FIVE YEAR FINANCIAL SUMMARY
- - ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------
Selected Year-End Balances:
Total assets $278,105,969 $256,671,312 $238,995,329 $189,672,758 $181,803,801
Total capital 31,800,533 32,214,509 31,818,296 28,809,166 26,724,571
Total loans (net) 154,744,620 136,732,017 110,012,320 102,649,919 101,687,193
Total deposits 231,513,152 216,422,556 204,001,334 158,811,959 153,751,531
- - ------------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest income 19,763,048 18,332,998 15,686,897 13,649,428 13,631,633
Interest expense 8,002,301 7,667,619 6,526,880 4,861,516 4,693,360
- - ------------------------------------------------------------------------------------------------------------------------
Net interest income 11,760,747 10,665,379 9,160,017 8,787,912 8,938,273
Provision for loan losses 330,000 30,000 -- 7,831 500,000
- - ------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan
losses 11,430,747 10,635,379 9,160,017 8,780,081 8,438,273
Other income 6,657,608 4,678,915 1,233,267 996,654 805,208
Operating expenses 11,537,565 10,294,220 6,126,722 4,867,502 4,776,934
- - ------------------------------------------------------------------------------------------------------------------------
Income before taxes 6,550,790 5,020,074 4,266,562 4,909,233 4,466,547
Income tax expense 1,613,963 958,900 890,630 1,170,839 1,020,335
- - ------------------------------------------------------------------------------------------------------------------------
Net income $ 4,936,827 $ 4,061,174 $ 3,375,932 $ 3,738,394 $ 3,446,212
- - ------------------------------------------------------------------------------------------------------------------------
Per share(1)
Earnings per common share --
assuming dilution $2.50 $1.84 $1.51 $1.67 $1.55
Dividends .70 .61 .59 .55 .49
- - ------------------------------------------------------------------------------------------------------------------------
Weighted average number of
shares -- assuming dilution 1,976,378 2,213,000 2,236,478 2,233,953 2,231,540
- - ------------------------------------------------------------------------------------------------------------------------
(1) Per share data has been restated to reflect the two-for-one stock split in
March, 1994.
SIGNIFICANT RATIOS
- - ----------------------------------------------------------------------------------------------
1997 1996 1995
- - ----------------------------------------------------------------------------------------------
Return on average assets 1.90% 1.65% 1.60%
Return on average equity 16.08 12.66 11.08
Dividend payout ratio 27.75 33.62 38.97
Average equity to average assets 11.81 13.06 14.44
- - ----------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of the
results of operations and financial condition, liquidity, and capital resources
of C&F Financial Corporation and subsidiary (the "Corporation"). This discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements.
Overview
Net income totaled $4.9 million in 1997, an increase of 21.6% over 1996. In
1996, net income totaled $4.1 million, a 20.3% increase over 1995. Earnings per
share were $2.50, $1.84, and $1.51 in 1997, 1996, and 1995, respectively. The
increase in earnings per share was a result of higher net income and the
repurchase of 119,803 shares of the Corporation's Common Stock in October of
1996 and 204,683 shares of the Corporation's Common Stock on April 4, 1997.
Profitability as measured by the Corporation's return on average equity (ROE)
was 16.08% in 1997, up from 12.66% in 1996, and 11.08% in 1995. Another key
indicator of performance, the return on average assets (ROA) for 1997 was 1.90%,
compared to 1.65% and 1.60% for 1996 and 1995, respectively.
13
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, 1997, 1996 and 1995. In addition, the amounts of interest earned on
earning assets, with related yields and interest on interest-bearing
liabilities, together with the rates, are shown. Loans include loans held for
sale. Also, loans placed on a non-accrual status are included in the balances
and were included in the computation of yields, upon which they had an
immaterial effect. Interest on tax-exempt securities is on a taxable equivalent
basis, which was computed using the federal corporate income tax rate of 34% for
all three years.
- - -------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------ ------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- - -------------------------------------------------------------------------------------------------------------
Assets
Securities:
Taxable $ 37,309 $ 2,737 7.34% $ 49,102 $ 3,595 7.32% $ 54,858 $ 3,940 7.18%
Tax-exempt 39,554 3,388 8.57 41,015 3,629 8.85 28,967 2,658 9.18
- - -------------------------------------------------------------------------------------------------------------
Total securities 76,863 6,125 7.97 90,117 7,224 8.02 83,825 6,598 7.87
Loans, net 165,168 14,656 8.87 136,089 12,139 8.92 107,422 9,640 8.97
Interest-bearing deposits
in other banks 1,251 68 5.44 3,178 172 5.41 3,660 214 5.85
Federal funds sold -- -- -- -- -- -- 2,423 139 5.74
- - -------------------------------------------------------------------------------------------------------------
Total earning assets 243,282 $20,849 8.57% 229,384 $19,535 8.52% 197,330 $16,591 8.41%
Reserve for loan losses (2,032) (1,915) (1,912)
Total non-earning assets 18,708 18,384 15,419
- - -------------------------------------------------------------------------------------------------------------
Total assets $259,958 $245,853 $210,837
- - -------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Time and savings deposits:
Interest-bearing
deposits $ 34,594 $ 890 2.57% $ 33,256 $ 891 2.68% $ 31,369 $ 902 2.88%
Money market deposits 23,416 767 3.28 20,468 671 3.28 18,946 639 3.37
Savings accounts 33,037 1,058 3.20 31,550 986 3.13 28,266 898 3.18
Certificates of deposit,
$100M or more 14,137 466 3.30 13,774 488 3.54 10,227 392 3.83
Other certificates of
deposit 82,655 4,493 5.44 80,412 4,418 5.49 67,391 3,668 5.44
- - -------------------------------------------------------------------------------------------------------------
Total time and
savings deposits 187,839 7,674 4.09 179,460 7,454 4.15 156,199 6,499 4.16
- - -------------------------------------------------------------------------------------------------------------
Borrowings 6,441 328 5.09 4,505 214 4.75 848 28 3.30
- - -------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 194,280 8,002 4.12 183,965 7,668 4.17 157,047 6,527 4.16
- - -------------------------------------------------------------------------------------------------------------
Demand deposits 31,449 26,741 20,749
Other liabilities 3,533 3,046 2,586
- - -------------------------------------------------------------------------------------------------------------
Total liabilities 229,262 213,752 180,382
Shareholders' equity 30,696 32,101 30,455
- - -------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders'
equity $259,958 $245,853 $210,837
- - -------------------------------------------------------------------------------------------------------------
Net interest income $12,847 $11,867 $10,064
- - -------------------------------------------------------------------------------------------------------------
Interest rate spread 4.45 4.35 4.25
- - -------------------------------------------------------------------------------------------------------------
Interest expense to
average earning assets 3.29 3.34 3.31
- - -------------------------------------------------------------------------------------------------------------
Net interest margin 5.28% 5.17% 5.10%
- - -------------------------------------------------------------------------------------------------------------
14
Results of Operations
Net Interest Income
During 1997, net interest income, on a tax equivalent basis, increased 8% to
$12.8 million from $11.9 million in 1996. Interest income was up $1.3 million
and interest expense was up $334,000. The increase in interest income was
primarily due to a 21.4% increase in average outstanding loans. This was
partially offset, however, by a 14.7% decline in securities. This decline is due
to both securities being called as well as to management's strategic decision to
invest more funds into higher yielding loans. For 1997, the average yield on
earning assets increased slightly to 8.57% from 8.52% in 1996. The average
balance of interest bearing liabilities increased 5.6% while the rate paid on
these liabilities decreased to 4.12% from 4.17% in 1996.
The Corporation's net interest margin increased to 5.28% in 1997 from 5.17% in
1996. This increase was a result of an increase in the Corporation's interest
rate spread to 4.45% for 1997 from 4.35% in 1996. The increase in the interest
rate spread was mainly attributed to the increase in higher yielding loans
offset by the decrease in lower yielding securities. Also, the cost of interest
bearing liabilities decreased slightly to 4.12% in 1997 from 4.17% in 1996.
Net interest income in 1996, on a tax equivalent basis, increased 16.8% to $11.9
million from $10.1 million in 1995. This was a result of a $2.9 million increase
in interest income which exceeded a $1.1 million increase in interest expense.
This was largely due to an approximate 16% increase in average earning assets
and an increase in the yield on average earning assets to 8.52% in 1996 from
8.41% in 1995. The rate paid on interest-bearing liabilities increased slightly
in 1996 to 4.17% from 4.16% in 1995. The increase in average earning assets was
funded by the approximate 15% growth in deposits during 1996. The increase in
the yield on average earning assets was a result of the investment of the
majority of the deposit growth in higher yielding loans rather than lower
yielding securities.
The Corporation's net interest margin increased slightly in 1996 to 5.17% from
5.10% in 1995. This was a result of a slight increase in the interest rate
spread of .10%. The increase in the interest rate spread is a result of
management's efforts to invest available funds into higher yielding loans rather
than securities and to manage the cost of deposits.
TABLE 2: RATE-VOLUME RECAP
Interest income and expense are affected by fluctuations in interest rates, by
changes in the volumes of earning assets and interest-bearing liabilities and by
the interaction of rate and volume factors. The following analysis shows the
direct causes of the year-to-year changes in the components of net interest
earnings on a taxable equivalent basis. The rate and volume variances are
calculated by a formula prescribed by the Securities and Exchange Commission.
Rate/volume variances, the third element in the calculation, are not shown
separately, but are allocated to the rate and volume variances in proportion to
the relationship of the absolute dollar amounts of the change in each. Loans
include both non-accrual loans and loans held for sale.
15
- - ----------------------------------------------------------------------------------------------------------
1997 from 1996 1996 from 1995
- - ----------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
------------------- Total ------------------- Total
Due to Increase Due to Increase
(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
- - ----------------------------------------------------------------------------------------------------------
Interest income:
Loans $2,581 $ (64) $ 2,517 $2,557 $ (58) $2,499
Investment securities:
Taxable (865) 7 (858) (420) 75 (345)
Tax-exempt (127) (114) (241) 1,069 (98) 971
- - ----------------------------------------------------------------------------------------------------------
Total investment securities (992) (107) (1,099) 649 (23) 626
- - ----------------------------------------------------------------------------------------------------------
Federal funds sold -- -- -- (69) (70) (139)
Interest-bearing deposits in other banks (105) 1 (104) (27) (15) (42)
- - ----------------------------------------------------------------------------------------------------------
Total interest income 1,484 (170) 1,314 3,110 (166) 2,944
- - ----------------------------------------------------------------------------------------------------------
Interest expense:
Time and savings deposits:
Interest-bearing deposits 35 (36) (1) 53 (64) (11)
Money market deposit accounts 97 (1) 96 50 (18) 32
Savings accounts 47 25 72 102 (14) 88
Certificates of deposit, $100M or more 13 (35) (22) 128 (32) 96
Other certificates of deposit 122 (47) 75 715 35 750
- - ----------------------------------------------------------------------------------------------------------
Total time and savings deposits 314 (94) 220 1048 (93) 955
Other borrowings 98 16 114 169 17 186
- - ----------------------------------------------------------------------------------------------------------
Total interest expense 412 (78) 334 1,217 (76) 1,141
- - ----------------------------------------------------------------------------------------------------------
Change in net interest income $1,072 $ (92) $ 980 $1,893 $ (90) $1,803
- - ----------------------------------------------------------------------------------------------------------
Interest Sensitivity
An important element of earnings performance and the maintenance of sufficient
liquidity is proper management of the interest sensitivity position ("GAP") of
the Bank. The interest sensitivity GAP is the difference between interest
sensitive assets and interest sensitive liabilities in a specific time interval.
This GAP can be managed by repricing assets and liabilities, which can be
affected by replacing an asset or liability at maturity or by adjusting the
interest rate during the life of the asset or liability. Matching the amounts of
assets and liabilities maturing in the same interval helps to reduce interest
rate risk and to minimize the impact on net interest income in periods of rising
or falling rates.
The Corporation's Asset Liability Committee (the "ALM Committee") reviews
financial data and sets asset-liability management goals and objectives. The ALM
Committee uses computer simulations to measure the effect of various interest
rate scenarios on net interest income. This modeling reflects interest rate
changes and the related impact on net income over specified time horizons.
The Corporation's interest rate sensitivity at December 31, 1997 reflects that
it is positioned more favorably for a lower interest rate environment. At
December 31, 1997, the net interest earning assets and interest-bearing
liabilities repricing in a one-year period as a percent of earning assets was a
cumulative net liability sensitivity of 20.02%. In other words, based on the
December 31, 1997 balance sheet, the amount of liabilities repricing in 1998 in
excess of the amount of assets repricing in 1998, will be $51,545 million, or
20.02% of all earning assets.
TABLE 3: INTEREST SENSITIVITY ANALYSIS
The interest sensitivity position is indicated by the volume of rate sensitive
assets less rate sensitive liabilities. This difference is generally referred to
as the interest sensitivity gap. The nature of the gap indicates how future
interest rate changes may affect net interest income. The table below shows the
Corporation's interest sensitivity position at December 31, 1997. Loans placed
on a non-accrual status are not included in the balances. Repricing dates may
differ from maturity dates for certain assets due to prepayment assumptions.
16
- - ------------------------------------------------------------------------------------------------------------
Interest Sensitive Periods
Within 91-365 1-5 Over
(Dollars in thousands) 90 Days Days Years 5 Years Total
- - ------------------------------------------------------------------------------------------------------------
December 31, 1997 Earning assets:
Loans, net of unearned income $ 74,204 $ 9,741 $ 48,745 $ 48,270 $ 180,960
Securities 3,252 3,398 9,185 59,590 75,425
Federal funds sold and
other short-term investments 1,027 -- -- -- 1,027
- - ------------------------------------------------------------------------------------------------------------
Total earning assets 78,483 13,139 57,930 107,860 257,412
- - ------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing transaction accounts 7,664 15,328 15,327 -- 38,319
Savings accounts 6,658 13,316 13,315 -- 33,289
Money market deposit accounts 4,699 9,399 9,399 -- 23,497
Certificates of deposit, $100M or more 3,650 8,804 2,988 -- 15,442
Other certificates of deposit 18,895 45,418 21,358 -- 85,671
Borrowings 9,336 -- -- -- 9,336
- - ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 50,902 92,265 62,387 -- 205,554
- - ------------------------------------------------------------------------------------------------------------
Period gap 27,581 (79,126) (4,457) 107,860 --
Cumulative gap $ 27,581 $(51,545) $(56,002) $ 51,858 --
Ratio of cumulative gap to
total earning assets 10.71% (20.02)% (21.76)% 20.15% --
- - ------------------------------------------------------------------------------------------------------------
Non-Interest Income
1997 vs. 1996
Non-interest income increased by $2.0 million or 42.3% over 1996. The majority
of increase was attributed to an approximate $1.4 million increase in gain on
the sale of loans resulting from an increase in loan production at C&F Mortgage
Corporation (the "Mortgage Corporation"). Loan closings totaled $286 million in
1997 compared to $174 million in 1996, and $2 million in 1995. Other service
charges and fees increased $322,000, or 48.4% over 1996 due to increased
activity at both Citizens and Farmers Bank (the "Bank") and the Mortgage
Corporation. At the Mortgage Corporation, the increase is directly correlated to
the increase in loan closings, while at the Bank the increase was attributed to,
among other things, fees associated with the Bank's "check" and credit card
programs as well as letter of credit fees. Other income increased by $258,000,
or 75%, over 1996 primarily the result of improvements at all three of the
Bank's subsidiaries. At the Mortgage Corporation, the increase was again
directly related to loan production; during 1997, C&F Investment Services, Inc.
saw an increase in income as a result of stronger demand for their services both
from current customers as well as many new ones. In January 1997, the Bank and
Mortgage Corporation joined together to form the Corporation's own title agency
using its subsidiary, C&F Title Agency, Inc. (the "Title Agency"). Prior to
this, the Title Agency owned a small portion of a jointly owned agency; however,
that partial ownership interest was sold and a wholly owned agency was formed.
With the amount of loan production at both the Bank and the Mortgage
Corporation, owning our own title agency made sense from an income standpoint
and a service one. The first full year of operations for the Title Agency has
proven this decision to be a good one.
1996 vs. 1995
Non-interest income increased by $3.4 million, or 279.4% over 1995. Gain on the
sale of loans increased by $2.7 million or 100% over 1995. The Mortgage
Corporation started business in December of 1995. As such, 1996 was the first
full year of operations. Loan closings at the Mortgage Corporation totaled $174
million in 1996 compared to $2 million in 1995. Service charges on deposit
accounts increased $146,000, or 17.5% over 1995 due largely to an increase in
overdraft fee income, the result of overall deposit growth. Other service
charges and fees increased $433,000, or 186.1%, over 1995. This increase can be
attributed to fees charged in connection with the origination of loans at the
Mortgage Corporation which increased by $356,000 during 1996. Other income
increased by $179,000, or 109.0%, over 1995. This increase, among other things,
was a result of an increase in title insurance fees and in fees generated by C&F
Investment Services, Inc.
17
Non-Interest Expense
1997 vs. 1996
Non-interest expense increased $1.2 million, or 12.1%, over 1996. $358,000 of
this increase resulted from increased salaries and employee benefits costs. The
majority of this increase can be attributed to general pay increases along with
the addition of new employees.
Other expenses increased by $912,000. At the Mortgage Corporation, other
expenses increased by $493,000 which was a result of increased loan closings
during 1997. At the Bank, other expenses increased by approximately $245,000.
This increase was a result of, among other things, increased employee training
costs, costs associated with the Bank's "check" and credit card programs and
costs associated with technology. During the year, the Bank upgraded the
majority of the personal computers used by its employees and also incurred costs
associated with the year 2000 issue. Other expenses also increased as a result
of general corporate expenses. During 1997, the Corporation incurred expenses
associated with listing on the Nasdaq National Market System and other expenses
relating to increasing the awareness of the Corporation's stock.
The Bank utilizes and is dependent upon data processing systems and software to
conduct its business. The data processing systems include various software
packages licensed to the Bank by outside vendors and a mainframe processing
system which are run on in-house computer networks. In 1997, the Bank initiated
a review and assessment of all hardware and software to confirm that it will
function properly in the year 2000. The Bank's mainframe software vendor and the
majority of the other vendors which have been contacted have indicated that
their hardware and/or software will be Year 2000 compliant. Testing will be
performed for compliance. While there may be some additional expenses incurred
during the next two years, Year 2000 compliance is not expected to have a
material effect on the Corporation's consolidated financial statements.
1996 vs. 1995
Non-interest expense increased $4.2 million or 68.0%, in 1996 over 1995. $2.7
million of this increase resulted from salaries and employee benefits with $2.1
million of this increase related to the Mortgage Corporation. As previously
mentioned, 1996 was the first full year of operations for the Mortgage
Corporation. Another $300,000 of this increase is a result of the new branches
opened and acquired during 1995. The Corporation opened one new branch and
acquired two branches during 1995. 1996 was also the first full year of
operation for these branches. The remaining increase is attributed to general
pay increases and continued growth of the Corporation.
Occupancy expense increased $741,000, or 69.9%, over 1995. Occupancy expenses at
the Mortgage Corporation increased $454,000. The majority of the remainder of
the increase is attributable to increases in depreciation expense and expenses
associated with computer hardware and software maintenance contracts. As
previously mentioned, two branches were acquired and one new branch was opened
during 1995. 1996 was the first full year of depreciation associated with these
branches. In addition, the Bank purchased a new mainframe computer and installed
five new ATMs during 1996. This attributed to both higher depreciation and
maintenance costs.
Goodwill amortization increased $221,000, or 359.3%, over 1995. This was a
result of a full year's amortization of the goodwill associated with the two
branches acquired in 1995 and the additional amortization of goodwill associated
with the deposits purchased during 1996.
Bank stock tax decreased $163,000, or 44.3%, over 1995. The bank stock tax for
1996 is more in line with the 1994 expense. In 1995, the bank stock tax
increased due to a re-calculation of the previous three years' state returns
which resulted in taxes being due. FDIC premiums decreased $183,000, or 98.9%,
over 1995 as a result of premium rate reductions.
Other expenses increased $812,000, or 66.6%, over 1995. $591,000 of this
increase is attributed to the Mortgage Corporation. The remaining increase can
be attributed to an increase in marketing expense and overall growth of the
Corporation. The Corporation engaged in a major advertising campaign during 1996
in an effort to attract new customers in its current trade areas.
18
Income Taxes
Applicable income taxes on 1997 earnings amounted to $1,614,000, resulting in an
effective tax rate of 24.6% compared to $959,000, or 19.0%, in 1996, and
$891,000, or 20.9%, in 1995. The increase in the effective tax rate is a result
of the increase in earnings subject to a 34% tax rate versus earnings subject to
no taxes such as certain loans to municipalities or investments in obligations
of state and political subdivisions.
TABLE 4: ALLOWANCE FOR LOAN LOSSES
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------
Reserve, beginning of period $ 1,927 $ 1,914 $ 1,895 $ 1,895 $ 1,441
Provision for loan losses 330 30 -- 8 500
Loans charged off:
Real estate - mortgage 12 -- -- 18 5
Real estate - construction -- -- -- -- --
Commercial, financial and agricultural 3 4 4 7 14
Consumer 12 25 4 1 33
- - -------------------------------------------------------------------------------------------------------------
Total loans charged off 27 29 8 26 52
Recoveries of loans previously charged off:
Real estate - mortgage -- 1 19 -- --
Real estate - construction -- -- -- -- --
Commercial, financial and agricultural -- 11 -- 8
Consumer 4 -- 8 10 6
- - -------------------------------------------------------------------------------------------------------------
Total recoveries 4 12 27 18 6
Net loans charged off 23 17 (19) 8 46
- - -------------------------------------------------------------------------------------------------------------
Balance, end of period $ 2,234 $ 1,927 $ 1,914 $ 1,895 $ 1,895
- - -------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average total loans
outstanding during period .01% .01% .01% .01% .05%
- - -------------------------------------------------------------------------------------------------------------
TABLE 5: ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for loan losses is a general allowance applicable to all loan
categories; however, management has allocated the allowance to provide an
indication of the relative risk characteristics of the loan portfolio. The
allocation is an estimate and should not be interpreted as an indication that
charge-offs in 1998 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) 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------
Allocation of allowance for possible loan losses,
end of year:
- - -------------------------------------------------------------------------------------------------------------
Real estate - mortgage $ 692 $ 873 $ 786 $ 751 $ 698
Real estate - construction 89 69 34 26 51
Commercial, financial and agricultural 926 733 352 260 236
Equity lines 71 62 60 62 65
Consumer 167 160 93 69 51
Unallocated 289 30 589 727 794
- - -------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 2,234 $ 1,927 $ 1,914 $ 1,895 $ 1,895
- - -------------------------------------------------------------------------------------------------------------
Ratio of loans to total year-end loans:
Real estate - mortgage 57% 62% 70% 71% 68%
Real estate - construction 3 2 2 1 3
Commercial, financial and agricultural 31 26 19 19 20
Equity lines 4 5 5 6 6
Consumer 5 5 4 3 3
- - -------------------------------------------------------------------------------------------------------------
100% 100% 100% 100% 100%
- - -------------------------------------------------------------------------------------------------------------
19
Asset Quality-Allowance/Provision For Loan Losses
The allowance is to provide for potential losses inherent in the loan portfolio.
Among other factors, management considers the Corporation's historical loss
experience, the size and composition of the loan portfolio, the value and
adequacy of collateral and guarantors, non-performing credits, and current and
anticipated economic conditions. There are additional risks of future loan
losses which cannot be precisely quantified or attributed to particular loans or
classes of loans. Since those risks include general economic trends as well as
conditions affecting individual borrowers, the allowance for loan losses is an
estimate. The allowance is also subject to regulatory examinations and
determination as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer banks identified by regulatory agencies.
In 1997, the Corporation had $330,000 in provision expense compared to $30,000
in provision expense in 1996 and no provision expense in 1995. The increase in
provision is a result of management's recognition of risks associated with the
reduction in residential real estate loans and increasing the volume of
commercial and commercial real estate loans. Loans charged off during 1997
amounted to $27,000 compared to $29,000 in 1996 and $8,000 in 1995. Recoveries
amounted to $4,000, $12,000, and $27,000 in 1997, 1996, and 1995, respectively.
The ratio of net charge-offs to average outstanding loans was .01% in 1997,
1996, and 1995. Management feels that the reserve is adequate to absorb any
losses on existing loans which may become uncollectible. Table 4 presents the
Corporation's loan loss and recovery experience for the past five years.
Non-Performing Assets
Total non-performing assets, which consist of the Corporation's non-accrual
loans and real estate owned was $941,000 at December 31, 1997, an increase of
$416,000 from December 31, 1996. The increase over 1996 was a result of a
$444,000 loan which was foreclosed on by the Mortgage Corporation. The property
which collateralizes the loan is for sale and no significant loss is expected.
The Corporation places a loan on non-accrual status when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of both principal and
interest is doubtful. Corporate policy is to place loans on non-accrual status
if principal or interest is past due for 90 days or more unless the debt is both
well secured and in the process of being collected. For 1997, $37,000 in gross
interest income would have been recorded if non-accrual loans had been current
throughout the period outstanding. For the period ended December 31, 1997,
interest income received on non-accrual loans was $14,000. Table 6 summarizes
non-performing loans for the past five years.
TABLE 6: NON-PERFORMING ASSET ACTIVITY
- - ------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 497 $ 525 $ 907 $1,331 $1,567
Real estate owned 444 -- -- -- --
- - ------------------------------------------------------------------------------------------------------------
Total non-performing assets 941 525 907 1,331 1,567
- - ------------------------------------------------------------------------------------------------------------
Principal and/or interest past due
for 90 days or more $ 768 $ 260 $ 180 $ 412 $1,096
- - ------------------------------------------------------------------------------------------------------------
Non-performing loans to total loans .31% .38% .81% 1.27% 1.55%
Allowance for loan losses to total loans 1.42 1.39 1.71 1.81 1.88
Allowance for loan losses to
non-performing loans 449.30 367.05 211.03 142.37 120.93
Non-performing assets to total assets .34% .20% .38% .70% .86%
- - ------------------------------------------------------------------------------------------------------------
20
Financial Condition
Summary
A financial institution's primary sources of revenue are generated by its
earning assets, while its major expenses are produced by the funding of those
assets with interest-bearing liabilities. Effective management of these sources
and uses of funds is essential in attaining a financial institution's maximum
profitability while maintaining a minimum amount of risk.
At the end of 1997, the Corporation had total assets of $278 million, up 8.4%
over the previous year-end. In 1996, there was an increase of 7.4% in total
assets over year-end 1995. Asset growth in 1997 and 1996 is attributed to
increases in loans held for sale which resulted from increased loan closings at
the Mortgage Corporation and the overall expansion and growth of the
Corporation.
TABLE 7: SUMMARY OF TOTAL LOANS
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------
Real estate - mortgage $ 88,973 $ 86,324 $ 77,924 $ 74,221 $ 69,009
Real estate - construction 4,454 3,415 1,681 1,308 2,554
Commercial, financial and agricultural1 48,737 36,385 21,719 19,379 20,072
Equity lines 7,131 6,180 5,954 6,223 6,496
Consumer 7,683 6,360 4,657 3,457 2,891
- - -------------------------------------------------------------------------------------------------------------
Total loans 156,978 138,664 111,935 104,588 101,022
Less unearned discount -- (5) (9) (43) (96)
Less allowance for possible loan losses (2,233) (1,927) (1,914) (1,895) (1,895)
- - -------------------------------------------------------------------------------------------------------------
Total loans, net $ 154,745 $136,732 $ 110,012 $ 102,650 $ 99,031
- - -------------------------------------------------------------------------------------------------------------
(1) $37.9 million of commercial, financial and agricultural loans are secured
by real estate.
TABLE 8: MATURITY/REPRICING SCHEDULE OF LOANS
- - --------------------------------------------------------------------------------------------------------
December 31, 1997
Commercial, financial Real estate
Dollars in thousands and agricultural construction
- - --------------------------------------------------------------------------------------------------------
Variable Rate:
Within 1 year $ 25,953 $ --
1 to 5 years 10,762 --
After 5 years -- --
Fixed Rate:
Within 1 year 2,065 4,454
1 to 5 years 4,331 --
After 5 years 5,626 --
- - --------------------------------------------------------------------------------------------------------
Loan Portfolio
At December 31, 1997, loans, net of unearned income and reserve for loan losses,
totaled $154.7 million, an increase of 13.2% over the 1996 total of $136.7
million. Net loans increased 24.3% and 7.2% in 1996 and 1995, respectively.
The Corporation's lending activities are its principal source of income. All
loans are attributable to domestic operations. Residential real estate loans,
both construction and permanent, represent the major portion of the
Corporation's loan portfolio although commercial loans continue to increase as a
percentage of total loans. Tables 7 and 8 present information pertaining to the
composition of loans including unearned income and the maturity/repricing of
loans.
21
TABLE 9: MATURITY OF INVESTMENT SECURITIES
- - ------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
--------------- ---------------- ---------------
Weighted Weighted Weighted
Book Average Book Average Book Average
(Dollars in thousands) Value Yield Value Yield Value Yield
- - ------------------------------------------------------------------------------------------------------------
U.S. Government agencies and corporations:
Maturing within 1 year $ 5,500 8.06% $ 2,000 7.20% $ 500 7.10%
Maturing after 1 year, but within 5 years 1,998 7.43 10,585 7.64 20,459 7.32
Maturing after 5 years, but within
10 years 12,498 6.75 23,472 7.09 29,379 7.21
Maturing after 10 years 11,998 7.30 4,000 8.00 3,000 8.00
- - ------------------------------------------------------------------------------------------------------------
Total U.S. Government agencies and
corporations 31,994 7.22 40,057 7.33 53,338 7.29
- - ------------------------------------------------------------------------------------------------------------
U.S. Treasuries:
Maturing within 1 year -- -- -- -- 4,998 6.86
Maturing after 1 year, but within 5 years 2,998 6.63 2,997 6.63 1,996 5.94
Maturing after 5 years, but within 10 years -- -- -- -- 999 8.02
- - ------------------------------------------------------------------------------------------------------------
Total U.S. Treasuries 2,998 6.63 2,997 6.63 7,993 6.45
- - ------------------------------------------------------------------------------------------------------------
State and municipals(1):
Maturing within 1 year 850 10.11 1,525 9.80% 1,508 10.62
Maturing after 1 year, but within 5 years 4,188 9.85 5,544 10.08 6,061 10.08
Maturing after 5 years, but within
10 years 10,666 8.74 9,040 8.76 9,193 9.56
Maturing after 10 years 20,425 8.11 21,680 8.15 17,539 8.25
- - ------------------------------------------------------------------------------------------------------------
Total state and municipals 36,129 8.55 37,789 8.65 34,301 9.06
- - ------------------------------------------------------------------------------------------------------------
Other securities:
Maturing within 1 year 300 8.62 -- -- 500 4.78
Maturing after 1 year, but within 5 years -- -- 300 8.62 300 8.62
- - ------------------------------------------------------------------------------------------------------------
Total other securities 300 8.62 300 8.62 800 6.22
- - ------------------------------------------------------------------------------------------------------------
Total investment securities(2):
Maturing within 1 year 6,650 8.37 3,525 8.32 7,506 7.62
Maturing after 1 year, but within 5 years 9,184 8.29 19,426 8.20 28,816 7.80
Maturing after 5 years, but
within 10 years 23,164 7.63 32,512 7.55 39,571 7.74
Maturing after 10 years 32,423 7.81 25,680 8.13 20,539 8.21
- - ------------------------------------------------------------------------------------------------------------
Total investment securities $71,421 7.87% $ 81,143 7.92% $ 96,432 7.81%
- - ------------------------------------------------------------------------------------------------------------
(1) Yields on tax exempt securities have been computed on a tax-equivalent
basis.
(2) Total investment securities excludes preferred stock at $4,004,000 and
$4,531,000 amortized cost at December 31, 1997 and 1996, respectively, or
$4,296,000 and $4,607,000 estimated fair value at December 31, 1997 and
1996, respectively.
Investment Securities
The investment securities portfolio plays a primary role in the management of
interest rate sensitivity of the Corporation and generates substantial interest
income. In addition, the portfolio serves as a source of liquidity and is used
as needed to meet collateral requirements.
The securities portfolio consists of two components, investment securities held
to maturity and securities available for sale. Securities are classified as
investment securities based on management's intent and the Corporation's
ability, at the time of purchase, to hold such securities to maturity. These
securities are carried at amortized cost. Securities which may be sold in
response to changes in market interest rates, changes in the securities'
prepayment risk, increases in loan demand, general liquidity needs, and other
similar factors are classified as available for sale and are carried at
estimated fair value.
At year-end 1997, total investment securities were $75.4 million, down 12.0%
from $85.7 million at year-end 1996. Securities of U.S. Government agencies and
corporations represent 42.4% of the total securities portfolio, obligations of
state and political subdivisions were 47.9%, U.S. Treasury securities were 4.0%,
preferred stocks were 5.3%, and the remainder, consisting of investment-grade
corporate bonds, totaled .4% at December 31, 1997. The decline in the securities
portfolio is due to both maturities of securities and securities with higher
yields being called because of the falling interest rate environment during
1997. It is management's intention to invest the majority of the proceeds from
the maturities and calls of securities into loans; however, when excess funds
are available, new securities will be purchased.
Table 9 presents information pertaining to the composition of the investment
securities portfolio.
22
TABLE 10: AVERAGE DEPOSITS AND RATES PAID
- - ------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
---------------- ----------------- ----------------
Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
- - ------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits $ 31,449 $ 26,741 $ 20,749
Interest-bearing transaction accounts 34,594 2.57% 33,256 2.68% 31,369 2.88%
Money market deposit accounts 23,416 3.28 20,468 3.28 18,946 3.37
Savings accounts 33,037 3.20 31,550 3.13 28,266 3.18
Certificates of deposit $100,000 or more 14,137 3.30 13,774 3.54 10,227 3.83
Other certificates of deposit 82,655 5.44 80,412 5.49 67,391 5.44
Total interest-bearing deposits 187,839 4.09% 179,460 4.15% 156,199 4.16%
- - ------------------------------------------------------------------------------------------------------------
Total deposits $ 219,288 $ 206,201 $ 176,948
- - ------------------------------------------------------------------------------------------------------------
TABLE 11: MATURITIES OF CERTIFICATES OF DEPOSIT WITH BALANCES $100,000 OR MORE
- - ------------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31, 1997
- - ------------------------------------------------------------------------------------------------------------
3 months or less $ 3,650
3-6 months 2,126
6-12 months 6,678
Over 12 months 2,988
- - ------------------------------------------------------------------------------------------------------------
Total $ 15,442
- - ------------------------------------------------------------------------------------------------------------
Deposits
The Corporation's predominate source of funds is depository accounts. The
Corporation's deposit base is comprised of demand deposits, savings and money
market accounts, and time deposits. The Corporation's deposits are provided by
individuals and businesses located within the communities served.
Total deposits increased $15.1 million, or 7.0%, in 1997 over 1996. In 1997, the
growth by deposit category was a 14.5% increase in non-interest-bearing
deposits, a 3.6% increase in savings and interest-bearing demand deposits, and a
7.8% increase in time deposits. In 1996, total deposits increased $12.4 million,
or 6.1% over 1995. Deposit growth in 1997 was attributed to growth at existing
branch locations. Deposit growth in 1996 was attributed to the acquisition of
$7.8 million in deposits from a Crestar Branch. Table 10 presents the average
deposit balances and average rates paid for the years 1997, 1996, and 1995.
Table 11 details maturities of certificates of deposit with balances of $100,000
and over at December 31, 1997.
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash and due from banks, interest-bearing deposits with banks, federal
funds sold, 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, 1997, cash, securities classified as available for sale, and
federal funds sold were 15.0% of total earning assets, compared to 11.3% at
December 31, 1996.
Additional sources of liquidity available to the Corporation include its
subsidiary Bank's capacity to borrow funds through an established line of credit
with a regional correspondent bank and the Federal Home Loan Bank.
23
Capital Resources
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, and changing competitive conditions
and economic forces. The adequacy of the Corporation's capital is reviewed by
management on an ongoing basis. Management seeks to maintain a capital structure
that will assure an adequate level of capital to support anticipated asset
growth and to absorb potential losses.
On April 4, 1997, the Corporation repurchased 204,683 shares of its common
stock. In addition, the Corporation repurchased a total of 119,803 shares of its
common stock during 1996. These repurchases were made to reduce capital as it
was high relative to the Corporation's asset size.
The Corporation's capital position continues to exceed regulatory requirements.
The primary indicators relied on by bank regulators in measuring the capital
position are the Tier I capital, total risk-based capital, and leverage ratios.
Tier I capital consists of common and qualifying preferred shareholders' equity
less goodwill. Total capital consists of Tier I capital, qualifying subordinated
debt, and a portion of the allowance for loan losses. Risk-based capital ratios
are calculated with reference to risk-weighted assets. The Corporation's Tier I
capital ratio was 14.1% at December 31, 1997, compared to 20.8% at December 31,
1996. The total capital ratio was 15.2% at December 31, 1997, compared to 22.1%
at December 31, 1996. These ratios are in excess of the mandated minimum
requirement of 4% and 8%, respectively.
Shareholders' equity was $31.8 million at year-end 1997 compared to $32.2
million at year-end 1996. The leverage ratio consists of Tier I capital divided
by average assets. At December 31, 1997, the Corporation's leverage ratio was
11.4%, compared to 12.2% at December 31, 1996. Each of these exceeds the
required minimum leverage ratio of 3%. The dividend payout ratio was 27.8%,
33.6%, and 39.0%, in 1997, 1996, and 1995, respectively. During 1997, the
Corporation paid dividends of $0.70 per share, up 14.8% from $0.61 per share
paid in 1996.
The Corporation is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, would have a material effect on the
Corporation's liquidity, capital resources, or results of operations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standards (FAS) 130, "Reporting Comprehensive Income" and FAS 131,
"Disclosures about Segments of an Enterprise and Related Information." FAS 130
mandates that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. FAS
131 requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. It also requires that a
public business enterprise report a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. Both statements are
effective for fiscal years beginning after December 15, 1997. Adoption of these
statements will not impact the Corporation's consolidated financial position,
results of operations or cash flow, and any effect will be limited to the form
and content of its disclosures.
Effects Of Inflation
The effect of changing prices on financial institutions is typically different
from other industries as the Corporation's assets and liabilities are monetary
in nature. Interest rates are significantly impacted by inflation, but neither
the timing nor the magnitude of the changes are directly related to price level
indices. The consolidated financial statements reflect the impacts of inflation
on interest rates, loan demands, and deposits.
Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
The statements contained in this annual report that are not historical facts may
be forward looking statements. The forward looking statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from historical results or those anticipated. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of their dates.
24
CONSOLIDATED BALANCE SHEETS
- - -------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
- - -------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 7,843,788 $ 8,254,573
Interest-bearing deposits in other banks 1,027,023 544,755
- - -------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,870,811 8,799,328
Investment securities - available for sale at fair value,
amortized cost of $29,497,833 and $19,021,635, respectively 29,793,498 18,918,211
Investment securities - held to maturity at amortized cost,
fair value of $47,685,859 and $67,687,235, respectively 45,926,549 66,651,211
Loans held for sale, net 24,479,103 12,284,022
Loans, net 154,744,620 136,732,017
Federal Home Loan Bank stock 1,061,800 856,800
Corporate premises and equipment, net of accumulated
depreciation 6,581,568 6,011,694
Accrued interest receivable 2,195,959 2,270,156
Other assets 4,452,061 4,147,873
- - -------------------------------------------------------------------------------------------------------------
Total assets $278,105,969 $256,671,312
- - -------------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Non-interest-bearing demand deposits $ 35,295,210 $ 30,828,663
Savings and interest-bearing demand deposits 95,105,425 91,828,621
Time deposits 101,112,517 93,765,272
- - -------------------------------------------------------------------------------------------------------------
Total deposits 231,513,152 216,422,556
Borrowings 9,335,687 5,055,275
Accrued interest payable 592,300 541,445
Other liabilities 4,864,297 2,437,527
- - -------------------------------------------------------------------------------------------------------------
Total liabilities 246,305,436 224,456,803
- - -------------------------------------------------------------------------------------------------------------
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,
1,916,190 and 2,113,041 shares issued and outstanding
at December 31, 1997 and 1996, respectively) 1,916,190 2,113,041
Additional paid-in capital 117,692 --
Retained earnings 29,236,260 29,795,739
Net unrealized gain on securities available for sale,
net of tax of $273,232 and $157,497, respectively 530,391 305,729
- - -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 31,800,533 32,214,509
- - -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $278,105,969 $256,671,312
- - -------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF INCOME
- - ------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------
Interest income
Interest and fees on loans $14,656,120 $12,138,668 $ 9,639,988
Interest on money market investments
Federal funds sold -- 678 139,609
Other money market investments 68,399 171, 077 213,647
Interest on investment securities
U.S. Treasury securities 198,883 340,449 551,310
U.S. Government agencies and corporations 2,422,390 3,164,782 3,198,130
Tax-exempt obligations of states and
political subdivisions 2,041,372 2,111,006 1,754,041
Corporate bonds and other 375,884 406,338 190,172
- - ------------------------------------------------------------------------------------------------------------
Total interest income 19,763,048 18,332,998 15,686,897
Interest expense
Savings and interest-bearing deposits 2,715,785 2,548,155 2,439,260
Certificates of deposit, $100,000 or more 465,701 487,543 391,600
Other time deposits 4,492,910 4,417,701 3,667,512
Short-term borrowings and other 327,905 214,220 28,508
- - ------------------------------------------------------------------------------------------------------------
Total interest expense 8,002,301 7,667,619 6,526,880
- - ------------------------------------------------------------------------------------------------------------
Net interest income 11,760,747 10,665,379 9,160,017
Provision for loan losses 330,000 30,000 --
- - ------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 11,430,747 10,635,379 9,160,017
Other operating income
Gain on sale of loans 4,056,340 2,687,629 --
Service charges on deposit accounts 1,012,410 982,752 836,585
Other service charges and fees 987,232 665,390 232,536
Other income 601,626 343,144 164,146
- - ------------------------------------------------------------------------------------------------------------
Total other operating income 6,657,608 4,678,915 1,233,267
Other operating expenses
Salaries and employee benefits 6,332,026 5,973,650 3,233,652
Occupancy expenses 1,798,561 1,800,904 1,060,068
Goodwill amortization 275,160 281,982 61,390
Bank stock tax 186,747 204,457 367,272
Other expenses 2,945,071 2,033,227 1,404,340
- - ------------------------------------------------------------------------------------------------------------
Total other operating expenses 11,537,565 10,294,220 6,126,722
- - ------------------------------------------------------------------------------------------------------------
Income before income taxes 6,550,790 5,020,074 4,266,562
Income tax expense 1,613,963 958,900 890,630
- - ------------------------------------------------------------------------------------------------------------
Net Income $ 4,936,827 $ 4,061,174 $ 3,375,932
- - ------------------------------------------------------------------------------------------------------------
Earnings per common share $ 2.51 $ 1.84 $ 1.52
- - ------------------------------------------------------------------------------------------------------------
Earnings per common share - assuming dilution 2.50 1.84 1.51
- - ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- - -------------------------------------------------------------------------------------------------------------
Net Unrealized
Additional Gain (Loss)
Common Paid-In Retained on Securities
Stock Capital Earnings Available for Sale Total
- - -------------------------------------------------------------------------------------------------------------
Balance January 1, 1995 $ 2,228,394 $ 1,275,452 $ 25,744,763 $ (439,443) $28,809,166
Stock options exercised 2,350 15,045 -- -- 17,395
Net income -- -- 3,375,932 -- 3,375,932
Cash dividends ($.59 per share) -- -- (1,315,525) -- (1,315,525)
Change in unrealized gains and losses
on securities available for sale -- -- -- 931,328 931,328
- - -------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 2,230,744 1,290,497 27,805,170 491,885 31,818,296
Repurchase of common stock (119,803) (1,301,282) (705,418) -- (2,126,503)
Stock options exercised 2,100 10,785 -- -- 12,885
Net income -- -- 4,061,174 -- 4,061,174
Cash dividends ($.61 per share) -- -- (1,365,187) -- (1,365,187)
Change in unrealized gains and losses
on securities available for sale -- -- -- (186,156) (186,156)
- - -------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 2,113,041 -- 29,795,739 305,729 32,214,509
Repurchase of common stock (204,683) -- (4,126,518) -- (4,331,201)
Stock options exercised 7,832 117,692 -- -- 125,524
Net income -- -- 4,936,827 -- 4,936,827
Cash dividends ($.70 per share) -- -- (1,369,788) -- (1,369,788)
Change in unrealized gains and losses
on securities available for sale -- -- -- 224,662 224,662
- - -------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 $ 1,916,190 $ 117,692 $ 29,236,260 $ 530,391 $31,800,533
- - -------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 4,936,827 $ 4,061,174 $ 3,375,932
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation 878,433 860,290 593,573
Amortization of goodwill 275,160 281,982 61,390
Deferred income taxes (320,929) (23,885) 76,647
Provision for loan losses 330,000 30,000 --
Accretion of discounts and amortization of
premiums on investment securities, net (104,715) (92,029) (172,492)
Net realized loss (gain) on securities 7,180 9,427 (21,885)
Gain on sale of corporate premises and equipment -- (17,973) --
Loss on sale of other real estate owned -- -- 3,407
Origination of loans held for sale (286,419,034) (173,881,464) (1,885,028)
Sale of loans 274,223,953 163,482,470 --
Change in other assets and liabilities:
Accrued interest receivable 74,197 169,150 (565,718)
Other assets (373,662) (177,931) (307,030)
Accrued interest payable 50,855 (28,684) 242,895
Other liabilities 2,426,770 1,031,957 1,035,870
- - -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating
activities (4,014,965) (4,295,516) 2,437,561
- - -------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from maturities of investments held to
maturity 25,632,350 16,355,272 12,976,250
Proceeds from sales and maturities of investments
available for sale 8,576,713 9,831,237 3,500,000
Purchase of investment securities held to maturity (4,867,024) (6,097,835) (7,013,711)
Purchase of investments available for sale (19,055,224) (5,219,270) (37,322,896)
Purchase of FHLB stock (205,000) (51,400) (32,500)
Net increase in customer loans (18,342,603) (26,749,697) (7,362,401)
Purchase of corporate premises and equipment (1,618,414) (960,713) (2,435,968)
Proceeds from the sale of corporate
premises and equipment 170,107 27,310 --
Proceeds from sale of other real estate -- -- 55,834
- - -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,709,095) (12,865,096) (37,635,392)
- - -------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase (decrease) in demand, interest-bearing
demand and savings deposits 7,743,351 1,619,262 (6,911,114)
Net increase in time deposits 7,347,245 2,964,659 30,636,645
Assumption of deposit liabilities in branch
acquisition, net of premium paid -- 7,406,802 19,368,958
Net increase in other borrowings 4,280,412 3,855,275 --
Repurchase of common stock (4,331,201) (2,126,503) --
Proceeds from exercise of stock options 125,524 12,885 17,072
Cash dividends (1,369,788) (1,365,187) (1,315,525)
- - -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,795,543 12,367,193 41,796,036
- - -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 71,483 (4,793,419) 6,598,205
Cash and cash equivalents at beginning of year 8,799,328 13,592,747 6,994,542
- - -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,870,811 $ 8,799,328 $ 13,592,747
- - -------------------------------------------------------------------------------------------------------------
Supplemental disclosure
Interest paid $ 7,951,446 $ 7,696,303 $ 6,283,986
Income taxes paid 1,699,427 903,611 960,007
- - -------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary Of Significant Accounting Policies
The accounting and reporting policies of C&F Financial Corporation (the
"Corporation") and subsidiary conform to generally accepted accounting
principles and to predominant practices within the banking industry.
Nature of Operations: C&F Financial Corporation is a bank holding company
incorporated under the laws of the Commonwealth of Virginia. The Corporation
owns all of the stock of its sole subsidiary, Citizens and Farmers Bank (the
"Bank"), which is an independent commercial bank chartered under the laws of the
Commonwealth of Virginia. The Bank offers a wide range of banking services
available to both individuals and small businesses.
The Bank has three wholly-owned subsidiaries, C&F Title Agency, Inc., C&F
Investment Services, Inc., and C&F Mortgage Corporation, all incorporated under
the laws of the Commonwealth of Virginia. C&F Title Agency, Inc., organized in
1992, sells title insurance to the mortgage loan customers of the Bank and C&F
Mortgage Corporation. C&F Investment Services, Inc., organized in April 1995, is
a full-service brokerage firm offering a comprehensive range of investment
services. C&F Mortgage Corporation, organized in September 1995, was formed to
originate and sell residential mortgages.
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of C&F Financial Corporation and its wholly-owned
subsidiary, Citizens and Farmers Bank. All material intercompany accounts and
transactions have been eliminated in consolidation.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities: Investments in debt and equity securities with readily
determinable fair values are classified as either held to maturity, available
for sale, or trading, based on management's intent. Available for sale
securities are carried at estimated fair value with the corresponding unrealized
gains and losses included in shareholders' equity on an after-tax basis.
Securities classified as held to maturity are carried at amortized cost. The
Corporation does not have any securities classified as trading securities. Gains
or losses are recognized only upon realization at the time of sale using the
cost of the specific security sold.
In December 1995, in accordance with a permissible, one-time reclassification of
securities, the Corporation reassessed its liquidity needs and transferred
securities with an amortized cost of $8,985,320 from held to maturity to
available for sale at fair value resulting in a net unrealized gain of $902.
Securities with an amortized cost of $33,163,438 were also transferred from
available for sale to held to maturity at fair value, resulting in a net
unrealized gain of $626,324. This effect has been reflected as a component of
shareholders' equity of $335,252 and $374,313, net of deferred taxes of $172,706
and $192,828 at December 31, 1997 and 1996, respectively. The unrealized gain
will be amortized over the life of each specific investment using the
level-yield method.
Federal Home Loan Bank Stock: Federal Home Loan Bank stock is stated at cost. No
ready market exists for this stock, and it has no quoted market value. For
presentation purposes, such stock is assumed to have market value which is equal
to cost. In addition, such stock is not considered a debt or equity security in
accordance with SFAS 115.
Loans: Loans are stated at face value, net of unearned discount and the
allowance for loan losses. Unearned discount on certain installment loans is
recognized as income over the terms of the loans by a method which approximates
the effective interest method. Interest on other loans is credited to operations
based on the principal amount outstanding. Loans are generally placed on
non-accrual status when the collection of principal or interest is 90 days or
more past due, or earlier, if collection is uncertain based upon an evaluation
of the net realizable value of the collateral and the financial strength of the
borrower. Loans greater than 90 days past due may remain on accrual status if
management determines it has adequate collateral to cover the principal and
interest. For those loans which
29
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.
In 1995, the Bank adopted Statement of Financial Accounting Standard No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), as amended by
SFAS 118. These pronouncements require that an impaired loan be measured based
on the present value of expected future cash flows discounted at the effective
interest rate of the loan, or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The Corporation considers a loan impaired when it is
probable that the Corporation will be unable to collect all interest and
principal payments as scheduled in the loan agreement. A loan is not considered
impaired during a period of delay in payment if the ultimate collectibility of
all amounts due is expected. A valuation allowance is maintained to the extent
that the measure of the impaired loan is less than the recorded investment.
Consistent with the Corporation's method for non-accrual loans, interest
receipts for impaired loans are recognized on the cash basis.
Loans Held for Sale: Loans held for sale are carried at the lower of cost or
market, determined in the aggregate. Market value considers commitment
agreements with investors and prevailing market prices. Substantially all loans
originated by the mortgage banking operations are held for sale to outside
investors.
Reserve for Loan Losses: The reserve for loan losses is established through a
provision for loan losses charged to expense. The reserve represents an amount
which, in management's judgment, will be adequate to absorb any losses on
existing loans which may become uncollectible. Management's judgment in
determining the adequacy of the reserve is based on evaluations of the
collectibility of loans while taking into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions
which may affect a borrower's ability to repay, overall portfolio quality, and
review of specific potential losses. Loans are charged against the reserve for
loan losses when management believes that the collectibility of the principal is
unlikely. Actual future losses may differ from estimates as a result of
unforeseen events.
Other Real Estate Owned: Foreclosed assets held for sale are carried at the
lower of (a) fair value minus estimated costs to sell or (b) cost at the time of
foreclosure. Such determination is made on an individual asset basis. If the
fair value of the asset minus the estimated costs to sell the asset is less than
the cost of the asset, the deficiency is recognized as a valuation allowance. If
the fair value of the asset minus the estimated costs to sell the asset
subsequently increases and the fair value of the asset minus the estimated costs
to sell the asset is more than its carrying amount, the valuation allowance is
reduced, but not below zero. Increases or decreases in the valuation allowance
are charged or credited to income.
Recovery of the carrying value of such real estate is dependent to a great
extent on economic, operating, and other conditions that may be beyond the
Corporation's control.
Corporate Premises and Equipment: Corporate premises and equipment are stated at
cost less accumulated depreciation computed using straight-line and accelerated
methods over the estimated useful lives of the assets. Estimated useful lives
range from 10 to 40 years for buildings and from 3 to 10 years for equipment,
furniture, and fixtures. Maintenance and repairs are charged to expense as
incurred and major improvements are capitalized. Upon sale or retirement of
depreciable properties, the cost and related accumulated depreciation are netted
against proceeds and any resulting gain or loss is reflected in income.
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.
30
Earnings Per Share: In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the Statement No. 128
requirements.
Shareholders' Equity: On April 4, 1997, the Corporation repurchased 204,683
shares of its common stock at a price of $21.00 per share. During 1996 the
Corporation repurchased a total of 119,803 shares of its common stock from three
shareholders in three independently negotiated transactions at a price of $17.75
per share.
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.
31
Note 2: Investment Securities
Debt and equity securities are summarized as follows:
- - -------------------------------------------------------------------------------------------------------------
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available for Sale Cost Gains Losses Value
- - -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 1,998,449 $ 7,177 $ -- $ 2,005,626
U.S. Government agencies and corporations 23,495,722 27,715 (31,234) 23,492,203
Corporate bonds
Preferred stock 4,003,662 292,007 -- 4,295,669
- - -------------------------------------------------------------------------------------------------------------
$29,497,833 $ 326,899 $ (31,234) $29,793,498
- - -------------------------------------------------------------------------------------------------------------
Held to Maturity
- - -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 999,543 $ 68,270 $ -- $ 1,067,813
U.S. Government agencies and corporations 8,498,250 82,321 -- 8,580,571
Obligations of states and political
subdivisions 36,128,774 1,617,875 (11,304) 37,735,345
Corporate bonds 299,982 2,148 -- 302,130
- - -------------------------------------------------------------------------------------------------------------
$45,926,549 $1,770,614 $ (11,304) $47,685,859
- - -------------------------------------------------------------------------------------------------------------
Available for Sale December 31, 1996
- - -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $1,997,202 $ 1,861 $ (938) $ 1,998,125
U.S. Government agencies and corporations 12,494,290 (181,264) 12,313,026
Preferred stock 4,530,143 106,435 (29,518) 4,607,060
- - -------------------------------------------------------------------------------------------------------------
$19,021,635 $ 108,296 $(211,720) $18,918,211
- - -------------------------------------------------------------------------------------------------------------
Held to Maturity
- - -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 999,407 $ 69,031 $ -- $ 1,068,438
U.S. Government agencies and corporations 27,562,617 242,749 (73,427) 27,731,939
Obligations of states and political
subdivisions 37,789,268 954,449 (165,976) 38,577,741
Corporate bonds 299,919 9,198 -- 309,117
- - -------------------------------------------------------------------------------------------------------------
$66,651,211 $1,275,427 $(239,403) $67,687,235
- - -------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without call or prepayment penalties.
- - -------------------------------------------------------------------------------------------------------------
December 31, 1997
Amortized Estimated
Available for Sale Cost Fair Value
- - -------------------------------------------------------------------------------------------------------------
Due in one year or less $ -- $ --
Due after one year through five years 1,998,449 2,005,626
Due after five years through ten years 11,497,881 11,482,532
Due after ten years 11,997,841 12,009,671
- - -------------------------------------------------------------------------------------------------------------
25,494,171 25,497,829
- - -------------------------------------------------------------------------------------------------------------
Preferred Stock 4,003,662 4,295,669
- - -------------------------------------------------------------------------------------------------------------
$29,497,833 $29,793,498
- - -------------------------------------------------------------------------------------------------------------
Held to Maturity
- - -------------------------------------------------------------------------------------------------------------
Due in one year or less $ 6,649,638 $ 6,703,188
Due after one year through five years 7,186,282 7,483,611
Due after five years through ten years 11,665,657 12,191,779
Due after ten years 20,424,972 21,307,281
- - -------------------------------------------------------------------------------------------------------------
$45,926,549 $47,685,859
- - -------------------------------------------------------------------------------------------------------------
32
Proceeds from maturities and the redemption of call provisions of investment
securities held to maturity in 1997 were $25,632,350. There were no realized
gains or losses. Proceeds from maturities and the redemption of call provisions
of investment securities available for sale were $8,576,713, resulting in gross
realized losses of $30,480 and realized gains of $23,300. The amortized cost and
approximate market value of securities pledged to secure public deposits
amounted to $22,175,000 and $22,736,000, respectively, at December 31, 1997.
Proceeds from maturities and the redemption of call provisions of investment
securities held to maturity in 1996 were $16,355,272, resulting in gross
realized gains of $8,936. There were no gross realized losses. Proceeds from
sales and maturities of investment securities available for sale were
$9,831,237, resulting in gross realized losses of $18,363. There were no gross
realized gains.
Proceeds from maturities and the redemption of call provisions of investment
securities held to maturity in 1995 were $12,976,250, resulting in gross
realized gains of $21,885. There were no gross realized losses. Proceeds from
sales and maturities of investment securities available for sale were
$3,500,000. There were no gross realized gains or losses.
Note 3: Loans
Major classifications of loans are summarized as follows:
- - -------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
- - -------------------------------------------------------------------------------------------------------------
Real estate - mortgage $ 89,927,391 $ 87,297,654
Real estate - construction 4,471,803 3,431,934
Commercial, financial and agricultural 48,751,540 36,389,560
Equity lines 7,130,910 6,179,907
Consumer 7,683,157 6,360,390
- - -------------------------------------------------------------------------------------------------------------
157,964,801 139,659,445
Less unearned discount (338) (4,696)
- - -------------------------------------------------------------------------------------------------------------
157,964,463 139,654,749
Less unearned loan fees (986,484) (995,957)
- - -------------------------------------------------------------------------------------------------------------
156,977,979 138,658,792
Less reserve for loan losses (2,233,359) (1,926,775)
- - -------------------------------------------------------------------------------------------------------------
$ 154,744,620 $136,732,017
- - -------------------------------------------------------------------------------------------------------------
Loans on non-accrual status were $497,260 and $525,110 at December 31, 1997 and
1996, respectively. If interest income had been recognized on non-performing
loans at their stated rates during fiscal years 1997, 1996, and 1995, interest
income would have increased by approximately $37,000, $56,000, and $359,000,
respectively. The balance of impaired loans at December 31, 1997 and 1996 was
$497,260 and $525,110, respectively, with no specific valuation allowance
associated with these loans.
Note 4: Reserve For Loan losses
Changes in the reserve for loan losses were as follows:
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
Balance at the beginning of year $1,926,775 $1,914,195 $1,895,340
Provision charged to operations 330,000 30,000 --
Loans charged off (27,430) (29,658) (8,201)
Recoveries of loans previously charged off 4,014 12,238 27,056
- - -------------------------------------------------------------------------------------------------------------
Balance at the end of year $2,233,359 $1,926,775 $1,914,195
- - -------------------------------------------------------------------------------------------------------------
33
Note 5: Corporate Premises And Equipment
Major classifications of corporate premises and equipment are summarized as
follows:
- - -------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
- - -------------------------------------------------------------------------------------------------------------
Land $ 1,213,073 $ 1,138,956
Buildings 4,974,919 4,415,659
Equipment, furniture, and fixtures 6,481,373 5,666,442
- - -------------------------------------------------------------------------------------------------------------
12,669,365 11,221,057
Less accumulated depreciation (6,087,797) (5,209,363)
- - -------------------------------------------------------------------------------------------------------------
$ 6,581,568 $ 6,011,694
- - -------------------------------------------------------------------------------------------------------------
Note 6: Time Deposits
Time deposits are summarized as follows:
- - -------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
- - -------------------------------------------------------------------------------------------------------------
Certificates of deposit, $100,000 or more $ 15,441,597 $ 14,513,548
Other time deposits 85,670,920 79,251,724
- - -------------------------------------------------------------------------------------------------------------
$ 101,112,517 $ 93,765,272
- - -------------------------------------------------------------------------------------------------------------
Remaining maturities on certificates are as follows:
- - ---------------------------------------------------------------------------------
Year Ending December 31,
- - ---------------------------------------------------------------------------------
1998 $ 76,766,915
1999 16,552,196
2000 5,688,583
2001 432,288
2002 1,672,535
- - ---------------------------------------------------------------------------------
$ 101,112,517
- - ---------------------------------------------------------------------------------
Note 7: 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,
1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
Weighted average number of common shares used
in earnings per common share 1,965,144 2,208,549 2,227,223
Effect of dilutive securities:
Stock options 11,234 4,451 9,255
- - -------------------------------------------------------------------------------------------------------------
Weighted average number of common shares used
in earnings per common share -
assuming dilution 1,976,378 2,213,000 2,236,478
- - -------------------------------------------------------------------------------------------------------------
Options on approximately 10,000, 22,800, and 1,600 shares were not included in
computing earnings per common share -assuming dilution for the years ended
December 31, 1997, 1996, and 1995, respectively, because their effects were
antidilutive.
34
Note 8: Income Taxes
Principal components of income tax expense as reflected in the statements of
income are as follows:
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
Current taxes $ 1,934,892 $ 982,785 $ 813,983
Deferred taxes (320,929) (23,885) 76,647
- - -------------------------------------------------------------------------------------------------------------
$ 1,613,963 $ 958,900 $ 890,630
- - -------------------------------------------------------------------------------------------------------------
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
1997 Income 1996 Income 1995 Income
- - -------------------------------------------------------------------------------------------------------------
Income tax computed at Federal
statutory rates $2,227,269 34.0% $1,706,825 34.0% $1,450,631 34.0%
Tax effect of exclusion of interest income
on obligations of states and
political subdivisions (714,061) (10.9) (712,075) (14.2) (601,178) (14.1)
Reduction of interest expense incurred to
carry tax-exempt assets 77,067 1.2 32,862 .6 61,693 1.5
State income taxes, net of federal
tax benefit 22,054 .3 -- -- -- --
Tax effect of dividends received
deduction on preferred stock (66,614) (1.0) (75,460) (1.5) -- --
Other 68,248 1.0 6,748 .1 (20,516) (0.5)
- - -------------------------------------------------------------------------------------------------------------
$1,613,963 24.6% $ 958,900 19.0% $ 890,630 20.9%
- - -------------------------------------------------------------------------------------------------------------
Amounts of deferred tax expense (benefit) attributable to individual temporary
differences are:
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
Provision for loan loss $(108,557) $(14,374) $ (2,662)
Depreciation (23,492) (11,019) (36,285)
Pension expense (31,708) 5,549 (12,765)
Deferred revenue on real estate loans 23,727 31,137 32,914
Interest on non-accrual loans (74,710) 631 73,660
Amortization of intangible assets (36,094) (35,734) 6,958
Other (70,095) (75) 14,827
- - -------------------------------------------------------------------------------------------------------------
$(320,929) $(23,885) $ 76,647
- - -------------------------------------------------------------------------------------------------------------
Other assets include deferred income taxes of $705,579 and $500,385 at December
31, 1997 and 1996, respectively. Other liabilities include current taxes payable
of $312,846 and $74,330 at December 31, 1997 and 1996, respectively. Income tax
returns subsequent to 1996 are subject to examination by taxing authorities.
35
The tax effects of each type of significant item that gave rise to deferred
taxes are:
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996
- - -------------------------------------------------------------------------------------------------------------
Deferred tax asset
Deferred loan fees $ 71,180 $ 94,907
Allowance for loan losses 613,371 504,814
Interest on non-accrual loans 138,568 63,858
Accrued pension 128,855 97,147
Intangible asset 68,990 32,896
Other 112,039 41,944
- - -------------------------------------------------------------------------------------------------------------
Deferred tax asset 1,133,003 835,566
- - -------------------------------------------------------------------------------------------------------------
Deferred tax liability
Net unrealized gain on securities available for sale (273,232) (157,497)
Depreciation (154,192) (177,684)
- - -------------------------------------------------------------------------------------------------------------
Deferred tax liability (427,424) (335,181)
- - -------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 705,579 $ 500,385
- - -------------------------------------------------------------------------------------------------------------
Note 9: Employee Benefit Plans
The Bank has a non-contributory, defined benefit pension plan for full-time
employees over 21 years of age. Benefits are generally based upon years of
service and average compensation for the five highest-paid consecutive years of
service. The net periodic pension cost consists of the following components:
service cost (benefits earned during the year), interest costs on the projected
benefit obligation, actual return on plan assets and the amount resulting from
the amortization and deferral of certain items over 25 years. The Bank funds
pension costs in accordance with the funding provisions of the Employee
Retirement Income Security Act.
The assumed interest rates used in computing benefits, expected return, and
salary increases were 7.5%, 9.0%, and 5.0%, respectively, in 1997, and 7.5%,
9.0%, and 6.0% in 1996, respectively, and 8.5%, 9.0%, and 6.0% in 1995,
respectively.
The Bank maintains a Defined Contribution "Profit-Sharing" Plan sponsored by the
Virginia Bankers Association. The plan was amended effective January 1, 1997 to
include a 401(k) savings provision which authorizes a maximum voluntary salary
deferral of up to 15% of compensation (with a partial company match), subject to
statutory limitations. The profit-sharing arrangement provides for an annual
discretionary contribution to the account of each eligible employee based in
part on the Bank's profitability for a given year, and on each participant's
yearly earnings. All full-time employees with at least six months of service are
eligible to participate. Contributions and earnings may be invested in various
investment vehicles offered through the Virginia Bankers Association.
Contributions and earnings are tax-deferred. An employee is 40% vested after
four years of service, 60% after five years, 80% after six years, and fully
vested after seven years. The amounts charged to expense under this plan were
$244,617, $226,938 and $170,607 in 1997, 1996, and 1995, respectively.
The Mortgage Corporation maintains a Defined Contribution 401(k) savings plan
(the "Plan") which authorizes a maximum voluntary salary deferral of up to 15%
of compensation, subject to statutory limitations. All full-time employees who
have attained the age of 18 and have at least one year of service are eligible
to participate. The Mortgage Corporation reserves the right to set matching
amounts each year. 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 $50,000 for
1997. There was no matching contribution in 1996 or 1995.
The Bank adopted a Management Incentive Bonus Plan (the "Bonus") effective
January 1, 1987. The Bonus is offered to selected members of management. The
Bonus is derived from a pool of funds determined by the 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
36
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 $136,700, $83,500, and $66,800 in 1997, 1996, and 1995,
respectively. Additional Bonuses totaling $35,205, $37,278, and $44,218 were
granted to employees not covered by the Management Incentive Bonus Plan in 1997,
1996, and 1995, respectively.
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the Consolidated Balance Sheet as of December 31, 1997 and
1996, computed as of October 1, 1997 and 1996:
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996
- - -------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation
(includes vested benefits of $754,801 and
$563,913, respectively) $ 798,249 $ 612,070
- - -------------------------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date (1,314,383) (1,014,681)
Plan assets at fair value 1,361,274 1,042,093
- - -------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation
(funded status) 46,891 27,412
Unrecognized net gain (396,657) (368,148)
Unrecognized net obligation at October 1, 1987,
being amortized over 25 years (75,786) (81,199)
Unrecognized prior service cost 46,567 49,671
- - -------------------------------------------------------------------------------------------------------------
Accrued pension cost included in other liabilities $ (378,985) $ (372,264)
- - -------------------------------------------------------------------------------------------------------------
Net pension cost for 1997, 1996, and 1995 includes the following components:
- - -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $125,797 $ 99,057 $ 77,343
Interest cost on projected benefit obligation 75,968 72,880 55,912
Actual return on plan assets (93,629) (87,149) (78,899)
Net amortization and deferral (14,878) (15,802) (16,813)
- - -------------------------------------------------------------------------------------------------------------
Net pension costs for the year $ 93,258 $ 68,986 $ 37,543
- - -------------------------------------------------------------------------------------------------------------
Note 10: Deferred Compensation Plan
Effective December 1, 1989, the President retired from his position; he remains
a member of the Board of Directors. In lieu of participation in the
Corporation's pension plan, the retired President has received a deferred
compensation contract to provide retirement benefits. The contract provides that
one half of his highest annual compensation will be paid for life or for a
minimum of ten years. An annuity contract payable to the Corporation has been
purchased to fund this obligation. The retired President began receiving payouts
on the annuity contract on March 1, 1990. The remaining balances of the annuity
contract and the deferred compensation liability are recorded in other assets
and other liabilities, respectively.
Note 11: Related Party Transactions
Loans to directors and officers totaled $1,506,000 and $1,760,000 at December
31, 1997 and 1996, respectively. New advances to directors and officers totaled
$524,000 and repayments totaled $778,000 in the year ended December 31, 1997.
Note 12: Stock Options
Under the incentive stock option plan ("the Plan"), options to purchase common
stock are granted to certain key employees of the Corporation. Options are
issued to employees at a price equal to the fair market value of common stock at
the date granted. One-third of the options granted become exercisable commencing
one year after the grant date with an additional one-third becoming exercisable
after each of the following two years. In 1983, the shareholders authorized
50,000 shares of common stock for issuance under the Plan. An additional 100,000
shares were authorized for the Plan in 1994. All options expire ten years from
the grant date.
37
The Corporation applies APB Opinion 25 and related Interpretations in accounting
for the Plan. Accordingly, no compensation cost has been recognized for its
Plan. Had compensation cost for the Plan been determined based on the fair value
at the grant dates of options consistent with FASB Statement 123, the
Corporation's net income and earnings per share would not have been materially
different from those amounts shown on the statements of income for the years
ended December 31, 1997, 1996, and 1995.
The fair value of each option granted during the years ended December 31, 1997,
1996, and 1995, was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions for 1997, 1996, and 1995,
respectively; risk-free rate of 5.6, 6.2, and 6.2 percent and volatility of 20,
15, and 15 percent. The dividend yield and expected lives used in the pricing
model was 3 percent and 8 years, respectively, for 1997, 1996, and 1995.
Transactions under the Plan for the periods indicated were as follows:
- - -----------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------- ----------------- ----------------
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
- - -----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 74,050 $ 18.37 62,400 $ 17.89 50,700 $ 16.65
Granted 16,850 25.00 14,250 18.75 14,050 20.59
Exercised (7,832) 15.06 (2,100) 6.14 (2,350) 7.26
Cancelled (600) 18.25 (500) 20.50 -- --
- - -----------------------------------------------------------------------------------------------------------
Outstanding at end of year 82,468 $ 19.88 74,050 $ 18.37 62,400 $ 17.89
- - -----------------------------------------------------------------------------------------------------------
*Weighted average
Options exercisable at year end 52,690 47,683 40,183
Weighted-average fair value
of options granted during the year $ 5.88 $ 4.20 $ 4.61
- - -----------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1997:
- - -------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Number Number
Range of Outstanding Remaining Exercisable
Exercise at December 31, Contractual Exercise at December 31, Exercise
Prices 1997 Life Price* 1997 Price*
- - -------------------------------------------------------------------------------------------------------------
$15.50 to 16.75 6,500 1.6 years $ 16.29 6,500 $ 16.29
$17.50 to 25.00 75,968 7.26 years 20.19 46,190 18.95
- - -------------------------------------------------------------------------------------------------------------
$15.50 to 25.00 82,468 6.82 years $ 19.88 52,690 $ 18.62
- - -------------------------------------------------------------------------------------------------------------
*Weighted average
Note 13: Regulatory Requirements And Restrictions
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the Corporation's and
the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation's and the
Bank's capital amounts and classification are subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined) less goodwill. For both the Corporation
and the Bank, Tier I capital consists of shareholders' equity excluding any net
38
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 $207,698,000
and $203,065,000, respectively, at December 31, 1997 and $142,688,000 and
$137,977,000, respectively, at December 31, 1996. Management believes, as of
December 31, 1997, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Reserve
Bank and the FDIC categorized the Corporation and the Bank, respectively, as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Corporation and the Bank must maintain
total risk based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Corporation's and the Bank's actual capital amounts and ratios are presented
in the table.
- - ------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
- - ------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
Corporation $ 31,586,661 15.2% $ 16,615,840 >8.0% N/A
-
Bank 26,915,847 13.3 16,245,200 >8.0 $ 20,306,500 >10.0%
- -
Tier I Capital (to Risk Weighted Assets)
Corporation 29,353,302 14.1 8,307,920 >4.0 N/A
-
Bank 24,681,488 12.2 8,122,600 >4.0 12,183,900 > 6.0
- -
Tier I Capital (to Average Assets)
Corporation 29,353,302 11.4 7,741,230 >3.0 N/A
-
Bank $ 24,681,488 9.7% $ 7,600,740 >3.0% $ 12,667,900 > 5.0%
- -
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Corporation $ 31,501,780 22.1% $ 11,415,040 >8.0% N/A
-
Bank 26,805,373 19.4 11,038,160 >8.0 $ 13,797,700 >10.0%
- -
Corporation 29,716,780 20.8 5,707,520 >4.0 N/A
-
Bank 25,078,373 18.2 5,519,000 >4.0 8,278,620 > 6.0
- -
Corporation 29,716,780 12.2 7,309,830 >3.0 N/A
-
Bank $ 25,078,373 10.5% $ 7,184,399 >3.0% $ 11,973,999 > 5.0%
- -
- - ------------------------------------------------------------------------------------------------------------
Note 14: Commitments And Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, commitments to
sell loans, and standby letters of credit. These instruments involve elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The contract amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual amount of these
instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Collateral is obtained
based on management's credit assessment of the customer.
39
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 $3,211,000 and
$2,980,000 at December 31, 1997 and 1996, respectively.
Loan commitments are agreements to extend credit to a customer provided that
there are no violations of the terms of the contract prior to funding.
Commitments have fixed expiration dates or other termination clauses and may
require payment of a fee by the customer. Since many of the commitments may
expire without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The total amount of loan
commitments was $23,110,000 and $19,883,000 at December 31, 1997 and 1996,
respectively.
Commitments to sell loans are designed to eliminate the Mortgage Corporation's
exposure to fluctuations in interest rates in connection with loans held for
sale. The Mortgage Corporation sells all of the residential mortgage loans it
originates to third party investors, some of whom require the repurchase of
loans in the event of early default or faulty documentation. Mortgage loans and
their related servicing rights are sold under agreements that define certain
eligibility criteria for the mortgage loan. Recourse periods vary from 90 days
up to one year and conditions for repurchase vary with the investor. Mortgages
subject to recourse are collateralized by single family residences, have
loan-to-value ratios of 80% or less, or have private mortgage insurance, or are
insured or guaranteed by an agency of the United States government.
At December 31, 1997, the Mortgage Corporation had locked rate commitments to
originate mortgage loans amounting to approximately $21,670,000. The Mortgage
Corporation has entered into mandatory commitments, on a best-effort basis, to
sell loans of approximately $46,195,000. Risks arise from the possible inability
of counterparties to meet the terms of their purchase contracts. The Mortgage
Corporation does not expect any counterparty to fail to meet its obligations.
As of December 31, 1997, the Corporation had $3,295,000 in deposits in financial
institutions in excess of amounts insured by the Federal Deposits Insurance
Corporation (FDIC).
The Mortgage Corporation is committed under noncancelable operating leases for
certain office locations. Rent expense associated with these operating leases
was $244,000 and $191,000 for the years ending December 31, 1997 and 1996,
respectively.
Future minimum lease payments under these leases are as follows:
- - ----------------------------------------------------------------------------
Year Ending December 31,
- - ----------------------------------------------------------------------------
1998 $ 272,032
1999 132,963
2000 22,629
- - ----------------------------------------------------------------------------
$ 427,624
- - ----------------------------------------------------------------------------
Note 15: Disclosures Concerning The Fair Market Value Of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS 107, "Disclosures About Fair
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Corporation using available market information and appropriate
valuation methodologies. Loan commitments are conditional and subject to market
pricing and, therefore, do not reflect a gain or loss on 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.
40
Cash and short-term investments. The nature of these instruments and their
relatively short maturities provide for the reporting of fair value equal to the
historical cost.
Investment securities. The fair value of investment securities is based on
quoted market prices.
Loans. The estimate of the fair value of the loan portfolio is estimated based
on present values using applicable spreads to the U.S. Treasury curve.
Deposits. The fair value of all demand accounts is the amount payable at the
report date. For all other deposits, the fair value is determined using the
discounted cash flow method. The discount rate was equal to the rate currently
offered on similar products.
Loans held for sale. The fair value of loans held for sale is estimated based on
commitments into which individual loans will be delivered.
- - ------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
--------------------------- -------------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
- - ------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and short-term investments $ 8,871 $ 8,871 $ 8,799 $ 8,799
Investment securities 75,720 77,479 85,569 86,605
Net loans 154,745 154,769 136,732 140,611
Loans held for sale, net 24,479 24,807 12,284 12,515
Financial liabilities:
Demand deposits 130,401 130,494 122,657 123,414
Time deposits 101,113 101,275 93,765 92,974
Short-term borrowings 9,336 9,336 5,055 5,054
Off-balance sheet items:
Letters of credit -- 3,211 -- 2,980
Unused portions of lines of credit -- 23,110 -- 19,883
- - ------------------------------------------------------------------------------------------------------------
Note 16: Branch Acquisition
On February 23, 1996, the Corporation acquired approximately $7.8 million of the
deposits of a Crestar Bank branch office located in West Point, Virginia. The
premium paid for these deposits is being amortized on a straight-line basis over
the expected period of benefit.
In 1995, the Corporation purchased two branches in Middlesex and Tappahannock,
Virginia, and the related deposits from First Union National Bank. The
Corporation received $19,368,958 in cash, $698,144 in premises and equipment,
plus other assets in exchange for the assumption of $22,375,850 in deposit
liabilities. The excess of cost over fair market value of net assets acquired is
classified as an intangible asset that is included in other assets on the
balance sheet. This intangible asset is being amortized on a straight-line basis
over the expected period of benefit.
41
Note 17: Parent Company Condensed Financial Information
Financial information for the Parent Company as of and for the years ended
December 31, 1997 and 1996, is as follows:
- - -----------------------------------------------------------------------------------------------------------------------
December 31,
Balance Sheet 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
Assets
Cash $ 112,456 $ 14,976
Investment securities available for sale 4,295,669 4,607,059
Other assets 613,874 119,700
Investments in subsidiary 26,935,994 27,525,661
- - -----------------------------------------------------------------------------------------------------------------------
Total assets $ 31,957,993 $32,267,396
- - -----------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Other liabilities $ 157,460 $ 52,887
Shareholders' equity 31,800,533 32,214,509
- - -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 31,957,993 $32,267,396
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
Statement of Income 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------
Interest income on investment securities $ 295,477 $ 319,001 $ 60,362
Interest income on loans 21,573 -- --
Dividends received from bank subsidiary 5,420,044 3,591,698 5,379,225
Distributions in excess of equity in net
income of subsidiary (672,045) -- (2,063,442)
Equity in undistributed net income of subsidiary -- 195,640 --
Other expenses (128,222) (45,165) (213)
- - -----------------------------------------------------------------------------------------------------------------------
Net income $ 4,936,827 $ 4,061,174 $ 3,375,932
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
Statement of Cash Flows 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 4,936,827 $ 4,061,174 $ 3,375,932
Adjustments to reconcile net income to net
cash provided by operating activities:
Distributions in excess of equity in net income of subsidiary 672,045 -- 2,063,442
Equity in undistributed earnings of subsidiary -- (195,640) --
(Decrease) increase in other assets (494,174) 314,912 (22,637)
Increase (decrease) in other liabilities 31,767 (294,040) 22,637
- - -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,146,465 3,886,406 5,439,374
- - -----------------------------------------------------------------------------------------------------------------------
Investing activities:
Sale of investments 2,083,893 282,500 --
Purchase of investments (1,557,413) (739,536) (4,086,950)
- - -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 526,480 (457,036) (4,086,950)
- - -----------------------------------------------------------------------------------------------------------------------
Financing activities:
Repurchase of common stock (4,331,201) (2,126,503) --
Dividends paid (1,369,788) (1,365,187) (1,315,525)
Proceeds from the issuance of stock 125,524 12,885 17,072
- - -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,575,465) (3,478,805) (1,298,453)
- - -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 97,480 (49,435) 53,971
Cash at beginning of year 14,976 64,411 10,440
- - -----------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 112,456 $ 14,976 $ 64,411
- - -----------------------------------------------------------------------------------------------------------------------
42
Note 18: Quarterly Condensed Statements Of Income - Unaudited
- - -------------------------------------------------------------------------------------------------------------
1997 Quarter Ended
In thousands (except per share) March 31 June 30 September 30 December 31
- - -------------------------------------------------------------------------------------------------------------
Total interest income $ 4,750 $ 4,844 $ 5,013 $ 5,156
Net interest income after provision for loan losses 2,842 2,784 2,888 2,917
Other income 1,145 1,420 1,979 2,114
Other expenses 2,504 2,636 3,049 3,349
Income before income taxes 1,483 1,568 1,818 1,682
Net income 1,174 1,223 1,334 1,206
Earnings per common share - assuming dilution $ .55 $ .63 $ .69 $ .63
Dividends per common share .16 .18 .18 .18
- - -------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------
1996 Quarter Ended
In thousands (except per share) March 31 June 30 September 30 December 31
- - -------------------------------------------------------------------------------------------------------------
Total interest income $ 4,375 $ 4,541 $ 4,645 $ 4,772
Net interest income after provision for loan losses 2,481 2,609 2,714 2,831
Other income 733 1,324 1,317 1,305
Other expenses 2,347 2,542 2,673 2,732
Income before income taxes 867 1,391 1,358 1,404
Net income 729 1,136 1,069 1,127
Earnings per common share - assuming dilution $ .33 $ .51 $ .48 $ .52
Dividends per common share .15 .15 .15 .16
- - -------------------------------------------------------------------------------------------------------------
43
INDEPENDENT AUDITOR'S REPORT
[YHB Logo]
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, 1997, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of C&F
Financial Corporation and subsidiary for the years December 31, 1996 and 1995
were audited by other auditors whose report, dated January 17, 1997, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of C&F Financial
Corporation and subsidiary at December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
_______________________________
January 15, 1998
Winchester, Virginia
44
INVESTOR INFORMATION
Annual Meeting of Shareholders
The annual meeting of shareholders of C&F Financial Corporation will be held at
3:30pm on Tuesday, April 21, 1998 at the van den Boogaard Center, 3510 King
William Avenue, West Point, Virginia. All shareholders are cordially invited to
attend.
Stock Price Information
Effective January 22, 1998, the Corporation's common stock is traded on the
over-the-counter market and is listed for quotation on the Nasdaq Stock Market
National Market System under the symbol "CFFI." Prior to this date the
Corporation's Common Stock appeared on the Nasdaq Bulletin Board Listing. As of
February 9, 1998 there were approximately 1,057 shareholders of record.
Following are the high and low closing prices in 1997 and 1996. The 1997
information was obtained from the Nasdaq Bulletin Board Listing. The 1996
information was obtained from internal shareholder records kept by C&F Financial
Corporation as the Corporation acted as its own transfer agent during this
period. Over-the-counter market quotations reflected inter-dealer prices,
without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.
- - -------------------------------------------------------------------------------------------------------------
1997 1996
- - -------------------------------------------------------------------------------------------------------------
Quarter High Low High Low
- - -------------------------------------------------------------------------------------------------------------
First $ 21.25 $ 17.50 $ 20.50 $ 18.75
Second 21.50 20.00 19.75 18.75
Third 22.50 20.75 19.00 18.50
Fourth 26.50 21.00 20.00 18.00
- - -------------------------------------------------------------------------------------------------------------
Stock Transfer Agent
American Stock Transfer & Trust Company serves as transfer agent for the
Corporation. You may write them at 40 Wall Street, New York, NY 10005 or
telephone them toll-free at 1-800-937-5449.
Annual Report on Form 10-K and Additional Information
A copy of Form 10-K as filed with the Securities and Exchange Commission is
available without charge to stockholders upon written request. Requests for this
or other financial information about C&F Financial Corporation should be
directed to:
Tom Cherry
Vice President and Chief Accounting Officer
C&F Financial Corporation
P.O. Box 391
West Point, VA 23181
45
DIRECTORS AND ADVISORS
C&F Financial Corporation / Citizens And Farmers Bank
- - -----------------------------------------------------
J. P. CAUSEY JR.*+
Senior Vice President, Secretary & General Counsel
Chesapeake Corporation
LARRY G. DILLON*+
Chairman, President & CEO
C&F Financial Corporation Citizens and Farmers Bank
P. L. HARRELL+
President
Old Dominion Grain, Inc.
JAMES H. HUDSON III*+
Attorney-at-Law
Hudson & Bondurant, P.C.
JOSHUA H. LAWSON+
President
Thrift Insurance Corporation
WILLIAM E. O'CONNELL JR.*+
Professor of Business
The College of William and Mary
STURE G. OLSSON*+
Retired Chairman of the Board
Chesapeake Corporation
PAUL C. ROBINSON+
Owner & President
Francisco, Robinson & Associates, Realtors
W. T. ROBINSON*+
Past Chairman of the Board
C&F Financial Corporation Citizens and Farmers Bank
THOMAS B. WHITMORE JR.+
Retired President
Whitmore Chevrolet, Oldsmobile, Pontiac Co., Inc.
* C&F Financial Corporation Board Member
+ Citizens and Farmers Bank Board Member
C&F Mortgage Corporation
- - ------------------------
J. P. CAUSEY JR.
Senior Vice President, Secretary & General Counsel
Chesapeake Corporation
LARRY G. DILLON
Chairman of the Board
JAMES H. HUDSON III
Attorney-at-Law
Hudson & Bondurant, P.C.
BRYAN E. MCKERNON
President & Chief Executive Officer
C&F Mortgage Corporation
WILLIAM E. O'CONNELL JR.
Professor of Business
The College of William and Mary
C&F Investment Services. Inc.
- - -----------------------------
LARRY G. DILLON
President
ERIC F. NOST
Vice President
BRAD E. SCHWARTZ
Treasurer
GARI B. SULLIVAN
Senior Vice President & Secretary
Independent Public
Accountants
- - ------------------
Yount, Hyde & Barbour, P.C.
Winchester, VA
Corporate Counsel
- - -----------------
Hudson & Bondurant, P.C.
West Point, VA
Varina Advisory Board
- - ---------------------
ROBERT A. CANFIELD
Attorney-at-Law
Canfield, Moore, Shapiro,
Sease & Baer
SUSAN R. FERGUSON
REGGIE H. NELSON IV
Partner
Colonial Acres Farm
ROBERT F. NELSON
Professional Engineer
Engineering Design Associates
PHIL T. RUTLEDGE
Retired Deputy County Manager
County of Henrico
SANDRA W. SEELMANN
Real Estate Broker/Owner
Varina & Seelmann Realty
46
OFFICERS AND LOCATIONS
Citizens And Farmers Bank
- - -------------------------
ADMINISTRATIVE OFFICE
802 Main Street
West Point, Virginia 23181
(804) 843-2360
Larry G. Dillon *
Chairman of the Board & Chief Executive Officer
Brad E. Schwartz *
Senior Vice President
Gari B. Sullivan *
Senior Vice President & Secretary
Howard P. Wilkinson
Senior Vice President & Chief Lending Officer
Leslie A. Campbell
Vice President
Thomas F. Cherry *
Vice President & Chief Accounting Officer
Sandra S. Fryer
Vice President
Deborah R. Nichols
Vice President, Branch Administration
Julia L. Gresham
Assistant Vice President
William B. Littreal
Assistant Vice President
Susan B. Milby
Assistant Vice President
WEST POINT - MAIN OFFICE
802 Main Street
West Point, Virginia 23181
(804) 843-2360
LONGHILL ROAD
Sandra C. St.Clair
Assistant Vice President & Branch Manager
4780 Longhill Road
Williamsburg, Virginia 23188
(757) 565-0593
MIDDLESEX
N. Susan Gordon
Branch Manager
Route 33 at Route 641
Saluda, Virginia 23149
(804) 758-3641
NORGE
Alec J. Nuttall
Assistant Vice President & Branch Manager
7534 Richmond Road
Norge, Virginia 23127
(757) 564-8114
PROVIDENCE FORGE
James D. W. King
Vice President & Branch Manager
3501 N. Courthouse Road
Providence Forge, Virginia 23140
(804) 966-2264
QUINTON
Mary T. "Joy" Whitley
Assistant Vice President & Branch Manager
2580 New Kent Highway
Quinton, Virginia 23141
(804) 932-4383
TAPPAHANNOCK
Douglas M. "Judge" Smith
Assistant Vice President & Branch Manager
1649 Tappahannock Boulevard
Tappahannock, Virginia 22560
(804) 443-2265
VARINA
Tracy E. Pendleton
Assistant Vice President & Branch Manager
W. Kendall Lipscomb
Assistant Vice President
Route 5 at Strath Road
Richmond, Virginia 23231
(804) 795-7000
WEST POINT - 14TH STREET
Karen T. Richardson
Assistant Vice President & Branch Manager
415 Fourteenth Street
West Point, Virginia 23181
(804) 843-2708
LOAN PRODUCTION OFFICE
Terrence C. Gates
Vice President, Real Estate Construction
300 Arboretum Place, Suite 245
Richmond, Virginia 23236
(804) 330-8300
* Officers of C&F Financial Corporation
C&F Mortgage Corporation
- - ------------------------
ADMINISTRATIVE OFFICE
300 Arboretum Place, Suite 245
Richmond, Virginia 23236
(804) 330-8300
Bryan E. McKernon
President & Chief Executive Officer
Mark A. Fox
Executive Vice President & Chief Financial Officer
Theresa M. Dougherty
Vice President & Senior Underwriter
Donna G. Jarratt
Vice President & Project Manager
ANNAPOLIS, MARYLAND
Larry Roussil
Vice President & Branch Manager
2191 Defense Highway, Suite 200
Crofton, Maryland 21114
(410) 721-6770
BELAIR, MARYLAND
David A. Lehnerd
Vice President & Branch Manager
2105 Laurel Bush Road, Suite 201
Belair, Maryland 21015
(410) 569-0479
CHARLOTTESVILLE
Philip N. Mahone
Vice President & Branch Manager
William E. Hamrick
Vice President & Branch Manager
114 Whitewood Road, Suite 2
Charlottesville, Virginia 22901
(804) 974-1450
CHESTER
Stephen L. Fuller
Vice President & Branch Manager
4517 West Hundred Road
Chester, Virginia 23831
(804) 748-2900
NEWPORT NEWS
Linda H. Gaskins
Vice President & Branch Manager
703 Thimble Shoals Boulevard, Suite C4
Newport News, Virginia 23606
(757) 873-8200
RICHMOND
Thomas A. Gill
Vice President & Branch Manager
Donald R. Jordan
Vice President & Richmond Production Manager
300 Arboretum Place, Suite 245
Richmond, Virginia 23236
(804) 330-8300
RICHMOND WEST
Page C. Yonce
Vice President & Branch Manager
7231 Forest Avenue, Suite 202
Richmond, Virginia 23226
(804) 673-3453
WILLIAMSBURG
Irving E. "Ed" Jenkins
Vice President & Branch Manager
3279-A Lake Powell Road
Williamsburg, Virginia 23185
(757) 259-1200
C&F Investment Services, Inc.
- - -----------------------------
Eric F. Nost
Vice President & Manager
417 Fourteenth Street
West Point, Virginia 23181
(804) 843-4584
(800) 853-3863
Douglas L. Hartz
Assistant Vice President
2580 New Kent Highway
Quinton, Virginia 23141
(804) 932-4383