UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
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 No.000-23423
C&F FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1680165
(State of incorporation) (I.R.S. Employer Identification No.)
Eighth and Main Streets, West Point, VA 23181
(Address of principal executive offices)
Registrant's telephone number (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
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.
Yes ( X ) 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 $69,327,000 as of February 26, 2002.
The number of shares of the registrant's common stock outstanding as of February
26, 2002 was 3,529,726.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 15, 2002 to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be held
April 16, 2002 are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
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 3
ITEM 6. SELECTED FINANCIAL DATA ......................................... page 4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION .................. page 5
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... page 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................... page 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ........................ page 43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT ............................................. page 43
ITEM 11. EXECUTIVE COMPENSATION .......................................... page 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ......................................... page 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS .................................................. page 44
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K ................................ page 44
ITEM 1. BUSINESS
--------
General
C&F Financial Corporation (the "Corporation") is a bank holding company
which was incorporated under the laws of the Commonwealth of Virginia in March,
1994. 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 has a total of twelve
branches including the main office. The Bank has its main office at Eighth and
Main Streets, West Point, Virginia, and has branch offices in Richmond, Norge,
Middlesex, Midlothian, Providence Forge, Quinton, Sandston, Varina, Williamsburg
(two branches), 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 generally 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; that portion of Gloucester County which is north and
west of Routes 14 and 17; Northwestern Chesterfield County, the western portion
of the City of Richmond and western Henrico County along the Route 250 corridor.
The Corporation, through its subsidiaries, offers a wide range of banking
services available to both individuals and 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. The Bank also offers ATMs, internet banking
services, 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 four wholly-owned subsidiaries, C&F Title Agency, Inc., C&F
Investment Services, Inc., C&F Insurance Services, Inc., and C&F Mortgage
Corporation, all incorporated under the laws of the Commonwealth of Virginia.
The Bank also operates Citizens and Commerce Bank (CCB), a division of the Bank,
to offer banking services to the Richmond Market. CCB operates two of the Bank's
Richmond Branches. C&F Title Agency, Inc. organized in October 1992, sells title
insurance. 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 Insurance Services,
Inc., organized in July 1999, owns 2.4% of the Virginia Bankers Insurance
Center, LLC which currently offers insurance products to commercial customers.
C&F Mortgage Corporation, organized in September 1995, originates and sells
residential mortgages. C&F Mortgage Corporation provides mortgage services
through seven locations in Virginia and three in Maryland. The Virginia offices
are in Richmond (two locations), Williamsburg, Newport News, Charlottesville,
Lynchburg, and Chester. The Maryland offices are in Annapolis, Crofton, and
Ellicott City. See Note 16 to the Consolidated Financial Statements for
summarized financial information by business segment.
As of December 31, 2001, a total of 311 persons were employed by the
Corporation, of whom 32 were part-time. The Corporation considers relations with
its employees to be excellent.
1
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 and national
banks. The Bank also competes for deposits with savings associations, credit
unions, money-market funds, and other community banks. 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 and C&F Insurance Services compete with other
investment companies, brokerage firms, and insurance companies to provide these
services.
C&F Title Agency competes with other title companies.
Regulation and Supervision
The Corporation is subject to regulation by the Federal Reserve Bank
under the Bank Holding Company Act of 1956. The Corporation 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
Corporation and its subsidiary.
The Corporation owns the headquarters building 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 Corporation's administrative personnel.
The Corporation 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 Corporation in 1991. The two-story building has 20,000
square feet.
The Corporation owns a building located at Sixth and Main Streets in
West Point, Virginia. The building provides space for Citizens and Farmers Bank
loan operations functions and staff. The building was bought and remodeled by
the Corporation in 1998. The building has 5,000 square feet.
2
The Corporation owns a building located at 1400 Alverser Drive in
Midlothian, Virginia. The building provides space for CCB's main office and
branch and for C&F Mortgage Corporation's administrative office. This two-story
building has 25,000 square feet
Citizens and Farmers Bank owns ten other branch locations in Virginia.
Also, the Bank owns several lots in West Point, Virginia, and one other lot in
New Kent County, Virginia.
C&F Mortgage Corporation has ten leased offices, seven in Virginia and
three in Maryland. Rental expense for these locations totaled $580,000 for the
year ended December 31, 2001.
All of the Corporation's properties are in good operating condition and
are adequate for the Corporation's present and anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no material pending legal proceedings to which the Corporation
is a party or to which the property of the Corporation 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 Corporation through
a solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The Corporation's common stock is traded on the over-the-counter market and is
listed on the Nasdaq Stock Market under the symbol "CFFI." As of March 5, 2002,
there were approximately 1,100 shareholders of record. Following are the high
and low closing prices along with the dividends that were paid quarterly in 2001
and 2000. Over-the-counter market quotations reflect interdealer prices, without
retail mark up, mark down, or commission, and may not necessarily represent
actual transactions.
2001 2000
-------------------------- --------------------------
Quarter High Low Dividends High Low Dividends
First $16.50 $14.50 $0.14 $18.00 $11.25 $0.13
Second 17.20 15.90 0.14 17.75 11.25 0.13
Third 18.20 16.25 0.15 17.38 15.00 0.13
Fourth 21.00 18.68 0.15 16.25 14.50 0.14
3
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
FIVE YEAR FINANCIAL SUMMARY
- ---------------------------
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Selected Year-End Balances:
Total assets $404,075,974 $347,471,672 $329,241,321 $320,863,629 $278,105,969
Total capital 44,743,023 38,780,450 35,129,710 36,647,493 31,800,533
Total loans (net) 246,112,369 229,943,715 206,115,896 169,918,428 154,744,620
Total deposits 323,912,501 290,688,036 260,853,635 251,673,159 231,513,152
- -----------------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest income 28,234,385 26,421,479 23,643,557 22,617,509 19,763,048
Interest expense 11,984,392 11,309,399 9,067,867 9,558,059 8,002,301
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 16,249,993 15,112,080 14,575,690 13,059,450 11,760,747
Provision for loan losses 400,000 400,000 600,000 600,000 330,000
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 15,849,993 14,712,080 13,975,690 12,459,450 11,430,747
Other operating income 17,420,619 8,945,062 11,004,456 10,835,243 6,657,608
Other operating expenses 21,964,093 15,998,380 15,829,550 14,807,306 11,537,565
- -----------------------------------------------------------------------------------------------------------------------------
Income before taxes 11,306,519 7,658,762 9,150,596 8,487,387 6,550,790
Income tax expense 3,317,802 1,822,731 2,394,366 2,353,351 1,613,963
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 7,988,717 $ 5,836,031 $ 6,756,230 $ 6,134,036 $ 4,936,827
=============================================================================================================================
Per share
Earnings per common share--assuming
dilution $ 2.23 $ 1.60 $ 1.81 $ 1.56 $ 1.25
Dividends .58 .53 .49 .44 .35
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares--assuming
dilution 3,587,307 3,640,314 3,738,234 3,919,775 3,952,756
- -----------------------------------------------------------------------------------------------------------------------------
Significant Ratios 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Return on average assets 2.09% 1.76% 2.19%
Return on average equity 18.93 15.99 19.22
Dividend payout ratio 25.74 32.74 26.60
Average equity to average assets 11.05 10.99 11.38
- -----------------------------------------------------------------------------------------------------------------------------
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATION
- ------------
OVERVIEW
Net income totaled $8.0 million in 2001, an increase of 36.9% compared
to 2000. Included in earnings for 2001 was $776,000 in other operating income
(after taxes) which resulted from a gain on the sale of the Bank's Tappahannock
branch. Excluding this gain, net income increased 23.6% compared to 2000. In
2000, net income totaled $5.8 million, a 13.6% decrease compared to 1999.
Diluted earnings per share were $2.23, $1.60, and $1.81, in 2001, 2000, and
1999, respectively. Excluding the gain on the sale of the branch, diluted
earnings per share were $2.01 in 2001. The increase in earnings per share for
2001 was a result of higher net income and the repurchase of 59,981 shares of
the Corporation's common stock. The decrease in earnings per share for 2000 was
a result of lower net income offset by the repurchase of 85,000 shares of the
Corporation's common stock.
Profitability as measured by the Corporation's return on average equity
(ROE) was 18.93% in 2001, 15.99% in 2000, and 19.22% in 1999. Another key
indicator of performance, the return on average assets (ROA) for 2001, was
2.09%, compared to 1.76% in 2000, and 2.19% for 1999.
5
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, 2001, 2000, and 1999. 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. 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.
2001 2000 1999
-------------------------- --------------------------- ---------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Securities:
Taxable $ 8,402 $ 591 7.03% $ 16,089 $ 1,157 7.19% $ 15,293 $ 1,097 7.17%
Tax-exempt 51,185 4,088 7.99 52,068 4,196 8.06 49,049 4,013 8.18
- --------------------------------------------------------------------------------------------------------------------------------
Total securities 59,587 4,679 7.85 68,157 5,353 7.85 64,342 5,110 7.94
Loans, net 293,056 24,810 8.47 241,291 22,245 9.22 216,295 18,850 8.71
Interest-bearing deposits
in other banks and fed funds 3,216 100 3.11 3,482 215 6.17 9,621 458 4.76
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 355,859 $29,589 8.31% 312,930 $27,813 8.89% 290,258 $24,418 8.41%
Reserve for loan losses (3,730) (3,451) (3,003)
Total non-earning assets 29,638 22,723 21,710
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $381,767 $332,202 $308,965
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Time and savings deposits:
Interest-bearing deposits $ 54,481 $ 1,046 1.92% $ 50,977 $ 1,236 2.42% $ 45,627 $ 1,084 2.38%
Money market deposit accounts 26,290 802 3.05 25,938 877 3.38 25,207 807 3.20
Savings accounts 38,921 952 2.45 38,640 1,150 2.98 39,131 1,164 2.97
Certificates of deposit,
$100M or more 32,421 1,769 5.46 22,955 1,266 5.52 17,977 857 4.77
Other certificates of deposit 119,535 6,639 5.55 96,004 5,203 5.42 89,467 4,416 4.94
- --------------------------------------------------------------------------------------------------------------------------------
Total time and savings deposits 271,648 11,208 4.13 234,514 9,732 4.15 217,409 8,328 3.83
- --------------------------------------------------------------------------------------------------------------------------------
Borrowings 19,628 836 4.26 25,774 1,577 6.12 15,002 740 4.93
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 291,276 12,044 4.14% 260,288 11,309 4.34% 232,411 9,068 3.90%
- --------------------------------------------------------------------------------------------------------------------------------
Demand deposits 39,240 31,511 35,697
Other liabilities 9,060 3,895 5,701
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 339,576 295,694 273,809
Shareholders' equity 42,191 36,508 35,156
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
Shareholders' equity $381,767 $332,202 $308,965
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $17,545 $16,504 $15,350
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 4.17 4.55 4.51
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense to
average earning assets 3.38 3.61 3.12
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.93% 5.27% 5.29%
================================================================================================================================
6
RESULTS OF OPERATIONS
NET INTEREST INCOME
During 2001, net interest income, on a taxable equivalent basis,
increased 6.3% to $17.5 million from $16.5 million. This was a result of a 13.7%
increase in the average balance of interest earning assets offset by a decrease
in the net interest margin to 4.93% in 2001 from 5.27% in 2000. The increase in
average earning assets was the result of an increase in the average balance of
the loan portfolio at the Bank and an increase in the average balance of loans
held for sale by C&F Mortgage Corporation (the "Mortgage Corporation") offset by
a decrease in the Bank's securities portfolio and an increase in non-earning
assets. The increase in loans at the Bank was a result of overall higher loan
demand. The decrease in the average balance of securities was a result of calls
and maturities of securities during 2001. The increase in non-earning assets
principally resulted from the addition of new branch locations. Numerous
securities were called as a result of the lower interest rate environment in
2001. The increase in loans held for sale at the Mortgage Corporation was a
result of an increase in loan originations to $627 million in 2001 from $294
million in 2000 and an increase in loan fundings (sales) to $575 million in 2001
from $302 million in 2000. The decrease in the net interest margin was a result
of a decrease in the yield on average earning assets from 8.89% in 2000 to 8.31%
in 2001 offset by a decrease in the cost of funds from 4.34% in 2000 to 4.14% in
2001. The decrease in the average yield on interest earning assets was primarily
a result of the declining interest rate environment. The decrease in the cost of
funds was primarily a result of the declining interest rate environment during
2001 and a decrease in the average balance of borrowings from the Federal Home
Loan Bank ("FHLB"). During 2001, the Federal Reserve decreased the federal funds
rate 11 times for a total of 475 basis points.
During 2000, net interest income, on a taxable equivalent basis,
increased 7.5% to $16.5 million from $15.4 million, excluding the one-time
interest collected on a non-accrual loan in 1999. This was a result of a 7.8%
increase in the average balance of interest earning assets offset by a slight
decrease in the net interest margin to 5.27% in 2000 from 5.29% in 1999. The
increase in average earning assets was the result of an increase in the average
balance of the loan portfolio and securities portfolio at the Bank offset by a
decrease in the average balance of loans held for sale by the Mortgage
Corporation, and a decrease in the average balance in interest earning deposits
in other banks and fed funds sold. The increase in loans at the Bank was a
result of overall higher loan demand. The increase in the average balance of
securities was a result of the purchase of securities during the last six months
of 1999. A large number of securities were called in the first half of 1999 and
were replaced in the second half of 1999. The current year reflects the effect
of a full year of these purchases. The decrease in loans held for sale at the
Mortgage Corporation was a result of a decrease in loan originations to $294
million in 2000 from $457 million in 1999 and a decrease in loan fundings
(sales) to $302 million in 2000 from $499 million in 1999. The decrease in the
average balance in interest earning deposits in other banks and fed funds sold
was a result of excess liquidity being invested in higher yielding loans and
securities. The decrease in the net interest margin was a result of an increase
in the cost of funds from 3.90% in 1999 to 4.34% in 2000 offset by an increase
in the yield on average earning assets from 8.41% in 1999 to 8.89% in 2000. The
increase in the cost of funds was a result of the overall higher interest rate
environment during 2000 and an increase in the average balance of higher cost
borrowings from the FHLB. From August 1999 to March 2000, the interest rates on
fed funds increased 150 basis points. This increase was clearly reflected in the
average cost of certificates of deposit paid by the Corporation. The increase in
the average balance of borrowings from the FHLB was a result of loan growth
outpacing deposit growth during most of 2000. In addition to providing funding
for loans originated and subsequently sold by the Mortgage Corporation,
borrowings from the FHLB are occasionally used for funding of the Bank's loan
portfolio. The increase in the average yield on interest earning assets was
mainly a result of the higher interest rate environment and the decrease in the
average balance of lower yielding loans held for sale at the Mortgage
Corporation.
7
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.
2001 from 2000 2000 from 1999
------------------------------- ---------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease)
- -------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ (1,925) $ 4,490 $ 2,565 $ 1,133 $ 2,262 $ 3,395
Securities:
Taxable (25) (541) (566) 3 57 60
Tax-exempt (37) (71) (108) (61) 244 183
- ------------------------------------------------------------------------------------------------------------------------------
Total securities (62) (612) (674) (58) 301 243
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits in other banks
and fed funds (97) (18) (115) 43 (286) (243)
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income (2,084) 3,860 1,776 1,118 2,277 3,395
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Time and savings deposits:
Interest-bearing deposits (270) 80 (190) 23 129 152
Money market deposit accounts (87) 12 (75) 46 24 70
Savings accounts (206) 8 (198) 1 (15) (14)
Certificates of deposit, $100M or more (14) 517 503 148 261 409
Other certificates of deposit 132 1,304 1,436 451 336 787
- ------------------------------------------------------------------------------------------------------------------------------
Total time and savings deposits (445) 1,921 1,476 669 735 1,404
Other borrowings (415) (326) (741) 210 627 837
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense (860) 1,595 735 879 1,362 2,241
- ------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ (1,224) $ 2,265 $ 1,041 $ 239 $ 915 $ 1,154
==============================================================================================================================
8
NON-INTEREST INCOME
TABLE 3: Non-Interest Income
Year Ended December 31,
------------------------
(Dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Gain on sale of loans $10,390 $ 5,009 $ 6,692
Service charges on deposit accounts 1,442 1,336 1,154
Other service charges and fees 3,211 1,675 1,950
Gain on calls of available for sale securities 6 100 139
Gain on sale of branch 1,176 -- --
Other income 1,196 825 1,069
- -----------------------------------------------------------------------------------------------------------------------------
$17,421 $ 8,945 $11,004
=============================================================================================================================
2001 vs. 2000
Non-interest income increased by $8.5 million, or 94.8%, in 2001. The
increase was mainly a result of a $5.4 million increase in the gain on sale of
loans at the Mortgage Corporation. This increase was a result of the overall
increase in production at the Mortgage Corporation which was a result of the
lower interest rate environment in 2001 compared to 2000. Other service charges
and fees increased $1,536,000 as a result of increased production at the
Mortgage Corporation and other income increased $371,000 largely due to
increased production at the Mortgage Corporation and C&F Title Agency. The gain
on sale of branch was a result of the sale of the Bank's Tappahannock branch
office during the fourth quarter of 2001. Management believed this location did
not fit into the Bank's geographic focus.
2000 vs. 1999
Non-interest income decreased by $2.1 million, or 18.7%, in 2000. The
decrease was mainly a result of a $1.7 million decrease in the gain on sale of
loans at the Mortgage Corporation. This decrease was a result of the overall
decrease in production at the Mortgage Corporation which was a result of the
higher interest rate environment in 2000 compared to 1999. In addition, other
service charges and fees at the Mortgage Corporation declined $309,000 and other
income at the Title Company, declined $132,000. These decreases were partially
offset by an increase in service charges on deposit accounts at the Bank of
$181,000 which was due to the overall growth of the Bank during 2000.
NON-INTEREST EXPENSE
TABLE 4: Non-Interest Expense
Year Ended December 31,
-----------------------
(Dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $13,443 $ 9,603 $ 9,366
Occupancy expense 2,886 2,378 2,044
Goodwill amortization 268 275 275
Other expenses 5,367 3,742 4,145
- -----------------------------------------------------------------------------------------------------------------------------
$21,964 $15,998 $15,830
=============================================================================================================================
9
2001 vs. 2000
Non-interest expense increased $5,966,000, or 37.3%, over 2000. This
increase was primarily a result of increased salaries and variable compensation
at the Mortgage Corporation due to an increase in production. Salaries and
benefits at the Bank also increased as a result of overall growth, the opening
of a new branch by CCB, and the opening of a branch of the Bank in Sandston
during the fourth quarter of 2001. The opening of the two new branches along
with investments in imaging and internet banking technology resulted in an
increase in occupancy expenses. Other expenses increased mainly as a result of
increased production at the Mortgage Corporation.
2000 vs. 1999
Non-interest expense increased $168,000, or 1.1%, over 1999. This
increase was a result of increased salaries and benefits at the Bank offset by
decreased salaries and variable compensation at the Mortgage Corporation due to
a decrease in production. The increase in salaries and benefits at the Bank was
due to overall growth including the formation of CCB, and the opening of a
branch of the Bank in Williamsburg, Virginia during the second quarter of 2000.
CCB was formed in the second half of 1999. The growth of the Bank also resulted
in an increase in occupancy expense. Other expenses declined mainly as a result
of decreased production at the Mortgage Corporation.
INCOME TAXES
Applicable income taxes on 2001 earnings amounted to $3,318,000,
resulting in an effective tax rate of 29.3% compared to $1,823,000, or 23.8% in
2000, and $2,394,000, or 26.1% in 1999. The increase in the effective tax rate
for 2001 as compared to 2000 was a result of a decrease in earnings from tax
exempt assets as a percentage of total income mainly resulting from the
increased earnings at the Mortgage Corporation. The decrease for 2000 compared
to 1999 was a result of the increase in earnings from tax exempt assets as a
percentage of total income mainly resulting from the decrease in earnings at the
Mortgage Corporation.
TABLE 5: Allowance for Loan Losses
Year Ended December 31,
------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Reserve, beginning of period $3,609 $3,302 $2,760 $2,234 $1,927
Provision for loan losses 400 400 600 600 330
Loans charged off:
Real estate--mortgage -- -- 10 33 12
Real estate--construction 32 31 -- -- --
Commercial, financial, and agricultural 126 -- -- -- 3
Consumer 192 71 76 66 12
- --------------------------------------------------------------------------------------------------------------------------------
Total loans charged off 350 102 86 99 27
Recoveries of loans previously charged off:
Real estate--mortgage -- -- -- 25 --
Commercial, financial, and agricultural -- -- 13 -- --
Consumer 25 9 15 -- 4
- --------------------------------------------------------------------------------------------------------------------------------
Total recoveries 25 9 28 25 4
Net loans charged off 325 93 58 74 23
- --------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $3,684 $3,609 $3,302 $2,760 $2,234
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average total loans
outstanding during period .11% .04% .03% .04% .01%
================================================================================================================================
10
TABLE 6: 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 2002 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:
(Dollars in thousands) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Allocation of allowance for loan losses, end of year:
Real estate--mortgage $ 619 $ 743 $ 753 $ 667 $ 692
Real estate--construction 263 251 160 108 89
Commercial, financial, and agricultural 2,203 2,005 1,686 1,211 926
Equity lines 113 116 103 86 71
Consumer 290 267 380 251 167
Unallocated 196 227 220 437 289
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $3,684 $3,609 $3,302 $2,760 $2,234
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of loans to total year-end loans:
Real estate--mortgage 32% 37% 43% 50% 57%
Real estate--construction 4 4 4 3 3
Commercial, financial, and agricultural 55 49 42 36 31
Equity lines 4 5 5 5 4
Consumer 5 5 6 6 5
- --------------------------------------------------------------------------------------------------------------------------------
100% 100% 100% 100% 100%
================================================================================================================================
ASSET QUALITY-ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is to provide for potential losses in the
loan portfolio. Among other factors, management considers the 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 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 2001, the provision for loan losses was $400,000 compared to
$400,000 in 2000 and $600,000 in 1999. Over the past several years, the
Corporation has substantially increased its portfolio of commercial, financial,
and agricultural loans. The risks associated with increasing the volume of such
loans resulted in an increase in the provision for loan losses for 1999 when
compared to years prior to 1998. While the Corporation continues to increase its
commercial, financial and agricultural loan portfolio, the portfolio also
continues to become "more seasoned" allowing management to better assess the
risk associated with the portfolio. Accordingly, management was able to reduce
the provision for loan losses in 2001 and 2000 to $400,000 from $600,000 in
1999. Table 6 presents the allocation of the allowance for possible loan losses
by loan category.
Loans charged off during 2001 amounted to $350,000 compared to $102,000
in 2000 and $86,000 in 1999. Recoveries amounted to $24,000, $9,000, and $28,000
in 2001, 2000, and 1999, respectively. The ratio of net charge-offs to average
outstanding loans was .11% in 2001,.04% in 2000, and .03% in 1999. Management
believes that the reserve is
11
adequate to absorb any losses on existing loans that may become uncollectible.
Table 5 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, were $1,026,000 at December 31, 2001,
an increase of $506,000 from December 31, 2000. The increase in non-performing
assets is a result of certain lending relationships being put on non-accrual
status during the year. The Corporation is closely monitoring these
relationships and does not anticipate a significant loss.
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.
$91,000, $37,000, and $8,000 in additional gross interest income would have been
recorded if non-accrual loans had been current throughout the period outstanding
for 2001, 2000, and 1999, respectively. Interest income received on non-accrual
loans was $2,000, $2,000, and $551,000 for the periods ended December 31, 2001,
2000, and 1999, respectively.
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. The balances of impaired loans at December 31, 2001 and
2000, was $1,026,000 and $473,000 respectively, with no specific valuation
allowance associated with these loans. The average balances of impaired loans
for 2001 and 2000 were $513,000 and $357,000, respectively.
Table 7 summarizes non-performing assets for the past five years.
TABLE 7: Non-Performing Asset Activity
(Dollars in thousands) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans $1,026 $ 473 $ 49 $463 $497
Real estate owned -- 47 -- -- 444
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets 1,026 520 49 463 941
- ---------------------------------------------------------------------------------------------------------------------------------
Principal and/or interest past due for 90 days or more $ 913 $1,586 $786 $958 $768
- ---------------------------------------------------------------------------------------------------------------------------------
Non-performing loans to total loans .41% .20% .02% .27% .31%
Allowance for loan losses to total loans 1.47 1.55 1.58 1.60 1.42
Allowance for loan losses to non-performing loans 359.06 763.00 6,738.78 596.11 449.30
Non-performing assets to total assets .25% .15% .01% .14% .34%
=================================================================================================================================
12
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 an acceptable level of risk.
At the end of 2001, the Corporation had total assets of $404 million,
up 16.4% over the previous year-end. In 2000, there was an increase of 5.5% in
total assets over year-end 1999. Asset growth in 2001 is attributable to an
increase in loans at the Bank and an increase in loans held for sale at the
Mortgage Corporation.
TABLE 8: Summary of Total Loans
Year Ended December 31,
------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Real estate--mortgage $ 80,977 $ 86,453 $ 89,952 $ 86,311 $ 88,973
Real estate--construction 8,819 9,099 7,968 5,359 4,454
Commercial, financial, and agricultura/l/ 137,374 113,570 89,135 62,885 48,737
Equity lines 11,284 11,616 10,272 8,580 7,131
Consumer 11,342 12,815 12,091 9,543 7,684
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 249,796 233,553 209,418 172,678 156,979
Less allowance for loan losses (3,684) (3,609) (3,302) (2,760) (2,234)
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans, net $246,112 $229,944 $206,116 $169,918 $154,745
==================================================================================================================================
/1/ Includes loans secured by real estate
TABLE 9: Maturity/Repricing Schedule of Loans
December 31, 2001
------------------------------------
Commercial, financial, Real estate
(Dollars in thousands) and agricultural construction
- -------------------------------------------------------------------------------------------------------------------------
Variable Rate:
Within 1 year $49,523 $ --
1 to 5 years 19,846 --
After 5 years 9,657 --
Fixed Rate:
Within 1 year 8,695 8,819
1 to 5 years 18,540 --
After 5 years 31,113 --
=========================================================================================================================
LOAN PORTFOLIO
At December 31, 2001, loans, net of unearned income and reserve for
loan losses, totaled $246.1 million, an increase of 7.0% over the 2000 total of
$229.9 million. Net loans increased 11.6% and 21.3% in 2000 and 1999,
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, and commercial, including,
commercial real
13
estate, represent the major portion of the Corporation's loan portfolio. Tables
8 and 9 present information pertaining to the composition of loans and the
maturity/repricing of loans.
TABLE 10: Maturity of Securities
Year Ended December 31,
------------------------------------------------
2001 2000 1999
---------------------- -------------------- ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
(Dollars in thousands) Cost Yield Cost Yield Cost Yield
- -------------------------------------------------------------------------------------------------------------------------------
U.S. government agencies and corporations:
Maturing after 5 years, but within 10 years $ -- --% $ 4,500 7.03% $ 4,500 7.03%
Maturing after 10 years -- -- 9,000 7.08 9,000 7.08
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. government agencies and corporations -- -- 13,500 7.07 13,500 7.07
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries:
Maturing within 1 year -- -- 1,000 8.01 -- --
Maturing after 1 year, but within 5 years -- -- -- -- 1,000 8.01
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasuries -- -- 1,000 8.01 1,000 8.01
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage backed securities:
Maturing after 1 year, but within 5 years 1,948 5.83 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage backed securities 1,948 5.83 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
States and municipals:1
Maturing within 1 year 1,164 8.55 2,028 10.43 155 9.77
Maturing after 1 year, but within 5 years 4,234 8.20 4,378 8.42 4,190 8.87
Maturing after 5 years, but within 10 years 19,061 7.54 15,871 7.61 14,352 7.97
Maturing after 10 years 20,817 7.22 23,907 7.29 28,496 7.52
- ------------------------------------------------------------------------------------------------------------------------------
Total states and municipals 45,276 7.48 46,184 7.64 47,193 7.66
- ------------------------------------------------------------------------------------------------------------------------------
Total securities:2
Maturing within 1 year 1,164 8.55 3,028 9.63 155 9.77
Maturing after 1 year, but within 5 years 6,182 7.46 4,378 8.42 5,190 8.71
Maturing after 5 years, but within 10 years 19,061 7.54 20,371 7.48 18,852 7.95
Maturing after 10 years 20,817 7.22 32,907 7.24 37,496 1.36
- ------------------------------------------------------------------------------------------------------------------------------
Total securities $ 47,224 7.41% $ 60,684 7.52% $ 61,693 7.54%
==============================================================================================================================
/1/ Yields on tax-exempt securities have been computed on a taxable-equivalent
basis.
/2/ Total securities excludes preferred stock at amortized cost of $5,899,358,
$5,504,870, and $5,209,736 at December 31, 2001, 2000, and 1999,
respectively ($5,468,496, $5,054,587, and $4,738,879 estimated fair value at
December 31, 2001, 2000, and 1999, respectively).
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, securities held to
maturity and securities available for sale. Securities are classified as held to
maturity based on management's intent and the Corporation's ability, at the time
of purchase, to hold such securities to maturity. These securities are carried
at amortized cost. Securities which may be sold in response to changes in market
interest rates, changes in the securities' prepayment risk, increases in loan
demand, general liquidity needs, and other similar factors are classified as
available for sale and are carried at estimated fair value.
At year-end 2001, total securities were $53.9 million, down 17.90% from
$65.7 million at year-end 2000. Mortgage backed securities represented 3.6% of
the total securities portfolio, obligations of states and political subdivisions
were 86.3%, and preferred stocks were 10.1% at December 31, 2001.
14
The Company adopted Financial Accounting Standards Board Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, effective
January 1, 2001 and, as permitted by the Statement, transferred securities with
a book value of $33,770,000 and a market value of $34,836,000 to the
available-for-sale category.
Table 10 presents information pertaining to the composition of the
securities portfolio.
DEPOSITS
The Corporation's predominant 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 $33.2 million, or 11.4%, in 2001 over 2000. In
2001, the growth by deposit category was a 7.7% increase in non-interest-bearing
deposits, an 11.9% increase in savings and interest-bearing demand deposits, and
a 12.0% increase in time deposits. In 2000, total deposits increased $29.8
million, or 11.4%, over 1999. Deposit growth in 2001 over 2000 was attributed to
growth at existing branch locations and to the opening of two new branches, CCB
in Midlothian and the Bank in Sandston, offset by the sale of the Bank's
Tappahannock branch during 2001. Table 11 presents the average deposit balances
and average rates paid for the years 2001, 2000, and 1999. Table 12 details
maturities of certificates of deposit with balances of $100,000 and over at
December 31, 2001.
TABLE 11: Average Deposits and Rates Paid
Year Ended December 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing demand deposits $ 39,240 $ 31,511 $ 35,697
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 54,481 1.92% 50,977 2.42% 45,627 2.38%
Money market deposit accounts 26,290 3.05 25,938 3.38 25,207 3.20
Savings accounts 38,921 2.45 38,640 2.98 39,131 2.97
Certificates of deposit, $100M or more 32,421 5.46 22,955 5.52 17,977 4.77
Other certificates of deposit 119,535 5.55 96,004 5.42 89,467 4.94
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 271,648 4.13% 234,514 4.15% 217,409 3.83%
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $310,888 $266,025 $253,106
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 12: Maturities of Certificates of Deposit with Balances of $100,000 or
More
(Dollars in thousands) December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
3 months or less $ 11,169
3-6 months 9,208
6-12 months 14,870
Over 12 months 3,234
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 38,481
- ------------------------------------------------------------------------------------------------------------------------------------
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
15
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.
At December 31, 2001, cash and cash equivalents and securities
classified as available for sale were 17.9% of total earning assets, compared to
14.6% at December 31, 2000.
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 from the FHLB.
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
structure that will assure an adequate level of capital to support anticipated
asset growth and to absorb potential losses.
During 2001 the Corporation repurchased 59,981 shares of its common
stock in the open market at prices between $14.88 and $18.00 per share. During
2000, the Corporation repurchased 85,000 shares of its common stock, in the open
market at prices between $13.69 and $17.00 per share. During March of 1999, the
Corporation repurchased 235,000 shares of its common stock in privately
negotiated transactions at prices between $19.88 and $20.00 per share and during
the second half of 1999, the Corporation repurchased an additional 12,500 shares
of its common stock in the open market at prices between $17.00 and $18.00 per
share. These repurchases were made to reduce capital since 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 13.3% at December 31, 2001, compared
to 14.4% at December 31, 2000. The total capital ratio was 14.4% at December 31,
2001 compared to 15.6% at December 31, 2000. These ratios are in excess of the
mandated minimum requirements of 4.0% and 8.0%, respectively.
Shareholders' equity was $44.7 million at year-end 2001 compared to
$38.8 million at year-end 2000. The leverage ratio consists of Tier I capital
divided by average assets. At December 31, 2001, the Corporation's leverage
ratio was 10.8%, compared to 10.9% at December 31, 2000, which exceeds the
required minimum leverage ratio of 4.0%. The dividend payout ratio was 25.7%,
32.7%, and 26.6%, in 2001, 2000, and 1999, respectively. During 2001, the
Corporation paid dividends of $0.58 per share, up 9.4% from $0.53 per share paid
in 2000.
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 July 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets. Statement 141 eliminates the pooling method of
16
accounting for business combinations and requires that intangible assets that
meet certain criteria be reported separately from goodwill. The Statement also
requires negative goodwill arising from a business combination to be recorded as
an extraordinary gain. Statement 142 eliminates the amortization of goodwill and
other intangibles that are determined to have an indefinite life. The Statement
requires, at a minimum, annual impairment tests for goodwill and other
intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, an organization is required to
re-evaluate goodwill and other intangible assets that arose from business
combinations entered into before July 1, 2001. If the recorded other intangible
assets do not meet the criteria for recognition, they should be classified as
goodwill. Similarly, if there are other intangible assets that meet the criteria
for recognition but were not separately recorded from goodwill, they should be
reclassified from goodwill. An organization also must reassess the useful lives
of intangible assets and adjust the remaining amortization periods accordingly.
Any negative goodwill must be written-off.
The standards generally are required to be implemented by the Bank in
its 2002 financial statements. The adoption of these standards is not expected
to have a material impact on the Corporation's financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement
143 Accounting for Asset Retirement Obligations. This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated retirement costs. It
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred and the associated asset
retirement costs be capitalized as part of the carrying amount of the long-lived
asset. This Statement is not expected to have a material effect on the
Corporation's financial statements.
In August 2001, the Financial Accounting Standards Board issued
Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
The Statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It also establishes a single accounting model for
long-lived assets to be disposed of by sale, which includes long-lived assets
that are part of a discontinued operation. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2001. The 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 constitute "forward-looking statements" as defined by federal
securities laws. These statements may address issues that involve estimates and
assumptions made by management, risks and uncertainties, and actual results
could differ materially from historical results or those anticipated by such
statements. Factors that could have a material adverse effect on the operations
and future prospects of the company include, but are not limited to, changes in:
interest rates, general economic conditions,
17
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Board of Governors
of the Federal Reserve System, the quality or composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Corporation's market area and accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating the forward-looking statements, and readers are
cautioned not to place undue reliance on such statements, which speak only as of
their dates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
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, Chesterfield, Middlesex, New Kent, Charles City, York, and
James City, and is, therefore, subject to risks associated with the local
economy. As of December 31, 2001, 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 rate analysis used
to estimate a financial institution's interest rate sensitivity 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
18
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 sensitivity gap position.
As part of its borrowings, the Corporation may utilize, from time to
time, daily, convertible and adjustable rate advances from the FHLB. Convertible
advances generally provide for a fixed rate of interest for a portion of the
term of the advance, an ability for the FHLB 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 elects to exercise the conversion feature. At December 31, 2001, the Bank
did not hold convertible advances from the FHLB. Also, the methodology used
estimates various rates of withdrawal for money market deposits, savings, and
checking accounts, which may vary significantly from actual experience.
TABLE 13: Interest Sensitivity Analysis
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 2001, 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 particular period
were determined in accordance with the contractual terms of the asset or
liability.
Interest-Sensitive Periods
----------------------------------------------------------
Within 91-365 1-5 Over
(Dollars in thousands) 90 Days Days Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2001
Earning assets:
Loans, net of unearned income $149,019 $ 25,283 $ 78,018 $66,739 $319,059
Securities 2,711 1,945 24,131 25,931 54,718
Federal funds sold and other short-term investments 930 - - - 930
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 152,660 27,228 102,149 92,670 374,707
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing transaction accounts 9,002 27,006 24,006 - 60,014
Savings accounts 6,213 18,640 16,569 - 41,422
Money market deposit accounts 4,511 13,533 12,029 - 30,073
Certificates of deposit, $100M or more 11,169 24,078 3,234 - 38,481
Other certificates of deposit 22,802 69,541 22,847 243 115,433
Borrowings 27,204 - - - 27,204
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 80,901 152,798 78,685 243 $312,627
- -----------------------------------------------------------------------------------------------------------------------------------
Period gap 71,759 (125,570) 23,464 92,427
Cumulative gap $ 71,759 $ (53,811) $(30,347) $62,080
Ratio of cumulative gap to total earning assets 19.15% (14.36)% (8.10)% 16.57%
- -----------------------------------------------------------------------------------------------------------------------------------
19
The following table provides information about the Corporation's
financial instruments that are sensitive to changes in interest rates as of
December 31, 2001 and 2000, 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 has been no significant changes in the
maturities of interest-earning assets or interest-bearing liabilities as
compared to 2000. The 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 the increase in loans held for sale.
The decrease in the yield on interest earning assets and amount paid on
interest-bearing liabilities is a result of the decrease in interest rates
throughout 2001.
20
TABLE 14: Maturity of Interest-Bearing Assets/Liabilities
Principal Amount Maturing in:
------------------------------------------------------------
(Dollars in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets:
Fixed rate loans /1, 2/
December 31, 2001 $ 28,366 $14,235 $10,870 $ 8,154 $ 7,183 $49,907 $118,715 $124,139
December 31, 2000 23,371 11,329 9,830 8,457 6,740 44,280 104,007 104,356
Average interest rate
December 31, 2001 8.12% 8.68% 8.43% 8.34% 8.25% 8.27% 8.30%
December 31, 2000 9.43% 8.89% 8.71% 8.53% 8.38% 8.43% 8.74%
Variable rate loans /1, 2/
December 31, 2001 $ 52,599 $16,492 $4,108 $ 4,759 $ 4,054 $50,026 $132,038 $135,612
December 31, 2000 46,426 10,372 5,489 5,039 4,516 58,690 130,532 130,574
Average interest rate
December 31, 2001 6.78% 6.76% 9.98% 8.12% 7.96% 7.74% 7.32%
December 31, 2000 10.43% 9.44% 8.90% 8.88% 8.79% 8.34% 9.23%
Loans held for sale
December 31, 2001 $ 69,263 $ - $ - $ - $ - $ - $ 69,263 $ 70,166
December 31, 2000 17,600 - - - - - 17,600 17,984
Average interest rate
December 31, 2001 6.69% - - - - - 6.69%
December 31, 2000 9.26% - - - - - 9.26%
Securities /3, 4/
December 31, 2001 $ 944 $ 1,504 $ 705 $ 781 $ 1,017 $49,767 $ 54,718 $ 55,548
December 31, 2000 1,385 1,148 1,504 806 1,084 61,856 67,783 68,484
Average interest rate
December 31, 2001 5.77% 5.85% 6.01% 5.58% 5.25% 5.27% 5.31%
December 31, 2000 5.43% 4.67% 4.73% 4.72% 4.39% 5.39% 5.34%
Interest-Bearing Liabilities:
Money market, savings, and interest-
bearing transaction accounts /5/
December 31, 2001 $ 78,905 $13,151 $13,151 $13,151 $13,151 $ - $131,509 $132,312
December 31, 2000 70,540 11,757 11,757 11,757 11,756 - 117,567 118,590
Average interest rate
December 31, 2001 1.79% 1.79% 1.79% 1.79% 1.79% - 1.79%
December 31, 2000 2.72% 2.72% 2.72% 2.72% 2.72% - 2.72%
Certificates of deposit
December 31, 2001 $127,590 $17,309 $ 5,488 $ 1,450 $ 1,833 $ 244 $153,914 $156,115
December 31, 2000 117,552 12,186 4,232 1,385 1,387 645 137,387 137,505
Average interest rate
December 31, 2001 4.40% 4.77% 5.17% 6.20% 5.35% 2.38% 4.49%
December 31, 2000 6.07% 5.86% 5.83% 5.21% 6.23% 4.36% 6.03%
Borrowings
December 31, 2001 $ 22,204 $ 5,000 $ - $ - $ - $ - $ 27,204 $ 27,190
December 31, 2000 13,969 - - - - - 13,969 13,969
Average interest rate
December 31, 2001 1.74% 5.35% - - - - 2.40%
December 31, 2000 5.66% - - - - - 5.66%
- ----------------------------------------------------------------------------------------------------------------------------
/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/ Assumes an annual decay rate of 60% for year 1 and 10% for each of the
years 2 through 5.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 10,127,368 $ 8,922,524
Interest-bearing deposits in other banks 929,549 5,915,378
- -----------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 11,056,917 14,837,902
Securities--available for sale at fair value, amortized cost of
$53,123,058 and $32,418,548, respectively 53,952,938 31,913,344
Securities--held to maturity at amortized cost, fair value of
$0 and $34,835,759, respectively -- 33,769,925
Loans held for sale, net 69,263,294 17,600,164
Loans, net of reserve for loan losses of $3,683,658 and $3,608,966,
respectively 246,112,369 229,943,715
Federal Home Loan Bank stock 1,595,000 1,595,000
Corporate premises and equipment, net 14,638,441 9,889,649
Accrued interest receivable 2,134,218 2,403,921
Other assets 5,322,797 5,518,052
- -----------------------------------------------------------------------------------------------------------
Total assets $404,075,974 $347,471,672
- -----------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Non-interest-bearing demand deposits $ 38,489,428 $ 35,734,625
Savings and interest-bearing demand deposits 131,508,973 117,566,594
Time deposits 153,914,100 137,386,817
- -----------------------------------------------------------------------------------------------------------
Total deposits 323,912,501 290,688,036
Borrowings 27,203,667 13,969,173
Accrued interest payable 811,088 992,852
Other liabilities 7,405,695 3,041,161
- -----------------------------------------------------------------------------------------------------------
Total liabilities 359,332,951 308,691,222
- -----------------------------------------------------------------------------------------------------------
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,
3,526,126 and 3,571,039 shares issued and outstanding at
December 31, 2001 and 2000, respectively) 3,526,126 3,571,039
Additional paid-in capital 46,871 20,133
Retained earnings 40,622,304 35,522,711
Accumulated other comprehensive income (loss), net of tax of
$282,159 and ($171,771), respectively 547,722 (333,433)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 44,743,023 38,780,450
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $404,075,974 $347,471,672
- -----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Interest income
Interest and fees on loans $24,809,972 $22,244,860 $19,405,445
Interest on money market investments
Federal funds sold 2,005 -- 90,964
Other money market investments 97,846 563,687 366,971
Interest on securities
U.S. Treasury securities 29,663 80,193 109,112
U.S. government agencies and corporations 439,380 953,900 864,461
Tax-exempt obligations of states and political subdivisions 2,385,946 2,455,762 2,347,868
Corporate bonds and other 469,573 123,077 458,736
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 28,234,385 26,421,479 23,643,557
- ------------------------------------------------------------------------------------------------------------------------
Interest expense
Savings and interest-bearing deposits 2,799,884 3,263,427 3,055,792
Certificates of deposit, $100M or more 1,768,972 1,266,707 856,670
Other time deposits 6,639,327 5,202,728 4,415,594
Short-term borrowings and other 776,209 1,576,537 739,811
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,984,392 11,309,399 9,067,867
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 16,249,993 15,112,080 14,575,690
Provision for loan losses 400,000 400,000 600,000
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 15,849,993 14,712,080 13,975,690
- ------------------------------------------------------------------------------------------------------------------------
Other operating income
Gain on sale of loans 10,389,684 5,008,850 6,691,998
Service charges on deposit accounts 1,442,253 1,335,679 1,154,373
Other service charges and fees 3,210,921 1,674,937 1,949,714
Gain on calls of available for sale securities 6,000 100,157 138,830
Gain on sale of branch 1,176,279 -- --
Other income 1,195,482 825,439 1,069,541
- ------------------------------------------------------------------------------------------------------------------------
Total other operating income 17,420,619 8,945,062 11,004,456
- ------------------------------------------------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits 13,442,765 9,603,442 9,365,548
Occupancy expenses 2,886,245 2,377,608 2,044,013
Goodwill amortization 267,860 275,160 275,160
Other expenses 5,367,223 3,742,170 4,144,829
- ------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 21,964,093 15,998,380 15,829,550
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 11,306,519 7,658,762 9,150,596
Income tax expense 3,317,802 1,822,731 2,394,366
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 7,988,717 $ 5,836,031 $ 6,756,230
- ------------------------------------------------------------------------------------------------------------------------
Earnings per common share--basic $ 2.25 $ 1.62 $ 1.83
- ------------------------------------------------------------------------------------------------------------------------
Earnings per common share--assuming dilution $ 2.23 $ 1.60 $ 1.81
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid-In Comprehensive Retained Comprehensive
Stock Capital Income Earnings Income (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 $3,866,888 $ 475,928 $31,739,483 $ 565,194 $36,647,493
Repurchase of common stock (247,500) (690,351) (3,971,173) -- (4,909,024)
Stock options exercised 25,068 228,819 -- -- 253,887
Comprehensive income
Net income $ 6,756,230 6,756,230 6,756,230
Other comprehensive income, net of
tax
Unrealized holding losses arising
during the period net of tax of
$938,495 (1,821,784) (1,821,784) (1,821,784)
-----------
Comprehensive income $ 4,934,446
-----------
Cash dividends ($.49 per share) -- -- (1,797,092) -- (1,797,092)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 3,644,456 14,396 32,727,448 (1,256,590) 35,129,710
Repurchase of common stock (85,000) (114,272) (1,130,139) -- (1,329,411)
Stock options exercised 11,583 120,009 -- -- 131,592
Comprehensive income
Net income $ 5,836,031 5,836,031 5,836,031
Other comprehensive income, net of
tax
Unrealized holding gains arising
during the period net of tax of
$475,566 923,157 923,157 923,157
-----------
Comprehensive income $ 6,759,188
-----------
Cash dividends ($.53 per share) -- -- (1,910,629) -- (1,910,629)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 3,571,039 20,133 35,522,711 (333,433) 38,780,450
Repurchase of common stock (59,981) (121,308) (833,031) -- (1,014,320)
Stock options exercised 15,068 148,046 -- -- 163,114
Comprehensive income
Net income $ 7,988,717 7,988,717 7,988,717
Other comprehensive income, net of
tax
Unrealized holding gains arising
during the period net of tax of
$453,928 881,155 881,155 881,155
-----------
Comprehensive income $ 8,869,872
-----------
Cash dividends ($.58 per share) -- -- (2,056,093) -- (2,056,093)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $3,526,126 $ 46,871 $40,622,304 $ 547,722 $44,743,023
===================================================================================================================================
Disclosure of reclassification amount for the year ended December 31:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Unrealized net holding gains (losses) arising during period $885,115 $989,272 $(1,730,156)
Less: reclassification adjustment for gains
included in net income 3,960 66,115 91,628
-------- -------- ------------
Net unrealized gains (losses) on securities $881,155 $923,157 $(1,821,784)
======== ======== ============
See notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 7,988,717 $ 5,836,031 $ 6,756,230
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 1,336,192 1,018,342 928,314
Amortization of goodwill 267,860 275,160 275,160
Deferred income taxes (37,024) (154,178) (123,139)
Provision for loan losses 400,000 400,000 600,000
Accretion of discounts and amortization of premiums
on securities, net (49,035) (45,047) (69,467)
Net realized gain on securities (6,000) (100,157) (138,830)
Origination of loans held for sale (627,303,955) (294,483,773) (456,926,073)
Sale of loans 575,640,825 301,770,123 499,032,881
Gain on sale of branch (1,176,279) -- --
Change in other assets and liabilities:
Accrued interest receivable 269,703 (267,828) 237,690
Other assets (489,510) (485,864) (881,041)
Accrued interest payable (181,764) 426,386 (31,680)
Other liabilities 4,364,534 384,756 (4,353,878)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (38,975,736) 14,573,951 45,306,167
- -----------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from maturities of securities held to maturity -- 1,060,000 3,628,850
Proceeds from maturities and calls of securities available for
sale 17,297,400 906,576 10,806,084
Purchase of securities available for sale (4,176,950) (1,107,101) (21,287,142)
Redemption (purchase) of FHLB stock -- (10,000) 121,200
Net increase in customer loans (19,233,654) (24,227,819) (36,797,468)
Purchase of corporate premises and equipment (6,426,178) (2,503,902) (2,867,029)
Sale of branch (10,857,527) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,396,909) (25,882,246) (46,395,505)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase (decrease) in demand, interest-bearing demand
and savings deposits 23,615,182 (3,171,413) 13,933,670
Net increase (decrease) in time deposits 24,649,283 33,005,814 (4,753,194)
Net increase (decrease) in other borrowings 13,234,494 (16,066,120) 5,374,215
Repurchase of common stock (1,014,320) (1,329,411) (4,909,024)
Proceeds from exercise of stock options 163,114 131,592 253,887
Cash dividends (2,056,093) (1,910,629) (1,797,092)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 58,591,660 10,659,833 8,102,462
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,780,985) (648,462) 7,013,124
Cash and cash equivalents at beginning of year 14,837,902 15,486,364 8,473,240
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 11,056,917 $ 14,837,902 $ 15,486,364
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure
Interest paid $ 12,166,156 $ 10,883,013 $ 9,099,547
Income taxes paid $ 2,805,205 $ 1,735,591 $ 2,743,114
===================================================================================================================================
See notes to consolidated financial statements.
25
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 accounting principles generally
accepted in the United States of America 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 businesses.
The Bank has four wholly owned subsidiaries, C&F Title Agency, Inc., C&F
Investment Services, Inc., C&F Mortgage Corporation, and C&F Insurance Services,
Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Title
Agency, Inc., organized in October 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. C&F Insurance Services, organized in July 1999, owns an equity
interest in an insurance agency which sells insurance products to customers of
the bank, C&F Mortgage Corporation and other financial institutions which have
an equity interest in the agency.
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 accounting
principles generally accepted in the United States of America 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.
Interest-bearing Deposits in Banks: Interest-bearing deposits in banks mature
within one year and are carried at cost.
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 Statement of Financial Accounting Standards 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.
26
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.
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.
Corporate Premises and Equipment: Corporate premises and equipment are carried
at cost less accumulated depreciation computed using a straight-line method 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.
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.
Comprehensive Income: Accounting principles generally require that recognized
revenue, expenses, gains, and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
Earnings Per Common Share: Basic earnings per share represents income available
to common shareholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Corporation relate solely to outstanding stock options, and are determined using
the treasury stock method.
27
Shareholders' Equity: During 2001 the Corporation repurchased 59,981 shares of
its common stock in the open market at prices between $14.88 and $18.00 per
share. During 2000, the Corporation repurchased 85,000 shares of its common
stock in the open market at prices between $13.69 and $17.00 per share. During
March 1999, the Corporation repurchased 235,000 shares of its common stock from
six shareholders at prices between $19.88 and $20.00 per share in privately
negotiated transactions. During the second half of 1999, the Corporation
repurchased an additional 12,500 shares of its common stock in the open market
at prices between $17.00 and $18.00 per share.
Statement of Cash Flows: For the purpose of the statement of cash flows, the
Corporation considers cash equivalents to include amounts due from banks,
federal funds sold, and money market investments purchased with a maturity of
three months or less. Generally, federal funds are purchased and sold for
one-day periods.
Reclassifications: Certain reclassifications have been made to prior period
amounts to conform to the current year presentation.
NOTE 2: Securities
Debt and equity securities are summarized as follows:
December 31, 2001
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Available for Sale Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 1,947,440 $ -- $ (23,064) $ 1,924,376
Obligations of states and political subdivisions 45,276,293 1,384,319 (100,546) 46,560,066
Preferred stock 5,899,325 86,840 (517,669) 5,468,496
- ----------------------------------------------------------------------------------------------------------------------------------
$53,123,058 $1,471,159 $ (641,279) $53,952,938
==================================================================================================================================
December 31, 2000
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Available for Sale Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. government agencies and corporations $13,500,000 $ -- $ (201,649) $13,298,351
Obligations of states and political subdivisions 13,413,678 219,405 (52,677) 13,580,406
Preferred stock 5,504,870 7,313 (477,596) 5,034,587
- ----------------------------------------------------------------------------------------------------------------------------------
$32,418,548 $ 226,718 $ (731,922) $31,913,344
- ----------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 999,950 $ 8,179 $ -- $ 1,008,129
Obligations of states and political subdivisions 32,769,975 1,059,569 (1,914) 33,827,630
- ----------------------------------------------------------------------------------------------------------------------------------
$33,769,925 $1,067,748 $ (1,914) $34,835,759
==================================================================================================================================
The amortized cost and estimated fair value of securities at December 31, 2001,
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.
28
December 31, 2001
------------------------------
Amortized Estimated
Available for Sale Cost Fair Value
- --------------------------------------------------------------------------------
Due in one year or less $1,163,403 $1,180,146
Due after one year through five years 6,181,857 6,318,720
Due after five years through ten years 19,061,079 19,838,185
Due after ten years 20,817,394 21,147,391
Preferred Stock 5,899,325 5,468,496
- --------------------------------------------------------------------------------
$53,123,058 $53,952,938
================================================================================
Proceeds from the maturities and the calls of securities available for sale in
2001 were $17,297,400, resulting in gross realized gains of $6,000. The
amortized cost and estimated fair value of securities pledged to secure public
deposits amounted to $11,484,000 and $11,938,000, respectively, at December 31,
2001.
Proceeds from the maturities and calls of securities held to maturity in 2000
were $1,060,000. There were no realized gains or losses. Proceeds from the
maturities and the calls of securities available for sale were $906,576,
resulting in gross realized gains of $100,157.
Proceeds from maturities and the calls of securities held to maturity in 1999
were $3,628,850. There were no realized gains or losses. Proceeds from
maturities and the calls of securities available for sale were $10,806,084,
resulting in gross realized gains of $138,830.
The Company adopted Financial Accounting Standards Board Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective January
1, 2001 and, as permitted by the Statement, transferred securities with a book
value of $33,770,000 and a market value of $34,836,000 to the available-for-sale
category.
NOTE 3: Loans
Major classifications of loans are summarized as follows:
December 31,
-------------------------------
2001 2000
- --------------------------------------------------------------------------------
Real estate--mortgage $ 81,924,063 $ 87,428,166
Real estate--construction 8,829,850 9,109,165
Commercial, financial, and agricultural 137,374,333 113,570,467
Equity lines 11,283,617 11,616,307
Consumer 11,341,663 12,815,274
- --------------------------------------------------------------------------------
250,753,526 234,539,379
Less unearned loan fees (957,499) (986,698)
- --------------------------------------------------------------------------------
249,796,027 233,552,681
Less reserve for loan losses (3,683,658) (3,608,966)
- --------------------------------------------------------------------------------
$246,112,369 $229,943,715
================================================================================
Loans on non-accrual status were $1,026,000 and $473,000 at December 31, 2001
and 2000, respectively. If interest income had been recognized on non-performing
loans at their stated rates during fiscal years 2001, 2000, and 1999, interest
income would have increased by approximately $91,000, $37,000, and $8,000,
respectively. The balance of impaired loans at December 31, 2001 and 2000, was
$1,026,000 and $473,000 respectively, with no specific valuation allowance
associated with these loans. The average balance of impaired loans for 2001 and
2000 were $513,000 and $357,000, respectively.
29
NOTE 4: Reserve for Loan Losses
Changes in the reserve for loan losses were as follows:
Year Ended December 31,
------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at the beginning of year $3,608,966 $3,301,778 $2,760,263
Provision charged to operations 400,000 400,000 600,000
Loans charged off (349,784) (101,733) (86,220)
Recoveries of loans previously charged off 24,476 8,921 27,735
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at the end of year $3,683,658 $3,608,966 $3,301,778
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE 5: Corporate Premises and Equipment
Major classifications of corporate premises and equipment are summarized as follows:
December 31,
--------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Land $ 3,523,577 $ 2,308,838
Buildings 10,108,440 7,018,997
Equipment, furniture, and fixtures 10,962,859 9,459,348
- ------------------------------------------------------------------------------------------------------------------------------------
24,594,876 18,787,183
Less accumulated depreciation (9,956,435) (8,897,534)
- ------------------------------------------------------------------------------------------------------------------------------------
$14,638,441 $ 9,889,649
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 6: Time Deposits
Time deposits are summarized as follows:
December 31,
----------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit, $100M or more $ 38,481,546 $ 27,018,509
Other time deposits 115,432,554 110,368,308
- ------------------------------------------------------------------------------------------------------------------------------------
$153,914,100 $137,386,817
- ------------------------------------------------------------------------------------------------------------------------------------
Remaining maturities on time deposits are as follows:
Year ending December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 $127,590,499
2003 17,309,102
2004 5,488,385
2005 1,450,373
2006 2,075,741
- ------------------------------------------------------------------------------------------------------------------------------------
$153,914,100
- ------------------------------------------------------------------------------------------------------------------------------------
30
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
FHLB, which are secured by a blanket floating lien on all real estate mortgage
loans secured by one-to-four family residential properties. The balance
outstanding on loans subject to the FHLB lien was $81,924,000 on December 31,
2001.
The table below presents selected information on short-term borrowings:
December 31,
-------------------------
2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Balance outstanding at year end $22,203,667 $ 8,969,173
Maximum balance at any month-end during the year $25,666,748 $28,103,898
Average balance for the year 14,628,473 $22,676,362
Weighted average rate for the year 4.26% 6.12%
Weighted average rate on borrowings at year-end 1.86% 5.45%
Estimated fair value $22,203,522 $ 8,969,173
- --------------------------------------------------------------------------------------------------------------------------------
The Corporation has unused lines of credit for borrowings totaling approximately
$89,305,000 at December 31, 2001.
Long-term borrowings consist of adjustable-rate advances from the FHLB. At
December 31, 2001, adjustable-rate advances totaled $5,000,000 with an interest
rate of 5.45% and a maturity date of May 19, 2003. At December 31, 2000,
adjustable-rate advances totaled $5,000,000 with an interest rate of 6.55% and a
maturity date of May 19, 2003. 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 Per 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.
December 31,
--------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares used in earnings per
common share--basic 3,547,873 3,608,673 3,684,796
Effect of dilutive securities:
Stock options 39,434 31,641 53,438
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares used in earnings per
common share--assuming dilution 3,587,307 3,640,314 3,738,234
- --------------------------------------------------------------------------------------------------------------------------------
Options on approximately 89,000, 175,000 and 15,000 shares were not included in
computing earnings per common share--assuming dilution for the years ended
December 31, 2001, 2000, and 1999, respectively, because their effects were
antidilutive.
NOTE 9: Income Taxes
Principal components of income tax expense as reflected in the consolidated
statements of income are as follows:
Year Ended December 31,
---------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Current taxes $3,354,826 $1,976,909 $2,517,505
Deferred taxes (37,024) (154,178) (123,139)
- --------------------------------------------------------------------------------------------------------------------------------
$3,317,802 $1,822,731 $2,394,366
- --------------------------------------------------------------------------------------------------------------------------------
31
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:
Year Ended December 31,
------------------------------------------------------------------------
Percent Percent Percent
of of of
Pre-tax Pre-tax Pre-tax
2001 Income 2000 Income 1999 Income
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax computed at federal statutory rates $3,844,216 34.0% $2,603,979 34.0% $3,111,203 34.0%
Tax effect of exclusion of interest income on
obligations of states and political subdivisions (850,319) (7.5) (879,995) (11.5) (833,784) (9.1)
Reduction of interest expense incurred to carry tax-
exempt assets 105,654 .9 116,418 1.5 94,336 1.0
State income taxes, net of federal tax benefit 203,782 1.8 59,348 .8 128,383 1.4
Tax effect of dividends-received deduction on
preferred stock (82,712) (.7) (83,036) (1.1) (79,695) (.9)
Other 97,181 .8 6,017 .1 (26,077) (.3)
- -----------------------------------------------------------------------------------------------------------------------------------
$3,317,802 29.3% $1,822,731 23.8% $2,394,366 26.1%
===================================================================================================================================
Other assets include deferred income taxes of $1,343,638 and $1,760,544 at
December 31, 2001 and 2000, respectively. The tax effects of each type of
significant item that gave rise to deferred taxes are:
Year Ended December 31,
---------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax asset
Allowance for loan losses $1,136,137 $1,097,141
Deferred compensation 348,194 244,953
Net unrealized loss on securities available for sale -- 171,771
Interest on non-accrual loans 30,869 12,631
Accrued pension -- 46,697
Intangible asset 73,321 177,248
Other 54,718 46,877
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax asset 1,643,239 1,797,318
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax liability
Depreciation (17,442) (36,774)
Net unrealized gain on securities available for sale (282,159) --
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax liability (299,601) (36,774)
- -----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $1,343,638 $1,760,544
===================================================================================================================================
NOTE 10: Employee Benefit Plans
The Bank maintains a Defined Contribution Profit-Sharing Plan (the
"Profit-Sharing Plan") sponsored by the Virginia Bankers Association. The
Profit-Sharing 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 Plan 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
20% vested after three years of service, 40% after four years, 60% after five
years, 80% after six years, and fully vested after seven years. The amounts
charged to expense under this plan were $385,805, $347,552, and $293,584, in
2001, 2000, and 1999, respectively.
32
The Mortgage Corporation maintains a Defined Contribution 401(k) Savings 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 $279,500, $53,000, and $160,000, for 2001, 2000, and 1999,
respectively.
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 $242,500, $204,300, and $173,200, in
2001, 2000, and 1999, respectively.
The Bank has a non-qualified defined contribution plan for certain executives.
The plan allows for elective salary and bonus deferrals. The plan also allows
for employer contributions to make up for arbitrary limitations on covered
compensation imposed by the Internal Revenue Code with respect to the Bank's
Profit Sharing/401(k) Plans and to enhance retirement benefits by providing
supplemental contributions from time to time. Expenses under this plan were
$32,350 and $25,200 in 2001 and 2000, respectively. There were no expenses under
the plan for 1999.
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:
Year Ended December 31,
-----------------------
2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation, beginning $2,017,537 $1,741,750
Service cost 227,178 178,489
Interest cost 151,185 130,501
Actuarial (gain)/loss (39,910) 80,457
Benefits paid (3,248) (113,660)
- --------------------------------------------------------------------------------------------------------------------------
Benefit obligation, ending $2,352,742 $2,017,537
- --------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets, beginning $2,212,205 $1,862,559
Actual return on plan assets (312,236) 285,634
Employer contributions 324,525 177,672
Benefits paid (3,248) (113,660)
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, ending $2,221,246 $2,212,205
- ---------------------------------------------------------------------------------------------------------------------------
Funded status $ 131,496) $ 194,668
Unrecognized net actual gain 160,991 (309,717)
Unrecognized net obligation at transition (54,134) (59,547)
Unrecognized prior service cost 34,151 37,255
- --------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 9,512 $ (137,341)
- --------------------------------------------------------------------------------------------------------------------------
33
Year Ended December 31,
-------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service cost $ 227,178 $ 178,489 $ 161,535
Interest cost 151,185 130,501 118,101
Expected return on plan assets (193,322) (149,027) (115,003)
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 (5,060) (3,970) (4)
- -------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 177,672 $ 153,684 $ 162,320
- -------------------------------------------------------------------------------------------------------
Weighted-Average Assumptions as of December 31
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 9.0 9.0 9.0
Rate of compensation increase 4.0 4.0 4.0
=======================================================================================================
NOTE 11: Related Party Transactions
Loans to directors and officers totaled $1,040,000 and $812,000 at December 31,
2001 and 2000, respectively. New advances to directors and officers totaled
$527,000 and repayments totaled $299,000 in the year ended December 31, 2001.
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. For options granted prior to December 21, 1999, one-third of
the options granted are exercisable commencing one year after the grant date
with an additional one-third becoming exercisable after each of the following
two years. Options granted on or after December 21, 1999, become exercisible
five years after the grant date. In 1983, the shareholders authorized 100,000
shares of common stock for issuance under the Plan. An additional 200,000 and
300,000 shares were authorized for the Plan in 1994 and 2000, respectively. 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 (the "Director
Plan"). In 1999, the Director Plan was amended to authorize a total of 150,000
shares for issuance. Under the Director Plan, options to purchase common stock
may be 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 six months after grant.
All options expire ten years from the grant date.
In 1999, the Board of Directors authorized 25,000 shares of common stock for
issuance under the 1999 Regional Director Stock Compensation Plan. Under this
plan, options to purchase common stock are granted to non-employee regional
directors of Citizens & Commerce Bank, a division of the Bank. Options are
issued to non-employee regional directors 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. 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, earnings per share-basic and
earnings per share-assuming dilution would have been
34
$7,745,779, $2.18 and $2.16, $5,627,587, $1.56 and $1.55, and, $6,625,664, $1.80
and $1.77, respectively for the years ended December 31, 2001, 2000 and 1999,
respectively.
The fair value of each option granted during the years ended December 31, 2001,
2000, and 1999, was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions for 2001, 2000, and 1999,
respectively: risk-free rate of 5.3, 5.2, and 6.7% and volatility of 35, 30, and
25%. The dividend yield used in the pricing model was 3.5, 3.5, and 2.8% for
2001, 2000, and 1999, respectively. The expected life used was eight years for
2001, 2000, and 1999.
Transactions under the various plans for the periods indicated were as follows:
2001 2000 1999
------------------ ------------------ ------------------
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 262,429 $ 14.93 208,444 $ 14.37 169,860 $ 12.36
Granted 71,650 18.55 69,800 15.80 68,350 17.64
Exercised (15,068) 9.71 (11,583) 9.62 (25,068) 9.44
Canceled (7,700) 17.12 (4,232) 16.22 (4,698) 15.27
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 311,311 $ 15.97 262,429 $14.93 208,444 $ 14.37
==================================================================================================================================
*Weighted average
Options exercisable at year-end 139,051 122,730 108,761
Weighted-average fair value of options granted during the year $ 5.95 $ 4.57 $ 5.40
==================================================================================================================================
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------------
Number Number
Outstanding Remaining Exercisable at
at December 31, Contractual Exercise December 31, Exercise
Range of Exercise Prices 2001 Life Price* 2001 Price*
- ----------------------------------------------------------------------------------------------------------------------------------
$8.87 to $12.50 72,378 4.48 $ 10.62 72,378 $10.62
$15.75 to $20.50 238,933 8.72 17.59 66,673 18.34
- ----------------------------------------------------------------------------------------------------------------------------------
$8.87 to $20.50 311,311 7.74 $ 15.97 139,051 $14.32
==================================================================================================================================
*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. Prompt
corrective action provisions are not applicable to bank holding companies.
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
35
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 $325,379,000 and $317,199,000 at December 31, 2001
and $264,375,000 and $256,559,000 at December 31, 2000. Management believes, as
of December 31, 2001, that the Corporation and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Corporation's and the Bank's actual capital amounts and ratios are presented
in the table.
Minimum To Be
Well Capitalized
Under Prompt
Minimum Capital Corrective Action
Actual Requirements Provisions
---------------- --------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
As of December 31, 2001:
Total Capital (to Risk-Weighted Assets)
Corporation $46,793 14.4% $26,030 8.0% N/A N/A
Bank 38,999 12.3 25,376 8.0 $31,720 10.0%
Tier I Capital (to Risk-Weighted Assets)
Corporation 43,110 13.3 13,015 4.0 N/A N/A
Bank 35,346 11.1 12,688 4.0 19,032 6.0
Tier I Capital (to Average Assets)
Corporation 43,110 10.8 16,027 4.0 N/A N/A
Bank 35,346 9.0 15,716 4.0 19,645 5.0
As of December 31, 2000:
Total Capital (to Risk-Weighted Assets)
Corporation $41,331 15.6% $21,174 8.0% N/A N/A
Bank 33,764 13.2 20,554 8.0 $25,693 10.0%
Tier I Capital (to Risk-Weighted Assets)
Corporation 38,023 14.4 10,587 4.0 N/A N/A
Bank 30,552 11.9 10,227 4.0 15,416 6.0
Tier I Capital (to Average Assets)
Corporation 38,023 10.9 13,874 4.0 N/A N/A
Bank 30,552 9.0 13,582 4.0 16,978 5.0
- ------------------------------------------------------------------------------------------------------------------------
Transfers of funds from the Bank to the Corporation in the form of loans,
advances and cash dividends are restricted by federal and state regulatory
authorities. As of December 31, 2001, the aggregate amount of unrestricted funds
which could be transferred from the Bank to the Corporation, without prior
regulatory approval, totaled $5,200,000 or 1.3% of the total consolidated net
assets.
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,
36
commitments to sell loans, and standby letters of credit. These instruments
involve elements of credit and interest rate risk in excess of the amount on 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.
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 $70,374,000 and $54,428,000 at December 31, 2001 and 2000,
respectively.
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 $3,943,000 and
$5,016,000 at December 31, 2001 and 2000, 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 substantially 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 repurchase vary with the
investor. Mortgages subject to recourse are collateralized by single-family
residences, have loan-to-value ratios of 80% or less, or have private mortgage
insurance, or are insured or guaranteed by an agency of the U.S. Government.
At December 31, 2001, the Mortgage Corporation had locked-rate commitments to
originate mortgage loans amounting to approximately $25,000,000. The Mortgage
Corporation has entered into mandatory commitments, on a best-effort basis, to
sell loans of approximately $94,263,000. Risks arise from the possible inability
of counterparties to meet the terms of their contracts. The Mortgage Corporation
does not expect any counterparty to fail to meet its obligations.
The Mortgage Corporation is committed under noncancelable operating leases for
certain office locations. Rent expense associated with these operating leases
was $580,000, $411,000, and $330,000, for the years ended December 31, 2001,
2000, and 1999, respectively.
Future minimum lease payments under these leases are as follows:
Year Ending December 31,
- ------------------------------------------------------------
2002 $418,077
2003 222,306
2004 20,202
- ------------------------------------------------------------
$660,585
============================================================
As of December 31, 2001, the Corporation had $6,836,331 in deposits in financial
institutions in excess of amounts insured by the FDIC.
37
NOTE 15: Fair Market Value of Financial Instruments and Interest Rate Risk
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.
Securities. The fair value of investment securities is based on quoted market
prices.
Loans. The estimated fair value of the loan portfolio is based on present values
using applicable spreads to the U.S. treasury yield 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 deposit 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.
Accrued interest. The carrying amount of accrued interest approximates fair
value.
December 31,
------------------------------------------
2001 2000
----------------- ------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------
Financial assets:
Cash and short-term investments $ 11,057 $ 11,057 $ 14,838 $ 14,838
Securities 53,952 53,952 66,594 67,336
Net loans 246,112 255,110 229,944 230,334
Loans held for sale, net 69,263 70,166 17,600 17,984
Accrued interest receivable 2,134 2,134 2,404 2,404
Financial liabilities:
Demand deposits 169,998 170,802 153,301 154,325
Time deposits 153,914 156,115 137,387 137,505
Borrowings 27,204 27,190 13,969 13,969
Accrued interest payable 811 811 993 993
Off-balance-sheet items:
Letters of credit -- 3,943 -- 5,016
Unused portions of lines of credit -- 70,374 -- 54,428
- -----------------------------------------------------------------------------------
The Corporation assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Corporation's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Corporation. Management attempts to match maturities of assets and liabilities
to the extent believed necessary to manage interest rate risk. However,
borrowers with fixed rate obligations are less likely to prepay in a rising rate
environment and more likely to prepay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely
38
to withdraw funds before maturity in a rising rate environment and less likely
to do so in a falling rate environment. Management monitors rates and maturities
of assets and liabilities and attempts to minimize interest rate risk by
adjusting terms of new loans and deposits and by investing in securities with
terms that mitigate the Corporation's overall interest rate risk.
NOTE 16: Business Segments
The Corporation 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 Corporation also has an
investment company, an insurance company and a title company subsidiary which
derive revenues from brokerage, insurance 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 years ended December 31, 2001, 2000, and 1999.
Year Ended December 31, 2001
-------------------------------------------
Retail Mortgage
(Dollars in thousands) Banking Banking Other Eliminations Consolidated
- -------------------------------------------------------------------------------------------------
Revenues:
Interest income $ 26,848 $ 2,931 $ -- $ (1,545) $ 28,234
Gain on sale of loans -- 10,390 -- -- 10,390
Other 3,340 2,690 1,001 -- 7,031
- -------------------------------------------------------------------------------------------------
Total operating income 30,188 16,011 1,001 (1,545) 45,655
- -------------------------------------------------------------------------------------------------
Expenses:
Interest expense 11,984 1,545 -- (1,545) 11,984
Salaries and employee benefits 6,372 6,681 390 -- 13,443
Other 5,465 3,296 160 -- 8,921
- -------------------------------------------------------------------------------------------------
Total operating expenses 23,821 11,522 550 (1,545) 34,348
- -------------------------------------------------------------------------------------------------
Income before income taxes $ 6,367 $ 4,489 $ 451 $ -- $ 11,307
- -------------------------------------------------------------------------------------------------
Total assets $389,426 $74,701 $ 52 $(60,103) $404,076
Capital expenditures $ 6,121 $ 304 $ -- $ -- $ 6,426
=================================================================================================
Year Ended December 31, 2000
------------------------------
Retail Mortgage
(Dollars in Thousands) Banking Banking Other Eliminations Consolidated
- -------------------------------------------------------------------------------------------------
Revenues:
Interest income $ 25,974 $ 1,298 $ -- $ (851) $ 26,421
Gain on sale of loans -- 5,009 -- -- 5,009
Other 2,036 1,183 717 -- 3,936
- -------------------------------------------------------------------------------------------------
Total operating income 28,010 7,490 717 (851) 35,366
- -------------------------------------------------------------------------------------------------
Expenses:
Interest expense 11,309 851 -- (851) 11,309
Salaries and employee benefits 5,829 3,368 406 -- 9,603
Other 4,387 2,283 125 -- 6,795
- -------------------------------------------------------------------------------------------------
Total operating expenses 21,525 6,502 531 (851) 27,707
- -------------------------------------------------------------------------------------------------
Income before income taxes $ 6,485 $ 988 $ 186 $ -- $ 7,659
- -------------------------------------------------------------------------------------------------
Total assets $339,877 $23,946 $ 9 $(16,360) $347,472
Capital expenditures $ 2,361 $ 145 $ -- $ -- $ 2,506
=================================================================================================
39
Year Ended December 31, 1999
----------------------------------------
Retail Mortgage
(Dollars in Thousands) Banking Banking Other Eliminations Consolidated
- ------------------------------------------------------------------------------------
Revenues:
Interest income $ 23,096 $ 1,916 $ -- $ (1,368) $ 23,644
Gain on sale of loans -- 6,692 -- -- 6,692
Other 2,134 1,589 860 -- 4,583
- ------------------------------------------------------------------------------------
Total operating income 25,230 10,197 860 (1,368) 34,919
- ------------------------------------------------------------------------------------
Expenses:
Interest expense 9,068 1,368 -- (1,368) 9,068
Salaries and employee benefits 5,127 3,889 350 -- 9,366
Other 4,586 2,599 149 -- 7,334
- ------------------------------------------------------------------------------------
Total operating expenses 18,781 7,856 499 (1,368) 25,768
- ------------------------------------------------------------------------------------
Income before income taxes $ 6,449 $ 2,341 $ 361 $ -- $ 9,151
- ------------------------------------------------------------------------------------
Total assets $327,877 $24,673 $ 36 (23,345) $329,241
Capital expenditures $ 2,709 $ 158 $ -- $ -- $ 2,867
====================================================================================
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.
NOTE 17: Parent Company Condensed Financial Information
Financial information for the parent company is as follows:
December 31,
---------------------
Balance Sheets 2001 2000
- ------------------------------------------------------------------------------
Assets
Cash $ 92,211 $ 62,073
Securities available for sale 5,468,496 5,034,587
Other assets 2,682,061 2,209,188
Investments in subsidiary 36,695,062 31,620,321
- ------------------------------------------------------------------------------
Total assets $44,937,830 $38,926,169
- ------------------------------------------------------------------------------
Liabilities and shareholders' equity
Other liabilities $ 194,807 $ 145,719
Shareholders' equity 44,743,023 38,780,450
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $44,937,830 $38,926,169
==============================================================================
Year Ended December 31,
-------------------------
Statements of Income 2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Interest income on securities $ 347,529 $ 354,357 $ 339,886
Interest income on loans 162,796 184,000 102,627
Dividends received from bank subsidiary 3,408,649 2,940,632 7,859,692
Distributions in excess of equity in net income of subsidiary -- -- (1,479,099)
Equity in undistributed net income of subsidiary 4,219,625 2,459,459 --
Other income 5,124 94,630 151,153
Other expenses (155,006) (197,047) (218,029)
- -------------------------------------------------------------------------------------------------------
Net income $7,988,717 $5,836,031 $ 6,756,230
=======================================================================================================
40
Year Ended December 31,
----------------------------------
Statements of Cash Flows 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Operating activities:
Net income $7,988,717 $ 5,836,031 $ 6,756,230
Adjustments to reconcile net income to net cash provided by operating
activities:
Distributions in excess of equity in net income of subsidiary -- -- 1,479,099
Equity in undistributed earnings of subsidiary (4,219,625) (2,459,459) --
Increase in other assets (486,288) (237,372) (1,368,443)
Increase in other liabilities 49,088 80,369 219,672
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,331,892 3,219,569 7,086,558
- ----------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities and calls of securities 50,000 811,945 667,249
Purchase of securities (444,455) (1,107,101) (1,107,292)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (394,455) (295,156) (440,043)
- ----------------------------------------------------------------------------------------------------------
Financing activities:
Repurchase of common stock (1,014,320) (1,329,411) (4,909,024)
Dividends paid (2,056,093) (1,910,629) (1,797,092)
Proceeds from the issuance of stock 163,114 131,592 253,887
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,907,299) (3,108,448) (6,452,229)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 30,138 (184,035) 194,286
Cash at beginning of year 62,073 246,108 51,822
- ----------------------------------------------------------------------------------------------------------
Cash at end of year $ 92,211 $ 62,073 $ 246,108
- ----------------------------------------------------------------------------------------------------------
NOTE 18: Quarterly Condensed Statements of Income--Unaudited
2001 Quarter Ended
----------------------------------
Dollars in thousands (except per share) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------
Total interest income $ 6,915 $ 7,222 $ 7,095 $ 7,002
Net interest income after provision for loan losses 3,667 3,924 4,014 4,245
Other income 2,958 3,882 4,436 6,145
Other expenses 4,626 5,196 5,460 6,682
Income before income taxes 1,999 2,610 2,990 3,708
Net income 1,497 1,866 2,090 2,536
Earnings per common share--assuming dilution $ .42 $ .52 $ .58 $ .71
Dividends per common share .14 .14 .15 .15
- -----------------------------------------------------------------------------------------------------------
2000 Quarter Ended
----------------------------------
Dollars in thousands (except per share) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------
Total interest income $ 6,147 $ 6,461 $ 6,830 $ 6,983
Net interest income after provision for loan losses 3,619 3,662 3,754 3,677
Other income 2,068 2,306 2,407 2,164
Other expenses 3,922 4,149 4,014 3,913
Income before income taxes 1,765 1,819 2,147 1,927
Net income 1,369 1,398 1,615 1,454
Earnings per common share--assuming dilution $ .37 $ .38 $ .45 $ .40
Dividends per common share .13 .13 .13 .14
- ----------------------------------------------------------------------------------------------------------
41
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
[LOGO YHB]
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, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years ended December 31, 2001, 2000 and 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of C&F Financial
Corporation and Subsidiary as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for the years ended December 31, 2001,
2000 and 1999, in conformity with accounting principles generally accepted in
the United States of America.
Yount, Hyde & Barbour, P.C.
January 15, 2002
Winchester, Virginia
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None.
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 3 through 4 of the 2002 Proxy Statement, which
is attached hereto as Exhibit 99, under the caption, "Election of Directors," is
incorporated herein by reference. The information required by Section 16(a)
reporting requirements with respect to Directors and Executive Officers is
contained on page 13 of the 2002 Proxy Statement, which is attached hereto as
Exhibit 99, under the caption, "Section 16(a) Beneficial Ownership Reporting
Compliance," is incorporated herein by reference.
The information in the following table pertains to the executive officers
of the Corporation:
Executive Officers of C&F Financial Corporation
Name (Age) Business Experience Number of Shares Beneficially
Present Position During Past Five Years Owned as of February 26, 2002
- ---------------------- ------------------------------------- -------------------------------
Larry G. Dillon (49) President of the Bank since 1989 46,202 (1)
Chairman, President and
Chief Executive Officer
Gari B. Sullivan (64) Senior Vice President of the Bank since 1990 3,237 (1)
Secretary
Thomas F. Cherry (33) Promoted to Senior Vice President of the Bank in 5,700 (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
(1) Includes exercisable options of 17,700, 1,500, and 5,500 held by Messrs.
Dillon, Sullivan, and Cherry, respectively.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information contained on pages 5 through 7 of the 2002 Proxy
Statement, which is attached hereto as Exhibit 99, under the caption, "Executive
Compensation," is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information contained on page 2 of the 2002 Proxy Statement, which is
attached hereto as Exhibit 99, under the caption, "Security Ownership of Certain
Beneficial Owners and Management," is incorporated herein by reference.
43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information contained on page 5 of the 2002 Proxy Statement, which is
attached hereto as Exhibit 99, under the caption, "Interest of Management In
Certain Transactions," is incorporated herein by reference.
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. 10: Material Contracts
10.1 Employment agreement dated December 16, 1997 between
C&F Financial Corporation and Larry Dillon filed as
Exhibit No. 10 to Form 10K filed March 23, 1998, of
C&F Financial Corporation is incorporated herein by
reference.
10.2 Employment agreement dated August 1, 1999 between C&F
Financial Corporation and Tom Cherry filed as Exhibit
No. 10 to Form 10K filed March 28, 2000, of C&F
Financial Corporation is incorporated herein by
reference.
10.3 C&F Executive Deferred Compensation Plan
10.4 C&F Financial Corporation 1994 Executive Stock Option
Plan filed as Exhibit 4.3 to Form S-8 filed May 1,
2000 is incorporated herein by reference.
10.5 C&F Financial Corporation 1998 Non-Employee Director
Stock Compensation Plan filed as Exhibit 4.3 to Form
S-8 filed September 18, 1998 is incorporated herein by
reference.
Exhibit No. 13: C&F Financial Corporation 2001 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.
Exhibit No. 99: Additional Exhibits
99.1 C&F Financial Corporation 2002 Annual Meeting Proxy
Statement
14 (b) Reports on Form 8-K filed in the fourth quarter of 2001:
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 14a-3(b).
44
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
- --------------------------------------- ------------------------------
Larry G. Dillon Thomas F. Cherry
Chairman, President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
Date: March 15, 2002 Date: March 15, 2002
- --------------------------------------- ------------------------------
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 15, 2002
- --------------------------------------- ------------------------------
J. P. Causey Jr., Director
/s/Barry R. Chernack Date: March 15, 2002
- --------------------------------------- ------------------------------
Barry R. Chernack, Director
/s/ Larry G. Dillon Date: March 15, 2002
- --------------------------------------- ------------------------------
Larry G. Dillon, Director
/s/ James H. Hudson III Date: March 15, 2002
- --------------------------------------- ------------------------------
James H. Hudson III, Director
/s/ Joshua H. Lawson Date: March 15, 2002
- --------------------------------------- ------------------------------
Joshua H. Lawson, Director
/s/ William E. O'Connell Jr. Date: March 15, 2002
- --------------------------------------- ------------------------------
William E. O'Connell Jr., Director
/s/ Paul C. Robinson Date: March 15, 2002
- --------------------------------------- ------------------------------
Paul C. Robinson, Director
45