More annual reports from C&F Financial Corporation:
2023 ReportC & F FINANCIAL CORP FORM 10-K (Annual Report) Filed 3/15/2002 For Period Ending 12/31/2001 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 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 or or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________to_____________ Commission file No.000-23423 C&F FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-1680165 (State of incorporation) (I.R.S. Employer Identification No.) Eighth and Main Streets, West Point, VA 23181 (Address of principal executive offices) Registrant's telephone number (804) 843-2360 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $69,327,000 as of February 26, 2002. The number of shares of the registrant's common stock outstanding as of February 26, 2002 was 3,529,726. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement dated March 15, 2002 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 16, 2002 are incorporated by reference into Part III. TABLE OF CONTENTS PART I ITEM 1. BUSINESS ........................................................ page 1 ITEM 2. PROPERTIES ...................................................... page 2 ITEM 3. LEGAL PROCEEDINGS ............................................... page 3 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................................. page 3 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ............................... page 3 ITEM 6. SELECTED FINANCIAL DATA ......................................... page 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION .................. page 5 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... page 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................... page 22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ........................ page 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............................................. page 43 ITEM 11. EXECUTIVE COMPENSATION .......................................... page 43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ......................................... page 43 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................................................. page 44 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K ................................ page 44 ITEM 1. BUSINESS General C&F Financial Corporation (the "Corporation") is a bank holding company which was incorporated under the laws of the Commonwealth of Virginia in March, 1994. The Corporation owns all of the stock of its sole subsidiary, Citizens and Farmers Bank (the "Bank"), which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia. The Bank has a total of twelve branches including the main office. The Bank has its main office at Eighth and Main Streets, West Point, Virginia, and has branch offices in Richmond, Norge, Middlesex, Midlothian, Providence Forge, Quinton, Sandston, Varina, Williamsburg (two branches), and West Point (two branches). The Bank was originally opened for business under the name Farmers and Mechanics Bank on January 22, 1927. The local community served by the Bank is generally defined as those portions of King William County, King and Queen County, Hanover County and Henrico County which are east of Route 360; Essex, Middlesex, New Kent, Charles City, and James City Counties; that portion of York County which is directly north of James City County; that portion of Gloucester County which is north and west of Routes 14 and 17; Northwestern Chesterfield County, the western portion of the City of Richmond and western Henrico County along the Route 250 corridor. The Corporation, through its subsidiaries, offers a wide range of banking services available to both individuals and businesses. These services include various types of checking and savings deposit accounts, and the making of business, real estate, development, mortgage, home equity, automobile, and other installment, demand and term loans. The Bank also offers ATMs, internet banking services, credit card services, trust services, travelers' checks, money orders, safe deposit rentals, collections, notary public, wire services, and other customary bank services to its customers. The Bank has four wholly-owned subsidiaries, C&F Title Agency, Inc., C&F Investment Services, Inc., C&F Insurance Services, Inc., and C&F Mortgage Corporation, all incorporated under the laws of the Commonwealth of Virginia. The Bank also operates Citizens and Commerce Bank (CCB), a division of the Bank, to offer banking services to the Richmond Market. CCB operates two of the Bank's Richmond Branches. C&F Title Agency, Inc. organized in October 1992, sells title insurance. C&F Investment Services, Inc., organized April 1995, is a full-service brokerage firm offering a comprehensive range of investment options including stocks, bonds, annuities, and mutual funds. C&F Insurance Services, Inc., organized in July 1999, owns 2.4% of the Virginia Bankers Insurance Center, LLC which currently offers insurance products to commercial customers. C&F Mortgage Corporation, organized in September 1995, originates and sells residential mortgages. C&F Mortgage Corporation provides mortgage services through seven locations in Virginia and three in Maryland. The Virginia offices are in Richmond (two locations), Williamsburg, Newport News, Charlottesville, Lynchburg, and Chester. The Maryland offices are in Annapolis, Crofton, and Ellicott City. See Note 16 to the Consolidated Financial Statements for summarized financial information by business segment. As of December 31, 2001, a total of 311 persons were employed by the Corporation, of whom 32 were part-time. The Corporation considers relations with its employees to be excellent. 1 Competition The Bank is subject to competition from various financial institutions and other companies or firms that offer financial services. The Bank's principal competition in its market area consists of all the major statewide and national banks. The Bank also competes for deposits with savings associations, credit unions, money-market funds, and other community banks. In making loans, the Bank competes with consumer finance companies, credit unions, leasing companies, and other lenders. C&F Mortgage Corporation competes for mortgage loans in its market areas with other mortgage companies, commercial banks, and other financial institutions. C&F Investment Services and C&F Insurance Services compete with other investment companies, brokerage firms, and insurance companies to provide these services. C&F Title Agency competes with other title companies. Regulation and Supervision The Corporation is subject to regulation by the Federal Reserve Bank under the Bank Holding Company Act of 1956. The Corporation is also under the jurisdiction of the Securities and Exchange Commission and certain state securities commissions with respect to matters relating to the offer and sale of its securities. In addition, the Bank is subject to regulation and examination by the State Corporation Commission and the Federal Deposit Insurance Corporation. ITEM 2. PROPERTIES The following describes the location and general character of the principal offices and other materially important physical properties of the Corporation and its subsidiary. The Corporation owns the headquarters building located at Eighth and Main Streets in the business district of West Point, Virginia. The building, originally constructed in 1923, has three floors totaling 15,000 square feet. This building houses the Citizens and Farmers Bank main office branch and office space for the Corporation's administrative personnel. The Corporation owns a building located at Seventh and Main Streets in West Point, Virginia. The building provides space for Citizens and Farmers Bank operations functions and staff. The building was originally constructed prior to 1935 and remodeled by the Corporation in 1991. The two-story building has 20,000 square feet. The Corporation owns a building located at Sixth and Main Streets in West Point, Virginia. The building provides space for Citizens and Farmers Bank loan operations functions and staff. The building was bought and remodeled by the Corporation in 1998. The building has 5,000 square feet. 2 The Corporation owns a building located at 1400 Alverser Drive in Midlothian, Virginia. The building provides space for CCB's main office and branch and for C&F Mortgage Corporation's administrative office. This two-story building has 25,000 square feet Citizens and Farmers Bank owns ten other branch locations in Virginia. Also, the Bank owns several lots in West Point, Virginia, and one other lot in New Kent County, Virginia. C&F Mortgage Corporation has ten leased offices, seven in Virginia and three in Maryland. Rental expense for these locations totaled $580,000 for the year ended December 31, 2001. All of the Corporation's properties are in good operating condition and are adequate for the Corporation's present and anticipated future needs. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Corporation is a party or to which the property of the Corporation is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Corporation through a solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Corporation's common stock is traded on the over-the-counter market and is listed on the Nasdaq Stock Market under the symbol "CFFI." As of March 5, 2002, there were approximately 1,100 shareholders of record. Following are the high and low closing prices along with the dividends that were paid quarterly in 2001 and 2000. Over-the-counter market quotations reflect interdealer prices, without retail mark up, mark down, or commission, and may not necessarily represent actual transactions. 2001 2000 -------------------------- -------------------------- Quarter High Low Dividends High Low Dividends First $16.50 $14.50 $0.14 $18.00 $11.25 $0.13 Second 17.20 15.90 0.14 17.75 11.25 0.13 Third 18.20 16.25 0.15 17.38 15.00 0.13 Fourth 21.00 18.68 0.15 16.25 14.50 0.14 3 ITEM 6. SELECTED FINANCIAL DATA FIVE YEAR FINANCIAL SUMMARY 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------------- Selected Year-End Balances: Total assets $404,075,974 $347,471,672 $329,241,321 $320,863,629 $278,105,969 Total capital 44,743,023 38,780,450 35,129,710 36,647,493 31,800,533 Total loans (net) 246,112,369 229,943,715 206,115,896 169,918,428 154,744,620 Total deposits 323,912,501 290,688,036 260,853,635 251,673,159 231,513,152 ----------------------------------------------------------------------------------------------------------------------------- Summary of Operations: Interest income 28,234,385 26,421,479 23,643,557 22,617,509 19,763,048 Interest expense 11,984,392 11,309,399 9,067,867 9,558,059 8,002,301 ----------------------------------------------------------------------------------------------------------------------------- Net interest income 16,249,993 15,112,080 14,575,690 13,059,450 11,760,747 Provision for loan losses 400,000 400,000 600,000 600,000 330,000 ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 15,849,993 14,712,080 13,975,690 12,459,450 11,430,747 Other operating income 17,420,619 8,945,062 11,004,456 10,835,243 6,657,608 Other operating expenses 21,964,093 15,998,380 15,829,550 14,807,306 11,537,565 ----------------------------------------------------------------------------------------------------------------------------- Income before taxes 11,306,519 7,658,762 9,150,596 8,487,387 6,550,790 Income tax expense 3,317,802 1,822,731 2,394,366 2,353,351 1,613,963 ----------------------------------------------------------------------------------------------------------------------------- Net income $ 7,988,717 $ 5,836,031 $ 6,756,230 $ 6,134,036 $ 4,936,827 ============================================================================================================================= Per share Earnings per common share--assuming dilution $ 2.23 $ 1.60 $ 1.81 $ 1.56 $ 1.25 Dividends .58 .53 .49 .44 .35 ----------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares--assuming dilution 3,587,307 3,640,314 3,738,234 3,919,775 3,952,756 ----------------------------------------------------------------------------------------------------------------------------- Significant Ratios 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Return on average assets 2.09% 1.76% 2.19% Return on average equity 18.93 15.99 19.22 Dividend payout ratio 25.74 32.74 26.60 Average equity to average assets 11.05 10.99 11.38 ----------------------------------------------------------------------------------------------------------------------------- 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Net income totaled $8.0 million in 2001, an increase of 36.9% compared to 2000. Included in earnings for 2001 was $776,000 in other operating income (after taxes) which resulted from a gain on the sale of the Bank's Tappahannock branch. Excluding this gain, net income increased 23.6% compared to 2000. In 2000, net income totaled $5.8 million, a 13.6% decrease compared to 1999. Diluted earnings per share were $2.23, $1.60, and $1.81, in 2001, 2000, and 1999, respectively. Excluding the gain on the sale of the branch, diluted earnings per share were $2.01 in 2001. The increase in earnings per share for 2001 was a result of higher net income and the repurchase of 59,981 shares of the Corporation's common stock. The decrease in earnings per share for 2000 was a result of lower net income offset by the repurchase of 85,000 shares of the Corporation's common stock. Profitability as measured by the Corporation's return on average equity (ROE) was 18.93% in 2001, 15.99% in 2000, and 19.22% in 1999. Another key indicator of performance, the return on average assets (ROA) for 2001, was 2.09%, compared to 1.76% in 2000, and 2.19% for 1999. 5 TABLE 1: Average Balances, Income and Expense, Yields and Rates The following table shows the average balance sheets for each of the years ended December 31, 2001, 2000, and 1999. In addition, the amounts of interest earned on earning assets, with related yields and interest on interest-bearing liabilities, together with the rates, are shown. Loans include loans held for sale. Loans placed on a non-accrual status are included in the balances and were included in the computation of yields, upon which they had an immaterial effect. Interest on tax-exempt securities is on a taxable-equivalent basis, which was computed using the federal corporate income tax rate of 34% for all three years. 2001 2000 1999 -------------------------- --------------------------- --------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate -------------------------------------------------------------------------------------------------------------------------------- Assets Securities: Taxable $ 8,402 $ 591 7.03% $ 16,089 $ 1,157 7.19% $ 15,293 $ 1,097 7.17% Tax-exempt 51,185 4,088 7.99 52,068 4,196 8.06 49,049 4,013 8.18 -------------------------------------------------------------------------------------------------------------------------------- Total securities 59,587 4,679 7.85 68,157 5,353 7.85 64,342 5,110 7.94 Loans, net 293,056 24,810 8.47 241,291 22,245 9.22 216,295 18,850 8.71 Interest-bearing deposits in other banks and fed funds 3,216 100 3.11 3,482 215 6.17 9,621 458 4.76 -------------------------------------------------------------------------------------------------------------------------------- Total earning assets 355,859 $29,589 8.31% 312,930 $27,813 8.89% 290,258 $24,418 8.41% Reserve for loan losses (3,730) (3,451) (3,003) Total non-earning assets 29,638 22,723 21,710 -------------------------------------------------------------------------------------------------------------------------------- Total assets $381,767 $332,202 $308,965 -------------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Time and savings deposits: Interest-bearing deposits $ 54,481 $ 1,046 1.92% $ 50,977 $ 1,236 2.42% $ 45,627 $ 1,084 2.38% Money market deposit accounts 26,290 802 3.05 25,938 877 3.38 25,207 807 3.20 Savings accounts 38,921 952 2.45 38,640 1,150 2.98 39,131 1,164 2.97 Certificates of deposit, $100M or more 32,421 1,769 5.46 22,955 1,266 5.52 17,977 857 4.77 Other certificates of deposit 119,535 6,639 5.55 96,004 5,203 5.42 89,467 4,416 4.94 -------------------------------------------------------------------------------------------------------------------------------- Total time and savings deposits 271,648 11,208 4.13 234,514 9,732 4.15 217,409 8,328 3.83 -------------------------------------------------------------------------------------------------------------------------------- Borrowings 19,628 836 4.26 25,774 1,577 6.12 15,002 740 4.93 -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 291,276 12,044 4.14% 260,288 11,309 4.34% 232,411 9,068 3.90% -------------------------------------------------------------------------------------------------------------------------------- Demand deposits 39,240 31,511 35,697 Other liabilities 9,060 3,895 5,701 -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 339,576 295,694 273,809 Shareholders' equity 42,191 36,508 35,156 -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and Shareholders' equity $381,767 $332,202 $308,965 -------------------------------------------------------------------------------------------------------------------------------- Net interest income $17,545 $16,504 $15,350 -------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 4.17 4.55 4.51 -------------------------------------------------------------------------------------------------------------------------------- Interest expense to average earning assets 3.38 3.61 3.12 -------------------------------------------------------------------------------------------------------------------------------- Net interest margin 4.93% 5.27% 5.29% ================================================================================================================================ 6 RESULTS OF OPERATIONS NET INTEREST INCOME During 2001, net interest income, on a taxable equivalent basis, increased 6.3% to $17.5 million from $16.5 million. This was a result of a 13.7% increase in the average balance of interest earning assets offset by a decrease in the net interest margin to 4.93% in 2001 from 5.27% in 2000. The increase in average earning assets was the result of an increase in the average balance of the loan portfolio at the Bank and an increase in the average balance of loans held for sale by C&F Mortgage Corporation (the "Mortgage Corporation") offset by a decrease in the Bank's securities portfolio and an increase in non-earning assets. The increase in loans at the Bank was a result of overall higher loan demand. The decrease in the average balance of securities was a result of calls and maturities of securities during 2001. The increase in non-earning assets principally resulted from the addition of new branch locations. Numerous securities were called as a result of the lower interest rate environment in 2001. The increase in loans held for sale at the Mortgage Corporation was a result of an increase in loan originations to $627 million in 2001 from $294 million in 2000 and an increase in loan fundings (sales) to $575 million in 2001 from $302 million in 2000. The decrease in the net interest margin was a result of a decrease in the yield on average earning assets from 8.89% in 2000 to 8.31% in 2001 offset by a decrease in the cost of funds from 4.34% in 2000 to 4.14% in 2001. The decrease in the average yield on interest earning assets was primarily a result of the declining interest rate environment. The decrease in the cost of funds was primarily a result of the declining interest rate environment during 2001 and a decrease in the average balance of borrowings from the Federal Home Loan Bank ("FHLB"). During 2001, the Federal Reserve decreased the federal funds rate 11 times for a total of 475 basis points. During 2000, net interest income, on a taxable equivalent basis, increased 7.5% to $16.5 million from $15.4 million, excluding the one-time interest collected on a non-accrual loan in 1999. This was a result of a 7.8% increase in the average balance of interest earning assets offset by a slight decrease in the net interest margin to 5.27% in 2000 from 5.29% in 1999. The increase in average earning assets was the result of an increase in the average balance of the loan portfolio and securities portfolio at the Bank offset by a decrease in the average balance of loans held for sale by the Mortgage Corporation, and a decrease in the average balance in interest earning deposits in other banks and fed funds sold. The increase in loans at the Bank was a result of overall higher loan demand. The increase in the average balance of securities was a result of the purchase of securities during the last six months of 1999. A large number of securities were called in the first half of 1999 and were replaced in the second half of 1999. The current year reflects the effect of a full year of these purchases. The decrease in loans held for sale at the Mortgage Corporation was a result of a decrease in loan originations to $294 million in 2000 from $457 million in 1999 and a decrease in loan fundings (sales) to $302 million in 2000 from $499 million in 1999. The decrease in the average balance in interest earning deposits in other banks and fed funds sold was a result of excess liquidity being invested in higher yielding loans and securities. The decrease in the net interest margin was a result of an increase in the cost of funds from 3.90% in 1999 to 4.34% in 2000 offset by an increase in the yield on average earning assets from 8.41% in 1999 to 8.89% in 2000. The increase in the cost of funds was a result of the overall higher interest rate environment during 2000 and an increase in the average balance of higher cost borrowings from the FHLB. From August 1999 to March 2000, the interest rates on fed funds increased 150 basis points. This increase was clearly reflected in the average cost of certificates of deposit paid by the Corporation. The increase in the average balance of borrowings from the FHLB was a result of loan growth outpacing deposit growth during most of 2000. In addition to providing funding for loans originated and subsequently sold by the Mortgage Corporation, borrowings from the FHLB are occasionally used for funding of the Bank's loan portfolio. The increase in the average yield on interest earning assets was mainly a result of the higher interest rate environment and the decrease in the average balance of lower yielding loans held for sale at the Mortgage Corporation. 7 TABLE 2: Rate-Volume Recap Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following analysis shows the direct causes of the year-to-year changes in the components of net interest earnings on a taxable-equivalent basis. The rate and volume variances are calculated by a formula prescribed by the Securities and Exchange Commission. Rate/volume variances, the third element in the calculation, are not shown separately, but are allocated to the rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each. Loans include both non- accrual loans and loans held for sale. 2001 from 2000 2000 from 1999 ------------------------------- --------------------------------- Increase (Decrease) Total Increase (Decrease) Total Due to Increase Due to Increase (Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease) ------------------------------------------------------------------------------------------------------------------------------- Interest income: Loans $ (1,925) $ 4,490 $ 2,565 $ 1,133 $ 2,262 $ 3,395 Securities: Taxable (25) (541) (566) 3 57 60 Tax-exempt (37) (71) (108) (61) 244 183 ------------------------------------------------------------------------------------------------------------------------------ Total securities (62) (612) (674) (58) 301 243 ------------------------------------------------------------------------------------------------------------------------------ Interest-bearing deposits in other banks and fed funds (97) (18) (115) 43 (286) (243) ------------------------------------------------------------------------------------------------------------------------------ Total interest income (2,084) 3,860 1,776 1,118 2,277 3,395 ------------------------------------------------------------------------------------------------------------------------------ Interest expense: Time and savings deposits: Interest-bearing deposits (270) 80 (190) 23 129 152 Money market deposit accounts (87) 12 (75) 46 24 70 Savings accounts (206) 8 (198) 1 (15) (14) Certificates of deposit, $100M or more (14) 517 503 148 261 409 Other certificates of deposit 132 1,304 1,436 451 336 787 ------------------------------------------------------------------------------------------------------------------------------ Total time and savings deposits (445) 1,921 1,476 669 735 1,404 Other borrowings (415) (326) (741) 210 627 837 ------------------------------------------------------------------------------------------------------------------------------ Total interest expense (860) 1,595 735 879 1,362 2,241 ------------------------------------------------------------------------------------------------------------------------------ Change in net interest income $ (1,224) $ 2,265 $ 1,041 $ 239 $ 915 $ 1,154 ============================================================================================================================== 8 NON-INTEREST INCOME TABLE 3: Non-Interest Income Year Ended December 31, ------------------------ (Dollars in thousands) 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Gain on sale of loans $10,390 $ 5,009 $ 6,692 Service charges on deposit accounts 1,442 1,336 1,154 Other service charges and fees 3,211 1,675 1,950 Gain on calls of available for sale securities 6 100 139 Gain on sale of branch 1,176 -- -- Other income 1,196 825 1,069 ----------------------------------------------------------------------------------------------------------------------------- $17,421 $ 8,945 $11,004 ============================================================================================================================= 2001 vs. 2000 Non-interest income increased by $8.5 million, or 94.8%, in 2001. The increase was mainly a result of a $5.4 million increase in the gain on sale of loans at the Mortgage Corporation. This increase was a result of the overall increase in production at the Mortgage Corporation which was a result of the lower interest rate environment in 2001 compared to 2000. Other service charges and fees increased $1,536,000 as a result of increased production at the Mortgage Corporation and other income increased $371,000 largely due to increased production at the Mortgage Corporation and C&F Title Agency. The gain on sale of branch was a result of the sale of the Bank's Tappahannock branch office during the fourth quarter of 2001. Management believed this location did not fit into the Bank's geographic focus. 2000 vs. 1999 Non-interest income decreased by $2.1 million, or 18.7%, in 2000. The decrease was mainly a result of a $1.7 million decrease in the gain on sale of loans at the Mortgage Corporation. This decrease was a result of the overall decrease in production at the Mortgage Corporation which was a result of the higher interest rate environment in 2000 compared to 1999. In addition, other service charges and fees at the Mortgage Corporation declined $309,000 and other income at the Title Company, declined $132,000. These decreases were partially offset by an increase in service charges on deposit accounts at the Bank of $181,000 which was due to the overall growth of the Bank during 2000. NON-INTEREST EXPENSE TABLE 4: Non-Interest Expense Year Ended December 31, ----------------------- (Dollars in thousands) 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits $13,443 $ 9,603 $ 9,366 Occupancy expense 2,886 2,378 2,044 Goodwill amortization 268 275 275 Other expenses 5,367 3,742 4,145 ----------------------------------------------------------------------------------------------------------------------------- $21,964 $15,998 $15,830 ============================================================================================================================= 9 2001 vs. 2000 Non-interest expense increased $5,966,000, or 37.3%, over 2000. This increase was primarily a result of increased salaries and variable compensation at the Mortgage Corporation due to an increase in production. Salaries and benefits at the Bank also increased as a result of overall growth, the opening of a new branch by CCB, and the opening of a branch of the Bank in Sandston during the fourth quarter of 2001. The opening of the two new branches along with investments in imaging and internet banking technology resulted in an increase in occupancy expenses. Other expenses increased mainly as a result of increased production at the Mortgage Corporation. 2000 vs. 1999 Non-interest expense increased $168,000, or 1.1%, over 1999. This increase was a result of increased salaries and benefits at the Bank offset by decreased salaries and variable compensation at the Mortgage Corporation due to a decrease in production. The increase in salaries and benefits at the Bank was due to overall growth including the formation of CCB, and the opening of a branch of the Bank in Williamsburg, Virginia during the second quarter of 2000. CCB was formed in the second half of 1999. The growth of the Bank also resulted in an increase in occupancy expense. Other expenses declined mainly as a result of decreased production at the Mortgage Corporation. INCOME TAXES Applicable income taxes on 2001 earnings amounted to $3,318,000, resulting in an effective tax rate of 29.3% compared to $1,823,000, or 23.8% in 2000, and $2,394,000, or 26.1% in 1999. The increase in the effective tax rate for 2001 as compared to 2000 was a result of a decrease in earnings from tax exempt assets as a percentage of total income mainly resulting from the increased earnings at the Mortgage Corporation. The decrease for 2000 compared to 1999 was a result of the increase in earnings from tax exempt assets as a percentage of total income mainly resulting from the decrease in earnings at the Mortgage Corporation. TABLE 5: Allowance for Loan Losses Year Ended December 31, ------------------------------------ (Dollars in thousands) 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------------------- Reserve, beginning of period $3,609 $3,302 $2,760 $2,234 $1,927 Provision for loan losses 400 400 600 600 330 Loans charged off: Real estate--mortgage -- -- 10 33 12 Real estate--construction 32 31 -- -- -- Commercial, financial, and agricultural 126 -- -- -- 3 Consumer 192 71 76 66 12 -------------------------------------------------------------------------------------------------------------------------------- Total loans charged off 350 102 86 99 27 Recoveries of loans previously charged off: Real estate--mortgage -- -- -- 25 -- Commercial, financial, and agricultural -- -- 13 -- -- Consumer 25 9 15 -- 4 -------------------------------------------------------------------------------------------------------------------------------- Total recoveries 25 9 28 25 4 Net loans charged off 325 93 58 74 23 -------------------------------------------------------------------------------------------------------------------------------- Balance, end of period $3,684 $3,609 $3,302 $2,760 $2,234 -------------------------------------------------------------------------------------------------------------------------------- Ratio of net charge-offs to average total loans outstanding during period .11% .04% .03% .04% .01% ================================================================================================================================ 10 TABLE 6: Allocation of Allowance for Possible Loan Losses The allowance for loan losses is a general allowance applicable to all loan categories; however, management has allocated the allowance to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs in 2002 will occur in these amounts, or that the allocation indicates future trends. The allocation of the allowance at December 31 for the years indicated and the ratio of related outstanding loan balances to total loans are as follows: (Dollars in thousands) 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------------------------------------------------------- Allocation of allowance for loan losses, end of year: Real estate--mortgage $ 619 $ 743 $ 753 $ 667 $ 692 Real estate--construction 263 251 160 108 89 Commercial, financial, and agricultural 2,203 2,005 1,686 1,211 926 Equity lines 113 116 103 86 71 Consumer 290 267 380 251 167 Unallocated 196 227 220 437 289 -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31 $3,684 $3,609 $3,302 $2,760 $2,234 -------------------------------------------------------------------------------------------------------------------------------- Ratio of loans to total year-end loans: Real estate--mortgage 32% 37% 43% 50% 57% Real estate--construction 4 4 4 3 3 Commercial, financial, and agricultural 55 49 42 36 31 Equity lines 4 5 5 5 4 Consumer 5 5 6 6 5 -------------------------------------------------------------------------------------------------------------------------------- 100% 100% 100% 100% 100% ================================================================================================================================ ASSET QUALITY-ALLOWANCE AND PROVISION FOR LOAN LOSSES The allowance for loan losses is to provide for potential losses in the loan portfolio. Among other factors, management considers the Corporation's historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits, and current economic conditions. There are additional risks of future loan losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Since those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. In 2001, the provision for loan losses was $400,000 compared to $400,000 in 2000 and $600,000 in 1999. Over the past several years, the Corporation has substantially increased its portfolio of commercial, financial, and agricultural loans. The risks associated with increasing the volume of such loans resulted in an increase in the provision for loan losses for 1999 when compared to years prior to 1998. While the Corporation continues to increase its commercial, financial and agricultural loan portfolio, the portfolio also continues to become "more seasoned" allowing management to better assess the risk associated with the portfolio. Accordingly, management was able to reduce the provision for loan losses in 2001 and 2000 to $400,000 from $600,000 in 1999. Table 6 presents the allocation of the allowance for possible loan losses by loan category. Loans charged off during 2001 amounted to $350,000 compared to $102,000 in 2000 and $86,000 in 1999. Recoveries amounted to $24,000, $9,000, and $28,000 in 2001, 2000, and 1999, respectively. The ratio of net charge-offs to average outstanding loans was .11% in 2001,.04% in 2000, and .03% in 1999. Management believes that the reserve is 11 adequate to absorb any losses on existing loans that may become uncollectible. Table 5 presents the Corporation's loan loss and recovery experience for the past five years. NON-PERFORMING ASSETS Total non-performing assets, which consist of the Corporation's non-accrual loans and real estate owned, were $1,026,000 at December 31, 2001, an increase of $506,000 from December 31, 2000. The increase in non-performing assets is a result of certain lending relationships being put on non-accrual status during the year. The Corporation is closely monitoring these relationships and does not anticipate a significant loss. Loans are generally placed on non-accrual status when the collection of principal or interest is ninety days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than ninety days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans which are carried on non-accrual status, interest is recognized on the cash basis. $91,000, $37,000, and $8,000 in additional gross interest income would have been recorded if non-accrual loans had been current throughout the period outstanding for 2001, 2000, and 1999, respectively. Interest income received on non-accrual loans was $2,000, $2,000, and $551,000 for the periods ended December 31, 2001, 2000, and 1999, respectively. Impaired loans are measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan (or, as a practical expedient, at the loan's observable market price) or the fair value of the collateral if the loan is collateral dependent. The Corporation considers a loan impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. A loan is not considered impaired during a period of delay in payment if the ultimate collectibility of all amounts due is expected. A valuation allowance is maintained to the extent that the measure of the impaired loan is less than the recorded investment. The balances of impaired loans at December 31, 2001 and 2000, was $1,026,000 and $473,000 respectively, with no specific valuation allowance associated with these loans. The average balances of impaired loans for 2001 and 2000 were $513,000 and $357,000, respectively. Table 7 summarizes non-performing assets for the past five years. TABLE 7: Non-Performing Asset Activity (Dollars in thousands) 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------------------- Non-accrual loans $1,026 $ 473 $ 49 $463 $497 Real estate owned -- 47 -- -- 444 --------------------------------------------------------------------------------------------------------------------------------- Total non-performing assets 1,026 520 49 463 941 --------------------------------------------------------------------------------------------------------------------------------- Principal and/or interest past due for 90 days or more $ 913 $1,586 $786 $958 $768 --------------------------------------------------------------------------------------------------------------------------------- Non-performing loans to total loans .41% .20% .02% .27% .31% Allowance for loan losses to total loans 1.47 1.55 1.58 1.60 1.42 Allowance for loan losses to non-performing loans 359.06 763.00 6,738.78 596.11 449.30 Non-performing assets to total assets .25% .15% .01% .14% .34% ================================================================================================================================= 12 FINANCIAL CONDITION SUMMARY A financial institution's primary sources of revenue are generated by its earning assets, while its major expenses are produced by the funding of those assets with interest-bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's maximum profitability while maintaining an acceptable level of risk. At the end of 2001, the Corporation had total assets of $404 million, up 16.4% over the previous year-end. In 2000, there was an increase of 5.5% in total assets over year-end 1999. Asset growth in 2001 is attributable to an increase in loans at the Bank and an increase in loans held for sale at the Mortgage Corporation. TABLE 8: Summary of Total Loans Year Ended December 31, ------------------------------------------------------------------ (Dollars in thousands) 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------------------- Real estate--mortgage $ 80,977 $ 86,453 $ 89,952 $ 86,311 $ 88,973 Real estate--construction 8,819 9,099 7,968 5,359 4,454 Commercial, financial, and agricultura/l/ 137,374 113,570 89,135 62,885 48,737 Equity lines 11,284 11,616 10,272 8,580 7,131 Consumer 11,342 12,815 12,091 9,543 7,684 ----------------------------------------------------------------------------------------------------------------------------------- Total loans 249,796 233,553 209,418 172,678 156,979 Less allowance for loan losses (3,684) (3,609) (3,302) (2,760) (2,234) ---------------------------------------------------------------------------------------------------------------------------------- Total loans, net $246,112 $229,944 $206,116 $169,918 $154,745 ================================================================================================================================== /1/ Includes loans secured by real estate TABLE 9: Maturity/Repricing Schedule of Loans December 31, 2001 ------------------------------------ Commercial, financial, Real estate (Dollars in thousands) and agricultural construction ------------------------------------------------------------------------------------------------------------------------- Variable Rate: Within 1 year $49,523 $ -- 1 to 5 years 19,846 -- After 5 years 9,657 -- Fixed Rate: Within 1 year 8,695 8,819 1 to 5 years 18,540 -- After 5 years 31,113 -- ========================================================================================================================= LOAN PORTFOLIO At December 31, 2001, loans, net of unearned income and reserve for loan losses, totaled $246.1 million, an increase of 7.0% over the 2000 total of $229.9 million. Net loans increased 11.6% and 21.3% in 2000 and 1999, respectively. The corporation's lending activities are its principal source of income. All loans are attributable to domestic operations. Residential real estate loans, both construction and permanent, and commercial, including, commercial real 13 estate, represent the major portion of the Corporation's loan portfolio. Tables 8 and 9 present information pertaining to the composition of loans and the maturity/repricing of loans. TABLE 10: Maturity of Securities Year Ended December 31, ------------------------------------------------ 2001 2000 1999 ---------------------- -------------------- ---------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average (Dollars in thousands) Cost Yield Cost Yield Cost Yield ------------------------------------------------------------------------------------------------------------------------------- U.S. government agencies and corporations: Maturing after 5 years, but within 10 years $ -- --% $ 4,500 7.03% $ 4,500 7.03% Maturing after 10 years -- -- 9,000 7.08 9,000 7.08 ------------------------------------------------------------------------------------------------------------------------------ Total U.S. government agencies and corporations -- -- 13,500 7.07 13,500 7.07 ------------------------------------------------------------------------------------------------------------------------------ U.S. Treasuries: Maturing within 1 year -- -- 1,000 8.01 -- -- Maturing after 1 year, but within 5 years -- -- -- -- 1,000 8.01 ------------------------------------------------------------------------------------------------------------------------------ Total U.S. Treasuries -- -- 1,000 8.01 1,000 8.01 ------------------------------------------------------------------------------------------------------------------------------ Mortgage backed securities: Maturing after 1 year, but within 5 years 1,948 5.83 -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ Total mortgage backed securities 1,948 5.83 -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ States and municipals:1 Maturing within 1 year 1,164 8.55 2,028 10.43 155 9.77 Maturing after 1 year, but within 5 years 4,234 8.20 4,378 8.42 4,190 8.87 Maturing after 5 years, but within 10 years 19,061 7.54 15,871 7.61 14,352 7.97 Maturing after 10 years 20,817 7.22 23,907 7.29 28,496 7.52 ------------------------------------------------------------------------------------------------------------------------------ Total states and municipals 45,276 7.48 46,184 7.64 47,193 7.66 ------------------------------------------------------------------------------------------------------------------------------ Total securities:2 Maturing within 1 year 1,164 8.55 3,028 9.63 155 9.77 Maturing after 1 year, but within 5 years 6,182 7.46 4,378 8.42 5,190 8.71 Maturing after 5 years, but within 10 years 19,061 7.54 20,371 7.48 18,852 7.95 Maturing after 10 years 20,817 7.22 32,907 7.24 37,496 1.36 ------------------------------------------------------------------------------------------------------------------------------ Total securities $ 47,224 7.41% $ 60,684 7.52% $ 61,693 7.54% ============================================================================================================================== /1/ Yields on tax-exempt securities have been computed on a taxable-equivalent basis. /2/ Total securities excludes preferred stock at amortized cost of $5,899,358, $5,504,870, and $5,209,736 at December 31, 2001, 2000, and 1999, respectively ($5,468,496, $5,054,587, and $4,738,879 estimated fair value at December 31, 2001, 2000, and 1999, respectively). SECURITIES The investment portfolio plays a primary role in the management of interest rate sensitivity of the Corporation and generates substantial interest income. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The investment portfolio consists of two components, securities held to maturity and securities available for sale. Securities are classified as held to maturity based on management's intent and the Corporation's ability, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost. Securities which may be sold in response to changes in market interest rates, changes in the securities' prepayment risk, increases in loan demand, general liquidity needs, and other similar factors are classified as available for sale and are carried at estimated fair value. At year-end 2001, total securities were $53.9 million, down 17.90% from $65.7 million at year-end 2000. Mortgage backed securities represented 3.6% of the total securities portfolio, obligations of states and political subdivisions were 86.3%, and preferred stocks were 10.1% at December 31, 2001. 14 The Company adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001 and, as permitted by the Statement, transferred securities with a book value of $33,770,000 and a market value of $34,836,000 to the available-for-sale category. Table 10 presents information pertaining to the composition of the securities portfolio. DEPOSITS The Corporation's predominant source of funds is depository accounts. The Corporation's deposit base is comprised of demand deposits, savings and money market accounts, and time deposits. The Corporation's deposits are provided by individuals and businesses located within the communities served. Total deposits increased $33.2 million, or 11.4%, in 2001 over 2000. In 2001, the growth by deposit category was a 7.7% increase in non- interest-bearing deposits, an 11.9% increase in savings and interest-bearing demand deposits, and a 12.0% increase in time deposits. In 2000, total deposits increased $29.8 million, or 11.4%, over 1999. Deposit growth in 2001 over 2000 was attributed to growth at existing branch locations and to the opening of two new branches, CCB in Midlothian and the Bank in Sandston, offset by the sale of the Bank's Tappahannock branch during 2001. Table 11 presents the average deposit balances and average rates paid for the years 2001, 2000, and 1999. Table 12 details maturities of certificates of deposit with balances of $100,000 and over at December 31, 2001. TABLE 11: Average Deposits and Rates Paid Year Ended December 31, --------------------------------------------- 2001 2000 1999 --------- --------- --------- Average Average Average Average Average Average (Dollars in thousands) Balance Rate Balance Rate Balance Rate ------------------------------------------------------------------------------------------------------------------------------------ Non-interest-bearing demand deposits $ 39,240 $ 31,511 $ 35,697 ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing transaction accounts 54,481 1.92% 50,977 2.42% 45,627 2.38% Money market deposit accounts 26,290 3.05 25,938 3.38 25,207 3.20 Savings accounts 38,921 2.45 38,640 2.98 39,131 2.97 Certificates of deposit, $100M or more 32,421 5.46 22,955 5.52 17,977 4.77 Other certificates of deposit 119,535 5.55 96,004 5.42 89,467 4.94 ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 271,648 4.13% 234,514 4.15% 217,409 3.83% ------------------------------------------------------------------------------------------------------------------------------------ Total deposits $310,888 $266,025 $253,106 ------------------------------------------------------------------------------------------------------------------------------------ TABLE 12: Maturities of Certificates of Deposit with Balances of $100,000 or More (Dollars in thousands) December 31, 2001 ------------------------------------------------------------------------------------------------------------------------------------ 3 months or less $ 11,169 3-6 months 9,208 6-12 months 14,870 Over 12 months 3,234 ------------------------------------------------------------------------------------------------------------------------------------ Total $ 38,481 ------------------------------------------------------------------------------------------------------------------------------------ LIQUIDITY Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include 15 cash and due from banks, interest-bearing deposits with banks, federal funds sold, securities available for sale, and investments and loans maturing within one year. As a result of the Corporation's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Corporation maintains overall liquidity sufficient to satisfy its depositors' requirements and to meet customers' credit needs. At December 31, 2001, cash and cash equivalents and securities classified as available for sale were 17.9% of total earning assets, compared to 14.6% at December 31, 2000. Additional sources of liquidity available to the Corporation include the Bank's capacity to borrow funds through an established line of credit with a regional correspondent bank and from the FHLB. CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Corporation's capital is reviewed by management on an ongoing basis. Management seeks to maintain a structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. During 2001 the Corporation repurchased 59,981 shares of its common stock in the open market at prices between $14.88 and $18.00 per share. During 2000, the Corporation repurchased 85,000 shares of its common stock, in the open market at prices between $13.69 and $17.00 per share. During March of 1999, the Corporation repurchased 235,000 shares of its common stock in privately negotiated transactions at prices between $19.88 and $20.00 per share and during the second half of 1999, the Corporation repurchased an additional 12,500 shares of its common stock in the open market at prices between $17.00 and $18.00 per share. These repurchases were made to reduce capital since it was high relative to the Corporation's asset size. The Corporation's capital position continues to exceed regulatory requirements. The primary indicators relied on by bank regulators in measuring the capital position are the Tier I capital, total risk-based capital, and leverage ratios. Tier I capital consists of common and qualifying preferred shareholders' equity less goodwill. Total capital consists of Tier I capital, qualifying subordinated debt, and a portion of the allowance for loan losses. Risk-based capital ratios are calculated with reference to risk-weighted assets. The Corporation's Tier I capital ratio was 13.3% at December 31, 2001, compared to 14.4% at December 31, 2000. The total capital ratio was 14.4% at December 31, 2001 compared to 15.6% at December 31, 2000. These ratios are in excess of the mandated minimum requirements of 4.0% and 8.0%, respectively. Shareholders' equity was $44.7 million at year-end 2001 compared to $38.8 million at year-end 2000. The leverage ratio consists of Tier I capital divided by average assets. At December 31, 2001, the Corporation's leverage ratio was 10.8%, compared to 10.9% at December 31, 2000, which exceeds the required minimum leverage ratio of 4.0%. The dividend payout ratio was 25.7%, 32.7%, and 26.6%, in 2001, 2000, and 1999, respectively. During 2001, the Corporation paid dividends of $0.58 per share, up 9.4% from $0.53 per share paid in 2000. The Corporation is not aware of any current recommendations by any regulatory authorities which, if they were implemented, would have a material effect on the Corporation's liquidity, capital resources, or results of operations. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets. Statement 141 eliminates the pooling method of 16 accounting for business combinations and requires that intangible assets that meet certain criteria be reported separately from goodwill. The Statement also requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142 eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. Upon adoption of these Statements, an organization is required to re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If the recorded other intangible assets do not meet the criteria for recognition, they should be classified as goodwill. Similarly, if there are other intangible assets that meet the criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill. An organization also must reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. Any negative goodwill must be written-off. The standards generally are required to be implemented by the Bank in its 2002 financial statements. The adoption of these standards is not expected to have a material impact on the Corporation's financial statements. In June 2001, the Financial Accounting Standards Board issued Statement 143 Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. This Statement is not expected to have a material effect on the Corporation's financial statements. In August 2001, the Financial Accounting Standards Board issued Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It also establishes a single accounting model for long-lived assets to be disposed of by sale, which includes long-lived assets that are part of a discontinued operation. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2001. The Statement is not expected to have a material effect on the Corporation's financial statements. EFFECTS OF INFLATION The effect of changing prices on financial institutions is typically different from other industries as the Corporation's assets and liabilities are monetary in nature. Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes are directly related to price-level indices. The consolidated financial statements reflect the impacts of inflation on interest rates, loan demands, and deposits. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements contained in this annual report that are not historical facts may constitute "forward-looking statements" as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the company include, but are not limited to, changes in: interest rates, general economic conditions, 17 legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements, and readers are cautioned not to place undue reliance on such statements, which speak only as of their dates. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK MANAGEMENT As the holding company for a commercial bank, the Corporation's primary component of market risk is interest rate volatility. Fluctuation in interest rates will ultimately impact the level of both income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Since the majority of the Corporation's interest-earning assets and all of the Corporation's interest-bearing liabilities are held by the Bank, virtually all of the Corporation's interest rate risk exposure lies at the Bank level. Therefore, all significant interest rate risk management procedures are performed by management of the Bank. Based on the nature of the Bank's operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank's loan portfolio is concentrated primarily in the Virginia counties of King William, King and Queen, Hanover, Henrico, Chesterfield, Middlesex, New Kent, Charles City, York, and James City, and is, therefore, subject to risks associated with the local economy. As of December 31, 2001, the Corporation does not own any trading assets nor does it have any hedging transactions in place such as interest rate swaps and caps. The Bank's interest rate management strategy is designed to stabilize net interest income and preserve capital. The Bank manages interest rate risk through the use of a simulation model which measures the sensitivity of future net interest income and the net portfolio value to changes in interest rates. In addition, the Bank monitors interest rate sensitivity through analysis, measuring the terms to maturity or next repricing date of interest-earning assets and interest-bearing liabilities. The matching of the maturities of assets and liabilities may be analyzed by examining the extent to which assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be "interest rate sensitive" within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity "gap" is defined as the difference between the amount of interest-earning assets anticipated, based on certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based on certain assumptions, to mature or reprice within that time period. A gap is considered negative when the amount of interest-rate-sensitive liabilities maturing or repricing within a specific time period exceeds the amount of interest-rate-sensitive assets maturing or repricing within that same time period. During a period of rising interest rates, a negative gap would tend to result in a decrease in net interest income while a positive gap would tend to result in an increase in net interest income. In a declining interest rate environment, an institution with a negative gap would generally be expected, absent the effect of other factors, to experience a greater decrease in the cost of its liabilities relative to the yield of its assets and thus an increase in the institution's net interest income, whereas an institution with a positive gap would be expected to experience the opposite result. Certain shortcomings are inherent in any method of rate analysis used to estimate a financial institution's interest rate sensitivity gap. The analysis is based at a given point in time and does not take into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, although certain assets and liabilities may have 18 similar maturities or repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and liabilities also may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. The interest rates on loans with call features may or may not change depending on their interest rates relative to market interest rates. The Corporation is also subject to prepayment risk, particularly in falling interest rate environments or in environments where the slope of the yield curve is relatively flat or negative. Such changes in the interest rate environment can cause substantial changes in the level of prepayments of loans, which may also affect the Corporation's interest rate sensitivity gap position. As part of its borrowings, the Corporation may utilize, from time to time, daily, convertible and adjustable rate advances from the FHLB. Convertible advances generally provide for a fixed rate of interest for a portion of the term of the advance, an ability for the FHLB to convert the advance from a fixed rate to an adjustable rate at some predetermined time during the remaining term of the advance (the "conversion" feature), and a concurrent opportunity for the Corporation to prepay the advance with no prepayment penalty in the event the FHLB elects to exercise the conversion feature. At December 31, 2001, the Bank did not hold convertible advances from the FHLB. Also, the methodology used estimates various rates of withdrawal for money market deposits, savings, and checking accounts, which may vary significantly from actual experience. TABLE 13: Interest Sensitivity Analysis The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2001, that are subject to repricing or that mature in each of the time periods shown. Additionally, loans and securities with call provisions are included in the period in which they may first be called. Except as stated above, the amount of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the contractual terms of the asset or liability. Interest-Sensitive Periods ---------------------------------------------------------- Within 91-365 1-5 Over (Dollars in thousands) 90 Days Days Years 5 Years Total ----------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 Earning assets: Loans, net of unearned income $149,019 $ 25,283 $ 78,018 $66,739 $319,059 Securities 2,711 1,945 24,131 25,931 54,718 Federal funds sold and other short-term investments 930 - - - 930 ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 152,660 27,228 102,149 92,670 374,707 ----------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Interest-bearing transaction accounts 9,002 27,006 24,006 - 60,014 Savings accounts 6,213 18,640 16,569 - 41,422 Money market deposit accounts 4,511 13,533 12,029 - 30,073 Certificates of deposit, $100M or more 11,169 24,078 3,234 - 38,481 Other certificates of deposit 22,802 69,541 22,847 243 115,433 Borrowings 27,204 - - - 27,204 ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 80,901 152,798 78,685 243 $312,627 ----------------------------------------------------------------------------------------------------------------------------------- Period gap 71,759 (125,570) 23,464 92,427 Cumulative gap $ 71,759 $ (53,811) $(30,347) $62,080 Ratio of cumulative gap to total earning assets 19.15% (14.36)% (8.10)% 16.57% ----------------------------------------------------------------------------------------------------------------------------------- 19 The following table provides information about the Corporation's financial instruments that are sensitive to changes in interest rates as of December 31, 2001 and 2000, based on the information and assumptions set forth in the notes. The Corporation believes that the assumptions utilized are reasonable. The expected maturity date values for loans were calculated by adjusting the instruments' contractual maturity date for expectations of prepayments, as set forth in the notes. Similarly, expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding, as set forth in the notes. From a risk-management perspective, however, the Corporation utilizes both maturity and repricing dates, as opposed to solely using expected maturity dates. As shown in the table, there has been no significant changes in the maturities of interest-earning assets or interest-bearing liabilities as compared to 2000. The increase in loans held for sale maturing within one year is a result of increased production at the Mortgage Corporation. All loans originated at the Mortgage Corporation are usually sold within one month. The increase in borrowings is also a result of the increase in loans held for sale. The decrease in the yield on interest earning assets and amount paid on interest-bearing liabilities is a result of the decrease in interest rates throughout 2001. 20 TABLE 14: Maturity of Interest-Bearing Assets/Liabilities Principal Amount Maturing in: ------------------------------------------------------------ (Dollars in thousands) 1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total Fair Value ---------------------------------------------------------------------------------------------------------------------------- Interest-Earning Assets: Fixed rate loans /1, 2/ December 31, 2001 $ 28,366 $14,235 $10,870 $ 8,154 $ 7,183 $49,907 $118,715 $124,139 December 31, 2000 23,371 11,329 9,830 8,457 6,740 44,280 104,007 104,356 Average interest rate December 31, 2001 8.12% 8.68% 8.43% 8.34% 8.25% 8.27% 8.30% December 31, 2000 9.43% 8.89% 8.71% 8.53% 8.38% 8.43% 8.74% Variable rate loans /1, 2/ December 31, 2001 $ 52,599 $16,492 $4,108 $ 4,759 $ 4,054 $50,026 $132,038 $135,612 December 31, 2000 46,426 10,372 5,489 5,039 4,516 58,690 130,532 130,574 Average interest rate December 31, 2001 6.78% 6.76% 9.98% 8.12% 7.96% 7.74% 7.32% December 31, 2000 10.43% 9.44% 8.90% 8.88% 8.79% 8.34% 9.23% Loans held for sale December 31, 2001 $ 69,263 $ - $ - $ - $ - $ - $ 69,263 $ 70,166 December 31, 2000 17,600 - - - - - 17,600 17,984 Average interest rate December 31, 2001 6.69% - - - - - 6.69% December 31, 2000 9.26% - - - - - 9.26% Securities /3, 4/ December 31, 2001 $ 944 $ 1,504 $ 705 $ 781 $ 1,017 $49,767 $ 54,718 $ 55,548 December 31, 2000 1,385 1,148 1,504 806 1,084 61,856 67,783 68,484 Average interest rate December 31, 2001 5.77% 5.85% 6.01% 5.58% 5.25% 5.27% 5.31% December 31, 2000 5.43% 4.67% 4.73% 4.72% 4.39% 5.39% 5.34% Interest-Bearing Liabilities: Money market, savings, and interest- bearing transaction accounts /5/ December 31, 2001 $ 78,905 $13,151 $13,151 $13,151 $13,151 $ - $131,509 $132,312 December 31, 2000 70,540 11,757 11,757 11,757 11,756 - 117,567 118,590 Average interest rate December 31, 2001 1.79% 1.79% 1.79% 1.79% 1.79% - 1.79% December 31, 2000 2.72% 2.72% 2.72% 2.72% 2.72% - 2.72% Certificates of deposit December 31, 2001 $127,590 $17,309 $ 5,488 $ 1,450 $ 1,833 $ 244 $153,914 $156,115 December 31, 2000 117,552 12,186 4,232 1,385 1,387 645 137,387 137,505 Average interest rate December 31, 2001 4.40% 4.77% 5.17% 6.20% 5.35% 2.38% 4.49% December 31, 2000 6.07% 5.86% 5.83% 5.21% 6.23% 4.36% 6.03% Borrowings December 31, 2001 $ 22,204 $ 5,000 $ - $ - $ - $ - $ 27,204 $ 27,190 December 31, 2000 13,969 - - - - - 13,969 13,969 Average interest rate December 31, 2001 1.74% 5.35% - - - - 2.40% December 31, 2000 5.66% - - - - - 5.66% ---------------------------------------------------------------------------------------------------------------------------- /1/ Net of undisbursed loan proceeds and does not include net deferred loan fees or the allowance for loan losses. /2/ For single-family residential loans, assumes annual prepayment rate of 12%. No prepayment assumptions were used for all other loans. /3/ Includes the Corporation's investment in Federal Home Loan Bank stock. /4/ Average interest rates are the average of stated coupon rates and have not been adjusted for taxes. /5/ Assumes an annual decay rate of 60% for year 1 and 10% for each of the years 2 through 5. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS December 31, ------------------------------ 2001 2000 ----------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 10,127,368 $ 8,922,524 Interest-bearing deposits in other banks 929,549 5,915,378 ----------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 11,056,917 14,837,902 Securities--available for sale at fair value, amortized cost of $53,123,058 and $32,418,548, respectively 53,952,938 31,913,344 Securities--held to maturity at amortized cost, fair value of $0 and $34,835,759, respectively -- 33,769,925 Loans held for sale, net 69,263,294 17,600,164 Loans, net of reserve for loan losses of $3,683,658 and $3,608,966, respectively 246,112,369 229,943,715 Federal Home Loan Bank stock 1,595,000 1,595,000 Corporate premises and equipment, net 14,638,441 9,889,649 Accrued interest receivable 2,134,218 2,403,921 Other assets 5,322,797 5,518,052 ----------------------------------------------------------------------------------------------------------- Total assets $404,075,974 $347,471,672 ----------------------------------------------------------------------------------------------------------- Liabilities Deposits Non-interest-bearing demand deposits $ 38,489,428 $ 35,734,625 Savings and interest-bearing demand deposits 131,508,973 117,566,594 Time deposits 153,914,100 137,386,817 ----------------------------------------------------------------------------------------------------------- Total deposits 323,912,501 290,688,036 Borrowings 27,203,667 13,969,173 Accrued interest payable 811,088 992,852 Other liabilities 7,405,695 3,041,161 ----------------------------------------------------------------------------------------------------------- Total liabilities 359,332,951 308,691,222 ----------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities Shareholders' Equity Preferred stock ($1.00 par value, 3,000,000 shares authorized) -- -- Common stock ($1.00 par value, 8,000,000 shares authorized, 3,526,126 and 3,571,039 shares issued and outstanding at December 31, 2001 and 2000, respectively) 3,526,126 3,571,039 Additional paid-in capital 46,871 20,133 Retained earnings 40,622,304 35,522,711 Accumulated other comprehensive income (loss), net of tax of $282,159 and ($171,771), respectively 547,722 (333,433) ----------------------------------------------------------------------------------------------------------- Total shareholders' equity 44,743,023 38,780,450 ----------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $404,075,974 $347,471,672 ----------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements. 22 CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, ------------------------------------------ 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------ Interest income Interest and fees on loans $24,809,972 $22,244,860 $19,405,445 Interest on money market investments Federal funds sold 2,005 -- 90,964 Other money market investments 97,846 563,687 366,971 Interest on securities U.S. Treasury securities 29,663 80,193 109,112 U.S. government agencies and corporations 439,380 953,900 864,461 Tax-exempt obligations of states and political subdivisions 2,385,946 2,455,762 2,347,868 Corporate bonds and other 469,573 123,077 458,736 ------------------------------------------------------------------------------------------------------------------------ Total interest income 28,234,385 26,421,479 23,643,557 ------------------------------------------------------------------------------------------------------------------------ Interest expense Savings and interest-bearing deposits 2,799,884 3,263,427 3,055,792 Certificates of deposit, $100M or more 1,768,972 1,266,707 856,670 Other time deposits 6,639,327 5,202,728 4,415,594 Short-term borrowings and other 776,209 1,576,537 739,811 ------------------------------------------------------------------------------------------------------------------------ Total interest expense 11,984,392 11,309,399 9,067,867 ------------------------------------------------------------------------------------------------------------------------ Net interest income 16,249,993 15,112,080 14,575,690 Provision for loan losses 400,000 400,000 600,000 ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 15,849,993 14,712,080 13,975,690 ------------------------------------------------------------------------------------------------------------------------ Other operating income Gain on sale of loans 10,389,684 5,008,850 6,691,998 Service charges on deposit accounts 1,442,253 1,335,679 1,154,373 Other service charges and fees 3,210,921 1,674,937 1,949,714 Gain on calls of available for sale securities 6,000 100,157 138,830 Gain on sale of branch 1,176,279 -- -- Other income 1,195,482 825,439 1,069,541 ------------------------------------------------------------------------------------------------------------------------ Total other operating income 17,420,619 8,945,062 11,004,456 ------------------------------------------------------------------------------------------------------------------------ Other operating expenses Salaries and employee benefits 13,442,765 9,603,442 9,365,548 Occupancy expenses 2,886,245 2,377,608 2,044,013 Goodwill amortization 267,860 275,160 275,160 Other expenses 5,367,223 3,742,170 4,144,829 ------------------------------------------------------------------------------------------------------------------------ Total other operating expenses 21,964,093 15,998,380 15,829,550 ------------------------------------------------------------------------------------------------------------------------ Income before income taxes 11,306,519 7,658,762 9,150,596 Income tax expense 3,317,802 1,822,731 2,394,366 ------------------------------------------------------------------------------------------------------------------------ Net income $ 7,988,717 $ 5,836,031 $ 6,756,230 ------------------------------------------------------------------------------------------------------------------------ Earnings per common share--basic $ 2.25 $ 1.62 $ 1.83 ------------------------------------------------------------------------------------------------------------------------ Earnings per common share--assuming dilution $ 2.23 $ 1.60 $ 1.81 ------------------------------------------------------------------------------------------------------------------------ See notes to consolidated financial statements. 23 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Additional Other Common Paid-In Comprehensive Retained Comprehensive Stock Capital Income Earnings Income (Loss) Total ----------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1998 $3,866,888 $ 475,928 $31,739,483 $ 565,194 $36,647,493 Repurchase of common stock (247,500) (690,351) (3,971,173) -- (4,909,024) Stock options exercised 25,068 228,819 -- -- 253,887 Comprehensive income Net income $ 6,756,230 6,756,230 6,756,230 Other comprehensive income, net of tax Unrealized holding losses arising during the period net of tax of $938,495 (1,821,784) (1,821,784) (1,821,784) ----------- Comprehensive income $ 4,934,446 ----------- Cash dividends ($.49 per share) -- -- (1,797,092) -- (1,797,092) ----------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1999 3,644,456 14,396 32,727,448 (1,256,590) 35,129,710 Repurchase of common stock (85,000) (114,272) (1,130,139) -- (1,329,411) Stock options exercised 11,583 120,009 -- -- 131,592 Comprehensive income Net income $ 5,836,031 5,836,031 5,836,031 Other comprehensive income, net of tax Unrealized holding gains arising during the period net of tax of $475,566 923,157 923,157 923,157 ----------- Comprehensive income $ 6,759,188 ----------- Cash dividends ($.53 per share) -- -- (1,910,629) -- (1,910,629) ----------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 2000 3,571,039 20,133 35,522,711 (333,433) 38,780,450 Repurchase of common stock (59,981) (121,308) (833,031) -- (1,014,320) Stock options exercised 15,068 148,046 -- -- 163,114 Comprehensive income Net income $ 7,988,717 7,988,717 7,988,717 Other comprehensive income, net of tax Unrealized holding gains arising during the period net of tax of $453,928 881,155 881,155 881,155 ----------- Comprehensive income $ 8,869,872 ----------- Cash dividends ($.58 per share) -- -- (2,056,093) -- (2,056,093) ----------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 2001 $3,526,126 $ 46,871 $40,622,304 $ 547,722 $44,743,023 =================================================================================================================================== Disclosure of reclassification amount for the year ended December 31: 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------ Unrealized net holding gains (losses) arising during period $885,115 $989,272 $(1,730,156) Less: reclassification adjustment for gains included in net income 3,960 66,115 91,628 -------- -------- ------------ Net unrealized gains (losses) on securities $881,155 $923,157 $(1,821,784) ======== ======== ============ See notes to consolidated financial statements. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, ---------------------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 7,988,717 $ 5,836,031 $ 6,756,230 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 1,336,192 1,018,342 928,314 Amortization of goodwill 267,860 275,160 275,160 Deferred income taxes (37,024) (154,178) (123,139) Provision for loan losses 400,000 400,000 600,000 Accretion of discounts and amortization of premiums on securities, net (49,035) (45,047) (69,467) Net realized gain on securities (6,000) (100,157) (138,830) Origination of loans held for sale (627,303,955) (294,483,773) (456,926,073) Sale of loans 575,640,825 301,770,123 499,032,881 Gain on sale of branch (1,176,279) -- -- Change in other assets and liabilities: Accrued interest receivable 269,703 (267,828) 237,690 Other assets (489,510) (485,864) (881,041) Accrued interest payable (181,764) 426,386 (31,680) Other liabilities 4,364,534 384,756 (4,353,878) ----------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (38,975,736) 14,573,951 45,306,167 ----------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from maturities of securities held to maturity -- 1,060,000 3,628,850 Proceeds from maturities and calls of securities available for sale 17,297,400 906,576 10,806,084 Purchase of securities available for sale (4,176,950) (1,107,101) (21,287,142) Redemption (purchase) of FHLB stock -- (10,000) 121,200 Net increase in customer loans (19,233,654) (24,227,819) (36,797,468) Purchase of corporate premises and equipment (6,426,178) (2,503,902) (2,867,029) Sale of branch (10,857,527) -- -- ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (23,396,909) (25,882,246) (46,395,505) ----------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Net increase (decrease) in demand, interest-bearing demand and savings deposits 23,615,182 (3,171,413) 13,933,670 Net increase (decrease) in time deposits 24,649,283 33,005,814 (4,753,194) Net increase (decrease) in other borrowings 13,234,494 (16,066,120) 5,374,215 Repurchase of common stock (1,014,320) (1,329,411) (4,909,024) Proceeds from exercise of stock options 163,114 131,592 253,887 Cash dividends (2,056,093) (1,910,629) (1,797,092) ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 58,591,660 10,659,833 8,102,462 ----------------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (3,780,985) (648,462) 7,013,124 Cash and cash equivalents at beginning of year 14,837,902 15,486,364 8,473,240 ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 11,056,917 $ 14,837,902 $ 15,486,364 ----------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure Interest paid $ 12,166,156 $ 10,883,013 $ 9,099,547 Income taxes paid $ 2,805,205 $ 1,735,591 $ 2,743,114 =================================================================================================================================== See notes to consolidated financial statements. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Summary of Significant Accounting Policies The accounting and reporting policies of C&F Financial Corporation and subsidiary (the "Corporation") conform to accounting principles generally accepted in the United States of America and to predominant practices within the banking industry. Nature of Operations: C&F Financial Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its sole subsidiary, Citizens and Farmers Bank (the "Bank"), which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia. The Bank offers a wide range of banking services available to both individuals and businesses. The Bank has four wholly owned subsidiaries, C&F Title Agency, Inc., C&F Investment Services, Inc., C&F Mortgage Corporation, and C&F Insurance Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Title Agency, Inc., organized in October 1992, sells title insurance to the mortgage loan customers of the Bank and C&F Mortgage Corporation. C&F Investment Services, Inc., organized in April 1995, is a full-service brokerage firm offering a comprehensive range of investment services. C&F Mortgage Corporation, organized in September 1995, was formed to originate and sell residential mortgages. C&F Insurance Services, organized in July 1999, owns an equity interest in an insurance agency which sells insurance products to customers of the bank, C&F Mortgage Corporation and other financial institutions which have an equity interest in the agency. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of C&F Financial Corporation and its wholly owned subsidiary, Citizens and Farmers Bank. All material intercompany accounts and transactions have been eliminated in consolidation. Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interest-bearing Deposits in Banks: Interest-bearing deposits in banks mature within one year and are carried at cost. Securities: Investments in debt and equity securities with readily determinable fair values are classified as either held to maturity, available for sale, or trading, based on management's intent. Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses included in shareholders' equity on an after-tax basis. Securities classified as held to maturity are carried at amortized cost. The Corporation does not have any securities classified as trading securities. Gains or losses are recognized only on realization at the time of sale using the amortized cost of the specific security sold. Federal Home Loan Bank Stock: Federal Home Loan Bank stock is stated at cost. No ready market exists for this stock, and it has no quoted market value. For presentation purposes, such stock is assumed to have market value which is equal to cost. In addition, such stock is not considered a debt or equity security in accordance with Statement of Financial Accounting Standards 115. Loans: Loans are stated at face value, net of unearned discount and the allowance for loan losses. Unearned discount on certain installment loans is recognized as income over the terms of the loans by a method which approximates the effective interest method. Interest on other loans is credited to operations based on the principal amount outstanding. Loans are generally placed on non-accrual status when the collection of principal or interest is ninety days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than ninety days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans which are carried on non-accrual status, interest is recognized on the cash basis. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan's yield using the level-yield method. The Corporation is amortizing these amounts over the contractual life of the related loans. 26 Impaired loans are measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan (or, as a practical expedient, at the loan's observable market price) or the fair value of the collateral if the loan is collateral dependent. The Corporation considers a loan impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. A loan is not considered impaired during a period of delay in payment if the ultimate collectibility of all amounts due is expected. A valuation allowance is maintained to the extent that the measure of the impaired loan is less than the recorded investment. Consistent with the Corporation's method for non-accrual loans, interest receipts for impaired loans are recognized on the cash basis. Loans Held for Sale: Loans held for sale are carried at the lower of cost or market, determined in the aggregate. Market value considers commitment agreements with investors and prevailing market prices. Substantially all loans originated by the mortgage banking operations are held for sale to outside investors. Other Real Estate Owned: Foreclosed assets held for sale are carried at the lower of (a) fair value minus estimated costs to sell or (b) cost at the time of foreclosure. Such determination is made on an individual asset basis. If the fair value of the asset minus the estimated costs to sell the asset is less than the cost of the asset, the deficiency is recognized as a valuation allowance. If the fair value of the asset minus the estimated costs to sell the asset subsequently increases and the fair value of the asset minus the estimated costs to sell the asset is more than its carrying amount, the valuation allowance is reduced, but not below zero. Increases or decreases in the valuation allowance are charged or credited to income. Corporate Premises and Equipment: Corporate premises and equipment are carried at cost less accumulated depreciation computed using a straight-line method over the estimated useful lives of the assets. Estimated useful lives range from ten to forty years for buildings and from three to ten years for equipment, furniture, and fixtures. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Upon sale or retirement of depreciable properties, the cost and related accumulated depreciation are netted against proceeds and any resulting gain or loss is reflected in income. Income Taxes: The Corporation uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Reserve for Loan Losses: The reserve for loan losses is established through a provision for loan losses charged to expense. The reserve represents an amount which, in management's judgment, will be adequate to absorb any losses on existing loans which may become uncollectible. Management's judgment in determining the adequacy of the reserve is based on evaluations of the collectibility of loans while taking into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions which may affect a borrower's ability to repay, overall portfolio quality, and review of specific potential losses. Loans are charged against the reserve for loan losses when management believes that the collectibility of the principal is unlikely. Actual future losses may differ from estimates as a result of unforeseen events. Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Earnings Per Common Share: Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method. 27 Shareholders' Equity: During 2001 the Corporation repurchased 59,981 shares of its common stock in the open market at prices between $14.88 and $18.00 per share. During 2000, the Corporation repurchased 85,000 shares of its common stock in the open market at prices between $13.69 and $17.00 per share. During March 1999, the Corporation repurchased 235,000 shares of its common stock from six shareholders at prices between $19.88 and $20.00 per share in privately negotiated transactions. During the second half of 1999, the Corporation repurchased an additional 12,500 shares of its common stock in the open market at prices between $17.00 and $18.00 per share. Statement of Cash Flows: For the purpose of the statement of cash flows, the Corporation considers cash equivalents to include amounts due from banks, federal funds sold, and money market investments purchased with a maturity of three months or less. Generally, federal funds are purchased and sold for one-day periods. Reclassifications: Certain reclassifications have been made to prior period amounts to conform to the current year presentation. NOTE 2: Securities Debt and equity securities are summarized as follows: December 31, 2001 ------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Available for Sale Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities $ 1,947,440 $ -- $ (23,064) $ 1,924,376 Obligations of states and political subdivisions 45,276,293 1,384,319 (100,546) 46,560,066 Preferred stock 5,899,325 86,840 (517,669) 5,468,496 ---------------------------------------------------------------------------------------------------------------------------------- $53,123,058 $1,471,159 $ (641,279) $53,952,938 ================================================================================================================================== December 31, 2000 ------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Available for Sale Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------------- U.S. government agencies and corporations $13,500,000 $ -- $ (201,649) $13,298,351 Obligations of states and political subdivisions 13,413,678 219,405 (52,677) 13,580,406 Preferred stock 5,504,870 7,313 (477,596) 5,034,587 ---------------------------------------------------------------------------------------------------------------------------------- $32,418,548 $ 226,718 $ (731,922) $31,913,344 ---------------------------------------------------------------------------------------------------------------------------------- Held to Maturity ---------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 999,950 $ 8,179 $ -- $ 1,008,129 Obligations of states and political subdivisions 32,769,975 1,059,569 (1,914) 33,827,630 ---------------------------------------------------------------------------------------------------------------------------------- $33,769,925 $1,067,748 $ (1,914) $34,835,759 ================================================================================================================================== The amortized cost and estimated fair value of securities at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties. 28 December 31, 2001 ------------------------------ Amortized Estimated Available for Sale Cost Fair Value -------------------------------------------------------------------------------- Due in one year or less $1,163,403 $1,180,146 Due after one year through five years 6,181,857 6,318,720 Due after five years through ten years 19,061,079 19,838,185 Due after ten years 20,817,394 21,147,391 Preferred Stock 5,899,325 5,468,496 -------------------------------------------------------------------------------- $53,123,058 $53,952,938 ================================================================================ Proceeds from the maturities and the calls of securities available for sale in 2001 were $17,297,400, resulting in gross realized gains of $6,000. The amortized cost and estimated fair value of securities pledged to secure public deposits amounted to $11,484,000 and $11,938,000, respectively, at December 31, 2001. Proceeds from the maturities and calls of securities held to maturity in 2000 were $1,060,000. There were no realized gains or losses. Proceeds from the maturities and the calls of securities available for sale were $906,576, resulting in gross realized gains of $100,157. Proceeds from maturities and the calls of securities held to maturity in 1999 were $3,628,850. There were no realized gains or losses. Proceeds from maturities and the calls of securities available for sale were $10,806,084, resulting in gross realized gains of $138,830. The Company adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001 and, as permitted by the Statement, transferred securities with a book value of $33,770,000 and a market value of $34,836,000 to the available-for-sale category. NOTE 3: Loans Major classifications of loans are summarized as follows: December 31, ------------------------------- 2001 2000 -------------------------------------------------------------------------------- Real estate--mortgage $ 81,924,063 $ 87,428,166 Real estate--construction 8,829,850 9,109,165 Commercial, financial, and agricultural 137,374,333 113,570,467 Equity lines 11,283,617 11,616,307 Consumer 11,341,663 12,815,274 -------------------------------------------------------------------------------- 250,753,526 234,539,379 Less unearned loan fees (957,499) (986,698) -------------------------------------------------------------------------------- 249,796,027 233,552,681 Less reserve for loan losses (3,683,658) (3,608,966) -------------------------------------------------------------------------------- $246,112,369 $229,943,715 ================================================================================ Loans on non-accrual status were $1,026,000 and $473,000 at December 31, 2001 and 2000, respectively. If interest income had been recognized on non-performing loans at their stated rates during fiscal years 2001, 2000, and 1999, interest income would have increased by approximately $91,000, $37,000, and $8,000, respectively. The balance of impaired loans at December 31, 2001 and 2000, was $1,026,000 and $473,000 respectively, with no specific valuation allowance associated with these loans. The average balance of impaired loans for 2001 and 2000 were $513,000 and $357,000, respectively. 29 NOTE 4: Reserve for Loan Losses Changes in the reserve for loan losses were as follows: Year Ended December 31, ------------------------------ 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Balance at the beginning of year $3,608,966 $3,301,778 $2,760,263 Provision charged to operations 400,000 400,000 600,000 Loans charged off (349,784) (101,733) (86,220) Recoveries of loans previously charged off 24,476 8,921 27,735 ----------------------------------------------------------------------------------------------------------------------------------- Balance at the end of year $3,683,658 $3,608,966 $3,301,778 ----------------------------------------------------------------------------------------------------------------------------------- NOTE 5: Corporate Premises and Equipment Major classifications of corporate premises and equipment are summarized as follows: December 31, -------------------- 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ Land $ 3,523,577 $ 2,308,838 Buildings 10,108,440 7,018,997 Equipment, furniture, and fixtures 10,962,859 9,459,348 ------------------------------------------------------------------------------------------------------------------------------------ 24,594,876 18,787,183 Less accumulated depreciation (9,956,435) (8,897,534) ------------------------------------------------------------------------------------------------------------------------------------ $14,638,441 $ 9,889,649 ------------------------------------------------------------------------------------------------------------------------------------ NOTE 6: Time Deposits Time deposits are summarized as follows: December 31, ---------------------- 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ Certificates of deposit, $100M or more $ 38,481,546 $ 27,018,509 Other time deposits 115,432,554 110,368,308 ------------------------------------------------------------------------------------------------------------------------------------ $153,914,100 $137,386,817 ------------------------------------------------------------------------------------------------------------------------------------ Remaining maturities on time deposits are as follows: Year ending December 31, ------------------------------------------------------------------------------------------------------------------------------------ 2002 $127,590,499 2003 17,309,102 2004 5,488,385 2005 1,450,373 2006 2,075,741 ------------------------------------------------------------------------------------------------------------------------------------ $153,914,100 ------------------------------------------------------------------------------------------------------------------------------------ 30 NOTE 7: Borrowings Short-term borrowings consist of securities sold under agreements to repurchase which are secured transactions with customers and generally mature the day following the date sold. Short-term borrowings also include advances from the FHLB, which are secured by a blanket floating lien on all real estate mortgage loans secured by one-to-four family residential properties. The balance outstanding on loans subject to the FHLB lien was $81,924,000 on December 31, 2001. The table below presents selected information on short-term borrowings: December 31, ------------------------- 2001 2000 -------------------------------------------------------------------------------------------------------------------------------- Balance outstanding at year end $22,203,667 $ 8,969,173 Maximum balance at any month-end during the year $25,666,748 $28,103,898 Average balance for the year 14,628,473 $22,676,362 Weighted average rate for the year 4.26% 6.12% Weighted average rate on borrowings at year-end 1.86% 5.45% Estimated fair value $22,203,522 $ 8,969,173 -------------------------------------------------------------------------------------------------------------------------------- The Corporation has unused lines of credit for borrowings totaling approximately $89,305,000 at December 31, 2001. Long-term borrowings consist of adjustable-rate advances from the FHLB. At December 31, 2001, adjustable-rate advances totaled $5,000,000 with an interest rate of 5.45% and a maturity date of May 19, 2003. At December 31, 2000, adjustable-rate advances totaled $5,000,000 with an interest rate of 6.55% and a maturity date of May 19, 2003. These advances are also secured by a blanket floating lien on all real estate mortgage loans secured by one-to-four family residential properties. NOTE 8: Earnings Per Share The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. December 31, -------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares used in earnings per common share--basic 3,547,873 3,608,673 3,684,796 Effect of dilutive securities: Stock options 39,434 31,641 53,438 -------------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares used in earnings per common share--assuming dilution 3,587,307 3,640,314 3,738,234 -------------------------------------------------------------------------------------------------------------------------------- Options on approximately 89,000, 175,000 and 15,000 shares were not included in computing earnings per common share--assuming dilution for the years ended December 31, 2001, 2000, and 1999, respectively, because their effects were antidilutive. NOTE 9: Income Taxes Principal components of income tax expense as reflected in the consolidated statements of income are as follows: Year Ended December 31, --------------------------------- 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Current taxes $3,354,826 $1,976,909 $2,517,505 Deferred taxes (37,024) (154,178) (123,139) -------------------------------------------------------------------------------------------------------------------------------- $3,317,802 $1,822,731 $2,394,366 -------------------------------------------------------------------------------------------------------------------------------- 31 The income tax provision is less than would be obtained by application of the statutory federal corporate tax rate to pre-tax accounting income as a result of the following items: Year Ended December 31, ------------------------------------------------------------------------ Percent Percent Percent of of of Pre-tax Pre-tax Pre-tax 2001 Income 2000 Income 1999 Income ----------------------------------------------------------------------------------------------------------------------------------- Income tax computed at federal statutory rates $3,844,216 34.0% $2,603,979 34.0% $3,111,203 34.0% Tax effect of exclusion of interest income on obligations of states and political subdivisions (850,319) (7.5) (879,995) (11.5) (833,784) (9.1) Reduction of interest expense incurred to carry tax- exempt assets 105,654 .9 116,418 1.5 94,336 1.0 State income taxes, net of federal tax benefit 203,782 1.8 59,348 .8 128,383 1.4 Tax effect of dividends-received deduction on preferred stock (82,712) (.7) (83,036) (1.1) (79,695) (.9) Other 97,181 .8 6,017 .1 (26,077) (.3) ----------------------------------------------------------------------------------------------------------------------------------- $3,317,802 29.3% $1,822,731 23.8% $2,394,366 26.1% =================================================================================================================================== Other assets include deferred income taxes of $1,343,638 and $1,760,544 at December 31, 2001 and 2000, respectively. The tax effects of each type of significant item that gave rise to deferred taxes are: Year Ended December 31, --------------------------- 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax asset Allowance for loan losses $1,136,137 $1,097,141 Deferred compensation 348,194 244,953 Net unrealized loss on securities available for sale -- 171,771 Interest on non-accrual loans 30,869 12,631 Accrued pension -- 46,697 Intangible asset 73,321 177,248 Other 54,718 46,877 ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax asset 1,643,239 1,797,318 ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax liability Depreciation (17,442) (36,774) Net unrealized gain on securities available for sale (282,159) -- ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax liability (299,601) (36,774) ----------------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $1,343,638 $1,760,544 =================================================================================================================================== NOTE 10: Employee Benefit Plans The Bank maintains a Defined Contribution Profit-Sharing Plan (the "Profit-Sharing Plan") sponsored by the Virginia Bankers Association. The Profit-Sharing Plan was amended effective January 1, 1997, to include a 401(k) savings provision which authorizes a maximum voluntary salary deferral of up to 15% of compensation (with a partial company match), subject to statutory limitations. The Profit-Sharing Plan provides for an annual discretionary contribution to the account of each eligible employee based in part on the Bank's profitability for a given year and on each participant's yearly earnings. All full-time employees who have attained the age of eighteen and have at least three months of service are eligible to participate. Contributions and earnings may be invested in various investment vehicles offered through the Virginia Bankers Association. Contributions and earnings are tax-deferred. An employee is 20% vested after three years of service, 40% after four years, 60% after five years, 80% after six years, and fully vested after seven years. The amounts charged to expense under this plan were $385,805, $347,552, and $293,584, in 2001, 2000, and 1999, respectively. 32 The Mortgage Corporation maintains a Defined Contribution 401(k) Savings Plan which authorizes a maximum voluntary salary deferral of up to 15% of compensation, subject to statutory limitations. All full-time employees who have attained the age of eighteen are eligible to participate on the first day of the next month following employment date. The Mortgage Corporation reserves the right for an annual discretionary contribution to the account of each eligible employee based in part on the Mortgage Corporation's profitability for a given year, and on each participant's yearly earnings. An employee is vested 25% after two years of service, 50% after three years of service, 75% after four years of service, and fully vested after five years. The amount charged to expense under the Plan was $279,500, $53,000, and $160,000, for 2001, 2000, and 1999, respectively. The Bank adopted a Management Incentive Bonus Plan (the "Bonus Plan") effective January 1, 1987. The Bonus Plan is offered to selected members of management. The Bonus Plan is derived from a pool of funds determined by the Bank's total performance relative to (1) prescribed growth-rates of assets and deposits, (2) return on average assets, and (3) absolute level of net income. Attainment, in whole or in part, of these goals dictates the amount set aside in the pool of funds. Evaluation of attainment and approval of the pool amount are performed by the Board. Payment of the bonus is based on individual performance and is paid in cash. Expense is accrued in the fiscal year of the specified bonus performance. Expenses under this plan were $242,500, $204,300, and $173,200, in 2001, 2000, and 1999, respectively. The Bank has a non-qualified defined contribution plan for certain executives. The plan allows for elective salary and bonus deferrals. The plan also allows for employer contributions to make up for arbitrary limitations on covered compensation imposed by the Internal Revenue Code with respect to the Bank's Profit Sharing/401(k) Plans and to enhance retirement benefits by providing supplemental contributions from time to time. Expenses under this plan were $32,350 and $25,200 in 2001 and 2000, respectively. There were no expenses under the plan for 1999. The Bank has a non-contributory, defined benefit pension plan for full-time employees over twenty-one years of age. Benefits are generally based upon years of service and average compensation for the five highest-paid consecutive years of service. The Bank funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act. Information about the plan follows: Year Ended December 31, ----------------------- 2001 2000 -------------------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation, beginning $2,017,537 $1,741,750 Service cost 227,178 178,489 Interest cost 151,185 130,501 Actuarial (gain)/loss (39,910) 80,457 Benefits paid (3,248) (113,660) -------------------------------------------------------------------------------------------------------------------------- Benefit obligation, ending $2,352,742 $2,017,537 -------------------------------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets, beginning $2,212,205 $1,862,559 Actual return on plan assets (312,236) 285,634 Employer contributions 324,525 177,672 Benefits paid (3,248) (113,660) --------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets, ending $2,221,246 $2,212,205 --------------------------------------------------------------------------------------------------------------------------- Funded status $ 131,496) $ 194,668 Unrecognized net actual gain 160,991 (309,717) Unrecognized net obligation at transition (54,134) (59,547) Unrecognized prior service cost 34,151 37,255 -------------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 9,512 $ (137,341) -------------------------------------------------------------------------------------------------------------------------- 33 Year Ended December 31, ------------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost $ 227,178 $ 178,489 $ 161,535 Interest cost 151,185 130,501 118,101 Expected return on plan assets (193,322) (149,027) (115,003) Amortization of prior service cost 3,104 3,104 3,104 Amortization of net obligation at transition (5,413) (5,413) (5,413) Recognized net actuarial gain (5,060) (3,970) (4) ------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 177,672 $ 153,684 $ 162,320 ------------------------------------------------------------------------------------------------------- Weighted-Average Assumptions as of December 31 Discount rate 7.5% 7.5% 7.5% Expected return on plan assets 9.0 9.0 9.0 Rate of compensation increase 4.0 4.0 4.0 ======================================================================================================= NOTE 11: Related Party Transactions Loans to directors and officers totaled $1,040,000 and $812,000 at December 31, 2001 and 2000, respectively. New advances to directors and officers totaled $527,000 and repayments totaled $299,000 in the year ended December 31, 2001. NOTE 12: Stock Options Under the Incentive Stock Option Plan ("the Plan"), options to purchase common stock are granted to certain key employees of the Corporation. Options are issued to employees at a price equal to the fair market value of common stock at the date granted. For options granted prior to December 21, 1999, one-third of the options granted are exercisable commencing one year after the grant date with an additional one- third becoming exercisable after each of the following two years. Options granted on or after December 21, 1999, become exercisible five years after the grant date. In 1983, the shareholders authorized 100,000 shares of common stock for issuance under the Plan. An additional 200,000 and 300,000 shares were authorized for the Plan in 1994 and 2000, respectively. All options expire ten years from the grant date. In 1998, the Board of Directors authorized 25,000 shares of common stock for issuance under the Non-Employee Director Stock Option Plan (the "Director Plan"). In 1999, the Director Plan was amended to authorize a total of 150,000 shares for issuance. Under the Director Plan, options to purchase common stock may be granted to non-employee directors of the Bank. Options are issued to non-employee directors at a price equal to the fair market value of common stock at the date granted. The options granted are exercisable six months after grant. All options expire ten years from the grant date. In 1999, the Board of Directors authorized 25,000 shares of common stock for issuance under the 1999 Regional Director Stock Compensation Plan. Under this plan, options to purchase common stock are granted to non-employee regional directors of Citizens & Commerce Bank, a division of the Bank. Options are issued to non-employee regional directors at a price equal to the fair market value of common stock at the date granted. One third of the options granted become exercisable commencing one year after the grant date with an additional one-third becoming exercisable after each of the following two years. All options expire ten years from the grant date. The Corporation applies APB Opinion 25 and related interpretations in accounting for the stock option plans. Accordingly, no compensation cost has been recognized for its plans. Had compensation cost for the plans been determined based on the fair value at the grant dates of options consistent with FASB Statement 123, the Corporation's net income, earnings per share-basic and earnings per share-assuming dilution would have been 34 $7,745,779, $2.18 and $2.16, $5,627,587, $1.56 and $1.55, and, $6,625,664, $1.80 and $1.77, respectively for the years ended December 31, 2001, 2000 and 1999, respectively. The fair value of each option granted during the years ended December 31, 2001, 2000, and 1999, was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2001, 2000, and 1999, respectively: risk-free rate of 5.3, 5.2, and 6.7% and volatility of 35, 30, and 25%. The dividend yield used in the pricing model was 3.5, 3.5, and 2.8% for 2001, 2000, and 1999, respectively. The expected life used was eight years for 2001, 2000, and 1999. Transactions under the various plans for the periods indicated were as follows: 2001 2000 1999 ------------------ ------------------ ------------------ Exercise Exercise Exercise Shares Price* Shares Price* Shares Price* ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 262,429 $ 14.93 208,444 $ 14.37 169,860 $ 12.36 Granted 71,650 18.55 69,800 15.80 68,350 17.64 Exercised (15,068) 9.71 (11,583) 9.62 (25,068) 9.44 Canceled (7,700) 17.12 (4,232) 16.22 (4,698) 15.27 ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 311,311 $ 15.97 262,429 $14.93 208,444 $ 14.37 ================================================================================================================================== *Weighted average Options exercisable at year-end 139,051 122,730 108,761 Weighted-average fair value of options granted during the year $ 5.95 $ 4.57 $ 5.40 ================================================================================================================================== The following table summarizes information about stock options outstanding at December 31, 2001: Options Outstanding Options Exercisable --------------------------------------------- ------------------------------- Number Number Outstanding Remaining Exercisable at at December 31, Contractual Exercise December 31, Exercise Range of Exercise Prices 2001 Life Price* 2001 Price* ---------------------------------------------------------------------------------------------------------------------------------- $8.87 to $12.50 72,378 4.48 $ 10.62 72,378 $10.62 $15.75 to $20.50 238,933 8.72 17.59 66,673 18.34 ---------------------------------------------------------------------------------------------------------------------------------- $8.87 to $20.50 311,311 7.74 $ 15.97 139,051 $14.32 ================================================================================================================================== *Weighted average NOTE 13: Regulatory Requirements and Restrictions The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Corporation's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and the Bank's capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined) less 35 goodwill. For both the Corporation and the Bank, Tier I capital consists of shareholders' equity excluding any net unrealized gain (loss) on securities available for sale less goodwill, and total capital consists of Tier I capital and a portion of the allowance for loan losses. Risk- weighted assets for the Corporation and the Bank were $325,379,000 and $317,199,000 at December 31, 2001 and $264,375,000 and $256,559,000 at December 31, 2000. Management believes, as of December 31, 2001, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2001, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category. The Corporation's and the Bank's actual capital amounts and ratios are presented in the table. Minimum To Be Well Capitalized Under Prompt Minimum Capital Corrective Action Actual Requirements Provisions ---------------- --------------- ----------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------------------------------ As of December 31, 2001: Total Capital (to Risk-Weighted Assets) Corporation $46,793 14.4% $26,030 8.0% N/A N/A Bank 38,999 12.3 25,376 8.0 $31,720 10.0% Tier I Capital (to Risk-Weighted Assets) Corporation 43,110 13.3 13,015 4.0 N/A N/A Bank 35,346 11.1 12,688 4.0 19,032 6.0 Tier I Capital (to Average Assets) Corporation 43,110 10.8 16,027 4.0 N/A N/A Bank 35,346 9.0 15,716 4.0 19,645 5.0 As of December 31, 2000: Total Capital (to Risk-Weighted Assets) Corporation $41,331 15.6% $21,174 8.0% N/A N/A Bank 33,764 13.2 20,554 8.0 $25,693 10.0% Tier I Capital (to Risk-Weighted Assets) Corporation 38,023 14.4 10,587 4.0 N/A N/A Bank 30,552 11.9 10,227 4.0 15,416 6.0 Tier I Capital (to Average Assets) Corporation 38,023 10.9 13,874 4.0 N/A N/A Bank 30,552 9.0 13,582 4.0 16,978 5.0 ------------------------------------------------------------------------------------------------------------------------ Transfers of funds from the Bank to the Corporation in the form of loans, advances and cash dividends are restricted by federal and state regulatory authorities. As of December 31, 2001, the aggregate amount of unrestricted funds which could be transferred from the Bank to the Corporation, without prior regulatory approval, totaled $5,200,000 or 1.3% of the total consolidated net assets. NOTE 14: Commitments and Financial Instruments with Off-Balance-Sheet Risk The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, 36 commitments to sell loans, and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount on the balance sheet. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral is obtained based on management's credit assessment of the customer. Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The total amount of loan commitments was $70,374,000 and $54,428,000 at December 31, 2001 and 2000, respectively. Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $3,943,000 and $5,016,000 at December 31, 2001 and 2000, respectively. Commitments to sell loans are designed to eliminate the Mortgage Corporation's exposure to fluctuations in interest rates in connection with loans held for sale. The Mortgage Corporation sells substantially all of the residential mortgage loans it originates to third-party investors, some of whom require the repurchase of loans in the event of early default or faulty documentation. Mortgage loans and their related servicing rights are sold under agreements that define certain eligibility criteria for the mortgage loan. Recourse periods vary from ninety days up to one year and conditions for repurchase vary with the investor. Mortgages subject to recourse are collateralized by single-family residences, have loan-to- value ratios of 80% or less, or have private mortgage insurance, or are insured or guaranteed by an agency of the U.S. Government. At December 31, 2001, the Mortgage Corporation had locked-rate commitments to originate mortgage loans amounting to approximately $25,000,000. The Mortgage Corporation has entered into mandatory commitments, on a best-effort basis, to sell loans of approximately $94,263,000. Risks arise from the possible inability of counterparties to meet the terms of their contracts. The Mortgage Corporation does not expect any counterparty to fail to meet its obligations. The Mortgage Corporation is committed under noncancelable operating leases for certain office locations. Rent expense associated with these operating leases was $580,000, $411,000, and $330,000, for the years ended December 31, 2001, 2000, and 1999, respectively. Future minimum lease payments under these leases are as follows: Year Ending December 31, ------------------------------------------------------------ 2002 $418,077 2003 222,306 2004 20,202 ------------------------------------------------------------ $660,585 ============================================================ As of December 31, 2001, the Corporation had $6,836,331 in deposits in financial institutions in excess of amounts insured by the FDIC. 37 NOTE 15: Fair Market Value of Financial Instruments and Interest Rate Risk The estimated fair value amounts have been determined by the Corporation using available market information and appropriate valuation methodologies. Loan commitments are conditional and subject to market pricing and, therefore, do not reflect a gain or loss of market value. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on estimated costs to terminate them or otherwise settle the obligations with the counterparties at the reporting date. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and short-term investments. The nature of these instruments and their relatively short maturities provide for the reporting of fair value equal to the historical cost. Securities. The fair value of investment securities is based on quoted market prices. Loans. The estimated fair value of the loan portfolio is based on present values using applicable spreads to the U.S. treasury yield curve. Loans held for sale. The fair value of loans held for sale is estimated based on commitments into which individual loans will be delivered. Deposits and borrowings. The fair value of all demand deposit accounts is the amount payable at the report date. For all other deposits and borrowings, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products. Accrued interest. The carrying amount of accrued interest approximates fair value. December 31, ------------------------------------------ 2001 2000 ----------------- ------------------ Carrying Estimated Carrying Estimated (Dollars in thousands) Amount Fair Value Amount Fair Value ----------------------------------------------------------------------------------- Financial assets: Cash and short-term investments $ 11,057 $ 11,057 $ 14,838 $ 14,838 Securities 53,952 53,952 66,594 67,336 Net loans 246,112 255,110 229,944 230,334 Loans held for sale, net 69,263 70,166 17,600 17,984 Accrued interest receivable 2,134 2,134 2,404 2,404 Financial liabilities: Demand deposits 169,998 170,802 153,301 154,325 Time deposits 153,914 156,115 137,387 137,505 Borrowings 27,204 27,190 13,969 13,969 Accrued interest payable 811 811 993 993 Off-balance-sheet items: Letters of credit -- 3,943 -- 5,016 Unused portions of lines of credit -- 70,374 -- 54,428 ----------------------------------------------------------------------------------- The Corporation assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporation's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to manage interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely 38 to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Corporation's overall interest rate risk. NOTE 16: Business Segments The Corporation operates in a decentralized fashion in two principal business activities, retail banking and mortgage banking. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities. Mortgage banking operating revenues consist mainly of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income. The Corporation also has an investment company, an insurance company and a title company subsidiary which derive revenues from brokerage, insurance and title insurance services. The results of these subsidiaries' are not significant to the Corporation as a whole and have been included in "Other." The following table presents segment information for the years ended December 31, 2001, 2000, and 1999. Year Ended December 31, 2001 ------------------------------------------- Retail Mortgage (Dollars in thousands) Banking Banking Other Eliminations Consolidated ------------------------------------------------------------------------------------------------- Revenues: Interest income $ 26,848 $ 2,931 $ -- $ (1,545) $ 28,234 Gain on sale of loans -- 10,390 -- -- 10,390 Other 3,340 2,690 1,001 -- 7,031 ------------------------------------------------------------------------------------------------- Total operating income 30,188 16,011 1,001 (1,545) 45,655 ------------------------------------------------------------------------------------------------- Expenses: Interest expense 11,984 1,545 -- (1,545) 11,984 Salaries and employee benefits 6,372 6,681 390 -- 13,443 Other 5,465 3,296 160 -- 8,921 ------------------------------------------------------------------------------------------------- Total operating expenses 23,821 11,522 550 (1,545) 34,348 ------------------------------------------------------------------------------------------------- Income before income taxes $ 6,367 $ 4,489 $ 451 $ -- $ 11,307 ------------------------------------------------------------------------------------------------- Total assets $389,426 $74,701 $ 52 $(60,103) $404,076 Capital expenditures $ 6,121 $ 304 $ -- $ -- $ 6,426 ================================================================================================= Year Ended December 31, 2000 ------------------------------ Retail Mortgage (Dollars in Thousands) Banking Banking Other Eliminations Consolidated ------------------------------------------------------------------------------------------------- Revenues: Interest income $ 25,974 $ 1,298 $ -- $ (851) $ 26,421 Gain on sale of loans -- 5,009 -- -- 5,009 Other 2,036 1,183 717 -- 3,936 ------------------------------------------------------------------------------------------------- Total operating income 28,010 7,490 717 (851) 35,366 ------------------------------------------------------------------------------------------------- Expenses: Interest expense 11,309 851 -- (851) 11,309 Salaries and employee benefits 5,829 3,368 406 -- 9,603 Other 4,387 2,283 125 -- 6,795 ------------------------------------------------------------------------------------------------- Total operating expenses 21,525 6,502 531 (851) 27,707 ------------------------------------------------------------------------------------------------- Income before income taxes $ 6,485 $ 988 $ 186 $ -- $ 7,659 ------------------------------------------------------------------------------------------------- Total assets $339,877 $23,946 $ 9 $(16,360) $347,472 Capital expenditures $ 2,361 $ 145 $ -- $ -- $ 2,506 ================================================================================================= 39 Year Ended December 31, 1999 ---------------------------------------- Retail Mortgage (Dollars in Thousands) Banking Banking Other Eliminations Consolidated ------------------------------------------------------------------------------------ Revenues: Interest income $ 23,096 $ 1,916 $ -- $ (1,368) $ 23,644 Gain on sale of loans -- 6,692 -- -- 6,692 Other 2,134 1,589 860 -- 4,583 ------------------------------------------------------------------------------------ Total operating income 25,230 10,197 860 (1,368) 34,919 ------------------------------------------------------------------------------------ Expenses: Interest expense 9,068 1,368 -- (1,368) 9,068 Salaries and employee benefits 5,127 3,889 350 -- 9,366 Other 4,586 2,599 149 -- 7,334 ------------------------------------------------------------------------------------ Total operating expenses 18,781 7,856 499 (1,368) 25,768 ------------------------------------------------------------------------------------ Income before income taxes $ 6,449 $ 2,341 $ 361 $ -- $ 9,151 ------------------------------------------------------------------------------------ Total assets $327,877 $24,673 $ 36 (23,345) $329,241 Capital expenditures $ 2,709 $ 158 $ -- $ -- $ 2,867 ==================================================================================== The retail banking segment provides the mortgage banking segment with the funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest at the daily FHLB advance rate plus 50 basis points. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the retail banking segment are not allocated to the mortgage banking and other segments. NOTE 17: Parent Company Condensed Financial Information Financial information for the parent company is as follows: December 31, --------------------- Balance Sheets 2001 2000 ------------------------------------------------------------------------------ Assets Cash $ 92,211 $ 62,073 Securities available for sale 5,468,496 5,034,587 Other assets 2,682,061 2,209,188 Investments in subsidiary 36,695,062 31,620,321 ------------------------------------------------------------------------------ Total assets $44,937,830 $38,926,169 ------------------------------------------------------------------------------ Liabilities and shareholders' equity Other liabilities $ 194,807 $ 145,719 Shareholders' equity 44,743,023 38,780,450 ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $44,937,830 $38,926,169 ============================================================================== Year Ended December 31, ------------------------- Statements of Income 2001 2000 1999 ------------------------------------------------------------------------------------------------------- Interest income on securities $ 347,529 $ 354,357 $ 339,886 Interest income on loans 162,796 184,000 102,627 Dividends received from bank subsidiary 3,408,649 2,940,632 7,859,692 Distributions in excess of equity in net income of subsidiary -- -- (1,479,099) Equity in undistributed net income of subsidiary 4,219,625 2,459,459 -- Other income 5,124 94,630 151,153 Other expenses (155,006) (197,047) (218,029) ------------------------------------------------------------------------------------------------------- Net income $7,988,717 $5,836,031 $ 6,756,230 ======================================================================================================= 40 Year Ended December 31, ---------------------------------- Statements of Cash Flows 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Operating activities: Net income $7,988,717 $ 5,836,031 $ 6,756,230 Adjustments to reconcile net income to net cash provided by operating activities: Distributions in excess of equity in net income of subsidiary -- -- 1,479,099 Equity in undistributed earnings of subsidiary (4,219,625) (2,459,459) -- Increase in other assets (486,288) (237,372) (1,368,443) Increase in other liabilities 49,088 80,369 219,672 ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,331,892 3,219,569 7,086,558 ---------------------------------------------------------------------------------------------------------- Investing activities: Proceeds from maturities and calls of securities 50,000 811,945 667,249 Purchase of securities (444,455) (1,107,101) (1,107,292) ---------------------------------------------------------------------------------------------------------- Net cash used in investing activities (394,455) (295,156) (440,043) ---------------------------------------------------------------------------------------------------------- Financing activities: Repurchase of common stock (1,014,320) (1,329,411) (4,909,024) Dividends paid (2,056,093) (1,910,629) (1,797,092) Proceeds from the issuance of stock 163,114 131,592 253,887 ---------------------------------------------------------------------------------------------------------- Net cash used in financing activities (2,907,299) (3,108,448) (6,452,229) ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 30,138 (184,035) 194,286 Cash at beginning of year 62,073 246,108 51,822 ---------------------------------------------------------------------------------------------------------- Cash at end of year $ 92,211 $ 62,073 $ 246,108 ---------------------------------------------------------------------------------------------------------- NOTE 18: Quarterly Condensed Statements of Income--Unaudited 2001 Quarter Ended ---------------------------------- Dollars in thousands (except per share) March 31 June 30 September 30 December 31 ---------------------------------------------------------------------------------------------------------- Total interest income $ 6,915 $ 7,222 $ 7,095 $ 7,002 Net interest income after provision for loan losses 3,667 3,924 4,014 4,245 Other income 2,958 3,882 4,436 6,145 Other expenses 4,626 5,196 5,460 6,682 Income before income taxes 1,999 2,610 2,990 3,708 Net income 1,497 1,866 2,090 2,536 Earnings per common share--assuming dilution $ .42 $ .52 $ .58 $ .71 Dividends per common share .14 .14 .15 .15 ----------------------------------------------------------------------------------------------------------- 2000 Quarter Ended ---------------------------------- Dollars in thousands (except per share) March 31 June 30 September 30 December 31 ---------------------------------------------------------------------------------------------------------- Total interest income $ 6,147 $ 6,461 $ 6,830 $ 6,983 Net interest income after provision for loan losses 3,619 3,662 3,754 3,677 Other income 2,068 2,306 2,407 2,164 Other expenses 3,922 4,149 4,014 3,913 Income before income taxes 1,765 1,819 2,147 1,927 Net income 1,369 1,398 1,615 1,454 Earnings per common share--assuming dilution $ .37 $ .38 $ .45 $ .40 Dividends per common share .13 .13 .13 .14 ---------------------------------------------------------------------------------------------------------- 41 INDEPENDENT AUDITOR'S REPORT [LOGO YHB] The Board of Directors and Shareholders C&F Financial Corporation We have audited the accompanying consolidated balance sheets of C&F Financial Corporation and Subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for the years ended December 31, 2001, 2000 and 1999. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of C&F Financial Corporation and Subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America. Yount, Hyde & Barbour, P.C. January 15, 2002 Winchester, Virginia 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND None. FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 with respect to the Directors of the Registrant is contained on pages 3 through 4 of the 2002 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Election of Directors," is incorporated herein by reference. The information required by Section 16(a) reporting requirements with respect to Directors and Executive Officers is contained on page 13 of the 2002 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Section 16(a) Beneficial Ownership Reporting Compliance," is incorporated herein by reference. The information in the following table pertains to the executive officers of the Corporation: Executive Officers of C&F Financial Corporation Name (Age) Business Experience Number of Shares Beneficially Present Position During Past Five Years Owned as of February 26, 2002 ---------------------- ------------------------------------- ------------------------------- Larry G. Dillon (49) President of the Bank since 1989 46,202 (1) Chairman, President and Chief Executive Officer Gari B. Sullivan (64) Senior Vice President of the Bank since 1990 3,237 (1) Secretary Thomas F. Cherry (33) Promoted to Senior Vice President of the Bank in 5,700 (1) Chief Financial Officer December 1998; Vice President of the Bank from December 1996 to December 1998; Manager with Price Waterhouse, LLP in Norfolk, prior to December 1996 (1) Includes exercisable options of 17,700, 1,500, and 5,500 held by Messrs. Dillon, Sullivan, and Cherry, respectively. ITEM 11. EXECUTIVE COMPENSATION The information contained on pages 5 through 7 of the 2002 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Executive Compensation," is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained on page 2 of the 2002 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Security Ownership of Certain Beneficial Owners and Management," is incorporated herein by reference. 43 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained on page 5 of the 2002 Proxy Statement, which is attached hereto as Exhibit 99, under the caption, "Interest of Management In Certain Transactions," is incorporated herein by reference. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K 14 (a) Exhibits Exhibit No. 3: Articles of Incorporation and Bylaws Articles of Incorporation and Bylaws of C&F Financial Corporation filed as Exhibit Nos. 3.1 and 3.2, respectively, to Form 10KSB filed March 29, 1996, of C&F Financial Corporation is incorporated herein by reference. Exhibit No. 10: Material Contracts 10.1 Employment agreement dated December 16, 1997 between C&F Financial Corporation and Larry Dillon filed as Exhibit No. 10 to Form 10K filed March 23, 1998, of C&F Financial Corporation is incorporated herein by reference. 10.2 Employment agreement dated August 1, 1999 between C&F Financial Corporation and Tom Cherry filed as Exhibit No. 10 to Form 10K filed March 28, 2000, of C&F Financial Corporation is incorporated herein by reference. 10.3 C&F Executive Deferred Compensation Plan 10.4 C&F Financial Corporation 1994 Executive Stock Option Plan filed as Exhibit 4.3 to Form S-8 filed May 1, 2000 is incorporated herein by reference. 10.5 C&F Financial Corporation 1998 Non-Employee Director Stock Compensation Plan filed as Exhibit 4.3 to Form S-8 filed September 18, 1998 is incorporated herein by reference. Exhibit No. 13: C&F Financial Corporation 2001 Annual Report to Shareholders Exhibit No. 21: Subsidiaries of the Registrant Citizens and Farmers Bank, incorporated in the Commonwealth of Virginia (100% owned) Exhibit No. 23: Consents of experts and counsel 23.1 Consent of Yount, Hyde & Barbour, P.C. Exhibit No. 99: Additional Exhibits 99.1 C&F Financial Corporation 2002 Annual Meeting Proxy Statement 14 (b) Reports on Form 8-K filed in the fourth quarter of 2001: None. 14 (c) Exhibits to this Form 10-K are either filed as part of this Report or are incorporated herein by reference. 14 (d) Financial Statements excluded from Annual Report to Shareholders pursuant to Rule 14a-3(b). 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, C&F Financial Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: C&F FINANCIAL CORPORATION /s/ Larry G. Dillon /s/ Thomas F. Cherry --------------------------------------- ------------------------------ Larry G. Dillon Thomas F. Cherry Chairman, President and Chief Executive Officer Senior Vice President and Chief Financial Officer Date: March 15, 2002 Date: March 15, 2002 --------------------------------------- ------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ J. P. Causey Jr. Date: March 15, 2002 --------------------------------------- ------------------------------ J. P. Causey Jr., Director /s/Barry R. Chernack Date: March 15, 2002 --------------------------------------- ------------------------------ Barry R. Chernack, Director /s/ Larry G. Dillon Date: March 15, 2002 --------------------------------------- ------------------------------ Larry G. Dillon, Director /s/ James H. Hudson III Date: March 15, 2002 --------------------------------------- ------------------------------ James H. Hudson III, Director /s/ Joshua H. Lawson Date: March 15, 2002 --------------------------------------- ------------------------------ Joshua H. Lawson, Director /s/ William E. O'Connell Jr. Date: March 15, 2002 --------------------------------------- ------------------------------ William E. O'Connell Jr., Director /s/ Paul C. Robinson Date: March 15, 2002 --------------------------------------- ------------------------------ Paul C. Robinson, Director 45 VIRGINIA BANKERS ASSOCIATION MODEL NON-QUALIFIED DEFERRED COMPENSATION PLAN FOR EXECUTIVES (July, 1996) ADOPTION AGREEMENT If the Employer completing this document has any questions about the adoption of the Plan, the provisions of the Plan, its representative should contact Bette J. Albert, C.L.U. at the Virginia Bankers Association Benefits Corporation, 700 East Main Street, Suite 1411, Post Office Box 462, Richmond, Virginia 23219, telephone number (804) 643-7469 during business hours. Each Employer named below hereby adopts the Plan through this Adoption Agreement (the "Adoption Agreement"), to be effective as of the date(s) specified below, and elects the following specifications and provides the following information relating thereto: In completing this Adoption Agreement, if additional space is required insert additional sheets. Adoption Agreement Contents Page ---- Option 1 Employer(s) Adopting Plan Named in Paragraph 1.12 of the Plan ......... 1 Option 2 General Plan Information .............................................. 2 Option 3 Status of Plan and Effective Date(s) .................................. 2 Option 4 Definitions ........................................................... 3 Option 5 Employer Contributions and Allocations ................................ 5 Option 6 Vesting ............................................................... 8 Option 7 Retirement Dates ...................................................... 9 Option 8 Time and Form of Benefit Payments ..................................... 9 Option 9 Participant Deemed Investment Direction ............................... 14 Option 10 Change in Control Definition .......................................... 14 1. EMPLOYER(S) ADOPTING PLAN NAMED IN PARAGRAPH 1.12 OF THE PLAN. ================================================================================ (a) Name of Employer: (b) Employer's telephone C& F Financial Corporation Number: (804) 843-2360 -------------------------------------------------------------------------------- (c) Address of Employer: (d) Employer's EIN: Post Ofice Box 391 54-1680165 West Point, VA 23181 ------------------------------- (e) Employer's Tax Year End: 12/31 ================================================================================ (f) Name, Address and Identifying Information of Other Participating Employers Adopting the Plan: Citizens and Farmers Bank C&F Mortgage Corporation Eighth and Main Streets 300 Arboretum Place -Suite 245 West Point, Virginia 23181 Richmond, Virginia 23236 Telephone number (804) 843-2360 Telephone (804) 330-8300 EIN 54-0169510 EIN 54-1773964 2. GENERAL PLAN INFORMATION. (a) Name of Plan: VBA Executive's Deferred Compensation Plan for C&F Financial Corporation (b) Name, Address and EIN of Plan Administrator(s): [If other than Plan Sponsor, appointment must be by resolution]: 3. STATUS OF PLAN AND EFFECTIVE DATE(S). (a) Effective Date of Plan: The Effective Date of the Plan is January 1, 1998. (b) Plan Status. The adoption of the Plan through this Adoption Agreement is: [_] (1) Initial Establishment. The initial adoption and establishment --------------------- of the Plan. [X] (2) Restated Plan. An amendment and restatement of the Plan (a ------------- Restated Plan). (A) Effective Date of this Restatement. The Effective Date of ---------------------------------- this Restatement of the Plan is January 1, 200. (B) Prior Plan. The Plan was last maintained under document ----------- dated, December 31, 1997 and was known as the for C&F Financial Corporation. (C) Transitional or Special Provisions: [Enter any ---------------------------------- transitional or special provisions relating to any Rollover Account and the Plan as restated] (c) Adoption of Plan by Additional Employers after Effective Date of Plan. The Effective Date(s) of the Plan with respect to Citizens and Farmers Bank is January 1, 1998 and C&F Mortgage Corporation is January 1, 2000. 2 4. DEFINITIONS. -------------------------------------------------------------------------------- (a) Compensation Compensation is used throughout the basic Paragraph 1.8 plan document for different purposes. The following specific rules apply. (1) General Definition. The Compensation ------------------ definition in paragraph 1.8 of the basic plan document is modified as follows: (A) Salary. Salary is more specifically ------ defined to mean: [Consider whether to fix the date for determining Salary. Consider whether to revise to exclude reductions for 401(k) and cafeteria plan contributions. Other revisions may be desired.] (B) Bonus. Bonus is more specifically ----- defined to mean: [Consider naming specific bonus or incentive programs. Indicate excluded programs specifically.] (2) Specific Definitions. When used with -------------------- respect to each type of contribution under the Plan, Compensation shall include: (A) Employee Deferral Contributions. ------------------------------- [_] (i) Salary. [_] (ii) Bonuses. [X] (iii) Salary and Bonuses. (B) Employer Non-Elective Contributions. ----------------------------------- - See Attachment. [_] (i) Salary. [_] (ii) Bonuses. [X] (iii) Salary and Bonuses - for purposes of the "SERP" Employer Non-Elective Contributions (see Attachment). [X] (iv) Other: for purposes of "Excess Profit Sharing" Employer Non-Elective Contributions (see Attachment), "Compensation" in excess of Compensation Limit. For purposes hereof, the terms "Compensation" and "Compensation Limit" has the same meaning assigned to them in the Virginia Bankers Association Defined Contribution Plan for Citizens and Farmers Bank as amended from time to time (or any successor thereto) (the "401(k) Plan"). 3 (C) Employer Matching Contributions. ------------------------------- [_] (i) Salary. [_] (ii) Bonuses. [_] (iii) Salary and Bonuses. [X] (iv) Other: "Compensation" in excess of "Compensation Limit" (as such terms are defined in the "401(k) Plan"). -------------------------------------------------------------------------------- (b) Eligible Employee Eligible Employee shall mean only the Paragraph 1.10 following: [x] (1) Determination by Board - for any --------------------------------- and all Employer Contributions. ------------------------------ Any individual who is designated as an Eligible Employee by resolution of the [] Plan Sponsor's [x] Employer's Board of Directors (or committee thereof). A copy of the resolution shall be attached to and incorporated by reference into the Plan. See Attachment. [x] (2) Determination by CEO - for -------------------------- Employee Deferral Contributions. ------------------------------- Any individual who is designated as an Eligible Employee by resolution of the [] Plan Sponsor's [x] Employer's Chief Executive Officer. A copy of the Chief Executive Officer's designation shall be attached to and incorporated by reference into the Plan. [] (3) Determined by Classification ---------------------------- or Grade - for all Contributions -------------------------------- other than SERP Non-Elective ---------------------------- Contributions. Any individual who ------------ is classified under the Employer's personnel practices and policies as employed in the following grades or classifications: [List executive classification to be included in plan coverage]. [] (4) Determined by Position or ---------------------------- Title. Any individual who is ----- employed in the following positions with the Employer: [List the executive positions to be included in plan coverage.] (c)) Plan Year In the case of Restated Plan which prior to Paragraph 1.20 the Effective Date of this Restatement was maintained on the basis of a Plan Year beginning on a date other than January 1, the Plan Year shall begin on ,19 and ending on , 19 with the short Plan Year beginning on , 19 and ending on December 31, 19 . Thereafter, the Plan Year shall be the 12 month period beginning each January 1. 4 -------------------------------------------------------------------------------- (d) Valuation Date The following date selected by the Paragraph 1.23 Employer: [X] (1) Quarterly. The last day of each --------- calendar quarter. [ ] (2) Semi-Annually. The last day of ------------- June and the last day of December of each Plan Year. [ ] (3) Annually. The last day of each -------- Plan Year. -------------------------------------------------------------------------------- (e) Effective Date The effective date of coverage for an of Coverage Eligible Employee shall be [Check one]: Subparagraph 2.1 [X] (1) Quarterly. The first day of --------- calendar quarter following the date the individual became an Eligible Employee. [ ] (2) Semi-Annually. The first day of ------------- the Plan Year or the first day of the seventh month of the Plan Year next following the date the individual became an Eligible Employee. [ ] (3) Annually. The first day of the --------- Plan Year following the date the individual became an Eligible Employee. 5. EMPLOYER CONTRIBUTIONS AND ALLOCATIONS -------------------------------------------------------------------------------- (a) Employer Contributions The following contributions by the Employer Paragraph 3.4 are elected: [ ] (1) None. Employer contributions are ---- not permitted. [X] (2) Employer Non-Elective Contribution. ------------- (A) Amount. Each Employer shall ------ make an Employer Non- Elective Contribution for each Plan Year in such amount, if any, which the Employer shall determine. [X] (i) Flexible Formula - Such ---------------- amount, if any, which the Board of Directors of the Employer shall determine by resolution. - See Attachment. [ ] (ii) Compensation Formula - % -------------------- [Insert percentage] of the Compensation of all Participants for such Plan Year eligible to receive an allocation of the Employer Non- Elective Contribution for such Plan Year, plus any additional amount that the Board of Directors of the Employer shall determine by resolution. [ ] (iii) Fixed Amount - $ ------------ [Insert amount], plus any additional amount that the Board of Directors of the Employer shall determine by resolution. 5 (B) Participants Entitled to Share of Employer ------------------------------------------ Non-Elective Contribution. The Employer ------------------------- Non-Elective Contribution shall be allocated in proportion to Compensation as defined in Option 4(a)(2)(B) of the Adoption Agreement for the Plan Year to the Employer Deferral Account of the Participants who [Select applicable provisions which shall apply conjunctively unless otherwise noted]: - See Attachment. [ ] (i) Are employed as Eligible Employees for at least [Insert number of months] full calendar months in for such Plan Year. [ ] (ii) Are Eligible Employees at any time during such Plan Year. [ ] (iii) Are Eligible Employees on the last day of such Plan Year. - For Excess Profit Sharing Non-Elective Contributions. [ ] (iv) If they died while Eligible Employees or retired on their Disability, Early, Normal or Delayed Retirement Date while Eligible Employees during such Plan Year [Check one]: - For Excess Profit Sharing Non-Elective Contributions. [ ] (a) But only if they are employed as an Eligible Employee for at least [Insert number of months] full calendar months in such Plan Year. [ ] (b) Regardless of the number of months employed during such Plan Year. (C) Time for Making and Allocating Employer --------------------------------------- Non-Elective Contribution. The Employer ------------------------- Non-Elective Contribution [Check one]: [ ] (i) Quarterly - For a calendar quarter of --------- a Plan Year shall be made to the Plan within a reasonable time after the end of such quarter and shall be allocated to Participant's accounts as of the last day of such quarter. [ ] (ii) Semi-Annually - For a six month ------------- period in the Plan Year shall be made to the Plan within a reasonable time after the end of June and December of each Plan Year and shall be allocated to Participants' accounts as of the last day of such month. [X] (iii) Annually - For a Plan Year shall be made to the Plan at such time(s) as the Employer shall determine and shall be allocated to Participants' accounts as of the last day of such Plan Year. 6 [X] (3) Employer Matching Contributions. ------------------------------- (A) Amount. Each Employer shall make an Employer ------ Matching Contribution for each Plan Year in an amount, subject to the limitations provided in the Plan, equal to the following percentage(s) of each Participant's Deferral Contribution of Compensation as defined in Option 4(a)(2)(C) of the Adoption Agreement for such Plan Year [Check one]: [X] (i) Straight Percentage - 100% [Insert ------------------- percentage] of his Compensation as defined in Option 4(a)(2)(C) of the Adoption Agreement contributed to the Plan (up to a maximum of 5% of such Compensation). [ ] (ii) Contribution Weighted Percentages - % --------------------------------- [Insert percentage] of the first % [Insert percentage] of his Compensation as defined in Option 4(a)(2)(C) of the Adoption Agreement contributed to the Plan and % of his Compensation as defined in Option 4(a)(2)(C) of the Adoption Agreement contributed to the Plan (up to a maximum of % of such Compensation). (B) Participants Entitled to Share of Employer ------------------------------------------ Matching Contribution. The Employer Matching --------------------- Contribution shall be allocated as described in Option 5(a)(3)(A) of the Adoption Agreement for the Plan Year to the Employer Deferral Account of the Participants who [Select applicable provisions which shall apply conjunctively unless otherwise noted]: [ ] (i) Are employed as an Eligible Employee for at least [Insert number of months] full calendar months in for such Plan Year. [ ] (ii) Are Eligible Employees at any time during such Plan Year. [X] (iii) Are Eligible Employees on the last day of such Plan Year. [X] (iv) If they died while an Eligible Employee or retired on his Disability, Early, Normal or Delayed Retirement Date while an Eligible Employee during such Plan Year [Check one]: [ ] (a) But only if they are employed as an Eligible Employee for at least [Insert number of months] full calendar months in such Plan Year. 7 [X] (b) Regardless of the number of months employed during such Plan Year. (C) Time for Making and Allocating Employer --------------------------------------- Matching Contribution. The Employer Matching --------------------- Contribution [Check one]: [ ] (i) Quarterly - For a calendar quarter of --------- a Plan Year shall be made to the Plan within a reasonable time after the end of such quarter and shall be allocated to Participants' accounts as of the last day of such quarter. [ ] (ii) Semi-Annually - For a six month ------------- period in the Plan Year shall be made to the Plan within a reasonable time after the end of June and December of each Plan Year and shall be allocated to Participants' accounts as of the last day of such month. [X] (iii) Annually - For a Plan Year shall be made to the Plan at such time(s) as the Employer shall determine and shall be allocated to Participants' accounts as of the last day of such Plan Year. 6. VESTING -------------------------------------------------------------------------------- (a) Vesting Schedule The following vesting schedule shall apply to Subparagraph 6.3(a) the Employer Deferral Employer Deferral Account of all Participants [Check one, and complete where applicable]: [X] (1) Apply Rules Described in Qualified Plan. --------------------------------------- A Participant is vested in his Employer Deferral Account under the Plan in the same manner and applying the same rules applicable under the following qualified retirement plan maintained by the Employer: For Employer Deferral Account Matching subaccount and Employer Deferral Account Profit Sharing subaccount. [ ] (2) Always 100% Vested. A Participant shall ------------------ always have a non-forfeitable right to one hundred percent (100%) of his Employer Deferral Account. [X] (3) Other Applicable Rules. A Participant ---------------------- shall be vested in his Employer Deferral Account in accordance with the following rules: See Attachment for vesting in Employer Deferral Account SERP subaccount. [Describe vesting provisions, including automatic vesting provisions, applicable schedule and rules for counting service]. 8 7. RETIREMENT DATES -------------------------------------------------------------------------------- (a) Normal Retirement Date A Participant's Normal Retirement Date shall Paragraph 6.1 be the day the Participant reaches age. -------------------------------------------------------------------------------- (b) Early Retirement Date [Select and complete applicable provision(s)] Paragraph 6.3 [X] (1) None. [ ] (2) Same as under the following qualified retirement plan maintained by the Employer. [ ] (3) No age requirement. [ ] (4) Age requirement of years. [ ] (5) No service requirement. [ ] (6) Service requirement of years of continuous full-time service with the employer. -------------------------------------------------------------------------------- (c) Disability Retirement Date [Select and complete applicable provision(s)] Paragraph 6.4 [X] (1) None. [ ] (2) Same as under the following qualified retirement plan maintained by the Employer. [ ] (3) No age requirement. [ ] (4) Age requirement of years. [ ] (5) No service requirement. [ ] (6) Service requirement of years of continuous full-time service with the Employer. 8. TIME AND FORM OF BENEFIT PAYMENTS. (a) Benefit Commencement Date The term Benefit Commencement Date shall mean the first day of Defined Paragraphs 1.5, calendar quarter coinciding with or next following: 3.3(a) and 7.1 [ ] (1) Retirement Date. The Participant's Retirement Date under the Plan as of which he retires. [ ] (2) Termination of Employment. The Participant's termination of employment with the Employer for whatever reason. 9 [X] (3) Selected By Participant. The date selected by the Participant in accordance with the following: (A) Participant's Options. The --------------------- Participant may elect that his Benefit Commencement Date be based on [Select options to be available to Participants]: [ ] (i) His Retirement Date under the Plan as of which he retires. [X] (ii) His termination of employment with the Employer. [ ] (iii) A date certain stated clearly in his election form which shall be without regard to when his employment with the Employer ends. [X] (iv) The later of a date certain or his Retirement Date as of which he retires. [ ] (v) Describe other options to be available: ______________________________ ______________________________ (B) Timing of Participant Election. The ------------------------------ Participant shall elect his Benefit Commencement Date at the following time: [ ] (i) At Time Deferral Election is ---------------------------- Made. The Participant's ---- election of the Benefit Commencement Date shall be made at the time his first Deferred Contribution Election is filed under the Plan. [X] (ii) In Plan Year Prior to Date -------------------------- Elected. The Participant's ------- election of the Benefit Commencement Date shall be made no later than the earlier of (a) the end of the Plan Year prior to the Benefit Commencement Date selected and (b) at least 90 days before the selected date. 10 -------------------------------------------------------------------------------- (b) Form of Payment to The form of benefit payments available to the Participant 7.2(a) Participant shall be determined in accordance with the following rules: [_] (1) Selected By Employer. The Employer -------------------- selects the following form of payment: [_] (A) Lump Sum Payment. Deferral ---------------- Benefits will be paid in the form of a lump sum payment. [_] (B) Periodic Installments. Deferral --------------------- Benefits will be paid in the form of periodic installment payments made: (i) Frequency: --------- [_] (a) Monthly. [_] (b) Quarterly. [_] (c) Semi-Annually. [_] (d) Annually. (ii) Duration. Over the following -------- period: [_] (a) Five (5) years. [_] (b) Ten (10) years. [_] (c) Fifteen (15) years. [_] (d) Twenty (20) years. [X] (2) Selected By Participant. The form of ----------------------- payment shall be selected by the Participant in accordance with the following: (A) Participant's Options. The --------------------- Participant may elect from among the following forms of payment [Select options to be available to Participants]: [X] (i) Lump Sum Payment. Deferral ---------------- Benefits may be paid only in the form of a lump sum payment. [X] (ii) Periodic Installments. --------------------- Deferral Benefits may be paid in the form of periodic installment payments made: (a) Frequency: --------- [X] (I) Monthly. 11 [X] (II) Quarterly. [X] (III) Semi-Annually. [X] (IV) Annually. (b) Duration. Over the -------- following period: [X] (I) Five (5) years. [X] (II) Ten (10) years. [X] (III) Fifteen (15) years. [X] (IV) Twenty (20) years. (B) Timing of Participant Election. ------------------------------ The Participant shall elect his form of payment at the following time: [_] (i) At Time Deferral Election ------------------------- is Made. The Participant's ------- election of the form of payment shall be made at the time his first Deferred Contribution Election is filed under the Plan. [X] (ii) In Plan Year Prior to Date -------------------------- Elected. The Participant's ------- election of the form of payment shall be made no later than the earlier of (a) the end of the Plan Year prior to the Benefit Commencement Date selected and (b) at least 90 days before the selected date. ------------------------------------------------------------------------------- (c) Form of Payment to The form of benefit payments available to Beneficiary the Beneficiary shall be determined in Paragraph 7.2(b) accordance with the following rules: [X] (1) Selected By Employer. The Employer -------------------- selects the following form of payment: [_] (A) Lump Sum Payment. Deferral ---------------- Benefits will be paid in the form of a lump sum payment. [_] (B) Periodic Installments. --------------------- Deferral Benefits will be paid in the form of periodic installment payments made: (i) Frequency. --------- [_] (a) Monthly. [_] (b) Quarterly. [_] (c) Semi-Annually. [_] (d) Annually. 12 (ii) Duration. Over the following period: -------- [ ] (a) Five (5) years. [ ] (b) Ten (10) years. [ ] (c) Fifteen (15) years. [ ] (d) Twenty (20) years. [X] (2) Selected By Participant. The form of ----------------------- payment shall be selected by the Participant in accordance with the following: (A) Participant's Options. The Participant --------------------- may elect from among the following forms of payment [Select options to be available to Participants]: [X] (i) Lump Sum Payment. Deferral Benefits ---------------- may be paid only in the form of a lump sum payment. [X] (ii) Periodic Installments. Deferral --------------------- Benefits may be paid in the form of periodic installment payments made: (a) Frequency: --------- [X] (I) Monthly. [X] (II) Quarterly. [X] (III) Semi-Annually. [X] (IV) Annually. (b) Duration. Over the following -------- period: [X] (I) Five (5) years. [X] (II) Ten (10) years. [X] (III) Fifteen (15) years. [X] (IV) Twenty (20) years. (B) Timing of Participant Election. The ------------------------------ Participant shall elect the Beneficiary's form of payment at the time his first Deferred Contribution Election is filed under the Plan or at any time prior to his death. 13 9. PARTICIPANT DEEMED INVESTMENT DIRECTION. Paragraph 3.6 (a) Availability Generally A Participant [Check one]: [ ](1) Not Permitted. May not make deemed investment directions. [ ](2) Permitted. May make deemed investment directions for the following accounts (the "directable accounts") [Check one or more]: [X](A) Employee Deferral Account. [X](B) Employer Deferral Account. - For Employer Deferral Account Matching subaccount and Employer Deferral Account Profit Sharing subaccount at all times; and for Employer Deferral Account SERP subaccount after vesting and termination of employment. (b) Frequency and Effective Participants may make their deemed Date of Investment investment directions as of [Check one Directions if Option 9(a)(2) is selected]: [X](1) Quarterly. Quarterly effective as --------- of the first date of each quarter of the Plan Year, [ ](2) Semi-Annually. Semi-annually ------------- effective as of the first day of each Plan Year, [ ](3) Annually. Annually effective as -------- of the first day of each Plan Year, and (if any of the above options are selected) at such other date(s) as the Administrator may from time to time authorize. ================================================================================ 10. CHANGE IN CONTROL DEFINITION Subparagraph 4.3(b) -------------------------------------------------------------------------------- Change in Control For purposes of subparagraph 4.3(b), the term Change in Control shall have the following meaning: [X](1) The same meaning as that or a similar term has in the following plan or program adopted by the Employer to protect executives in the event of a major corporate transaction: As provided in the Plan Sponsor's 1994 Incentive Stock Plan, as amended from time to time. [ ](2) The meaning set forth in clause (ii) of subparagraph 4.3(b). - 14 [ ] (3) The meaning set forth in clause (ii) of subparagraph 4.3(b) with the following modifications:___________________________ [ ] (4) The meaning set forth on the attached Appendix to this Adoption Agreement which shall be incorporated by reference and made a part of the terms of the Plan. IN WITNESS WHEREOF, each Employer, by its duly authorized representatives, has executed this instrument this 28th day of February, 2001. [Enter Name of Employer] C&F Financial Corporation By /s/ Tom Cherry ----------------------------------------- Its SVP & CFO ---------------------------------------- [SEAL] ATTEST: /s/ Larry G. Dillon ------------------------------- Its President & CEO --------------------------- [Enter Name of Employer] Citizens and Farmers Bank By /s/ Tom Cherry ----------------------------------------- Its SVP & CFO ---------------------------------------- [SEAL] ATTEST: /s/ Larry G. Dillon ------------------------------- Its President & CEO --------------------------- [Enter Name of Employer] C&F Mortgage Corporation By /s/ Larry G Dillon ----------------------------------------- Its Chairman ---------------------------------------- [SEAL] ATTEST: /s/ Tom Cherry ------------------------------- Its SVP & CFO --------------------------- 15 ATTACHMENT TO THE ADOPTION AGREEMENT FOR VBA EXECUTIVES DEFERRED COMPENSATION PLAN FOR C&F FINANCIAL CORPORATION (As Restated Effective January 1, 2001) Pursuant to authorization of the Board of Directors of C&F Financial Corporation, the following additions are made to the Adoption Agreement for the VBA Executive's Deferred Compensation Plan for C&F Financial Corporation, as restated effective January 1, 2001 in the form of the Virginia Bankers Association Model Non-Qualified Deferred Compensation Plan for Executives and as amended from time to time (the "Plan"): 1. Types of Employer Contributions. The Employer may make Employer Matching Contributions and two types of Employer Non-Elective Contributions - (1) "Excess Profit Sharing" Employer Non-Elective Contributions and (2) "SERP" Employer Non-Elective Contributions. 2. Designation as a Participant Eligible for Employer Contributions. Eligibility of an Employee for participation in any or all of the Employer Contributions requires designation by the Board (or a committee thereof). (a) Participants who may be entitled to an Employer Matching Contribution are sometimes referred to as Matching Participants for this purpose. (b) Participants who may be entitled to a "Excess Profit Sharing" Employer Non-Elective Contribution are sometimes referred to as Excess Profit Sharing Participants for this purpose. (c) Participants who may be entitled to a SERP Employer Non-Elective Contribution are sometimes referred to as SERP Participants for this purpose. 3. Excess Profit Sharing Employer Non-Elective Contributions. Effective as of and from January 1, 2000, unless otherwise provided by the Board, an "Excess Profit Sharing" Employer Non-Elective Contribution shall be made on behalf of a Participant who has Compensation (as defined in the 401(k) Plan) in excess of the Compensation Limit and who meets the accrual requirements to receive an allocation of the profit sharing contribution under the 401(k) Plan in an amount equal to the product obtained by multiplying (a) the 401(k) Plan profit sharing contribution rate (i.e., the actual profit sharing contribution to the 401(k) Plan expressed as a percentage of the covered compensation of 401(k) Plan participants entitled to a share of the profit sharing contribution) by (b) the SERP Participant's Compensation in excess of the Compensation Limit 4. SERP Employer Non-Elective Contributions. Effective as of and from January 1, 2000, unless otherwise provided by the Board, a "SERP" Employer Non-Elective Contribution shall be made on behalf of a Participant who is a SERP Participant in such amount, if any, as determined by the Board. 5. Employer Accounts. The Employer Deferral Account shall be subdivided into three subaccounts: (a) The Employer Deferral Account Matching subaccount to which shall be allocated Employer Matching Contributions. (b) The Employer Deferral Account Profit Sharing subaccount to which shall be allocated Excess Profit Sharing Employer Non-Elective Contributions. 16 (c) The Employer Deferral Account SERP subaccount to which shall be allocated SERP Employer Non-Elective Contributions. 6. Vesting in Employer Deferral Account SERP subaccount. A Participant's Employer Deferral Account SERP subaccount shall be fully vested upon the first to occur of the following while he is an Employee: (a) His death. (b) His total disability (based on the standard applicable under the Employer's long term disability program or, if none or if he is not a participant in that program, based on his entitlement to Social Security disability). (c) His retirement at or after age 65. (d) His early retirement with consent of the Board expressly providing for such vesting. (e) A Change in Control. IN WITNESS WHEREOF, C&F Financial Corporation, as the Plan Sponsor, has caused its name to be signed to this Attachment by its duly authorized officer as of the date noted below. Dated: 2-28-01 C&F Financial Corporation, Plan Sponsor By: /s/ Tom Cherry ------------------------------------ Its SVP & CFO ---------------------------------- By execution hereof by the duly authorized Representative, the Virginia Bankers Association hereby accept the above Attachment. Dated: ____________________ _____________________________________ Trustee's Representative 17 [PHOTO] [C&F LOGO] C&F FINANCIAL CORPORATION 2001 ANNUAL REPORT [LOGO GRAPHIC] OUR MISSION It is the mission of the directors, officers, and staff to maximize the long-term wealth of the shareholders of C&F Financial Corporation through Citizens and Farmers Bank and its other subsidiaries. We believe we provide a superior value when we balance long-term and short-term objectives to achieve both a competitive return on investment and a consistent increase in the market value of the Corporation's stock. This must be achieved while maintaining adequate liquidity and safety standards for the protection of all of the Corporation's interested parties, especially its depositors and shareholders. This mission will be accomplished by providing our customers with distinctive service and quality financial products which are responsive to their needs, fairly priced, and delivered promptly and efficiently with the highest degree of accuracy and professionalism. OUR VALUES We believe that excellence is the standard for all we do, achieved by encouraging and nourishing: respect for others; honest, open communication; individual development and satisfaction; a sense of ownership and responsibility for the Corporation's success; participation, cooperation, and teamwork; creativity, innovation, and initiative; prudent risk-taking; and recognition and rewards for achievement. We believe that we must conduct ourselves morally and ethically at all times and in all relationships. We believe that we have an obligation to the well-being of all the communities we serve. We believe that our officers and staff are our most important assets, making the critical difference in how the Corporation performs and, through their work and effort, separate us from all competitors. 2001 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 ten branch offices serving the surrounding towns and counties. Citizens & Commerce Bank, which operates as a division of Citizens and Farmers Bank, offers quality banking services in the Richmond market and has two branch offices. Citizens and Farmers Bank has four wholly-owned subsidiaries. C&F Mortgage Corporation originates and sells residential mortgages. These mortgage services are provided through seven offices in Virginia and three offices in Maryland. Brokerage services are offered through C&F Investment Services, Inc. C&F Title Agency, Inc., offers title insurance services. Insurance services are offered through C&F Insurance Services, Inc. Trust services are provided in association with The Trust Company of Virginia. Return on Average Equity Return on Average Assets [GRAPH] [GRAPH] 16.08% 17.81% 19.22% 15.99% 18.93% 1.90% 2.03% 2.19% 1.76% 2.09% 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Net Income Earnings Per Share dollars in thousands [GRAPH] [GRAPH] $4,937 $6,134 $6,756 $5,836 $7,989 $1.25 $1.56 $1.81 $1.60 $2.23 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 [PHOTO] [PHOTO GRAPHIC] LETTER FROM THE PRESIDENT [PHOTO] Larry G. Dillon Chairman, President and Chief Executive Officer Dear Fellow Shareholders On behalf of the Board of Directors, I am pleased to present the Annual Report of C&F Financial Corporation for the year 2001, another year in which we achieved record growth and earnings. It was a year where unmatched drops in interest rates stagnated the earnings at Citizens and Farmers Bank, yet precipitated record production and earnings at C&F Mortgage Corporation. It was also a year in which our country experienced unbelievable acts of terrorism, which in turn played havoc on our economy. These acts brought back both patriotic and spiritual values and served to unite us as a country. The record-breaking results of our company are pale compared to what has happened to us as a country. The year 2001 will be one none of us will ever forget. Net income in 2001 totaled just under $7.2 million (excluding the $776,000 after-tax gain on the sale of the Tappahannock Office to Northern Neck State Bank, which occurred in the 4th quarter), up 24% from $5.8 million earned in 2000. This resulted in a return on average assets of 1.89% and a return on average equity of 17.09%, up from 1.76% and 15.99%, respectively, in 2000. Our earnings also compare favorably with those of our peers who, as of September 2001, showed average annualized returns on average assets of 1.03% and average equity of 11.15%. Earnings per share jumped from $1.60 to $2.01. Earnings for the Corporation are up primarily due to the superb results of C&F Mortgage Corporation. You will note as you review this report that the unprecedented eleven drops of the federal funds rate drastically affected the Bank's interest spread, which dropped by 34 basis points during the year. This drop negated the Bank's asset growth for the year and, as mentioned above, was primarily responsible for the flat earnings of the Bank. Also impacting the Bank was the increase in overhead costs associated with opening two new branches and the new technology implemented over the last eighteen months. The significant drop in interest rates, on the other hand, tremendously helped the Mortgage Corporation. With interest rates down, C&F Mortgage saw its loan production more than double, increasing from $294 million in 2000 to $627 million in 2001, which resulted in more than a 400% growth in earnings. Also affecting earnings in 2001 was the growth in revenues and earnings of both C&F Title Agency, Inc. and C&F Investment Services, Inc., both of which saw their earnings more than double. The sale of the Tappahannock Office resulted in a one-time $776,000 after-tax gain. This sale to Northern Neck State Bank was the result of an unsolicited offer from them that made economic sense to us; in addition, Tappahannock is far removed from the rest of our branch network. We saw many exciting changes for the Corporation in 2001. The most notable was the opening of our new 25,000 sq. ft. facility in Midlothian, which is now the headquarters for C&F Mortgage 2 C & F Financial Corporation [PHOTO] The unique lobby design provides a warm atmosphere to welcome customers into the Citizens & Commerce Bank branch on Alverser Drive in Midlothian. Corporation and Citizens & Commerce Bank, a division of Citizens and Farmers Bank. This facility, located in a new commercial development appropriately named the "C&F Center," offers the Mortgage Corporation greatly expanded facilities at a strategically located site and allows us room for future expansion. The bank portion of this facility offers Citizens & Commerce Bank not only a new and strategically important location, but has been designed and built as one of the most unique banking lobbies in the country. In addition to the typical offices, teller line and new account desks, it offers the customers two large television screens to watch continuously running news and two Internet workstations to be able to "surf the net." In addition, there is a coffee bar, from which the net proceeds of coffee sales will be given to various local charities. These combined amenities provide for an inviting setting to the customer, which is what we want. This philosophy is very different from some of our larger competitors who are doing all they can to keep the customers out of their branches. Also located within this facility are the headquarters of C&F Title Agency, Inc. and an office of C&F Investment Services, Inc. We can now offer all of our customers and potential customers in the Midlothian market full banking services, brokerage services and mortgage banking services. It truly is a financial "center." In December of 2001, we also opened our twelfth banking office, in Sandston. This freestanding office offers all of the same inviting amenities as our Midlothian office. Given the overwhelming volume of new accounts being opened, this office may become one of our busiest locations. We saw many exciting changes for the Corporation in 2001. The most notable was the opening of our new 25,000 sq. ft. facility in Midlothian, which is now the headquarters for C&F Mortgage Corporation and Citizens & Commerce Bank, a division of Citizens and Farmers Bank. 2001 Annual Report 3 [PHOTO] Employees and customers enjoy the spacious coffee bar, television and Internet area at the Citizens & Commerce Bank branch on Alverser Drive. In January of 2001, we began offering our customers "imaged" monthly statements. This service allows us to offer our customers condensed images of their cleared checks in a manner that allows them to better organize their home record keeping. [75 YRS. LOGO] We make every effort to provide our customers with the best products and services possible, therefore, we must constantly be improving our training and technology. The year 2001 was no exception, as we made several enhancements to both our technology and offerings. Unseen to the customer, and possibly most important to our speed of delivery, was a replacement of our mainframe computer system during 2001. Not only will this change increase our computing speed and capacity, it will also keep us at the forefront of computing hardware. In January of 2001, we began offering our customers "imaged" monthly statements. This service allows us to offer our customers condensed images of their cleared checks in a manner that allows them to better organize their home record keeping. This system also offers two other important services. First, it allows our internal research, either for our own purposes or that of the customer, to be almost instantaneous. Secondly, after initiating our Internet banking service in the spring of 2001, our customers now have the ability to see the image of any cleared check online. Not only do our Internet banking customers have the ability to "see" their cleared items, they are now able to perform just about any banking transaction online in the privacy of their own homes and at their own convenience. With our system being "real time," no matter whether the customer is performing the transaction or inquiry within the branch, on our telephone banking system, or over the Internet, the customer will always receive the same information. The Board of Directors was sad to receive the recent resignation of P. Loy Harrell from the Board of Citizens and Farmers Bank, where he 4 C & F Financial Corporation [PHOTO GRAPHIC] had served as a Board member since 1966. The entire Board will sorely miss Mr. Harrell's experience, depth of knowledge and guidance. During 2001, the Board appointed Audrey D. Holmes to the Board of Citizens and Farmers Bank. Ms. Holmes is a local attorney in the Sandston market and not only provides knowledge of that market but also of the Charles City County market where she has been a lifelong resident. Her knowledge of and respect in both markets as well as her expertise will be a great benefit to the Board. At its meeting in January 2002, the Board appointed Barry R. Chernack, who has served as a member of the Board of Directors of Citizens and Farmers Bank since 2000, to the Board of C&F Financial Corporation. Mr. Chernack, a past managing partner of PriceWaterhouseCoopers LLP, will bring considerable accounting and business knowledge to both the Board and its Audit Committee. The directors, officers, and staff of C&F Financial Corporation are committed to supporting the communities in which we are located and demonstrate that support in many fashions. Most of our staff are very active in various civic groups, often giving many hours of their personal time. These activities range from overseeing various "walk-a-thons," to coaching at the local high school, to serving on local community boards. We are very appreciative of the communities we serve and try to give back in ways that keep us involved in these communities. Our philosophy at C&F is that in order for us to be successful on a long-term basis, which is our primary goal, we have to look out for the interests of three constituencies: our staff, who provide the backbone of what we do; the communities we serve, who provide our customers and without which we would not exist; and our stockholders, who provide us the financial support. To look out for one above the others would lead to failure. The interests of all have to be well served. We look out for our staff members by trying to assure fair compensation and benefits packages to provide for them and their families; we provide them with growth and educational opportunities; and, we are constantly challenging them with the changes both within the organization as well as the industry. We care for our communities by providing the best in products and services we possibly can and we give back both personally and financially in as many ways as possible. And finally, we look out for you, our stockholders, by striving to provide the best returns possible. We are ever cognizant that to remain a viable long-term organization we must provide you with a solid return on your investment. We are not perfect, however we do strive for perfection in all we do. Our thanks and appreciation go out to all of our constituencies for helping to make this organization what it is - a truly fine financial services corporation. We thank you for your support and ask for your continued patronage as we celebrate our 75th year of providing financial services. /s/ Larry G. Dillon Larry G. Dillon Chairman, President and Chief Executive Officer [PHOTO] Kitty Buckner-Branch Manager and Alice Robbins-Assistant Branch Manager discuss new customer opportunities at our Citizens and Farmers Bank branch in Sandston. 2001 Annual Report 5 DIRECTORS AND ADVISORS [PHOTO] Citizens and Farmers Bank (back left to right)-- Bryan E. McKernon, Reginald H. Nelson IV, Paul C. Robinson, J. P. Causey Jr., James H. Hudson III, Joshua H. Lawson, and Thomas B. Whitmore Jr. (front left to right) Barry R. Chernack, Larry G. Dillon, Audrey D. Holmes, and William E. O'Connell Jr. C&F Financial Corporation/Citizens and Farmers Bank J. P. Causey Jr.*+ Senior Vice President, Secretary & General Counsel Chesapeake Corporation Barry R. Chernack*+ Retired Partner PriceWaterhouseCoopers LLP Larry G. Dillon *+ Chairman, President & CEO C&F Financial Corporation Citizens and Farmers Bank P. L. Harrell+ President Old Dominion Grain, Inc. Audrey D. Holmes+ Attorney-at-Law Audrey D. Holmes, Attorney-at-Law James H. Hudson III*+ Attorney-at-Law Hudson & Bondurant, P.C. Joshua H. Lawson*+ President Thrift Insurance Corporation Bryan E. McKernon+ President & CEO C&F Mortgage Corporation Reginald H. Nelson IV+ Retired Partner Colonial Acres Farm William E. O'Connell Jr.*+ Chessie Professor of Business The College of William and Mary Paul C. Robinson*+ Owner & President Francisco, Robinson & Associates, Realtors Thomas B. Whitmore Jr.+ Retired President Whitmore Chevrolet, Oldsmobile, Pontiac Co., Inc. Citizens & Commerce Bank Frank Bell III President Citizens & Commerce Bank Jeffery W. Jones Chairman & Chief Executive Officer WFofR, Incorporated S. Craig Lane President Lane & Hamner, P.C. William E. O'Connell Jr. Chairman of the Board Chessie Professor of Business The College of William and Mary Meade A. Spotts President Spotts, Fain, Chappell & Anderson, P.C. Scott E. Strickler Treasurer Robins Insurance Agency, Inc. Katherine K. Wagner Senior Vice President Commercial Lending Citizens & Commerce Bank C&F Mortgage Corporation J. P. Causey Jr. Senior Vice President, Secretary & General Counsel Chesapeake Corporation Larry G. Dillon Chairman of the Board James H. Hudson III Attorney-at-Law Hudson & Bondurant, P.C. Bryan E. McKernon President & CEO C&F Mortgage Corporation William E. O'Connell Jr. Chessie Professor of Business The College of William and Mary Paul C. Robinson Owner & President Francisco, Robinson & Associates, Realtors C&F Investment Services, Inc. Larry G. Dillon President Eric F. Nost Vice President Thomas F. Cherry Treasurer Gari B. Sullivan Secretary * C&F Financial Corporation Board Member + Citizens and Farmers Bank Board Member Citizens & Commerce Bank Board (back left to right)-- Scott E. Strickler, S. Craig Lane, Katherine K. Wagner, Frank Bell III, and William E. O'Connell Jr. (front left to right) Jeffery W. 6 C & F Financial Corporation Jones and Meade A. Spotts [PHOTO] OFFICERS AND LOCATIONS [GRAPHIC] Independent Public Accountants Yount, Hyde & Barbour, P.C. Winchester, VA Corporate Counsel Hudson & Bondurant, P.C. West Point, VA Varina Advisory Board Robert A. Canfield Attorney-at-Law Canfield, Shapiro, Baer, Heller & Johnston Robert F. Nelson Jr. Professional Engineer Engineering Design Associates Phil T. Rutledge Jr. Retired Deputy County Manager County of Henrico Sandra W. Seelmann Real Estate Broker/Owner Varina & Seelmann Realty Citizens and Farmers Bank ADMINISTRATIVE OFFICE 802 Main Street West Point, Virginia 23181 (804) 843-2360 Larry G. Dillon * Chairman, President & CEO Maria E. Campbell Senior Vice President, Retail Thomas F. Cherry * Senior Vice President & CFO Gari B. Sullivan * Senior Vice President & Secretary Leslie A. Campbell Vice President, Loan Operations Sandra S. Fryer Vice President, Operations William B. Littreal Vice President, Information Systems Deborah R. Nichols Vice President, Quality Control Laura H. Shreaves Vice President & Director of Human Resources * Officers of C&F Financial Corporation WEST POINT -- MAIN OFFICE Thomas W. Stephenson Jr. Branch Manager 802 Main Street West Point, Virginia 23181 (804) 843-2360 JAMESTOWN ROAD Alec J. Nuttall Assistant Vice President & Branch Manager 1167 Jamestown Road Williamsburg, Virginia 23185 (757) 220-3293 LONGHILL ROAD Sandra C. St. Clair Assistant Vice President & Branch Manager 4780 Longhill Road Williamsburg, Virginia 23188 (757) 565-0593 MIDDLESEX N. Susan Gordon Assistant Vice President & Branch Manager Route 33 at Route 641 Saluda, Virginia 23149 (804) 758-3641 NORGE Robert J. Unangst Branch Manager 7534 Richmond Road Norge, Virginia 23127 (757) 564-8114 PROVIDENCE FORGE James D. W. King Vice President & Branch Manager 3501 N. Courthouse Road Providence Forge, Virginia 23140 (804) 966-2264 QUINTON Mary T. "Joy" Whitley Assistant Vice President & Branch Manager 2580 New Kent Highway Quinton, Virginia 23141 (804) 932-4383 SANDSTON Katherine P. Buckner Assistant Vice President & Branch Manager 100 East Williamsburg Road Sandston, Virginia 23150 (804) 737-7005 VARINA Susan M. Terry Branch Manager Route 5 at Strath Road Richmond, Virginia 23231 (804) 795-7000 Tracy E. Pendleton Vice President & Area Credit Manager (804) 795-7706 WEST POINT -- 14TH STREET Karen T. Richardson Assistant Vice President & Branch Manager 415 Fourteenth Street West Point, Virginia 23181 (804) 843-2708 CONSTRUCTION LENDING OFFICE Terrence C. Gates Vice President, Real Estate Construction C&F Center 1400 Alverser Drive Midlothian, Virginia 23113 (804) 858-8351 Citizens & Commerce Bank ADMINISTRATIVE OFFICE C&F Center 1400 Alverser Drive Midlothian, Virginia 23113 (804) 378-0332 Frank Bell III President Katherine K. Wagner Senior Vice President Commercial Lending MIDLOTHIAN Sandra R. Gee Branch Manager C&F Center 1400 Alverser Drive Midlothian, Virginia 23113 (804) 378-0332 RICHMOND Michele Hottle Branch Manager 8001 West Broad Street Richmond, Virginia 23294 (804) 290-0402 2001 Annual Report 7 OFFICERS AND LOCATIONS [GRAPHIC] C&F Mortgage Corporation ADMINISTRATIVE OFFICE 1400 Alverser Drive Midlothian, VA 23113 (804) 858-8300 Bryan E. McKernon President & Chief Executive Officer Mark A. Fox Executive Vice President & Chief Financial Officer Donna G. Jarratt Senior Vice President & Project Manager Kevin A. McCann Vice President & Controller Tracy L. Bishop Vice President & Human Resources Manager M. Kathy Burley Vice President & Closing Manager James A. Ryan, III Vice President & Underwriting Manager RICHMOND, VIRGINIA 1400 Alverser Drive Midlothian, VA 23113 (804) 858-8300 Donald R. Jordan Vice President & Branch Manager Daniel J. Murphy Vice President & Production Manager Susan P. Burkett Vice President & Operations Manager RICHMOND, VIRGINIA 7231 Forest Avenue, Suite 202 Richmond, Virginia 23226 (804) 673-3453 Page C. Yonce Vice President & Branch Manager Constance Bachman-Hamilton Vice President & Production Manager CHESTER, VIRGINIA 4517 West Hundred Road Chester, Virginia 23831 (804) 748-2900 Stephen L. Fuller Vice President & Branch Manager CHARLOTTESVILLE, VIRGINIA 1420 Greenbrier Place Charlottesville, Virginia 22901 (434) 974-1450 William E. Hamrick Vice President & Branch Manager Philip N. Mahone Vice President & Branch Manager NEWPORT NEWS, VIRGINIA 703 Thimble Shoals Boulevard, Suite C4 Newport News, Virginia 23606 (757) 873-8200 Linda H. Gaskins Vice President & Branch Manager WILLIAMSBURG, VIRGINIA 1167-A Jamestown Road Williamsburg, Virginia 23185 (757) 259-1200 Irving E. "Ed" Jenkins Vice President & Branch Manager LYNCHBURG, VIRGINIA 17835 Forest Road, Suite B Forest, Virginia 24551 (434) 385-0700 J. Garnett Atkins Vice President & Branch Manager CROFTON, MARYLAND 2191 Defense Highway, Suite 200 Crofton, Maryland 21114 (410) 721-6770 Michael J. Mazzola Senior Vice President & Maryland Area Manager ANNAPOLIS, MARYLAND 20 Ridgely Avenue, Suite 302 Annapolis, Maryland 21401 (410) 263-9229 William J. Regan Vice President & Branch Manager ELLICOTT CITY, MARYLAND 5052 Dorsey Hall Drive Suite 202 Ellicott City , MD 21042 (410) 964-9223 Scott B. Segrist Branch Manager Robert G. Menton Branch Manager APPRAISAL SERVICES 1400 Alverser Drive Midlothian, VA 23113 (804) 858-8300 H. Daniel Salomonsky Vice President & Appraisal Manager C&F Title Agency, Inc. 1400 Alverser Drive Midlothian, VA 23113 (804) 858-8399 Eileen A. Cherry Vice President & Title Insurance Underwriter C&F Investment Services, Inc. Eric F. Nost Vice President & Manager 417 Fourteenth Street West Point, Virginia 23181 (804) 843-4584 (800) 583-3863 Douglas L. Hartz Assistant Vice President 1400 Alverser Drive Midlothian, Virginia 23113 (804) 378-7296 (888) 435-2033 Douglas L. Cash, Jr. Branch Manager 1167 Jamestown Road Williamsburg, Virginia 23185 (757) 229-5629 8 C & F Financial Corporation [C&F LOGO] [LOGO] C F F I NASDAQ LISTED Stock Listing Current market quotations for the common stock of C&F Financial Corporation are available under the symbol CFFI. 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. Investor Relations & Financial Statements A copy of Form 10-K and quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission, are available without charge to stockholders upon written request. Requests for this or other financial information about C&F Financial Corporation should be directed to: Thomas Cherry Senior Vice President and Chief Financial Officer C&F Financial Corporation P.O. Box 391 West Point, VA 23181 [C&F LOGO] C&F Financial Corporation 802 Main Street o PO Box 391 West Point, Virginia 23181 (804) 843-2360 www.cffc.com Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-63699, No.333-67535, No. 333- 89551, No. 333-89505, and No. 333-35996) and Form S-3 (No. 333-60877 and No. 333-30497) and in the related Prospectuses, of our report, dated January 15, 2002, relating to the consolidated financial statements of C&F Financial Corporation and Subsidiary, included in the 2001 Annual Report of Shareholders and incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 2001. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia March 14, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E)(2)) [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12 C & F FINANCIAL CORPORRATION (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: Notes: Reg. (S) 240.14a-101. SEC 1913 (3-99) [LOGO] C&F Financial Corporation Eighth and Main Streets P.O. Box 391 West Point, Virginia 23181 Dear Fellow Shareholders: You are cordially invited to attend the 2002 Annual Meeting of Shareholders of C&F Financial Corporation, the holding company for Citizens and Farmers Bank. The meeting will be held on Tuesday, April 16, 2002, at 3:30 p.m. at the Father van den Boogaard Center, 3510 King William Avenue, West Point, Virginia. The accompanying Notice and Proxy Statement describe the matters to be presented at the meeting. Enclosed is our Annual Report to Shareholders that will be reviewed at the Annual Meeting. Please complete, sign, date, and return the enclosed proxy card as soon as possible. Whether or not you will be able to attend the Annual Meeting, it is important that your shares be represented and your vote recorded. If you decide to attend the Annual Meeting in person, you can revoke your proxy at any time before it is voted at the Annual Meeting. We appreciate your continuing loyalty and support of C&F Financial Corporation. Sincerely, /s/ Larry G. Dillon Larry G. Dillon President & Chief Executive Officer West Point, Virginia March 15, 2002 C&F FINANCIAL CORPORATION Eighth and Main Streets P.O. Box 391 West Point, Virginia 23181 NOTICE OF 2002 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 16, 2002 The 2002 Annual Meeting of Shareholders of C&F Financial Corporation (the "Company") will be held at the Father van den Boogaard Center, 3510 King William Avenue, West Point, Virginia, on Tuesday, April 16, 2002, at 3:30 p.m. for the following purposes: 1. To elect three Class III directors to the Board of Directors of the Company to serve until the 2005 Annual Meeting of Shareholders, as described in the Proxy Statement accompanying this notice. 2. To ratify the Board of Directors' appointment of Yount, Hyde & Barbour, P.C., as the Company's independent public accountants for 2002. 3. To transact such other business as may properly come before the meeting or any adjournment thereof. Shareholders of record at the close of business on February 26, 2002, are entitled to notice of and to vote at the Annual Meeting or any adjournment thereof. By Order of the Board of Directors, /s/ Gari B. Sullivan Gari B. Sullivan Secretary March 15, 2002 IMPORTANT NOTICE Please complete, sign, date, and return the enclosed proxy card in the accompanying postage paid envelope so that your shares will be represented at the meeting. Shareholders attending the meeting may personally vote on all matters that are considered, in which event their signed proxies are revoked. C&F FINANCIAL CORPORATION Eighth and Main Streets P.O. Box 391 West Point, Virginia 23181 PROXY STATEMENT 2002 ANNUAL MEETING OF SHAREHOLDERS April 16, 2002 GENERAL The following information is furnished in connection with the solicitation by and on behalf of the Board of Directors of the enclosed proxy to be used at the 2002 Annual Meeting of the Shareholders (the "Annual Meeting") of C&F Financial Corporation (the "Company") to be held Tuesday, April 16, 2002, at 3:30 p.m. at the Father van den Boogaard Center, 3510 King William Avenue, West Point, Virginia. The approximate mailing date of this Proxy Statement and accompanying proxy is March 15, 2002. Revocation and Voting of Proxies Execution of a proxy will not affect a shareholder's right to attend the Annual Meeting and to vote in person. Any shareholder who has executed and returned a proxy may revoke it by attending the Annual Meeting and requesting to vote in person. A shareholder may also revoke his proxy at any time before it is exercised by filing a written notice with the Company or by submitting a proxy bearing a later date. Proxies will extend to, and will be voted at, any properly adjourned session of the Annual Meeting. If a shareholder specifies how the proxy is to be voted with respect to any proposals for which a choice is provided, the proxy will be voted in accordance with such specifications. If a shareholder fails to specify with respect to such proposals, the proxy will be voted FOR proposals 1, and 2, as set forth in the accompanying notice and further described herein. Voting Rights of Shareholders Only those shareholders of record at the close of business on February 26, 2002, are entitled to notice of and to vote at the Annual Meeting, or any adjournments thereof. The number of shares of common stock of the Company outstanding and entitled to vote at the Annual Meeting is 3,529,726. The Company has no other class of stock outstanding. A majority of the votes entitled to be cast, represented in person or by proxy, will constitute a quorum for the transaction of business. Each share of Company common stock entitles the record holder thereof to one vote upon each matter to be voted upon at the Annual Meeting. With regard to the election of directors, votes may be cast in favor or withheld. If a quorum is present, the nominees receiving a plurality of the votes cast at the Annual Meeting will be elected directors; therefore, votes withheld will have no effect. The ratification of Yount, Hyde & Barbour, P.C. as the Company's independent public accountants requires an affirmative vote of a majority of the shares cast on the matter. Thus, although abstentions and broker non-votes (shares held by customers which may not be voted on certain matters because the broker has not received specific instructions from the customers) are counted for purposes of determining the presence or absence of a quorum for the transaction of business, they are generally not counted for purposes of determining whether such a proposal has been approved, and therefore have no effect. 1 Solicitation of Proxies The cost of solicitation of proxies will be borne by the Company. Solicitations will be made only by the use of the mail, except that officers and regular employees of the Company and Citizens and Farmers Bank (the "Bank") may make solicitations of proxies by telephone, telegram, special letter, or by special call, acting without compensation other than their regular compensation. It is contemplated that brokerage houses and other nominees, custodians, and fiduciaries will be requested to forward the proxy soliciting material to the beneficial owners of the stock held of record by such persons, and the Company will reimburse them for their charges and expenses in this connection. Security Ownership of Certain Beneficial Owners and Management The following table shows the share ownership as of February 26, 2002, of the shareholders known to the Company to be the beneficial owners of more than 5% of the Company's common stock, par value $1.00 per share, which is the Company's only voting security outstanding. Amount and Nature Name and Address of Beneficial Percent of Beneficial Owner Ownership/(1)/ of Class ------------------- --------- -------- SunTrust Banks, Inc. 244,828/(2)/ 6.9% 303 Peachtree Street, Suite 1500 Atlanta, Georgia 30308 _________________________ /(1)/ For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934 under which, in general, a person is deemed to be the beneficial owner of a security if he or she has or shares the power to vote or direct the voting of the security or the power to dispose of or direct the disposition of the security, or if he or she has the right to acquire beneficial ownership of the security within sixty days. /(2)/ Based on Amendment No. 3 to a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2002 by SunTrust Banks, Inc. and certain of its subsidiaries. According to this Amendment No. 3, SunTrust Banks, Inc. and these subsidiaries have sole voting power with respect to 244,828 of theses shares, sole investment power with respect to 38,680 of these shares and shared investment power with respect to 206,148 of these shares. The 244,828 shares are held by one or more subsidiaries of SunTrust Banks, Inc. in various fiduciary and agency capacities. SunTrust Banks, Inc. and such subsidiaries disclaim any beneficial interest in any of the shares reported. The following table shows as of February 26, 2002, the beneficial ownership of the Company's common stock for each director, director nominee, certain executive officers and for all directors, director nominees, and executive officers of the Company as a group. Amount and Nature of Name Beneficial Ownership/(1)/ Percent of Class ----- ------------------------- ---------------- J. P. Causey Jr. 36,938/(3)/ 1.0% Barry R. Chernack 605 * Larry G. Dillon 46,202/(2)/ 1.3% James H. Hudson III 5,590/(3)/ * Joshua H. Lawson 30,922/(3)/ * William E. O'Connell Jr. 5,750/(3)/ * Paul C. Robinson 6,192/(3)/ * Thomas F. Cherry 5,700/(2)/ * Gari B. Sullivan 3,237/(2)/ * All Directors, Nominees and Executive Officers as a group (9 persons) 141,136 4.0% 2 * Represents less than 1% of the total outstanding shares of the Company's common stock. /(1)/ For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934 under which, in general, a person is deemed to be the beneficial owner of a security if he or she has or shares the power to vote or direct the voting of the security or the power to dispose of or direct the disposition of the security, or if he or she has the right to acquire beneficial ownership of the security within sixty days. /(2)/ Includes 17,700 shares, 5,500 shares, and 1,500 shares for Mr. Dillon, Mr. Cherry, and Mr. Sullivan, respectively, as to which they hold presently exercisable options. A description of such options is set forth below in greater detail in "Compensation Committee Report on Executive Compensation." /(3)/ Includes 3,750 shares that may be acquired upon the exercise of options. A description of the plan under which these options were issued is set forth below in "Director Compensation." PROPOSAL ONE ELECTION OF DIRECTORS The Company's Board is divided into three classes (I, II, and III) of directors. The term of office for Class III directors will expire at the Annual Meeting. Three persons named below, each of whom currently serves as a director of the Company, will be nominated to serve as Class III directors. If elected, the Class III nominees will serve until the 2005 Annual Meeting of Shareholders. The persons named in the proxy will vote for the election of the nominees named below unless authority is withheld. The Company's Board believes that the nominees will be available and able to serve as directors, but if any of these persons should not be available or able to serve, the proxies may exercise discretionary authority to vote for a substitute proposed by the Company's Board. Certain information concerning the nominees for election at the Annual Meeting as Class III directors is set forth below, as well as certain information about the other Class I and II directors, who will continue in office until the 2003 and 2004 Annual Meeting of Shareholders, respectively. Principal Served Occupation During Name (Age) Since/(1)/ Past Five Years ---------- ---------- --------------- Class I Directors (Serving Until the 2003 Annual Meeting) Larry G. Dillon (49) 1989 Chairman, President and Chief Executive Officer of the Company and the Bank James H. Hudson III (53) 1997 Attorney-at-Law Hudson & Bondurant, P.C. Class II Directors (Serving Until the 2004 Annual Meeting) Joshua H. Lawson (60) 1993 President, Thrift Insurance Corporation Paul C. Robinson (44) 1994 President, Francisco, Robinson & Associates, Inc. Class III Directors (Nominees) (Serving Until the 2005 Annual Meeting) J. P. Causey Jr. (58) 1984 Executive Vice President, Secretary & General Counsel of Chesapeake Corporation 2001 to present; Senior Vice President prior to 2001 3 Barry R. Chernack (54) 2000 Retired January 2000 to present; Managing Partner, Pricewaterhouse- Coopers, LLP, Southern Virginia Practice prior to January 2000 William E. O'Connell Jr. (64) 1994 Chessie Professor of Business, The College of William and Mary (1) Refers to the year in which the director was first elected to the Board of Directors of the Bank. The Board of Directors of the Bank consists of the seven members of the Company's Board listed above, as well as, Audrey D. Holmes, Bryan E. McKernon, Reginald H. Nelson IV, and Thomas B. Whitmore Jr. The Board of Directors is not aware of any family relationship between any director, executive officer or person nominated by the Company to become director; nor is the Board of Directors aware of any involvement in legal proceedings which are material to an evaluation of the ability or integrity of any director or person nominated to become a director. Unless authority for the nominees is withheld, the shares represented by the enclosed proxy card, if executed and returned, will be voted FOR the election of the nominees proposed by the Board of Directors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE DIRECTORS NOMINATED TO SERVE AS CLASS III DIRECTORS. Board Committees and Attendance During 2001, there were eight meetings of the Board of Directors of the Company. Each director attended at least 75% of all meetings of the boards and committees on which he or she served. The Board of Directors of the Company has a Capital Plan Committee and an Audit Committee and the Board of Directors of the Bank has an Executive Committee and a Compensation Committee. The Board of Directors of the Company acts as the nominating committee for nominees to be voted on for election as directors. In its capacity as the nominating committee, the Board of Directors will accept for consideration shareholder's nominations for directors if made in writing. In accordance with the Company's bylaws, such a shareholder nomination must include the nominee's written consent to the nomination, sufficient background information with respect to the nominee, sufficient identification of the nominating shareholder and a representation by shareholder of his or her intention to appear at the Annual Meeting (in person or by proxy) to nominate the individual specified in the notice. Nominations must be received by the Company's Secretary at the Company's principal office in West Point, Virginia, no later than February 13, 2003 in order to be considered for the next annual election of directors. Members of the Bank's Executive Committee are Messrs. Causey, Dillon, Hudson, and O'Connell. The Executive Committee reviews various matters and submits proposals or recommendations to the Board of Directors. The Executive Committee met one time during 2001. Members of the Bank's Compensation Committee are Messrs. Causey, Chernack, Hudson, and Whitmore. The Compensation Committee recommends the level of compensation of each officer of the Bank, the granting of stock options and other employee remuneration plans to the Board of Directors. The Compensation Committee met two times during 2001. Members of the Company's Audit Committee are Messrs. Causey, Chernack, Lawson, O'Connell, and Robinson. The Audit Committee reviews and approves various audit functions including the year-end audit performed by the Company's independent public accountants. The Audit Committee met four times during 2001. See Report of the Audit Committee on page 10. 4 Directors' Compensation Each of the directors of the Company is also a director of the Bank. Non-employee members of the Board of Directors of the Bank receive an annual retainer of $2,500, payable quarterly, with a base meeting fee of $300 per day for Company or Bank meetings and a fee of $100 for each secondary meeting of the Company, Bank, or any committees thereof held on the same day as a meeting for which the base meeting fee is paid. In addition to cash compensation, non-employee members of the Board of Directors of the Bank participate in the Non-Employee Directors' Stock Compensation Plan. Under this plan, directors are granted the option to purchase the Company's common stock at a price equal to the fair market value of the stock at the date of grant. Options are exercisable twelve months after the date of grant and expire ten years from the date of grant. On May 1, 2001, all non-employee members of the Board of Directors of the Bank were granted 1,500 options with an exercise price of $16.75 per share. Interest of Management in Certain Transactions As of December 31, 2001, the total maximum extensions of credit (including used and unused lines of credit) to policy-making officers, directors, and their associates amounted to $2,583,189, or 5.77%, of total year-end capital. The maximum aggregate amount of such indebtedness outstanding during 2001 was $1,174,198, or 2.62%, of total year-end capital. These loans were made in the ordinary course of the Bank's business, on the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with others, and do not involve more than the normal risks of collectibility or present other unfavorable features. The Bank expects to have in the future similar banking transactions with officers, directors, and their associates. Executive Compensation Summary of Cash and Certain Other Compensations. The following table shows the cash compensation paid to Mr. Dillon, President and Chief Executive Officer of the Company, Thomas F. Cherry, Senior Vice President and Chief Financial Officer of the Company, and Gari B. Sullivan, Senior Vice President and Secretary of the Company, during 2001, 2000, and 1999. During 2001, no other executive officer of the Company received compensation in excess of $100,000. SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation --------------------------------------------------- ------------ All Name and Other Annual Other Principal Position Year Salary Bonus/(1)/ Compensation/(2)/ Options/(3)/ Compensation/(4)/ ------------------ ---- ------ ----- ------------ ------- ------------ Larry G. Dillon 2001 $172,500 $60,000 - 3,500 $28,518 President/Chief 2000 167,500 50,000 - 3,500 27,533 Executive Officer 1999 152,500 50,000 - 3,500 22,736 Thomas F. Cherry 2001 104,000 25,000 - 2,500 22,725 Senior Vice 2000 100,000 20,000 - 2,500 21,773 President/CFO 1999 89,000 20,000 - 2,500 10,410 Gari B. Sullivan 2001 94,000 18,000 - 2,000 29,048 Senior Vice 2000 90,500 13,000 - 2,000 28,489 President/Secretary 1999 87,500 13,000 - 2,000 29,811 5 /(1)/ All bonuses were paid under the Management Incentive Bonus Plan. /(2)/ The amount of compensation in the form of perquisites or other personal benefits properly categorized in this column according to the disclosure rules adopted by the Securities and Exchange Commission did not exceed the lesser of either $50,000, or 10% of the total annual salary and bonus reported in each of the three years reported for Mr. Dillon, Mr. Cherry, and Mr. Sullivan, respectively. /(3)/ Year 2001 options were granted at an exercise price of $19.05 per share; year 2000 options were granted at an exercise price of $15.75 per share; year 1999 options were granted at an exercise price of $17.00 per share. /(4)/ $8,500, $7,680, and $8,000 were contributed for Mr. Dillon, $6,125, $5,773, and $5,210 were contributed for Mr. Cherry, and $5,364, $4,980, and $4,975 were contributed for Mr. Sullivan under the Bank's Profit-Sharing Plan for 2001, 2000, and 1999, respectively. $6,218, $6,218, and $6,736 were contributed for Mr. Dillon and $18,334, $18,334, and $19,861 were contributed for Mr. Sullivan under the Bank's Split-Dollar Insurance Program for 2001, 2000, and 1999, respectively. $8,500, $8,000, and $8,000 were contributed for Mr. Dillon, $6,200, $6,000, and $5,200 were contributed for Mr. Cherry, and $5,350, $5,175, and $4,975 were contributed for Mr. Sullivan under the Bank's 401(k) Plan for 2001, 2000, and 1999, respectively. $5,300 and $5,635 were contributed for Mr. Dillon and $10,400 and $10,000 for Mr. Cherry, under the Company's Executive Deferred Compensation Plan for 2001 and 2000, respectively. Stock Options and SAR. The following table shows all grants of options to Messrs. Dillon, Cherry, and Sullivan in 2001: Option/SAR Grants in Last Fiscal Year Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term -------------------------------------------------------------------- --------------- % of Total Options Granted Exercise or Options to Employees in Base Price Expiration 5% 10% Name Granted (#) (1) Fiscal Year ($/Sh) Date ($) ($) ---- --------------- ----------- ------ ---- --- --- Larry G. Dillon 3,500 6.23% $19.05 12/17/11 $41,932 $106,263 Thomas F. Cherry 2,500 4.45% 19.05 12/17/11 29,951 75,902 Gari B. Sullivan 2,000 3.56% 19.05 12/17/11 23,961 60,722 /(1)/ Vesting is as follows: 100% on December 18, 2006. Option/SAR Exercises and Holdings. The following table shows stock options exercised by Messrs. Dillon, Cherry, and Sullivan in 2001. 6 Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Options/SAR Values Value of Unexercised Number of Unexercised In-the-Money Options at Options at Shares December 31, 2001 (#) December 31, 2001($) Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized ($) Unexercisable Unexercisable ---- ------------ ------------ ------------- ------------- Larry G. Dillon 2,000 $18,000 17,700/ $141,613/ 10,500 28,700 Thomas F. Cherry -- -- 5,500/ 30,313/ 7,500 20,500 Gari B. Sullivan 3,000 15,700 2,700/ 11,063/ 6,000 16,400 Change in Control Agreements The Company has entered into "change in control agreements" with Mr. Dillon and Mr. Cherry. The agreement for Mr. Dillon provides certain payments and benefits in the event of a termination of his employment by the Company without "cause," or by Mr. Dillon for "good reason," during the period beginning on the occurrence of a "change in control" (as defined in the agreement) of the Company and ending sixty-one days after the second anniversary of the change in control date. In such event, Mr. Dillon would be entitled (i) to receive in 12 consecutive quarterly installments, or in a lump sum, two and one-half times the sum of his highest aggregate annual base salary during the 24 month period preceding the change in control date and his highest aggregate annual bonus for the three fiscal years preceding the change in control date; (ii) for a period of three years following termination, to receive continuing health insurance, life insurance, split-dollar insurance, and similar benefits under the Company's welfare benefit plans and to have the three year period credited as service towards completion of any service requirement for retiree coverage under the Company's welfare benefit plans; and (iii) if Mr. Dillon requests within one year after his termination to have the Company acquire his residence for its appraised fair market value. The agreement for Mr. Cherry provides certain payments and benefits in the event of a termination of his employment by the Company without "cause," or by Mr. Cherry for "good reason," during the period beginning on the occurrence of a "change in control" (as defined in the agreement) of the Company and ending sixty-one days after the first anniversary of the change in control date. In such event, Mr. Cherry would be entitled (i) to receive in four consecutive quarterly installments, or in a lump sum, the sum of his highest aggregate annual base salary during the 24 month period preceding the change in control date and his highest aggregate annual bonus for the three fiscal years preceding the change in control date; and (ii) for a period of one year following termination, to receive continuing health insurance, life insurance, and similar benefits under the Company's welfare benefit plans and to have the one year period credited as service towards completion of any service requirement for retiree coverage under the Company's welfare benefit plans. During the term of the agreements following a change in control, Mr. Dillon or Mr. Cherry may voluntarily terminate his employment and become entitled to these payments and benefits under certain circumstances. These circumstances include, but are not limited to, a material adverse change in his position, authority, or responsibilities, or a reduction in his rate of annual base salary, benefits (including incentives, bonuses, stock compensation, and retirement and welfare plan coverage), or other perquisites as in effect immediately prior to the change in control date. Payments and benefits provided under the agreements will be reduced, if and to the extent necessary, so that Mr. Dillon and Mr. Cherry will not be subject to a federal excise tax on, and the Company will not be denied an income tax deduction on account of having made, excess parachute payments. 7 Employee Benefit Plans The Bank has a Non-Contributory Defined Benefit Retirement Plan (the "Retirement Plan") covering substantially all employees who have reached the age of 21 and have been fully employed for at least one year. The Retirement Plan provides participants with retirement benefits related to salary and years of credited service. Employees become vested after five plan years of service, and the normal retirement date is the plan anniversary date nearest the employee's 65th birthday. The Retirement Plan does not cover directors who are not active employees. The amount expensed for the Retirement Plan during the year ended December 31, 2001, was $177,672. The following table shows the estimated annual retirement benefits payable to employees in the average annual salary and years of service classifications set forth below assuming retirement at the normal retirement age of 65. Consecutive Five-Year Years of Credited Service Average Salary 15 20 25 30 35 --------------------- ------ ------ ------ ------ ------ $ 25,000 $ 4,688 $ 6,250 $ 7,813 $ 8,750 $ 9,688 40,000 7,815 10,420 13,025 14,630 16,235 55,000 12,315 16,420 20,525 23,255 25,985 75,000 18,315 24,420 30,525 34,755 38,985 100,000 25,815 34,420 43,025 49,130 55,235 125,000 33,315 44,420 55,525 63,505 71,485 150,000 40,815 54,420 68,025 77,880 87,735 170,000 46,815 62,420 78,025 89,380 100,735 Benefits under the Retirement Plan are based on a straight life annuity assuming full benefit at age 65, no offsets, and covered compensation of $35,400 for a person age 65 in 2000. Compensation is currently limited to $170,000 by the Internal Revenue Code, but is anticipated to increase to $200,000, effective October 1, 2002. The estimated annual benefit payable under the Retirement Plan upon retirement is $90,511, $58,109, and $24,033 for Messrs. Dillon, Cherry, and Sullivan, respectively, credited with 40 years of service for Messrs. Dillon and Cherry and 15 years of service for Mr. Sullivan. Benefits are estimated on the basis that they will continue to receive, until age 65, covered salary in the same amount paid in 2001. Compensation Committee Report on Executive Compensation The Compensation Committee (the "Committee"), which is composed of non-employee Directors of the Company and the Bank listed below, recommends to the Board of Directors of the Bank (the "Bank Board") the annual salary levels and any bonuses to be paid to the Bank's executive officers. The Committee also makes recommendations to the Bank Board regarding the issuance of stock options and other compensation related matters. Currently, the individuals serving as Chief Executive Officer and executive officers of the Company also serve in the same capacities, respectively, for the Bank. These officers are presently compensated for services rendered by them to the Bank, but not for services rendered by them to the Company. The primary objective of the Bank's executive compensation program is to attract and retain highly skilled and motivated executive officers who will manage the Bank in a manner that will promote its growth and profitability and advance the interest of the Company's shareholders. As such, the compensation program is designed to provide levels of compensation which are reflective of both the individual's and the organization's performance in achieving the organization's goals and objectives, both financial and non-financial, and in helping to build value for the Company's shareholders. Based on its evaluation of these factors, the Committee believes that the executive officers are dedicated to achieving significant improvements in long-term financial performance 8 and that the compensation plans the Committee has implemented and administered have contributed to achieving this management focus. The principal elements of the Bank's compensation program include base annual salary, split-dollar insurance participation, short-term incentive compensation under the Bank's Management Incentive Bonus Plan (detailed below), long-term incentives through the grants of stock options under the Incentive Plan (detailed below), and employer contributions under the amended Executive's Deferred Compensation Plan (detailed below). The Bank adopted a Management Incentive Bonus Plan (the "Bonus Plan") effective January 1, 1987. The Bonus Plan is offered to selected members of management. The bonus is derived from a pool of funds determined by the Bank's total performance relative to (1) prescribed growth rates of assets and deposits, (2) return on average assets, and (3) absolute level of net income. Attainment, in whole or in part, of these goals dictates the amount set aside in the pool of funds. Evaluation of attainment and approval of the pool amount is done by the Bank Board. Payment of the bonus is based on individual performance and paid in cash as a percentage of the respective individual's base salary. Expense is accrued in the year of the specified performance. The Company adopted the 1994 Incentive Stock Option Plan (the "Incentive Plan") effective May 1, 1994. The Incentive Plan was amended by the Company on February 15, 2000. The Incentive Plan makes available up to 500,000 shares of common stock for awards to key employees of the Company and its subsidiaries in the form of stock options, stock appreciation rights, and restricted stock. The purpose of the Incentive Plan is to promote the success of the Company and its subsidiaries by providing incentives to key employees that will promote the identification of their personal interests with the long term financial success of the Company and with growth in shareholder value. The Incentive Plan is designed to provide flexibility to the Company in its ability to motivate, attract, and retain the services of key employees upon whose judgment, interest, and special effort the successful conduct of its operation is largely dependent. In considering compensation for the Chief Executive Officer and the other executive officers, the Committee relied on compensation surveys and an evaluation of the officers' levels of responsibility and performance. In 2000, the Committee used the following compensation surveys to assist in developing its recommendation on compensation for 2001: the SNL Executive Compensation Review; the Sheshunoff Bank Executive and Director Compensation Survey; and the Virginia Bankers Association's Salary Survey of Virginia Banks. The Committee believes that these are relevant and appropriate indicators of compensation paid by the Bank's competitors. The Committee received an evaluation by the Chief Executive Officer of the performance of the executive officers (other than the Chief Executive Officer) during 2000. The Committee evaluated the performance of the Chief Executive Officer based on the financial performance of the Company and the Bank, achievements in implementing the Bank's long-term strategy, and the personal observations of the Chief Executive Officer's performance by the members of the Committee. No particular weight was given to any one aspect of the performance of the Chief Executive Officer, but his performance in 2000 was evaluated as outstanding, with the Company and the Bank achieving earnings in excess of its peer group and significant progress being made on the Bank's long-term strategy. Based on the salary surveys and the performance evaluations, the Committee generally set base annual salaries for the Chief Executive Officer and the other executive officers in the median range of salaries contained in the various surveys for comparable positions. The Committee also reviews each executive officer's performance and responsibility to assess the payment of short-term incentive compensation. The Committee uses the compensation surveys and considers the performance of the Bank relative to its peer group, taking into consideration profit growth, asset growth, return on equity, and return on assets. No particular weight is given to each of these elements. The cash bonuses were given based upon the role of such officers in the growth and profitability of the Bank in 2001. Each year, the Committee also considers the desirability of granting long-term incentive awards under the Company's Incentive Plan. The Committee believes that grants of options focus the Bank's senior management on building profitability and shareholder value. The Committee notes in particular its view that 9 stock option grants afford a desirable long-term compensation method because they closely ally the interest of management with shareholder value. In fixing the grants of stock options with the senior management group, other than the Chief Executive Officer, the Committee reviewed with the Chief Executive Officer recommended individual awards, taking into account the respective scope of responsibility and contributions of each member of the senior management group. The award to the Chief Executive Officer was fixed separately and was based, among other things, on the review of competitive compensation data from selected peer companies and information on his total compensation, as well as, the Committee's perception of his past and expected future contributions to the Company's achievement of its long-term goals. For 2000 and ensuing years, the Committee determined that additional retirement funding for select executives is appropriate and should be provided by amending its non-qualified defined contribution plan known as the Executive's Deferred Compensation Plan (which previously only provided for elective salary and bonus deferrals). These employer contributions are in the form of additional retirement contributions to make up for arbitrary limitations on covered compensation imposed by the Internal Revenue Code with respect to the Bank's Profit Sharing / 401(k) Plans and to enhance retirement benefits by providing supplemental contributions from time to time on such basis as the Committee and the Board determine. Compensation Committee J. P. Causey Jr. - Chairman Barry R. Chernack James H. Hudson III Thomas B. Whitmore Jr. Compensation Committee Interlocks and Insider Participation During 2001 and up to the present time, there were transactions between the Company's banking subsidiary and certain members of the Compensation Committee or their associates, all consisting of extensions of credit by the Bank in the ordinary course of business. Each transaction was made on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions with the general public. In the opinion of management, none of the transactions involved more than the normal risk of collectibility or present other unfavorable features. None of the members of the Compensation Committee has served as an officer or employee of the Company or any of its affiliates. No director may serve as a member of the Committee if he is eligible to participate in the Incentive Plan or was at any time within one year prior to his appointment to the Committee eligible to participate in the Incentive Plan. Report of the Audit Committee The Audit Committee of the Board of Directors of the Company (the "Board"), which consists entirely of directors who meet the independence requirements of Rule 4200(a)(15) of the National Association of Securities Dealers listing standards, has furnished the following report: The Audit Committee assists the Board in overseeing and monitoring the integrity of the Company's financial reporting process, its compliance with legal and regulatory requirements and the quality of its internal and external audit processes. The role and responsibilities of the Audit Committee are set forth in a written Charter adopted by the Board. The Audit Committee reviews and reassesses the Charter annually and recommends any changes to the Board for approval. The Audit Committee is responsible for overseeing the Company's overall financial reporting process. In fulfilling its oversight responsibilities for the financial statements for fiscal year 2001, the Audit Committee: 10 . Reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2001 with management and Yount, Hyde & Barbour, P.C. ("YHB"), the Company's independent accountants; . Discussed with YHB the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit; and . Received written disclosures and the letter from YHB regarding its independence as required by Independence Standards Board Standard No. 1. The Audit Committee discussed with YHB their independence. The Audit Committee also considered the status of pending litigation, taxation matters and other areas of oversight relating to the financial reporting and audit process that the Audit Committee determined appropriate. In performing all of these functions, the Audit Committee acts only in an oversight capacity. The Audit Committee does not complete its reviews prior to the Company's public announcements of financial results. Also, in its oversight role, the Audit Committee relies on the work and assurances of the Company's management, which has the primary responsibility for financial statements and reports, and of the independent auditors, who, in their report, express an opinion on the conformity of the Company's annual financial statements to generally accepted accounting principles. Based on the Audit Committee's review of the audited financial statements and discussions with management and YHB, the Audit Committee recommended to the Board that the audited financial statements be included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 for filing with the Securities and Exchange Commission. Audit Committee Barry R. Chernack, Chairman J. P. Causey Jr Joshua H. Lawson William E. O'Connell Jr. Paul C. Robinson Principal Accounting Fees Audit Fees. During 2001, the Company paid its principal accounting firm, Yount, Hyde & Barbour, P.C., $55,500 in audit fees including reviews of Form 10-Qs and Form 10-K. The Company paid Yount, Hyde & Barbour, P.C. an additional $19,100 for other services. These primarily consist of fees for tax matters, employee benefit financial statement audits and compliance attestation services. The Audit Committee has reviewed such services and does not believe they impair the independence of Yount Hyde & Barbour, P. C. Financial Information System Design and Implementation Fees. The Company paid no fees to Yount, Hyde & Barbour, P.C. for services regarding financial information system design and implementation. 11 Performance Graph The following graph compares the yearly cumulative total shareholder return on the Company's common stock with (1) the yearly cumulative total shareholder return on stocks included in the NASDAQ stock index and (2) the yearly cumulative total shareholder return on stocks included in the Independent Bank Index prepared by the Carson Medlin Company. The Independent Bank Index is the compilation of the total return to shareholders over the past five years of a group of twenty-three independent community banks located in the southeastern states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. There can be no assurance that the Company's stock performance will continue into the future with the same or similar trends depicted in the graph below. C&F FINANCIAL CORPORATION Five Year Performance Index [GRAPH] 1996 1997 1997 1999 2000 2001 ---- ---- ---- ---- ---- ---- C&F FINANCIAL CORPORATION 100 143 211 198 174 247 INDEPENDENT BANK INDEX 100 148 154 140 139 165 NASDAQ INDEX 100 122 173 321 193 153 12 Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires directors, executive officers, and 10% beneficial owners of the Company's common stock to file reports concerning their ownership of common stock. The Company believes that its officers and directors complied with all filing requirements under Section 16(a) of the Securities Exchange Act of 1934 during 2001. PROPOSAL TWO RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors, subject to ratification by the shareholders, has appointed Yount, Hyde & Barbour, P.C. as independent public accountants for the current fiscal year ending December 31, 2002. A representative of Yount, Hyde & Barbour, P.C. will be present at the Annual Meeting and will be given the opportunity to make a statement and respond to appropriate questions from the shareholders. Unless marked to the contrary, the shares represented by the enclosed proxy card, if executed and returned, will be voted FOR the ratification of the appointment of Yount, Hyde & Barbour, P.C. as the independent public accountants of the Company. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF YOUNT, HYDE & BARBOUR, P.C. AS INDEPENDENT PUBLIC ACCOUNTANTS. As of the date of this Proxy Statement, management of the Company has no knowledge of any matters to be presented for consideration at the Annual Meeting other than those referred to above. If any other matters properly come before the Annual Meeting, the persons named in the accompanying proxy intend to vote such proxy, to the extent entitled, in accordance with their best judgment. OTHER BUSINESS 13 SHAREHOLDER PROPOSALS FOR 2003 ANNUAL MEETING If any shareholder intends to present a proposal to be considered for inclusion in the Company's proxy materials in connection with the 2003 Annual Meeting, the proposal must be in proper form and must be received by the Company's Secretary, at the Company's principal office in West Point, Virginia, on or before November 15, 2002. In addition, if a shareholder intends to present a proposal for action at the 2003 Annual Meeting, the shareholder must provide the Company with notice thereof on or before January 29, 2003, by delivering such notice to the Company's Secretary. By Order of the Board of Directors, /s/ Gari B. Sullivan Gari B. Sullivan Secretary West Point, Virginia March 15, 2002 A copy of the Company's Annual Report on Form 10-K Report (including exhibits) as filed with the Securities and Exchange Commission for the year ended December 31, 2001, will be furnished without charge to shareholders upon written request directed to the Company's Secretary as set forth on the first page of this Proxy Statement. 14 This Proxy is solicited on behalf of the Board of Directors C&F FINANCIAL CORPORATION The undersigned hereby appoints Larry G. Dillon and James H. Hudson III, jointly and severally as proxies, with full power to act alone, and with full power of substitution to represent the undersigned, and to vote all shares of the Company standing in the name of the undersigned as of February 26, 2002, at the annual meeting of shareholders to be held Tuesday, April 16, 2002 - 3:30 p.m. at the Father van den Boogaard Center, 3510 King William Avenue, West Point, Virginia, or any adjournments thereof, on each of the following matters. This proxy, when properly executed, will be voted in the manner directed by the undersigned shareholder. If no direction is made, this proxy will be voted FOR each proposal and on other matters at the discretion of the proxy agents. (Continued and to be signed on Reverse Side) Please sign, date and mail your proxy card back as soon as possible! Annual Meeting of Shareholders C&F FINANCIAL CORPORATION April 16, 2002 . Please Detach and Mail in the Envelope Provided . ------------------------------------------------------------------------------------------------------------------------------------ Please mark your A [X] votes as in this example. FOR all nominees WITHHELD (except as marked to from all the contrary below). nominees. 1. To elect Three Class III FOR AGAINST ABSTAIN directors to [_] [_] Nominees: 2. Proposal to ratify the serve until the J.P. Causey Jr. appointment of Yount, 2000 Annual Meeting of Shareholders, or Barry R. Chernack Hyde & Barbour, P.C. [_] [_] [_] until their successors are elected and William E. O'Connell Jr. as independent public qualified, as instructed below. accountants of the (Instruction: To withhold authority to Company for 2002. vote for any nominees(s), write that nominee(s) name on the space provided below.) 3. The transaction of any other business as may ______________________________________________ properly come before the Annual Meeting or any adjournment thereof. Management presently knows of no other business to be represented at the Annual Meeting. Meeting Attendance ------------------ I plan to attend the annual meeting on Tuesday, April 16th, 2002 at the location printed on the back. I will also note the number of attendees. Will Will not Attend [_] Attend [_] Meeting Meeting Number of Attendees _____________________________ Signature____________________________________________ ___________________________________________ Dated: ________________, 2002 NOTE: Please sign your name(s) exactly as shown imprinted hereon. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, (trustee, or guardian, please give full title as such. If a corporation, please sign full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. ------------------------------------------------------------------------------------------------------------------------------------ End of Filing © 2005 | EDGAR Online, Inc.
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