UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________
Commission file number 000-23423
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C&F FINANCIAL CORPORATION
(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
(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-K 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-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant was approximately $59,757,000 as of March 3, 1999.
The number of shares outstanding of the registrant's common stock, $1.00
par value was 3,731,888 at March 3, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Location in Form 10-K Incorporated Document
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PART II
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Item 5 - Market for Registrants Common The Company's 1998 Annual Report to
Equity and Related Stockholder Shareholders for fiscal years ended
Matters December 31, 1998, Quarterly Condensed Statements of
Income-Unaudited, page 43, and
Investor Information, page 45.
Item 6 - Selected Financial Data The Company's 1998 Annual Report to Shareholders for
fiscal years ended December 31, 1998, Five Year Financial
Summary, page 10.
Item 7 - Management's Discussion and The Company's 1998 Annual Report to Shareholders
Analysis of Financial Conditions for the fiscal years ended December 31, 1998,
and Results of Operations Management's Discussion and Analysis of Financial
Condition and Results of Operations, pages 9 through 23.
Item 7a - Quantitative and Qualitative Disclosures The Company's 1998 Annual Report to Shareholders for
about Market Risk for the fiscal years ended December 31, 1998, Market
Risk Management, pages 13 through 15.
Item 8 - Financial Statements and The Company's 1998 Annual Report to Shareholders
Supplementary Data for fiscal years ended December 31, 1998, Consolidated
Financial Statements, Notes to Consolidated Financial
Statements, and Independent Auditors' Report,
pages 24 through 44.
PART III
Item 10 - Directors and Executive The Company's 1998 Proxy Statement, Election
Officers of the Registrant of Directors, pages 2 through 3.
Item 11 - Executive Compensation The Company's 1999 Proxy Statement, Executive
Compensation, pages 5 through 6.
Item 12 - Security Ownership of Certain The Company's 1999 Proxy Statement, Principal Holders
Beneficial Owners and Management of Capital Stock, page 2.
Item 13 - Certain Relationships and The Company's 1999 Proxy Statement, Interest of
Related Transactions Management in Certain Transactions, pages 4 through 5.
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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. SELECTED FINANCIAL DATA.....................................page 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION..............page 4
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..page 4
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................page 4
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....................page 4
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT........................................page 5
ITEM 11. EXECUTIVE COMPENSATION......................................page 5
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.....................................page 6
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS..............................................page 6
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K............................page 7
<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
including the main office. 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 (two 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. See Note 16 to the Consolidated
Financial Statements for summarized financial information by business segment.
C&F Mortgage Corporation provides mortgage services through six locations
in Virginia and two in Maryland. The Virginia offices are in Richmond (two
locations), Williamsburg, Newport News, Charlottesville, and Chester. The
Maryland offices are in Crofton and Bel Aire.
As of December 31, 1998, a total of 230 persons were employed by the
Company, of whom 17 were part-time. The Company considers relations with its
employees to be excellent.
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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 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.
C&F Title Agency competes with other title companies owned by lawyers and
other financial institutions.
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 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.
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C&F Mortgage Corporation has eight leased offices, six in Virginia and two
in Maryland. Rental expense for these locations totaled $297,000 for the year
ended December 31, 1998.
All of the Company's properties are in good operating condition and are
adequate for the Company's present and anticipated future needs.
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 information contained on pages 43 and 45 of the 1998 Annual Report to
Shareholders, which is attached hereto as Exhibit 13, under the captions, "Note
18: Quarterly Condensed Statements of Income - Unaudited" and "Investor
Information" is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained on page 10 of the 1998 Annual Report to
Shareholders, which is attached hereto as Exhibit 13, under the caption, "Five
Year Financial Summary" is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information contained on pages 9 through 23 of the 1998 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained on pages 13 through 15 of the 1998 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained on pages 24 through 44 of the 1998 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 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to the Directors of the
Registrant is contained on pages 2 through 3 of the 1999 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
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<CAPTION>
Name (Age) Business Experience Number of Shares Beneficially
Present Position During Past Five Years Owned as of March 3, 1999
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<S> <C> <C>
Larry G. Dillon (46) President of the Bank since 1989; 44,336 (1)
Chairman, President and Senior Vice President of the Bank
Chief Executive Officer prior to 1989
Gari B. Sullivan (61) Senior Vice President of the Bank since 1990; 10,944 (1)
Secretary Vice President of the Bank from 1989 to 1990;
President of the Middlesex Region of First
Virginia Bank prior to 1989
Brad E. Schwartz (36) Promoted to Senior Vice President of the Bank 13,106 (1)
Chief Operating Officer in December 1997. Vice President of the Bank
from 1991 to December 1997; 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
Thomas F. Cherry (30) Promoted to Senior Vice President of the Bank in 1,667 (1)
Chief Financial Officer December 1998. Vice President of the Bank from
December 1996 to December 1998. Manager with Price
Waterhouse, LLP in Norfolk, prior to December 1996.
</TABLE>
(1)Includes exercisable options of 16,602, 8,202, 12,202 and 1,467 held by
Messrs. Dillon, Sullivan, Schwartz, and Cherry, respectively.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 5 through 6 of the 1999 Proxy Statement,
which is attached hereto as Exhibit 99, under the caption, "Executive
Compensation", is incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP ON CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on page 2 of the 1999 Proxy Statement, which is
attached hereto as Exhibit 99, under the caption, "Principal Holders of Capital
Stock", is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on pages 4 through 5 of the 1999 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 14. EXHIBITS AND REPORTS ON FORM 8-K
14 (a) Exhibits
Exhibit No. 3: Articles of Incorporation and Bylaws
Articles of Incorporation and Bylaws of C&F Financial Corporation
filed as Exhibit Nos. 3.1 and 3.2, respectively, to Form 10KSB
filed March 29, 1996, of C&F Financial Corporation is incorporated
herein by reference.
Exhibit No. 13: C&F Financial Corporation 1998 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
23.1 Consent of Yount, Hyde & Barbour, P.C.
23.2 Consent of Deloitte & Touche LLP
Exhibit No. 27: Financial Data Schedule
Exhibit No. 99: Additional Exhibits
99.1 C&F Financial Corporation 1999 Annual Meeting Proxy Statement
99.2 Independent Auditors Report of Deloitte & Touche LLP for 1996
14 (b) Reports on Form 8-K filed in the fourth quarter of 1998:
None.
14 (c) Exhibits to this Form 10-K are either filed as part of this Report or
are incorporated herein by reference.
14 (d) Financial Statements Excluded from Annual Report to Shareholders
pursuant to Rule 14a3(b).
Not applicable.
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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/ Thomas F. Cherry
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Larry G. Dillon Thomas F. Cherry
Chairman, President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
Date: March 3, 1999 Date: March 3, 1999
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/ J. P. Causey Jr. Date: March 3, 1999
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J. P. Causey Jr., Director
/s/ James H. Hudson III Date: March 3, 1999
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James H. Hudson, III, Director
/s/ Larry G. Dillon Date: March 3, 1999
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Larry G. Dillon, Director
/s/ William E. O'Connell Jr. Date: March 3, 1999
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William E. O'Connell, Jr., Director
/s/ Sture G. Olsson, Date: March 3, 1999
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Sture G. Olsson, Director
[C&F LOGO]
FINANCIAL
CORPORATION
1998
ANNUAL
REPORT
<PAGE>
CONTENTS
Financial Highlights 1
The C&F Mission 2
From the President 3
The C&F Values Statement 4
The Y2K Challenge 6
Services 8
Company Financials 9
Independent Auditor's Report 44
Investor Information 45
Directors and Advisors 46
Officers and Locations 47
[C&F LOGO]
<PAGE>
RETURN ON AVERAGE EQUITY RETURN ON AVERAGE ASSETS
1998 17.81 1998 2.03
1997 16.08 1997 1.90
1996 12.66 1996 1.65
1995 11.08 1995 1.60
[C&F LOGO]
C&F FINANCIAL CORPORATION
1998 FINANCIAL HIGHLIGHTS
NET INCOME EARNINGS PER SHARE
1998 6,134,036 1998 1.56
1997 4,936,827 1997 1.25
1996 4,061,174 1996 0.92
1995 3,375,932 1995 0.76
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 six 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.
1
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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 and
short-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 and efficiently with the highest
degree of accuracy and professionalism.
2
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LETTER FROM THE PRESIDENT
DEAR FELLOW SHAREHOLDERS
It is a great pleasure to present this report covering the financial results of
C&F Financial Corporation for 1998. For the third year in a row, your
Corporation's net income has increased by more than 20% over the previous year's
results.
Net income reached a record $6,134,036 for the year, a 24.3% increase over
the previous record of $4,936,827 earned in 1997. Earnings per share rose to
$1.56, a 24.8% improvement over 1997's $1.25. Net income for 1998 resulted in a
return on average assets of 2.03% and a return on average equity of 17.81%
versus 1.90% and 16.08%, respectively, for 1997. As of September 30, our state
banking peers showed an average of 1.34% return on average assets and a 12.40%
return on average equity. Total assets increased $43 million, going from $278
million in 1997 to $321 million at year-end 1998. Deposits rose from $232
million to $252 million.
We take great pride in reporting that C&F Financial Corporation was rated
as one of the top 50 community banks in the country in the July 1998 issue of
U.S. Banker. This recognition was based on five financial criteria, including
return on assets, return on equity, efficiency ratio, nonperforming assets
ratio, and leverage ratio.
Our success in 1998 was augmented by substantial contributions from our
subsidiary corporations. C&F Mortgage Corporation saw a significant jump in both
loan production and net income. Loan volume increased from $286 million in 1997
to $524 million in 1998. One very positive result of this increased production
at the Mortgage Corporation was that it led to increased title insurance
business for C&F Title Agency, Inc. This subsidiary posted an increase in its
net income of over 200%. The addition of these two subsidiaries has resulted in
much higher income results for C&F Financial Corporation as well as better
service and products for our customers.
Our other subsidiary, C&F Investment Services, Inc., continues to
experience significant growth in both its business and profitability. Assets
under management grew 29% in 1998 and now exceed $66 million. Our ability to
offer this line of business, which is in high demand by our customers,
encourages them to maintain more of their relationships with us on a long-term
basis.
Our strong financial performance had a positive influence on C&F Financial
Corporation stock during 1998. In January, the
3
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Our Values
We believe that 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 the Corporation's success; participation, cooperation, and teamwork;
creativity, innovation, and initiative; prudent risk taking; and recognition and
rewards for achievement.
We believe that we must conduct ourselves morally and ethically at all
times and in all relationships.
We believe that we have an obligation to the well-being of all the
communities we serve.
We believe that our officers and staff are our most important assets,
making the critical difference in how the Corporation performs and, through
their work and effort, separate us from all competitors.
The Citizens & Farmers Bank Board of Directors (from back to front and left to
right): Paul C. Robinson, Bryan E. McKernon, James H. Hudson III,
J.P. Causey Jr., P.L. Harrell, Larry G. Dillon, William E. O'Connell, Jr.,
Joshua H. Lawson, Reginald H. Nelson IV, Thomas B. Whitmore Jr. (Not pictured:
Sture G. Olsson.)
4
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stock was listed for the first time on the NASDAQ National Market and the price
jumped 54% within a one-month period. During the year, your Board of Directors
increased the quarterly dividend three times, taking it from $.09 per share to
$.12, a 33% increase. Additionally, your Board declared a two-for-one stock
split in June. The combination of these events has resulted in a higher market
value for our stock as well as significantly improved cash income for our
shareholders.
The year 1998 brought many changes to your Corporation, not the least of
which was the retirement of past Chairman and President W. T. "Bill" Robinson
from the Board of Directors. Mr. Robinson devoted over fifty years to the
management of this organization and he will be sorely missed. In honor of his
many years of outstanding leadership, Mr. Robinson was named Chairman of the
Board Emeritus of Citizens and Farmers Bank.
The Board of Citizens and Farmers Bank was fortunate to have two new
additions during the year. Bryan E. McKernon, President and CEO of C&F Mortgage
Corporation, was elected in August, and in November, Reginald H. Nelson IV, a
member of the Bank's Varina Advisory Board since its inception, was elected.
Both of these gentlemen bring tremendous knowledge and experience to the Board
and we look forward to many years of their guidance.
During 1998, a significant amount of time and resources were spent on
training to improve our customer service skills. Not only did we institute the
training, we commenced the implementation of monitoring the level of service we
provide by using "mystery shoppers" who evaluate and grade each staff member
providing service to them. In addition, we now receive a more accurate
evaluation of our customer contact areas through customer surveys. Based on the
scores our "shoppers" are giving us, and the increased number of compliments we
are receiving from our customers, our initiatives are proving very successful.
As part of our efforts to meet the needs of our customers, the Bank began
offering a new "Generations Gold" checking account for our customers during the
fourth quarter of 1998. Not only does this new account provide value to our
customers by giving them discounts on frequently purchased items, it also helps
us increase customer retention, improve our fee income, maintain the loyalty of
local merchants, and distinguish our products from those of our competition. In
the short time in which this new account has been offered, it has been
positively received and we look forward to its great success.
We anticipate that 1999 will be another year of positives for your
Corporation. A new office in the Lynchburg area has already been approved for
C&F Mortgage Corporation and Citizens and Farmers Bank has recently approved a
new office in the City of Williamsburg. This office will house not only the
Bank, but also the Williamsburg office of C&F Mortgage Corporation and an
investment advisor for C&F Investment Services, Inc.
We have waited to introduce electronic banking until the creation of a
genuine demand on the part of our customers would make it financially prudent to
do so. With the growing popularity of the Internet, we now believe that we have
reached this point and plan to make this service available during the second
half of 1999. Electronic banking will allow our customers to handle their
banking transactions and inquiries from the convenience of their homes via the
Internet.
Also in 1999, we will sharpen our focus on lending by increasing our
volume in all lending areas while placing more
5
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MEETING
THE YEAR 2000 CHALLENGE
For years, software programmers used just two digits to represent a specific
year, failing to envision the consequences of having to distinguish dates in one
century from those in another. Now that we are approaching the year 2000, this
error must be corrected.
At C&F Financial Corporation, we have been particularly diligent in protecting
the interests of our customers. A committee was established in 1997 to oversee
and prepare for all the implications of this situation and has made excellent
progress throughout 1998 to assure that the Corporation is well prepared to
enter the new century smoothly.
Substantially all major testing has now been completed. The minor problem
areas identified will be addressed in the next few months. As a result, we
anticipate being fully prepared for the Y2K challenge, including back-up plans,
well before year-end.
6
<PAGE>
emphasis on the commercial and small business markets. We increased our lending
staff during 1998 and anticipate the addition of several staff members during
1999.
The year 1999 will also see much time and effort spent on dealing with the
potential "Y2K" year-end computer problem. A Y2K Committee was established in
1997 to oversee and prepare for all the implications of this situation and has
made excellent progress throughout 1998 assuring that the Corporation is well
prepared. Substantially all major testing has now been completed with results
showing only minor problem areas which will be addressed in the next few months.
We anticipate being fully prepared for this event, including back-up plans, well
before year-end.
While we continue to make many changes to our organization, our philosophy
remains the same. We are a locally owned and service-oriented organization and
believe that now, more than ever, there is a real opportunity for community
banks--banks where the staff knows the customers by name, where they ask, "How's
your family?"; banks where customers see the same staff that was there last
week, last month, etc. The friendly, personal touch is what customers want and
this is what we intend to deliver.
We will deliver this friendly, personal service in a professional manner
and at the same time offer all of the financial services that our customers
need. C&F is now a full financial services corporation. We offer a full range of
banking services, full mortgage services, full investment services, and through
our affiliation with The Trust Company of Virginia, full trust services. We
believe we are in the right setting with the right tools to take advantage of
our financial strength and stability. We have the foundation upon which to grow,
adapt to change, and still be profitable. We have adapted in the past, we will
in the future, and we will always be willing to take on short-term losses to
increase our long-term gains. As a result, we believe we have a very bright
future.
The many successes we have experienced would not have been possible were
it not for the hard work and commitment of our officers and staff. Our thanks to
them for their dedicated service and to our Board of Directors for their
continued guidance and support. Our thanks also to each of you for your
continued confidence in C&F Financial Corporation and for your patronage and
referrals of prospective customers as we strive to keep this a strong, highly
profitable organization.
/s/ Larry G. Dillon
LARRY G. DILLON
CHAIRMAN, PRESIDENT, AND
CHIEF EXECUTIVE OFFICER
7
<PAGE>
BANKING SERVICES
Citizens and Farmers Bank offers a wide array of general banking services to
individuals, professionals, and small businesses through nine branch offices.
These services include a variety of checking and savings deposit accounts, as
well as business, home equity, automobile, and other installment loans. Our goal
is to help our customers live better for less by offering savings accounts with
competitive rates of interest and smart borrowing solutions that meet their
needs.
For the convenience of our customers, the Bank offers extended
drive-through hours, ATMs at all locations, credit card services, trust
services, traveler's checks, money orders, safe deposit rentals, collections,
notary public, and wire services. In addition, the Bank's 24-hour telephone
banking service provides assistance to our customers around the clock.
MORTGAGE AND TITLE SERVICES
C&F Mortgage Corporation originates single-family residential loans from eight
locations in Virginia and Maryland. C&F Mortgage offers programs designed for
home purchases, the first-time home buyer, and home mortgage refinancing. By
originating and selling residential mortgages, C&F Mortgage Corporation is able
to offer competitive fixed- and adjustable-rate mortgages.
One of the distinctive features of C&F Mortgage Corporation is our
commitment to work closely with our customers and to provide the best possible
information so that they can choose the mortgage that is right for them. A
mortgage loan officer is dedicated to each account, minimizing paperwork,
reducing response time, and accelerating approvals. As a convenience to our
mortgage customers, we provide title searches and title insurance through C&F
Title Agency, Inc.
INVESTMENT COMPANY
C&F Investment Services, Inc. provides a full range of brokerage services,
giving our customers a broad spectrum of financial tools to address their needs
and realize their aspirations. Personal financial planners help our customers
pinpoint their goals and craft a long-term plan for achieving them. They then
help customers choose investment vehicles, whether they be stocks, bonds, or
mutual funds, to create a portfolio that matches their objectives and tolerance
for risk. Our personal financial planners follow up with customers to ensure
that their portfolio allocation remains appropriate for their investment
profile. On-site investment planning is available at all Citizens & Farmers Bank
branch offices.
8
<PAGE>
COMPANY FINANCIALS
Management's Discussion and Analysis
of Financial Condition and Results of Operations
[C&F LOGO]
The following discussion provides information about the major components of the
results of operations, 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.
9
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Year-End Balances:
Total assets $320,863,629 $278,105,969 $256,671,312 $238,995,329 $189,672,758
Total capital 36,647,493 31,800,533 32,214,509 31,818,296 28,809,166
Total loans (net) 169,918,428 154,744,620 136,732,017 110,012,320 102,649,919
Total deposits 251,673,159 231,513,152 216,422,556 204,001,334 158,811,959
- -------------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest income 22,617,509 19,763,048 18,332,998 15,686,897 13,649,428
Interest expense 9,558,059 8,002,301 7,667,619 6,526,880 4,861,516
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 13,059,450 11,760,747 10,665,379 9,160,017 8,787,912
Provision for loan losses 600,000 330,000 30,000 -- 7,831
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 12,459,450 11,430,747 10,635,379 9,160,017 8,780,081
Other income 11,009,622 6,657,608 4,678,915 1,233,267 996,654
Operating expenses 14,981,685 11,537,565 10,294,220 6,126,722 4,867,502
- -------------------------------------------------------------------------------------------------------------------------
Income before taxes 8,487,387 6,550,790 5,020,074 4,266,562 4,909,233
Income tax expense 2,353,351 1,613,963 958,900 890,630 1,170,839
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 6,134,036 $ 4,936,827 $ 4,061,174 $ 3,375,932 $ 3,738,394
- -------------------------------------------------------------------------------------------------------------------------
Per share(1)
Earnings per common share--
assuming dilution $1.56 $1.25 $.92 $.76 $.84
Dividends .44 .35 .31 .30 .28
- -------------------------------------------------------------------------------------------------------------------------
Weighted average number of
shares--assuming dilution 3,919,775 3,952,756 4,426,000 4,472,956 4,467,906
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data has been restated to reflect the two-for-one stock split in
July 1998.
Significant Ratios
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 2.03% 1.90% 1.65%
Return on average equity 17.81 16.08 12.66
Dividend payout ratio 27.70 27.75 33.62
Average equity to average assets 11.42 11.81 13.06
- ------------------------------------------------------------------------------------
</TABLE>
Overview
Net income totaled $6.1 million in 1998, an increase of 24.3% over 1997. In
1997, net income totaled $4.9 million, a 21.6% increase over 1996. Earnings per
share were $1.56, $1.25, and $.92 in 1998, 1997, and 1996, respectively. The
increase in earnings per share was a result of higher net income and the
repurchase of 119,803 shares of the Corporation's common stock in October of
1996 and 204,683 shares of the Corporation's common stock on April 4, 1997.
Profitability as measured by the Corporation's return on average equity (ROE)
was 17.81% in 1998, up from 16.08% in 1997, and 12.66% in 1996. Another key
indicator of performance, the return on average assets (ROA) for 1998 was 2.03%,
compared to 1.90% and 1.65% for 1997 and 1996, respectively.
10
<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, 1998, 1997, and 1996. 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 include loans held for
sale. Also, 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>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable $ 33,607 $ 2,359 7.02% $ 37,309 $ 2,737 7.34% $ 49,102 $ 3,595 7.32%
Tax-exempt 42,606 3,590 8.43 39,554 3,388 8.57 41,015 3,629 8.85
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities 76,213 5,949 7.81 76,863 6,125 7.97 90,117 7,224 8.02
Loans, net 206,353 17,790 8.62 165,168 14,656 8.87 136,089 12,139 8.92
Interest-bearing deposits
in other banks 1,088 69 6.34 1,251 68 5.44 3,178 172 5.41
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 283,654 $23,808 8.39% 243,282 $20,849 8.57% 229,384 $19,535 8.52%
Reserve for loan losses (2,451) (2,032) (1,915)
Total non-earning assets 20,484 18,708 18,384
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 301,687 $259,958 $ 245,853
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Time and savings deposits:
Interest-bearing deposits $ 37,178 $ 901 2.42% $ 34,594 $ 890 2.57% $ 33,256 $ 891 2.68%
Money market deposits 21,984 718 3.27 23,416 767 3.28 20,468 671 3.28
Savings accounts 35,094 1,135 3.23 33,037 1,058 3.20 31,550 986 3.13
Certificates of deposit,
$100M or more 16,670 819 4.91 14,137 466 3.30 13,774 488 3.54
Other certificates of deposit 87,938 4,616 5.25 82,655 4,493 5.44 80,412 4,418 5.49
- ---------------------------------------------------------------------------------------------------------------------------------
Total time and
savings deposits 198,864 8,189 4.12 187,839 7,674 4.09 179,460 7,454 4.15
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowings 25,169 1,369 5.44 6,441 328 5.09 4,505 214 4.75
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 224,033 9,558 4.27 194,280 8,002 4.12 183,965 7,668 4.17
Demand deposits 35,987 31,449 26,741
Other liabilities 7,221 3,533 3,046
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 267,241 229,262 213,752
Shareholders' equity 34,446 30,696 32,101
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders' equity $ 301,687 $ 259,958 $ 245,853
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $14,250 $ 12,847 $11,867
- ---------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 4.12 4.45 4.35
Interest expense to
average earning assets 3.37 3.29 3.34
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.02% 5.28% 5.17%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Results of Operations
Net Interest Income
During 1998, net interest income, on a tax-equivalent basis, increased 10.9% to
$14.3 million from $12.8 million in 1997. This was a result of a 16.6% increase
in the average balance of interest-earning assets offset by a decrease in the
net interest margin to 5.02% for the year ended December 31, 1998, from 5.28%
for 1997. The increase in the average balance of interest-earning assets was
attributed to an increase in the average balance of loans at Citizens and
Farmers Bank (the "Bank") and loans held for sale at C&F Mortgage Corporation
(the "Mortgage Corporation"). The decrease in the net interest margin was a
result of an 18-basis-point decrease in the yield on interest-earning assets
resulting from the lower interest rate environment and a 15-basis-point increase
in the cost of funds mainly attributed to increased borrowings from the Federal
Home Loan Bank (FHLB). Borrowings from the FHLB are used to fund loans
originated and subsequently sold by the Mortgage Corporation. Loan closings at
the Mortgage Corporation increased to $524,396,000 for the year ended December
31, 1998, compared to $286,419,000 for 1997.
Net interest income, on a tax-equivalent basis, increased 8% to $12.8 million
for the year ended December 31, 1997, from $11.9 million in 1996. This was a
result of a 6% increase in the average balance of interest-earning assets and an
increase in the net interest margin to 5.28% for the year ended December 31,
1997, from 5.17% in 1996. The increase in average earning assets was due to a
21.4% increase in average outstanding loans partially offset by a 14.7% decline
in securities. The decline in securities was due to securities' being called as
well as management's decision to invest more funds into higher yielding loans.
The increase in the net interest margin was a result of a 5-basis-point increase
in the yield on earning assets and a 5-basis-point decrease in the cost of
funds. The increase in the yield on earning assets was a result of an increase
in the average balance of higher yielding loans and a decrease in the average
balance of lower yielding investments. The decrease in the cost of funds was a
result of an overall decrease in the rates paid on deposit products.
TABLE 2: RATE-VOLUME RECAP
Interest income and expense are affected by fluctuations in interest rates, by
changes in the volume 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>
- ---------------------------------------------------------------------------------------------------------------------
1998 from 1997 1997 from 1996
- ---------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 3,561 $ (427) $ 3,134 $ 2,581 $ (64) $ 2,517
Investment securities:
Taxable (263) (115) (378) (865) 7 (858)
Tax-exempt 258 (56) 202 (127) (114) (241)
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities (5) (171) (176) (992) (107) (1,099)
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits in other banks (10) 11 1 (105) 1 (104)
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 3,546 (587) 2,959 1,484 (170) 1,314
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Time and savings deposits:
Interest-bearing deposits 64 (53) 11 35 (36) (1)
Money market deposit accounts (47) (2) (49) 97 (1) 96
Savings accounts 66 11 77 47 25 72
Certificates of deposit, $100M or more 94 259 353 13 (35) (22)
Other certificates of deposit 281 (158) 123 122 (47) 75
- ---------------------------------------------------------------------------------------------------------------------
Total time and savings deposits 458 57 515 314 (94) 220
Other borrowings 1,017 24 1,041 98 16 114
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 1,475 81 1,556 412 (78) 334
- ---------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 2,071 $ (668) $ 1,403 $ 1,072 $ (92) $ 980
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
MARKET RISK MANAGEMENT
As the holding company for a commercial bank, the Corporation's primary
component of market risk is interest rate volatility. Fluctuation in interest
rates will ultimately impact the level of both income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, other than those which
possess a short term to maturity.Since the majority of the Corporation's
interest-earning assets and all of the Corporation's interest-bearing
liabilities are held by the Bank, virtually all of the Corporation's interest
rate risk exposure lies at the Bank level. Therefore, all significant interest
rate risk management procedures are performed by management of the Bank. Based
on the nature of the Bank's operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank's loan portfolio is
concentrated primarily in the Virginia counties of King William, King and Queen,
Hanover, Henrico, Essex, Middlesex, New Kent, Charles City, York, and James
City, and is, therefore, subject to risks associated with the local economy. As
of December 31, 1998, the Corporation does not own any trading assets nor does
it have any hedging transactions in place such as interest rate swaps and caps.
The Bank's interest rate management strategy is designed to stabilize net
interest income and preserve capital. The Bank manages interest rate risk
through the use of a simulation model which measures the sensitivity of future
net interest income and the net portfolio value to changes in interest rates. In
addition, the Bank monitors interest rate sensitivity through analysis,
measuring the terms to maturity or next repricing date of interest-earning
assets and interest-bearing liabilities. The matching of the maturities of
assets and liabilities may be analyzed by examining the extent to which assets
and liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to be "interest
rate sensitive" within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity "gap" is defined as the
difference between the amount of interest-earning assets anticipated, based on
certain assumptions, to mature or reprice within a specific time period and the
amount of interest-bearing liabilities anticipated, based on certain
assumptions, to mature or reprice within that time period. A gap is considered
negative when the amount of interest-rate-sensitive liabilities maturing or
repricing within a specific time period exceeds the amount of
interest-rate-sensitive assets maturing or repricing within that same time
period. During a period of rising interest rates, a negative gap would tend to
result in a decrease in net interest income while a positive gap would tend to
result in an increase in net interest income. In a declining interest rate
environment, an institution with a negative gap would generally be expected,
absent the effect of other factors, to experience a greater decrease in the cost
of its liabilities relative to the yield of its assets and thus an increase in
the institution's net interest income, whereas an institution with a positive
gap would be expected to experience the opposite result.
Certain shortcomings are inherent in any method of analysis used to estimate a
financial institution's interest gap.The analysis is based at a given point in
time and does not take into consideration that changes in interest rates do not
affect all assets and liabilities equally. For example, although certain assets
and liabilities may have similar maturities or repricing, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities also may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. The interest rates on loans with call features may or
may not change depending on their interest rates relative to market interest
rates.
The Corporation is also subject to prepayment risk, particularly in falling
interest rate environments or in environments where the slope of the yield curve
is relatively flat or negative. Such changes in the interest rate environment
can cause substantial changes in the level of prepayments of loans, which may
also affect the Corporation's interest rate gap position.
As part of its borrowings, the Corporation may utilize, from time to time, daily
and convertible advances from the FHLB-Atlanta.Convertible advances generally
provide for a fixed rate of interest for a portion of the term of the advance,
an ability for the FHLB-Atlanta to convert the advance from a fixed rate to an
adjustable rate at some predetermined time during the remaining term of the
advance (the "conversion" feature), and a concurrent opportunity for the
Corporation to prepay the advance with no prepayment penalty in the event the
FHLB-Atlanta elects to exercise the conversion feature. Changes in interest
rates from those at December 31, 1998 may result in a change in the estimated
maturity of convertible advances and, therefore, the Corporation's interest rate
gap position.
Also, the methodology used estimates various rates of withdrawal (or "decay")
for money market deposit, savings, and checking accounts, which may vary
significantly from actual experience.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 that are subject
to repricing or that mature in each of the time periods shown. Additionally,
loans and securities with call provisions are included in the period in which
they may first be called. Except as stated above, the amount of assets and
liabilities shown that reprice or mature during a par ticular period were
determined in accordance with the contractual terms of the asset or liability.
13
<PAGE>
TABLE 3: INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Periods
Within 91-365 1-5 Over
(Dollars in thousands) 90 Days Days Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Earning assets:
Loans, net of unearned income $128,486 $ 13,737 $ 47,224 $ 50,225 $ 239,672
Securities 10,312 6,728 15,877 28,631 61,548
Federal funds sold and
other short-term investments 333 -- -- -- 333
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets 139,131 20,465 63,101 78,856 301,553
- -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing transaction accounts 6,232 18,696 16,619 -- 41,547
Savings accounts 5,588 16,763 14,900 -- 37,251
Money market deposit accounts 3,425 10,275 9,133 -- 22,833
Certificates of deposit, $100M or more 5,024 10,798 2,746 -- 18,568
Other certificates of deposit 18,830 45,838 25,898 -- 90,566
Borrowings 24,661 -- -- -- 24,661
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 63,760 102,370 69,296 -- 235,426
- -----------------------------------------------------------------------------------------------------------------------------
Period gap 75,371 (81,905) (6,195) 78,856
Cumulative gap $ 75,371 $(6,534) $(12,729) $ 66,127
Ratio of cumulative gap to total earning assets 24.99% (2.17)% (4.22)% 21.93%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following tables provide information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of December 31,
1998 and 1997, based on the information and assumptions set forth in the notes.
The Corporation believes that the assumptions utilized are reasonable. The
expected maturity date values for loans were calculated by adjusting the
instruments' contractual maturity date for expectations of prepayments, as set
forth in the notes. Similarly, expected maturity date values for
interest-bearing core deposits were calculated based on estimates of the period
over which the deposits would be outstanding, as set forth in the notes. From a
risk-management perspective, however, the Corporation utilizes both maturity and
repricing dates, as opposed to solely using expected maturity dates.
As shown in the table, there have been no significant changes in the maturities
of interest-earning assets or liabilities. The large increase in loans held for
sale maturing within one year is a result of increased production at the
Mortgage Corporation.All loans originated at the Mortgage Corporation are
usually sold within one month. The increase in borrowings is also a result of
increased production at the Mortgage Corporation. Funds are borrowed from the
FHLB to fund loans originated and subsequently sold by the Mortgage Corporation.
14
<PAGE>
- --------------------------------------------------------------------------------
TABLE 4: MATURITY OF INTEREST-BEARING ASSETS/LIABILITIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Principal Amount Maturing in:
DOLLARS IN THOUSANDS 1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Fixed rate loans(1)(2)
December 31, 1998 $39,706 $ 9,700 $ 8,355 $ 6,344 $ 4,900 $ 16,792 $ 85,797 $ 87,051
December 31, 1997 28,233 10,478 7,614 6,283 5,161 18,282 76,051 75,882
Average interest rate
December 31, 1998 8.92% 8.67% 8.32% 8.07% 7.97% 7.86% 8.51%
December 31, 1997 9.28% 8.75% 8.33% 8.07% 7.92% 7.83% 8.57%
Variable rate loans(1)(2)
December 31, 1998 $18,459 $ 7,019 $ 6,135 $ 5,590 $ 5,448 $ 45,168 $ 87,819 $ 89,477
December 31, 1997 18,804 7,637 5,830 5,273 4,728 39,641 81,913 82,106
Average interest rate
December 31, 1998 8.84% 8.45% 8.40% 8.37% 8.31% 8.30% 8.44%
December 31, 1997 8.80% 8.83% 8.63% 8.61% 8.60% 8.61% 8.79%
Loans held for sale
December 31, 1998 $ 66,993 $ -- $ -- $ -- $ -- $ -- $ 66,993 $ 68,098
December 31, 1997 24,479 -- -- -- -- -- 24,479 24,807
Average interest rate
December 31, 1998 6.24% -- -- -- -- -- 6.24%
December 31, 1997 6.28% -- -- -- -- -- 6.28%
Securities(3)(4)
December 31, 1998 $ 3,969 $ 495 $ 2,040 $ 1,384 $ 2,351 $ 51,758 $ 61,997 $ 64,459
December 31, 1997 6,300 4,167 1,950 2,039 1,378 60,652 76,486 78,541
Average interest rate
December 31, 1998 6.92% 6.70% 7.32% 5.82% 5.99% 5.52% 5.69%
December 31, 1997 7.95% 6.66% 6.59% 7.32% 5.82% 6.17% 6.38%
Interest-Bearing Liabilities:
Money market, savings, and interest-
bearing transaction accounts(5)
December 31, 1998 $60,979 $10,163 $ 10,163 $ 10,163 $ 10,163 $ -- $101,631 $ 101,604
December 31, 1997 57,063 9,511 9,511 9,510 9,510 -- 95,105 95,199
Average interest rate
December 31, 1998 2.98% 2.98% 2.98% 2.98% 2.98% -- 2.98%
December 31, 1997 3.00% 3.01% 2.98% 2.95% 2.92% -- 2.99%
Certificates of deposit
December 31, 1998 $ 80,490 $21,629 $ 2,369 $ 1,272 $ 3,029 $ 345 $109,134 $ 109,714
December 31, 1997 76,767 16,552 5,689 432 1,326 347 101,113 101,275
Average interest rate
December 31, 1998 5.02% 5.50% 5.30% 5.81% 5.67% 3.52% 5.15%
December 31, 1997 5.09% 5.46% 6.08% 5.37% 5.81% 3.55% 5.21%
Borrowings
December 31, 1998 $14,661 $ -- $ 10,000 $ -- $ -- $ -- $ 24,661 $ 24,658
December 31, 1997 9,336 -- -- -- -- -- 9,336 9,336
Average interest rate
December 31, 1998 4.68% -- 4.98% -- -- -- 4.80%
December 31, 1997 5.16% -- -- -- -- -- 5.16%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of undisbursed loan proceeds and does not include net deferred loan fees
or the allowance for loan losses.
(2) For single-family residential loans, assumes annual prepayment rate of 12%.
No prepayment assumptions were used for all other loans.
(3) Includes the Corporation's investment in Federal Home Loan Bank stock.
(4) Average interest rates are the average of stated coupon rates and have not
been adjusted for taxes.
(5) For money market, savings, and interest-bearing transaction accounts,
assumes an annual decay rate of 60% for year 1 and 10% for each of the years
2 through 5.
15
<PAGE>
Non-Interest Income
- --------------------------------------------------------------------------------
TABLE 5: NON-INTEREST INCOME
- --------------------------------------------------------------------------------
Year Ended December 31,
Dollars in thousands 1998 1997 1996
- --------------------------------------------------------------------------------
Gain on sale of loans $ 7,129 $ 4,056 $ 2,688
Service charges on deposit accounts 1,033 1,013 983
Other service charges and fees 1,867 987 665
Other income 981 602 343
- --------------------------------------------------------------------------------
$ 11,010 $ 6,658 $ 4,679
- --------------------------------------------------------------------------------
1998 vs. 1997
Non-interest income increased by $4.4 million, or 65.4% over 1997. The majority
of the increase was attributed to an approximate $3.1 million increase in the
gain on the sale of loans resulting from an increase in loan production at the
Mortgage Corporation. Loan closings at the Mortgage Corporation totaled $524
million in 1998 compared to $286 million in 1997 and $174 million in 1996. Other
service charges and fees increased $880,000, or 89.1% over 1997. The majority of
this was attributed to fees associated with loan closings at the Mortgage
Corporation. Other income increased approximately $379,000, or 63% over 1997.
The majority of this income is attributed to increased income at C&F Title
Agency, Inc. (the "Title Agency"). The increase in income at the Title Agency is
a direct result of the increased loan closings at the Mortgage Corporation.
1997 vs. 1996
Non-interest income increased by $2.0 million, or 42.3% over 1996. The majority
of the increase was attributed to an approximate $1.4 million increase in gain
on the sale of loans resulting from an increase in loan production at the
Mortgage Corporation. Loan closings totaled $286 million in 1997 compared to
$174 million in 1996 and $2.0 million in 1995. Other service charges and fees
increased $322,000, or 48.4% over 1996, due to increased activity at both the
Bank and the Mortgage Corporation. At the Mortgage Corporation, the increase was
directly correlated to the increase in loan closings, while at the Bank the
increase was attributed to, among other things, fees associated with the Bank's
check and credit card programs, as well as letter of credit fees. Other income
increased by $258,000, or 75% over 1996, primarily as the result of improvements
at all three of the Bank's subsidiaries. At the Mortgage Corporation, the
increase was again directly related to loan production; during 1997, C&F
Investment Services, Inc., saw an increase in income as a result of stronger
demand for its services both from current customers as well as from many new
ones. In January 1997, the Bank and Mortgage Corporation joined together to form
the Corporation's own title agency using its subsidiary, C&F Title Agency, Inc.
Prior to this, the Title Agency owned a small portion of a jointly owned agency;
however, that partial ownership interest was sold and a wholly owned agency was
formed.
Non-Interest Expense
- --------------------------------------------------------------------------------
TABLE 6: NON-INTEREST EXPENSE
- -------------------------------------------------------------------------
Year Ended December 31,
Dollars in thousands 1998 1997 1996
- -------------------------------------------------------------------------
Salaries and employee benefits $ 8,286 $ 6,332 $ 5,974
Occupancy expense 2,010 1,799 1,801
Goodwill amortization 275 275 282
Other expenses 4,411 3,132 2,237
- -------------------------------------------------------------------------
$ 14,982 $ 11,538 $ 10,294
- -------------------------------------------------------------------------
1998 vs. 1997
Non-interest expense increased $3.4 million, or 29.9% over 1997. $2.0 million of
this increase resulted from increased salaries and employee benefits. The
majority of this increase can be attributed to increased commissions at the
Mortgage Corporation, which was a result of increased loan closings. The
remainder of the increase in salaries and employee benefits is a result of
general pay increases along with the addition of new employees at both the Bank
and the Mortgage Corporation. Other expenses increased by $1.3 million, or 43%
over 1997. The majority of this increase can be associated with costs related to
the increase in loan closings at the Mortgage Corporation. The remainder of the
increase can be attributed to general expenses at the Bank including $100,000 in
costs associated with the Year 2000 (Y2K) issue.
1997 vs. 1996
Non-interest expense increased $1.2 million, or 12.1% over 1996. Of this
increase, $358,000 resulted from increased salaries and employee benefits costs.
The majority of this increase can be attributed to general pay increases along
with the addition of new employees. Other expenses increased
16
<PAGE>
by $912,000. At the Mortgage Corporation, other expenses increased by $493,000,
which was a result of increased loan closings during 1997. At the Bank, other
expenses increased by approximately $245,000. This increase was a result of,
among other things, increased employee training costs, costs associated with the
Bank's check and credit card programs, and costs associated with technology.
During the year, the Bank upgraded the majority of the personal computers used
by its employees and also incurred costs associated with the Y2K issue. Other
expenses also increased as a result of general corporate expenses. During 1997,
the Corporation incurred expenses associated with listing on the Nasdaq National
Market System and other expenses relating to increasing the awareness of the
Corporation's stock.
YEAR 2000 ISSUE
The Y2K issue involves the risk that computer programs and computer systems may
not be able to perform without interruption into the year 2000. If computer
systems do not correctly recognize the date change from December 31, 1999 to
January 1, 2000, computer applications that rely on the date field could fail or
create erroneous results. Such erroneous results could affect interest payments
or due dates and could cause the temporary inability to process transactions and
to engage in ordinary business activities. The failure of the Corporation, its
suppliers, and its borrowers to address the Y2K issue could have a material
adverse effect on the Corporation's financial condition, results of operations,
or liquidity.
In 1997, the Corporation initiated a review and assessment of all hardware and
software to confirm that it will function properly in the year 2000. Based on
this assessment, the Corporation's mainframe hardware and banking software are
currently Y2K compliant. However, testing is required to confirm this. Testing
began in the third quarter of 1998 and will continue through the second quarter
of 1999. For certain other systems, the Corporation has determined that it will
have to replace or modify certain pieces of hardware and/or software so that the
systems will properly function in the year 2000. For systems that the
Corporation relies on third-party vendors, these vendors have been contacted and
have indicated that the hardware and/or software will be Y2K compliant.
The Corporation has also initiated formal communications with all significant
loan and deposit customers to determine the extent to which the Corporation is
vulnerable to those third-parties' failure to remedy their own Y2K issue. The
Corporation believes that exposure to customers' not being Y2K compliant is
minimal.
The Corporation plans to complete the majority of the Year 2000 project by June
30, 1999. To date, the Corporation has expensed $150,000 related to the
assessment of and efforts in connection with the Year 2000 issue. Remaining
expenditures are not expected to have a material effect on the Corporation's
consolidated financial statements.
The Corporation continues to assess its risk from other environmental factors
over which it has little direct control, such as electrical power supply, and
voice and data transmission. Because of the nature of these external factors,
the Corporation is not actively engaged in any repair, replacement, or testing
efforts for these services. Based on its current assessments and remediation
plans, which are based in part on certain representations of third-party
servicers, the Corporation does not expect that it will experience a significant
disruption of its operations as a result of the change to the new millennium.
Although the Corporation has no reason to conclude that a failure will occur,
the most likely worst-case Y2K scenario would entail a disruption or failure of
the Corporation's power suppliers' or voice and data transmission suppliers'
capability to provide power or data transmission services to a computer system
or a facility. If such a failure were to occur, the Corporation would implement
a contingency plan. While it is impossible to quantify the impact of such a
scenario, the most likely worst-case scenario would entail diminishment of
service levels, some customer inconvenience, and additional, as yet not
understood, costs associated with the implementation of the contingency plan.
For the computer systems and facilities that it has determined to be most
critical, the Corporation expects to complete development, testing, and adoption
and testing of business contingency plans by June 30, 1999. These plans will
conform to recently issued guidelines from the FFIEC on business contingency
planning for Y2K readiness. Contingency plans will include, among other actions,
manual workarounds and identification of resource requirements and alternative
solutions for resuming critical business processes in the event of a Y2K-related
failure. While the Corporation will have contingency plans in place to address a
temporary disruption in these services, there can be no assurance that any
disruption or failure will be only temporary, that the Corporation's contingency
plans will function as anticipated, or that the results of operations, financial
condition, or liquidity of the Corporation will not be adversely affected in the
event of a prolonged disruption or failure.
Additionally, there can be no assurance that the FFIEC or other federal
regulators will not issue new regulatory requirements that require additional
work by the Corporation and, if issued, that new regulatory requirements will
not increase the cost or delay the completion of the Corporation's Y2K project.
The costs of the project and the date on which the Corporation plans to complete
the Y2K modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third-party modification plans, and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel trained
17
<PAGE>
in this area, the ability of third-party vendors to correct their software and
hardware, the ability of significant customers to remedy their Year 2000 issues,
and similar uncertainties.
Income Taxes
Applicable income taxes on 1998 earnings amounted to $2,353,000, resulting in an
effective tax rate of 27.7% compared to $1,614,000, or 24.6%, in 1997, and
$959,000, or 19.0%, in 1996. The increase in the effective tax rate is a result
of the increase in earnings subject to a 34% tax rate versus earnings subject to
no taxes, such as certain loans to municipalities or investments in obligations
of states and political subdivisions.
- --------------------------------------------------------------------------------
TABLE 7: ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve, beginning of period $ 2,234 $ 1,927 $ 1,914 $ 1,895 $ 1,895
Provision for loan losses 600 330 30 -- 8
Loans charged off:
Real estate--mortgage 33 12 -- -- 18
Real estate--construction -- -- -- -- --
Commercial, financial, and agricultural -- 3 4 4 7
Consumer 66 12 25 4 1
- -----------------------------------------------------------------------------------------------------
Total loans charged off 99 27 29 8 26
Recoveries of loans previously charged off:
Real estate--mortgage 25 -- 1 19 --
Real estate--construction -- -- -- -- --
Commercial, financial, and agricultural -- -- 11 -- 8
Consumer -- 4 -- 8 10
- -----------------------------------------------------------------------------------------------------
Total recoveries 25 4 12 27 18
Net loans charged off 74 23 17 (19) 8
- -----------------------------------------------------------------------------------------------------
Balance, end of period $ 2,760 $ 2,234 $ 1,927 $ 1,914 $ 1,895
- -----------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average total loans
outstanding during period .04% .01% .01% (.01%) .01%
- ------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
TABLE 8: 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 1999 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) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allocation of allowance for possible loan losses,
end of year:
Real estate--mortgage $ 667 $ 692 $ 873 $ 786 $ 751
Real estate--construction 108 89 69 34 26
Commercial, financial, and agricultural 1,211 926 733 352 260
Equity lines 86 71 62 60 62
Consumer 251 167 160 93 69
Unallocated 437 289 30 589 727
- ----------------------------------------------------------------------------------------------------------
Balance, December 31 $ 2,760 $ 2,234 $1,927 $ 1,914 $ 1,895
- ----------------------------------------------------------------------------------------------------------
Ratio of loans to total year-end loans:
Real estate--mortgage 50% 57% 62% 70% 71%
Real estate--construction 3 3 2 2 1
Commercial, financial, and agricultural 36 31 26 19 19
Equity lines 5 4 5 5 6
Consumer 6 5 5 4 3
- ----------------------------------------------------------------------------------------------------------
100% 100% 100% 100% 100%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Asset Quality-Allowance/Provision For Loan Losses
The allowance for loan losses 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 1998, the Corporation had $600,000 in provision for loan losses compared to
$330,000 in 1997 and $30,000 in 1996. The increase in provision is a result of
management's recognition of risks associated with the reduction in residential
real estate loans and increasing the volume of commercial and commercial real
estate loans. Loans charged off during 1998 amounted to $99,000 compared to
$27,000 in 1997 and $29,000 in 1996. Recoveries amounted to $25,000, $4,000, and
$12,000 in 1998, 1997, and 1996, respectively. The ratio of net charge-offs to
average outstanding loans was .04% in 1998, .01% in 1997, and 0.1% in 1996.
Management feels that the reserve is adequate to absorb any losses on existing
loans that may become uncollectible. Table 7 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 and real estate owned, was $463,000 at December 31, 1998, a decrease of
$478,000 from December 31, 1997. The decrease over 1997 was primarily the result
of the sale of a single-family home which was foreclosed on by the Mortgage
Corporation.
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 ninety days or more unless the debt is
both well secured and in the process of being collected. For 1998, $37,000 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,
1998, interest income received on non-accrual loans was $16,000.
19
<PAGE>
Table 9 summarizes non-performing assets for the past five years.
- --------------------------------------------------------------------------------
TABLE 9: NON-PERFORMING ASSET ACTIVITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
Non-accrual loans $ 463 $ 497 $ 525 $ 907 $1,331
Real estate owned -- 444 -- -- --
- -------------------------------------------------------------------------------------------
Total non-performing assets 463 941 525 907 1,331
- -------------------------------------------------------------------------------------------
Principal and/or interest past due
for 90 days or more $ 958 $ 768 $ 260 $ 180 $ 412
- -------------------------------------------------------------------------------------------
Non-performing loans to total loans .27% .31% .38% .81% 1.27%
Allowance for loan losses to total loans 1.60 1.42 1.39 1.71 1.81
Allowance for loan losses to
non-performing loans 596.11 449.30 367.05 211.03 142.37
Non-performing assets to total assets .14% .34% .20% .38% .70%
- -------------------------------------------------------------------------------------------
</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 while maintaining a minimum amount of risk.
At the end of 1998, the Corporation had total assets of $321 million, up 15.4%
over the previous year-end. In 1997, there was an increase of 8.4% in total
assets over year-end 1996. Asset growth in 1998 and 1997 is attributed to
increases in loans held for sale, which resulted from increased loan closings at
the Mortgage Corporation and the overall expansion and growth of the Bank.
- --------------------------------------------------------------------------------
TABLE 10: SUMMARY OF TOTAL LOANS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate--mortgage $ 86,311 $ 88,973 $ 86,324 $ 77,924 $ 74,221
Real estate--construction 5,359 4,454 3,415 1,681 1,308
Commercial, financial, and agricultural(1) 62,885 48,737 36,385 21,719 19,379
Equity lines 8,580 7,131 6,180 5,954 6,223
Consumer 9,543 7,683 6,355 4,648 3,414
- -----------------------------------------------------------------------------------------------------------
Total loans 172,678 156,978 138,659 111,926 104,545
Less allowance for possible loan losses (2,760) (2,233) (1,927) (1,914) (1,895)
- -----------------------------------------------------------------------------------------------------------
Total loans, net $169,918 $154,745 $ 136,732 $110,012 $ 102,650
- -----------------------------------------------------------------------------------------------------------
</TABLE>
1 Includes loans secured by real estate
- --------------------------------------------------------------------------------
TABLE 11: MATURITY/REPRICING SCHEDULE OF LOANS
- ---------------------------------------------------------------------------
December 31, 1998
Commercial, financial, Real estate
(Dollars in thousands) and agricultural construction
- ---------------------------------------------------------------------------
VariableRate:
Within 1 year $ 12,803 $ --
1 to 5 years 7,914 --
After 5 years 17,121 --
Fixed Rate:
Within 1 year 23,079 5,359
1 to 5 years 1,360 --
After 5 years 608 --
- ---------------------------------------------------------------------------
20
<PAGE>
Loan Portfolio
At December 31, 1998, loans, net of unearned income and reserve for loan losses,
totaled $169.9 million, an increase of 9.8% over the 1997 total of $154.7
million. Net loans increased 13.2% and 24.3% in 1997 and 1996, respectively.
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 10 and 11 present information pertaining to
the composition of loans including unearned income and the maturity/repricing of
loans.
- --------------------------------------------------------------------------------
TABLE 12: MATURITY OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
(Dollars in thousands) Cost Yield Cost Yield Cost Yield
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies and corporations:
Maturing within 1 year $ 999 8.46% $ 5,500 8.06% $ 2,000 7.20%
Maturing after 1 year, but within 5 years 500 6.21 1,998 7.43 10,585 7.64
Maturing after 5 years, but within 10 years 3,500 6.76 12,498 6.75 23,472 7.09
Maturing after 10 years 8,498 6.96 11,998 7.30 4,000 8.00
- --------------------------------------------------------------------------------------------------------------------------------
Total U.S. government agencies and corporations 13,497 6.99 31,994 7.22 40,057 7.33
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries:
Maturing within 1 year 1,999 5.94 -- -- -- --
Maturing after 1 year, but within 5 years 1,000 8.02 2,998 6.63 2,997 6.63
- --------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasuries 2,999 6.63 2,998 6.63 2,997 6.63
- --------------------------------------------------------------------------------------------------------------------------------
State and municipals:(1)
Maturing within 1 year 971 10.18 850 10.11 1,525 9.80%
Maturing after 1 year, but within 5 years 4,770 9.46 4,188 9.85 5,544 10.08
Maturing after 5 years, but within 10 years 13,163 8.42 10,666 8.74 9,040 8.76
Maturing after 10 years 20,121 7.90 20,425 8.11 21,680 8.15
- --------------------------------------------------------------------------------------------------------------------------------
Total state and municipals 39,025 8.33 36,129 8.55 37,789 8.65
- --------------------------------------------------------------------------------------------------------------------------------
Other securities:
Maturing within 1 year -- -- 300 8.62 -- --
Maturing after 1 year, but within 5 years -- -- -- -- 300 8.62
- --------------------------------------------------------------------------------------------------------------------------------
Total other securities -- -- 300 8.62 300 8.62
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities:(2)
Maturing within 1 year 3,969 7.76 6,650 8.37 3,525 8.32
Maturing after 1 year, but within 5 years 6,270 8.95 9,184 8.29 19,426 8.20
Maturing after 5 years, but within 10 years 16,663 8.06 23,164 7.63 32,512 7.55
Maturing after 10 years 28,619 7.62 32,423 7.81 25,680 8.13
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 55,521 7.91% $ 71,421 7.87% $ 81,143 7.92%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
1 Yields on tax-exempt securities have been computed on a tax-equivalent basis.
2 Total investment securities excludes preferred stock at $4,770,000,
$4,004,000, and $4,531,000 amortized cost at December 31, 1998, 1997, and
1996, respectively, or $5,104,000, $4,296,000, and $4,607,000 estimated fair
value at December 31, 1998, 1997, and 1996, respectively.
Investment Securities
The investment 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 investment 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 matu-
21
<PAGE>
rity. 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 1998, total investment securities at amortized cost were $60.3
million, down 20.1% from $75.4 million at year-end 1997. Securities of U.S.
government agencies and corporations represented 22.4% of the total securities
portfolio, obligations of states and political subdivisions were 64.7%, U.S.
Treasury securities were 5.0%, and preferred stocks were 7.9% at December 31,
1998. The decline in the securities portfolio is due to both maturities of
securities and securities with higher yields being called because of the falling
interest rate environment during 1998. It is management's intention to invest
the majority of the proceeds from the maturities and calls of securities into
loans; however, when excess funds are available, new securities will be
purchased.
Table 12 presents information pertaining to the composition of the investment
securities portfolio.
- --------------------------------------------------------------------------------
TABLE 13: AVERAGE DEPOSITS AND RATES PAID
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 35,987 $ 31,449 $ 26,741
- -------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 37,178 2.42% 34,594 2.57% 33,256 2.68%
Money market deposit accounts 21,984 3.27 23,416 3.28 20,468 3.28
Savings accounts 35,094 3.23 33,037 3.20 31,550 3.13
Certificates of deposit, $100M or more 16,670 4.91 14,137 3.30 13,774 3.54
Other certificates of deposit 87,938 5.25 82,655 5.44 80,412 5.49
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 198,864 4.12% 187,839 4.09% 179,460 4.15%
- -------------------------------------------------------------------------------------------------------------------------
Total deposits $234,851 $219,288 $ 206,201
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TABLE 14: MATURITIES OF CERTIFICATES OF DEPOSIT WITH BALANCES OF $100,000 OR
MORE
- -------------------------------------------
(Dollars in thousands) December 31, 1998
- -------------------------------------------
3 months or less $ 5,024
3-6 months 2,330
6-12 months 8,468
Over 12 months 2,746
- -------------------------------------------
Total $ 18,568
- -------------------------------------------
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 $20.1 million, or 8.7%, in 1998 over 1997. In 1998, the
growth by deposit category was a 15.9% increase in non-interest-bearing
deposits, a 6.8% increase in savings and interest-bearing demand deposits, and a
7.9% increase in time deposits. In 1997, total deposits increased $15.1 million,
or 7.0% over 1996. Deposit growth in 1998 and 1997 was attributed to growth at
existing branch locations. Table 13 presents the average deposit balances and
average rates paid for the years 1998, 1997, and 1996. Table 14 details
maturities of certificates of deposit with balances of $100,000 and over at
December 31, 1998.
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 and due from banks, interest-bearing deposits with banks, federal
funds sold, securities available for sale, 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 sufficient to satisfy
its depositors' requirements and to meet customers' credit needs.
22
<PAGE>
At December 31, 1998, cash, securities classified as available for sale, and
federal funds sold were 10.1% of total earning assets, compared to 15.0% at
December 31, 1997.
Additional sources of liquidity available to the Corporation include the Bank's
capacity to borrow 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 ongoing 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.
On April 4, 1997, the Corporation repurchased 204,683 shares of its common
stock. In addition, the Corporation repurchased a total of 119,803 shares of its
common stock during 1996. These repurchases were made to reduce capital as it
was high relative to the Corporation's asset size.
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 12.5% at December 31, 1998, compared to 14.1% at December 31,
1997. The total capital ratio was 13.4% at December 31, 1998, compared to 15.2%
at December 31, 1997. These ratios are in excess of the mandated minimum
requirement of 4.0% and 8.0%, respectively.
Shareholders' equity was $36.6 million at year-end 1998 compared to $31.8
million at year-end 1997. The leverage ratio consists of Tier I capital divided
by average assets. At December 31, 1998, the Corporation's leverage ratio was
11.5%, compared to 11.4% at December 31, 1997. Each of these exceeds the
required minimum leverage ratio of 3.0%. The dividend payout ratio was 27.7%,
27.8%, and 33.6%, in 1998, 1997, and 1996, respectively. During 1998, the
Corporation paid dividends of $0.44 per share, up 25.7% from $0.35 per share
paid in 1997.
The Corporation is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, would have a material effect on the
Corporation's liquidity, capital resources, or results of operations.
New Accounting Pronouncements
In June 1998, FASB issued FAS 133, "Accounting for Derivative Instruments and
Hedging Activities." FAS 133 establishes accounting and reporting standards for
derivative financial instruments and other similar financial instruments and for
hedging activities. The standard also allows securities classified as
held-to-maturity to be transferred to the available-for-sale category at the
date of initial application of this standard. FAS 133 is effective for all
fiscal years beginning after June 15, 1999. Management is currently reviewing
this statement to determine the impact, if any, it will have since the
Corporation currently has no derivative instruments.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." FASB Statement No. 65, as amended, requires that, after securitization
of a mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed security as a trading
security. This statement further amends Statement No. 65 to require that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. This statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
This statement is effective beginning in 1999. This statement is 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. The consolidated financial statements reflect the impacts of inflation
on interest rates, loan demands, and deposits.
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.
23
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 8,139,884 $ 7,843,788
Interest-bearing deposits in other banks 333,356 1,027,023
- --------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,473,240 8,870,811
Investment securities--available for sale at fair value,
amortized cost of $21,480,714 and $29,497,833, respectively 21,888,295 29,793,498
Investment securities--held to maturity at amortized cost,
fair value of $40,864,681 and $47,685,859, respectively 38,810,290 45,926,549
Loans held for sale, net 66,993,322 24,479,103
Loans, net 169,918,428 154,744,620
Federal Home Loan Bank stock 1,706,200 1,061,800
Corporate premises and equipment, net 6,465,375 6,581,568
Accrued interest receivable 2,373,783 2,195,959
Other assets 4,234,696 4,452,061
- --------------------------------------------------------------------------------------------------------------------
Total assets $320,863,629 $278,105,969
- --------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Non-interest-bearing demand deposits $ 40,907,814 $ 35,295,210
Savings and interest-bearing demand deposits 101,631,148 95,105,425
Time deposits 109,134,197 101,112,517
- --------------------------------------------------------------------------------------------------------------------
Total deposits 251,673,159 231,513,152
Borrowings 24,661,078 9,335,687
Accrued interest payable 598,146 592,300
Other liabilities 7,283,753 4,864,297
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 284,216,136 246,305,436
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock ($1.00 par value, 3,000,000 shares authorized) -- --
Common stock ($1.00 par value, 8,000,000 shares authorized,
3,866,888 and 1,916,190 shares issued and outstanding
at December 31, 1998 and 1997, respectively) 3,866,888 1,916,190
Additional paid-in capital 475,928 117,692
Retained earnings 31,739,483 29,236,260
Accumulated other comprehensive income,
net of tax of $291,161 and $273,232, respectively 565,194 530,391
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 36,647,493 31,800,533
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $320,863,629 $278,105,969
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 17,789,920 $ 14,656,120 $12,138,668
Interest on money market investments
Federal funds sold -- -- 678
Other money market investments 68,584 68,399 171, 077
Interest on securities
U.S. Treasury securities 198,883 198,883 340,449
U.S. government agencies and corporations 2,035,832 2,422,390 3,164,782
Tax-exempt obligations of states and
political subdivisions 2,097,657 2,041,372 2,111,006
Corporate bonds and other 426,633 375,884 406,338
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 22,617,509 19,763,048 18,332,998
Interest expense
Savings and interest-bearing deposits 2,754,417 2,715,785 2,548,155
Certificates of deposit, $100M or more 818,548 465,701 487,543
Other time deposits 4,616,052 4,492,910 4,417,701
Short-term borrowings and other 1,369,042 327,905 214,220
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 9,558,059 8,002,301 7,667,619
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 13,059,450 11,760,747 10,665,379
Provision for loan losses 600,000 330,000 30,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 12,459,450 11,430,747 10,635,379
Other operating income
Gain on sale of loans 7,128,998 4,056,340 2,687,629
Service charges on deposit accounts 1,032,918 1,012,410 982,752
Other service charges and fees 1,866,763 987,232 665,390
Other income 980,943 601,626 343,144
- -----------------------------------------------------------------------------------------------------------------------
Total other operating income 11,009,622 6,657,608 4,678,915
Other operating expenses
Salaries and employee benefits 8,286,380 6,332,026 5,973,650
Occupancy expenses 2,009,917 1,798,561 1,800,904
Goodwill amortization 275,160 275,160 281,982
Other expenses 4,410,228 3,131,818 2,237,684
- -----------------------------------------------------------------------------------------------------------------------
Total other operating expenses 14,981,685 11,537,565 10,294,220
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,487,387 6,550,790 5,020,074
Income tax expense 2,353,351 1,613,963 958,900
- -----------------------------------------------------------------------------------------------------------------------
Net Income $ 6,134,036 $ 4,936,827 $ 4,061,174
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share--basic $ 1.59 $ 1.26 $ .92
Earnings per common share--assuming dilution 1.56 1.25 .92
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-In Comprehensive Retained Comprehensive
Stock Capital Income Earnings Income Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Comprehensive income
Net income $4,061,174 4,061,174 4,061,174
Other comprehensive income,
net of tax
Unrealized holding gains
arising during the period
net of tax of $95,8991 (186,156) (186,156) (186,156)
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income $3,875,018
- -------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.31 per share) -- -- (1,365,187) -- (1,365,187)
- -------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 2,113,041 -- 29,795,739 305,729 32,214,509
Repurchase of common stock (204,683) -- (4,126,518) -- (4,331,201)
Stock options exercised 7,832 117,692 -- -- 125,524
Comprehensive income
Net income $4,963,827 4,936,827 4,936,827
Other comprehensive income,
net of tax
Unrealized holding gains
arising during the period
net of tax of $115,7351 224,662 224,662 224,662
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income $5,188,489
- -------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.35 per share) -- -- (1,369,788) -- (1,369,788)
- -------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 1,916,190 117,692 29,236,260 530,391 31,800,533
Stock options exercised 19,004 358,236 -- -- 377,240
Comprehensive income
Net income $6,134,036 6,134,036 6,134,036
Other comprehensive income,
net of tax
Unrealized holding gains arising
during the period net
of tax of $17,9291 34,803 34,803 34,803
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income $6,168,839
- -------------------------------------------------------------------------------------------------------------------------
Stock dividends 1,931,694 -- (1,931,694) -- --
Cash dividends ($.44 per share) -- -- (1,699,119) -- (1,699,119)
- -------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 $3,866,888 $ 475,928 $31,739,483 $ 565,194 $36,647,493
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 THERE WERE NO RECLASSIFICATION ADJUSTMENTS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998, 1997, AND 1996.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 6,134,036 $ 4,936,827 $ 4,061,174
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation 949,451 878,433 860,290
Amortization of goodwill 275,160 275,160 281,982
Deferred income taxes (332,645) (320,929) (23,885)
Provision for loan losses 600,000 330,000 30,000
Accretion of discounts and amortization of
premiums on investment securities, net (51,444) (104,715) (92,029)
Net realized loss (gain) on securities -- 7,180 9,427
Gain on sale of corporate premises and equipment -- -- (17,973)
Origination of loans held for sale (524,395,568) (286,419,034) (173,881,464)
Sale of loans 481,881,349 274,223,953 163,482,470
Change in other assets and liabilities:
Accrued interest receivable (177,824) 74,197 169,150
Other assets 271,213 (373,662) (177,931)
Accrued interest payable 5,846 50,855 (28,684)
Other liabilities 2,405,165 2,426,770 1,031,957
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (32,435,261) (4,014,965) (4,295,516)
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from maturities of investments held to maturity 9,674,100 25,632,350 16,355,272
Proceeds from sales and maturities of investments
available for sale 22,449,745 8,576,713 9,831,237
Purchase of investment securities held to maturity (2,572,800) (4,867,024) (6,097,835)
Purchase of investments available for sale (14,425,408) (19,055,224) (5,219,270)
Purchase of FHLB stock (644,400) (205,000) (51,400)
Net increase in customer loans (15,773,808) (18,342,603) (26,749,697)
Purchase of corporate premises and equipment (879,180) (1,618,414) (960,713)
Proceeds from the sale of corporate
premises and equipment 45,922 170,107 27,310
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,125,829) (9,709,095) (12,865,096)
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase in demand, interest-bearing
demand and savings deposits 12,138,327 7,743,351 1,619,262
Net increase in time deposits 8,021,680 7,347,245 2,964,659
Assumption of deposit liabilities in branch
acquisition, net of premium paid -- -- 7,406,802
Net increase in other borrowings 15,325,391 4,280,412 3,855,275
Repurchase of common stock -- (4,331,201) (2,126,503)
Proceeds from exercise of stock options 377,240 125,524 12,885
Cash dividends (1,699,119) (1,369,788) (1,365,187)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 34,163,519 13,795,543 12,367,193
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (397,571) 71,483 (4,793,419)
Cash and cash equivalents at beginning of year 8,870,811 8,799,328 13,592,747
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,473,240 $ 8,870,811 $ 8,799,328
- ------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure
Interest paid $ 9,552,213 $ 7,951,446 $7,696,303
Income taxes paid 2,674,475 1,699,427 903,611
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of C&F Financial Corporation and
subsidiary (the "Corporation") 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, sells title insurance to the mortgage loan customers of the Bank and C&F
Mortgage Corporation. 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.
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 on realization at the time of sale using the
amortized cost of the specific security sold.
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 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 ninety days
or more past due, or earlier, if collection is uncertain based on an evaluation
of the net realizable value of the collateral and the financial strength of the
borrower. Loans greater than ninety days past due may remain on accrual status
if management determines it has adequate collateral to cover the principal and
interest. For those loans which are carried on non-accrual status, interest is
recognized on the cash basis. Loan fees and origination costs are deferred and
the net amount is 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.
Impaired loans are measured based on the present value of expected future cash
flows discounted at the effective interest rate of the loan, or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The 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.
28
<PAGE>
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 ten to forty years for buildings and from three to ten 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.
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.
Defined Benefit Plan: In 1998, the Corporation adopted Financial Accounting
Standard (FAS) 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This pronouncement does not change the measurement or
recognition of amounts recognized in the Corporation's financial statements
applicable to its defined benefit plan. FAS 132 revises the existing disclosure
requirements by standardizing the disclosure requirements for pensions,
requiring certain additional information on changes in the benefit obligations
and fair values of plan assets, and eliminating certain disclosures.
Segment Information: In 1998, the Corporation adopted Financial Accounting
Standard (FAS) 131, "Disclosures about Segments of an Enterprise and Related
Information." FAS 131 supercedes FAS 14, "Financial Reporting for Segment of a
Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Corporation's reportable segments.
The adoption of FAS 131 did not affect the results of operations or financial
position but did affect the disclosure of segment information.
Comprehensive Income: In 1998, the Corporation adopted Financial Accounting
Standard (FAS) 130, "Reporting Comprehensive Income." The consolidated
statements of shareholders' equity have been changed to include columns for
comprehensive income and accumulated other comprehensive income. Comprehensive
income for the Corporation includes net income plus the change in the unrealized
gain or loss on securities available for sale. Accumulated other comprehensive
income includes the cumulative changes in unrealized gain or loss on securities
available for sale. Adoption of this standard did not impact the Corporation's
consolidated financial position, results of operations, or cash flows.
Earnings Per Share: In 1997, the Corporation adopted Financial Accounting
Standard (FAS) 128, "Earnings per Share." FAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the FAS 128
requirements.
Shareholders' Equity: On April 4, 1997, the Corporation repurchased 204,683
shares of its common stock at a price of $21.00 per share. During 1996 the
Corporation repurchased a total of 119,803 shares of its common stock from three
shareholders in three independently negotiated transactions at a price of $17.75
per share.
29
<PAGE>
On June 16, 1998, the Corporation declared a 100% stock dividend in the form of
a two-for-one stock split. All the financial data included in this Annual Report
has been retroactively restated to reflect the effect of the stock split.
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.
- --------------------------------------------------------------------------------
NOTE 2: INVESTMENT SECURITIES
Debt and equity securities are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available for Sale Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,999,696 $ 7,179 $ -- $ 2,006,875
U.S. government agencies and corporations 12,497,651 64,342 (5,744) 12,556,249
Obligations of states and political subdivisions 2,213,698 11,338 (3,575) 2,221,461
Preferred stock 4,769,669 366,326 (32,285) 5,103,710
- -------------------------------------------------------------------------------------------------------------------------
$21,480,714 $ 449,185 $ (41,604) $21,888,295
- -------------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Treasury securities $ 999,678 $ 75,009 $ -- $1,074,687
U.S. government agencies and corporations 999,296 29,141 -- 1,028,437
Obligations of states and political subdivisions 36,811,316 1,950,241 -- 38,761,557
- -------------------------------------------------------------------------------------------------------------------------
$38,810,290 $2,054,391 $ -- $40,864,681
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available for Sale Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $1,998,449 $ 7,177 $ -- $ 2,005,626
U.S. government agencies and corporations 23,495,722 27,715 (31,234) 23,492,203
Preferred stock 4,003,662 292,007 -- 4,295,669
- -------------------------------------------------------------------------------------------------------------------------
$29,497,833 $ 326,899 $ (31,234) $29,793,498
- -------------------------------------------------------------------------------------------------------------------------
Held to Maturity
U.S. Treasury securities $ 999,543 $ 68,270 $ -- $1,067,813
U.S. government agencies and corporations 8,498,250 82,321 -- 8,580,571
Obligations of states and political subdivisions 36,128,774 1,617,875 (11,304) 37,735,345
Corporate bonds 299,982 2,148 -- 302,130
- -------------------------------------------------------------------------------------------------------------------------
$45,926,549 $1,770,614 $ (11,304) $47,685,859
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
The amortized cost and estimated fair value of debt securities at December 31,
1998, 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, 1998
Amortized Estimated
Available for Sale Cost Fair Value
- --------------------------------------------------------------------------------
Due in one year or less $ 1,999,695 $ 2,006,875
Due after one year through five years 500,000 524,050
Due after five years through ten years 3,500,000 3,517,944
Due after ten years 10,711,350 10,735,716
- --------------------------------------------------------------------------------
16,711,045 16,784,585
- --------------------------------------------------------------------------------
Preferred Stock 4,769,669 5,103,710
$ 21,480,714 $ 21,888,295
Held to Maturity
Due in one year or less $ 1,969,296 $ 2,008,195
Due after one year through five years 5,770,981 6,076,468
Due after five years through ten years 13,162,923 13,965,213
Due after ten years 17,907,090 18,814,805
- --------------------------------------------------------------------------------
$ 38,810,290 $ 40,864,681
- --------------------------------------------------------------------------------
Proceeds from maturities and the redemption of call provisions of investment
securities held to maturity in 1998 were $9,674,100. There were no realized
gains or losses. Proceeds from maturities and the redemption of call provisions
of investment securities available for sale were $22,449,745. There were no
realized gains or losses. The amortized cost and approximate market value of
securities pledged to secure public deposits amounted to $20,785,000 and
$21,559,000, respectively, at December 31, 1998.
Proceeds from maturities and the redemption of call provisions of investment
securities held to maturity in 1997 were $25,632,350. There were no realized
gains or losses. Proceeds from maturities and the redemption of call provisions
of investment securities available for sale were $8,576,713, resulting in gross
realized losses of $30,480 and realized gains of $23,300. The amortized cost and
approximate market value of securities pledged to secure public deposits
amounted to $22,175,000 and $22,736,000, respectively, at December 31, 1997.
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.
- --------------------------------------------------------------------------------
NOTE 3: LOANS
Major classifications of loans are summarized as follows:
- ---------------------------------------------------------------------------
DECEMBER 31,
1998 1997
- ---------------------------------------------------------------------------
Real estate--mortgage $ 87,231,351 $ 89,927,391
Real estate--construction 5,375,752 4,471,803
Commercial, financial, and agricultural 62,885,477 48,751,540
Equity lines 8,579,523 7,130,910
Consumer 9,543,608 7,682,819
- ---------------------------------------------------------------------------
173,615,711 157,964,463
Less unearned loan fees (937,020) (986,484)
- ---------------------------------------------------------------------------
172,678,691 156,977,979
Less reserve for loan losses (2,760,263) (2,233,359)
- ---------------------------------------------------------------------------
$ 169,918,428 $154,744,620
- ---------------------------------------------------------------------------
31
<PAGE>
Loans on non-accrual status were $463,000 and $497,000 at December 31, 1998 and
1997, respectively. If interest income had been recognized on non-performing
loans at their stated rates during fiscal years 1998, 1997, and 1996, interest
income would have increased by approximately $37,000, $37,000, and $56,000,
respectively. The balance of impaired loans at December 31, 1998 and 1997, was
$463,000 and $497,000, 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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at the beginning of year $2,233,359 $1,926,775 $1,914,195
Provision charged to operations 600,000 330,000 30,000
Loans charged off (98,699) (27,430) (29,658)
Recoveries of loans previously charged off 25,603 4,014 12,238
- -----------------------------------------------------------------------------------
Balance at the end of year $2,760,263 $2,233,359 $1,926,775
- -----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5: CORPORATE PREMISES AND EQUIPMENT
Major classifications of corporate premises and equipment are summarized as
follows:
- ----------------------------------------------------------------------------
DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------
Land $1,316,381 $ 1,213,073
Buildings 5,277,851 4,974,919
Equipment, furniture, and fixtures 6,881,025 6,481,373
- ----------------------------------------------------------------------------
13,475,257 12,669,365
Less accumulated depreciation (7,009,882) (6,087,797)
- ----------------------------------------------------------------------------
$6,465,375 $ 6,581,568
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
NOTE 6: TIME DEPOSITS
Time deposits are summarized as follows:
- ----------------------------------------------------------------------------
DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------
Certificates of deposit, $100M or more $ 18,567,412 $ 15,441,597
Other time deposits 90,566,785 85,670,920
- ----------------------------------------------------------------------------
$109,134,197 $101,112,517
- ----------------------------------------------------------------------------
Remaining maturities on certificates are as follows:
- ----------------------------------------------------------------------------
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------
1999 $ 80,489,820
2000 21,628,993
2001 2,369,491
2002 1,271,610
2003 3,374,283
- ----------------------------------------------------------------------------
$109,134,197
- ----------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7: BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase
which are secured transactions with customers and generally mature the day
following the date sold. Short-term borrowings also include advances from the
Federal Home Loan Bank (FHLB), which are secured by a blanket floating lien on
all real estate mortgage loans secured by one- to four-family residential
properties.
The table below presents selected information on short-term borrowings:
- --------------------------------------------------------------------------------
DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------
Maximum balance at any month-end during the year $43,609,000 $13,435,000
Average balance for the year $22,237,000 $ 6,441,000
Weighted average rate for the year 5.50% 5.09%
Weighted average rate on borrowings at year-end 4.61% 5.07%
Estimated fair value $14,661,078 $ 9,335,687
- -------------------------------------------------------------------------------
The Corporation has unused lines of credit for short-term borrowings totaling
approximately $53,000,000 at December 31, 1998.
Long-term borrowings consist of convertible fixed-rate advances from the FHLB.
At December 31, 1998, convertible fixed-rate advances totaled $10,000,000 with
an average interest rate of 5.01%. The advances are convertible to
adjustable-rate advances at the option of the FHLB in March 1999, and quarterly
thereafter until the advances mature in September 2001. These advances are also
secured by a blanket floating lien on all real estate mortgage loans secured by
one- to four-family residential properties.
- --------------------------------------------------------------------------------
NOTE 8: EARNINGS FOR SHARE
The following shows the weighted average number of shares used in computing
earnings per share and the effect on weighted average number of shares of
diluted potential common stock. All shares have been restated to reflect the
effect of a two-for-one stock split in July 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
DECEMBER 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of common shares used
in earnings per common share--basic 3,857,542 3,930,288 4,417,098
Effect of dilutive securities:
Stock options 62,233 22,468 8,902
- --------------------------------------------------------------------------------------
Weighted average number of common shares used
in earnings per common share--assuming dilution 3,919,775 3,952,756 4,426,000
- --------------------------------------------------------------------------------------
</TABLE>
Options on approximately 20,000 and 45,600 shares were not included in computing
earnings per common share--assuming dilution for the years ended December 31,
1997 and 1996, respectively, because their effects were antidilutive. All
options were included in computing earnings per common share--assuming dilution
for the year ended December 31, 1998.
- --------------------------------------------------------------------------------
NOTE 9: INCOME TAXES
Principal components of income tax expense as reflected in the statements of
income are as follows:
- -----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1998 1997 1996
- -----------------------------------------------------------------------------
Current taxes $2,685,996 $1,934,892 $982,785
Deferred taxes (332,645) (320,929) (23,885)
- -----------------------------------------------------------------------------
$2,353,351 $ 1,613,963 $ 958,900
- -----------------------------------------------------------------------------
33
<PAGE>
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
1998 Income 1997 Income 1996 Income
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed at federal
statutory rates $2,885,712 34.0% $2,227,269 34.0% $1,706,825 34.0%
Tax effect of exclusion of interest income
on obligations of states and
political subdivisions (713,203) (8.4) (714,061) (10.9) (712,075) (14.2)
Reduction of interest expense incurred to
carry tax-exempt assets 87,710 1.0 77,067 1.2 32,862 .6
State income taxes, net of federal
tax benefit 122,650 1.4 22,054 .3 -- --
Tax effect of dividends-received
deduction on preferred stock (71,957) (.8) (66,614) (1.0) (75,460) (1.5)
Other 42,439 .5 68,248 1.0 6,748 .1
- --------------------------------------------------------------------------------------------------------------------------
$2,353,351 27.7% $1,613,963 24.6% $958,900 19.0%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other assets include deferred income taxes of $1,020,295 and $705,579 at
December 31, 1998 and 1997, respectively. Other liabilities include current
taxes payable of $29,166 and $312,846 at December 31, 1998 and 1997,
respectively. Income tax returns subsequent to 1996 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,
1998 1997
- -----------------------------------------------------------------------------------
Deferred tax asset
<S> <C> <C>
Deferred loan fees $ 47,453 $ 71,180
Allowance for loan losses 852,515 613,371
Interest on non-accrual loans 149,406 138,568
Accrued pension 69,354 128,855
Intangible asset 105,076 68,990
Other 204,419 112,039
- -----------------------------------------------------------------------------------
Deferred tax asset 1,428,223 1,133,003
- -----------------------------------------------------------------------------------
Deferred tax liability
Net unrealized gain on securities available for sale (291,161) (273,232)
Depreciation (116,767) (154,192)
- -----------------------------------------------------------------------------------
Deferred tax liability (407,928) (427,424)
- -----------------------------------------------------------------------------------
Net deferred tax asset $1,020,295 $ 705,579
- -----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 10: EMPLOYEE BENEFIT PLANS
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 who have attained the age of eighteen
and have at least three 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. The amounts
charged to expense under this plan were $281,230, $244,617, and $226,938 in
1998, 1997, and 1996, respectively.
34
<PAGE>
The Mortgage Corporation maintains a Defined Contribution 401(k) Savings Plan
(the "Plan") which authorizes a maximum voluntary salary deferral of up to 15%
of compensation, subject to statutory limitations. All full-time employees who
have attained the age of eighteen are eligible to participate on the first day
of the next month following employment date. The Mortgage Corporation reserves
the right for an annual discretionary contribution to the account of each
eligible employee based in part on the Mortgage Corporation's profitability for
a given year, and on each participant's yearly earnings. An employee is vested
25% after two years of service, 50% after three years of service, 75% after four
years of service, and fully vested after five years. The amount charged to
expense under the Plan was $185,000 and $50,000 for 1998 and 1997, respectively.
There was no contribution in 1996.
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 Plan 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 are performed by
the Board. Payment of the bonus is based on individual performance and is paid
in cash. Expense is accrued in the fiscal year of the specified bonus
performance. Expenses under this plan were $166,150, $136,700, and $83,500 in
1998, 1997, and 1996, respectively. Additional bonuses totaling $31,148,
$35,205, and $37,278 were granted to employees not covered by the Bonus Plan in
1998, 1997, and 1996, respectively.
The Bank has a non-contributory, defined benefit pension plan for full-time
employees over twenty-one years of age. Benefits are generally based upon years
of service and average compensation for the five highest-paid consecutive years
of service. The Bank funds pension costs in accordance with the funding
provisions of the Employee Retirement Income Security Act. Information about the
plan follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year Ended December 31,
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation, beginning $1,314,383 $1,014,681
Service cost 141,160 125,797
Interest cost 98,446 75,968
Actuarial loss 98,633 111,842
Benefits paid (76,170) (13,905)
- ---------------------------------------------------------------------------------
Benefit obligation, ending $1,576,452 $1,314,383
- ---------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets, beginning $1,361,274 $1,042,093
Actuarial return on plan assets (5,523) 246,549
Employer contributions 277,539 86,537
Benefits paid (76,170) (13,905)
- ---------------------------------------------------------------------------------
Fair value of plan assets, ending $1,557,120 $1,361,274
- ---------------------------------------------------------------------------------
Funded status $ (19,332) $ 46,891
Unrecognized net actual gain (157,740) (396,657)
Unrecognized net obligation at transition (70,373) (75,786)
Unrecognized prior service cost 43,463 46,567
- ---------------------------------------------------------------------------------
Accrued benefit cost included in other liabilities $ (203,982) $ (378,985)
- ---------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service cost $ 141,160 $ 125,797 $ 99,057
Interest cost 98,446 75,968 72,880
Expected return on plan assets (122,355) (93,629) (87,149)
Amortization of prior service cost 3,104 3,104 3,104
Amortization of net obligation at transition (5,413) (5,413) (5,413)
Recognized net actuarial gain (12,406) (12,569) (13,493)
- --------------------------------------------------------------------------------------
Net periodic benefit cost $ 102,536 $ 93,258 $ 68,986
- --------------------------------------------------------------------------------------
Weighted-Average Assumptions as of December 31
Discount rate 7.5% 7.5% 8.5%
Expected return on plan assets 9.0 9.0 9.0
Rate of compensation increase 4.0 4.0 6.0
- --------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 11: RELATED PARTY TRANSACTIONS
Loans to directors and officers totaled $1,070,000 and $1,506,000 at December
31, 1998 and 1997, respectively. New advances to directors and officers totaled
$311,000 and repayments totaled $747,000 in the year ended December 31, 1998.
- --------------------------------------------------------------------------------
NOTE 12: 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 100,000
shares were authorized for the Plan in 1994. All options expire ten years from
the grant date.
In 1998, the Board of Directors authorized 25,000 shares of common stock for
issuance under the Non-Employee Director Stock Option Plan. Under this plan,
options to purchase common stock are granted to non-employee directors of the
Bank. Options are issued to non-employee directors at a price equal to the fair
market value of common stock at the date granted. The options granted are
exercisable one year after grant. All options expire ten years from the grant
date.
The Corporation applies APB Opinion 25 and related Interpretations in accounting
for the stock option plans. Accordingly, no compensation cost has been
recognized for its plans. Had compensation cost for the plans been determined
based on the fair value at the grant dates of options consistent with FASB
Statement 123, the Corporation'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, 1998, 1997, and 1996.
The fair value of each option granted during the years ended December 31, 1998,
1997, and 1996, was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions for 1998, 1997, and 1996,
respectively: risk-free rate of 4.5, 5.6, and 6.2% and volatility of 30, 20, and
15%. The dividend yield used in the pricing model was 2.6, 3.0, and 3.0% for
1998, 1997, and 1996, respectively. The expected lives used was eight years for
1998, 1997, and 1996.
36
<PAGE>
Transactions under the Plan for the periods indicated, restated to reflect the
effect of a two-for-one stock split in July 1998, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 164,936 $ 9.94 148,100 $ 9.19 124,800 $ 8.95
Granted 42,900 18.77 33,700 12.50 28,500 9.38
Exercised (34,508) 9.05 (15,664) 7.53 (4,200) 3.07
Canceled (3,468) 9.69 (1,200) 9.13 (1,000) 10.25
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 169,860 $ 12.36 164,936 $ 9.94 148,100 $ 9.19
- ----------------------------------------------------------------------------------------------------------------------
*Weighted average
Options exercisable at year-end 97,304 105,380 95,366
Weighted-average fair value
of options granted during the year $ 5.81 $ 2.94 $ 2.10
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------- -------------------
Number Number
Range of Outstanding Remaining Exercisable
Exercise at December 31, Contractual Exercise at December 31, Exercise
Prices 1998 Life Price* 1998 Price*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.38 to 10.63 97,460 5.6 years $ 9.49 87,568 $ 9.51
$12.50 to 18.63 72,400 9.6 years 16.21 9,736 12.50
- -------------------------------------------------------------------------------------------------------------------------
$8.38 to 18.63 169,860 7.3 years $ 12.36 97,304 $ 9.81
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*WEIGHTED AVERAGE
- --------------------------------------------------------------------------------
NOTE 13: 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's 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's and
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Corporation's 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 shareholders' 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 $278,514,000
and $273,132,000, respectively, at December 31, 1998, and $207,698,000 and
$203,065,000, respectively, at December 31, 1997. Management believes, as of
December 31, 1998, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, 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 below. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Corporation's and the Bank's actual capital amounts and ratios are presented
in the table.
37
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Capital (to Risk-Weighted Assets)
Corporation $ 37,350 13.4% $ 22,281 >= 8.0% N/A
Bank 31,781 11.6 21,851 >= 8.0 $ 27,313 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Corporation 34,440 12.5 11,141 >= 4.0 N/A
Bank 29,021 10.6 10,925 >= 4.0 16,388 >= 6.0
Tier I Capital (to Average Assets)
Corporation 34,440 11.5 9,001 >= 3.0 N/A
Bank 29,021 9.9 8,832 >= 3.0 14,720 >= 5.0
AS OF DECEMBER 31, 1997:
Total Capital (to Risk-Weighted Assets)
Corporation $ 31,587 15.2% $ 16,616 >= 8.0% N/A
Bank 26,916 13.3 16,245 >= 8.0 $ 20,307 >=10.0%
Tier I Capital (to Risk-Weighted Assets)
Corporation 29,353 14.1 8,308 >= 4.0 N/A
Bank 24,681 12.2 8,123 >= 4.0 12,184 >= 6.0
Tier I Capital (to Average Assets)
Corporation 29,353 11.4 7,741 >= 3.0 N/A
Bank 24,681 9.7 7,601 >= 3.0 12,668 >= 5.0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 14: 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 $4,240,000 and
$3,211,000 at December 31, 1998 and 1997, respectively.
Loan commitments are agreements to extend credit to a customer provided that
there are no violations of the terms of the contract prior to funding.
Commitments have fixed expiration dates or other termination clauses and may
require payment of a fee by the customer. 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 $29,043,000 and $23,110,000 at December 31, 1998 and 1997,
respectively.
Commitments to sell loans are designed to eliminate the Mortgage Corporation's
exposure to fluctuations in interest rates in connection with 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 loan. Recourse periods vary from ninety
days up to one year and conditions for repur-
38
<PAGE>
chase 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
U.S. government.
At December 31, 1998, the Mortgage Corporation had locked-rate commitments to
originate mortgage loans amounting to approximately $32,104,000. The Mortgage
Corporation has entered into mandatory commitments, on a best-effort basis, to
sell loans of approximately $99,097,000. Risks arise from the possible inability
of counterparties to meet the terms of their purchase contracts. The Mortgage
Corporation does not expect any counterparty to fail to meet its obligations.
The Corporation is conducting a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue, and is
developing a remediation plan to resolve the issue. The issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Corporation is
heavily dependent on computer processing in the conduct of its business
activities. Failure of these systems could have a significant impact on the
Corporation's operations. Based on the review of the computer systems,
management does not believe the cost of remediation will be material to the
Corporation's financial statements.
As of December 31, 1998, the Corporation had $4,528,000 in deposits in financial
institutions in excess of amounts insured by the Federal Deposit Insurance
Corporation (FDIC).
The Mortgage Corporation is committed under noncancelable operating leases for
certain office locations. Rent expense associated with these operating leases
was $297,000 and $244,000 for the years ending December 31, 1998 and 1997,
respectively.
Future minimum lease payments under these leases are as follows:
- -------------------------------------------
Year Ending December 31,
- -------------------------------------------
1999 $ 293,134
2000 169,961
2001 143,264
2002 147,562
2003 151,989
- -------------------------------------------
$ 905,910
- -------------------------------------------
- --------------------------------------------------------------------------------
NOTE 15: 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 of market value. The fair
value of standby letters of credit is based on fees currently charged for
similar agreements or on estimated costs 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 provide 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.
Loans held for sale. The fair value of loans held for sale is estimated based on
commitments into which individual loans will be delivered.
Deposits and Borrowings. The fair value of all demand accounts is the amount
payable at the report date. For all other deposits and borrowings, the fair
value is determined using the discounted cash flow method. The discount rate was
equal to the rate currently offered on similar products.
39
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31,
1998 1997
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 8,473 $ 8,473 $ 8,871 $ 8,871
Investment securities 60,699 62,753 75,720 77,479
Net loans 169,918 172,830 154,745 154,769
Loans held for sale, net 66,993 68,098 24,479 24,807
Financial liabilities:
Demand deposits 142,539 142,512 130,401 130,494
Time deposits 109,134 109,714 101,113 101,275
Borrowings 24,661 24,658 9,336 9,336
Off-balance-sheet items:
Letters of credit -- 4,240 -- 3,211
Unused portions of lines of credit -- 29,043 -- 23,110
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 16: BUSINESS SEGMENTS
The Company operates in a decentralized fashion in two principal business
activities, retail banking and mortgage banking. Revenues from retail banking
operations consist primarily of interest earned on loans and investment
securities. Mortgage banking operating revenues consist mainly of interest
earned on mortgage loans held for sale, gains on sales of loans in the secondary
mortgage market, and loan origination fee income. The Company also has an
investment company and a title company subsidiary which derive revenues from
brokerage and title insurance services. The results of these subsidiaries are
not significant to the Corporation as a whole and have been included in "Other."
The following table presents segment information for the year ended December 31,
1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Retail Mortgage
Banking Banking Other Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income $ 22,195 $ 2,805 $ -- $ (2,382) $ 22,618
Gain on sale of loans -- 7,129 -- 7,129
Other 1,721 1,458 701 -- 3,880
- -----------------------------------------------------------------------------------------------------------
Total operating income 23,916 11,392 701 (2,382) 33,627
- -----------------------------------------------------------------------------------------------------------
Expenses:
Interest expense 9,558 2,382 -- (2,382) 9,558
Salaries and employee benefits 4,587 3,441 258 -- 8,286
Other 4,395 2,777 124 -- 7,296
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 18,540 8,600 382 (2,382) 25,140
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 5,376 2,792 319 -- 8,487
- -----------------------------------------------------------------------------------------------------------
Total assets 316,584 66,366 26 (62,112) 320,864
Capital expenditures $ 775 $ 104 $ -- $ -- $ 879
- -----------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Retail Mortgage
Banking Banking Other Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Interest income $ 19,635 $ 1,184 $ -- $ (1,056) $ 19,763
Gain on sale of loans -- 4,057 -- 4,057
Other 1,578 621 402 -- 2,601
- ------------------------------------------------------------------------------------------------------------
Total operating income 21,213 5,862 402 (1,056) 26,421
- ------------------------------------------------------------------------------------------------------------
Expenses:
Interest expense 8,002 1,056 -- (1,056) 8,002
Salaries and employee benefits 3,949 2,203 180 -- 6,332
Other 3,786 1,691 59 -- 5,536
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 15,737 4,950 239 (1,056) 19,870
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 5,476 912 163 -- 6,551
- ------------------------------------------------------------------------------------------------------------
Total assets 275,618 24,348 10 (21,870) 278,106
Capital expenditures $ 1,402 $ 216 $ -- $ -- $ 1,618
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Retail Mortgage
Banking Banking Other Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------
Revenues:
Interest income $ 18,195 $ 758 $ -- $ (620) $ 18,333
Gain on sale of loans -- 2,688 -- 2,688
Other 1,374 423 194 -- 1,991
- ------------------------------------------------------------------------------------------------------------
Total operating income 19,569 3,869 194 (620) 23,012
- ------------------------------------------------------------------------------------------------------------
Expenses:
Interest expense 7,668 620 -- (620) 7,668
Salaries and employee benefits 3,590 2,262 121 -- 5,973
Other 3,175 1,164 12 -- 4,351
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 14,433 4,046 133 (620) 17,992
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 5,136 (177) 61 -- 5,020
- ------------------------------------------------------------------------------------------------------------
Total assets 256,260 11,742 5 (11,336) 256,671
Capital expenditures $ 828 $ 133 $ -- $ -- $ 961
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The retail banking segment provides the mortgage banking segment with the funds
needed to originate mortgage loans through a warehouse line of credit and
charges the mortgage banking segment interest at the daily FHLB advance rate
plus 50 basis points. These transactions are eliminated to reach consolidated
totals. Certain corporate overhead costs incurred by the retail banking segment
are not allocated to the mortgage banking and other segments.
41
<PAGE>
- --------------------------------------------------------------------------------
NOTE 17: PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Financial information for the parent company is as follows:
- --------------------------------------------------------------------------------
December 31,
Balance Sheet 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash $ 51,822 $ 112,456
Investment securities available for sale 5,103,710 4,295,669
Other assets 603,561 613,874
Investments in subsidiary 31,007,732 26,935,994
- --------------------------------------------------------------------------------
Total assets $ 36,766,825 $31,957,993
- --------------------------------------------------------------------------------
Liabilities and shareholders' equity
Other liabilities $ 119,332 $ 157,460
Shareholders' equity 36,647,493 31,800,533
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 36,766,825 $31,957,993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
Statement of Income 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income on investment securities $ 308,804 $ 295,477 $ 319,001
Interest income on loans 41,910 21,573 --
Dividends received from bank subsidiary 1,839,119 5,420,044 3,591,698
Distributions in excess of equity in net income of subsidiary -- (672,045) --
Equity in undistributed net income of subsidiary 4,064,679 -- 195,640
Other expenses (120,476) (128,222) (45,165)
- ------------------------------------------------------------------------------------------------------------------------
Net income $6,134,036 $ 4,936,827 $4,061,174
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31,
Statement of Cash Flows 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $6,134,036 $4,936,827 $4,061,174
Adjustments to reconcile net income to net
cash provided by operating activities:
Distributions in excess of equity in net income of subsidiary -- 672,045 --
Equity in undistributed earnings of subsidiary (4,064,679) -- (195,640)
(Increase) decrease in other assets 10,314 (494,174) 314,912
Increase (decrease) in other liabilities (52,417) 31,767 (294,040)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,027,254 5,146,465 3,886,406
- -----------------------------------------------------------------------------------------------------------
Investing activities:
Sale of investments 949,743 2,083,893 282,500
Purchase of investments (1,715,752) (1,557,413) (739,536)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (766,009) 526,480 (457,036)
- -----------------------------------------------------------------------------------------------------------
Financing activities:
Repurchase of common stock -- (4,331,201) (2,126,503)
Dividends paid (1,699,119) (1,369,788) (1,365,187)
Proceeds from the issuance of stock 377,240 125,524 12,885
- -----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,321,879) (5,575,465) (3,478,805)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (60,634) 97,480 (49,435)
Cash at beginning of year 112,456 14,976 64,411
- -----------------------------------------------------------------------------------------------------------
Cash at end of year $ 51,822 $ 112,456 $ 14,976
- -----------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
- --------------------------------------------------------------------------------
NOTE 18: QUARTERLY CONDENSED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1998 QUARTER ENDED
IN THOUSANDS (EXCEPT PER SHARE) March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 5,314 $ 5,865 $ 5,756 $ 5,683
Net interest income after provision for loan
losses 3,050 3,144 3,073 3,192
Other income 2,139 2,841 3,125 2,905
Other expenses 3,236 3,772 3,838 4,136
Income before income taxes 1,953 2,213 2,360 1,961
Net income 1,435 1,617 1,673 1,409
Earnings per common share--assuming dilution $ .37 $ .41 $ .43 $ .36
Dividends per common share .10 .11 .11 .12
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
1997 QUARTER ENDED
IN THOUSANDS (EXCEPT PER SHARE) March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------
Total interest income $ 4,750 $ 4,844 $ 5,013 $ 5,156
Net interest income after provision for loan
losses 2,842 2,784 2,888 2,917
Other income 1,145 1,420 1,979 2,114
Other expenses 2,504 2,636 3,049 3,349
Income before income taxes 1,483 1,568 1,818 1,682
Net income 1,174 1,223 1,334 1,206
Earnings per common share--assuming dilution $ .28 $ .32 $ .35 $ .32
Dividends per common share .08 .09 .09 .09
- --------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
[LOGO OF YOUNT, HYDE & BARBOUR, P.C. APPEARS HERE]
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, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1998 and 1997. 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. The
financial statements of C&F Financial Corporation and subsidiary for the year
ended December 31, 1996 were audited by other auditors whose report, dated
January 15, 1997, expressed an unqualified opinion on those statements.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of C&F Financial
Corporation and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years ended December 31, 1998 and
1997, in conformity with generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
January 15, 1999
Winchester, Virginia
44
<PAGE>
Investor Information
Annual Meeting of Shareholders
The annual meeting of shareholders of C&F Financial Corporation will be held at
3:30 p.m. on Tuesday, April 20, 1999, at the van den Boogaard Center, 3510 King
William Avenue, West Point, Virginia. All shareholders are cordially invited to
attend.
Stock Price Information
Effective January 22, 1998, the Corporation's common stock is traded on the
over-the-counter market and is listed for quotation on the Nasdaq National
Market System under the symbol "CFFI." Prior to this date the Corporation's
common stock appeared on the Nasdaq Bulletin Board Listing. As of February 22,
1999, there were approximately 1,100 shareholders of record. Following are the
high and low closing prices in 1998 and 1997. The 1997 information was obtained
from the Nasdaq Bulletin Board Listing. Over-the-counter market quotations
reflected inter dealer prices, without retail mark up, mark down, or commission,
and may not necessarily represent actual transactions. All quotations have been
restated to reflect the effect of a two-for-one stock split in July 1998.
- --------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------
First $ 20.20 $ 13.50 $ 10.63 $ 8.75
Second 22.00 20.25 10.75 10.00
Third 22.50 19.00 11.25 10.38
Fourth 20.00 18.25 13.25 10.50
- --------------------------------------------------------------------
Stock Transfer Agent
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.
Annual Report On Form 10-K And Additional Information
A copy of Form 10-K as filed with the Securities and Exchange Commission is
available without charge to stockholders upon written request. Requests for this
or other financial information about C&F Financial Corporation should be
directed to:
Tom Cherry
Senior Vice President and Chief Financial Officer
C&F Financial Corporation
P.O. Box 391
West Point, VA 23181
45
<PAGE>
Directors and advisors
C&F Financial Corporation / Citizens and Farmers Bank
- -----------------------------------------------------
J. P. Causey Jr.*+
Senior Vice President, Secretary &
General Counsel
Chesapeake Corporation
Larry G. Dillon*+
Chairman, President & CEO
C&F Financial Corporation
Citizens and Farmers Bank
P. L. Harrell+
President
Old Dominion Grain, Inc.
James H. Hudson III*+
Attorney-at-Law
Hudson & Bondurant, P.C.
Joshua H. Lawson+
President
Thrift Insurance Corporation
BRYAN E. MCKERNON+
President & CEO
C&F Mortgage Corporation
REGINALD H. NELSON IV+
Retired Partner
Colonial Acres Farm
WILLIAM E. O'CONNELL JR.*+
Chessie 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
THOMAS B. WHITMORE JR.+
Retired President
Whitmore Chevrolet, Oldsmobile,
Pontiac Co., Inc.
* C&F Financial Corporation Board Member
+ Citizens and Farmers Bank Board Member
C&F Mortgage Corporation
- ----------------------------------
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, P.C.
Bryan E. McKernon
President & CEO
C&F Mortgage Corporation
William E. O'Connell Jr.
Chessie 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
Secretary
Independent Public Accountants
- -------------------------------
Yount, Hyde & Barbour, P.C.
Winchester, VA
Corporate Counsel
- -------------------------------
Hudson & Bondurant, P.C.
West Point, VA
Varina Advisory Board
- -------------------------------------
Robert A. Canfield
Attorney-at-Law
Canfield, Moore, Shapiro, Sease & Baer
Susan R. Ferguson
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
46
<PAGE>
OFFICERS AND LOCATIONS
Citizens and Farmers Bank
- --------------------------------
ADMINISTRATIVE OFFICE
802 Main Street
West Point, Virginia 23181
(804) 843-2360
Larry G. Dillon *
Chairman of the Board & Chief Executive Officer
Thomas F. Cherry *
Senior Vice President & Chief Financial Officer
Dudley M. Patteson
Senior Vice President & Commercial Lending Officer
Brad E. Schwartz *
Senior Vice President & Chief Operating Officer
Gari B. Sullivan *
Senior Vice President & Secretary
Howard P. Wilkinson Jr.
Senior Vice President & Chief Lending Officer
Leslie A. Campbell
Vice President, Loan Administration
Sandra S. Fryer
Vice President, Operations
Deborah R. Nichols
Vice President, Branch Administration
* Officers of C&F Financial Corporation
WEST POINT - MAIN OFFICE
Thomas W. Stephenson Jr.
Branch Manager
802 Main Street
West Point, Virginia 23181
(804) 843-2360
LONGHILL ROAD
Sandra C. St.Clair
Assistant Vice President
& Branch Manager
4780 Longhill Road
Williamsburg, Virginia 23188
(757) 565-0593
MIDDLESEX
N. Susan Gordon
Branch Manager
Route 33 at Route 641
Saluda, Virginia 23149
(804) 758-3641
NORGE
Alec J. Nuttall
Assistant Vice President
& Branch Manager
7534 Richmond Road
Norge, Virginia 23127
(757) 564-8114
PROVIDENCE FORGE
James D. W. King
Vice President & Branch Manager
3501 N. Courthouse Road
Providence Forge, Virginia 23140
(804) 966-2264
QUINTON
Mary T. "Joy" Whitley
Assistant Vice President
& Branch Manager
2580 New Kent Highway
Quinton, Virginia 23141
(804) 932-4383
TAPPAHANNOCK
Douglas M. "Judge" Smith
Assistant Vice President
& Branch Manager
1649 Tappahannock Boulevard
Tappahannock, Virginia 22560
(804) 443-2265
VARINA
Tracy E. Pendleton
Vice President & Branch Manager
Route 5 at Strath Road
Richmond, Virginia 23231
(804) 795-7000
WEST POINT - 14TH STREET
Karen T. Richardson
Assistant Vice President
& Branch Manager
415 Fourteenth Street
West Point, Virginia 23181
(804) 843-2708
LOAN PRODUCTION OFFICE
Terrence C. Gates
Vice President,
Real Estate Construction
300 Arboretum Place, Suite 245
Richmond, Virginia 23236
(804) 330-8300
C&F Mortgage Corporation
- -----------------------------------------
ADMINISTRATIVE OFFICE
300 Arboretum Place, Suite 245
Richmond, Virginia 23236
(804) 330-8300
Bryan E. McKernon
PRESIDENT & CHIEF EXECUTIVE OFFICER
Mark A. Fox
EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER
Michael J. Mazzola
SENIOR VICE PRESIDENT & MARYLAND AREA MANAGER
Theresa M. Dougherty
VICE PRESIDENT & SENIOR UNDERWRITER
Donna G. Jarratt
VICE PRESIDENT & PROJECT MANAGER
ANNAPOLIS, MARYLAND
Larry Roussil
VICE PRESIDENT & BRANCH MANAGER
2191 Defense Highway, Suite 200
Crofton, Maryland 21114
(410) 721-6770
CHARLOTTESVILLE
Philip N. Mahone
VICE PRESIDENT & BRANCH MANAGER
William E. Hamrick
VICE PRESIDENT & BRANCH MANAGER
114 Whitewood Road, Suite 2
Charlottesville, Virginia 22901
(804) 974-1450
CHESTER
Stephen L. Fuller
VICE PRESIDENT & BRANCH MANAGER
4517 West Hundred Road
Chester, Virginia 23831
(804) 748-2900
COLUMBIA, MARYLAND
Scott B. Segrist
VICE PRESIDENT & BRANCH MANAGER
8492 Baltimore National Pike, Suite 207
Ellicott City, Maryland 21043
(410) 461-6233
NEWPORT NEWS
Linda H. Gaskins
VICE PRESIDENT & BRANCH MANAGER
703 Thimble Shoals Boulevard, Suite C4
Newport News, Virginia 23606
(757) 873-8200
RICHMOND
Thomas A. Gill
VICE PRESIDENT & BRANCH MANAGER
Donald R. Jordan
VICE PRESIDENT & RICHMOND PRODUCTION MANAGER
300 Arboretum Place, Suite 245
Richmond, Virginia 23236
(804) 330-8300
RICHMOND WEST
Page C. Yonce
VICE PRESIDENT & BRANCH MANAGER
7231 Forest Avenue, Suite 202
Richmond, Virginia 23226
(804) 673-3453
WILLIAMSBURG
Irving E. "Ed" Jenkins
VICE PRESIDENT & BRANCH MANAGER
Delena A. Icard
VICE PRESIDENT & SENIOR LOAN OFFICER
3279 Lake Powell Road
Williamsburg, Virginia 23185
(757) 259-1200
C&F Title Agency, Inc.
- --------------------------------------------
Eileen A.Cherry
Vice President & Title Insurance Underwriter
300 Arboretum Place, Suite 245
Richmond, Virginia 23236
(804) 327-3810
C&F Investment Services, Inc.
- -------------------------------
Eric F. Nost
VICE PRESIDENT & MANAGER
417 Fourteenth Street
West Point, Virginia 23181
(804) 843-4584
(800) 853-3863
Douglas L. Hartz
ASSISTANT VICE PRESIDENT
2580 New Kent Highway
Quinton, Virginia 23141
(804) 932-4383
47
<PAGE>
on the Cover:
upper left
C&F Financial Corporation Headquarters, West Point, Virginia.
upper right
Overlooking the Mattaponi River in West Point, Virginia.
middle left
Colonial Downs race track in New Kent County, Virginia. Citizens
& Farmers Bank has two offices in this growing county.
Photograph by Jeff Coady, Full Stride Productions, Texas.
middle right
Citizens & Farmers Bank is one of the sponsors of the annual
Crab Carnival held in October. Photograph by Teresa S. Bohannon.
lower left
The Governor's Palace located in Williamsburg, Virginia.
Citizens & Farmers has two offices in the Williamsburg area with
another on the way. Photograph by Robert Llewellyn.
lower right
C&F Mortgage Corporation has offices in Annapolis and Columbia,
Maryland.
agency
Fleshman Associates
creative director
Anne Matthews
design & production
Anne Matthews
text copywriter
Charlie Feigenoff
photography
Jackson Smith
printing
T&N Printing
<PAGE>
[C&F LOGO APPEARS HERE]
C&F Financial Corporation
802 Main Street
PO Box 391
West Point, Virginia 23181
(804) 843-2360
www.cffc.com
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-88624, No. 333-67535 and No. 333-63699) and Form
S-3 (No. 333-60877) and in the related Prospectuses, of our report, dated
January 15, 1999, relating to the consolidated financial statements of C&F
Financial Corporation and subsidiary, included in the 1998 Annual Report of
Shareholders and incorporated by reference in the Annual Report on Form 10-K for
the years ended December 31, 1998 and 1997.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 3, 1999
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-88624, No. 333-67535 and No. 333-63699) and Form
S-3 (No. 333-60877) and in the related Prospectuses, of our report, dated
January 17, 1997, relating to the consolidated financial statements of C&F
Financial Corporation and subsidiary, incorporated by reference in this Annual
Report on Form 10-K for the year ended December 31, 1996.
/s/DELOITTE & TOUCHE LLP
Richmond, Virginia
March 5, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,140
<INT-BEARING-DEPOSITS> 333
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,888
<INVESTMENTS-CARRYING> 38,810
<INVESTMENTS-MARKET> 40,865
<LOANS> 172,679
<ALLOWANCE> 2,760
<TOTAL-ASSETS> 320,864
<DEPOSITS> 251,673
<SHORT-TERM> 14,661
<LIABILITIES-OTHER> 7,284
<LONG-TERM> 10,000
0
0
<COMMON> 3,867
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 320,864
<INTEREST-LOAN> 17,790
<INTEREST-INVEST> 4,828
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,618
<INTEREST-DEPOSIT> 8,189
<INTEREST-EXPENSE> 9,558
<INTEREST-INCOME-NET> 13,059
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,982
<INCOME-PRETAX> 8,487
<INCOME-PRE-EXTRAORDINARY> 8,487
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,134
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 8.39
<LOANS-NON> 463
<LOANS-PAST> 958
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,234
<CHARGE-OFFS> 99
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 2,760
<ALLOWANCE-DOMESTIC> 2,760
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</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 1999 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 20, 1999, at 3:30 p.m.
at the Father 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, SIGN, DATE AND RETURN 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,
/s/ LARRY G. DILLON
-----------------------------------
Larry G. Dillon
PRESIDENT & CHIEF EXECUTIVE OFFICER
West Point, Virginia
March 15, 1999
<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 1999 ANNUAL MEETING OF SHAREHOLDERS
-----------------------------------------------------------------
TO BE HELD APRIL 20, 1999
The 1999 Annual Meeting of Shareholders of C&F Financial
Corporation (the "Company") will be held at the Father van den Boogaard Center,
3510 King William Avenue, West Point, Virginia, on Tuesday, April 20, 1999, at
3:30 p.m. for the following purposes:
1. To elect two Class III directors to the board of
Directors of the Company to serve until the 2002
Annual Meeting of Shareholders, as described in the
Proxy Statement accompanying this notice.
2. To approve the Company's Amended and Restated 1998
Non-Employee Director Stock Compensation Plan, the
material terms of which are described in the Proxy
Statement accompanying this notice.
3. To ratify the Board of Directors' appointment of
Yount, Hyde & Barbour, P.C., as the Company's
independent public accountants for 1999.
4. 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 22,
1999, are entitled to notice of and to vote at the Annual Meeting or any
adjournment thereof.
By Order of the Board of Directors
/s/ Gari B. Sullivan
--------------------------------
Gari B. Sullivan
SECRETARY
March 15, 1999
IMPORTANT NOTICE
PLEASE COMPLETE, SIGN, DATE 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
EIGHTH AND MAIN STREETS
P.O. BOX 391
WEST POINT, VIRGINIA 23181
PROXY STATEMENT
1999 ANNUAL MEETING OF SHAREHOLDERS
APRIL 20, 1999
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 1999 Annual Meeting of the Shareholders (the "Annual Meeting") of
C&F Financial Corporation (the "Company") to be held Tuesday, April 20, 1999, at
3:30 p.m. at the Father van den Boogaard Center, 3510 King William Avenue, West
Point, Virginia. The approximate mailing date of this Proxy Statement and
accompanying proxy is March 15, 1999.
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, 2 and 3, as set forth in the
accompanying notice and further described herein.
VOTING RIGHTS OF SHAREHOLDERS
Only those shareholders of record at the close of business on
February 22, 1999 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 3,866,888. 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.
With regard to the election of directors, votes may be cast in
favor or withheld. If a quorum is present, the nominees receiving a plurality of
the votes cast at the Annual Meeting will be elected directors; therefore, votes
withheld will have no effect. The approval of the Company's Amended and Restated
1998 Non-Employee Director Stock Compensation Plan and the ratification of
Yount, Hyde & Barbour, P.C. as the Company's independent public accountants
require the affirmative vote of a majority of the shares cast on the matter.
Thus, although abstentions and broker non-votes (shares held by customers which
may not be voted on certain matters because the broker has not received specific
instructions from the customers) are counted for purposes of determining the
presence or absence of a quorum for the transaction of business, they are
generally not counted for purposes of determining whether such proposals have
been approved and therefore have no effect.
1
<PAGE>
SOLICITATIONS OF PROXIES
The cost of solicitation of proxies will be borne by the Company.
Solicitations will be made only by the use of the mail, 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.
PRINCIPAL HOLDERS OF CAPITAL STOCK
The following table shows the share ownership as of February 22,
1999, 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.
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ------------------- ------------- ---------
Sture G. Olsson 285,648(2) 7.4%
P.O. Box 311
West Point, VA 23181
- -------------------------
(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 269,072 shares held in a trust of which Crestar Bank and
Mr. Olsson are co-trustees.
As of February 22, 1999, the directors and executive officers of
the Company and its subsidiary Bank beneficially owned as a group 501,783 shares
(or approximately 12.9%) of Company common stock (including shares for which
they hold presently exercisable 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 III directors will expire at the
Annual Meeting. Two persons named below, each of whom currently serves as a
director of the Company, will be nominated to serve as Class III directors. If
elected, the Class III nominees will serve until the 2002 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 III directors is set forth below, as well as certain
information about the other Class I and II directors, who will continue in
office until the 2000 and 2001 Annual Meeting of Shareholders, respectively.
2
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
PRINCIPAL BENEFICIALLY OWNED
SERVED OCCUPATION DURING AS OF FEBRUARY 22, 1999
NAME (AGE) SINCE(1) PAST FIVE YEARS (PERCENT OF CLASS)(2)
- ----------------- -------- ----------------- ----------------------
<S> <C> <C> <C> <C>
CLASS I DIRECTORS (SERVING UNTIL THE 2000 ANNUAL MEETING)
Larry G. Dillon (45) 1989 Chairman, President and 44,336(3)
Chief Executive Officer of the (1.1%)
Company and the Bank
James H. Hudson III (50) 1997 Attorney-at-Law 1,893
Hudson & Bondurant, P.C. *
CLASS II DIRECTORS (SERVING UNTIL THE 2001 ANNUAL MEETING)
Sture G. Olsson (78) 1952 Retired; previously Chairman of 285,648(4)
the Board, Chesapeake Corporation (7.4%)
CLASS III DIRECTORS (NOMINEES) (SERVING UNTIL THE 2002 ANNUAL MEETING)
J. P. Causey Jr. (55) 1984 Senior Vice President, Secretary & 34,788
General Counsel of Chesapeake *
Corporation
William E. O'Connell Jr. (61) 1994 Chessie Professor of Business, 2,000
The College of William and Mary *
All Directors and Executive 501,783
Officers as a group (14 persons) (12.9%)
</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) Includes16,602 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: Mr. Olsson, see discussion above
under "Principal Holders of Capital Stock".
The Board of Directors of the Bank consists of the five members of the
Company's Board listed above as well as P. L. Harrell, Joshua H. Lawson, Bryan
E. McKernon, Reginald H. Nelson IV, Paul C. Robinson, and Thomas B. Whitmore Jr.
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. UNLESS AUTHORITY FOR THE NOMINEES IS WITHHELD,
THE SHARES REPRESENTED BY THE ENCLOSED PROXY CARD, IF EXECUTED AND RETURNED,
WILL BE VOTED FOR THE ELECTION OF THE NOMINEES PROPOSED BY THE BOARD OF
DIRECTORS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE DIRECTORS NOMINATED TO SERVE
AS CLASS III DIRECTORS.
3
<PAGE>
BOARD COMMITTEES AND ATTENDANCE
During 1998, there were nine meetings of the Board of Directors of the
Company and thirteen meetings of the Board of Directors of the Bank. With the
exception of Mr. Olsson, 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 and Nominating Committee and the Board of Directors
of the Bank has Executive, Compensation and Audit Committees.
Members of the Capital Plan Committee are Messrs. Causey, Dillon,
Hudson, 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 did not meet during 1998.
Members of the Nominating Committee are Messrs. Causey, Dillon, Hudson,
and O'Connell. The Nominating Committee reviews, on an as-needed basis, the
qualifications of candidates for membership to the Board. The Nominating
Committee met three times during 1998.
Members of the Executive Committee are Messrs. Causey, Dillon, Hudson,
O'Connell, and Olsson. The Executive Committee reviews various matters and
submits proposals or recommendations to the Board of Directors. The Executive
Committee met twice during 1998.
Members of the Compensation Committee are Messrs. Causey, Harrell,
Hudson, 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 three times during 1998.
Members of the Audit Committee are Messrs. Causey, Lawson, and
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 1998.
DIRECTORS' COMPENSATION
Each of the directors of the Company is also a director of the Bank.
Non-employee members of the Board of Directors of the Bank receive an annual
retainer of $2,500, payable quarterly, with a base meeting fee of $300 per day
for Company or Bank meetings and a fee of $100 for each secondary meeting of the
Company, Bank, or any committees thereof held on the same day as a meeting for
which the base meeting fee is paid.
The Board of Directors of the Company has approved the Amended and
Restated 1998 Non-Employee Directors Stock Compensation Plan subject to
shareholder approval. See "Approval of Amended and Restated 1998 Non-Employee
Director Stock Compensation Plan".
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
As of December 31, 1998, the total maximum extensions of credit
(including used and unused lines of credit) to policy-making officers,
directors, principal shareholders and their associates amounted to $3,604,920,
or 9.8%, of total year-end capital. The maximum aggregate amount of such
indebtedness during 1998 was $1,786,355, or 4.8%, 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.
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
4
<PAGE>
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 1998, the Bank paid premiums totaling $202,919 to Thrift
Insurance Corporation, as agent, for the insurance coverage maintained by the
Bank ($75,061 of which represents an annualized portion of a three-year prepaid
premium).
During 1998, the Company and the Bank and its subsidiaries utilized the
legal services of the law firm of Hudson and Bondurant, P.C., of which James H.
Hudson, III is a partner. The amount of fees paid to Hudson and Bondurant, P.C.
did not exceed 5% of the firm's gross revenue.
The board of directors of the Company recently approved the repurchase
of up to 250,000 shares of Company common stock in blocks of 10,000 shares or
higher at a price of $20.00 per share or less. The Company believes it has
agreements to buy 235,000 shares from six shareholders by March 12, 1999. Of
those shares, 100,000 will be purchased from a trust of which Sture G. Olsson, a
director of the Company, is co-trustee and 10,000 from Thomas B. Whitmore Jr., a
director of the Bank. Sture G. Olsson was not present and did not discuss or
vote on the repurchase. The shares to be purchased from the trust are subject to
approval by the co-trustee and the court.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATIONS. The following table
shows the cash compensation paid to Mr. Dillon, President and Chief Executive
Officer of the Company, and Brad E. Schwartz, Senior Vice President and Chief
Operating Officer of the Company, during 1998, 1997, and 1996. During 1998, no
other executive officer of the Company received compensation in excess of
$100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------- ------------ ALL
NAME AND OTHER ANNUAL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS(3) COMPENSATION(4)
- ------------------ ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry G. Dillon 1998 $140,000 $50,000 - 3,500 $22,842
President/Chief 1997 120,000 40,000 - 3,200 19,118
Executive Officer 1996 102,500 20,000 - 3,200 17,126
Brad E. Schwartz 1998 84,000 18,000 - 2,500 12,727
Senior Vice Pres./ 1997 75,000 14,000 - 2,200 10,777
Chief Operating 1996 70,000 8,000 - 2,200 10,509
Officer
</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 Messrs. Dillon and
Schwartz, and therefore, is not required to be reported.
(3) 1998 options were granted at an exercise price of $18.625 per share;
1997 options were granted at an exercise price of $12.50 per share;
1996 options were granted at an exercise price of $9.38 per share.
(4) $8,667, $6,966, and $11,711, were paid to Mr. Dillon and $5,044,
$4,140 and $7,877 were paid to Mr. Schwartz under the Bank's
Profit-Sharing Plan for 1998, 1997, and 1996, respectively. $5,454,
$5,383, and $5,415, were
5
<PAGE>
paid to Mr. Dillon and $2,639, $2,631 and $2,632 were paid to
Mr. Schwartz under the Bank's Split-Dollar Insurance Program for
1998, 1997, and 1996, respectively. $8,721 and $6,769 were paid to
Mr. Dillon and $5,044 and $4,006 were paid to Mr. Schwartz under the
Bank's 401(k) Plan for 1998 and 1997, respectively. All three plans
are described below in "Employee Benefit Plans".
STOCK OPTIONS AND SAR. The following table shows all grants of
options to Messrs. Dillon and Schwartz in 1998:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------------------------- ---------------------------
% OF TOTAL
OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
NAME GRANTED (#) (1) FISCAL YEAR ($/SH) DATE ($) ($)
- ---- --------------- ----------- ------ ---- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Larry G. Dillon 3,500 10.0% 18.625 12/15/08 40,996 103,892
Brad E. Schwartz 2,500 7.2% 18.625 12/15/08 29,282 74,208
</TABLE>
- ------------------
(1) Vesting is as follows: One-third by December 15, 1999; two-thirds by
December 15, 2000; and 100% by December 15, 2001.
OPTION/SAR EXERCISES AND HOLDINGS. The following table shows stock
options exercised by Messrs. Dillon and Schwartz in 1998:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS/SAR VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Larry G. Dillon 2,000 41,000 16,602/ 152,181/
6,698 23,756
Brad E. Schwartz -- -- 12,202/ 111,350/
4,698 16,338
</TABLE>
CHANGE IN CONTROL ARRANGEMENT
The Company has entered into a "change in control agreement" with Mr.
Dillon. The agreement provides certain payments to and benefits for Mr. Dillon
in the event of a termination of his employment by the Company without "cause,"
or by Mr. Dillon for "good reason," during the period beginning on the
occurrence of a "change in control" (as defined) of the Company and ending
sixty-one days after the second anniversary of the change in control date. In
such event, Mr. Dillon would be entitled (i) to receive in 12 consecutive
quarterly
6
<PAGE>
installments, or in a lump sum, two and one-half times the sum of his highest
aggregate annual base salary during the 24 month period preceding the change in
control date and his highest aggregate annual bonus for the three fiscal years
preceding the change in control date; (ii) for a period of three years following
termination, to receive continuing health insurance, life insurance,
split-dollar insurance, and similar benefits under the Company's welfare benefit
plans and to have the three year period credited as service towards completion
of any service requirement for retiree coverage under the Company's welfare
benefit plans; and (iii) if Mr. Dillon requests within one year after his
termination to have the Company acquire his residence for its appraised fair
market value. During the term of the agreement following a change in control,
Mr. Dillon may voluntarily terminate his employment and become entitled to these
payments and benefits under certain circumstances. These circumstances include,
but are not limited to, a material adverse change in his position, authority, or
responsibilities, or a reduction in his rate of annual base salary, benefits
(including incentives, bonuses, stock compensation, and retirement and welfare
plan coverage), or other perquisites as in effect immediately prior to the
change in control date.
Payments and benefits provided under the agreement will be reduced,
if and to the extent necessary, so that Mr. Dillon will not be subject to a
federal excise tax on, and the Company will not be denied an income tax
deduction on account of having made excess parachute payments.
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.
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 who have attained the age of 18 and have at least three
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, 1998, was $102,536.
7
<PAGE>
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> <C> <C> <C> <C> <C>
$ 25,000 $ 4,688 $ 6,250 $ 7,813 $ 8,750 $ 9,688
40,000 8,490 11,320 14,150 15,980 17,810
55,000 12,990 17,320 21,650 24,605 27,560
75,000 18,990 25,320 31,650 36,105 40,560
100,000 26,490 35,320 44,150 50,480 56,810
125,000 33,990 45,320 56,650 64,855 73,060
150,000 41,490 55,320 69,150 79,230 89,310
160,000 44,490 59,320 74,150 84,980 95,810
</TABLE>
Benefits under the Retirement Plan are based on a straight life
annuity assuming full benefit at age 65, no offsets, and covered compensation of
$31,200 for a person age 65 in 1998. Compensation is currently limited to
$160,000 by the Internal Revenue Code. The estimated annual benefit payable
under the Retirement Plan upon retirement is $85,912 and $44,846 for Messrs.
Dillon and Schwartz, respectively, credited with 40 years of service. Benefits
are estimated on the basis that they will continue to receive, until age 65,
covered salary in the same amount paid in 1998.
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. The Bank recovers its
cost from each participant at retirement or from the proceeds of the policy if
the participant dies before reaching retirement age.
INCENTIVE STOCK OPTION PLAN. The company adopted the 1994 Incentive
Stock Option Plan (the "Incentive Plan") effective May 1, 1994. The Incentive
Plan makes available up to 200,000 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") administers the 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
8
<PAGE>
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.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee"), which is composed of
non-employee Directors of the Company and the Bank listed below, recommends to
the Board of Directors of the Bank (the "Board") the annual salary levels and
any bonuses to be paid to the Bank's executive officers. The Committee also
makes recommendations to the Board regarding the issuance of stock options and
all other compensation related matters.
Currently, the individuals serving as Chief Executive Officer and
executive officers of the Company also serve in the same capacities,
respectively, for the Bank. These officers are presently compensated for
services rendered by them to the Bank, but not for services rendered by them to
the Company.
The primary objective of the Bank's executive compensation program is
to attract and retain highly skilled and motivated executive officers who will
manage the Bank in a manner to promote its growth and profitability and advance
the interest of the Company's stockholders. As such, the compensation program is
designed to provide levels of compensation which are reflective of both the
individual's and the organization's performance in achieving the organization's
goals and objectives, both financial and non-financial, and in helping to build
value for the Company's stockholders. Based on its evaluation of these factors,
the Committee believes that the executive officers are dedicated to achieving
significant improvements in long-term financial performance and that the
compensation plans the Committee has implemented and administered have
contributed to achieving this management focus.
The principal elements of the Bank's compensation program include
base annual salary, short-term incentive compensation under the Bank's
Management Incentive Bonus Plan, and long-term incentives through the grants of
stock options under the 1994 Incentive Stock Option Plan.
In considering compensation for the Chief Executive Officer and the
other executive officers, the Committee relied on compensation surveys and an
evaluation of the officers' level of responsibility and performance. In 1998,
the Committee used the following compensation surveys to assist in developing
its recommendation on compensation: The SNL Executive Compensation Review; the
Sheshunoff Bank Executive and Director Compensation Survey; and the Virginia
Bankers Association's Salary Survey of Virginia Banks. The Committee believes
that these are relevant and appropriate indicators of compensation paid by the
Bank's competitors. The Committee received an evaluation by the Chief Executive
Officer of the performance of the executive officers (other than the Chief
Executive Officer) during 1998. The Committee evaluated the performance of the
Chief Executive Officer based on the financial performance of the Company and
the Bank, achievements in implementing the Bank's long-term strategy, and the
personal observations of the Chief Executive Officer's performance by the
members of the Committee. No particular weight was given to any particular
aspects of the performance of the Chief Executive Officer, but his performance
in 1998 was evaluated as outstanding, with the Company and the Bank achieving
record earnings and significant progress being made on the Bank's long-term
strategy.
Based on the salary surveys and the performance evaluations, the
Committee generally set base annual salaries for the Chief Executive Officer and
the other executive officers in the median range of salaries contained in the
various surveys for comparable positions.
The Committee also reviewed each executive officer's performance and
responsibility to assess the payment of short-term incentive compensation. The
Committee uses the compensation surveys and takes into consideration the
performance of the Bank relative to its peer group, taking into consideration
profit growth, asset growth, return on equity, and return on assets. No
particular weight is given to each of these elements. The cash bonuses were
given based upon the role of such officers in the growth and profitability of
the Bank in 1998.
Each year, the Committee also considers the desirability of granting
long-term incentive awards under the Company's 1994 Incentive Stock Option Plan.
The Committee believes that grants of options focus the
9
<PAGE>
Bank's senior management on building profitability and shareholder value. The
Committee notes in particular its view that stock option grants afford a
desirable long-term compensation method because they closely ally the interest
of management with shareholder value. In fixing the grants of stock options with
the senior management group, other than the Chief Executive Officer, the
Committee reviewed with the Chief Executive Officer recommended individual
awards, taking into account the respective scope of accountability and
contributions of each member of the senior management group. The award to the
Chief Executive Officer was fixed separately and was based, among other things,
on the review of competitive compensation data from selected peer companies and
information on his total compensation as well as the Committee's perception of
his past and expected future contributions to the Company's achievement of its
long-term goals.
COMPENSATION COMMITTEE
J. P. Causey Jr. - Chairman
P. Loy Harrell
James H. Hudson III
Thomas B. Whitmore Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998 and up to the present time, there were transactions
between the Company's banking subsidiary and certain members of the Compensation
Committee, or their associates, all consisting of extensions of credit by the
Bank in the ordinary course of business. Each transaction was made on
substantially the same terms, including interest rates, collateral and repayment
terms, as those prevailing at the time for comparable transactions with the
general public. In the opinion of management, none of the transactions involved
more than the normal risk of collectibility or present other unfavorable
features.
None of the members of the Compensation Committee has served as an
officer or employee of the Company or any of its affiliates. 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.
10
<PAGE>
PERFORMANCE GRAPH
The following graph compares the yearly cumulative total shareholder
return on the Company's common stock with (1) the yearly cumulative total
shareholder return on stocks included in the NASDAQ stock index and (2) the
yearly cumulative total shareholder return on stocks included in the Independent
Bank Index prepared by the Carson Medlin Company. The Independent Bank Index is
the compilation of the total return to shareholders over the past 5 years of a
group of twenty-three independent community banks located in the southeastern
states of Florida, Georgia, North Carolina, South Carolina, Tennessee, Virginia,
and West Virginia.
There can be no assurance that the Company's stock performance will
continue into the future with the same or similar trends depicted in the graph
below.
[GRAPH]
<TABLE>
<CAPTION>
C&F FINANCIAL CORPORATION
Five Year Performance Index
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
C&F FINANCIAL CORPORATION 100 120 124 117 167 247
INDEPENDENT BANK INDEX 100 119 151 191 280 296
NASDAQ INDEX 100 98 138 170 209 293
</TABLE>
11
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act requires directors,
executive officers, and 10% beneficial owners of the Company's common stock to
file reports concerning their ownership of common stock. 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 1998. The following persons inadvertently failed to file on a timely
basis reports required by Section 16(a) as follows: James H. Hudson III, Sture
G. Olsson, J. P. Causey Jr., and William E. O'Connell Jr. each filed one report
late involving one transaction. The required reports for these individuals were
filed as of December 28, 1998.
PROPOSAL TWO
APPROVAL OF THE AMENDED AND RESTATED 1998 NON-EMPLOYEE
DIRECTOR STOCK COMPENSATION PLAN
The C&F Financial Corporation 1998 Non-Employee Director Stock
Compensation Plan (the "Plan") was adopted by the Board of Directors on August
18, 1998, to be effective on September 1, 1998. The Plan made available up to
25,000 shares of common stock for awards to non-employee directors of the
Company and its wholly-owned subsidiary, Citizens and Farmers Bank (the "Bank"),
in the form of stock options ("Awards"). As of February 22, 1999, 8,000 options
to purchase company common stock were outstanding under the Plan.
The Board of Directors voted on February 16, 1999 to amend the Plan
to increase the number of shares of common stock authorized to be issued under
the Plan to 150,000 shares of common stock, subject to shareholder approval of
the Plan at the 1999 Annual Meeting.
The principal features of the Plan, as amended, are summarized in the
following paragraphs. This summary is subject, in all respects, to the terms of
the Plan. The Company will provide promptly, upon request and without charge, a
copy of the full text of the Plan to each person to whom a copy of this Proxy
Statement is delivered. Requests should be directed to the Chief Financial
Officer of the Company at Eighth and Main Streets, West Point, Virginia 23181.
PURPOSE. The purpose of the Plan is to promote a greater identity of
interest between non-employee directors of the Company and the Bank and the
Company's shareholders by increasing the participation of such directors'
proprietary interest in the Company through the receipt of Awards.
ADMINISTRATION. Under the terms of the Plan, one or more persons who
are employees of the Company and directors of the Board (the "Employee
Directors"), and such additional employees as the Employee Directors shall
designate, will be appointed to administer the Plan.
ELIGIBILITY. All non-employee directors of the Company and the Bank
("Non-Employee Directors") are eligible for Awards under the Plan. Non-Employee
Directors serving on both the Board of the Company and the Bank will be entitled
to receive only one Award under the Plan per year.
OPTIONS. The stock options awarded under the Plan will not constitute
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, the stock options
will be non-qualified stock options ("NQSOs") and will be subject to taxation
under Section 83 of the Code.
Commencing on September 1, 1998 and on May 1 of each succeeding year
ending in the year 2008 or until there are insufficient shares of common stock
available for the grant of Awards in accordance with the terms of the Plan, each
Non-Employee Director will automatically receive an Award of 1,000 stock
options. At the discretion of the Board, the number of shares subject to the
automatic option may be increased up to 250 shares per year per participant, on
a cumulative basis, during the term of the Plan, subject to a maximum of 2,000
shares granted per year per participant.
12
<PAGE>
Awards are not exercisable until April 30 in the calendar year
following its date of grant. However, an Award will be immediately exercisable
if the Non-Employee Director's membership on the board of directors of the
Company or the Bank terminates as a result of retirement in accordance with the
Company's or the Bank's policies, death, or disability (as defined in Section
22(e)(3) of the Code). An Award will be forfeited if, as of the termination of
the Non-Employee Director's membership on the board of directors of the Company
or the Bank, the Award is not then exercisable and such termination occurs for
any reason other than the Non-Employee Director's retirement in accordance with
the Company's or the Bank's policies, death, or disability (as defined above).
An Award may be exercised with respect to any number of whole shares less than
the full number for which the Award could be exercised.
The option exercise price will be the closing price (or, if there are
not trades on the date of grant, then the next preceding date that a closing
price is available) of the common stock as reported on NASDAQ (or other
applicable listing service or exchanges used by the Company) on the Award's date
of grant ("Fair Market Value"), or if in the judgment of the Board there is
insufficient recent trading activity to warrant determination of the Fair Market
Value solely on the basis of such closing prices on the listing service or
exchange, then the Fair Market Value will be determined as of the date of grant
in good faith by the Board.
Unless otherwise provided by the option agreement, upon the exercise
of an Award, in whole or in part, optionees must tender cash or a cash
equivalent to the Company in payment for the common stock purchased. In
addition, all or part of the option price may be paid by surrendering shares of
common stock to the Company. If common stock is used to pay all or part of the
option price, the shares surrendered must have a Fair Market Value that is not
less than such price or part thereof.
No stock option will be exercisable after ten years from the date of
grant.
SHARES SUBJECT TO THE PLAN. Up to 150,000 shares of common stock may
be issued under the Plan. Except as set forth below, shares of common stock
issued in connection with the exercise of, or as other payment for an Award will
be charged against the total number of shares issuable under the Plan. If any
Award terminates, in whole or in part, for any reason other than as a result of
being exercised, the common stock subject to such Award will be available for
further Awards.
In order to reflect such events as stock dividends, stock split-ups,
subdivisions or consolidations of shares of common stock, or transactions to
which Section 424 of the Code applies, the Employee Directors will adjust the
aggregate number of shares from which grants or awards may be made and the terms
of each outstanding Award.
CHANGE IN CONTROL. In order to maintain all the participants' rights
in the event of a Change in Control of the Company (as that term is defined in
the Plan), the Employee Directors, as constituted before such Change in Control,
may take in its sole discretion any one or more of the following actions either
at the time an Award is made or any time thereafter: (i) provide for the
acceleration of any time periods relating to the exercise or realization of any
such Awards so that such Award may be exercised or realized in full on or before
a date initially fixed by the Employee Directors; (ii) provide for the purchase
or settlement of any such Award by the Company, upon the participant's request,
for an amount of cash equal to the amount which could have been obtained upon
the exercise of such Award or realization of such participant's rights had such
Award been currently exercisable or payable; (iii) make such adjustment to any
such Award then outstanding as the Employee Directors deem appropriate to
reflect such Change in Control; or (iv) cause any such Award then outstanding to
be assumed, or new rights substituted therefor, by the acquiring or surviving
corporation in such Change in Control.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. A participant will not
recognize income on the grant of a NQSO, but generally will recognize income
upon the exercise of a NQSO. The amount of income recognized upon the exercise
of a NQSO will be measured by the excess, if any, of the Fair Market Value of
the shares at the time of exercise over the exercise price.
13
<PAGE>
In the case of ordinary income recognized by an optionee as described
above in connection with the exercise of a NQSO, the Company will be entitled to
a deduction in the amount of ordinary income so recognized by the optionee,
provided the Company satisfies certain federal income tax withholding
requirements.
AMENDMENT AND TERMINATION OF THE PLAN. The Board of Directors may
amend the Plan from time to time without the consent of the shareholders or
optionees. If the Board determines that shareholder approval is required and the
Plan is submitted for such approval and adopted, then no subsequent amendment
may become effective until shareholder approval is obtained if the amendment
materially increases the total number of shares of the common stock available
for grant under the Plan, materially modifies the class of eligible individuals
under the Plan, or materially increases the benefits to participants under the
Plan. No amendment will, without the participant's consent, adversely affect any
rights of such participant under any Award outstanding at the time such
amendment is made.
The Board may terminate the Plan at any time. The Plan will terminate
automatically, without any action of the Board, if, on any date of grant, there
are insufficient shares available for the grant of Awards in accordance with the
terms of the Plan.
VOTE REQUIRED. The affirmative vote of the holders of a majority of
the common stock cast at the Annual Meeting, assuming a quorum is present, is
required to ratify and approve the Plan including the options previously granted
thereunder.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" ADOPTION OF
THE PROPOSED PLAN.
PROPOSAL THREE
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, subject to ratification by the shareholders,
has appointed Yount, Hyde & Barbour, P.C. as independent public accountants for
the current fiscal year ending December 31, 1999.
A representative of Yount, Hyde & Barbour, P.C. 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. Unless marked to the
contrary, the shares represented by the enclosed proxy card, if executed and
returned, will be voted FOR the ratification of the appointment of Yount, Hyde &
Barbour, P.C. as the independent public accountants of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE APPOINTMENT
OF YOUNT, HYDE & BARBOUR, P.C. 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.
14
<PAGE>
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Proposals of shareholders intended to be presented at the 2000 Annual
Meeting must be received by the Company no later than November 20, 1999. 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
/s/ Gari B. Sullivan
-----------------------------
Gari B. Sullivan
SECRETARY
West Point, Virginia
March 15, 1999
15
<PAGE>
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K REPORT (INCLUDING EXHIBITS)
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER
31, 1998, 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.
16
<PAGE>
C&F FINANCIAL CORPORATION
This Proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Larry G. Dillon and James H. Hudson III,
jointly and severally as proxies, with full power to act alone, and with full
power of substitution to represent the undersigned, and to vote all shares of
the Company standing in the name of the undersigned as of February 22, 1999, at
the annual meeting of shareholders to be held Tuesday, April 20, 1999 - 3:30
p.m. at the Father van den Boogaard Center, 3510 King William Avenue, West
Point, Virginia, or any adjournments thereof, on each of the following matters.
This proxy, when properly executed, will be voted in the manner directed by the
undersigned shareholder. If no direction is made, this proxy will be voted FOR
each proposal and on other matters at the discretion of the proxy agents.
(Continued and to be signed on Reverse Side)
<PAGE>
Please Detach and Mail in the Envelope Provided
A [X] Please mark your
votes as in this
example.
<TABLE>
<CAPTION>
<S> <C> <C>
FOR
all nominees
(except as marked to the WITHHELD
contrary below.) from all nominees
1. To elect two Class [ ] [ ] Nominees:
III directors to serve
until the 2002 Annual Meeting of Shareholders, or until their J.P. Causey Jr.
successors are elected and qualified, as instructed below. William E. O'Connell Jr.
(Instruction: To withhold authority to vote for any nominee(s),
write that nominee(s) name on the space provided below.)
_______________________________________________________________
FOR AGAINST ABSTAIN
2. Proposal to approve the Company's Amended and Restated 1998 Non-Employee [ ] [ ] [ ]
Director Stock Compensation Plan.
3. Proposal to ratify the appointment of Yount, Hyde & Barbour, P.C. as [ ] [ ] [ ]
independent public accountants of the Company for 1999.
4. The transaction of any other business as may properly come before the Annual Meeting or any adjournment thereof. Management
presently knows of no other business to be presented at the Annual Meeting.
Meeting Attendance
I plan to attend the annual meeting on Tuesday, April 20th, 1999 at the location
printed on the back. I will also note the number of attendees.
Will [ ] Will not [ ]
Attend Attend
Meeting Meeting
Number of Attendees
_____________________________
Signature___________________________ _______________________ Dated _____________________________, 1999
NOTE: Please sign your name(s) exactly as shown imprinted hereon. When shares are held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee, or guardian, please give full title as such. If a corporation, please
sign full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by
authorized person.
</TABLE>
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
C&F Financial Corporation
We have audited the consolidated balance sheet of C&F Financial Corporation and
subsidiary as of December 31, 1996, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the year then ended.
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 audit.
We conducted our audit 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 audit provides 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 as of December 31, 1996, the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Richmond, Virginia
January 17, 1997
