C&F Financial Corporation
Annual Report 1999

Plain-text annual report

C & F FINANCIAL CORP FORM 10-K (Annual Report) Filed 3/28/2000 For Period Ending 12/31/1999 Address EIGHTH & MAIN STREETS P O BOX 391 WEST POINT, Virginia 23181 Telephone 804-843-2360 CIK Industry Sector 0000913341 Regional Banks Financial Fiscal Year 12/31 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________________to_______________________ Commission file number 000-23423 C&F FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-1680165 ------------------------------ ------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) Eighth and Main Streets, West Point, VA 23181 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (804) 843-2360 --------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock $1.00 Par (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X) Yes ( ) No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $50,171,000 as of March 21, 2000. The number of shares outstanding of the registrant's common stock, $1.00 par value was $3,644,324 at March 21, 2000. TABLE OF CONTENTS PART I ITEM 1. BUSINESS.................................................. page 1 ITEM 2. PROPERTIES................................................ page 2 ITEM 3. LEGAL PROCEEDINGS......................................... page 3 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ page 3 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................... page 4 ITEM 6. SELECTED FINANCIAL DATA................................... page 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION............. page 4 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................................... page 4 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... page 4 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................... page 4 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................ page 5 ITEM 11. EXECUTIVE COMPENSATION.................................... page 5 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................... page 5 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. page 6 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.......................... page 6 DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Incorporated Document --------------------- --------------------- PART II ------- Item 5 - Market for Registrants Common The Corporation's 1999 Annual Report to Shareholders for fiscal years ended December 31, 1999, Quarterly Condensed Equity and Related Stockholder Matters Statements of Income-Unaudited, page 43, and Investor Information, page 45. Item 6 - Selected Financial Data The Corporation's 1999 Annual Report to Shareholders for fiscal years ended December 31, 1999, Five Year Financial Summary, page 10. Item 7 - Management's Discussion and The Corporation's 1999 Annual Report to Shareholders Analysis of Financial Conditions for the fiscal years ended December 31, 1999, and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations, pages 9 through 23. Item 7a - Quantitative and Qualitative Disclosures The Corporation's 1999 Annual Report to Shareholders about Market Risk for the fiscal years ended December 31, 1999, Market Risk Management, pages 14 through 16. Item 8 - Financial Statements and The Corporation's 1999 Annual Report to Shareholders Supplementary Data for fiscal years ended December 31, 1999, Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Independent Auditors' Report, pages 24 through 44. PART III -------- Item 10 - Directors and Executive The Corporation's 2000 Proxy Statement, Election of Officers of the Registrant Directors, pages 3 through 4. Item 11 - Executive Compensation The Corporation's 2000 Proxy Statement, Executive Compensation, pages 5 through 7. Item 12 - Security Ownership of Certain The Corporation's 2000 Proxy Statement, Principal Beneficial Owners and Management Holders of Capital Stock, page 2. Item 13 - Certain Relationships and The Corporation's 2000 Proxy Statement, Interest of Related Transactions Management in Certain Transactions, page 5. ITEM 1. BUSINESS General PART I C&F Financial Corporation (the "Corporation") is a bank holding company which was incorporated under the laws of the Commonwealth of Virginia in March, 1994. The Corporation owns all of the stock of its sole subsidiary, Citizens and Farmers Bank (the "Bank"), which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia. The Bank has a total of ten branches including the main office. The Bank has its main office at Eighth and Main Streets, West Point, Virginia, and has branch offices in the locations of Richmond, Norge, Middlesex, Providence Forge, Quinton, Tappahannock, Varina, Williamsburg, and West Point (two branches). The Bank was originally opened for business under the name Farmers and Mechanics Bank on January 22, 1927. The local community served by the Bank is defined as those portions of King William County, King and Queen County, Hanover County and Henrico County which are east of Route 360; Essex, Middlesex, New Kent, Charles City, and James City Counties; that portion of York County which is directly north of James City County; that portion of Gloucester County surrounded by Routes 14 and 17; and the western portion of the City of Richmond along the Route 250 corridor. The Corporation, through its subsidiaries, offers a wide range of banking services available to both individuals and small businesses. These services include various types of checking and savings deposit accounts, and the making of business, real estate, development, mortgage, home equity, automobile, and other installment, demand and term loans. Also, the Bank offers ATMs at all locations, credit card services, trust services, travelers' checks, money orders, safe deposit rentals, collections, notary public, wire services, and other customary bank services to its customers. The Bank has four wholly-owned subsidiaries, C & F Title Agency, Inc., C&F Investment Services, Inc., C&F Insurance Services, Inc., and C&F Mortgage Corporation, all incorporated under the laws of the Commonwealth of Virginia. C&F Title Agency, Inc. sells title insurance to the mortgage loan customers of the Corporation. C&F Investment Services, Inc., organized April 1995, is a full-service brokerage firm offering a comprehensive range of investment options including stocks, bonds, annuities, and mutual funds. C&F Insurance Services, Inc., organized in July 1999, owns 2.4% of the Virginia Bankers Insurance Center, LLC which is in the process of buying an existing insurance agency. C&F Mortgage Corporation, organized in September 1995, originates and sells residential mortgages. See Note 16 to the Consolidated Financial Statements for summarized financial information by business segment. 1 C&F Mortgage Corporation provides mortgage services through seven locations in Virginia and two in Maryland. The Virginia offices are in Richmond (two locations), Williamsburg, Newport News, Charlottesville, Lynchburg, and Chester. The Maryland offices are in Crofton and Columbia. As of December 31, 1999, a total of 278 persons were employed by the Corporation, of whom 24 were part-time. The Corporation considers relations with its employees to be excellent. Competition The Bank is subject to competition from various financial institutions and other companies or firms that offer financial services. The Bank's principal competition in its market area consists of all the major statewide banks. The Bank also competes for deposits with savings associations, credit unions, money- market funds, and other community banks. In making loans, the Bank competes with consumer finance companies, credit unions, leasing companies, and other lenders. C&F Mortgage Corporation competes for mortgage loans in its market areas with other mortgage companies, commercial banks, and other financial institutions. C&F Investment Services and C&F Insurance Services compete with other investment companies, brokerage firms, and insurance companies to provide these services. C&F Title Agency competes with other title companies. Regulation and Supervision The Corporation is subject to regulation by the Federal Reserve Bank under the Bank Holding Company Act of 1956. The Corporation is also under the jurisdiction of the Securities and Exchange Commission and certain state securities commissions with respect to matters relating to the offer and sale of its securities. In addition, the Bank is subject to regulation and examination by the State Corporation Commission and the Federal Deposit Insurance Corporation. ITEM 2. PROPERTIES The following describes the location and general character of the principal offices and other materially important physical properties of the Corporation and its subsidiary. The Corporation owns the headquarters located at Eighth and Main Streets in the business district of West Point, Virginia. The building, originally constructed in 1923, has three floors totaling 15,000 square feet. This building houses the Citizens and Farmers Bank main office branch and office space for the Coorporation's administrative personnel. 2 The Corporation owns a building located at Seventh and Main Streets in West Point, Virginia. The building provides space for Citizens and Farmers Bank operations functions and staff. The building was originally constructed prior to 1935 and remodeled by the Corporation in 1991. The two-story building has 20,000 square feet. The Corporation also owns a building located at Sixth and Main Streets in West Point, Virginia. The building provides space for Citizens and Farmers Bank loan operations functions and staff. The building was bought and remodeled by the Corporation in 1998. The building has 5,000 square feet. Citizens and Farmers Bank owns ten other branch locations in Virginia. Also, the Bank owns several lots in West Point, Virginia, and one other lot in New Kent County, Virginia. C&F Mortgage Corporation has nine leased offices, seven in Virginia and two in Maryland. Rental expense for these locations totaled $330,000 for the year ended December 31, 1999. All of the Corporation's properties are in good operating condition and are adequate for the Corporation's present and anticipated future needs. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Corporation is a party or of which the property of the Corporation is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Corporation through a solicitation of proxies or otherwise. 3 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information contained on pages 43 and 45 of the 1999 Annual Report to Shareholders, which is attached hereto as Exhibit 13, under the captions, "Note 18: Quarterly Condensed Statements of Income - Unaudited" and "Investor Information," is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information contained on page 10 of the 1999 Annual Report to Shareholders, which is attached hereto as Exhibit 13, under the caption, "Five Year Financial Summary," is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information contained on pages 9 through 23 of the 1999 Annual Report to Shareholders, which is attached hereto as Exhibit 13, under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operation," is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained on pages 14 through 16 of the 1999 Annual Report to Shareholders, which is attached hereto as Exhibit 13, under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operation," is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information contained on pages 24 through 44 of the 1999 Annual Report to Shareholders, which is attached hereto as Exhibit 13, under the captions, "Consolidated Financial Statements," "Notes to Consolidated Financial Statements," and "Independent Auditors' Report," is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 4 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT PART III The information required by Item 10 with respect to the Directors of the Registrant is contained on pages 3 through 4 of the 2000 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Election of Directors," is incorporated herein by reference. The information in the following table pertains to the executive officers of the Corporation. Executive Officers of C&F Financial Corporation Name (Age) Business Experience Number of Shares Beneficially Present Position During Past Five Years Owned as of March 21, 2000 ------------------------- ------------------------------------------------ ---------------------------------------------- Larry G. Dillon (47) President of the Bank since 1989 47,634 /(1)/ Chairman, President and Chief Executive Officer Gari B. Sullivan (62) Senior Vice President of the Bank since 1990 9,451 /(1)/ Secretary Thomas F. Cherry (31) Promoted to Senior Vice President of the Bank in 3,500 /(1)/ Chief Financial Officer December 1998; Vice President of the Bank from December 1996 to December 1998; Manager with Price Waterhouse, LLP in Norfolk, prior to December 1996 /(1)/ Includes exercisable options of 17,500, 7,167, and 3,300 held by Messrs. Dillon, Sullivan, and Cherry, respectively. ITEM 11. EXECUTIVE COMPENSATION The information contained on pages 5 through 7 of the 2000 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Executive Compensation," is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP ON CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained on page 2 of the 2000 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Principal Holders of Capital Stock," is incorporated herein by reference. 5 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained on page 5 of the 2000 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Interest of Management In Certain Transactions," is incorporated herein by reference. ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K 14 (a) Exhibits PART IV Exhibit No. 3: Articles of Incorporation and Bylaws Articles of Incorporation and Bylaws of C&F Financial Corporation filed as Exhibit Nos. 3.1 and 3.2, respectively, to Form 10KSB filed March 29, 1996, of C&F Financial Corporation is incorporated herein by reference. Exhibit No. 10: Material Contracts Exhibit No. 13: C&F Financial Corporation 1999 Annual Report to Shareholders Exhibit No. 21: Subsidiaries of the Registrant Citizens and Farmers Bank, incorporated in the Commonwealth of Virginia (100% owned) Exhibit No. 23: Consents of experts and counsel 23.1 Consent of Yount, Hyde & Barbour, P.C. Exhibit No. 27: Financial Data Schedule Exhibit No. 99: Additional Exhibits 99.1 C&F Financial Corporation 1999 Annual Meeting Proxy Statement 14 (b) Reports on Form 8-K filed in the fourth quarter of 1999: None. 14 (c) Exhibits to this Form 10-K are either filed as part of this Report or are incorporated herein by reference. 14 (d) Financial Statements Excluded from Annual Report to Shareholders pursuant to Rule 14a3(b). Not applicable. 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, C&F Financial Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: C&F FINANCIAL CORPORATION __________________________________ ______________________________ Larry G. Dillon Thomas F. Cherry Chairman, President and Chief Executive Officer Senior Vice President and Chief Financial Officer Date: March 21, 2000 Date: March 21, 2000 ---------------------------------- ------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: March 21, 2000 __________________________________ ------------------------------ J. P. Causey Jr., Director Date: March 21, 2000 __________________________________ ------------------------------ James H. Hudson III, Director Date: March 21, 2000 __________________________________ ------------------------------ Larry G. Dillon, Director Date: March 21, 2000 __________________________________ ------------------------------ William E. O'Connell Jr., Director Date: March 21, 2000 __________________________________ ------------------------------ Sture G. Olsson, Director THIS AGREEMENT is entered into as of the ___ day of August, 1999, by and between C&F FINANCIAL CORPORATION, a Virginia corporation (the "Company"), and THOMAS F. CHERRY (the "Executive"). CHANGE IN CONTROL AGREEMENT RECITALS I. The Executive currently serves as Senior Vice President and Chief Financial Officer of Citizens and Farmers Bank, is a key member of management of the Company and its affiliates, and his services and knowledge are valuable to the Company and its affiliates. II. The Board (as defined below) has determined that it is in the best interest of the Company and its shareholders to assure that the Company and its affiliates will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change in Control and to encourage the Executive's full attention and dedication to the Company and its affiliates currently and in the event of any threatened or pending Change in Control. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, it is hereby agreed as follows: 1. CERTAIN DEFINITIONS. (a) "Agreement Effective Date" means August __, 1999. (b) The "Agreement Term" means the period commencing on the Agreement Effective Date and ending on the earlier of (i) the Agreement Regular Termination Date or (ii) the date this Agreement terminates pursuant to Section 7. The "Agreement Regular Termination Date" means the third anniversary of the Agreement Effective Date, provided, however, that commencing on the first anniversary of the Agreement Effective Date, and on each subsequent anniversary (such date and each subsequent anniversary shall be hereinafter referred to as the "Renewal Date"), unless this Agreement is previously terminated, the Agreement Regular Termination Date shall be automatically extended for three years from the latest Renewal Date, unless at least one month prior to the latest Renewal Date, the Company shall give notice to the Executive in accordance with Section 10(c) of this Agreement that the Agreement Regular Termination Date shall not be so extended. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means: (i) the willful and continued failure of the Executive to substantially perform his duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board, pursuant to a vote of a majority of the Directors of the Company, which specifically identifies the manner in which the Directors of the Board believe that the Executive has not substantially performed his duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. 1 For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interest of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the members of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive in accordance with Section 10(c) of this Agreement and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive has engaged in the conduct described in paragraph (i) or (ii) above, and specifying the particulars thereof in detail. (e) The "Change in Control Date" means the first date during the Agreement Term on which a Change in Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment either (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the "Change in Control Date" shall mean the date immediately prior to the date of such termination of employment. (f) "Company" means C&F Financial Corporation, a Virginia corporation. (g) "Coverage Period" means the period of time beginning with the Change in Control Date and ending on the earliest to occur of (i) the Executive's death and (ii) the sixty-first day after the first anniversary of the Change in Control Date. (h) "Disability" means the absence of the Executive from his duties with the Company on a full-time basis for six months as a result of incapacity to serve as the Area President of Hanover Bank, including substantially all duties normally considered a part thereof, due to mental or physical illness or injury which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. If the Company determines in good faith that the Disability of the Executive has occurred, it may give to the Executive written notice in accordance with Section 10(c) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of his duties. (i) "Good Reason" means any good faith determination made by the Executive (which determination shall be conclusive) that any of the following has occurred: (i) the occurrence, on or after the Agreement Effective Date and during the Coverage Period, of any of the following: (A) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately 2 prior to the Change in Control, or any other action by the Company or its affiliates which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive in accordance with Section 10(c) of this Agreement; (B) a reduction by the Company or its affiliates in the Executive's rate of annual base salary, benefits (including, without limitation, incentive or bonus pay arrangements, stock plan benefit arrangements, and retirement and welfare plan coverage) and perquisites as in effect immediately prior to the Change in Control or as the same may be increased from time to time thereafter, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive in accordance with Section 10(c) of this Agreement; (C) the Company's requiring the Executive to be based at any office or location more than 35 miles from the facility where the Executive is located at the time of the Change in Control or the Company' s requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Change in Control Date (but determined without regard to travel necessitated by reason of any anticipated Change in Control); (D) any purported termination by the Company or its affiliates of the Executive's employment otherwise than as expressly permitted by this Agreement; (E) any failure by the Company or its affiliates to comply with and satisfy Section 9(c) of this Agreement by obtaining satisfactory agreement from any successor to assume and perform this Agreement; or (F) so long as no Cause for Executive's termination by the Company exists (or would exist assuming the Board made a determination of Cause), a voluntary cessation by the Executive of his employment for any reason during any Window Period. (ii) any event or condition described in paragraph (i) of this Section 1(i) which occurs on or after the Agreement Effective Date, but prior to a Change in Control, but was at the request of a third party who effectuates the Change in Control, notwithstanding that it occurred prior to the Change in Control, but such event or condition shall not be considered to actually have occurred until the Change in Control Date. (j) "Covered Termination" means a termination of Executive's employment during the Coverage Period (i) by the Company for any reason other than Cause or the Executive's Disability or death, or (ii) by the Executive for Good Reason. (k) "Noncovered Termination" means a cessation of Executive's employment which is not a Covered Termination. (l) "Window Period" means any of (i) the 60-day period commencing on the Change in Control Date, (ii) the 60-day period commencing on the first anniversary of the 3 Change in Control Date, and (iii) the 60-day period commencing on the second anniversary of the Change in Control Date. 2. CHANGE IN CONTROL. "Change in Control" means the occurrence, during the Agreement Term, of either an "Acquisition of Controlling Ownership" (as defined in Section 2(a) below), a "Change in the Incumbent Board" (as defined in Section 2(b) below), a "Business Combination" (as defined in Section 2(c) below), or a "Liquidation or Dissolution" (as defined in Section 2(d) below). (a) "Acquisition of Controlling Ownership" means the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"). Notwithstanding the foregoing, for purposes of this Section 2(a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with paragraphs (i), (ii) and (iii) of this Section 2(c). (b) "Change in the Incumbent Board" means that individuals who, as of August __, 1999, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board. For this purpose, any individual who becomes a director subsequent to August __, 1999 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be thereupon considered a member of the Incumbent Board (with his predecessor thereafter ceasing to be a member), but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. (c) "Business Combination" means the consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") unless all of the following occur: (i) all or substantially all of the individuals and entities who were the beneficial owners respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns 4 the Company or all or substantial all of the Company's assets either directly or through one or more subsidiaries, in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. (d) "Liquidation or Dissolution" means the approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. OBLIGATIONS OF THE EXECUTIVE TO REMAIN EMPLOYED. The Executive agrees that in the event any person or group attempts a Change in Control, he shall not voluntarily leave the employ of the Company without Good Reason (i) until such attempted Change in Control terminates or (ii) if a Change in Control shall occur, until the Change in Control Date. For purposes of the foregoing clause (i), Good Reason shall be determined as if a Change in Control had occurred when such attempted Change in Control became known to the Board. 4. OBLIGATIONS UPON THE EXECUTIVE'S TERMINATION. (a) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive, other than by reason of death, shall be communicated by Notice of Termination to the other party hereto given. For purposes hereof: (i) "Notice of Termination" means a written notice given in accordance with Section 10(c) of this Agreement which (A) states whether such termination is for Cause, Good Reason or Disability, (B) indicates the specific termination provision in this Agreement relied upon, if any, (C) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (D) if the Date of Termination is other than the date of receipt of such notice, specifies the termination date. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason, Cause or Disability shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (ii) "Date of Termination" means (A) if the Executive's employment is terminated by reason of Disability, the Disability 5 Effective Date, (B) if the Executive's employment is terminated by the Company for any reason other than Disability, the date of the Executive's receipt of the Notice of Termination or any later date specified therein, as the case may be, and (C) if the Executive's employment is terminated by the Executive for any reason, the date of the Company's receipt of the Notice of Termination or any later date specified therein, as the case may be, (b) Obligations of the Company in a Covered Termination. If the Executive's employment shall cease by reason of a Covered Termination, then the following shall be paid or provided (the payments and benefits described in (i), (ii) and (iii) below may hereinafter sometimes be referred to as the "Change in Control Benefit" or "Change in Control Benefits"): (i) the Company shall pay or cause to be paid in cash to the Executive four (4) consecutive quarterly installments, with interest at the applicable federal rate (as defined in Section 1274(d) of the Internal Revenue Code of 1986, as amended (the Code") determined at the Change in Control Date on the unpaid balance paid at the same time on each installment payment other than the first payment, with the first of such installments being paid not later than 30 days after the Date of Termination, (or if the Executive requests and the Company agrees in a lump sum within 30 days after the Date of Termination) and with the aggregate payments (excluding interest) totaling an amount equal to the sum of the Executive's (1) highest aggregate annual base salary from the Company and its affiliated companies in effect at any time during the 24 month period ending on the Change in Control Date and (2) highest annual bonus (including any deferrals thereof) from the Company and its affiliated companies payable for the Company's three fiscal years immediately preceding the fiscal year which includes the Change in Control Date; (ii) for one year after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue or cause to be continued benefits to the Executive and/or the Executive's family at least equal to those under the Welfare Benefit Plans. If the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for any retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until one year after the Date of Termination and to have retired on the last day of such period. For purposes hereof, the term "Welfare Benefit Plan" means the welfare benefit plans, practices, policies and programs provided by the Company and its affiliates (including, without limitation, any medical, prescription, dental, vision, disability, life, accidental death and travel accident insurance plans and split dollar insurance programs) to the extent applicable generally to other peer executives of the Company and its affiliates, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time 6 during the one year period immediately preceding the Change in Control Date or, if more favorable to the Executive, those provided generally at any time after the Change in Control Date to other peer executives of the Company and its affiliated companies; (iii) to the extent not theretofore paid or provided, the Company shall timely pay or cause to be paid or provide or cause to be provided to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any compensation arrangement, plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (c) Obligations of the Company in a Noncovered Termination. If the Executive's employment shall cease by reason of a Noncovered Termination, this Agreement shall terminate without further obligations to the Executive other than the obligation timely to pay or cause to be paid or provide or cause to be provided to the Executive his Other Benefits. 5. FULL SETTLEMENT. (a) No Offset or Mitigation. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. (b) Executive's Expense in Dispute Resolution. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of a contest (in which the Executive substantially prevails) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the lower of (i) the Wall Street Journal Prime Rate or (ii) the applicable Federal mid-term rate provided for in Section 1274(d), compounded semi-annually, of the Code. (c) Payment prior to Dispute Resolution. If there shall be any dispute between the Company and the Executive in the event of any termination of Executive's employment, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was a Noncovered Termination, that the determination by the Executive of the existence of Good Reason was not made in good faith, or that the Company is not otherwise obligated to pay any amount or provide any benefit to the Executive and his dependents or other beneficiaries, as the case may be, under Section 4(b), the Company shall pay all amounts, and provide all benefits, to the Executive and his dependents or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 4(b) as though such termination were not a Noncovered Termination. Notwithstanding the foregoing, the Company shall not be required to pay any disputed amounts pursuant to this Section 5(c) except upon receipt of an adequate bond, letter of credit or undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 6. PAYMENT LIMITATIONS. (a) Excise Tax Payment Limitation. Notwithstanding anything contained in this Agreement or any other agreement or plan to the contrary, the payments and benefits 7 provided to, or for the benefit of, the Executive under this Agreement or under any other plan or agreement which became payable or are taken into account as a result of the Change in Control (the "Payments") shall be reduced (but not below zero) to the extent necessary so that no payment to be made, or benefit to be provided, to the Executive or for his benefit under this Agreement or any other plan or agreement shall be subject to the imposition of an excise tax under Section 4999 of the Code (such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless the Executive and the Company shall otherwise agree, the Company shall reduce or eliminate the Payments to the Executive by first reducing or eliminating those payments or benefits which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing Executive's rights and entitlements to any benefits or compensation. (b) Excise Tax Payment Limitation Determinations. All determinations required to be made under this Section 6 shall be made by the Company's public accounting firm (the "Accounting Firm"). The Accounting Firm shall provide its calculations, together with detailed supporting documentation, both to the Company and the Executive within fifteen days after the receipt of notice from the Company that there has been a Payment (or at such earlier times as is requested by the Company) and, with respect to any Limited Payment Amount, a reasonable opinion to the Executive that he is not required to report any excise tax on his federal income tax return with respect to the Limited Payment Amount (collectively the "Determination"). In the event that the Accounting Firm is serving as an accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determination required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees, costs and expenses (including, but not limited to, the costs of retaining experts) of the Accounting Firm shall be borne by the Company. The Determination by the Accounting Firm shall be binding upon the Company and the Executive (except as provided in Section 6(c) below). (c) Excise Tax Excess Payments Considered a Loan. If it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, the Executive by the Company, which are in excess of the limitations provided in Section 6(a) (hereinafter referred to as an "Excess Payment"), such Excess Payment shall be deemed for all purposes to be a loan to the Executive made on the date the Executive received the Excess Payment and the Executive shall repay the Excess Payment to the Company on demand, together with interest on the Excess Payment at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive's receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of Determination, it is possible that Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made under this Section 6. In the event that it is determined (i) by the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS or (ii) pursuant to a determination by a court, that an Underpayment has occurred, the Company shall pay an amount equal to such Underpayment to the Executive within ten days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to the Executive until the date of payment. (d) Banking Payment Limitation. Notwithstanding anything contained in this Agreement or any other agreement or plan to the contrary, the payments and benefits provided to, or for the benefit of, the Executive under this Agreement or under any other plan or agreement shall be reduced (but not below zero) to the extent necessary so that no payment to be made, or benefit to be provided, to the Executive or for his benefit under this 8 Agreement or any other plan or agreement shall be in violation of the golden parachute and indemnification payment limitations and prohibitions of 12 CFR Section 359. 7. TERMINATION OF AGREEMENT. This Agreement shall be effective as of the Agreement Effective Date and shall normally continue until the later of the Agreement Regular Termination Date or, if a Change in Control has occurred, until the end of the Coverage Period. Notwithstanding the foregoing, this Agreement shall terminate in any event upon the Executive's cessation of employment in a Noncovered Termination. 8. CONFIDENTIAL INFORMATION. (a) No Disclosure by Executive. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Remedies for Breach. It is recognized that damages in the event of breach of Section 8(a) above by the Executive would be difficult, if not impossible, to ascertain, and it is therefore specifically agreed that the Company, in addition to and without limiting any other remedy or right it may have, shall have the right to an injunction or other equitable relief in any court of competent jurisdiction, enjoining any such breach. The existence of this right shall not preclude the Company from pursuing any other rights and remedies at law or in equity which it may have. (c) Breach Not Basis to Withhold Payment. In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 9. BENEFIT AND SUCCESSORS. (a) Executive's Benefit. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die and any amount remains payable thereunder after his death, any such amount, unless otherwise agreed by the Company or provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee of such payment or, if there is no such designee, the Executive's estate. (b) Company's Benefit. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) Assumption by Successor to Company. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 10. MISCELLANEOUS. 9 (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Virginia, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (b) Amendment. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto on their respective successors and legal representatives. (c) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: If to the Company: Thomas F. Cherry President, C&F Financial Corporation P. O. Box 391 8th & main Streets West Point, Virginia 23181 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) Tax Withholding. The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (g) Executive's Employment. The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to paragraph (ii) of Section 1(i) hereof deeming a termination to have occurred on or after the occurrence of a Change in Control Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Change in Control Date, in which case the Executive shall have no further rights under this Agreement. (h) Nonexclusivity of Rights. Except as expressly provided in Section 6, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or 10 otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Executive's termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. (i) Statutory References. Any reference in this Agreement to a specific statutory provision shall include that provision and any comparable provision or provisions of future legislation amending, modifying, supplementing or superseding the referenced provision. (j) Nonassignability. This Agreement is personal to the Executive, and without the prior written consent of the Company, no right, benefit or interest hereunder shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, except by will or the laws of descent and distribution, and any attempt thereat shall be void; and no right, benefit or interest hereunder shall, prior to receipt of payment, be in any manner liable for or subject to the recipient's debts, contracts, liabilities, engagements or torts. (k) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be considered an original and all of which together shall constitute one agreement. (l) Employment with Affiliates. Employment with the Company for purposes of this Agreement shall include employment with any corporation or other entity in which the Company has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities of such corporation or other entity entitled to vote generally in the election of directors or which has a direct or indirect ownership interest of 50% or more of the total combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. C&F FINANCIAL CORPORATION By: Larry G. Dillon, President Thomas F. Cherry 11 1999 FINANCIAL HIGHLIGHTS C&F Financial Corporation (the "Corporation") is a one-bank holding company with administrative offices in West Point, Virginia. Its wholly- owned subsidiary, Citizens and Farmers Bank, offers quality banking services to individuals, professionals, and small businesses through nine branch offices serving the surrounding towns and counties. Citizens and Commerce Bank, which operates as a division of Citizens and Farmers Bank, offers quality banking services in the Richmond market. Citizens and Farmers Bank has three wholly-owned subsidiaries. C&F Mortgage Corporation originates and sells residential mortgages. These mortgage services are provided through seven offices in Virginia and two offices in Maryland. Brokerage services are offered through C&F Investment Services, Inc. C&F Title Agency, Inc., offers title insurance services. Trust services are provided in association with The Trust Company of Virginia. [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] BANKING MORTGAGE INVESTMENT COMMERCIAL [GRAPH] [GRAPH] Return on Average Equity Return on Average Assets 1996 12.66% 1996 1.65% 1997 16.08% 1997 1.90% 1998 17.81% 1998 2.03% 1999 19.22% 1999 2.19% [GRAPH] [GRAPH] Net Income Earnings Per Share dollars in thousands 1996 $4,061 1996 $ .92 1997 $4,937 1997 $1.25 1998 $6,134 1998 $1.56 1999 $6,756 1999 $1.81 [GRAPHIC] OUR MISSION It is the mission of the directors, offices, and the staff to maximize the long-term wealth of the shareholders of C&F Financial Corporation through Citizens and Farmers Bank and its other subsidiaries. We believe we provide a superior value when we balance long-term and short-term objectives to achieve both a competitive return on investment and a consistent increase in the market value of the Corporation's stock. This must be achieved while maintaining adequate liquidity and safety standards for the protection of all of the Corporation's interested parties, especially its depositors and shareholders. This mission will be accomplished by providing our customers with distinctive service and quality financial products which are responsive to their needs, fairly priced, and delivered promptly and efficiently with the highest degree of accuracy and professionalism. 2 C&F Financial Corporation [GRAPHIC] LETTER FROM THE PRESIDENT Dear Fellow Shareholders [PHOTO] Larry G. Dillon Chairman, President, and Chief Executive Officer On behalf of the Board of Directors, I am pleased to present this Annual Report for C&F Financial Corporation for the year 1999. Our financial results for 1999 continue to place our corporation at the top of its peer group in both Virginia and the nation. Our earnings, assets, and returns all outpaced the records set in 1998. In 1999, net income totaled $6.8 million, or 10.14% higher than the record earnings of 1998. This resulted in a return on average assets of 2.07% and a return on average equity of 18.17% (these returns do not include the $370,000, net, one-time increase in earnings discussed below), up from 2.03% and 17.81%, respectively, in 1998. Our earnings also compare favorably with those of our peers, who as of September 30, 1999 showed average annualized returns on average assets of 1.09% and average equity of 12.32%. Once again we are honored to have been named one of the top 50 mid-sized community banking organizations in the country by U. S. Banker. In its July 1999 issue, C&F Financial Corporation was recognized for its superior performance using the criteria of return on assets, return on equity, efficiency ratio, non-performing assets ratio, and leverage ratio. This is a recognition of which we are most proud. Our success in 1999 was due to increased earnings at Citizens and Farmers Bank and C&F Investment Services, Inc., as well as strong performances by C&F Mortgage Corporation and C&F Title Agency, Inc. A part of Citizens and Farmers Bank's performance increase was due to the collection of a non-accruing loan early in the year that resulted in a $370,000, net, onetime increase in the Bank's earnings for 1999. Also contributing to the improved earnings was the Bank's increase in net interest income, which resulted from higher interest income combined with lower interest costs. The increase in interest income was primarily the result of increased loan volume. Please review Management's Discussion and Analysis for a more in-depth review of our numbers. Our subsidiary companies continue to positively impact the performance and services of the Corporation. While contributing significantly to the Corporation's earnings in 1999, C&F Mortgage Corporation did experience a slight decline in its earnings compared to 1998, as mortgage loan production declined due to the increase in home mortgage interest rates. This decrease in production has been experienced by mortgage companies across the nation so it is not unique to C&F. Some, in fact, experienced losses for the year 1999. 3 The decline in production also impacted the earnings of C&F Title Agency, Inc., whose earnings are closely correlated with those of the Mortgage Corporation. With the decline in mortgage loan production there was a The decline in production also impacted the earnings of C&F Title Agency, Inc., whose earnings are closely correlated with those of the Mortgage Corporation. With the decline in mortgage loan production there was a corresponding decline in business at the Title Agency and hence a decline in earnings. At C&F Investment Services, Inc., sales and income were both up for 1999. We are very pleased with the contributing impact these services are adding both to our product offerings and net income. Increased earnings also indicate how important the addition of this service is to our customer base. During 1999, assets under management increased by more than $16 million, reaching in excess of $83 million at year-end. We now have three full-time brokers serving our nine offices and anticipate adding more in 2000. We are excited with our customers' acceptance and demand for this service. In 1999, we took the first step toward another line of services, which we anticipate will round out our product line and add to our future profitability. We joined a consortium of state community banks and, under the auspices of the Virginia Bankers Association, have formed the Virginia Bankers Insurance Center, LLC to enter the insurance sales marketplace. The strategy for this consortium is to join resources to acquire an existing general insurance agency and thereby allow us to offer a full line of insurance products. This strategy will provide us a lower cost of entry into the insurance arena; give us the opportunity to buy into a larger and more diversified agency; give us an experienced insurance agency staff to service an array of various products; and will outsource management so that we can concentrate on sales. It is anticipated that an agency will be acquired during the first half of 2000, and the opportunities for sales will begin shortly thereafter. Another initiative undertaken in 1999 was the establishment of our Loan Operations Center in West Point. After a lengthy study, it was determined that in the long range interest of the Bank, the consolidation of the backroom loan functions would not only enhance customer service, but would help us assure uniformity in loan underwriting and production. In the long run, it will reduce the number of loan personnel needed throughout the organization and the costs associated with future training. An additional benefit will be to greatly reduce the risk of any loan discrimination, which is important to us as well as to our customers. In the short run, this center will add to our overhead, but in the long run will help us provide better service at reduced costs. During 1999, Citizens and Farmers Bank took a step that was somewhat unusual in the Virginia banking marketplace. We formed a new bank, Citizens and Commerce Bank ("CCB"), which while legally a division of Citizens and Farmers Bank, will operate as a separate entity. The advantages of this structure are that the setup is more efficient; regulatory oversight is less burdensome; CCB will have the capacity to make larger loans as compared to being separately chartered; and the two banks can more easily serve each others' customers. Headquartered in Richmond, Virginia, Citizens and Commerce Bank will cater to both the consumer and small-business markets. CCB opened its first branch on West Broad Street in Richmond in November and anticipates opening several additional branches within the next two to three years. With a management team that is very familiar with the Richmond small-business market and an active, local Board of Directors, we anticipate this new organization will be very successful in contributing to the future growth and earnings of the corporation. In April of this year, Citizens and Farmers Bank will open its tenth branch office, which will be located at the corner 4 of Jamestown Road and Route 199 in Williamsburg. This facility will be our first to have branch offices for Citizens and Farmers Bank, C&F Mortgage Corporation, and C&F Investment Services, Inc., all in the same location. We expect this to be an excellent addition to our branching network. While our goal had been to offer internet banking to our customers before the end of 1999, we deemed it appropriate to delay that service offering until sometime this year. With the "Y2K" cloud hanging over us the latter part of 1999, we felt it prudent to delay any major computer projects until after year-end. With Y2K successfully behind us we are now reevaluating the best solution for offering this service and anticipate having it in place later this year. The year 2000 will be challenging in trying to maintain the same earnings level as was attained in 1999. However, we are confident that the future looks very bright for your corporation both for asset growth and future earnings. We could not have achieved these extraordinary results without the dedication and hard work of an exceptional staff, the insight and direction of our Boards of Directors, and your support and patronage. Please accept our gratitude to all who have had a hand in making this a successful year. /s/ Larry G. Dillon Larry G. Dillon Chairman, President, and Chief Executive Officer [GRAPHIC] Citizens & Commerce Bank In November 1999, Citizens and Farmers Bank opened Citizens & Commerce Bank ("CCB"), in Richmond, its first banking division operating as a local financial institution. It is anticipated that CCB will be able to expand through local management and decision making, while leveraging the many resources provided by Citizens and Farmers Bank. The Bank offers a full range of banking services to all its clients as well as mortgage and investment services offered through C&F Mortgage Corporation and C&F Investment Services, Inc. Citizens & Commerce employs skilled and seasoned bankers that blend old-fashioned customer service with highly diversified quality products that customers require today. 1999 Annual Report 5 [GRAPHIC] Banking Services Citizens and Farmers Bank offers a wide array of general banking services to individuals, professionals, and small businesses through nine branch offices, with the tenth branch of Citizens and Farmers Bank opening in the second quarter of 2000. These services include a variety of checking and savings deposit accounts, as well as business, home equity, automobile, and other installment loans. With new relationship-based checking products, along with our latest addition, "Generations Gold," Citizens and Farmers Bank can provide an account that is best suited to meet the needs of our customers. In addition, the Bank offers "TeleBanc24," which allows our customers access to their accounts 24- hours a day from any touch-tone telephone. [GRAPHIC] Mortgage and Title Services C&F Mortgage offers programs designed for new home purchases, the first-time homebuyer, and home mortgage refinancing. By originating and selling residential mortgages, C&F Mortgage Corporation is able to offer competitive fixed and adjustable rate mortgages. Nine locations are available throughout Virginia and Maryland. The relationship with C&F Mortgage allows our customers to take advantage of the best possible mortgage with competitive rates of interest. A mortgage loan officer is dedicated to each account, minimizing paperwork, reducing response time, and accelerating approvals. As a convenience to our customers, we provide title searches and title insurance through C&F Title Agency, Inc. Established in 1927, Citizens and Farmers Bank continues to maintain superior customer service. [GRAPHIC] [PHOTO] Standing (left to right) - Thomas B. Whitmore Jr., Joshua H. Lawson, J. P. Causey Jr., James H. Hudson III, Bryan E. McKernon, Paul C. Robinson. Seated (left to right) - William E. O'Connell Jr., P. L. Harrell, Larry G. Dillon, Reginald H. Nelson IV, Sture G. Olsson Doug Cash and Eric Nost discuss the latest research report on internet stocks. [PHOTO] [GRAPHIC] Investment Company C&F Investment Services, Inc. is a full service investment company offering the advice of large investment firms with the advantage of home town personal service. Through its affiliation with Raymond James Financial Services, Inc., one of the largest brokerage operations in the U.S., the C&F investment team offers a complete and comprehensive line-up of products and services. Whether you are interested in stocks or bonds, mutual funds, tax-advantaged investments, or financial planning, the C&F investment team is dedicated to helping investors make their decisions in a familiar setting. For added convenience, C&F Investment Advisors are accessible at any of our bank branch locations. [GRAPHIC] Commercial Banking At Citizens and Farmers Bank, we understand that getting a loan is crucial to helping businesses grow. That's why we provide prompt responses to loan requests. For deposit needs, we offer many locations with convenient hours. Not only do we give quick and reliable service, but we also offer a full range of banking products designed specifically for businesses. Our merchant services program allows your businesses to process customers' credit card payments quickly and efficiently. With our individualized commercial account analysis, we are able to offer financial savings to help businesses prosper. But most of all our experienced and knowledgeable bankers are available to provide financial solutions to meet business needs. Branch Manager, Alec Nuttall and Branch Operations Manager, Melissa Loudermilk, make final arrangements for the opening of the Jamestown Road Office in Williamsburg. [GRAPHIC] Standing (left to right) - Meade A. Spotts, Jeffery W. Jones, Scott E. Strickler Seated (left to right) - S. Craig Lane, William E. O'Connell Jr., Frank Bell III [PHOTO] We believe that excellence is the standard for all we do, achieved by encouraging and nourishing: respect for others; honest,open communication; individual development and satisfaction; a sense of ownership and responsibility for the Corporation's success; participation, cooperation, and teamwork; creativity, innovation,and initiative; prudent risk-taking; and recognition and rewards for achievement. OUR VALUES We believe that we must conduct ourselves morally and ethically at all times and in all relationships. We believe that we have an obligation to the well-being of all the communities we serve. [GRAPHIC] We believe that our officers and staff are our most important assets, making the critical difference in how the Corporation performs and, through their work and effort, separate us from all competitors. 8 C&F Financial Corporation [GRAPHIC] COMPANY FINANCIALS [LOGO] 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, financial condition, liquidity, and capital resources of C&F Financial Corporation and subsidiary (the "Corporation"). 1999 Annual Report This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements. 9 FIVE YEAR FINANCIAL SUMMARY 1999 1998 1997 1996 1995 -------------------------------------------------------------------------------------------- Selected Year-End Balances: Total assets $329,241,321 $320,863,629 $278,105,969 $256,671,312 $238,995,329 Total capital 35,129,710 36,647,493 31,800,533 32,214,509 31,818,296 Total loans (net) 206,115,896 169,918,428 154,744,620 136,732,017 110,012,320 Total deposits 260,853,635 251,673,159 231,513,152 216,422,556 204,001,334 -------------------------------------------------------------------------------------------- Summary of Operations: Interest income 23,643,557 22,617,509 19,763,048 18,332,998 15,686,897 Interest expense 9,067,867 9,558,059 8,002,301 7,667,619 6,526,880 -------------------------------------------------------------------------------------------- Net interest income 14,575,690 13,059,450 11,760,747 10,665,379 9,160,017 Provision for loan losses 600,000 600,000 330,000 30,000 -- -------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 13,975,690 12,459,450 11,430,747 10,635,379 9,160,017 Other income 11,274,596 11,009,622 6,657,608 4,678,915 1,233,267 Operating expenses 16,099,690 14,981,685 11,537,565 10,294,220 6,126,722 -------------------------------------------------------------------------------------------- Income before taxes 9,150,596 8,487,387 6,550,790 5,020,074 4,266,562 Income tax expense 2,394,366 2,353,351 1,613,963 958,900 890,630 -------------------------------------------------------------------------------------------- Net income $ 6,756,230 $ 6,134,036 $ 4,936,827 $ 4,061,174 $ 3,375,932 -------------------------------------------------------------------------------------------- Per share/1/ Earnings per common share--assuming dilution $1.81 $1.56 $1.25 $.92 $.76 Dividends .49 .44 .35 .31 .30 -------------------------------------------------------------------------------------------- Weighted average number of shares--assuming dilution 3,738,234 3,919,775 3,952,756 4,426,000 4,472,956 -------------------------------------------------------------------------------------------- /1/Per share data has been restated to reflect the two-for-one stock split in July 1998. Significant Ratios 1999 1998 1997 -------------------------------------------------------------------------------------------- Return on average assets 2.19% 2.03% 1.90% Return on average equity 19.22 17.81 16.08 Dividend payout ratio 26.60 27.70 27.75 Average equity to average assets 11.38 11.42 11.81 -------------------------------------------------------------------------------------------- OVERVIEW Net income totaled $6.8 million in 1999, an increase of 10.1% over 1998. Included in earnings for 1999 is $370,000 in interest income (after taxes) which resulted from the payoff of a non-accrual loan in January. Excluding this, net income increased 4.1% over 1998. In 1998, net income totaled $6.1 million, a 24.3% increase over 1997. Diluted earnings per share were $1.81, $1.56, and $1.25 in 1999, 1998, and 1997, respectively. Excluding the interest income collected on the non-accrual loan, diluted earnings per share was $1.71 in 1999. The increase in earnings per share was a result of higher net income and the repurchase of 247,500 shares of the Corporation's common stock in 1999 and 204,683 shares of the Corporation's common stock in 1997. Profitability as measured by the Corporation's return on average equity (ROE), excluding the interest income collected on the non-accrual loan, was 18.17% in 1999, up from 17.81% in 1998, and 16.08% in 1997. Another key indicator of performance, the return on average assets (ROA) for 1999, excluding the interest income collected on the non-accrual loan, was 2.07%, compared to 2.03% and 1.90% for 1998 and 1997, respectively. C&F Financial Corporation 10 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, 1999, 1998, and 1997. 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. 1999 1998 1997 ------------------------ ------------------------ ------------------------ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate ------------------------------------------------------------------------------------------------------ Assets Securities: Taxable $ 15,293 $ 1,097 7.17% $ 33,607 $ 2,359 7.02% $ 37,309 $ 2,737 7.34% Tax-exempt 49,049 4,013 8.18 42,606 3,590 8.43 39,554 3,388 8.57 ------------------------------------------------------------------------------------------------------ Total securities 64,342 5,110 7.94 76,213 5,949 7.81 76,863 6,125 7.97 Loans, net 216,295 18,850 8.71 206,353 17,790 8.62 165,168 14,656 8.87 Interest-bearing deposits in other banks and fed funds 9,621 458 4.76 1,088 69 6.34 1,251 68 5.44 ------------------------------------------------------------------------------------------------------ Total earning assets 290,258 $24,418 8.41% 283,654 $23,808 8.39% 243,282 $20,849 8.57% Reserve for loan losses (3,003) (2,451) (2,032) Total non-earning assets 21,710 20,484 18,708 ------------------------------------------------------------------------------------------------------ Total assets $308,965 $301,687 $259,958 ------------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity Time and savings deposits: Interest-bearing deposits $ 45,627 $ 1,084 2.38% $ 37,178 $ 901 2.42% $ 34,594 $ 890 2.57% Money market deposits 25,207 807 3.20 21,984 718 3.27 23,416 767 3.28 Savings accounts 39,131 1,164 2.97 35,094 1,135 3.23 33,037 1,058 3.20 Certificates of deposit, $100M or more 17,977 857 4.77 16,670 819 4.91 14,137 466 3.30 Other certificates of deposit 89,467 4,416 4.94 87,938 4,616 5.25 82,655 4,493 5.44 ------------------------------------------------------------------------------------------------------ Total time and savings deposits 217,409 8,328 3.83 198,864 8,189 4.12 187,839 7,674 4.09 ------------------------------------------------------------------------------------------------------ Borrowings 15,002 740 4.93 25,169 1,369 5.44 6,441 328 5.09 ------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 232,411 9,068 3.90 224,033 9,558 4.27 194,280 8,002 4.12 ------------------------------------------------------------------------------------------------------ Demand deposits 35,697 35,987 31,449 Other liabilities 5,701 7,221 3,533 ------------------------------------------------------------------------------------------------------ Total liabilities 273,809 267,241 229,262 Shareholders' equity 35,156 34,446 30,696 ------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $308,965 $301,687 $259,958 ------------------------------------------------------------------------------------------------------ Net interest income $15,350 $14,250 $12,847 ------------------------------------------------------------------------------------------------------ Interest rate spread 4.51 4.12 4.45 ------------------------------------------------------------------------------------------------------ Interest expense to average earning assets 3.12 3.37 3.29 ------------------------------------------------------------------------------------------------------ Net interest margin 5.29% 5.02% 5.28% ------------------------------------------------------------------------------------------------------ 1999 Annual Report 11 RESULTS OF OPERATIONS NET INTEREST INCOME During 1999, net interest income, on a tax-equivalent basis, excluding the one-time interest collected on a non-accrual loan, increased 7.7% to $15.4 million from $14.3 million in 1998. This was a result of a 2.3% increase in the average balance of interest earning assets and an increase in the net interest margin to 5.29% for 1999 from 5.02% for 1998. The increase in the average balance of interest earning assets was a result of an increase in average balance of loans at Citizens and Farmers Bank (the "Bank") and an increase in the average balance of interest-bearing deposits in other banks and fed funds offset by a decrease in the average balance of securities and loans held for sale at C&F Mortgage Corporation (the "Mortgage Corporation"). The increase in loans at the Bank was a result of overall higher loan demand and the increase in interest bearing deposits in other banks and fed funds was a result of excess liquidity resulting from the decrease in securities. The decline in securities was a result of a large number of securities being called in the first half of 1999. The decrease in loans held for sale at the Mortgage Corporation was a result of a decrease in loan closings to $457 million in 1999 from $524 million in 1998 and an increase in loan fundings (sold) to $499 million in 1999 from $481 million in 1998. The increase in the net interest margin was mainly a result of a decrease in cost of funds to 3.90% for 1999 from 4.27% for 1998. The decrease in cost of funds was a result of the decrease in cost of deposits and borrowings and an overall decrease in the average balance of higher cost borrowings. The decrease in the cost of deposits and borrowings was a result of the overall lower interest rate for the first half of 1999. The decrease in the average balance of borrowings is a result of the decrease in loans held for sale at the Mortgage Corporation. Borrowings from the Federal Home Loan Bank ("FHLB") are used to fund loans originated and subsequently sold by the Mortgage Corporation. During 1998, net interest income, on a tax-equivalent basis, increased 10.9% to $14.3 million from $12.8 million in 1997. This was a result of a 16.6% increase in the average balance of interest-earning assets offset by a decrease in the net interest margin to 5.02% for the year ended December 31, 1998, from 5.28% for 1997. The increase in the average balance of interest- earning assets was attributed to an increase in the average balance of loans at the Bank and loans held for sale at the Mortgage Corporation. The decrease in the net interest margin was a result of a decrease in the yield on interest-earning assets resulting from the lower interest rate environment and a increase in the cost of funds mainly attributed to increased borrowings from the FHLB. As mentioned above, borrowings from the FHLB are used to fund loans originated and subsequently sold by the Mortgage Corporation. Loan closings at the Mortgage Corporation increased to $524 million for the year ended December 31, 1998, compared to $286 million for 1997. C&F Financial Corporation 12 TABLE 2: Rate-Volume Recap Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following analysis shows the direct causes of the year-to-year changes in the components of net interest earnings on a taxable-equivalent basis. The rate and volume variances are calculated by a formula prescribed by the Securities and Exchange Commission. Rate/volume variances, the third element in the calculation, are not shown separately, but are allocated to the rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each. Loans include both non- accrual loans and loans held for sale. 1999 from 1998 1998 from 1997 ---------------------------------- --------------------------------- Increase (Decrease) Total Increase (Decrease) Total Due to Increase Due to Increase (Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease) -------------------------------------------------------------------------------------------------------------- Interest income: Loans $ 865 $ 195 $1,060 $ 3,561 $ (427) $3,134 Securities: Taxable (1,313) 51 (1,262) (263) (115) (378) Tax-exempt 530 (107) 423 258 (56) 202 -------------------------------------------------------------------------------------------------------------- Total securities (783) (56) (839) (5) (171) (176) -------------------------------------------------------------------------------------------------------------- Interest-bearing deposits in other banks and fed funds 365 24 389 (10) 11 1 -------------------------------------------------------------------------------------------------------------- Total interest income 447 163 610 3,546 (587) 2,959 -------------------------------------------------------------------------------------------------------------- Interest expense: Time and savings deposits: Interest-bearing deposits 201 (18) 183 64 (53) 11 Money market deposit accounts 103 (14) 89 (47) (2) (49) Savings accounts 124 (95) 29 66 11 77 Certificates of deposit, $100M or more 63 (25) 38 94 259 353 Other certificates of deposit 79 (279) (200) 281 (158) 123 -------------------------------------------------------------------------------------------------------------- Total time and savings deposits 570 (431) 139 458 57 515 Other borrowings (511) (118) (629) 1,017 24 1,041 -------------------------------------------------------------------------------------------------------------- Total interest expense 59 (549) (490) 1,475 81 1,556 -------------------------------------------------------------------------------------------------------------- Change in net interest income $ 388 $ 712 $1,100 $ 2,071 $ (668) $1,403 -------------------------------------------------------------------------------------------------------------- 1999 Annual Report 13 MARKET RISK MANAGEMENT As the holding company for a commercial bank, the Corporation's primary compo- nent of market risk is interest rate volatility. Fluctuation in interest rates will ultimately impact the level of both income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Since the majority of the Corpora- tion's interest-earning assets and all of the Corporation's interest-bearing liabilities are held by the Bank, virtually all of the Corporation's interest rate risk exposure lies at the Bank level. Therefore, all significant interest rate risk management procedures are performed by management of the Bank. Based on the nature of the Bank's operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank's loan portfolio is con- centrated primarily in the Virginia counties of King William, King and Queen, Hanover, Henrico, Essex, Middlesex, New Kent, Charles City, York, and James City, and is, therefore, subject to risks associated with the local economy. As of December 31, 1999, the Corporation does not own any trading assets nor does it have any hedging transactions in place such as interest rate swaps and caps. The Bank's interest rate management strategy is designed to stabilize net in- terest income and preserve capital. The Bank manages interest rate risk through the use of a simulation model which measures the sensitivity of future net interest income and the net portfolio value to changes in interest rates. In addition, the Bank monitors interest rate sensitivity through analysis, measuring the terms to maturity or next repricing date of interest-earning as- sets and interest-bearing liabilities. The matching of the maturities of as- sets and liabilities may be analyzed by examining the extent to which assets and liabilities are "interest rate sensitive" and by monitoring an institu- tion's interest rate sensitivity "gap." An asset or liability is said to be "interest rate sensitive" within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity "gap" is de- fined as the difference between the amount of interest-earning assets antici- pated, based on certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based on certain assumptions, to mature or reprice within that time period. A gap is considered negative when the amount of interest-rate-sensitive liabilities ma- turing or repricing within a specific time period exceeds the amount of inter- est-rate-sensitive assets maturing or repricing within that same time period. During a period of rising interest rates, a negative gap would tend to result in a decrease in net interest income while a positive gap would tend to result in an increase in net interest income. In a declining interest rate environ- ment, an institution with a negative gap would generally be expected, absent the effect of other factors, to experience a greater decrease in the cost of its liabilities relative to the yield of its assets and thus an increase in the institution's net interest income, whereas an institution with a positive gap would be expected to experience the opposite result. Certain shortcomings are inherent in any rate method of analysis used to esti- mate a financial institution's interest rate gap. The analysis is based at a given point in time and does not take into consideration that changes in in- terest rates do not affect all assets and liabilities equally. For example, although certain assets and liabilities may have similar maturities or repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and liabilities also may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. The interest rates on loans with call features may or may not change depending on their interest rates relative to market interest rates. The Corporation is also subject to prepayment risk, particularly in falling interest rate environments or in environments where the slope of the yield curve is relatively flat or negative. Such changes in the interest rate envi- ronment can cause substantial changes in the level of prepayments of loans, which may also affect the Corporation's interest rate gap position. As part of its borrowings, the Corporation may utilize, from time to time, daily and convertible advances from the FHLB-Atlanta. Convertible advances generally provide for a fixed rate of interest for a portion of the term of the advance, an ability for the FHLB-Atlanta to convert the advance from a fixed rate to an adjustable rate at some predetermined time during the remain- ing term of the advance (the "conversion" feature), and a concurrent opportu- nity for the Corporation to prepay the advance with no prepayment penalty in the event the FHLB-Atlanta elects to exercise the conversion feature. Changes in interest rates from those at December 31, 1999, may result in a change in the estimated maturity of convertible advances and, therefore, the Corpora- tion's interest rate gap position. Also, the methodology used estimates various rates of withdrawal for money market deposits, savings, and checking accounts, which may vary significantly from actual experience. The following table sets forth the amounts of interest-earning assets and in- terest-bearing liabilities outstanding at December 31, 1999, that are subject to repricing or that mature in each of the time periods shown. Additionally, loans and securities with call provisions are included in the period in which they may first be called. Except as stated above, the amount of assets and li- abilities shown that reprice or mature during a particular period were deter- mined in accordance with the contractual terms of the asset or liability. C&F Financial Corporation 14 TABLE 3: Interest Sensitivity Analysis Interest-Sensitive Periods -------------------------------------------------- Within 91-365 1-5 Over (Dollars in thousands) 90 Days Days Years 5 Years Total ------------------------------------------------------------------------------ December 31, 1999 Earning assets: Loans, net of unearned income $ 96,218 $ 14,723 $ 56,837 $ 66,527 $234,305 Securities 5,201 6,719 21,643 34,925 68,488 Federal funds sold and other short-term investments 2,062 -- -- -- 2,062 ------------------------------------------------------------------------------ Total earning assets 103,481 21,442 78,480 101,452 304,855 ------------------------------------------------------------------------------ Interest-bearing liabilities: Interest-bearing transaction accounts 8,574 25,721 22,863 -- 57,158 Savings accounts 5,752 17,257 15,338 -- 38,347 Money market deposit accounts 3,921 11,764 10,456 -- 26,141 Certificates of deposit, $100M or more 3,522 11,345 2,800 -- 17,667 Other certificates of deposit 19,138 44,766 22,810 -- 86,714 Borrowings 30,035 -- -- -- 30,035 ------------------------------------------------------------------------------ Total interest-bearing liabilities 70,942 110,853 74,267 -- 256,062 ------------------------------------------------------------------------------ Period gap 32,539 (89,411) 4,213 101,452 Cumulative gap $ 32,539 $(56,872) $(52,659) $ 48,793 Ratio of cumulative gap to total earning assets 10.67% (18.66)% (17.27)% 16.01% ------------------------------------------------------------------------------ The following tables provide information about the Corporation's financial instruments that are sensitive to changes in interest rates as of December 31, 1999 and 1998, based on the information and assumptions set forth in the notes. The Corporation believes that the assumptions utilized are reasonable. The expected maturity date values for loans were calculated by adjusting the instruments' contractual maturity date for expectations of prepayments, as set forth in the notes. Similarly, expected maturity date values for interest- bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding, as set forth in the notes. From a risk-management perspective, however, the Corporation utilizes both maturity and repricing dates, as opposed to solely using expected maturity dates. As shown in the table, there have been no significant changes in the maturities of interest-earning assets or liabilities. The large decrease in loans held for sale maturing within one year is a result of decreased production at the Mortgage Corporation. All loans originated at the Mortgage Corporation are usually sold within one month. The increase in borrowings is also a result of the increased loan growth at the Bank. 1999 Annual Report 15 TABLE 4: Maturity of Interest-Bearing Assets/Liabilities Principal Amount Maturing in: ---------------------------------------------------------------------- Dollars in thousands 1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total Fair Value ----------------------------------------------------------------------------------------------- Earning Assets: Fixed rate loans(/1/)(/2/) December 31, 1999 $23,772 $11,390 $ 9,664 $ 7,762 $ 6,221 $28,460 $ 87,269 $ 85,193 December 31, 1998 18,157 9,532 7,834 6,308 4,860 16,591 63,282 64,537 Average interest rate December 31, 1999 8.79% 8.56% 8.32% 8.16% 8.07% 7.98% 8.34% December 31, 1998 9.00% 8.66% 8.33% 8.06% 7.96% 7.84% 8.53% Variable rate loans(/1/)(/2/) December 31, 1999 $41,271 $12,601 $ 8,136 $ 6,407 $ 7,155 $47,590 $123,160 $122,633 December 31, 1998 40,008 7,187 6,656 5,626 5,488 45,369 110,334 111,991 Average interest rate December 31, 1999 8.88% 8.67% 8.47% 8.30% 8.48% 8.24% 8.53% December 31, 1998 8.85% 8.47% 8.38% 8.38% 8.32% 8.30% 8.44% Loans held for sale December 31, 1999 $24,887 $ -- $ -- $ -- $ -- $ -- $ 24,887 $ 25,319 December 31, 1998 66,993 -- -- -- -- -- 66,993 68,098 Average interest rate December 31, 1999 8.15% -- -- -- -- -- 8.15% December 31, 1998 6.24% -- -- -- -- -- 6.24% Securities(/3/)(/4/) December 31, 1999 $ 155 $ 1,385 $ 1,146 $ 1,853 $ 806 $63,143 $ 68,488 $ 66,769 December 31, 1998 3,969 495 2,040 1,384 2,351 51,758 61,997 64,459 Average interest rate December 31, 1999 6.65% 7.68% 5.86% 5.96% 6.21% 5.76% 5.81% December 31, 1998 6.92% 6.70% 7.32% 5.82% 5.99% 5.52% 5.69% Interest-Bearing Liabilities: Money market, savings, and interest- bearing transaction accounts(/5/) December 31, 1999 $72,985 $12,165 $12,165 $12,165 $12,165 $ -- $121,645 $121,514 December 31, 1998 60,979 10,163 10,163 10,163 10,163 -- 101,631 101,604 Average interest rate December 31, 1999 2.77% 2.77% 2.77% 2.77% 2.77% -- 2.77% December 31, 1998 2.98% 2.98% 2.98% 2.98% 2.98% -- 2.98% Certificates of deposit December 31, 1999 $78,772 $16,466 $ 4,112 $ 3,048 $ 1,514 $ 469 $104,381 $104,344 December 31, 1998 80,490 21,629 2,369 1,272 3,029 345 109,134 109,714 Average interest rate December 31, 1999 4.77% 4.91% 5.20% 5.69% 5.15% 3.73% 4.83% December 31, 1998 5.02% 5.50% 5.30% 5.81% 5.67% 3.52% 5.15% Borrowings December 31, 1999 $30,035 $ -- $ -- $ -- $ -- $ -- $ 30,035 $ 30,035 December 31, 1998 14,661 -- 10,000 -- -- -- 24,661 24,658 Average interest rate December 31, 1999 5.40% -- -- -- -- -- 5.40% December 31, 1998 4.68% -- 4.98% -- -- -- 4.80% ----------------------------------------------------------------------------------------------- (1) Net of undisbursed loan proceeds and does not include net deferred loan fees or the allowance for loan losses. (2) For single-family residential loans, assumes annual prepayment rate of 12%. No prepayment assumptions were used for all other loans. (3) Includes the Corporation's investment in Federal Home Loan Bank stock. (4) Average interest rates are the average of stated coupon rates and have not been adjusted for taxes. (5) For money market, savings, and interest-bearing transaction accounts, assumes an annual decay rate of 60% for year 1 and 10% for each of the years 2 through 5. C&F Financial Corporation 16 NON-INTEREST INCOME TABLE 5: Non-Interest Income Year Ended December 31, ---------------------- Dollars in thousands 1999 1998 1997 --------------------------------------------------------------------- Gain on sale of loans $ 6,692 $ 7,129 $4,056 Service charges on deposit accounts 1,154 1,033 1,013 Other service charges and fees 2,220 1,867 987 Gain on sale of available for sale securities 139 -- -- Other income 1,070 981 602 --------------------------------------------------------------------- $11,275 $11,010 $6,658 --------------------------------------------------------------------- 1999 VS. 1998 Non-interest income increased by $265,000, or 2.4%, in 1999. The increase is a result of increased fees at C&F Investment Services, Inc. (the "Investment Company") and the Bank and a $139,000 gain on securities which were called during the year. The increase in fees at the Investment Company and the Bank is due to overall growth. These increases are offset by a $437,000 decrease in the gain on sale of loans at the Mortgage Corporation. This decrease is a re- sult of the overall decrease in production in the Mortgage Corporation which is a result of the higher interest rate environment in the second half of 1999 as compared to 1998. 1998 VS. 1997 Non-interest income increased by $4.4 million, or 65.4%, over 1997. The major- ity of the increase was attributed to an approximate $3.1 million increase in the gain on the sale of loans resulting from an increase in loan production at the Mortgage Corporation. Loan closings at the Mortgage Corporation totaled $524 million in 1998 compared to $286 million in 1997 and $174 million in 1996. Other service charges and fees increased $880,000, or 89.1%, over 1997. The majority of this was attributed to fees associated with loan closings at the Mortgage Corporation. Other income increased approximately $379,000, or 63%, over 1997. The majority of this income was attributed to increased income at C&F Title Agency, Inc. (the "Title Agency"). The increase in income at the Title Agency was a direct result of the increased loan closings at the Mort- gage Corporation. NON-INTEREST EXPENSE TABLE 6: Non-Interest Expense Year Ended December 31, ----------------------- Dollars in thousands 1999 1998 1997 ------------------------------------------------------- Salaries and employee benefits $ 9,366 $ 8,286 $ 6,332 Occupancy expense 2,044 2,010 1,799 Goodwill amortization 275 275 275 Other expenses 4,415 4,411 3,132 ------------------------------------------------------- $16,100 $14,982 $11,538 ------------------------------------------------------- 1999 VS. 1998 Non-interest expense increased $1.1 million, or 7.5%, over 1998. The majority of this increase is a result of increased salaries and benefits at the Bank, the Mortgage Corporation, and the Investment Company. The increase in salaries and benefits at the Bank is due to overall growth including the formation of Citizens & Commerce Bank ("CCB"), which operates as a division of the Bank. CCB was formed in the second half of 1999, and has an area President and a re- gional Board of Directors. CCB was formed to serve the greater Richmond mar- ket. Currently, CCB has one branch open. The increase in salaries and benefits at the Mortgage Corporation was a result of increased non-commission positions due to the low interest rate environment in the second half of 1998 and the first half of 1999. The increase in salaries at the Investment Company is a result of overall growth. 1998 VS. 1997 Non-interest expense increased $3.4 million, or 29.9%, over 1997. $2.0 million of this increase resulted from increased salaries and employee benefits. The majority of this increase can be attributed to increased commissions at the Mortgage Corporation, which was a result of increased loan closings. The re- mainder of the increase in salaries and employee benefits was a result of gen- eral pay increases along with the addition of new employees at both the Bank and the Mortgage Corporation. Other expenses increased by $1.3 million, or 43%, over 1997. The majority of this increase can be associated with costs re- lated to the increase in loan closings at the Mortgage Corporation. The re- mainder of the increase can be attributed to general expenses at the Bank in- cluding $100,000 in costs associated with the Year 2000 ("Y2K") issue. 1999 Annual Report 17 YEAR 2000 ISSUE The Y2K issue involved the risk that computer programs and computer systems would not be able to perform without interruption into the year 2000. If com- puter systems did not correctly recognize the date change from December 31, 1999 to January 1, 2000, computer applications that rely on the date field could have failed or created erroneous results. All computer programs and sys- tems at the Corporation operated without problems when the date changed from December 31, 1999 to January 1, 2000. While the Corporation will continue to monitor computer programs and systems, no problems are expected. To date, the Corporation has expensed $150,000 related with the Year 2000 is- sue. Remaining expenditures are not expected to have a material effect on the Corporation's consolidated financial statements. INCOME TAXES Applicable income taxes on 1999 earnings amounted to $2,394,000, resulting in an effective tax rate of 26.1% compared to $2,353,000, or 27.7%, in 1998, and $1,614,000, or 24.6%, in 1997. The decrease in the effective tax rate for 1999 as compared to 1998 is a result of the increase in earnings subject to no taxes such as certain loans to municipalities or investment obligations of states and political subdivisions. The increase in the effective tax rate in 1998 as compared to 1997 was a result of the increase in earnings subject to a 34% tax rate, mainly resulting from increased income at the Mortgage Corpora- tion, versus earnings subject to no taxes. TABLE 7: Allowance for Loan Losses Year Ended December 31, -------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------- Reserve, beginning of period $2,760 $2,234 $1,927 $1,914 $1,895 Provision for loan losses 600 600 330 30 -- Loans charged off: Real estate--mortgage 10 33 12 -- -- Real estate--construction -- -- -- -- -- Commercial, financial, and agricultural -- -- 3 4 4 Consumer 76 66 12 25 4 ----------------------------------------------------------------------------- Total loans charged off 86 99 27 29 8 Recoveries of loans previously charged off: Real estate--mortgage -- 25 -- 1 19 Real estate--construction -- -- -- -- -- Commercial, financial, and agricultural 13 -- -- 11 -- Consumer 15 -- 4 -- 8 ----------------------------------------------------------------------------- Total recoveries 28 25 4 12 27 Net loans charged off 58 74 23 17 (19) ----------------------------------------------------------------------------- Balance, end of period $3,302 $2,760 $2,234 $1,927 $1,914 ----------------------------------------------------------------------------- Ratio of net charge-offs to average total loans outstanding during period .03% .04% .01% .01% (.01%) ----------------------------------------------------------------------------- C&F Financial Corporation 18 TABLE 8: Allocation of Allowance for Possible Loan Losses The allowance for loan losses is a general allowance applicable to all loan categories; however, management has allocated the allowance to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs in 2000 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) 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------- Allocation of allowance for possible loan losses, end of year: Real estate--mortgage $ 753 $ 667 $ 692 $ 873 $ 786 Real estate--construction 160 108 89 69 34 Commercial, financial, and agricultural 1,686 1,211 926 733 352 Equity lines 103 86 71 62 60 Consumer 380 251 167 160 93 Unallocated 220 437 289 30 589 ----------------------------------------------------------------------------- Balance, December 31 $3,302 $2,760 $2,234 $1,927 $1,914 ----------------------------------------------------------------------------- Ratio of loans to total year-end loans: Real estate--mortgage 43% 50% 57% 62% 70% Real estate--construction 4 3 3 2 2 Commercial, financial, and agricultural 42 36 31 26 19 Equity lines 5 5 4 5 5 Consumer 6 6 5 5 4 ----------------------------------------------------------------------------- 100% 100% 100% 100% 100% ----------------------------------------------------------------------------- ASSET QUALITY-ALLOWANCE/ PROVISION FOR LOAN LOSSES The allowance for loan losses is to provide for potential losses inherent in the loan portfolio. Among other factors, management considers the Corpora- tion's historical loss experience, the size and composition of the loan port- folio, 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 al- lowance for loan losses is an estimate. The allowance is also subject to regu- latory examinations and determination as to adequacy, which may take into ac- count 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 1999, the Corporation had $600,000 in provision for loan losses compared to $600,000 in 1998 and $330,000 in 1997. The increase in provision from 1997 to 1998 was 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 1999 amounted to $86,000 compared to $99,000 in 1998 and $27,000 in 1997. Recoveries amounted to $28,000, $25,000, and $4,000 in 1999, 1998, and 1997, respectively. The ratio of net charge-offs to average outstanding loans was .03% in 1999, .04% in 1998, and .01% in 1997. Management feels that the reserve is adequate to absorb any losses on existing loans that may become uncollectible. Table 7 presents the Corporation's loan loss and recovery experience for the past five years. NON-PERFORMING ASSETS Total non-performing assets, which consist of the Corporation's non-accrual loans and real estate owned, were $49,000 at December 31, 1999, a decrease of $414,000 from December 31, 1998. The decrease in 1999 was primarily the col- lection of one large non-accrual loan which was on the Corporation's books at December 31, 1998. Loans are generally placed on non-accrual status when the collection of prin- cipal or interest is ninety days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collat- eral and the financial strength of the borrower. Loans greater than ninety days past due may remain on accrual status if management determines it has ad- equate collateral to cover the principal and interest. For those loans which are carried on non-accrual status, interest is recognized on the cash basis. For 1999, $8,000 in gross interest income would have been recorded if non-ac- crual loans had been current throughout the period outstanding. For the period ended December 31, 1999, interest income received on non-accrual loans was $551,000. 1999 Annual Report 19 Table 9 summarizes non-performing assets for the past five years. TABLE 9: Non-Performing Asset Activity (Dollars in thousands) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------- Non-accrual loans $ 49 $ 463 $ 497 $ 525 $ 907 Real estate owned -- -- 444 -- -- ------------------------------------------------------------------------------- Total non-performing assets 49 463 941 525 907 ------------------------------------------------------------------------------- Principal and/or interest past due for 90 days or more $ 786 $ 958 $ 768 $ 260 $ 180 ------------------------------------------------------------------------------- Non-performing loans to total loans .02% .27% .31% .38% .81% Allowance for loan losses to total loans 1.58 1.60 1.42 1.39 1.71 Allowance for loan losses to non- performing loans 6,738.78 596.11 449.30 367.05 211.03 Non-performing assets to total assets .01% .14% .34% .20% .38% ------------------------------------------------------------------------------- FINANCIAL CONDITION SUMMARY At the end of 1999, the Corporation A financial institution's primary had total assets of $329 million, up sources of revenue are generated by 2.5% over the previous year-end. In its earning assets, while its major 1998, there was an increase of 15.4% expenses are produced by the funding in total assets over year-end 1997. of those assets with interest-bearing Asset growth in 1999 is attributable liabilities. Effective management of to an increase in loans at the Bank these sources and uses of funds is offset by a decrease in loans held essential in attaining a financial for sale at the Mortgage Corporation. institution's maximum profitability while maintaining a minimum amount of risk. TABLE 10: Summary of Total Loans Year Ended December 31, ------------------------------------------------ (Dollars in thousands) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------ Real estate--mortgage $ 89,952 $ 86,311 $ 88,973 $ 86,324 $ 77,924 Real estate--construction 7,968 5,359 4,454 3,415 1,681 Commercial, financial, and agricultural/1/ 89,135 62,885 48,737 36,385 21,719 Equity lines 10,272 8,580 7,131 6,180 5,954 Consumer 12,091 9,543 7,683 6,355 4,648 ------------------------------------------------------------------------------ Total loans 209,418 172,678 156,978 138,659 111,926 Less allowance for possible loan losses (3,302) (2,760) (2,233) (1,927) (1,914) ------------------------------------------------------------------------------ Total loans, net $206,116 $169,918 $154,745 $136,732 $110,012 ------------------------------------------------------------------------------ /1/ Includes loans secured by real estate TABLE 11: Maturity/Repricing Schedule of Loans December 31, 1999 ----------------------------------- (Dollars in Commercial, financial, Real estate thousands) and agricultural construction --------------------------------------------------- Variable Rate: Within 1 year $35,171 $ -- 1 to 5 years 16,857 -- After 5 years 16,312 -- Fixed Rate: Within 1 year 2,270 7,968  1 to 5 years 6,392 -- After 5 years 12,133 -- --------------------------------------------------- C&F Financial Corporation 20 LOAN PORTFOLIO The Corporation's lending activities At December 31, 1999, loans, net of are its principal source of income. unearned income and reserve for loan All loans are attributable to domes- losses, totaled $206.1 million, an tic operations. Residential real es- increase of 21.3% over the 1998 total tate loans, both construction and of $169.9 million. Net loans in- permanent, represent the major por- creased 9.8% and 13.2% in 1998 and tion of the Corporation's loan port- 1997, respectively. folio, although commercial loans con- tinue to increase as a percentage of total loans. Tables 10 and 11 present information pertaining to the compo- sition of loans including unearned income and the maturity/repricing of loans. TABLE 12: Maturity of Securities Year Ended December 31, ---------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average (Dollars in thousands) Cost Yield Cost Yield Cost Yield ------------------------------------------------------------------------------------------------------------ U.S. government agencies and corporations: Maturing within 1 year $ -- --% $ 999 8.46% $ 5,500 8.06% Maturing after 1 year, but within 5 years -- -- 500 6.21 1,998 7.43 Maturing after 5 years, but within 10 years 4,500 7.03 3,500 6.76 12,498 6.75 Maturing after 10 years 9,000 7.08 8,498 6.96 11,998 7.30 ------------------------------------------------------------------------------------------------------------ Total U.S. government agencies and corporations 13,500 7.07 13,497 6.99 31,994 7.22 ------------------------------------------------------------------------------------------------------------ U.S. Treasuries: Maturing within 1 year -- -- 1,999 5.94 -- -- Maturing after 1 year, but within 5 years 1,000 8.01 1,000 8.02 2,998 6.63 ------------------------------------------------------------------------------------------------------------ Total U.S. Treasuries 1,000 8.01 2,999 6.63 2,998 6.63 ------------------------------------------------------------------------------------------------------------ States and municipals:/1/ Maturing within 1 year 155 9.77 971 10.18 850 10.11 Maturing after 1 year, but within 5 years 4,190 8.87 4,770 9.46 4,188 9.85 Maturing after 5 years, but within 10 years 14,352 7.97 13,163 8.42 10,666 8.74 Maturing after 10 years 28,496 7.52 20,121 7.90 20,425 8.11 ------------------------------------------------------------------------------------------------------------ Total states and municipals 47,193 7.66 39,025 8.33 36,129 8.55 ------------------------------------------------------------------------------------------------------------ Other securities: Maturing within 1 year -- -- -- -- 300 8.62 Maturing after 1 year, but within 5 years -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------ Total other securities -- -- -- -- 300 8.62 ------------------------------------------------------------------------------------------------------------ Total securities:/2/ Maturing within 1 year 155 9.77 3,969 7.76 6,650 8.37 Maturing after 1 year, but within 5 years 5,190 8.71 6,270 8.95 9,184 8.29 Maturing after 5 years, but within 10 years 18,852 7.95 16,663 8.06 23,164 7.63 Maturing after 10 years 37,496 1.36 28,619 7.62 32,423 7.81 ------------------------------------------------------------------------------------------------------------ Total securities $61,693 7.54% $55,521 7.91% $71,421 7.87% ------------------------------------------------------------------------------------------------------------ /1/Yields on tax-exempt securities have been computed on a tax-equivalent basis. /2/Total securities excludes preferred stock at $5,209,736, $4,770,000, and $4,004,000, amortized cost at December 31, 1999, 1998, and 1997, respectively, or $4,738,879 $5,104,000, and $4,296,000, estimated fair value at December 31, 1999, 1998, and 1997, respectively. SECURITIES The investment portfolio consists of The investment portfolio plays a pri- two components, securities held to mary role in the management of inter- maturity and securities available for est rate sensitivity of the Corpora- sale. Securities are classified as tion and generates substantial inter- securities based on management's in- est income. In addition, the portfo- tent and the Corporation's ability, lio serves as a source of liquidity at the time of purchase, to hold such and is used as needed to meet collat- securities to maturity. These securi- eral requirements. ties are carried at amortized cost. Securities which may be sold in re- sponse to changes in 1999 Annual Report 21 ------------------------------------------------------------------------------- market interest rates, changes in the rities portfolio, obligations of securities' prepayment risk, in- states and political subdivisions creases in loan demand, general li- were 70.5%, U.S. Treasury securities quidity needs, and other similar fac- were 1.5%, and preferred stocks were tors are classified as available for 7.8% at December 31, 1999. sale and are carried at estimated fair value. Table 12 presents information per- taining to the composition of the se- At year-end 1999, total securities at curities portfolio. amortized cost were $66.9 million, up 10.9% from $60.3 million at year-end 1998. Securities of U.S. government agencies and corporations represented 20.2% of the total secu- TABLE 13: Average Deposits and Rates Paid Year Ended December 31, ---------------------------------------------------- 1999 1998 1997 ---------------- ---------------- ---------------- Average Average Average Average Average Average (Dollars in thousands) Balance Rate Balance Rate Balance Rate ------------------------------------------------------------------------------- Non-interest-bearing demand deposits $ 35,697 $ 35,987 $ 31,449 ------------------------------------------------------------------------------- Interest-bearing transaction accounts 45,627 2.38% 37,178 2.42% 34,594 2.57% Money market deposit accounts 25,207 3.20 21,984 3.27 23,416 3.28 Savings accounts 39,131 2.97 35,094 3.23 33,037 3.20 Certificates of deposit, $100M or more 17,977 4.77 16,670 4.91 14,137 3.30 Other certificates of deposit 89,467 4.94 87,938 5.25 82,655 5.44 ------------------------------------------------------------------------------- Total interest-bearing deposits 217,409 3.83% 198,864 4.12% 187,839 4.09% ------------------------------------------------------------------------------- Total deposits $253,106 $234,851 $219,288 ------------------------------------------------------------------------------- TABLE 14: Maturities of Certificates of Deposit with Balances of $100,000 or More (Dollars in thousands) December 31, 1999 -------------------------------------------------------------------------------- 3 months or less $ 3,522 3-6 months 2,487 6-12 months 8,858 Over 12 months 2,800 -------------------------------------------------------------------------------- Total $17,667 -------------------------------------------------------------------------------- DEPOSITS LIQUIDITY The Corporation's predominate source Liquidity represents an institution's of funds is depository accounts. The ability to meet present and future Corporation's deposit base is com- financial obligations through either prised of demand deposits, savings the sale or maturity of existing as- and money market accounts, and time sets or the acquisition of additional deposits. The Corporation's deposits funds through liability management. are provided by individuals and busi- Liquid assets include cash and due nesses located within the communities from banks, interest-bearing deposits served. with banks, federal funds sold, secu- rities available for sale, and in- Total deposits increased $9.2 mil- vestments and loans maturing within lion, or 3.6%, in 1999 over 1998. In one year. As a result of the Corpora- 1999, the growth by deposit category tion's management of liquid assets was a 14.9% decrease in non-interest- and the ability to generate liquidity bearing deposits, a 19.7% increase in through liability funding, management savings and interest-bearing demand believes that the Corporation main- deposits, and a 4.4% decrease in time tains overall liquidity sufficient to deposits. In 1998, total deposits in- satisfy its depositors' requirements creased $20.1 million, or 8.7%, over and to meet customers' credit needs. 1997. Deposit growth in 1999 and 1998 was attributed to growth at existing At December 31, 1999, cash, securi- branch locations. Table 13 presents ties classified as available for the average deposit balances and av- sale, and federal funds sold were erage rates paid for the years 1999, 14.6% of total earning assets, com- 1998, and 1997. Table 14 details ma- pared to 10.1% at December 31, 1998. turities of certificates of deposit with balances of $100,000 and over at Additional sources of liquidity December 31, 1999. available to the Corporation include the Bank's capacity to borrow funds through an established line of credit with a regional correspondent bank and the Federal Home Loan Bank. C&F Financial Corporation 22 CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as as- set quality, liquidity, earnings performance, and changing competitive condi- tions and economic forces. The adequacy of the Corporation's capital is re- viewed by management on an ongoing basis. Management seeks to maintain a capi- tal structure that will assure an adequate level of capital to support antici- pated asset growth and to absorb potential losses. During March of 1999, the Corporation repurchased 235,000 shares of its common stock from six shareholders at prices between $19.88 and $20.00 per share in privately negotiated transactions. During the second half of 1999, the Corpo- ration repurchased a further 12,500 shares of its common stock in the open market at prices between $17.00 and $18.00 per share. On April 4, 1997, the Corporation repurchased 204,683 shares of its common stock. 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 require- ments. The primary indicators relied on by bank regulators in measuring the capital position are the Tier I capital, total risk-based capital, and lever- age ratios. Tier I capital consists of common and qualifying preferred share- holders' equity less goodwill. Total capital consists of Tier I capital, qual- ifying subordinated debt, and a portion of the allowance for loan losses. Risk-based capital ratios are calculated with reference to risk-weighted as- sets. The Corporation's Tier I capital ratio was 14.0% at December 31, 1999, compared to 12.5% at December 31, 1998. The total capital ratio was 15.2% at December 31, 1999, compared to 13.4% at December 31, 1998. These ratios are in excess of the mandated minimum requirement of 4.0% and 8.0%, respectively. Shareholders' equity was $35.1 million at year-end 1999 compared to $36.6 million at year-end 1998. The leverage ratio consists of Tier I capital divided by average assets. At December 31, 1999, the Corporation's leverage ratio was 11.3%, compared to 11.5% at December 31, 1998. Each of these exceeds the required minimum leverage ratio of 4.0%. The dividend payout ratio was 26.6%, 27.7%, and 27.8%, in 1999, 1998, and 1997, respectively. During 1999, the Corporation paid dividends of $0.49 per share, up 11.4% from $0.44 per share paid in 1998. The Corporation is not aware of any current recommendations by any regulatory authorities which, if they were implemented, would have a material effect on the Corporation's liquidity, capital resources, or results of operations. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities." FAS 133 establishes accounting and reporting standards for derivative financial instruments and other similar financial instruments and for hedging activities. The standard also allows securities classified as held-to-maturity to be transferred to the available-for-sale category at the date of initial application of this standard. FAS 133 is effective for all fiscal years beginning after June 15, 2000. Management is currently reviewing this statement to determine the impact, if any, it will have since the Corpo- ration currently has no derivative instruments. 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. 1999 Annual Report 23 CONSOLIDATED BALANCE SHEETS December 31, ------------------------- 1999 1998 ------------------------------------------------------------------------------ Assets Cash and due from banks $ 13,423,967 $ 8,139,884 Interest-bearing deposits in other banks 2,062,397 333,356 ------------------------------------------------------------------------------ Total cash and cash equivalents 15,486,364 8,473,240 Securities--available for sale at fair value, amortized cost of $32,112,083 and $21,480,714, respectively 30,208,134 21,888,295 Securities--held to maturity at amortized cost, fair value of $34,976,323 and $40,864,681, respectively 34,790,682 38,810,290 Loans held for sale, net 24,886,514 66,993,322 Loans, net of reserve for loan losses of $3,301,778 and $2,760,263, respectively 206,115,896 169,918,428 Federal Home Loan Bank stock 1,585,000 1,706,200 Corporate premises and equipment, net 8,404,090 6,465,375 Accrued interest receivable 2,136,093 2,373,783 Other assets 5,628,548 4,234,696 ------------------------------------------------------------------------------ Total assets $329,241,321 $320,863,629 ------------------------------------------------------------------------------ Liabilities Deposits Non-interest-bearing demand deposits $ 34,827,212 $ 40,907,814 Savings and interest-bearing demand deposits 121,645,420 101,631,148 Time deposits 104,381,003 109,134,197 ------------------------------------------------------------------------------ Total deposits 260,853,635 251,673,159 Borrowings 30,035,293 24,661,078 Accrued interest payable 566,466 598,146 Other liabilities 2,656,217 7,283,753 ------------------------------------------------------------------------------ Total liabilities 294,111,611 284,216,136 ------------------------------------------------------------------------------ Commitments and contingent liabilities Shareholders' Equity Preferred stock ($1.00 par value, 3,000,000 shares authorized) -- -- Common stock ($1.00 par value, 8,000,000 shares authorized, 3,644,456 and 3,866,888 shares issued and outstanding at December 31, 1999 and 1998, respectively) 3,644,456 3,866,888 Additional paid-in capital 14,396 475,928 Retained earnings 32,727,448 31,739,483 Accumulated other comprehensive income (loss), net of tax of $647,334 and $291,161, respectively (1,256,590) 565,194 ------------------------------------------------------------------------------ Total shareholders' equity 35,129,710 36,647,493 ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $329,241,321 $320,863,629 ------------------------------------------------------------------------------ See notes to consolidated financial statements. C&F Financial Corporation 24 CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, ----------------------------------- 1999 1998 1997 ------------------------------------------------------------------------------------------ Interest income Interest and fees on loans $19,405,445 $17,789,920 $14,656,120 Interest on money market investments Federal funds sold 90,964 -- -- Other money market investments 366,971 68,584 68,399 Interest on securities U.S. Treasury securities 109,112 198,883 198,883 U.S. government agencies and corporations 864,461 2,035,832 2,422,390 Tax-exempt obligations of states and political subdivisions 2,347,868 2,097,657 2,041,372 Corporate bonds and other 458,736 426,633 375,884 ------------------------------------------------------------------------------------------ Total interest income 23,643,557 22,617,509 19,763,048 Interest expense Savings and interest-bearing deposits 3,055,792 2,754,417 2,715,785 Certificates of deposit, $100M or more 856,670 818,548 465,701 Other time deposits 4,415,594 4,616,052 4,492,910 Short-term borrowings and other 739,811 1,369,042 327,905 ------------------------------------------------------------------------------------------ Total interest expense 9,067,867 9,558,059 8,002,301 ------------------------------------------------------------------------------------------ Net interest income 14,575,690 13,059,450 11,760,747 Provision for loan losses 600,000 600,000 330,000 ------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 13,975,690 12,459,450 11,430,747 Other operating income Gain on sale of loans 6,691,998 7,128,998 4,056,340 Service charges on deposit accounts 1,154,373 1,032,918 1,012,410 Other service charges and fees 2,219,854 1,866,763 987,232 Gain on sale of available for sale securities 138,830 -- -- Other income 1,069,541 980,943 601,626 ------------------------------------------------------------------------------------------ Total other operating income 11,274,596 11,009,622 6,657,608 Other operating expenses Salaries and employee benefits 9,365,548 8,286,380 6,332,026 Occupancy expenses 2,044,013 2,009,917 1,798,561 Goodwill amortization 275,160 275,160 275,160 Other expenses 4,414,969 4,410,228 3,131,818 ------------------------------------------------------------------------------------------ Total other operating expenses 16,099,690 14,981,685 11,537,565 ------------------------------------------------------------------------------------------ Income before income taxes 9,150,596 8,487,387 6,550,790 Income tax expense 2,394,366 2,353,351 1,613,963 ------------------------------------------------------------------------------------------ Net Income $ 6,756,230 $ 6,134,036 $ 4,936,827 ------------------------------------------------------------------------------------------ Earnings per common share--basic $ 1.83 $ 1.59 $ 1.26 ------------------------------------------------------------------------------------------ Earnings per common share--assuming dilution $ 1.81 $ 1.56 $ 1.25 ------------------------------------------------------------------------------------------ See notes to consolidated financial statements. 1999 Annual Report 25 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Additional Other Common Paid-In Comprehensive Retained Comprehensive Stock Capital Income Earnings Income (Loss) Total --------------------------------------------------------------------------------------------------------- Balance December 31, 1996 $2,113,041 -- $29,795,739 $ 305,729 $32,214,509 Repurchase of common stock (204,683) -- (4,126,518) -- (4,331,201) Stock options exercised 7,832 $ 117,692 -- -- 125,524 Comprehensive income Net income $4,963,827 4,936,827 4,936,827 Other comprehensive income, net of tax Unrealized holding gains arising during the period net of tax of $115,735/1/ 224,662 224,662 224,662 ---------- Comprehensive income $5,188,489 ---------- Cash dividends ($.35 per share) -- -- (1,369,788) -- (1,369,788) --------------------------------------------------------------------------------------------------------- Balance December 31, 1997 1,916,190 117,692 29,236,260 530,391 31,800,533 Stock options exercised 19,004 358,236 -- -- 377,240 Comprehensive income Net income $6,134,036 6,134,036 6,134,036 Other comprehensive income, net of tax Unrealized holding gains arising during the period net of tax of $17,929/1/ 34,803 34,803 34,803 ---------- Comprehensive income $6,168,839 ---------- Stock dividends 1,931,694 -- (1,931,694) -- -- Cash dividends ($.44 per share) -- -- (1,699,119) -- (1,699,119) --------------------------------------------------------------------------------------------------------- Balance December 31, 1998 3,866,888 475,928 31,739,483 565,194 36,647,493 Repurchase of common stock (247,500) (690,351) (3,971,173) -- (4,909,024) Stock options exercised 25,068 228,819 -- -- 253,887 Comprehensive income Net income $6,756,230 6,756,230 6,756,230 Other comprehensive income, net of tax Unrealized holding losses arising during the period net of tax of $938,495 (1,821,784) (1,821,784) (1,821,784) ---------- Comprehensive income $4,934,446 ---------- Cash dividends ($.49 per share) -- -- (1,797,092) -- (1,797,092) --------------------------------------------------------------------------------------------------------- Balance December 31, 1999 $3,644,456 $ 14,396 $32,727,448 $(1,256,590) $35,129,710 Disclosure of reclassification amount for the year ended December 31, 1999: Unrealized net holding losses arising during period $(1,730,156) Less: reclassification adjustment for gains included in net income (91,628)  ------------ Net unrealized losses on securities $(1,821,784) ============ /1/There were no reclassification adjustments for the twelve months ended December 31, 1998, and 1997. See notes to consolidated financial statements. C&F Financial Corporation 26 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, ------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------------ Operating Activities: Net income $ 6,756,230 $ 6,134,036 $ 4,936,827 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 928,314 949,451 878,433 Amortization of goodwill 275,160 275,160 275,160 Deferred income taxes (123,139) (332,645) (320,929) Provision for loan losses 600,000 600,000 330,000 Accretion of discounts and amortization of premiums on securities, net (69,467) (51,444) (104,715) Net realized loss (gain) on securities (138,830) -- -- Origination of loans held for sale (456,926,073) (524,395,568) (286,419,034) Sale of loans 499,032,881 481,881,349 274,223,953 Change in other assets and liabilities: Accrued interest receivable 237,690 (177,824) 74,197 Other assets (881,041) 271,213 (373,662) Accrued interest payable (31,680) 5,846 50,855 Other liabilities (4,353,878) 2,405,165 2,426,770 ------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 45,306,167 (32,435,261) (4,022,145) ------------------------------------------------------------------------------ Investing Activities: Proceeds from maturities of securities held to maturity 3,628,850 9,674,100 25,632,350 Proceeds from sales and maturities of securities available for sale 10,806,084 22,449,745 8,583,893 Purchase of securities held to maturity -- (2,572,800) (4,867,024) Purchase of securities available for sale (21,287,142) (14,425,408) (19,055,224) Redemption (purchase) of FHLB stock 121,200 (644,400) (205,000) Net increase in customer loans (36,797,468) (15,773,808) (18,342,603) Purchase of corporate premises and equipment (2,867,029) (879,180) (1,618,414) Proceeds from the sale of corporate premises and equipment -- 45,922 170,107 ------------------------------------------------------------------------------ Net cash used in investing activities (46,395,505) (2,125,829) (9,701,915) ------------------------------------------------------------------------------ Financing Activities: Net increase in demand, interest-bearing demand and savings deposits 13,933,670 12,138,327 7,743,351 Net increase (decrease) in time deposits (4,753,194) 8,021,680 7,347,245 Net increase in other borrowings 5,374,215 15,325,391 4,280,412 Repurchase of common stock (4,909,024) -- (4,331,201) Proceeds from exercise of stock options 253,887 377,240 125,524 Cash dividends (1,797,092) (1,699,119) (1,369,788) ------------------------------------------------------------------------------ Net cash provided by financing activities 8,102,462 34,163,519 13,795,543 ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 7,013,124 (397,571) 71,483 Cash and cash equivalents at beginning of year 8,473,240 8,870,811 8,799,328 ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 15,486,364 $ 8,473,240 $ 8,870,811 ------------------------------------------------------------------------------ Supplemental disclosure Interest paid $ 9,099,547 $ 9,552,213 $ 7,951,446 Income taxes paid $ 2,743,114 $ 2,674,475 $ 1,699,427 ------------------------------------------------------------------------------ See notes to consolidated financial statements. 1999 Annual Report 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Summary of Significant Accounting Policies The accounting and reporting policies of C&F Financial Corporation and subsid- iary (the "Corporation") conform to generally accepted accounting principles and to predominant practices within the banking industry. Nature of Operations: C&F Financial Corporation is a bank holding company in- corporated 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 In- vestment 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 state- ments 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 gener- ally 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 re- porting period. Actual results could differ from those estimates. Securities: Investments in debt and equity securities with readily determin- able fair values are classified as either held to maturity, available for sale, or trading, based on management's intent. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses included in shareholders' equity on an after-tax basis. Securities classified as held to maturity are carried at amortized cost. The Corporation does not have any securities classified as trading securities. Gains or losses are recognized only on realization at the time of sale using the amortized cost of the specific security sold. Federal Home Loan Bank Stock: Federal Home Loan Bank stock is stated at cost. No ready market exists for this stock, and it has no quoted market value. For presentation purposes, such stock is assumed to have market value which is equal to cost. In addition, such stock is not considered a debt or equity se- curity in accordance with SFAS 115. Loans: Loans are stated at face value, net of unearned discount and the allow- ance for loan losses. Unearned discount on certain installment loans is recog- nized as income over the terms of the loans by a method which approximates the effective interest method. Interest on other loans is credited to operations based on the principal amount outstanding. Loans are generally placed on non- accrual status when the collection of principal or interest is ninety days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than ninety days past due may remain on accrual status if management determines it has adequate collateral to cover the prin- cipal and interest. For those loans which are carried on non-accrual status, interest is recognized on the cash basis. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan's yield using the level-yield method. The Corporation is amortizing these amounts over the contractual life of the related loans. Impaired loans are measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan, or, as a practi- cal 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 col- lect 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 ul- timate 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 re- ceipts 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 ex- isting loans which may become uncollectible. Management's judgment in deter- mining 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 con- ditions 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 es- timated costs to sell the asset is more than its carrying amount, the valua- tion allowance is reduced, but not below zero. Increases or decreases in the valuation allowance are charged or credited to income. C&F Financial Corporation 28 Recovery of the carrying value of such real estate is dependent to a great ex- tent on economic, operating, and other conditions that may be beyond the Cor- poration's control. Corporate Premises and Equipment: Corporate premises and equipment are stated at cost less accumulated depreciation computed using straight-line and accel- erated methods over the estimated useful lives of the assets. Estimated useful lives range from ten to forty years for buildings and from three to ten years for equipment, furniture, and fixtures. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Upon sale or re- tirement of depreciable properties, the cost and related accumulated deprecia- tion 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 finan- cial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial state- ment 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 applica- ble to the periods in which the differences are expected to affect taxable in- come. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Defined Benefit Plan: In 1998, the Corporation adopted Financial Accounting Standards (FAS) 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This pronouncement does not change the measurement or recognition of amounts recognized in the Corporation's financial statements applicable to its defined benefit plan. FAS 132 revises the existing disclo- sure requirements by standardizing the disclosure requirements for pensions, requiring certain additional information on changes in the benefit obligations and fair values of plan assets, and eliminating certain disclosures. Segment Information: In 1998, the Corporation adopted Financial Accounting Standard (FAS) 131, "Disclosures about Segments of an Enterprise and Related Information." FAS 131 supercedes FAS 14, "Financial Reporting for Segment of a Business Enterprise," replacing the "industry segment" approach with the "man- agement" approach. The management approach designates the internal organiza- tion that is used by management for making operating decisions and assessing performance as the source of the Corporation's reportable segments. The adop- tion of FAS 131 did not affect the results of operations or financial position but did affect the disclosure of segment information. Comprehensive Income: In 1998, the Corporation adopted Financial Accounting Standard (FAS) 130, "Reporting Comprehensive Income." The consolidated statements of shareholders' equity have been changed to include columns for comprehensive income and accumulated other comprehensive income. Comprehensive income for the Corporation includes net income plus the change in the unrealized gain or loss on securities available for sale. Accumulated other comprehensive income includes the cumulative changes in unrealized gain or loss on securities available for sale. Adoption of this standard did not impact the Corporation's consolidated financial position, results of operations, or cash flows. Earnings Per Share: In 1997, the Corporation adopted Financial Accounting Standard (FAS) 128, "Earnings per Share." FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share ex- cludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the FAS 128 requirements. Shareholders' Equity: During March of 1999 the Corporation repurchased 235,000 shares of its common stock from six shareholders at prices between $19.88 and $20.00 per share in privately negotiated transactions. During the second half of 1999, the Corporation repurchased a further 12,500 shares of its common stock in the open market at prices between $17.00 and $18.00 per share. On April 4, 1997, the Corporation repurchased 204,683 shares of its common stock at a price of $21.00 per share. On June 16, 1998, the Corporation declared a 100% stock dividend in the form of a two-for-one stock split. All the financial data included in this Annual Report has been retroactively restated to reflect the effect of the stock split. Statement of Cash Flows: For the purpose of the statement of cash flows, the Corporation considers cash equivalents to include amounts due from banks, fed- eral 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. 1999 Annual Report 29 NOTE 2: Securities Debt and equity securities are summarized as follows: December 31, 1999 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Available for Sale Cost Gains Losses Fair Value ----------------------------------------------------------------------------- U.S. government agencies and corporations $13,500,000 $ -- $ (862,314) $12,637,686 Obligations of states and political subdivisions 13,402,347 20,925 (591,703) 12,831,569 Preferred stock 5,209,736 7,313 (478,170) 4,738,879 ----------------------------------------------------------------------------- $32,112,083 $ 28,238 $(1,932,187) $30,208,134 ----------------------------------------------------------------------------- Held to Maturity ----------------------------------------------------------------------------- U.S. Treasury securities $ 999,814 $ 24,246 $ -- $ 1,024,060 Obligations of states and political subdivisions 33,790,868 505,563 (344,168) 33,952,263 ----------------------------------------------------------------------------- $34,790,682 $ 529,809 $ (344,168) $34,976,323 ----------------------------------------------------------------------------- December 31, 1998 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Available for Sale Cost Gains Losses Fair Value ----------------------------------------------------------------------------- U.S. Treasury securities $ 1,999,696 $ 7,179 $ -- $ 2,006,875 U.S. government agencies and corporations 12,497,651 64,342 (5,744) 12,556,249 Obligations of states and political subdivisions 2,213,698 11,338 (3,575) 2,221,461 Preferred stock 4,769,669 366,326 (32,285) 5,103,710 ----------------------------------------------------------------------------- $21,480,714 $ 449,185 $ (41,604) $21,888,295 ----------------------------------------------------------------------------- Held to Maturity ----------------------------------------------------------------------------- U.S. Treasury securities $ 999,678 $ 75,009 $ -- $ 1,074,687 U.S. government agencies and corporations 999,296 29,141 -- 1,028,437 Obligations of states and political subdivisions 36,811,316 1,950,241 -- 38,761,557 ----------------------------------------------------------------------------- $38,810,290 $2,054,391 $ -- $40,864,681 ----------------------------------------------------------------------------- C&F Financial Corporation 30 The amortized cost and estimated fair value of debt securities at December 31, 1999, 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, 1999 ----------------------- Amortized Estimated Available for Sale Cost Fair Value --------------------------------------------------------------- Due after five years through ten years $ 4,500,000 $ 4,269,741 Due after ten years 22,402,347 21,199,514 --------------------------------------------------------------- Preferred Stock 5,209,736 4,738,879 --------------------------------------------------------------- $32,112,083 $30,208,134 --------------------------------------------------------------- Held to Maturity --------------------------------------------------------------- Due in one year or less $ 155,000 $ 156,570 Due after one year through five years 5,189,477 5,326,834 Due after five years through ten years 14,352,186 14,641,927 Due after ten years 15,094,019 14,850,992 --------------------------------------------------------------- $34,790,682 $34,976,323 --------------------------------------------------------------- Proceeds from the maturities and the redemption of call provisions of securities held to maturity in 1999 were $3,628,850. There were no realized gains or losses. Proceeds from the maturities and the redemption of call provisions of securities available for sale were $10,806,084, resulting in gross realized gains of $138,830. The amortized cost and approximate market value of securities pledged to secure public deposits amounted to, $21,075,000 and $20,723,000, respectively, at December 31, 1999. Proceeds from maturities and the redemption of call provisions of securities held to maturity in 1998 were $9,674,100. There were no realized gains or losses. Proceeds from maturities and the redemption of call provisions of securities available for sale were $22,449,745. There were no realized gains or losses. Proceeds from maturities and the redemption of call provisions of 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 securities available for sale were $8,576,713. There were no realized gains or losses. NOTE 3: Loans Major classifications of loans are summarized as follows: December 31, -------------------------- 1999 1998 -------------------------------------------------------------------- Real estate--mortgage $ 90,947,032 $ 87,231,351 Real estate--construction 7,980,243 5,375,752 Commercial, financial, and agricultural 89,139,244 62,885,477 Equity lines 10,271,970 8,579,523 Consumer 12,090,548 9,543,608 -------------------------------------------------------------------- 210,429,037 173,615,711 Less unearned loan fees (1,011,363) (937,020) -------------------------------------------------------------------- 209,417,674 172,678,691 Less reserve for loan losses (3,301,778) (2,760,263) -------------------------------------------------------------------- $206,115,896 $169,918,428 -------------------------------------------------------------------- Loans on non-accrual status were $49,000 and $463,000 at December 31, 1999 and 1998, respectively. If interest income had been recognized on non-performing loans at their stated rates during fiscal years 1999, 1998, and 1997, interest income would have increased by approximately $8,000, $37,000, and $37,000, respectively. The balance of impaired loans at December 31, 1999 and 1998, was $49,000 and $463,000, respectively, with no specific valuation allowance associated with these loans. 1999 Annual Report 31 NOTE 4: Reserve for Loan Losses Changes in the reserve for loan losses were as follows: Year Ended December 31, ---------------------------------- 1999 1998 1997 ------------------------------------------------------------------------------- Balance at the beginning of year $2,760,263 $2,233,359 $1,926,775 Provision charged to operations 600,000 600,000 330,000 Loans charged off (86,220) (98,699) (27,430) Recoveries of loans previously charged off 27,735 25,603 4,014 ------------------------------------------------------------------------------- Balance at the end of year $3,301,778 $2,760,263 $2,233,359 ------------------------------------------------------------------------------- NOTE 5: Corporate Premises and Equipment Major classifications of corporate premises and equipment are summarized as follows: December 31, ------------------------ 1999 1998 ------------------------------------------------------------- Land $ 1,516,381 $ 1,316,381 Buildings 7,168,528 5,277,851 Equipment, furniture, and fixtures 7,605,931 6,881,025 ------------------------------------------------------------- 16,290,840 13,475,257 Less accumulated depreciation (7,886,750) (7,009,882) ------------------------------------------------------------- $ 8,404,090 $ 6,465,375 ------------------------------------------------------------- NOTE 6: Time Deposits Time deposits are summarized as follows: December 31, ------------------------- 1999 1998 ----------------------------------------------------------------- Certificates of deposit, $100M or more $ 17,667,262 $ 18,567,412 Other time deposits 86,713,741 90,566,785 ----------------------------------------------------------------- $104,381,003 $109,134,197 ----------------------------------------------------------------- Remaining maturities on time deposits are as follows: Year ending December 31, --------------------------------------------- 2000 $ 78,771,622 2001 16,466,099 2002 4,111,452 2003 3,048,345 2004 and thereafter 1,983,485 --------------------------------------------- $104,381,003 --------------------------------------------- C&F Financial Corporation 32 NOTE 7: Borrowings Short-term borrowings consist of securities sold under agreements to repurchase which are secured transactions with customers and generally mature the day following the date sold. Short-term borrowings also include advances from the Federal Home Loan Bank (FHLB), which are secured by a blanket floating lien on all real estate mortgage loans secured by one- to-four family residential properties. The table below presents selected information on short-term borrowings: December 31, ------------------------ 1999 1998 --------------------------------------------------------------------------- Maximum balance at any month-end during the year $27,200,000 $43,609,000 Average balance for the year $12,601,055 $22,237,000 Weighted average rate for the year 4.93% 5.50% Weighted average rate on borrowings at year-end 4.80% 4.61% Estimated fair value $30,035,293 $14,661,078 --------------------------------------------------------------------------- The Corporation has unused lines of credit for borrowings totaling approximately $47,800,000 at December 31, 1999. Long-term borrowings consist of convertible fixed-rate advances from the FHLB. There were no long-term borrowings at December 31, 1999. At December 31, 1998, convertible fixed-rate advances totaled $10,000,000 with an average interest rate of 5.01%. These advances are also secured by a blanket floating lien on all real estate mortgage loans secured by one-to-four family residential properties. NOTE 8: Earnings Per Share The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. All shares have been restated to reflect the effect of a two-for-one stock split in July 1998. December 31, ----------------------------- 1999 1998 1997 ------------------------------------------------------------------------------- Weighted average number of common shares used in earnings per common share--basic 3,684,796 3,857,542 3,930,288 Effect of dilutive securities: Stock options 53,438 62,233 22,468 ------------------------------------------------------------------------------- Weighted average number of common shares used in earnings per common share--assuming dilution 3,738,234 3,919,775 3,952,756 ------------------------------------------------------------------------------- Options on approximately 15,000 and 20,000 shares were not included in computing earnings per common share--assuming dilution for the years ended December 31, 1999 and 1997, respectively, because their effects were antidilutive. All options were included in computing earnings per common share--assuming dilution for the year ended December 31, 1998. NOTE 9: Income Taxes Principal components of income tax expense as reflected in the statements of income are as follows: Year Ended December 31, ---------------------------------- 1999 1998 1997 --------------------------------------------------- Current taxes $2,517,505 $2,685,996 $1,934,892 Deferred taxes (123,139) (332,645) (320,929) --------------------------------------------------- $2,394,366 $2,353,351 $1,613,963 --------------------------------------------------- 1999 Annual Report 33 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 of Percent of Percent of Pre-tax Pre-tax Pre-tax 1999 Income 1998 Income 1997 Income ------------------------------------------------------------------------------------------------- Income tax computed at federal statutory rates $3,111,203 34.0% $2,885,712 34.0% $2,227,269 34.0% Tax effect of exclusion of interest income on obligations of states and political subdivisions (833,784) (9.1) (713,203) (8.4) (714,061) (10.9) Reduction of interest expense incurred to carry tax-exempt assets 94,336 1.0 87,710 1.0 77,067 1.2 State income taxes, net of federal tax benefit 128,383 1.4 122,650 1.4 22,054 .3 Tax effect of dividends- received deduction on preferred stock (79,695) (.9) (71,957) (.8) (66,614) (1.0) Other (26,077) (.3) 42,439 .5 68,248 1.0 ------------------------------------------------------------------------------------------------- $2,394,366 26.1% $2,353,351 27.7% $1,613,963 24.6% ------------------------------------------------------------------------------------------------- Other assets include deferred income taxes of $2,081,929 and $1,020,295 at December 31, 1999 and 1998, respectively. Other assets include current taxes receivable of $343,000 at December 31, 1999. Other liabilities include current taxes payable of $29,166 at December 31, 1998. Income tax returns subsequent to 1996 are subject to examination by taxing authorities. The tax effects of each type of significant item that gave rise to deferred taxes are: Year Ended December 31, ---------------------- 1999 1998 ----------------------------------------------------------------------------- Deferred tax asset Deferred loan fees $ 23,726 $ 47,453 Allowance for loan losses 1,006,100 852,515 Deferred compensation 217,169 105,393 Net unrealized loss on securities available for sale 647,334 -- Interest on non-accrual loans 1,060 149,406 Accrued pension 54,853 69,354 Intangible asset 141,162 105,076 Other 68,606 99,026 ----------------------------------------------------------------------------- Deferred tax asset 2,160,010 1,428,223 ----------------------------------------------------------------------------- Deferred tax liability Net unrealized gain on securities available for sale -- (291,161) Depreciation (78,081) (116,767) ----------------------------------------------------------------------------- Deferred tax liability (78,081) (407,928) ----------------------------------------------------------------------------- Net deferred tax asset $2,081,929 $1,020,295 ----------------------------------------------------------------------------- NOTE 10: Employee Benefit Plans The Bank maintains a Defined Contribution Profit-Sharing Plan (the "Profit- Sharing Plan") sponsored by the Virginia Bankers Association. The Profit- Sharing Plan was amended effective January 1, 1997, to include a 401(k) savings provision which authorizes a maximum voluntary salary deferral of up to 15% of compensation (with a partial company match), subject to statutory limitations. The Profit-Sharing Plan provides for an annual discretionary contribution to the account of each eligible employee based in part on the Bank's profitability for a given year and on each participant's yearly earnings. All full-time employees who have attained the age of eighteen and have at least three months of service are eligible to participate. Contributions and earnings may be invested in various investment vehicles offered through the Virginia Bankers Association. Contributions and earnings are tax-deferred. An employee is 20% vested after three years of service, 40% after four years, 60% after five years, 80% after six years, and fully vested after seven years. The amounts charged to expense under this plan were $293,584, $281,230, and $244,617 in 1999, 1998, and 1997, respectively. C&F Financial Corporation 34 The Mortgage Corporation maintains a Defined Contribution 401(k) Savings Plan which authorizes a maximum voluntary salary deferral of up to 15% of compensa- tion, subject to statutory limitations. All full-time employees who have at- tained the age of eighteen are eligible to participate on the first day of the next month following employment date. The Mortgage Corporation reserves the right for an annual discretionary contribution to the account of each eligible employee based in part on the Mortgage Corporation's profitability for a given year, and on each participant's yearly earnings. An employee is vested 25% af- ter 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 ex- pense under the Plan was $160,000, $185,000 and $50,000 for 1999, 1998 and 1997, respectively. The Bank adopted a Management Incentive Bonus Plan (the "Bonus Plan") effec- tive January 1, 1987. The Bonus Plan is offered to selected members of manage- ment. The Bonus Plan is derived from a pool of funds determined by the Bank's total performance relative to (1) prescribed growth-rates of assets and depos- its, (2) return on average assets, and (3) absolute level of net income. At- tainment, in whole or in part, of these goals dictates the amount set aside in the pool of funds. Evaluation of attainment and approval of the pool amount are performed by the Board. Payment of the bonus is based on individual per- formance and is paid in cash. Expense is accrued in the fiscal year of the specified bonus performance. Expenses under this plan were $173,200, $166,150, and $136,700 in 1999, 1998, and 1997, respectively. Additional bonuses total- ing $31,148 and $35,205, were granted to employees not covered by the Bonus Plan in 1998 and 1997, respectively. The Bank has a non-contributory, defined benefit pension plan for full-time employees over twenty-one years of age. Benefits are generally based upon years of service and average compensation for the five highest-paid consecu- tive years of service. The Bank funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act. Information about the plan follows: Year Ended December 31, ---------------------- 1999 1998 --------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation, beginning $1,576,452 $1,314,383 Service cost 161,535 141,160 Interest cost 118,101 98,446 Actuarial (gain)/loss (37,775) 98,633 Benefits paid (76,563) (76,170) --------------------------------------------------------------------------- Benefit obligation, ending $1,741,750 $1,576,452 --------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets, beginning $1,557,120 $1,361,274 Actuarial return on plan assets 177,029 (5,523) Employer contributions 204,973 277,539 Benefits paid (76,563) (76,170) --------------------------------------------------------------------------- Fair value of plan assets, ending $1,862,559 $1,557,120 --------------------------------------------------------------------------- Funded status $ 120,809 $ (19,332) Unrecognized net actual gain (257,537) (157,740) Unrecognized net obligation at transition (64,960) (70,373) Unrecognized prior service cost 40,359 43,463 --------------------------------------------------------------------------- Accrued benefit cost included in other liabilities $ (161,329) $ (203,982) --------------------------------------------------------------------------- 1999 Annual Report 35  Year Ended December 31, ---------------------------- 1999 1998 1997 ----------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost $161,535 $141,160 $125,797 Interest cost 118,101 98,446 75,968 Expected return on plan assets (115,003) (122,355) (93,629) Amortization of prior service cost 3,104 3,104 3,104 Amortization of net obligation at transition (5,413) (5,413) (5,413) Recognized net actuarial gain (4) (12,406) (12,569) ----------------------------------------------------------------------------- Net periodic benefit cost $162,320 $102,536 $ 93,258 ----------------------------------------------------------------------------- Weighted-Average Assumptions as of December 31 Discount rate 7.5% 7.5% 7.5% Expected return on plan assets 9.0 9.0 9.0 Rate of compensation increase 4.0 4.0 4.0 ----------------------------------------------------------------------------- NOTE 11: Related Party Transactions Loans to directors and officers totaled $926,000 and $1,070,000 at December 31, 1999 and 1998, respectively. New advances to directors and officers to- taled $413,000 and repayments totaled $557,000 in the year ended December 31, 1999. 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 is- sued to employees at a price equal to the fair market value of common stock at the date granted. Prior to December 21, 1999, 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. Options granted on December 21, 1999, become exercisible five years after the grant date. In 1983, the shareholders authorized 100,000 shares of common stock for issuance under the Plan. An additional 200,000 shares were authorized for the Plan in 1994. All options expire ten years from the grant date. In 1998, the Board of Directors authorized 25,000 shares of common stock for issuance under the Non-Employee Director Stock Option Plan (the "Director Plan"). In 1999, the Director Plan was amended to authorize a total of 150,000 shares for issuance. Under the Director Plan, options to purchase common stock are granted to non-employee directors of the Bank. Options are issued to non- employee directors at a price equal to the fair market value of common stock at the date granted. The options granted are exercisable six months after grant. All options expire ten years from the grant date. In 1999, the Board of Directors authorized 25,000 shares of common stock for issuance under the 1999 Regional Director Stock Compensation Plan. Under this plan, options to purchase common stock are granted to non-employee regional directors of Citizens & Commerce Bank, a division of the Bank. Options are is- sued to non-employee regional directors at a price equal to the fair market value of common stock at the date granted. One third of the options granted become exercisable commencing one year after the grant date with an additional one-third becoming exercisable after each of the following two years. All op- tions expire ten years from the grant date. The Corporation applies APB Opinion 25 and related Interpretations in account- ing for the stock option plans. Accordingly, no compensation cost has been recognized for its plans. Had compensation cost for the plans been determined based on the fair value at the grant dates of options consistent with FASB Statement 123, the Corporation's net income and earnings per share would not have been materially different from those amounts shown on the statements of income for the years ended December 31, 1999, 1998, and 1997 . The fair value of each option granted during the years ended December 31, 1999, 1998, and 1997, was estimated on the date of grant using the Black- Scholes option pricing model with the following assumptions for 1999, 1998, and 1997, respectively: risk-free rate of 6.7, 4.5, and 5.6% and volatility of 25, 30, and 20%. The dividend yield used in the pricing model was 2.8, 2.6, and 3.0% for 1999, 1998, and 1997, respectively. The expected lives used was eight years for 1999, 1998, and 1997. C&F Financial Corporation 36 Transactions under the Plan for the periods indicated, restated to reflect the effect of a two-for-one stock split in July 1998, were as follows: 1999 1998 1997 ----------------- ----------------- ----------------- Exercise Exercise Exercise Shares Price* Shares Price* Shares Price* ------------------------------------------------------------------------------- Outstanding at beginning of year 169,860 $12.36 164,936 $ 9.94 148,100 $9.19 Granted 68,350 17.64 42,900 18.77 33,700 12.50 Exercised (25,068) 9.44 (34,508) 9.05 (15,664) 7.53 Canceled (4,698) 15.27 (3,468) 9.69 (1,200) 9.13 ------------------------------------------------------------------------------- Outstanding at end of year 208,444 $14.37 169,860 $12.36 164,936 $9.94 ------------------------------------------------------------------------------- *Weighted average Options exercisable at year-end 108,761 97,304 105,380 Weighted-average fair value of options granted during the year $ 5.40 $ 5.81 $ 2.94 ------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at December 31, 1999: Options Outstanding Options Exercisable ------------------------------------ ----------------------- Number Number Outstanding Remaining Exercisable at Range of at December 31, Contractual Exercise December 31, Exercise Exercise Prices 1999 Life Price* 1999 Price* ----------------------------------------------------------------------------- $8.75 to 12.50 99,694 5.86 years $10.35 90,069 $10.15 $17.00 to 20.50 108,750 9.63 years 18.06 18,692 18.95 ----------------------------------------------------------------------------- $8.75 to 20.50 208,444 7.83 years $14.37 108,761 $11.66 ----------------------------------------------------------------------------- *Weighted average NOTE 13: Regulatory Requirements and Restrictions The Corporation and the Bank are subject to various regulatory capital re- quirements administered by the federal banking agencies. Failure to meet mini- mum capital requirements can initiate certain mandatory--and possibly addi- tional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Corporation's and the Bank's financial state- ments. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific cap- ital guidelines that involve quantitative measures of the Corporation's and the Bank's assets, liabilities, and certain off-balance-sheet items as calcu- lated under regulatory accounting practices. The Corporation's and the Bank's capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt cor- rective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy re- quire 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 regu- lations) to risk-weighted assets (as defined), and of Tier I capital (as de- fined) to average assets (as defined) less goodwill. For both the Corporation and the Bank, Tier I capital consists of shareholders' equity excluding any net unrealized gain (loss) on securities available for sale less goodwill, and total capital consists of Tier I capital and a portion of the allowance for loan losses. Risk-weighted assets for the Corporation and the Bank were $251,051,000 and $243,735,000, respectively, at December 31, 1999, and $278,514,000 and $273,132,000, respectively, at December 31, 1998. Management believes, as of December 31, 1999, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the FDIC catego- rized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must main- tain total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notifi- cation that management believes have changed the institution's category. 1999 Annual Report 37 The Corporation's and the Bank's actual capital amounts and ratios are presented in the table. Minimum To Be Well Capitalized Under Prompt Minimum Corrective Capital Action Actual Requirements Provisions ------------- ------------- ------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------ As of December 31, 1999: Total Capital (to Risk-Weighted Assets) Corporation $38,158 15.2% $20,084 18.0% N/A Bank 30,867 12.7 19,499 18.0 $24,373 110.0% Tier I Capital (to Risk-Weighted Assets) Corporation 35,019 14.0 10,042 14.0 N/A Bank 27,818 11.4 9,749 14.0 14,624 16.0 Tier I Capital (to Average Assets) Corporation 35,019 11.3 12,358 14.0 N/A Bank 27,818 9.2 12,095 14.0 15,118 15.0 As of December 31, 1998: Total Capital (to Risk-Weighted Assets) Corporation $37,350 13.4% $22,281 18.0% N/A Bank 31,781 11.6 21,851 18.0 $27,313 110.0% Tier I Capital (to Risk-Weighted Assets) Corporation 34,440 12.5 11,141 14.0 N/A Bank 29,021 10.6 10,925 14.0 16,388 16.0 Tier I Capital (to Average Assets) Corporation 34,440 11.5 12,067 14.0 N/A Bank 29,021 9.9 11,842 14.0 14,720 15.0 ------------------------------------------------------------------------------ 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 cus- tomers. These financial instruments include commitments to extend credit, com- mitments to sell loans, and standby letters of credit. These instruments in- volve elements of credit and interest rate risk in excess of the amount recog- nized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial in- struments. 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 ob- tained based on management's credit assessment of the customer. Standby let- ters of credit are written conditional commitments issued by the Bank to guar- antee 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 ex- tending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $5,547,000 and $4,240,000 at December 31, 1999 and 1998, 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. Commit- ments 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 nec- essarily represent future cash requirements. The Bank evaluates each custom- er's creditworthiness on a case-by-case basis. The total amount of loan com- mitments was $43,210,000 and $29,043,000 at December 31, 1999 and 1998, re- spectively. Commitments to sell loans are designed to eliminate the Mortgage Corporation's exposure to fluctuations in interest rates in connection with loans held for sale. The Mortgage Corporation sells substantially all of the residential mortgage loans it originates to third-party investors, some of whom require the repurchase of loans in the event of early default or faulty documentation. Mortgage loans and their related servicing rights are sold under agreements that define certain eligibility criteria for the mortgage loan. Recourse peri- ods vary from ninety days up to one year and conditions for repurchase vary with the investor. Mortgages subject to recourse are collateralized by single- family residences, have loan- to-value ratios of 80% or C&F Financial Corporation 38 less, or have private mortgage insurance, or are insured or guaranteed by an agency of the U.S. government. At December 31, 1999, the Mortgage Corporation had locked-rate commitments to originate mortgage loans amounting to approximately $14,370,000. The Mortgage Corporation has entered into mandatory commitments, on a best-effort basis, to sell loans of approximately $39,256,000. Risks arise from the possible inabil- ity of counterparties to meet the terms of their purchase contracts. The Mort- gage Corporation does not expect any counterparty to fail to meet its obliga- tions. The Mortgage Corporation is committed under noncancelable operating leases for certain office locations. Rent expense associated with these operating leases was $330,000, $297,000, and $244,000 for the years ending December 31, 1999, 1998, and 1997, respectively. Future minimum lease payments under these leases are as follows: Year Ending December 31, ------------------- 2000 $ 347,356 2001 278,540 2002 234,938 2003 198,399 2004 20,202 ------------------- $1,079,435 ------------------- As of December 31, 1999, the Corporation had $4,850,000 in deposits in finan- cial institutions in excess of amounts insured by the Federal Deposit Insur- ance Corporation (FDIC). 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 FAS 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Corporation using available market information and ap- propriate valuation methodologies. Loan commitments are conditional and sub- ject to market pricing and, therefore, do not reflect a gain or loss of market value. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on estimated costs to terminate them or oth- erwise 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 esti- mation methodologies may have a material effect on the estimated fair value amounts. Cash and short-term investments. The nature of these instruments and their relatively short maturities provide for the reporting of fair value equal to the historical cost. Investment securities. The fair value of investment securities is based on quoted market prices. Loans. The estimate of the fair value of the loan portfolio is estimated based on present values using applicable spreads to the U.S. Treasury curve. Loans held for sale. The fair value of loans held for sale is estimated based on commitments into which individual loans will be delivered. Deposits and borrowings. The fair value of all demand accounts is the amount payable at the report date. For all other deposits and borrowings, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products. Accrued interest. The carrying amount of accrued interest approximates fair value. 1999 Annual Report 39  December 31, --------------------------------------- 1999 1998 ------------------- ------------------- Carrying Estimated Carrying Estimated Dollars in thousands Amount Fair Value Amount Fair Value --------------------------------------------------------------------------- Financial assets: Cash and short-term investments $ 15,486 $ 15,486 $ 8,473 $ 8,473 Securities 66,584 66,769 62,405 64,459 Net loans 206,116 203,500 169,918 172,830 Loans held for sale, net 24,887 25,319 66,993 68,098 Accrued interest receivable 2,136 2,136 2,374 2,374 Financial liabilities: Demand deposits 156,473 156,342 142,539 142,512 Time deposits 104,381 104,344 109,134 109,714 Borrowings 30,035 30,035 24,661 24,658 Accrued interest payable 566 566 598 598 Off-balance-sheet items: Letters of credit -- 5,547 -- 4,240 Unused portions of lines of credit -- 43,210 -- 29,043 --------------------------------------------------------------------------- NOTE 16: Business Segments The Corporation operates in a decentralized fashion in two principal business activities, retail banking and mortgage banking. Revenues from retail banking operations consist primarily of interest earned on loans and investment secu- rities. Mortgage banking operating revenues consist mainly of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income. The Corporation also has an investment company and a title company subsidiary which derive revenues from brokerage and title insurance services. The results of these subsidiaries are not significant to the Corporation as a whole and have been included in "Oth- er." The following table presents segment information for the years ended De- cember 31, 1999, 1998, and 1997. Year Ended December 31, 1999 ------------------------------------------------- Retail Mortgage Dollars in thousands Banking Banking Other Eliminations Consolidated ----------------------------------------------------------------------------- Revenues: Interest income $ 23,096 $ 1,916 $ -- $ (1,368) $ 23,644 Gain on sale of loans 6,692 6,692 Other 2,134 1,589 860 -- 4,583 ----------------------------------------------------------------------------- Total operating income 25,230 10,197 860 (1,368) 34,919 ----------------------------------------------------------------------------- Expenses: Interest expense 9,068 1,368 -- (1,368) 9,068 Salaries and employee benefits 5,127 3,889 350 -- 9,366 Other 4,586 2,599 149 -- 7,334 ----------------------------------------------------------------------------- Total operating expenses 18,781 7,856 499 (1,368) 25,768 ----------------------------------------------------------------------------- Income before income taxes $ 6,449 $ 2,341 $361 $ -- $ 9,151 ----------------------------------------------------------------------------- Total assets $327,877 $24,673 $ 36 $(23,345) $329,241 Capital expenditures $ 2,709 $ 158 $ -- $ -- $ 2,867 ----------------------------------------------------------------------------- C&F Financial Corporation 40  Year Ended December 31, 1998 -------------------------------------------------- Retail Mortgage Dollars in Thousands Banking Banking Other Eliminations Consolidated ------------------------------------------------------------------------------ Revenues: Interest income $ 22,195 $ 2,805 $ -- $ (2,382) $ 22,618 Gain on sale of loans -- 7,129 -- 7,129 Other 1,721 1,458 701 -- 3,880 ------------------------------------------------------------------------------ Total operating income 23,916 11,392 701 (2,382) 33,627 ------------------------------------------------------------------------------ Expenses: Interest expense 9,558 2,382 -- (2,382) 9,558 Salaries and employee benefits 4,587 3,441 258 -- 8,286 Other 4,395 2,777 124 -- 7,296 ------------------------------------------------------------------------------ Total operating expenses 18,540 8,600 382 (2,382) 25,140 ------------------------------------------------------------------------------ Income before income taxes $ 5,376 $ 2,792 $319 $ -- $ 8,487 ------------------------------------------------------------------------------ Total assets $316,584 $ 66,366 $ 26 $(62,112) $320,864 Capital expenditures $ 775 $ 104 $ -- $ -- $ 879 ------------------------------------------------------------------------------ Year Ended December 31, 1997 -------------------------------------------------- Retail Mortgage Dollars in Thousands Banking Banking Other Eliminations Consolidated ------------------------------------------------------------------------------ Revenues: Interest income $ 19,635 $ 1,184 $ -- $ (1,056) $ 19,763 Gain on sale of loans -- 4,057 -- 4,057 Other 1,578 621 402 -- 2,601 ------------------------------------------------------------------------------ Total operating income 21,213 5,862 402 (1,056) 26,421 ------------------------------------------------------------------------------ Expenses: Interest expense 8,002 1,056 -- (1,056) 8,002 Salaries and employee benefits 3,949 2,203 180 -- 6,332 Other 3,786 1,691 59 -- 5,536 ------------------------------------------------------------------------------ Total operating expenses 15,737 4,950 239 (1,056) 19,870 ------------------------------------------------------------------------------ Income before income taxes $ 5,476 $ 912 $163 $ -- $ 6,551 ------------------------------------------------------------------------------ Total assets $275,618 $ 24,348 $ 10 $(21,870) $278,106 Capital expenditures $ 1,402 $ 216 $ -- $ -- $ 1,618 ------------------------------------------------------------------------------ The retail banking segment provides the mortgage banking segment with the funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest at the daily FHLB advance rate plus 50 basis points. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the retail banking segment are not allocated to the mortgage banking and other segments. 1999 Annual Report 41 NOTE 17: Parent Company Condensed Financial Information Financial information for the parent company is as follows: December 31, ----------------------- Balance Sheets 1999 1998 -------------------------------------------------------------------- Assets Cash $ 246,108 $ 51,822 Investment securities available for sale 4,738,879 5,103,710 Other assets 1,972,004 603,561 Investments in subsidiary 28,238,069 31,007,732 -------------------------------------------------------------------- Total assets $35,195,060 $36,766,825 -------------------------------------------------------------------- Liabilities and shareholders' equity Other liabilities $ 65,350 $ 119,332 Shareholders' equity 35,129,710 36,647,493 -------------------------------------------------------------------- Total liabilities and shareholders' equity $35,195,060 $36,766,825 -------------------------------------------------------------------- Year Ended December 31, ---------------------------------- Statements of Income 1999 1998 1997 ----------------------------------------------------------------------------- Interest income on investment securities $ 339,886 $ 308,804 $ 295,477 Interest income on loans 102,627 41,910 21,573 Dividends received from bank subsidiary 7,859,692 1,839,119 5,420,044 Distributions in excess of equity in net income of subsidiary (1,479,099) -- (672,045) Equity in undistributed net income of subsidiary -- 4,064,679 -- Other income 151,153 -- -- Other expenses (218,029) (120,476) (128,222) ----------------------------------------------------------------------------- Net income $6,756,230 $6,134,036 $4,936,827 ----------------------------------------------------------------------------- Year Ended December 31, ---------------------------------- Statements of Cash Flows 1999 1998 1997 ------------------------------------------------------------------------------- Operating activities: Net income $6,756,230 $6,134,036 $4,936,827 Adjustments to reconcile net income to net cash provided by operating activities: Distributions in excess of equity in net income of subsidiary 1,479,099 -- 672,045 Equity in undistributed earnings of subsidiary -- (4,064,679) -- (Increase) decrease in other assets (1,368,443) 10,314 (494,174) Increase (decrease) in other liabilities 219,672 (52,417) 31,767 ------------------------------------------------------------------------------- Net cash provided by operating activities 7,086,558 2,027,254 5,146,465 ------------------------------------------------------------------------------- Investing activities: Sale of investments 667,249 949,743 2,083,893 Purchase of investments (1,107,292) (1,715,752) (1,557,413) ------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (440,043) (766,009) 526,480 ------------------------------------------------------------------------------- Financing activities: Repurchase of common stock (4,909,024) -- (4,331,201) Dividends paid (1,797,092) (1,699,119) (1,369,788) Proceeds from the issuance of stock 253,887 377,240 125,524 ------------------------------------------------------------------------------- Net cash used in financing activities (6,452,229) (1,321,879) (5,575,465) ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 194,286 (60,634) 97,480 Cash at beginning of year 51,822 112,456 14,976 ------------------------------------------------------------------------------- Cash at end of year $ 246,108 $ 51,822 $ 112,456 ------------------------------------------------------------------------------- C&F Financial Corporation 42 NOTE 18: Quarterly Condensed Statements of Income--Unaudited 1999 Quarter Ended ----------------------------------------- In thousands (except per share) March 31 June 30 September 30 December 31 ------------------------------------------------------------------------------ Total interest income $6,090 $5,592 $5,924 $6,037 Net interest income after provision for loan losses 3,675 3,310 3,555 3,436 Other income 3,178 2,945 2,902 2,250 Other expenses 3,808 4,092 4,073 4,128 Income before income taxes 3,045 2,163 2,384 1,558 Net income 2,146 1,634 1,765 1,211 Earnings per common share--assuming dilution $ .56 $ .44 $ .48 $ .33 Dividends per common share .12 .12 .12 .13 ------------------------------------------------------------------------------ 1998 Quarter Ended ----------------------------------------- In thousands (except per share) March 31 June 30 September 30 December 31 ------------------------------------------------------------------------------ Total interest income $5,314 $5,865 $5,756 $5,683 Net interest income after provision for loan losses 3,050 3,144 3,073 3,192 Other income 2,139 2,841 3,125 2,905 Other expenses 3,236 3,772 3,838 4,136 Income before income taxes 1,953 2,213 2,360 1,961 Net income 1,435 1,617 1,673 1,409 Earnings per common share--assuming dilution $ .37 $ .41 $ .43 $ .36 Dividends per common share .10 .11 .11 .12 ------------------------------------------------------------------------------ 1999 Annual Report 43 INDEPENDENT AUDITOR'S REPORT [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, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of C&F Financial Corporation and Subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ Yount, Hyde & Barbour, P.C. January 20, 2000 Winchester, Virginia C&F Financial Corporation 44 INVESTOR INFORMATION ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders of C&F Financial Corporation will be held at 3:30 p.m. on Tuesday, April 18, 2000, 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 on the Nasdaq Stock Market under the symbol "CFFI." Prior to this date the Corporation's common stock appeared on the NASDAQ Bulletin Board Listing. As of March 3, 2000, there were approximately 1,100 shareholders of record. Following are the high and low closing prices in 1999 and 1998. Over-the- counter market quotations reflect interdealer prices, without retail mark up, mark down, or commission, and may not necessarily represent actual transactions. All quotations have been restated to reflect the effect of a two-for-one stock split in July 1998. 1999 1998 ------------- ------------- Quarter High Low High Low --------------------------------- First $19.63 $18.25 $20.20 $13.50 Second 21.00 18.38 22.00 20.25 Third 23.00 17.25 22.50 19.00 Fourth 22.50 16.75 20.00 18.25 --------------------------------- STOCK TRANSFER AGENT American Stock Transfer & Trust Company serves as transfer agent for the Corporation. You may write them at 40 Wall Street, New York, NY 10005, or telephone them toll-free at 1-800-937-5449. ANNUAL REPORT ON FORM 10-K AND ADDITIONAL INFORMATION A copy of Form 10-K as filed with the Securities and Exchange Commission is available without charge to stockholders upon written request. Requests for this or other financial information about C&F Financial Corporation should be directed to: Tom Cherry Senior Vice President and Chief Financial Officer C&F Financial Corporation P.O. Box 391 West Point, VA 23181 1999 Annual Report 45 DIRECTORS AND ADVISORS C&F Financial Corporation / Citizens and Farmers Bank ----------------------------------------------------------------------------------------------------------- J. P. Causey Jr.*+ Joshua H. Lawson+ Sture G. Olsson*+ Senior Vice President, Secretary & President Retired Chairman of the General Counsel Thrift Insurance CorporationBoard Chesapeake Corporation Chesapeake Corporation Bryan E. McKernon+ Paul C. Robinson+ Larry G. Dillon *+ President & CEO Owner & President Chairman, President & CEO C&F Mortgage Corporation Francisco, Robinson & C&F Financial Corporation Citizens and Farmers Bank Reginald H. Nelson IV+ Thomas B. Whitmore Jr.+ Retired Partner Retired President P. L. Harrell+ Colonial Acres Farm Whitmore Chevrolet, Oldsmobile, President Old Dominion Grain, Inc. Pontiac Co., Inc. William E. O'Connell Jr.*+ James H. Hudson III*+ Chessie Professor of Business Attorney-at-Law Hudson The College of William and Mary & Bondurant, P.C. * C&F Financial Corporation Board Member + Citizens and Farmers Bank Board Member Citizens & Commerce Bank C&F Mortgage Corporation Independent Public ------------------------ ------------------------ ------------------ Accountants Frank Bell III J. P. Causey Jr. ----------- President Senior Vice President, Yount, Hyde & Barbour, P.C. Citizens & Commerce Bank Secretary & General Counsel Winchester, VA Chesapeake Corporation Jeffery W. Jones Corporate Counsel President & Chief Operating Officer Larry G. Dillon -------------- WFofR, Incorporated Chairman of the Board Hudson & Bondurant, P.C. West Point, VA S. Craig Lane James H. Hudson III President Attorney-at-Law Varina Advisory Board Lane & Hamner, P.C. Hudson & Bondurant, P.C. --------------------- Robert A. Canfield William E. O'Connell Jr. Bryan E. McKernon Attorney-at-Law Chairman of the Board President & CEO Canfield, Moore, Chessie Professor of Business C&F Mortgage Corporation Sharpiro, Sease & Baer The College of William and Mary William E. O'Connell Jr. Susan R. Ferguson Meade A. Spotts Chessie Professor of Business President The College of William and Mary Robert F. Nelson Spotts, Smith, Fain & Buis, P.C. Professional Engineer Paul C. Robinson Engineering Design Associates Scott E. Strickler Owner & President Treasurer Francisco, Robinson & Associates, Phil T. Rutledge Robins Insurance Agency, Inc. Realtors Retired Deputy County Manager County of Henrico C&F Investment Services, Inc. ----------------------------- Sandra W. Seelmann Larry G. Dillon Real EstateBroker/Owner President Varina & Seelmann Realty Eric F. Nost Vice President Thomas F. Cherry Treasurer Gari B. Sullivan Secretary C&F Financial Corporation 46 OFFICERS AND LOCATIONS Citizens and Farmers Bank ------------------------------------------------------------------------------------------------------------------------------------ ADMINISTRATIVE OFFICE JAMESTOWN ROAD PROVIDENCE FORGE WEST POINT -- 14TH STREET 802 Main Street Alec J. Nuttall James D. W. King Karen T. Richardson West Point, Virginia 23181 Assistant Vice President Vice President Assistant Vice President (804) 843-2360 & Branch Manager & Branch Manager & Branch Manager 1167 Jamestown Road 3501 N. Courthouse Road 415 Fourteenth Street Larry G. Dillon * Williamsburg, Virginia 23185 Providence Forge, West Point, Virginia 23181 Chairman of the Board (757) 220-3293 Virginia 23140 (804) 843-2708 & Chief Executive Officer (804) 966-2264 LONGHILL ROAD LOAN PRODUCTION OFFICE Thomas F. Cherry * Sandra C. St.Clair QUINTON Terrence C. Gates Senior Vice President Assistant Vice President Mary T. "Joy" Whitley Vice President, & Chief Financial Officer & Branch Manager Assistant Vice President Real Estate Construction 4780 Longhill Road & Branch Manager 300 Arboretum Gari B. Sullivan * Williamsburg, Virginia 23188 2580 New Kent Highway Place, Suite 245 Senior Vice President (757) 565-0593 Quinton, Virginia 23141 Richmond, Virginia 23236 & Secretary (804) 932-4383 (804) 330-8300 MIDDLESEX Howard P. Wilkinson Jr. N. Susan Gordon TAPPAHANNOCK Senior Vice President Assistant Vice President Douglas M. "Judge" Smith & Chief Lending Officer & Branch Manager Assistant Vice President Route 33 at Route 641 & Branch Manager Leslie A. Campbell Saluda, Virginia 23149 1649 Tappahannock Boulevard Vice President, (804) 758-3641 Tappahannock, Virginia 22560 Loan Administration (804) 443-2265 NORGE Sandra S. Fryer Laura G. Colvin VARINA Vice President, Branch Manager Tracy E. Pendleton Operations 7534 Richmond Road Vice President & Branch Manager Norge, Virginia 23127 Route 5 at Strath Road Deborah R. Nichols Richmond, Virginia 23231 Vice President, Branch Administration WEST POINT -- MAIN OFFICE Thomas W. Stephenson Jr. Branch Manager 802 Main Street West Point, Virginia 23181 (804) 843-2360 * Officers of C&F Financial Corporation (757) 564-8114 (804) 795-7000 Citizens & Commerce Bank ------------------------------------------------------------------------------------------------------------------------------------ ADMINISTRATIVE OFFICE RICHMOND Frank Bell III Diana W. Voron President Assistant Vice President & Branch Manager 8001 West Broad Street 8001 West Broad Street Richmond, Virginia 23294 Richmond, Virginia 23294 (804) 290-0402 (804) 290-0409 Katherine K. Wagner Senior Vice President, Commercial Lending 8001 West Broad Street Richmond, Virginia 23294 (804) 290-0402 1999 Annual Report 47 OFFICERS AND LOCATIONS C&F Mortgage Corporation C&F Title Agency, Inc. ------------------------------------------------------------------- ---------------------- ADMINISTRATIVE OFFICE COLUMBIA, MARYLAND Eileen A. Cherry 300 Arboretum Place, Suite 245 Scott B. Segrist Vice President & Title Richmond, Virginia 23236 Vice President & Branch Manager Insurance Underwriter (804) 330-8300 8492 Baltimore National Pike, Suite 207 300 Arboretum Place, Suite 245 Ellicott City, Maryland 21043 Richmond, Virginia 23236 Bryan E. McKernon (410) 461-6233 (804) 327-3810 President & Chief Executive Officer Mark A. Fox LYNCHBURG C&F Investment Services, Inc. Executive Vice President & J. Garnett Atkins ----------------------------- Chief Financial Officer Branch Manager Eric F. Nost 17835 Forest Road, Suite B Vice President & Manager Michael J. Mazzola Forest, Virginia 24551 417 Fourteenth Street Senior Vice President & (804) 385-0700 West Point, Virginia 23181 Maryland Area Manager (804) 843-4584 NEWPORT NEWS (800) 583-3863 Zana D. Creekmore Linda H. Gaskins Vice President & Vice President & Branch Manager Douglas L. Hartz Underwriting Manager 703 Thimble Shoals Boulevard, Suite C4 Assistant Vice President Newport News, Virginia 23606 2580 New Kent Highway Donna G. Jarratt (757) 873-8200 Quinton, Virginia 23141 Vice President & Project Manager (804) 932-8802 RICHMOND Kevin A. McCann Donald R. Jordan Douglas L. Cash Jr. Vice President & Controller Vice President & Branch Manager Branch Manager 1167 Jamestown Road ANNAPOLIS, MARYLAND Daniel J. Murphy Williamsburg, Virginia 23185 Lawrence Roussil Vice President & Production Manager (757) 229-5629 Vice President & Branch Manager 300 Arboretum Place, Suite 245 2191 Defense Highway, Suite 200 Richmond, Virginia 23236 Crofton, Maryland 21114 (804) 330-8300 (410) 721-6770 RICHMOND WEST Michael K. Vaughan Page C. Yonce Vice President & Loan Officer Vice President & Branch Manager Mary M. Yonke Constance Bachman-Hamilton Vice President & Loan Officer Vice President & Production Manager 7231 Forest Avenue, Suite 202 CHARLOTTESVILLE Richmond, Virginia 23226 Philip N. Mahone (804) 673-3453 Vice President & Branch Manager WILLIAMSBURG William E. Hamrick Irving E. "Ed" Jenkins Vice President & Branch Manager Vice President & Branch Manager 1420 Greenbriar Place 1167-A Jamestown Road Charlottesville, Virginia 22901 Williamsburg, Virginia 23185 (804) 974-1450 (757) 259-1200 CHESTER Stephen L. Fuller Vice President & Branch Manager 4517 West Hundred Road Chester, Virginia 23831 (804) 748-2900 48 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-88624, No. 333-67535, No. 333- 63699, and No. 333- 89551) and Form S-3 (No. 333-60877) and in the related Prospectuses, of our report, dated January 20, 2000, relating to the consolidated financial statements of C&F Financial Corporation and subsidiary, included in the 1999 Annual Report of Shareholders and incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 1999. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia March 22, 2000 ARTICLE 9 PERIOD TYPE FISCAL YEAR END PERIOD END CASH INT BEARING DEPOSITS FED FUNDS SOLD TRADING ASSETS INVESTMENTS HELD FOR SALE INVESTMENTS CARRYING INVESTMENTS MARKET LOANS ALLOWANCE TOTAL ASSETS DEPOSITS SHORT TERM LIABILITIES OTHER LONG TERM PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITIES AND EQUITY INTEREST LOAN INTEREST INVEST INTEREST OTHER INTEREST TOTAL INTEREST DEPOSIT INTEREST EXPENSE INTEREST INCOME NET LOAN LOSSES SECURITIES GAINS EXPENSE OTHER INCOME PRETAX INCOME PRE EXTRAORDINARY EXTRAORDINARY CHANGES NET INCOME EPS BASIC EPS DILUTED YIELD ACTUAL LOANS NON LOANS PAST LOANS TROUBLED LOANS PROBLEM ALLOWANCE OPEN CHARGE OFFS RECOVERIES ALLOWANCE CLOSE ALLOWANCE DOMESTIC ALLOWANCE FOREIGN ALLOWANCE UNALLOCATED End of Filing 12 MOS DEC 31 1999 DEC 31 1999 15,486 2,062 0 0 30,208 34,790 34,976 231,002 3,302 329,241 260,854 30,035 2,713 0 0 0 3,644 0 329,241 19,405 4,239 0 23,644 8,328 9,068 14,576 600 139 16,100 9,151 9,151 0 0 6,756 1.83 1.81 8.41 835 786 0 0 2,760 86 28 3,302 3,302 0 0 © 2005 | EDGAR Online, Inc. 

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