,096 $ 1,359
- ---------------------------------------------------------------------------------------------------------
Non-performing loans to total loans .38% .81% 1.27% 1.55% .05%
Allowance for loan losses to total loans 1.39 1.71 1.81 1.88 1.55
Allowance for loan losses to non-performing loans 367.05 211.03 142.37 120.93 3,202.22
Non-performing assets to total assets .20% .38% .70% .86% .03%
=========================================================================================================
</TABLE>
FINANCIAL CONDITION
SUMMARY
A financial institution's primary sources of revenue are generated by its
earning assets, while its major expenses are produced by the funding of those
assets with interest-bearing liabilities. Effective management of these sources
and uses of funds is essential in attaining a financial institution's maximum
profitability whilemaintaining a minimum amount of risk.
At the end of 1996, the Corporation had total assets of $257 million, up 7.4%
over the previous year-end. In 1995, there was an increase of 26.1% over
year-end 1994. Asset growth in 1996 and 1995 is attributed to the overall
expansion and growth of the Corporation.
TABLE 7. SUMMARY OF TOTAL LOANS
<TABLE>
<CAPTION>
==========================================================================================================
Year Ended December 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Real estate - mortgage $ 86,324 $ 77,924 $ 74,221 $ 69,009 $ 65,594
Real estate - construction 3,415 1,681 1,308 2,554 1,894
Commercial, financial and agricultural 36,385 21,719 19,379 20,072 15,401
Equity Lines 6,180 5,954 6,223 6,496 6,654
Consumer 6,360 4,657 3,457 2,891 3,341
- ----------------------------------------------------------------------------------------------------------
Total loans 138,664 111,935 104,588 101,022 92,884
Less allowance for possible loan losses (1,927) (1,914) (1,895) (1,895) (1,441)
Less unearned income (5) (9) (43) (96) (116)
- ----------------------------------------------------------------------------------------------------------
Total loans, net $ 136,732 $ 110,012 $ 102,650 $ 99,031 $ 91,327
==========================================================================================================
</TABLE>
TABLE 8. MATURITY/REPRICING SCHEDULE OF LOANS
(DOLLARS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------
Within 1 year
Fixed rate $ 8,428 $ 11,157 $ 12,450
Variable rate 31,011 31,278 28,381
After 1 year, but within 5 years
Fixed rate 12,013 8,950 7,672
Variable rate 28,349 17,072 13,016
After 5 years
Fixed rate 58,814 43,392 42,972
Variable rate 49 86 97
===================================================================
LOAN PORTFOLIO
At December 31, 1996, loans, net of unearned income and reserve for loan losses,
totaled $136.7 million, an increase of 24.3% over the 1995 total of $110.0
million. Net loans increased 7.2% and 3.7% in 1995 and 1994, respectively. The
increase in loans is a result of management's emphasis on lending and the
investment of the proceeds from the sale and maturities of securities into
higher yielding loans. Also, during 1996 the Bank initiated a new 24-hour loan
application service and a major marketing campaign to originate loans.
The Corporation's lending activities are its principal source of income. All
loans are attributable to domestic operations. Residential real estate loans,
both construction and permanent, represent the major portion of the
Corporation's loan portfolio, although commercial loans continue to increase as
a percentage of total loans. TABLES 7 AND 8 present information pertaining to
the composition of loans including unearned income and the maturity/repricing of
loans.
15
<PAGE>
TABLE 9. MATURITY OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
==============================================================================================================================
Year Ended December 31,
1996 1995 1994
-------------------------- --------------------- -----------------------
Weighted Weighted Weighted
Book Average Book Average Book Average
(DOLLARS IN THOUSANDS) Value Yield Value Yield Value Yield
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government agencies and corporations:
Maturing within 1 year $ 2,000 7.20% $ 500 7.10% $ 2,000 8.05%
Maturing after 1 year, but within 5 years 10,585 7.64 20,459 7.32 13,483 7.84
Maturing after 5 years, but within 10 years 23,472 7.09 29,379 7.21 20,467 7.28
Maturing after 10 years 4,000 8.00 3,000 8.00
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government agencies and corporations 40,057 7.33 53,338 7.29 35,950 7.53
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries:
Maturing within 1 year 4,998 6.86
Maturing after 1 year, but within 5 years 2,997 6.63 1,996 5.94 5,993 6.15
Maturing after 5 years, but within 10 years 999 8.02 999 8.02
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasuries 2,997 6.63 7,993 6.45 6,992 6.41
- ------------------------------------------------------------------------------------------------------------------------------
State and municipals(1):
Maturing within 1 year 1,525 9.80 1,508 10.62 550 13.24
Maturing after 1 year, but within 5 years 5,544 10.08 6,061 10.08 5,455 10.93
Maturing after 5 years, but within 10 years 9,040 8.76 9,193 9.56 9,798 10.00
Maturing after 10 years 21,680 8.15 17,539 8.25 11,953 8.65
- ------------------------------------------------------------------------------------------------------------------------------
Total state and municipals 37,789 8.65 34,301 9.06 27,756 9.82
- ------------------------------------------------------------------------------------------------------------------------------
Other securities:
Maturing within 1 year 500 4.78 340 11.68
Maturing after 1 year, but within 5 years 300 8.62 300 8.62 800 6.22
- ------------------------------------------------------------------------------------------------------------------------------
Total other securities 300 8.62 800 6.22 1,140 7.85
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities(2):
Maturing within 1 year 3,525 8.32 7,506 7.62 2,890 9.72
Maturing after 1 year, but within 5 years 19,426 8.20 28,816 7.80 25,731 8.67
Maturing after 5 years, but within 10 years 32,512 7.55 39,571 7.74 31,264 8.27
Maturing after 10 years 25,680 8.13 20,539 8.21 11,953 8.65
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 81,143 7.92% $ 96,432 7.81% $ 71,838 8.47%
==============================================================================================================================
</TABLE>
(1) Yields on tax exempt securities have been computed on a tax-equivalent
basis.
(2) Total investment securities excludes preferred stock at $4,530,000 and
$4,087,000 amortized cost at December 31, 1996 and 1995, respectively, or
$4,607,000 and $4,124,000 estimated fair value at December 31, 1996 and
1995, respectively.
INVESTMENT SECURITIES
The investment securities portfolio plays a primary role in the management of
interest rate sensitivity of the Corporation and generates substantial interest
income. In addition, the portfolio serves as a source of liquidity and is
used as needed to meet collateral requirements.
The securities portfolio consists of two components, investment securities held
to maturity and securities available for sale. Securities are classified as
investment securities based on management's intent and the Corporation's
ability, at the time of purchase, to hold such securities to maturity. These
securities are carried at amortized cost. Securities which may be sold in
response to changes in market interest rates, changes in the securities'
prepayment risk, increases in loan demand, general liquidity needs and other
similar factors are classified as available for sale and are carried at
estimated fair value.
At year-end 1996, total investment securities were $85.7 million, down 14.8%
from $100.6 million at year-end 1995. Securities of U.S. Government agencies and
corporations represent 46.7% of the total securities portfolio, obligations of
state and political subdivisions were 44.1%, U.S. Treasury securities were 3.5%,
preferred stocks were 5.3%, and the remainder, consisting of investment-grade
corporate bonds, totaled .4% at December 31, 1996. The decline in the securities
portfolio is primarily due to the investment of the majority of the proceeds
from the sales and maturities of securities in loans rather than new securities.
TABLE 9 presents information pertaining to the composition of the investment
securities portfolio.
16
<PAGE>
TABLE 10. AVERAGE DEPOSITS AND RATES PAID
<TABLE>
<CAPTION>
=============================================================================================================
Year Ended December 31, 1996
1996 1995 1994
---------------------- ----------------- -------------------
AVERAGE AVERAGE Average Average Average Average
BALANCE RATE Balance Rate Balance Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Non-interest bearing demand deposits $ 26,741 $ 20,749 $ 16,287
Interest-bearing transaction accounts 33,256 2.68% 31,369 2.88% 28,878 2.84%
Money market deposit accounts 20,468 3.28 18,946 3.37 18,969 3.24
Savings accounts 31,550 3.13 28,266 3.18 30,915 3.17
Certificates of deposit $100,000 or more 13,774 3.54 10,227 3.83 8,396 3.49
Other certificates of deposit 80,412 5.49 67,391 5.44 49,651 4.33
Total interest-bearing deposits 179,460 4.15% 156,199 4.16% 136,809 3.55%
- -------------------------------------------------------------------------------------------------------------
Total deposits $ 206,201 $ 176,948 $153,096
=============================================================================================================
</TABLE>
TABLE 11. MATURITIES OF CERTIFICATES OF DEPOSIT WITH BALANCES $100,000 OR MORE
==============================================
(Dollars in thousands) 12/31/96
- ----------------------------------------------
3 months or less $ 3,844
3-6 months 2,768
6-12 months 5,627
Over 12 months 2,274
- ----------------------------------------------
Total $ 14,513
==============================================
DEPOSITS
The Corporation's predominate source of funds is depository accounts. The
Corporation's deposit base is comprised of demand deposits, savings and money
market accounts and time deposits. The Corporation's deposits are provided by
individuals and businesses located within the communities served.
Total deposits increased $12.4 million, or 6.1%, in 1996 over 1995. In 1996, the
growth by deposit category was a 6.7% increase in non-interest-bearing deposits,
a 8.9% increase in savings and interest-bearing demand deposits and a 3.3%
increase in time deposits. In 1995, total deposits increased $45.2 million, or
28.5%, over 1994. Deposit growth in 1996 was attributed to the acquisition of
$7.8 million in deposits from a Crestar Bank Branch and increased marketing
efforts to increase deposits. Deposit growth in 1995 was attributed to the
acquisition of the Middlesex and Tappahannock bank branches, opening of the
Varina branch, and growth of deposits at existing branch locations. TABLE 10
presents the average deposit balances and average rates paid for the years 1996,
1995 and 1994. TABLE 11 details maturities of certificates of deposit with
balances $100,000 and over at December 31, 1996.
LIQUIDITY
Liquidity represents an institution's 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 and
investments and loans maturing within one year. As a result of the Corporation's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Corporation maintains overall
liquidity which is sufficient to satisfy its depositors' requirements and to
meet customers' credit needs.
At December 31, 1996, cash, securities classified as available for sale and
federal funds sold were 11.3% of total earning assets, compared to 16.5% at
December 31, 1995. Asset liquidity is also provided by managing loan and
securities maturities.
Additional sources of liquidity available to the Corporation include its
subsidiary Bank's capacity to borrow additional funds through an established
line of credit with a regional correspondent bank and the Federal Home Loan
Bank.
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 adequacy of the Corporation's capital is reviewed by
management on an onging basis. Management seeks to maintain a capital structure
that will assure an adequate level of capital to support anticipated asset
growth and to absorb potential losses.
The Corporation repurchased a total of 119,803 shares of its common stock during
1996. The common stock was purchased from three shareholders in three
independently negotiated transactions. Management believes this was a unique
opportunity to reduce the outstanding common stock of the Corporation at a price
per share that was favorable to remaining shareholders.
17
<PAGE>
The Corporation's capital position continues to exceed regulatory requirements.
The primary indicators relied on by bank regulators in measuring the capital
position are the Tier I capital, total risk-based capital and leverage ratios.
Tier I capital consists of common and qualifying preferred shareholders' equity
less goodwill. Total capital consists of Tier I 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. The Corporation's Tier I
capital ratio was 20.8% at December 31, 1996, compared to 23.9% at December 31,
1995. The total capital ratio was 22.1% at December 31, 1996, compared to 25.1%
at December 31, 1995. These ratios are in excess of the mandated minimum
requirement of 4% and 8%, respectively.
Shareholders' equity reached $32.2 million at year-end 1996 compared to $31.8
million at year-end 1995. The leverage ratio consists of Tier I capital divided
by average assets. At December 31, 1996, the Corporation's leverage ratio was
12.2%, compared to 14.0% at December 31, 1995. Each of these exceeds the
required minimum leverage ratio of 3%. The dividend payout ratio was 33.6%,
39.0% and 32.8%, in 1996, 1995 and 1994, respectively. During 1996, the
Corporation paid dividends of $0.61 per share, up 3.4% from $0.59 per share paid
in 1995.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", was issued and is effective for transactions occurring after
December 31, 1996 and establishes new criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
SFAS No. 125 also establishes new accounting requirements for pledged
collateral. In December 1996, SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS Statement No. 125", was issued and amends SFAS No.
125 by deferring for one year the effective date of certain sections. These
standards are not expected to have a material effect on the Corporation's
financial statements.
EFFECTS OF INFLATION
The effect of changing prices on financial institutions is typically different
from other industries as the Corporation's assets and liabilities are monetary
in nature. Interest rates are significantly impacted by inflation, but neither
the timing nor the magnitude of the changes are directly related to price level
indices. Impacts of inflation on interest rates, loan demands and deposits are
reflected in the consolidated financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this annual report that are not historical facts may
be forward looking statements. The forward looking statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from historical results or those anticipated. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of their dates.
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
==================================================================================================
December 31,
1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash and due from banks $ 8,254,573 $ 9,931,431
Interest-bearing deposits in other banks 544,755 3,031,316
Federal funds sold 630,000
- --------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,799,328 13,592,747
Investment securities - available for sale at fair value,
amortized cost of $19,021,635 and $23,623,320, respectively 18,918,211 23,742,276
Investment securities - held to maturity at amortized cost,
fair value of $67,687,235 and $78,605,638, respectively 66,651,211 76,895,496
Loans held for sale, net 12,284,022 1,885,028
Loans, net 136,732,017 110,012,320
Federal Home Loan Bank stock 856,800 805,400
Corporate premises and equipment, net of accumulated depreciation 6,011,694 5,920,608
Accrued interest receivable 2,270,156 2,439,306
Other assets 4,147,873 3,702,148
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $256,671,312 $238,995,329
- --------------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Non-interest-bearing demand deposits $ 30,828,663 $ 28,888,254
Savings and interest-bearing demand deposits 91,828,621 84,312,467
Time deposits 93,765,272 90,800,613
- --------------------------------------------------------------------------------------------------
Total deposits 216,422,556 204,001,334
Other borrowings 5,055,275 1,200,000
Accrued interest payable 541,445 570,129
Other liabilities 2,437,527 1,405,570
- --------------------------------------------------------------------------------------------------
Total liabilities 224,456,803 207,177,033
- --------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock ($1.00 par value, 3,000,000 shares authorized)
Common stock ($1.00 par value, 8,000,000 shares authorized,
2,113,041 and 2,230,744 shares issued and outstanding
at December 31, 1996 and 1995, respectively) 2,113,041 2,230,744
Additional paid-in capital 1,290,497
Retained earnings 29,795,739 27,805,170
Net unrealized gain on securities available for sale,
net of tax of $157,497 and $253,395, respectively 305,729 491,885
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 32,214,509 31,818,296
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $256,671,312 $238,995,329
==================================================================================================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
==============================================================================================================
Year Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income
Interest and fees on loans $12,138,668 $ 9,639,988 $ 8,530,429
Interest on money market investments
Federal funds sold 678 139,609 119,711
Other money market investments 171, 077 213,647 46,614
Interest on investment securities
U.S. Treasury securities 340,449 551,310 406,912
U.S. Government agencies and corporations 3,164,782 3,198,130 2,832,942
Tax-exempt obligations of states and political subdivisions 2,111,006 1,754,041 1,626,921
Corporate bonds and other 406,338 190,172 85,899
- --------------------------------------------------------------------------------------------------------------
Total interest income 18,332,998 15,686,897 13,649,428
Interest expense
Savings and interest-bearing deposits 2,548,155 2,439,260 2,403,489
Certificates of deposit, $100,000 or more 487,543 391,600 292,769
Other time deposits 4,417,701 3,667,512 2,161,359
Short-term borrowings and other 214,220 28,508 3,899
- --------------------------------------------------------------------------------------------------------------
Total interest expense 7,667,619 6,526,880 4,861,516
- --------------------------------------------------------------------------------------------------------------
Net interest income 10,665,379 9,160,017 8,787,912
Provision for loan losses 30,000 7,831
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,635,379 9,160,017 8,780,081
Other operating income
Gain on sale of loans 2,687,629
Service charges on deposit accounts 982,752 836,585 696,463
Other service charges and fees 665,390 232,536 139,114
Other income 343,144 164,146 161,077
- --------------------------------------------------------------------------------------------------------------
Total other operating income 4,678,915 1,233,267 996,654
Other operating expenses
Salaries and employee benefits 5,973,650 3,233,652 2,556,786
Occupancy expenses 1,800,904 1,060,068 911,687
Goodwill amortization 281,982 61,390
Bank stock tax 204,457 367,272 166,395
FDIC premiums 2,000 185,250 338,346
Other expenses 2,031,227 1,219,090 894,288
- --------------------------------------------------------------------------------------------------------------
Total other operating expenses 10,294,220 6,126,722 4,867,502
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 5,020,074 4,266,562 4,909,233
Income tax expense 958,900 890,630 1,170,839
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,061,174 $ 3,375,932 $ 3,738,394
- --------------------------------------------------------------------------------------------------------------
Earnings per common share $ 1.84 $ 1.51 $ 1.67
==============================================================================================================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
===========================================================================================================================
Net Unrealized
Additional Gain (loss)
Common Paid-In Retained on Securities
Stock Capital Earnings Available for Sale Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance January 1, 1994 $ 2,782,993 $ 710,413 $23,231,165 $ $26,724,571
Two-for-one stock split and change
in par value from $2.50 per share
to $1.00 per share resulting from
formation of holding company (556,599) 556,599
Stock options exercised 2,000 8,440 10,440
Net income 3,738,394 3,738,394
Cash dividends ($.55 per share) (1,224,796) (1,224,796)
Effect of adopting SFAS No. 115
at January 1, 1994 512,986 512,986
Change in unrealized gains and losses
on securities available for sale (952,429) (952,429)
- ----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 2,228,394 1,275,452 25,744,763 (439,443) 28,809,166
Stock options exercised 2,350 14,722 17,072
Net income 3,375,932 3,375,932
Cash dividends ($.59 per share) (1,315,525) (1,315,525)
Tax benefit from early disposition of
stock options 323 323
Change in unrealized gains and losses
on securities available for sale 931,328 931,328
- ----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 2,230,744 1,290,497 27,805,170 491,885 31,818,296
REPURCHASE OF COMMON STOCK (119,803) (1,301,282) (705,418) (2,126,503)
STOCK OPTIONS EXERCISED 2,100 10,785 12,885
NET INCOME 4,061,174 4,061,174
CASH DIVIDENDS ($.61 PER SHARE) (1,365,187) (1,365,187)
CHANGE IN UNREALIZED GAINS AND LOSSES
ON SECURITIES AVAILABLE FOR SALE (186,156) (186,156)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ 2,113,041 $ $29,795,739 $ 305,729 $32,214,509
============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
==============================================================================================
Year Ended December 31,
1996 1995 1994
<S> <C>
- ----------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 4,061,174 $3,375,932 $3,738,394
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 860,290 593,573 519,888
Amortization of goodwill 281,982 61,390
Deferred income taxes (23,885) 76,647 14,916
Provision for loan losses 30,000 7,831
Accretion of discounts and amortization of
premiums on investment securities, net (92,029) (172,492) (32,644)
Net realized loss (gain) on securities 9,427 (21,885) (54,936)
Gain on sale of corporate premises and
equipment (17,973)
Loss on sale of other real estate owned 3,407
Origination of loans held for sale (173,881,464) (1,885,028)
Sale of Loans 163,482,470
Change in other assets
and liabilities:
Accrued interest receivable 169,150 (565,718) 14,636
Other assets (177,931) (307,030) (377,988)
Accrued interest payable (28,684) 242,895 4,234
Other liabilities 1,031,957 1,035,870 719,700
- ----------------------------------------------------------------------------------------------
Net cash (used) provided by operating
activities (4,295,516) 2,437,561 4,554,031
- ----------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from maturities of investments
held to maturity 16,355,272 12,976,250 9,526,501
Proceeds from sales and maturities of
investments available for sale 9,831,237 3,500,000 952,259
Purchase of investment securities (6,097,835) (7,013,711) (16,594,953)
Purchase of investments available for sale (5,219,270) (37,322,896)
Purchase of FHLB stock (51,400) (32,500)
Net increase in customer loans (26,749,697) (7,362,401) (3,685,503)
Purchase of corporate premises and equipment (960,713) (2,435,968) (860,527)
Proceeds from the sale of corporate
premises and equipment 27,310
Proceeds from sale of other real estate 55,834
- ----------------------------------------------------------------------------------------------
Net cash used for investing activities (12,865,096) (37,635,392) (10,662,223)
- ----------------------------------------------------------------------------------------------
Financing Activities:
Net increase (decrease) in demand, interest-bearing
demand and savings deposits 1,619,262 (6,911,114) 1,969,002
Net increase in time deposits 2,964,659 30,636,645 3,091,426
Assumption of deposit liabilities in branch
acquisition, net of premium paid 7,406,802 19,368,958
Net increase in other borrowings 3,855,275
Repurchase of common stock (2,126,503)
Proceeds from exercise of stock options 12,885 17,072 10,440
Cash dividends (1,365,187) (1,315,525) (1,224,796)
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,367,193 41,796,036 3,846,072
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,793,419) 6,598,205 (2,262,120)
Cash and cash equivalents at beginning of year 13,592,747 6,994,542 9,256,662
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,799,328 $13,592,747 $6,994,542
- ----------------------------------------------------------------------------------------------
Supplemental disclosure
Interest paid $ 7,696,303 $ 6,283,986 $4,857,282
Income taxes paid $ 903,611 $ 960,007 $1,196,147
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of C&F Financial Corporation (the
"Corporation") and subsidiary conform to generally accepted accounting
principles and to predominant practices within the banking industry.
NATURE OF OPERATIONS: C&F Financial Corporation is a bank holding company
incorporated under the laws of the Commonwealth of Virginia. The Corporation
owns all of the stock of its sole subsidiary, Citizens and Farmers Bank (the
"Bank"), which is an independent commercial bank chartered under the laws of the
Commonwealth of Virginia. The Bank offers a wide range of banking services
available to both individuals and small businesses.
The Bank has three wholly-owned subsidiaries, C&F Title Agency, Inc., C&F
Investment Services, Inc. and C&F Mortgage Corporation, all incorporated under
the laws of the Commonwealth of Virginia. C&F Title Agency, Inc., organized in
1992, owns an equity interest in a land title insurance agency which sells title
insurance to the mortgage loan customers of the Bank and the other financial
institutions which have an equity interest in the agency. C&F Investment
Services, Inc., organized in April, 1995, is a full-service brokerage firm
offering a comprehensive range of investment services. C&F Mortgage Corporation,
organized in September, 1995, was formed to originate and sell residential
mortgages.
HOLDING COMPANY FORMATION: In December of 1993, the shareholders of Citizens and
Farmers Bank approved a Plan of Reorganization for the Bank. The reorganization
consisted of forming a holding company for the Bank named C&F Financial
Corporation. The Bank would then conduct business as a wholly-owned subsidiary
of C&F Financial Corporation. As a plan of reorganization, a two-for-one stock
split was granted to each shareholder of the Bank and that for each share of
Citizens and Farmers Bank common stock owned, the shareholder received one share
of C&F Financial Corporation. The par value of common stock was changed from
$2.50 per share to $1.00 per share and the authorized shares of common stock
were increased from 3,000,000 shares to 8,000,000 shares. In addition, 3,000,000
shares of preferred stock with a par value of $1.00 were authorized. The
formation of the holding company was completed in 1994.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of C&F Financial Corporation and its wholly-owned
subsidiary, Citizens and Farmers Bank. All material intercompany accounts and
transactions have been eliminated in consolidation.
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.
INVESTMENT SECURITIES: Investments in debt and equity securities with readily
determinable fair values are classified as either held to maturity, available
for sale or trading, based on management's intent. Available for sale securities
are carried at estimated fair value with the corresponding unrealized gains and
losses included in shareholders' equity on an after-tax basis. Securities
classified as held to maturity are carried at amortized cost. The Corporation
does not have any securities classified as trading securities. Gains or losses
are recognized only upon realization at the time of sale using the cost of the
specific security sold.
In December, 1995, in accordance with a permissible, one-time reclassification
of securities, the Corporation reassessed its liquidity needs and
transferred securities with an amortized cost of $8,985,320 from held to
maturity to available for sale at fair value resulting in a net unrealized
gain of $902. Securities with an amortized cost of $33,163,438 were also
transferred from available for sale to held to maturity at fair value,
resulting in a net unrealized gain of $626,324. This effect has been reflected
as a component of shareholders' equity of $374,313 and $413,374, net of deferred
taxes of $192,828 and $212,950 at December 31, 1996, and 1995, respectively. The
unrealized gain will be amortized over the life of each specific investment
using the level-yield method.
FEDERAL HOME LOAN BANK STOCK: Federal Home Loan Bank stock is stated at cost. No
ready market exists for this stock, and it has no quoted market value. For
presentation purposes, such stock is assumed to have market value which is equal
to cost. In addition, such stock is not considered a debt or equity security in
accordance with SFAS 115.
LOANS: Loans are stated at face value, net of unearned discount and the
allowance for loan losses. Unearned discount on certain installment loans is
recognized as
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income over the terms of the loans by a method which approximates the
effective interest method. Interest on other loans is credited to operations
based on the principal amount outstanding. Loans are generally placed on
non-accrual status when the collection of principal or interest is 90 days
or more past due, or earlier, if collection is uncertain based upon an
evaluation of the net realizable value of the collateral and the financial
strength of the borrower. Loans greater than 90 days past due may remain on
accrual status if management determines it has adequate collateral to cover the
principal and interest. For those loans which are carried on non-accrual
status, interest is recognized on the cash basis. Loan fees and origination
costs are deferred and the net amount amortized as an adjustment of the related
loan's yield using the level-yield method. The Corporation is amortizing
these amounts over the contractual life of the related loans.
In 1995, the Bank adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), as amended by
SFAS 118. These pronouncements require that an impaired loan be measured based
on the present value of expected future cash flows discounted at the effective
interest rate of the loan, or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The Corporation considers a loan impaired when it is
probable that the Corporation will be unable to collect all interest and
principal payments as scheduled in the loan agreement. A loan is not considered
impaired during a period of delay in payment if the ultimate collectibility of
all amounts due is expected. A valuation allowance is maintained to the extent
that the measure of the impaired loan is less than the recorded investment.
Consistent with the Corporation's method for non-accrual loans, interest
receipts for impaired loans are recognized on the cash basis.
LOANS HELD FOR SALE: Loans held for sale are carried at the lower of cost or
market, determined in the aggregate. Market value considers commitment
agreements with investors and prevailing market prices. Substantially all loans
originated by the mortgage banking operations are held for sale to outside
investors.
RESERVE FOR LOAN LOSSES: The reserve for loan losses is established through a
provision for loan losses charged to expense. The reserve represents an amount
which, in management's judgment, will be adequate to absorb any losses on
existing loans which may become uncollectible. Management's judgment in
determining the adequacy of the reserve is based on evaluations of the
collectibility of loans while taking into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions
which may affect a borrower's ability to repay, overall portfolio quality and
review of specific potential losses. Loans are charged against the reserve for
loan losses when management believes that the collectibility of the principal is
unlikely. Actual future losses may differ from estimates as a result of
unforeseen events.
OTHER REAL ESTATE OWNED: Foreclosed assets held for sale are carried at the
lower of (a) fair value minus estimated costs to sell or (b) cost at the time of
foreclosure. Such determination is made on an individual asset basis. If the
fair value of the asset minus the estimated costs to sell the asset is less than
the cost of the asset, the deficiency is recognized as a valuation allowance. If
the fair value of the asset minus the estimated costs to sell the asset
subsequently increases and the fair value of the asset minus the estimated costs
to sell the asset is more than its carrying amount, the valuation allowance is
reduced, but not below zero. Increases or decreases in the valuation allowance
are charged or credited to income.
Recovery of the carrying value of such real estate is dependent to a great
extent on economic, operating and other conditions that may be beyond the
Corporation's control.
CORPORATE PREMISES AND EQUIPMENT: Corporate premises and equipment are stated at
cost less accumulated depreciation computed using straight-line and accelerated
methods over the estimated useful lives of the assets. Estimated useful lives
range from 10 to 40 years for buildings and from 3 to 10 years for equipment,
furniture and fixtures. Maintenance and repairs are charged to expense as
incurred and major improvements are capitalized. Upon sale or retirement of
depreciable properties, the cost and related accumulated depreciation are netted
against proceeds and any resulting gain or loss is reflected in income.
RETIREMENT PLANS: The Corporation has a non-contributory, defined benefit
pension plan for all full-time employees over 21 years of age. The net periodic
pension cost consists of the following components: service cost (benefits earned
during the year), interest
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
costs on the projected benefit obligation, actual return on plan assets and
the net amount resulting from the amortization and deferral of certain
items over 25 years. The Corporation also has a defined contribution plan
with discretionary funding subject to certain overall annual limitations.
INCOME TAXES: The Corporation uses an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
EARNINGS PER SHARE: Earnings per share are based on the weighted average number
of shares, taking into account common stock equivalents, outstanding during the
year. The weighted average number of shares utilized in calculating earnings per
share was 2,213,000 in 1996, 2,236,478 in 1995 and 2,233,953 in 1994.
SHAREHOLDERS' EQUITY: The Corporation repurchased a total of 119,803 shares of
its common stock during 1996. The common stock was purchased from three
shareholders in three independently negotiated transactions at a price of $17.75
per share.
STATEMENT OF CASH FLOWS: For the purpose of the statement of cash flows, the
Corporation considers cash equivalents to include amounts due from banks,
federal funds sold and money market investments purchased with a maturity of
three months or less. Generally, federal funds are purchased and sold for
one-day periods.
During the year ended December 31, 1994, the Corporation transferred a loan
totaling $59,241 to real estate acquired in settlement of loans.
NOTE 2 - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Debt and equity securities are summarized as follows:
===================================================================================================
December 31, 1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------
<S> <C>
U.S. TREASURY SECURITIES $ 1,997,202 1,861 $(938) $ 1,998,125
U.S. GOVERNMENT AGENCIES
AND CORPORATIONS 12,494,290 (181,264) 12,313,026
CORPORATE BONDS
PREFERRED STOCK 4,530,143 106,435 (29,518) 4,607,060
- --------------------------------------------------------------------------------------------------
$19,021,635 $ 108,296 $(211,720) $ 18,918,211
- --------------------------------------------------------------------------------------------------
HELD TO MATURITY
- --------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES $ 999,407 $ 69,031 $ $1,068,438
U.S. GOVERNMENT AGENCIES
AND CORPORATIONS 27,562,617 242,749 (73,427) 27,731,939
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS 37,789,268 954,449 (165,976) 38,577,741
CORPORATE BONDS 299,919 9,198 309,117
- --------------------------------------------------------------------------------------------------
$66,651,211 $1,275,427 $(239,403) $ 67,687,235
- --------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE December 31, 1995
- --------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 3,494,075 $ 41,100 $ $ 3,535,175
U.S. Government agencies
and corporations 15,542,295 70,149 (29,466) 15,582,978
Corporate bonds 500,000 500,000
Preferred stock 4,086,950 56,713 (19,540) 4,124,123
- --------------------------------------------------------------------------------------------------
23,623,320 $ 167,962 $(49,006) $23,742,276
- --------------------------------------------------------------------------------------------------
HELD TO MATURITY
- --------------------------------------------------------------------------------------------------
U.S. Treasury securities $4,498,617 $ 163,102 $ $ 4,661,719
U.S. Government agencies
and corporations 37,795,846 378,038 38,173,884
Obligations of states and
political subdivisions 34,301,176 1,189,070 (38,391) 35,451,855
Corporate bonds 299,857 18,323 318,180
- --------------------------------------------------------------------------------------------------
$ 76,895,496 $1,748,533 $(38,391) $78,605,638
===================================================================================================
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without call or prepayment penalties.
===========================================================================
DECEMBER 31, 1996
AMORTIZED ESTIMATED
AVAILABLE FOR SALE COST FAIR VALUE
- ----------------------------------------------------------------------------
DUE IN ONE YEAR OR LESS $ $
DUE AFTER ONE YEAR THROUGH FIVE YEARS 2,997,202 2,997,715
DUE AFTER FIVE YEARS THROUGH TEN YEARS 8,494,290 8,314,061
DUE AFTER TEN YEARS 3,000,000 2,999,375
- ----------------------------------------------------------------------------
PREFERRED STOCK 14,491,492 14,311,151
- ----------------------------------------------------------------------------
4,530,143 4,607,060
- ----------------------------------------------------------------------------
$19,021,635 $18,918,211
============================================================================
HELD TO MATURITY
- ----------------------------------------------------------------------------
DUE IN ONE YEAR OR LESS $ 3,524,553 $ 3,539,573
DUE AFTER ONE YEAR THROUGH FIVE YEARS 16,428,649 16,968,488
DUE AFTER FIVE YEARS THROUGH TEN YEARS 24,017,824 24,315,978
DUE AFTER TEN YEARS 22,680,185 22,863,196
- ----------------------------------------------------------------------------
$66,651,211 $67,687,235
============================================================================
Proceeds from maturities and the redemption of call provisions of investment
securities held to maturity in 1996 were $16,355,272, resulting in gross
realized gains of $8,936. There were no gross realized losses. Proceeds from
sales and maturities of investment securities available for sale were
$9,831,237, resulting in gross realized losses of $18,363. There were no gross
realized gains. The amortized cost and approximate market value of securities
pledged to secure public deposits amounted to $26,066,709 and $26,441,297,
respectively at December 31, 1996.
Proceeds from maturities and the redemption of call provisions of investment
securities held to maturity in 1995 were $12,976,250, resulting in gross
realized gains of $21,885. There were no gross realized losses. Proceeds from
sales and maturities of investment securities available for sale were
$3,500,000. There were no gross realized gains or losses.
Proceeds from maturities and the redemption of call provisions of investment
securities held to maturity during 1994 were $9,526,501, resulting in gross
realized gains of $102,677. No gross losses were realized. Proceeds from sales
and maturities of investment securities available for sale during 1994 were
$952,259, resulting in gross realized losses of $47,741. No gross gains were
realized.
NOTE 3 - LOANS
Major classifications of loans are summarized as follows:
==============================================================================
December 31,
1996 1995
- ------------------------------------------------------------------------------
Real estate - mortgage $87,297,654 $ 78,730,078
Real estate - construction 3,431,934 1,697,909
Commercial, financial and agricultural 36,389,560 21,719,326
Equity Lines 6,179,907 5,954,169
Consumer 6,360,390 4,657,150
- ------------------------------------------------------------------------------
139,659,445 112,758,632
Less unearned discount (4,696) (8,705)
- ------------------------------------------------------------------------------
139,654,749 112,749,927
Less unearned loan fees (995,957) (823,412)
- ------------------------------------------------------------------------------
138,658,792 111,926,515
Less reserve for loan losses (1,926,775) (1,914,195)
- ------------------------------------------------------------------------------
$136,732,017 $110,012,320
===============================================================================
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (CONTINUED)
Loans on non-accrual status were $525,110 and $907,438 at December 31, 1996 and
1995, respectively. If interest income had been recognized on non-performing
loans at their stated rates during fiscal years 1996, 1995 and 1994, interest
income would have increased by approximately $56,000, $359,000 and $368,000,
respectively. The balance of impaired loans at December 31, 1996 and 1995 was
$525,110 and $907,438, respectively, with no specific valuation allowance
associated with these loans.
NOTE 4 - RESERVE FOR LOAN LOSSES
Changes in the reserve for loan losses were as follows:
===============================================================================
Year Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------
Balance at the beginning of year $ 1,914,195 $ 1,895,340 $ 1,895,340
Provision charged to operations 30,000 7,831
Loans charged off (29,658) (8,201) (25,859)
Recoveries of loans previously
charged off 12,238 27,056 18,028
- -------------------------------------------------------------------------------
Balance at the end of year $ 1,926,775 $1,914,195 $ 1,895,340
===============================================================================
NOTE 5 - CORPORATE PREMISES AND EQUIPMENT
Major classifications of corporate premises and equipment are summarized as
follows:
===============================================================================
December 31,
1996 1995
- -------------------------------------------------------------------------------
Land $1,138,956 $1,138,956
Buildings 4,415,659 4,335,387
Equipment, furniture and fixtures 5,666,442 4,795,339
- -------------------------------------------------------------------------------
11,221,057 10,269,682
Less accumulated depreciation (5,209,363) (4,349,074)
- -------------------------------------------------------------------------------
$ 6,011,694 $ 5,920,608
===============================================================================
NOTE 6 - TIME DEPOSITS
Time deposits are summarized as follows:
===============================================================================
December 31,
1996 1995
- -------------------------------------------------------------------------------
Certificates of deposit $100,000 or more $14,513,548 $14,079,246
Other time deposits 79,251,724 76,721,367
- -------------------------------------------------------------------------------
$93,765,272 $90,800,613
===============================================================================
Remaining maturities on certificates are as follows:
===============================================================================
Year ending December 31,
- -------------------------------------------------------------------------------
1997 $72,254,441
1998 11,977,009
1999 4,806,596
2000 4,171,045
2001 556,181
- -------------------------------------------------------------------------------
$93,765,272
===============================================================================
NOTE 7 - INCOME TAXES
Principal components of income tax expense as reflected in the statements of
income are as follows:
================================================================================
Year Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
Federal - current taxes $ 982,785 $ 813,983 $1,155,923
Federal - deferred taxes (23,885) 76,647 14,916
- --------------------------------------------------------------------------------
$ 958,900 $ 890,630 1,170,839
================================================================================
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (CONTINUED)
The income tax provision is less than would be obtained by application of the
statutory Federal corporate tax rate to pre-tax accounting income as a result of
the following items:
<TABLE>
<CAPTION>
=================================================================================================================
Year Ended December 31,
PERCENT PERCENT PERCENT
OF OF OF
PRE-TAX PRE-TAX PRE-TAX
1996 INCOME 1995 INCOME 1994 INCOME
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
Income tax computed at Federal statutory rates $ 1,706,825 34.0% $1,450,631 34.0% $1,671,803 34.0%
Tax effect of exclusion of interest income on
obligations of states and political subdivisions (712,075) (14.2) (601,178) (14.1) (554,071) (11.3)
Reduction of interest expense incurred to
carry tax-exempt assets 32,862 .6 61,693 1.5 47,451 1.0
Other (68,712) (1.4) (20,516) (0.5) 5,656 0.1
- ------------------------------------------------------------------------------------------------------------------
$ 958,900 19.0% $ 890,630 20.9% $1,170,839 23.8%
==================================================================================================================
</TABLE>
Amounts of deferred tax expense (benefit) attributable to individual temporary
differences are:
<TABLE>
<CAPTION>
==================================================================================================================
Year Ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Provision for loan loss $(14,374) $(2,662) $(9,145)
Depreciation (11,019) (36,285) (13,262)
Annuity interest income 3,949 3,949 3,949
Pension expense 5,549 (12,765) (5,651)
Deferred revenue on real estate loans 31,137 32,914 46,132
Interest on non-accrual loans 631 73,660 (58,520)
Other real estate owned 3,400
Effect of change in tax accounting method
for deferred revenue on real estate loans 459,559
Amortization of intangible assets (35,734) 6,958
Other (4,024) 7,478 5,254
- -------------------------------------------------------------------------------------------------------------------
$ (23,885) $76,647 $ 14,916
===================================================================================================================
</TABLE>
Other assets include current income taxes receivable of $72,577 at December 31,
1995 and deferred income taxes of $500,385 and $380,601 at December 31, 1996 and
1995, respectively. Other liabilities include current taxes payable of $74,330
at December 31, 1996. Income tax returns subsequent to 1992 are subject to
examination by taxing authorities.
The tax effects of each type of significant item that gave rise to deferred
taxes are:
<TABLE>
<CAPTION>
==============================================================================================================
Year Ended December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Deferred tax asset:
Deferred loan fees $ 94,907 $126,044
Allowance for loan losses 504,814 490,440
Interest on non-accrual loans 63,858 64,489
Accrued pension 97,147 102,696
Other 74,840 39,031
- --------------------------------------------------------------------------------------------------------------
Deferred tax asset 835,566 822,700
- --------------------------------------------------------------------------------------------------------------
Deferred tax liability:
Net unrealized gain on securities available for sale (157,497) (253,396)
Depreciation (177,684) (188,703)
- --------------------------------------------------------------------------------------------------------------
Deferred tax liability (335,181) (442,099)
- --------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 500,385 $ 380,601
==============================================================================================================
</TABLE>
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Corporation has a non-contributory, defined benefit pension plan for
full-time employees over 21 years of age. Benefits are generally based upon
years of service and average compensation for the five highest-paid consecutive
years of service. The Corporation funds pension costs in accordance with the
funding provisions of the Employee Retirement Income Security Act.
The assumed interest rates used in computing benefits, expected return and
salary increases were 7.5%, 9.0%
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - EMPLOYEE BENEFIT PLANS (CONTINUED)
and 6.0%, respectively, in 1996, and 8.5%, 9.0% and 6.0% in 1995 and 8.5%, 9.5%
and 6.0% in 1994, respectively.
The Corporation has an approved profit-sharing plan sponsored by the Virginia
Bankers Association. All full-time employees with one year of service are
eligible. Contributions each year are at the discretion of the Board of
Directors, within certain limitations prescribed by Federal tax regulations. The
amounts charged to expense under this plan were $226,938, $170,607 and $162,160
in 1996, 1995 and 1994, respectively.
The Corporation adopted a Management Incentive Bonus Plan (the "Bonus")
effective January 1, 1987. The Bonus is offered to selected members of
management. The Bonus is derived from a pool of funds determined by the
Corporation's total performance relative to (1) prescribed growth rates of
assets and deposits, (2) return on average assets and (3) absolute level of net
income. Attainment, in whole or in part, of these goals dictates the amount set
aside in the pool of funds. Evaluation of attainment and approval of the pool
amount are done by the Board. Payment of the Bonus is based on individual
performance and is paid in cash. Expense is accrued in the year of the specified
bonus performance. Expenses under this plan were $83,500, $66,800 and $84,480 in
1996, 1995 and 1994, respectively. Additional Bonuses totaling $37,278, $44,218
and $88,239 were granted to employees in 1996, 1995 and 1994, respectively.
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the Consolidated Balance Sheets as of December 31, 1996
and 1995, computed as of October 1, 1996 and 1995:
<TABLE>
<CAPTION>
================================================================================================================================
December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulated benefit obligation
(includes vested benefits of $563,913 and $399,784, respectively) $612,070 $424,313
- --------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date (1,014,681) (859,179)
Plan assets at fair value 1,042,093 970,099
- --------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation (funded status) 27,412 110,920
Unrecognized net gain (368,148) (380,361)
Unrecognized net obligation at October 1, 1987, being amortized
over 25 years (81,199) (86,612)
Unrecognized prior service cost 49,671 52,775
- --------------------------------------------------------------------------------------------------------------------------------
Accrued pension cost included in other liabilities $(372,264) $(303,278)
================================================================================================================================
</TABLE>
Net pension cost for 1996, 1995 and 1994 includes the following component:
<TABLE>
<CAPTION>
=============================================================================================================================
Year Ended December 31,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Service cost - benefits earned during the year $99,057 $77,343 $70,067
Interest cost on projected benefit obligation 72,880 55,912 47,211
Actual return on plan assets (87,149) (78,899) (80,279)
Net amortization and deferral (15,802) (16,813) (20,379)
- -----------------------------------------------------------------------------------------------------------------------------
Net pension costs for the year $68,986 $37,543 $16,620
=============================================================================================================================
</TABLE>
NOTE 9 - DEFERRED COMPENSATION PLAN
Effective December 1, 1989, the Chairman of the Board and President retired from
his position as the President; he remains as Chairman of the Board on a yearly
contractual basis. In lieu of participation in the Corporation's pension plan,
the retired President has received a deferred compensation contract to provide
retirement benefits. The contract provides that one half of his highest annual
compensation will be paid for life or for a minimum of ten years. An annuity
contract payable to the Corporation has been purchased to fund this obligation.
The Chairman began receiving payouts on the annuity contract on March 1, 1990.
The benefits paid to the Chairman exceed the payouts on the annuity contract.
The difference is charged to current year expense. The amount recorded as
deferred compensation expense was $11,487 in 1996, $11,685 in 1995 and $11,381
in 1994. The remaining balances of the annuity contract and the deferred
compensation liability are recorded in other assets and other liabilities,
respectively.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTY TRANSACTIONS
Loans to directors and officers totaled $1,760,406 and $1,825,984 at December
31, 1996 and 1995, respectively. New advances to directors and officers
totaled $1,047,936 and repayments totaled $1,113,514 in the year ended December
31, 1996.
NOTE 11 - STOCK OPTIONS
Under the incentive stock option plan ("the Plan"), options to purchase common
stock are granted to certain key employees of the Corporation. Options are
issued to employees at a price equal to the fair market value of common stock at
the date granted. One-third of the options granted become exercisable
commencing one year after the grant date with an additional one-third becoming
exercisable after each of the following two years. In 1983, the shareholders
authorized 50,000 shares of common stock for issuance under the Plan. An
additional 50,000 and 100,000 shares were authorized for the Plan in 1991 and
1994, respectively. All options expire ten years from the grant date.
The Company applies APB Opinion 25 and related Interpretations in accounting for
the Plan. Accordingly, no compensation cost has been recognized for its Plan.
Had compensation cost for the Plan been determined based on the fair value at
the grant dates of options consistent with the method of FASB Statement 123, the
Company's net income and earnings per share would not have been materially
different from those amounts shown on the statements of income for the years
ended December 31, 1996 and 1995.
The fair value of each option granted during the years ended December 31, 1996
and 1995 was estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions for both 1996 and 1995; risk-free
rate of return at 6.2 percent; dividend yield of 3 percent; expected lives of 8
years; and volatility of 15 percent.
Transactions under the Plan for the periods indicated were as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
1996 1995 1994
-------------------------- ----------------------- ----------------------
EXERCISE Exercise Exercise
SHARES PRICE* Shares Price* Shares Price*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Outstanding at beginning of year 62,400 $ 17.89 50,700 $16.65 44,050 $ 15.32
Granted 14,250 18.75 14,050 20.59 9,250 20.50
Exercised (2,100) 6.14 (2,350) 7.26 (2,000) 5.22
Cancelled (500) 20.50 (600) 17.83
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 74,050 $ 18.37 62,400 $17.89 50,700 $ 16.65
=================================================================================================================================
*Weighted-average
Options exercisable at year end 47,683 40,183 38,283
Weighted-average fair value
of options granted during the
year $ 4.20 $ 4.61
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
=====================================================================================================================
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------
Number Number
Range of Outstanding Remaining Exercisable
Exercise at December 31, Contractual Exercise at December 31, Exercise
Prices 1996 Life* Price* 1996 Price*
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
$11.25 to $16.75 12,100 2.2 years $ 14.96 12,100 $ 14.96
17.50 to 21.25 61,950 7.5 19.03 35,583 18.62
- ---------------------------------------------------------------------------------------------------------------------
11.25 to 21.25 74,050 6.6 18.37 47,683 17.70
=====================================================================================================================
</TABLE>
*Weighted-average
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - REGULATORY REQUIREMENTS AND RESTRICTIONS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. 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 Corporation and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the Corporation and the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Corporation and the Bank's capital amounts
and classification are 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 Corporation and the Bank to maintain minimum amounts and ratios (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) less goodwill. For both the Corporation
and the Bank, Tier I Capital consists of stockholders' equity excluding any net
unrealized gain (loss) on securities available for sale less goodwill and total
capital consists of Tier I Capital and a portion of the allowance for loan
losses. Risk weighted assets for the Corporation and the Bank were $142,688,000
and $137,977,000, respectively, at December 31, 1996 and $122,668,000 and
$118,109,000, respectively, at December 31, 1995. Management believes, as of
December 31, 1996, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Bank and the FDIC categorized the Corporation and the Bank, respectively, as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Corporation and the Bank must maintain
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 Corporation and the Bank's actual capital amounts and ratios are presented
in the table below.
<TABLE>
<CAPTION>
====================================================================================================================================
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets)
Corporation $ 31,501,780 22.1% $11,415,040 > 8.0% $14,268,800 > 10.0%
- -
Bank 26,805,373 19.4 11,038,160 > 8.0 13,797,700 > 10.0
- -
Tier I Capital (to Risk Weighted Assets)
Corporation 29,716,780 20.8 5,707,520 > 4.0 8,561,280 > 6.0
- -
Bank 25,078,373 18.2 5,519,000 > 4.0 8,278,620 > 6.0
- -
Tier I Capital (to Average Assets)
Corporation 29,716,780 12.2 7,309,830 > 3.0 9,746,440 > 4.0
- -
Bank 25,078,373 10.5 7,184,399 > 3.0 11,973,999 > 5.0
- -
AS OF DECEMBER 31, 1995:
Total Capital (to Risk Weighted Assets)
Corporation $ 30,816,411 25.1% $ 9,813,440 > 8.0% $12,266,800 > 10.0%
- -
Bank 26,507,732 22.4 9,448,741 > 8.0 11,810,927 > 10.0
- -
Tier I Capital (to Risk Weighted Assets)
Corporation 29,283,411 23.9 4,906,720 > 4.0 7,360,080 > 6.0
- -
Bank 25,031,732 21.2 4,724,371 > 4.0 7,086,556 > 6.0
- -
Tier I Capital (to Average Assets)
Corporation 29,283,411 14.0 6,263,820 > 3.0 10,439,700 > 5.0
- -
Bank 25,031,732 12.0 6,263,820 > 3.0 10,439,700 > 5.0
- -
====================================================================================================================================
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a 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, commitments to
sell loans and standby letters of credit. These instruments involve elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The contract amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
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 written is represented by the contractual amount of these
instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Collateral is obtained
based on management's credit assessment of the customer.
Standby letters of credit are written conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The total contract amount of standby letters of
credit, whose contract amounts represent credit risk, was $2,980,000 and
$1,675,000 at December 31, 1996 and 1995, respectively.
Since many of the commitments may expire without being completely drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The total amount of loan commitments was $19,883,000 and
$10,604,000 at December 31, 1996 and 1995, respectively.
Commitments to sell loans are designed to eliminate the Corporation's
exposure to fluctuations in interest rates in connection with the
Corporation's loans held for sale. The mortgage corporation sells all of the
residential mortgage loans it originates to third party investors, some of
whom require the repurchase of loans in the event of early default or faulty
documentation. Mortgage loans and their related servicing rights are sold under
agreements that define certain eligibility criteria for the mortgage loans.
Recourse periods vary from 90 days up to one year and conditions for repurchase
vary with the investor. Mortgages subject to recourse are collateralized by
single family residences, have loan-to-value ratios of 80% or less, or have
private mortgage insurance or are insured or guaranteed by an agency of the
United States government. During 1996, the mortgage company did not
repurchase any loans.
The Corporation has entered into mandatory commitments, on a best-effort basis,
to sell loans of approximately $22,806,000. Risks arise from the possible
inability of counterparties to meet the terms of their purchase contracts. The
Corporation does not expect any counterparty to fail to meet its obligations.
The Corporation is committed under noncancelable operating leases for certain
office locations. Rent expense associated with these operating leases was
$191,250 and $22,399 for the years ending December 31, 1996 and 1995,
respectively.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
================================================================================
Year ending December 31,
- --------------------------------------------------------------------------------
<S> <C>
1997 $ 176,481
1998 121,509
1999 29,508
2000 6,398
- --------------------------------------------------------------------------------
$ 333,896
================================================================================
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DISCLOSURES CONCERNING THE FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS 107, "Disclosures About Fair
Value of Financial Instruments". The estimated fair value amounts have been
determined by the Corporation using available market information and appropriate
valuation methodologies. Loan commitments are conditional and subject to market
pricing and, therefore, do not reflect a gain or loss on market value. The fair
value of standby letters of credit is based on fees currently charged for
similar agreements or on estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting date. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Corporation could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CASH AND SHORT-TERM INVESTMENTS. The nature of these instruments and their
relatively short maturities provides for the reporting of fair value equal to
the historical cost.
INVESTMENT SECURITIES. The fair value of investment securities is based on
quoted market prices.
LOANS. The estimate of the fair value of the loan portfolio is estimated based
on present values using applicable spreads to the U.S. Treasury curve.
DEPOSITS. The fair value of all demand accounts is the amount payable at the
report date. For all other deposits, the fair value is determined using the
discounted cash flow method. The discount rate is equal to the rate currently
offered on similar products.
LOANS HELD FOR SALE. The fair value of loans held for sale is estimated based on
the commitments into which individual loans will be delivered.
<TABLE>
<CAPTION>
===================================================================================================================================
December 31,
1996 1995
CARRYING ESTIMATED Carrying Estimated
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Financial Assets:
Cash and short-term investments $ 8,799 $ 8,799 $ 13,593 $ 13,593
Investment securities 85,569 86,605 100,638 102,347
Net loans 136,732 140,611 110,012 114,277
Loans held for sale, net 12,284 12,515 1,885 1,919
Financial Liabilities:
Demand deposits 122,657 123,414 113,211 113,211
Time deposits 93,765 92,974 90,800 91,433
Short-term borrowings 5,055 5,054 1,200 1,199
Off-Balance Sheet Items:
Letters of credit 2,980 1,675
Unused portions of lines of credit 19,883 10,604
===================================================================================================================================
</TABLE>
Note 15 - Branch Acquisition
On February 23, 1996, the Corporation acquired approximately $7.8 million of the
deposits of a Crestar Bank branch office located in West Point, Virginia. The
premium paid for these deposits is being amortized on a straight-line basis over
the expected periods of benefit.
In 1995, the Corporation purchased two branches in Middlesex and Tappahannock,
Virginia, and the related deposits from First Union National Bank. The
Corporation received $19,368,958 in cash, $698,144 in premises and equipment,
plus other assets in exchange for the assumption of $22,375,850 in deposit
liabilities. The excess of cost over fair market value of net assets acquired is
classified as an intangible asset that is included in other assets on the
balance sheet. This intangible asset is being amortized on a straight-line basis
over the expected periods of benefit.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Financial information for the Parent Company as of and for the years ended
December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31,
BALANCE SHEET 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash $ 14,976 $ 64,411
Investment securities available for sale 4,607,059 4,124,122
Other assets 119,700 434,612
Investments in subsidiary 27,525,661 27,542,078
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 32,267,396 $ 32,165,223
====================================================================================================================================
Liabilities and Shareholders' Equity
Other liabilities $ 52,887 $ 346,927
Shareholders' equity 32,214,509 31,818,296
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 32,267,396 $ 32,165,223
====================================================================================================================================
Years Ended December 31,
STATEMENT OF INCOME 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income on investment securities $ 319,001 $ 60,362
Dividends received from bank subsidiary 3,591,698 5,379,225
Distributions in excess of equity in net income of subsidiary (2,063,442)
Equity in undistributed net income of subsidiary 195,640
Other expenses (45,165) (213)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,061,174 $ 3,375,932
====================================================================================================================================
Years Ended December 31,
STATEMENT OF CASH FLOWS 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 4,061,174 $ 3,375,932
Adjustments to reconcile net income to net cash provided by operating
activities:
Distributions in excess of equity in net income of subsidiary 2,063,442
Equity in undistributed earnings of subsidiary (195,640)
Increase(decrease) in other assets 314,912 (22,637)
(Decrease)increase in other liabilities (294,040) 22,637
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,886,406 5,439,374
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of investments 282,500
Purchase of investments (739,536) (4,086,950)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (457,036) (4,086,950)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Repurchase of common stock (2,126,503)
Dividends paid (1,365,187) (1,315,525)
Proceeds from the issuance of stock 12,885 17,072
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,478,805) (1,298,453)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (49,435) 53,971
Cash at beginning of year 64,411 10,440
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 14,976 $ 64,411
====================================================================================================================================
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
C&F Financial Corporation
We have audited the accompanying consolidated balance sheets of C&F Financial
Corporation and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' 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, such consolidated financial statements present fairly, in all
material respects, the financial position of C&F Financial Corporation and
subsidiary at December 31, 1996 and 1995, 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.
January 17, 1997
Richmond, Virginia
35
<PAGE>
DIRECTORS AND ADVISERS (as of February 1997)
C&F FINANCIAL CORPORATION
CITIZENS AND FARMERS BANK
J. P. Causey Jr.*+
SENIOR VICE PRESIDENT, SECRETARY &
GENERAL COUNSEL
Chesapeake Corporation
Larry G. Dillon*+
PRESIDENT & CHIEF EXECUTIVE OFFICER
C&F Financial Corporation
Citizens and Farmers Bank
P. L. Harrell+
PRESIDENT
Old Dominion Grain, Inc.
Joshua H. Lawson+
PRESIDENT
Thrift Insurance Corporation
William E. O'Connell Jr.*+
PROFESSOR OF BUSINESS
The College of William and Mary
Sture G. Olsson*+
RETIRED CHAIRMAN OF THE BOARD
Chesapeake Corporation
Paul C. Robinson+
OWNER & PRESIDENT
Francisco, Robinson &
Associates, Realtors
W. T. Robinson*+
CHAIRMAN OF THE BOARD
C&F Financial Corporation
Citizens and Farmers Bank
D. N. Sutton Jr.*+
ATTORNEY-AT-LAW
Thomas B. Whitmore Jr.+
PRESIDENT
Whitmore Chevrolet, Oldsmobile,
Pontiac Co., Inc.
*C&F Financial Corporation Board Member
+Citizens and Farmers Bank Board Member
C&F MORTGAGE
CORPORATION
L. ANTHONY BOTTOMS III
EXECUTIVE VICE PRESIDENT &
CHIEF OPERATIONS OFFICER
J. P. CAUSEY JR.
SENIOR VICE PRESIDENT, SECRETARY &
GENERAL COUNSEL
Chesapeake Corporation
LARRY G. DILLON
CHAIRMAN OF THE BOARD
JAMES H. HUDSON III
ATTORNEY-AT-LAW
Hudson & Bondurant, PC
BRYAN E. MCKERNON
PRESIDENT & CHIEF EXECUTIVE OFFICER
WILLIAM E. O'CONNELL JR.
PROFESSOR OF BUSINESS
The College of William and Mary
PAUL C. ROBINSON
OWNER & PRESIDENT
Francisco, Robinson &
Associates, Realtors
C&F INVESTMENT
SERVICES, INC.
LARRY G. DILLON
PRESIDENT
ERIC F. NOST
VICE PRESIDENT
BRAD E. SCHWARTZ
TREASURER
GARI B. SULLIVAN
SENIOR VICE PRESIDENT & SECRETARY
INDEPENDENT PUBLIC
ACCOUNTANTS
DELOITTE & TOUCHE LLP
RICHMOND, VIRGINIA
CORPORATE COUNSEL
JAMES H. HUDSON III
ATTORNEY-AT-LAWA
Hudson & Bondurant, PC
VARINA ADVISORY BOARD
ROBERT A. CANFIELD
ATTORNEY-AT-LAW
Canfield, Moore, Shapiro,
Sease & Baer
SUSAN R. FERGUSON
REGGIE H. NELSON IV
PARTNER
Colonial Acres Farm
ROBERT F. NELSON
PROFESSIONAL ENGINEER
Engineering Design Associates
PHIL T. RUTLEDGE
RETIRED DEPUTY COUNTY MANAGER
County of Henrico
SANDRA W. SEELMANN
REAL ESTATE BROKER/OWNER
Varina & Seelmann Realty
36
<PAGE>
OFFICERS AND LOCATIONS (as of February 1997)
CITIZENS AND FARMERS BANK
ADMINISTRATIVE OFFICE
802 Main Street
West Point, VA 23181
(804) 843-2360
W. T. ROBINSON
CHAIRMAN OF THE BOARD
LARRY G. DILLON
PRESIDENT & CHIEF EXECUTIVE OFFICER
GARI B. SULLIVAN
SENIOR VICE PRESIDENT & SECRETARY
THOMAS F. CHERRY
VICE PRESIDENT & CHIEF ACCOUNTING OFFICER
KENNETH D. MILLS
VICE PRESIDENT, MARKETING & SALES
DEBORAH R. NICHOLS
VICE PRESIDENT, BRANCH ADMINISTRATION
BRAD E. SCHWARTZ
VICE PRESIDENT & CHIEF INFORMATION OFFICER
SANDRA S. FRYER
CASHIER
LESLIE A. CAMPBELL
ASSISTANT VICE PRESIDENT
JULIA L. GRESHAM
ASSISTANT VICE PRESIDENT
WEST POINT-MAIN OFFICE
KAREN T. BRISTOW
ASSISTANT VICE PRESIDENT & BRANCH MANAGER
802 Main Street
West Point, VA 23181
(804) 843-2360
LONGHILL ROAD
SANDRA C. ST.CLAIR
BRANCH MANAGER
4780 Longhill Road
Williamsburg, VA 23188
(757) 565-0593
MIDDLESEX
N. SUSAN GORDON
BRANCH MANAGER
Route 33 at Route 641
Saluda, VA 23149
(804) 758-3641
NORGE
ALEC J. NUTTALL
ASSISTANT VICE PRESIDENT & BRANCH MANAGER
Route 60 at Croaker Road
Norge, VA 23127
(757) 564-8114
PROVIDENCE FORGE
JAMES D. W. KING
VICE PRESIDENT & BRANCH MANAGER
Route 60 at Courthouse Road
Providence Forge, VA 23140
(804) 966-2264
QUINTON
MARY T. "JOY" WHITLEY
BRANCH MANAGER
Route 249 at I-64
Quinton, VA 23141
(804) 932-4383
TAPPAHANNOCK
DOUGLAS M. "JUDGE" SMITH
ASSISTANT VICE PRESIDENT & BRANCH MANAGER
1649 Tappahannock Boulevard
Tappahannock, VA 22560
(804) 443-2265
VARINA
TRACY E. PENDLETON
ASSISTANT VICE PRESIDENT & BRANCH MANAGER
W. KENDALL LIPSCOMB
ASSISTANT VICE PRESIDENT
Route 5 at Strath Road
Richmond, VA 23231
(804) 795-7000
WEST POINT-14TH STREET
CARLA H. STURTZ
BRANCH MANAGER
425 Fourteenth Street
West Point, VA 23181
(804) 843-2708
LOAN PRODUCTION OFFICE
TERRENCE C. GATES
VICE PRESIDENT, REAL ESTATE CONSTRUCTION
300 Arboretum Place, Suite 245
Richmond, VA 23236
(804) 330-8300
C&F INVESTMENT
SERVICES, INC.
ERIC F. NOST
VICE PRESIDENT & MANAGER
802 Main Street
West Point, VA 23181
(804) 843-4584
(800) 853-3863
MARK A. H. DAVIS
ASSISTANT VICE PRESIDENT
Route 5 at Strath Road
Richmond, VA 23231
(804) 795-7706
C&F MORTGAGE CORPORATION
ADMINISTRATIVE OFFICE
300 Arboretum Place, Suite 245
Richmond, VA 23236
(804) 330-8300
BRYAN E. MCKERNON
PRESIDENT & CHIEF EXECUTIVE OFFICER
L. ANTHONY BOTTOMS III
EXECUTIVE VICE PRESIDENT & CHIEF OPERATIONS OFFICER
MARK A. FOX
EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER
TERESA M. DOUGHERTY
VICE PRESIDENT & SENIOR UNDERWRITER
DONNA G. JARRATT
ASSISTANT VICE PRESIDENT & PRODUCTION COORDINATOR
ANNAPOLIS, MD
MICHAEL MAZZOLA
SENIOR VICE PRESIDENT & AREA MANAGER
2191 Defense Highway, Suite 200
Crofton, MD 21114
(410) 721-6770
BELAIR, MD
BRIAN BOYD
MANAGER
2105 Laurel Bush Road, Suite 201
Belair, MD 21015
(410) 569-0479
CHESTER
LEIGH ROBERTSON
MANAGER
4517 West Hundred Road
Chester, VA 23831
(804) 748-2900
NEWPORT NEWS
LINDA H. GASKINS
MANAGER
703 Thimble Shoals Boulevard, Suite C4
Newport News, VA 23606
(757) 873-8200
RICHMOND
THOMAS A. GILL
VICE PRESIDENT & MANAGER
DONALD R. JORDAN
VICE PRESIDENT & RICHMOND PRODUCTION MANAGER
300 Arboretum Place, Suite 245
Richmond, VA 23236
(804) 330-8300
RICHMOND WEST
PAGE C. YONCE
VICE PRESIDENT & MANAGER
7231 Forest Avenue, Suite 202
Richmond, VA 23226
(804) 673-3453
WILLIAMSBURG
IRVING E. "ED" JENKINS
MANAGER
3279-A Lake Powell Road
Williamsburg, VA 23185
(757) 259-1200
37
<PAGE>
C&F Financial Corporation
802 Main Street
P.O. Box 391
West Point, Virginia 23182
C&F Financial CoRporation
1996 Annual Report
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-88624 of C&F Financial Corporation on Form S-8 of our report dated January
17, 1997, incorporated by reference in this Annual Report on Form 10-KSB of C&F
Financial Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Richmond, Virginia
February 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,255
<INT-BEARING-DEPOSITS> 545
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,918
<INVESTMENTS-CARRYING> 66,651
<INVESTMENTS-MARKET> 67,687
<LOANS> 138,659
<ALLOWANCE> (1,927)
<TOTAL-ASSETS> 256,671
<DEPOSITS> 216,423
<SHORT-TERM> 5,055
<LIABILITIES-OTHER> 2,438
<LONG-TERM> 0
0
0
<COMMON> 2,113
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 256,671
<INTEREST-LOAN> 12,139
<INTEREST-INVEST> 6,194
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 18,333
<INTEREST-DEPOSIT> 7,453
<INTEREST-EXPENSE> 7,668
<INTEREST-INCOME-NET> 10,665
<LOAN-LOSSES> 30
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 10,255
<INCOME-PRETAX> 5,020
<INCOME-PRE-EXTRAORDINARY> 5,020
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,061
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 8.47
<LOANS-NON> 525
<LOANS-PAST> 260
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,914
<CHARGE-OFFS> 29
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 1,927
<ALLOWANCE-DOMESTIC> 1,897
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 30
</TABLE>
[Logo]
C&F Financial Corporation
Eighth and Main Streets
P.O. Box 391
West Point, Virginia 23181
Dear Fellow Shareholders:
You are cordially invited to attend the Annual Meeting of
Shareholders of C&F Financial Corporation, the holding company for Citizens and
Farmers Bank. The meeting will be held on Tuesday, April 15, 1997, at 3:30 p.m.
at the van den Boogaard Center, 3510 King William Avenue, West Point, Virginia.
The accompanying Notice and Proxy Statement describe the matters to be presented
at the meeting. Enclosed is our Annual Report to Shareholders that will be
reviewed at the Annual Meeting.
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AS SOON AS
POSSIBLE. Whether or not you will be able to attend the Annual Meeting, it is
important that your shares be represented and your vote recorded. The proxy may
be revoked at any time before it is voted at the Annual Meeting.
We appreciate your continuing loyalty and support of Citizens and
Farmers Bank and C&F Financial Corporation.
Sincerely,
Larry G. Dillon
PRESIDENT & CHIEF EXECUTIVE OFFICER
March 7, 1997
<PAGE>
(This page intentionally left blank)
<PAGE>
C&F FINANCIAL CORPORATION
Eighth and Main Streets
P. O. Box 391
West Point, Virginia 23181
------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------------------------------
The Annual Meeting of Shareholders of C&F Financial Corporation
(the "Company") will be held at the van den Boogaard Center, 3510 King William
Avenue, West Point, Virginia, on Tuesday, April 15, 1997, at 3:30 p.m. for the
following purposes:
1. To elect two Class I directors and one Class III
director to the Board of Directors of the Company as
described in the Proxy Statement accompanying this
notice.
2. To ratify the Board of Directors' appointment of Deloitte &
Touche LLP as the Company's independent public accountants
for 1997.
3. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Shareholders of record at the close of business on February
14, 1997, are entitled to notice of and to vote at the Annual Meeting or
any adjournment thereof.
By Order of the Board of Directors
Gari B. Sullivan
SECRETARY
March 7, 1997
IMPORTANT NOTICE
PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN
THE ACCOMPANYING POSTAGE PAID ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED
AT THE MEETING. SHAREHOLDERS ATTENDING THE MEETING MAY PERSONALLY VOTE ON ALL
MATTERS WHICH ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE REVOKED.
<PAGE>
(This page intentionally left blank)
<PAGE>
C&F FINANCIAL CORPORATION
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 15, 1997
GENERAL
The following information is furnished in connection with the
solicitation by and on behalf of the Board of Directors of the enclosed proxy to
be used at the Annual Meeting of Shareholders (the "Annual Meeting") of C&F
Financial Corporation (the "Company") to be held Tuesday, April 15, 1997, at
3:30 p.m. at the van den Boogaard Center, 3510 King William Avenue, West Point,
Virginia. The approximate mailing date of this Proxy Statement and accompanying
proxy is March 7, 1997.
REVOCATION AND VOTING OF PROXIES
Execution of a proxy will not affect a shareholder's right to
attend the Annual Meeting and to vote in person. Any shareholder who has
executed and returned a proxy may revoke it by attending the Annual Meeting and
requesting to vote in person. A shareholder may also revoke his proxy at any
time before it is exercised by filing a written notice with the Company or by
submitting a proxy bearing a later date. Proxies will extend to, and will be
voted at, any properly adjourned session of the Annual Meeting. If a shareholder
specifies how the proxy is to be voted with respect to any proposals for which a
choice is provided, the proxy will be voted in accordance with such
specifications. If a shareholder fails to specify with respect to such
proposals, the proxy will be voted FOR proposals 1 and 2.
VOTING RIGHTS OF SHAREHOLDERS
Only those shareholders of record at the close of business on
February 14, 1997, are entitled to notice of and to vote at the Annual Meeting,
or any adjournments thereof. The number of shares of common stock of the Company
outstanding and entitled to vote at the Annual Meeting is 2,113,041. The Company
has no other class of stock outstanding. A majority of the votes entitled to be
cast, represented in person or by proxy, will constitute a quorum for the
transaction of business. Each share of Company Common Stock entitles the record
holder thereof to one vote upon each matter to be voted upon at the Annual
Meeting.
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by the Company.
Solicitations will be made only by the use of the mails, except that officers
and regular employees of the Company and Citizens and Farmers Bank (the "Bank")
may make solicitations of proxies by telephone, telegram, special letter, or by
special call, acting without compensation other than regular compensation. It is
contemplated that brokerage houses and other nominees, custodians, and
fiduciaries will be requested to forward the proxy soliciting material to the
beneficial owners of the stock held of record by such persons, and the Company
will reimburse them for their charges and expenses in this connection.
<PAGE>
PRINCIPAL HOLDERS OF CAPITAL STOCK
The following table shows the share ownership as of February 14,
1997, of the shareholders known to the Company to be the beneficial owners of
more than 5% of the Company's Common Stock, par value $1.00 per share, which are
the only voting securities outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- -------------------- ---------------------- ----------
<S> <C>
Sture G. Olsson 257,824(2) 12.2%
P. O. Box 311
West Point, VA 23181
W. T. Robinson 112,048(2) 5.3%
P. O. Box 391
West Point, VA 23181
</TABLE>
(1) For purposes of this table, beneficial ownership has been
determined in accordance with the provision of Rule 13d-3 of the
Securities Exchange Act of 1934 under which, in general, a
person is deemed to be the beneficial owner of a security if he
or she has or shares the power to vote or direct the voting of
the security or the power to dispose of or direct the
disposition of the security, or if he has the right to acquire
beneficial ownership of the security within sixty days.
(2) Includes shares held by affiliated corporations, close
relatives, and children, and shares held jointly with spouses or
as custodians or trustees for children, as follows: Mr. Olsson,
249,536 shares (held in a trust of which Crestar Bank and Mr.
Olsson are co-trustees); Mr. Robinson, 50,000 shares owned by
spouse.
As of February 14, 1997, the directors and officers of the
Company and its subsidiary bank beneficially owned as a group 575,299 shares (or
approximately 26.9%) of Company Common Stock (including shares for which they
hold presently exerciseable stock options).
PROPOSAL ONE
ELECTION OF DIRECTORS
The Company's Board is divided into three classes (I, II, and
III) of directors. The term of office for Class I directors will expire at the
Annual Meeting. Two persons named immediately below, each of whom currently
serves as a director of the Company, will be nominated to serve as a Class I
director and one person named below, who currently serves as a director of the
Company, will be nominated to serve as a Class III director. If elected, the
Class I nominees will serve until the 2000 Annual Meeting of Shareholders and
the Class III nominee will serve until the 1999 Annual Meeting of Shareholders.
The persons named in the proxy will vote for the election of the nominees named
below unless authority is withheld. The Company's Board believes that the
nominees will be available and able to serve as directors, but if any of these
persons should not be available or able to serve, the proxies may exercise
discretionary authority to vote for a substitute proposed by the Company's
Board.
Certain information concerning the nominees for election at the
Annual Meeting as Class I and Class III directors is set forth below, as well as
certain information about Class II directors and the other Class III director,
who will continue in office until the 1998 and 1999 Annual Meeting of
Shareholders, respectively.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
PRINCIPAL BENEFICIALLY OWNED
SERVED AS OCCUPATION DURING AS OF FEBRUARY 14, 1997
NAME (AGE) SINCE (1) PAST FIVE YEARS (PERCENT OF CLASS)(2)
- ---------- --------- --------------- ---------------------
<S> <C>
CLASS I DIRECTORS (NOMINEES) (SERVING UNTIL THE 2000 ANNUAL MEETING)
Larry G. Dillon (43) 1989 President of the Company 21,010(3)
and the Bank *
D. N. Sutton, Jr. (71) 1974 David Nelson Sutton, Jr. 104,671(4)
Attorney-at-Law (4.9%)
CLASS II DIRECTORS (SERVING UNTIL THE 1998 ANNUAL MEETING)
Sture G. Olsson (76) 1952 Retired; previously Chairman of 257,824(4)
the Board, Chesapeake Corporation (12.2%)
W. T. Robinson (84) 1948 Chairman of the Board 112,048(4)
of the Company and the Bank (5.3%)
CLASS III DIRECTORS (SERVING UNTIL THE 1999 ANNUAL MEETING)
J. P. Causey Jr. (53) 1984 Senior Vice President, Secretary & 17,744
General Counsel of Chesapeake *
Corporation
William E. O'Connell, Jr. (59) 1994 Professor of Business, The College 1,000
(NOMINEE) of William and Mary *
</TABLE>
* Represents less than 1% of the total outstanding shares of the
Company's Common Stock.
(1) Refers to the year in which the director was first elected to the
Board of Directors of the Bank.
(2) See footnote 1 of table above "Principal Holders of Capital Stock"
for description of how beneficial ownership has been determined
for purposes of this table.
(3) Includes 10,033 shares as to which Mr. Dillon holds presently
exercisable options. A description of such options is set forth
below in greater detail in "Employee Benefit Plans - Incentive Stock
Option Plan".
(4) Includes shares held by affiliated corporations, close relatives,
children, and shares held jointly with spouses or as custodians or
trustees for children, as follows: Messrs. Olsson and W. T.
Robinson, see discussion above under "Principal Holders of Capital
Stock"; Mr. Sutton, 55,000 shares owned by children for whom Mr.
Sutton is attorney-in-fact.
The Board of Directors is not aware of any family relationship
between any director or person nominated by the Company to become director; nor
is the Board of Directors aware of any involvement in legal proceedings which
are material to any impairment of the ability or integrity of any director or
person nominated to become a director.
The Board of Directors of the Bank consists of the six members
of the Company's Board listed above as well as P. L. Harrell, Joshua H.
Lawson, Paul C. Robinson, and Thomas B. Whitmore, Jr.
- 3 -
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE DIRECTORS
NOMINATED TO SERVE AS CLASS I DIRECTORS AND THE DIRECTOR NOMINATED TO SERVE
AS A CLASS III DIRECTOR.
BOARD COMMITTEES AND ATTENDANCE
During 1996, there were seven meetings of the Board of Directors
of the Company and 14 meetings of the Board of Directors of the Bank. Each
director attended at least 75% of all meetings of the boards and committees on
which he served. The Board of Directors of the Company has a Capital Plan
Committee and the Board of Directors of the Bank has Executive, Compensation,
and Audit Committees.
Members of the Capital Plan Committee are Messrs. Dillon,
Causey, W. T. Robinson, and O'Connell. The Capital Plan Committee reviews
capital related matters and submits proposals or recommendations to the Board of
Directors. The Capital Plan Committee met four times during 1996.
Members of the Executive Committee are Messrs. Dillon, Olsson,
W. T. Robinson, Sutton, and O'Connell. The Executive Committee reviews
various matters and submits proposals or recommendations to the Board of
Directors. The Executive Committee did not meet during 1996.
Members of the Compensation Committee are Messrs. Causey,
Harrell, W. T. Robinson, and Whitmore. The Compensation Committee recommends the
level of compensation of each officer of the Bank, the granting of stock
options and other employee remuneration plans to the Board of Directors. The
Compensation Committee met twice during 1996.
Members of the Audit Committee are Messrs. Causey, Lawson,
and P. Robinson. The Audit Committee reviews and approves various audit
functions including the year-end audit performed by the Company's independent
public accountants. The Audit Committee met four times during 1996.
The Board has no separate nominating committee. The entire Board
reviews, on an as-needed basis, the qualifications of candidates for membership
to the Board.
DIRECTORS' FEES
Each of the directors of the Company is also a director of the
Bank. Effective January 1, 1997, non-employee members of the Board of Directors
of the Bank will receive an annual retainer of $2,500, payable quarterly, with a
base meeting fee of $300 per day for Bank or Company meetings and a secondary
meeting fee of $100 for Board committee or Company or Bank meetings on the same
day as another meeting for which the base meeting fee is paid.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
As of December 31, 1996, borrowing by all policy-making officers,
directors, principal shareholders and their associates amounted to $1,760,406,
or 5.5%, of total capital. The maximum aggregate amount of such indebtedness
during 1996 was $2,681,441, or 8.3%, of total year-end capital. These loans were
made in the ordinary course of the Bank's business, on the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with others, and do not involve more than the normal
risks of collectibility or present other unfavorable features. The Bank expects
to have in the future similar banking transactions with officers, directors,
principal shareholders and their associates.
- 4 -
<PAGE>
The firm of Thrift Insurance Corporation serves as the local
agent for the Fidelity and Deposit Company of Maryland. Mr. Lawson, a director
of the Bank, is the majority owner of Thrift Insurance Corporation. The Bank
maintains its various insurance policies including its blanket bond coverage,
directors and officers liability coverage, and building and equipment coverage
through Fidelity and Deposit Company of Maryland. All premiums are negotiated
directly with representatives of Fidelity and Deposit Company of Maryland.
During 1996, the Bank paid premiums totaling $87,508 to Thrift Insurance
Corporation, as agent, for the insurance coverage maintained by the Bank
($24,429 of which represents an annualized portion of a two-year prepaid
premium).
EXECUTIVE COMPENSATION
The following table shows the cash compensation paid to Mr.
Dillon, President and Chief Executive Officer of the Company, during 1996, 1995,
and 1994. During 1996, no other executive officer of the Company received
compensation in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- --------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS(3) COMPENSATION(4)
- ------------------- -------- -------- --------- --------------- ------------ ---------------
<S> <C>
Larry G. Dillon 1996 $102,500 $20,000 - 1,600 $17,126
President/Chief 1995 92,500 15,000 1,500 16,322
Executive Officer 1994 82,500 16,575 - 1,400 14,619
</TABLE>
(1) All bonuses were paid under the Management Incentive Bonus Plan,
which is described below in "Employee Benefit Plans".
(2) The amount of compensation in the form of perquisites or other
personal benefits properly categorized in this column according to
the disclosure rules adopted by the Commission did not exceed the
lesser of either $50,000, or 10% of the total annual salary and
bonus reported in each of the three years reported for Mr. Dillon,
and therefore, is not required to be reported.
(3) 1996 options were granted at an exercise price of $18.75 per share;
1995 options were granted at an exercise price of $20.50 per share;
1994 options were granted at an exercise price of $20.50 per share.
(4) $11,711, $10,908, and $9,150 were paid under the Bank's
Profit-Sharing Plan for 1996, 1995, and 1994, respectively, and
$5,415, $5,414, and $5,469 were paid under the Bank's Split-Dollar
Insurance Program for 1996, 1995, and 1994, respectively, which are
described below under "Employee Benefits Plans".
EMPLOYEE BENEFIT PLANS
MANAGEMENT INCENTIVE BONUS PLAN. The Bank adopted a Management
Incentive Bonus Plan (the "Bonus Plan") effective January 1, 1987. The Bonus
Plan is offered to selected members of management. The bonus is derived from a
pool of funds determined by the Bank's total performance relative to (1)
prescribed growth rates of assets and deposits, (2) return on average assets,
and (3) absolute level of net income. Attainment, in whole or in part, of these
goals dictates the amount set aside in the pool of funds. Evaluation of
attainment and approval of the pool amount is done by the Board of Directors of
the Bank. Payment of the bonus is based on individual performance and paid in
cash as a percentage of the respective individual's base salary. Expense is
accrued in the year of the specified bonus performance.
- 5 -
<PAGE>
Other than the Bonus Plan (above), the Incentive Stock Option
Plan (detailed below), and the Split-Dollar Insurance Program (detailed below),
there are no personal benefits provided to principal officers and directors
which are not provided to all other full-time employees.
PROFIT-SHARING/401(K) PLAN. The Bank maintains a Defined
Contribution "Profit-Sharing" Plan sponsored by the Virginia Bankers
Association. The plan was amended effective January 1, 1997, to include a 401(k)
savings provision, which authorizes a maximum voluntary salary deferral of up to
15% of compensation (with a partial company match), subject to statutory
limitations. The profit-sharing arrangement provides for an annual discretionary
contribution to the account of each eligible employee based in part on the
Bank's profitability for a given year, and on each participant's yearly
earnings. All full-time employees with at least six months of service are
eligible to participate. Contributions and earnings may be invested in various
investment vehicles offered through the Virginia Bankers Association.
Contributions and earnings are tax-deferred. An employee is 40% vested after
four years of service, 60% after five years, 80% after six years, and fully
vested after seven years.
RETIREMENT PLAN. The Bank has a Non-Contributory Defined Benefit
Retirement Plan (the "Retirement Plan") covering substantially all employees who
have reached the age of 21 and have been fully employed for at least one year.
The Retirement Plan provides participants with retirement benefits related to
salary and years of credited service. Employees become vested after five plan
years of service, and the normal retirement date is the plan anniversary date
nearest the employee's 65th birthday. The Retirement Plan does not cover
directors who are not active officers. The amount expensed for the Retirement
Plan during the year ended December 31, 1996, was $68,986.
The following table shows the estimated annual retirement
benefits payable to employees in the average annual salary and years of service
classifications set forth below assuming retirement at the normal retirement age
of 65.
<TABLE>
<CAPTION>
CONSECUTIVE FIVE-YEAR YEARS OF CREDITED SERVICE
AVERAGE SALARY 15 20 25 30 35
- ------------------------------ --------------- --------------- --------------- --------------- ---------------
<S> <C>
$ 25,000 $ 4,688 $ 6,250 $ 7,813 $ 8,750 $ 9,688
40,000 8,895 11,860 14,825 16,790 18,755
55,000 13,395 17,860 22,325 25,415 28,505
75,000 19,395 25,860 33,325 36,915 41,505
100,000 26,895 35,860 44,825 51,290 57,755
</TABLE>
Benefits under the Retirement Plan are based on a straight life
annuity assuming full benefit at age 65 and do not reflect the deduction taken
for Social Security Benefits. The estimated annual benefit payable under the
Retirement Plan upon retirement is $59,880 for Mr. Dillon, credited with 40
years of service. Benefits are estimated on the basis that he will continue to
receive, until age 65, covered salary in the same amount paid in 1996.
SPLIT-DOLLAR INSURANCE PLAN. In addition to a group life
insurance plan that is available to all full- time employees, the Bank offers
a Split-Dollar Insurance Program to selected members of management. The
insurance benefit under this program is equal to five times an officer's annual
salary in effect at the time the officer is enrolled in the program. While the
Bank advances a portion of the annual premium expense, each participant is
obligated to reimburse, without interest, the aggregate amount advanced on
his behalf during his participation in the program. Citizens and Farmers Bank
recovers its cost from each participant at retirement or from the proceeds of
the policy if the participant dies before reaching retirement age.
- 6 -
<PAGE>
INCENTIVE STOCK OPTION PLAN. The Company adopted the 1994
Incentive Stock Plan (the "Incentive Plan") effective May 1, 1994. The Incentive
Plan makes available up to 100,000 shares of common stock for awards to key
employees of the Company and its subsidiaries in the form of stock options,
stock appreciation rights, and restricted stock (collectively, "Awards"). The
purpose of the Incentive Plan is to promote the success of the Company and its
subsidiaries by providing incentives to key employees that will promote the
identification of their personal interests with the long-term financial success
of the Company and with growth in shareholder value. The Incentive Plan is
designed to provide flexibility to the Company in its ability to motivate,
attract, and retain the services of key employees upon whose judgment, interest,
and special effort the successful conduct of its operation is largely dependent.
Under the terms of the Incentive Plan, the Compensation Committee
of the Board of Directors of the Bank (the "Committee") will administer the
plan. No director may serve as a member of the Committee if he is eligible to
participate in the Incentive Plan or was at any time within one year prior to
his appointment to the Committee eligible to participate in the Incentive Plan.
The Committee will have the power to determine the key employees to whom Awards
shall be made.
Each Award under the Incentive Plan will be made pursuant to a
written agreement between the Company and the recipient of the Award (the
"Agreement"). In administering the Incentive Plan, the Committee will have the
authority to determine the terms and conditions upon which Awards may be made
and exercised, to determine terms and provisions of each Agreement, to construe
and interpret the Incentive Plan and the Agreements, to establish, amend, or
waive rules or regulations for the Incentive Plan's administration, to
accelerate the exercisability of any Award, the end of any performance period,
or termination of any period of restriction, and to make all other
determinations and take all other actions necessary or advisable for the
administration of the Incentive Plan.
The Board may terminate, amend, or modify the Incentive Plan from
time to time in any respect without shareholder approval, unless the particular
amendment or modification requires shareholder approval under the Internal
Revenue Code of 1986, as amended (the "Code"), the rules and regulations under
Section 16 of the Securities Exchange Act of 1934 or pursuant to any other
applicable laws, rules, or regulations.
The following table shows all grants of options to Mr. Dillon in
1996:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE
- ---- ----------------- ----------------- ------------ ------------
<S> <C>
Larry G. Dillon 1,600 11.2% $18.75 12/17/06
</TABLE>
(1) Vesting is as follows: One-third by December 17, 1997; two-thirds
by December 17, 1998; and 100% by December 17, 1999.
<PAGE>
-7-
The following table shows stock options exercised by Mr. Dillon in
1996:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS/SAR
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ----- ------------- -------------- --------------------- ----------------------
<S> <C>
Larry G. Dillon 2,000 27,740 10,033/ 54,982/
3,067 (2,567)
</TABLE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Except as set forth below, the Company believes that its officers
and directors complied with all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934 during 1996. The following persons inadvertently
failed to file on a timely basis reports required by Section 16(a) as follows:
Brad E. Schwartz and Larry G. Dillon each filed two reports late involving two
transactions; Gari B. Sullivan filed one report late involving one transaction.
The required reports for these individuals were filed as of February 6, 1997.
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, subject to ratification by the
shareholders, has appointed Deloitte & Touche LLP as independent public
accountants for 1997.
A representative of Deloitte & Touche LLP will be present at the
Annual Meeting and will be given the opportunity to make a statement and respond
to appropriate questions from the shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF
THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT PUBLIC ACCOUNTANTS.
OTHER BUSINESS
As of the date of this Proxy Statement, management of the Company
has no knowledge of any matters to be presented for consideration at the Annual
Meeting other than those referred to above. If any other matters properly come
before the Annual Meeting, the persons named in the accompanying proxy intend to
vote such proxy, to the extent entitled, in accordance with their best judgment.
<PAGE>
-8-
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 1998
Annual Meeting must be received by the Company no later than November 22, 1997.
Under applicable law, the Board of Directors need not include an otherwise
appropriate shareholder proposal (including any shareholder nominations for
director candidates) in its proxy statement or form of proxy for that meeting
unless the proposal is received by the Company's Secretary, at the Company's
principal office in West Point, Virginia, on or before the date set forth above.
By Order of the Board of Directors
Gari B. Sullivan
SECRETARY
March 7, 1997
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB REPORT (INCLUDING EXHIBITS)
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER
31, 1996, WILL BE FURNISHED WITHOUT CHARGE TO SHAREHOLDERS UPON WRITTEN REQUEST
DIRECTED TO THE COMPANY'S SECRETARY AS SET FORTH ON THE FIRST PAGE OF THIS PROXY
STATEMENT.
- 9 -
