2004 Annual Report
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.
Return on Average Equity
18.93% 19.62%
21.32%
15.99%
16.78%
2000
2001
2002
2003
2004
Return on Average Assets
2.35%
2.19%
2.09%
1.91%
1.76%
25%
20%
15%
10%
5%
0%
2.5%
2.0%
1.5%
1.0%
0.5%
0%
Financial Highlights
C&F Financial Corporation is a one-bank holding company with
administrative offices in West Point, Virginia. Its wholly-owned
subsidiary, Citizens and Farmers Bank (referred to as “C&F Bank”), offers
quality banking services to individuals, professionals and small businesses
through fourteen retail bank branches located throughout the Newport
News to Richmond corridor in Virginia. C&F Mortgage Corporation
2000
2001
2002
2003
2004
originates and sells residential mortgages. These mortgage services are
provided through ten offices in Virginia, four offices in Maryland and one
each in Delaware, North Carolina and New Jersey. Through its sub-
sidiaries, C&F Mortgage provides ancillary mortgage loan production
services for loan settlement, residential appraisals and private mortgage
insurance. C&F Finance Company, formerly Moore Loans, Inc., special-
izes in new and used automobile lending in the Richmond, Hampton
Roads and Northern Virginia markets, as well as portions of Tennessee and
Maryland. Brokerage services are offered through C&F Investment
Services, Inc. C&F Title Agency, Inc. offers title insurance services.
Focused on You
2 0 0 4 A N N U A L R E P O R T
Net Income
(dollars in thousands)
$15,000
$12,000
$9,000
$6,000
$5,836
$9,765
$7,989
$12,919
$11,198
15
12
$3,000
$0
$4.00
$3.00
$2.00
$1.00
$0
2000
2001
2002
2003
2004
Earnings Per Share
(assuming dilution)
$3.42
$3.00
$2.67
$2.23
$1.60
2000
2001
2002
2003
2004
1
LETTER from the PRESIDENT
INTEGRITY
Dear Fellow Shareholders:
It is a pleasure to present C&F Financial Corporation’s results for 2004.
Although we did not set a new earnings record as we have in each of the past three
years, we are extremely satisfied with our achievements, especially compared with
the results of our peer banks. In fact, given the changes in the economy and other
challenges we faced, I believe that management at all three of our primary business
units did a better job this year than in the record-setting years.
Net income for 2004 was $11.2 million compared with $12.9 million for
2003. As we had anticipated, higher interest rates resulted in a decline in
mortgage loan production and hence our Mortgage Banking segment’s income.
However, this decline was partially offset by increased income at both the Retail
Banking and Consumer Finance segments. Our return on average assets was
1.91 percent in 2004 versus 2.35 percent in 2003, and our return on equity was
16.78 percent versus 21.32 percent. At September 30, 2004, the last period for
which data is available, our peer banks averaged a return on average assets of
1.07 percent and a return on equity of 11.91 percent. For this same period, we
ranked in the top 6 percent of our peers on a return on assets basis and the top
13 percent on a return on equity basis.
We continued our growth in assets, going from $574 million to $609 million,
and in deposits, going from $428 million to $447 million. A $44 million increase
in loans, from $350 million to $394 million, was a major contributor to the
improved results at our Retail Banking and Consumer Finance segments.
This growth resulted in a $2.2 million increase in interest income and an
improvement in the interest margin from 6.14 percent to 6.41 percent.
We increased the quarterly dividends declared on our common stock by 20
percent, from 20 cents per share to 24 cents per share. Over the past two years,
Personal
The year 2004 was a busy
one for your company.
We undertook many
new initiatives – some to
enhance future earnings,
you have seen quarterly dividends increase 50 percent. We have been successful
some to enhance future
through stock price increases.
meet new government
efficiencies and some to
over the years and want our shareholders to share in that success other than
Community
Larry G. Dillon
Chairman, President and
Chief Executive Officer
precipitated by the unethical and illegal actions of a few large companies, but
new initiatives – some to enhance future earnings, some to enhance future
The year 2004 was a busy one for your company. We undertook many
In 2002, Congress passed the Sarbanes-Oxley Act, legislation that was
efficiencies and some to meet new government regulation.
regulation.
2
C & F F I N A N C I A L C O R P O R A T I O N
EGRITY Focused on You
which applies to all public companies, most of which are run effectively and
with high ethical standards, such as ours is. It is a shame that Congress saw the
need to try to legislate sound management practices in all companies when only
a few were guilty of misdoings. Our compliance with this regulation cost the
company at least $200,000 in direct expenses plus the countless man-hours that
could have been more productively used in enhancing earnings and hence your
investment. The compliance process, however, did reaffirm our confidence in
our financial controls and the integrity of our employees.
The majority of our 2004 initiatives were focused on maintaining a firm
foundation for future earnings. Early in the year, we commissioned a market
study that revealed several important facts. First, the use of various names for
our subsidiaries was confusing to existing and potential customers and likely
resulted in our missing some business opportunities. Second, customers
recognized “C&F” for it’s personalized service, integrity, stability and sense of
Personalized
Treating people as individuals,
not a number, means listening
to what the customer wants to
accomplish and responding quickly
with customized service.
Integrity
This honest and trustworthy
company has an extensive track record
for treating customers and employees
in a fair open way.
customers and employees alike.
We made a difficult decision this year when we chose to move some of our
names. For example, we will now be C&F Bank in all our banking markets and
recognized and respected and we would benefit by associating that brand with
community. Finally, the study indicated that the “C&F” brand is highly
addition, we have adopted the tagline “Focused on You” throughout the
company to emphasize the personalized service that is well recognized by
the Consumer Finance segment will be known as C&F Finance Company. In
all our businesses. As a result, we have begun to use “C&F” in all our subsidiary
Personal
nity
“soul searching” by both our management team and the Board of Directors.
difficult to attract the number of qualified individuals that we need from the
operations out of the Town of West Point. Unfortunately, we have outgrown our
commuters, has already proven beneficial to attracting experienced talent,
needs came after much research and many hours of intense discussions and
operations facilities in West Point and over the past few years have found it more
and we anticipate that its close proximity to West Point will enable our staff
The facility’s close proximity to Interstate 64, and therefore easy access to
facility only 12 miles outside of West Point and renovate it to meet our
living in town to remain there. Again, this was a difficult decision we wished
Our decision to purchase, at a reasonable price, a 60,000-square-foot-
small workforce available in the immediate area.
Stability
At a time when new banks are being
formed, or established ones being
sold, we have a record of employee
stability and officer continuity that
includes only three presidents in
over 75 years of service.
Hospitable
Wholesome and friendly people
throughout make customers feel
welcomed and comfortable – almost
as if they were part of a family.
Community
By always being supportive, we thrive
on becoming part of the communities
where our customers live and work.
Teamwork
All areas work together
to meet the financial services needs
of customers.
2 0 0 4 A N N U A L R E P O R T
3
HOSPITABLE
What
Customers
Say
Personalized
To have my personal needs met
is the reason I do business with
C&F Mortgage Corporation.
– C&F Mortgage Corporation Customer
When so many companies lack
personal service, it’s a pleasure to
walk into my investment office
and be treated like I’m an
important customer.
– C&F Investment Services Customer
As a business client,
it is very important for the
company to know me and
my business needs.
– C&F Finance Company Customer
Integrity
I want to be able to rely
on my bank.
– C&F Bank Customer
I would not want to put my
money with people that
I could not trust.
– C&F Investment Services Customer
When I go to the bank I like to
feel confident they are helping me.
– C&F Bank Customer
I like a bank where I can
TRUST the employees and
institution to be honest and fair.
– C&F Bank Customer
we had not had to make, but one we believed to be in the best interest of the
Company.
We also made good strides to improve the future earnings from each of our
segments. At C&F Mortgage, we opened a Waldorf, Maryland, office that
proved to be a productive and profitable addition. We also opened a settlement
company in Charlottesville, Virginia that reached profitability in a much shorter
timeframe than was anticipated.
At C&F Finance, we implemented a new loan origination system that
greatly increased our speed and efficiency in approving and booking loans and
expect this new system, in conjunction with new procedures, to assist us in
improving our loan quality. Through the hiring of new lending personnel, we
also entered the markets of Nashville, Tennessee, and the state of Maryland.
At C&F Bank, our entrance into the Peninsula market exceeded our
expectations for both growth and profitability. We were fortunate to attract a
giving the Bank new talents and positively changing our portfolio, geographic
group of lenders who have a combined total of more than 100 years’ experience,
Stability
take better advantage of the synergies between our various companies and create
and product mixes. Other changes helped us better cross-sell many new
products between C&F Bank and C&F Mortgage. We are just beginning to
our own “niche” through the utilization and cross-selling of products from all of
our companies.
As 2004 has been busy, 2005 will be as well. We will implement new
technology throughout many areas of the company. Our new operations center
will open this Spring with a new mainframe computer system that utilizes a
major upgrade in our primary software system. At C&F Bank, we plan to
upgrade all our bank branch technology and implement new loan automation
software similar to that already in place at C&F Mortgage and C&F Finance.
In addition, we plan to implement a major enhancement of our web site to
support a more sophisticated cash management system for commercial deposit
customers.
In the later part of this year, we will open two C&F Bank branches on the
Peninsula, one in Hampton and one in lower Yorktown. Both will be full-service
banking facilities, with the Hampton location also housing the local office of
4
C & F F I N A N C I A L C O R P O R A T I O N
What
Employees
Say
Personalized
The personal service is the reason
people bank here.
– C&F Bank/Head Teller/CSR
We are people who truly care
about our clients’ financial needs.
– C&F Bank/Marketing Director
C&F provides customers an
intimate and caring
relationship across
C&F Financial Corporation.
– C&F Investment Services/Manager
The best word to describe our
organization is “personal.”
– C&F Finance Company, CEO
We do whatever we can to
make certain that whoever we
are on the phone with is most
important at that time.
– C&F Title Agency/Manager
Our goal as a company is to be the financial institution
of choice in the markets we serve, and we make every effort
to obtain that goal. This expectation could never be
achieved without an exceptional group of officers and staff,
and we believe we have the best.
C&F Finance and the Yorktown location housing our Peninsula management
and commercial lending officers.
As we have in the past, we will continue to use a three-prong approach to
managing our capital. We will continue to grow the company in a controlled
manner; we will continue to increase our dividends to shareholders; and we will
continue to repurchase our stock. We believe this plan will maintain C&F as a
long-term company that gives its shareholders a good return on their
investment.
In closing, I want to note the recent loss of P. Loy Harrell, who served as a
director of the Bank for more than 35 years. Loy was a friend to all who knew
him and was a close friend and confidant of mine for many years. I continued
to seek his advice even after he stepped down from the Board in 2002. He had
a great business mind, was a true gentleman and will be greatly missed.
Our goal as a company is to be the financial institution of choice in the
markets we serve, and we make every effort to obtain that goal. This expectation
could never be achieved without an exceptional group of officers and staff, and
we believe we have the best. Our thanks go out to them for all of their dedicated
service and to our Board for their continuing guidance and support. We also
thank each of you for your continued confidence as shown by your patronage
and hope that we make you so proud that you will always refer your friends and
acquaintances to us as we strive to enhance your investment in our organization.
Teamwork
Larry G. Dillon
Chairman, President and Chief Executive Officer
2 0 0 4 A N N U A L R E P O R T
5
DIRECTORS and OFFICERS
C&F Bank — (Front, left to right) Joshua H. Lawson, William E. O’Connell Jr., Thomas B. Whitmore Jr.,
Bryan E. McKernon and Audrey D. Holmes (Back, left to right) Barry R. Chernack, J. P. Causey Jr.,
Larry G. Dillon, C. Elis Olsson, James H. Hudson III and Paul C. Robinson
SANDSTON/VARINA
ADVISORY BOARD
Robert A. Canfield
Attorney-at-Law
Canfield, Shapiro, Baer, Heller & Johnston
E. Ray Jernigan
Business Owner
Citizens Machine Shop
S. Floyd Mays
Insurance Agent/Owner
Floyd Mays Insurance
James M. Mehfoud
Pharmacist/Business Owner
Sandston Pharmacy
Robert F. Nelson Jr.
Professional Engineer
Engineering Design Associates
Reginald H. Nelson IV
Senior Partner
Colonial Acres Farm
John G. Ragsdale II
Business Owner
Sandston Cleaners
Philip T. Rutledge Jr.
Retired Deputy County Manager
County of Henrico
Sandra W. Seelmann
Real Estate Broker/Owner
Varina & Seelmann Realty
C&F FINANCIAL CORPORATION/
C&F BANK
J. P. Causey Jr.*+
Executive 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
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
William E. O’Connell Jr.*+
Chessie Professor of Business, Emeritus
The College of William and Mary
C. Elis Olsson+
Director of Operations
Martinair, Inc.
Paul C. Robinson*+
Owner & President
Francisco, Robinson & Associates, Realtors
Thomas B. Whitmore Jr.+
Retired President
Whitmore Chevrolet, Oldsmobile,
Pontiac Co., Inc.
* C&F Financial Corporation Board Member
+ C&F Bank Board Member
C&F BANK/RICHMOND
Jeffery W. Jones
Chairman & CEO
WFofR, Incorporated
S. Craig Lane
President
Lane & Hamner, P.C.
William E. O’Connell Jr.
Chairman of the Board
Chessie Professor of Business, Emeritus
The College of William and Mary
Meade A. Spotts
President
Spotts, Fain, P.C.
Scott E. Strickler
Treasurer
Robins Insurance Agency, Inc.
Katherine K. Wagner
Senior Vice President
Commercial Lending
C&F Bank/Richmond
C&F MORTGAGE
CORPORATION
J. P. Causey Jr.
Executive 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, Emeritus
The College of William and Mary
Paul C. Robinson
Owner & President
Francisco, Robinson & Associates, Realtors
INDEPENDENT PUBLIC
ACCOUNTANTS
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
CORPORATE COUNSEL
Hudson & Bondurant, P.C.
West Point, Virginia
6
C & F F I N A N C I A L C O R P O R A T I O N
OFFICERS and LOCATIONS
C&F BANK
ADMINISTRATIVE OFFICE
802 Main Street
West Point, Virginia 23181
(804) 843-2360
Larry G. Dillon *
Chairman, President & CEO
Robert L. Bryant *
Executive Vice President & COO
Thomas F. Cherry *
Executive Vice President, CFO & Secretary
Ronald P. Espy
Senior Vice President & Senior Lending
Officer
Martin E. Schrodt
Senior Vice President, Retail Operations
Laura H. Shreaves
Senior Vice President & Director of Human
Resources
William J. Callaghan
Vice President, Information Technology
E. Turner Coggin
Vice President, Senior Loan Underwriter
Sandra S. Fryer
Vice President, Special Projects Leader
Deborah H. Hall
Vice President, Credit Administration
Ellen M. Howard
Vice President & Loan Operations Manager
Deborah R. Nichols
Vice President, Quality Control
Mary-Jo Rawson
Vice President & Controller
Evelyn Townsend
Vice President, Operations
* Officers of C&F Financial Corporation
WEST POINT – MAIN OFFICE
802 Main Street
West Point, Virginia 23181
(804) 843-2360
Margaret C. Cooper
Assistant Vice President & Branch Manager
JAMESTOWN ROAD
1167 Jamestown Road
Williamsburg, Virginia 23185
(757) 220-3293
Alec J. Nuttall
Assistant Vice President & Branch Manager
LONGHILL ROAD
4780 Longhill Road
Williamsburg, Virginia 23188
(757) 565-0593
Sandra C. St. Clair
Assistant Vice President & Branch Manager
MECHANICSVILLE
7021 Mechanicsville Turnpike
Mechanicsville, Virginia 23111
(804) 569-9776
Ranee Blanton-Clifford
Assistant Vice President & Branch Manager
MIDDLESEX
Route 33 at Route 641
Saluda, Virginia 23149
(804) 758-3641
Elizabeth B. Faudree
Assistant Vice President & Branch Manager
NORGE
7534 Richmond Road
Norge, Virginia 23127
(757) 564-8114
Robert J. Unangst
Assistant Vice President & Branch Manager
PROVIDENCE FORGE
3501 N. Courthouse Road
Providence Forge, Virginia 23140
(804) 966-2264
James D. W. King
Vice President & Branch Manager
QUINTON
2580 New Kent Highway
Quinton, Virginia 23141
(804) 932-4383
Mary T. ‘‘Joy’’ Whitley
Assistant Vice President & Branch Manager
SANDSTON
100 East Williamsburg Road
Sandston, Virginia 23150
(804) 737-7005
Katherine P. Buckner
Assistant Vice President & Branch Manager
VARINA
Route 5 at Strath Road
Richmond, Virginia 23231
(804) 795-7000
Tracy E. Pendleton
Vice President & Branch Manager
WEST POINT – 14TH STREET
415 Fourteenth Street
West Point, Virginia 23181
(804) 843-2708
Karen T. Richardson
Assistant Vice President & Branch Manager
CONSTRUCTION LENDING OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8351
Terrence C. Gates
Vice President, Real Estate Construction
C&F BANK / RICHMOND
ADMINISTRATIVE OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 378-0332
Katherine K. Wagner
Senior Vice President, Commercial Lending
Charles T. Nuttle
Vice President, Commercial Lending
MIDLOTHIAN
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 378-0332
Jesse E. Bullard
Vice President & Branch Manager
RICHMOND
8001 West Broad Street
Richmond, Virginia 23294
(804) 290-0402
Kevin L. Ford
Assistant Vice President & Branch Manager
C&F BANK / PENINSULA
ADMINISTRATIVE OFFICE
City Center
698 Town Center Drive
Newport News, Virginia 23606
(757) 596-4775
Vern E. Lockwood II
President
Lori D. Sarrett – Newport News
Vice President, Commercial Lending
Bonnie S. Smith – Newport News
Vice President, Real Estate Lending
Deborah H. Linkenauger – Williamsburg
Vice President, Commercial Lending
(757) 220-6623
NEWPORT NEWS – CITY CENTER
698 Town Center Drive
Newport News, Virginia 23606
(757) 596-4775
Joycelyn Y. Spight
Assistant Vice President & Branch Manager
C&F INVESTMENT SERVICES, INC.
417 Fourteenth Street
West Point, Virginia 23181
(804) 843-4584 (800) 583-3863
Eric F. Nost
President
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 378-7296 (888) 435-2033
Douglas L. Hartz
Vice President
1167 Jamestown Road
Williamsburg, Virginia 23185
(757) 229-5629
Douglas L. Cash Jr.
Vice President
2 0 0 4 A N N U A L R E P O R T
7
OFFICERS and LOCATIONS
C&F MORTGAGE CORPORATION
ADMINISTRATIVE OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8300
Bryan E. McKernon
President & CEO
Mark A. Fox
Executive Vice President & CFO
Donna G. Jarratt
Senior Vice President & Chief of Branch
Administration
Kevin A. McCann
Senior Vice President & Controller
Tracy L. Bishop
Vice President & Human Resources Manager
M. Kathy Burley
Vice President & Closing Manager
Susan L. Driver
Vice President & Underwriting Manager
Ronald M. Waddell
Vice President & Marketing Manager
Christopher S. Vick
Vice President & Construction Manager
RICHMOND, VIRGINIA
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8300
Donald R. Jordan
Vice President & Branch Manager
Daniel J. Murphy
Vice President & Production Manager
Susan P. Moore
Vice President & Operations Manager
RICHMOND, VIRGINIA
7231 Forest Avenue, Suite 202
Richmond, Virginia 23226
(804) 673-2150
Page C. Yonce
Vice President & Branch Manager
RICHMOND, VIRGINIA
6200 B Lakeside Avenue
Richmond, Virginia 23228
(804) 673-3453
Constance Bachman-Hamilton
Vice President & Branch 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
RUCKERSVILLE, VIRGINIA
8458 Seminole Trail, Unit 3
Ruckersville, Virginia 22968
(434) 990-2022
WAYNESBORO, VIRGINIA
40 Stoneridge Drive, Suite 101
Waynesboro, Virginia 22980
(540) 949-0260
William E. Hamrick
Vice President & Branch Manager
Philip N. Mahone
Vice President & Branch Manager
8
FREDERICKSBURG, VIRGINIA
1340 Central Park Boulevard, Suite 206
Fredericksburg, Virginia 22401
(540) 548-8855
CHARLOTTE, NORTH CAROLINA
Ballantyne One
15720 John Jay Delaney Drive, Suite 300
Charlotte, North Carolina 28277
(704) 944-3217
Brian F. Whetzel
Branch Manager
R. W. Edmondson III
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
Mary Rebholz
Production Manager
WILLIAMSBURG, VIRGINIA
1167-A Jamestown Road
Williamsburg, Virginia 23185
(757) 259-1200
Lorrie A. Cook
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
705 Melvin Avenue, Suite 104
Annapolis, Maryland 21401
(410) 263-9229
William J. Regan
Vice President & Branch Manager
Jeffery R. Schroll
Vice President & Production Manager
SOUTHERN MARYLAND
12070 Old Line Centre, Suite 308
Waldorf, Maryland 20602
(301) 885-2830
Timothy J. Murphy
Branch Manager
ELLICOTT CITY, MARYLAND
6339 Ten Oaks Road, Suite 200
Clarksville, Maryland 21029
(410) 531-0910
NEWPORT, DELAWARE
240 North James Street, Suite 206
Newport, Delaware 19804
(302) 999-0130
CHERRY HILL, NEW JERSEY
1939 Olney Avenue, Suite 300
Cherry Hill, New Jersey 08003
(856) 751-8927
Scott B. Segrist
Branch Manager
Robert G. Menton
Branch Manager
C&F TITLE AGENCY, INC.
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8399
Eileen A. Cherry
Vice President & Title Insurance Underwriter
HOMETOWN SETTLEMENT
SERVICES LLC
1463 Greenbrier Place
Charlottesville, Virginia 22901
(434) 220-1046
Donna L. West
Settlement Manager
CERTIFIED APPRAISALS LLC
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
H. Daniel Salomonsky
Vice President & Appraisal Manager
C&F FINANCE COMPANY
ADMINISTRATIVE OFFICE
316 E. Grace Street
Richmond, Virginia 23219
(804) 643-8479
Matthew G. Majikes
President & CEO
Abby W. Moore
President Emeritus
C. Norwood Ashworth
Senior Vice President
Thomas W. Fee
Senior Vice President &
Risk Management Officer
C. Shawn Moore
Senior Vice President &
Sales Management Officer
Michael K. Wilson
Senior Vice President & COO
COLLECTION CENTER
403 E. Grace Street
Richmond, Virginia 23219
(804) 644-0363
H. Lee Shifflett
Manager
NORTHERN VIRGINIA REGION
Paul M. Martin
Area Sales Manager
(804) 643-8479
HAMPTON, VIRGINIA
2017 Cunningham Drive, Suite 208
Hampton, Virginia 23666
(757) 826-5660
RICHMOND, VIRGINIA
316 E. Grace Street
Richmond, Virginia 23219
(804) 643-8479
ROANOKE, VIRGINIA
5115 Bernard Drive, Suite 111
Roanoke, Virginia 24018
(540) 776-0938
Livia P. Woodford
Area Sales Manager
TENNESSEE
Alan Paul Esstman
Area Sales Manager
C & F F I N A N C I A L C O R P O R A T I O N
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X )
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2004
or
( )
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________to_____________
Commission file number 000-23423
C&F FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation or organization)
54-1680165
(I.R.S. Employer Identification No.)
Eighth and Main Streets
West Point, VA 23181
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 843-2360
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par
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
Yes ( X ) No ( )
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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. ( X )
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ( X ) No ( )
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $112,261,574 as of
June 30, 2004.
The number of shares of the registrant's common stock outstanding as of February 15, 2005 was 3,553,654.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 15, 2005 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held April 19, 2005, are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS ............................................................................................................................. page 1
ITEM 2.
PROPERTIES ........................................................................................................................ page 10
ITEM 3.
LEGAL PROCEEDINGS ..................................................................................................... page 11
ITEM 4.
SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS......................................................................... page 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES ........................................................................................................ page 12
ITEM 6.
SELECTED FINANCIAL DATA.......................................................................................... page 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................. page 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................................................................................... page 47
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
page 51
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................... page 81
ITEM 9A. CONTROLS AND PROCEDURES ...................................................................................... page 81
ITEM 9B. OTHER INFORMATION...................................................................................................... page 82
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT...................................................................................................... page 85
ITEM 11. EXECUTIVE COMPENSATION.......................................................................................... page 85
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ................................................................................... page 86
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ............................................................................................................... page 87
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ...................................................... page 87
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ..................................................... page 88
PART I
ITEM 1.
BUSINESS
General
C&F Financial Corporation is a bank holding company that was incorporated in March 1994 under the laws
of the Commonwealth of Virginia. The Corporation owns all of the stock of its sole subsidiary, Citizens and
Farmers Bank, which is an independent commercial bank chartered under the laws of the Commonwealth of
Virginia. The Bank originally opened for business under the name Farmers and Mechanics Bank on January 22,
1927. The Bank has the following five wholly-owned subsidiaries, all incorporated under the laws of the
Commonwealth of Virginia:
• C&F Mortgage Corporation and its wholly-owned subsidiaries Hometown Settlement Services, LLC,
Certified Appraisals, LLC and C&F Reinsurance, LTD
• C&F Title Agency, Inc.
• C&F Finance Company (formerly Moore Loans, Inc.)
• C&F Investment Services, Inc. and
• C&F Insurance Services, Inc.
The Corporation operates in a decentralized manner in three principal business activities: (1) retail banking,
(2) mortgage banking and (3) consumer finance. The following general business discussion focuses on the activities
within each of these segments. In addition, the Corporation conducts brokerage activities through C&F Investment
Services, Inc., insurance activities through C&F Insurance Services, Inc. and title insurance services through C&F
Title Agency, Inc. The financial position and operating results of any one of these subsidiaries are not significant to
the Corporation as a whole and are not considered principal activities of the Corporation at this time.
Retail Banking
We provide retail banking services at the Bank’s main office in West Point, Virginia, and 13 Virginia
branches located one each in Richmond, Mechanicsville, Norge, Middlesex, Midlothian, Providence Forge, Quinton,
Sandston, Varina, West Point and Newport News, and two in Williamsburg. These branches provide a wide range
of banking services to individuals and businesses. These services include various types of checking and savings
deposit accounts, as well as business, real estate, development, mortgage, home equity and installment loans. The
Bank also offers ATMs, internet banking, credit card and trust services, as well as travelers’ checks, safe deposit box
rentals, collections, notary public, wire services and other customary bank services to its customers. Revenues from
retail banking operations consist primarily of interest earned on loans and investment securities and fees related to
deposit services. At December 31, 2004, assets of the Retail Banking segment totaled $523.04 million. For the year
ended December 31, 2004, income before income taxes totaled $7.30 million.
Mortgage Banking
We conduct mortgage banking activities through C&F Mortgage, which was organized in September 1995.
C&F Mortgage provides mortgage loan origination services through 10 locations in Virginia, four in Maryland and
one each in Newport, Delaware; Cherry Hill, New Jersey and Charlotte, North Carolina. The Virginia offices are
located one each
in Charlottesville, Chester, Fredericksburg, Midlothian, Newport News, Ruckersville,
Waynesboro, and Williamsburg, and two in Richmond. The Maryland offices are located in Annapolis, Crofton,
Waldorf and Clarksville. C&F Mortgage offers a wide variety of residential mortgage loans, which are originated
for sale to numerous investors. C&F Mortgage does not securitize loans. Purchasers of loans include, but are not
limited to, Countrywide Home Loans, Inc.; Chase Manhattan Mortgage Corporation; Washington Mutual Bank, FA
and Wells Fargo Home Mortgage. The Bank also purchases lot and permanent loans and home equity lines of
credit from the Mortgage Company. C&F Mortgage originates conventional mortgage loans, mortgage loans
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insured by the Federal Housing Administration (the FHA), mortgage loans partially guaranteed by the Veterans
Administration (the VA) and home equity loans. A majority of the conventional loans are conforming loans that
qualify for purchase by the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation. The remainder of the conventional loans are non-conforming that do not meet Fannie Mae or Freddie
Mac guidelines. Through its subsidiaries, C&F Mortgage also provides ancillary mortgage loan origination services
for loan settlement, residential appraisals and private mortgage insurance. Revenues from mortgage banking
operations consist principally of gains on sales of loans in the secondary mortgage market, loan origination fee
income and interest earned on mortgage loans held for sale. At December 31, 2004, assets of the Mortgage Banking
segment totaled $56.85 million. For the year ended December 31, 2004, income before income taxes totaled $4.75
million.
Consumer Finance
We conduct consumer finance activities through C&F Finance, which the Bank acquired on September 1,
2002. C&F Finance is a regional finance company providing automobile loans in Richmond, Roanoke and Hampton
Roads, Virginia, in Northern Virginia and in portions of Tennessee and Maryland. C&F Finance is an indirect
lender that provides automobile financing through lending programs that are designed to serve customers in the
“non-prime” market who have limited access to traditional automobile financing. C&F Finance generally originates
loans through manufacturer-franchised dealerships with used-car operations and through selected independent
dealerships. C&F Finance selects these dealers based on the types of vehicles sold. Specifically, C&F Finance
prefers to finance later model, low mileage used vehicles and moderately priced new vehicles. C&F Finance’s
typical borrowers have experienced prior credit difficulties or have modest income. Because C&F Finance serves
customers who are unable to meet the credit standards imposed by most traditional automobile financing sources,
C&F Finance typically charges interest at higher rates than those charged by traditional financing sources. Because
C&F Finance provides financing in a relatively high-risk market, it also expects to experience a higher level of credit
losses than traditional automobile financing sources. Revenues from consumer finance operations consist
principally of interest earned on automobile loans. At December 31, 2004, assets of the Consumer Finance segment
totaled $103.65 million. For the year ended December 31, 2004, income before income taxes totaled $3.77 million.
Employees
At December 31, 2004, we employed 430 full-time equivalent employees. We consider relations with our
employees to be excellent.
Competition
Retail Banking
In the Bank’s market area, we compete with large national and regional financial institutions, savings and
loans and other independent community banks, as well as credit unions, mutual funds and life insurance
companies. Increased competition has come from out-of-state banks through their acquisition of Virginia-based
banks.
The banking business in Virginia, and in the Bank’s primary service area in the Newport News to
Richmond corridor, is highly competitive for both loans and deposits, and is dominated by a relatively small
number of large banks with many offices operating over a wide geographic area. Among the advantages such large
banks have over us are their ability to finance wide-ranging advertising campaigns and, by virtue of their greater
total capitalization, to have substantially higher lending limits than the Bank.
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Factors such as interest rates offered, the number and location of branches and the types of products
offered, as well as the reputation of the institution affect competition for deposits and loans. We compete by
emphasizing customer service and technology, establishing long-term customer relationships and building
customer loyalty, and providing products and services to address the specific needs of our customers. Through the
Bank, we target individual and small-to-medium size business customers.
No material part of the Bank’s business is dependent upon a single or a few customers, and the loss of any
single customer would not have a materially adverse effect upon the Bank’s business.
Mortgage Banking
In recent years, several factors have caused rapid consolidation in the mortgage lending industry. First, the
continuing evolution of the secondary mortgage market has led to more commodity-like mortgages. Second,
increased regulation imposed on the industry has resulted in significant costs and the need for higher levels of
specialization. Third, over the last decade interest rate volatility has risen markedly and resulted in an increase in
mortgagors’ propensity to refinance their mortgages. The combined result of these three factors has been relatively
large swings in the volume of loans originated from year to year and dramatically increased complexity in the
business. To operate profitably in this environment, lenders must have a high level of operational and risk
management skills, as well as technological expertise.
As a result, large, sophisticated financial institutions, primarily commercial banks through their mortgage
banking subsidiaries, currently dominate the mortgage industry. Our mortgage subsidiary competes by offering a
wide selection of products; providing consistent, high quality customer service; and pricing its products at
competitive rates.
No material part of the C&F Mortgage business is dependent upon a single or a few customers or investors,
and the loss of any single customer or investor would not have a materially adverse effect upon C&F Mortgage’s
business.
Consumer Finance
The non-prime automobile finance business is highly competitive. The automobile finance market is highly
fragmented and is served by a variety of financial entities, including the captive finance affiliates of major
automotive manufacturers, banks, thrifts, credit unions and independent finance companies. Many of these
competitors have substantially greater financial resources and lower costs of funds than our finance subsidiary. In
addition, competitors often provide financing on terms that are more favorable to automobile purchasers or dealers
than the terms C&F Finance offers. Many of these competitors also have long-standing relationships with
automobile dealerships and may offer dealerships or their customers other forms of financing, including dealer
floor plan financing and leasing, which we do not.
Providers of automobile financing traditionally have competed on the basis of interest rates charged, the
quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and
customers. To establish C&F Finance as one of the principal financing sources at the dealers it serves, we compete
predominately through a high level of dealer service, strong dealer relationships and by offering flexible loan terms.
No material part of the C&F Finance business is dependent on any single dealer relationship, and the loss of
any single dealership would not have a materially adverse effect upon C&F Finance’s business.
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Regulation and Supervision
General
Bank holding companies and banks are extensively regulated under both federal and state law. The
following summary briefly describes the more significant provisions of applicable federal and state laws and certain
regulations and the potential impact of such provisions on the Corporation and the Bank. This summary is not
complete, and we refer you to the particular statutory or regulatory provisions or proposals for more information.
Because federal regulation of financial institutions changes regularly and is the subject of constant legislative
debate, we cannot forecast how federal regulation of financial institutions may change in the future and impact the
Corporation’s and the Bank’s operations.
Regulation of the Corporation
The Corporation must file annual, quarterly and other periodic reports with the Securities and Exchange
Commission (the SEC). The Corporation is directly affected by the corporate responsibility and accounting reform
legislation signed into law on July 30, 2002, known as the Sarbanes-Oxley Act of 2002 (the SOX Act), and the related
rules and regulations . The SOX Act includes provisions that (1) require that periodic reports containing financial
statements that are filed with the SEC be accompanied by chief executive officer and chief financial officer
certifications as to their accuracy and compliance with law; (2) prohibit public companies, with certain limited
exceptions, from making personal loans to their directors or executive officers; (3) require chief executive officers
and chief financial officers to forfeit bonuses and profits if company financial statements are restated due to
misconduct; (4) require audit committees to pre-approve all audit and non-audit services provided by an issuer’s
outside auditors, except for de minimis non-audit services; (5) protect employees of public companies who assist in
investigations relating to violations of the federal securities laws from job discrimination; (6) require companies to
disclose in plain English on a “rapid and current basis” material changes in their financial condition or operations as
well as certain other specified information; (7) require a public company’s Section 16 insiders to make Form 4 filings
with the SEC within two business days following the day on which purchases or sales of the company’s equity
securities were made; and (8) increase penalties for existing crimes and create new criminal offenses. Compliance
with other provisions will be required after implementing rules and regulations are adopted by the SEC and the
newly created Public Company Accounting Oversight Board authorized by the SOX Act. While the Corporation
has incurred additional expenses and we expect to continue to incur additional expenses in complying with the
requirements of the SOX Act and related regulations adopted by the SEC and the Public Company Accounting
Oversight Board, we anticipate that those expenses will not have a material effect on the Corporation’s results of
operations or financial condition.
The Corporation is subject to regulation by the Board of Governors of the Federal Reserve System. The
Federal Reserve Board has jurisdiction to approve any bank or non-bank acquisition, merger or consolidation
proposed by a bank holding company. The Bank Holding Company Act of 1956 (the BHCA) generally limits the
activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any
other activity that is closely related to banking or to managing or controlling banks.
Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks
and bank holding companies located in any other state, subject to certain conditions, including nationwide and state
imposed concentration limits. Banks also are able to branch across state lines, provided certain conditions are met,
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including that applicable state laws expressly permit such interstate branching. Virginia permits branching across
state lines, provided there is reciprocity with the state in which the out-of-state bank is based.
Federal law and regulatory policy impose a number of obligations and restrictions on bank holding
companies and their depository institution subsidiaries to reduce potential loss exposure to the depositors and to
the Federal Deposit Insurance Corporation (the FDIC) insurance funds. For example, a bank holding company
must commit resources to support its subsidiary depository institutions. In addition, insured depository institutions
under common control must reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund (SAIF) or the Bank Insurance Fund (BIF) as a result of the default of a
commonly controlled insured depository institution. The FDIC may decline to enforce the provisions if it
determines that a waiver is in the best interest of the SAIF or the BIF or both. An FDIC claim for damage is superior
to claims of stockholders of an insured depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt, other than affiliates, of the commonly controlled
insured depository institution.
The Federal Deposit Insurance Act (the FDIA) provides that amounts received from the liquidation or other
resolution of any insured depository institution must be distributed, after payment of secured claims, to pay the
deposit liabilities of the institution before payment of any other general creditor or stockholder. This provision
would give depositors a preference over general and subordinated creditors and stockholders if a receiver is
appointed to distribute the assets of the Bank.
The Corporation also is subject to regulation and supervision by the State Corporation Commission of
Virginia.
Capital Requirements
The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital
guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements of these
federal bank regulatory agencies, the Corporation and the Bank are required to maintain a minimum ratio of total
capital to risk-weighted assets of at least 8 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of
at least 4 percent. At least half of the total capital must be Tier 1 capital, which includes common equity, retained
earnings and qualifying perpetual preferred stock, less certain intangibles and other adjustments. The remainder
may consist of Tier 2 capital, such as a limited amount of subordinated and other qualifying debt (including certain
hybrid capital instruments), other qualifying preferred stock and a limited amount of the general loan loss
allowance. At December 31, 2004, the total capital to risk-weighted asset ratio of the Corporation was 13.4 percent
and the ratio of the Bank was 12.2 percent. At December 31, 2004, the Tier 1 capital to risk-weighted asset ratio was
12.1 percent for the Corporation and 10.9 percent for the Bank.
In addition, each of the federal regulatory agencies has established leverage capital ratio guidelines for
banking organizations. These guidelines provide for a minimum Tier l leverage ratio of 4 percent for banks and
bank holding companies. At December 31, 2004, the Tier l leverage ratio was 9.7 percent for the Corporation and
8.8 percent for the Bank. The guidelines also provide that banking organizations experiencing internal growth or
making acquisitions maintain capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
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Limits on Dividends
The Corporation is a legal entity, separate and distinct from the Bank. A significant portion of the revenues
of the Corporation result from dividends paid to it by the Bank. Both the Corporation and the Bank are subject to
laws and regulations that limit the payment of dividends, including requirements to maintain capital at or above
regulatory minimums. Banking regulators have indicated that Virginia banking organizations should generally pay
dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses, interest and taxes
accrued or due by the bank and only (2) if the prospective rate of earnings retention appears consistent with the
organization’s capital needs, asset quality and overall financial condition. In addition, the FDIA prohibits insured
depository institutions such as the Bank from making capital distributions, including the payment of dividends, if,
after making such distribution, the institution would become undercapitalized as defined in the statute.
We do not expect that any of these laws, regulations or policies will materially affect the ability of the
Corporation or the Bank to pay dividends. During the year ended December 31, 2004, the Bank declared $5.59
million in dividends payable to the Corporation, and the Corporation declared $3.20 million in dividends to
shareholders.
Regulation of the Bank and Other Subsidiaries
The Bank is subject to supervision, regulation and examination by the Virginia State Corporation
Commission Bureau of Financial Institutions (VBFI) and the FDIC. The various laws and regulations administered
by the regulatory agencies affect corporate practices, such as the payment of dividends, the incurrence of debt and
the acquisition of financial institutions and other companies, and affect business practices, such as the payment of
interest on deposits, the charging of interest on loans, the types of business conducted and the location of offices.
FDIA and Associated Regulations. Section 36 of the FDIA and associated regulations require management of
every insured depository institution with total assets of at least $500 million at the beginning of a fiscal year to
obtain an annual audit of its financial statements by an independent public accountant, report to the banking
agencies on the effectiveness of the institution’s internal controls over financial reporting and on the institution’s
compliance with designated laws and regulations and obtain a report from an external auditor attesting to
management’s assertions about these internal controls. The Bank is subject to the annual audit and reporting
requirements of Section 36 of the FDIA.
Community Reinvestment Act. The Community Reinvestment Act imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local communities, including low and
moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial
institution’s efforts in meeting community credit needs are assessed based on 12 factors. These factors also are
considered in evaluating mergers, acquisitions and applications to open a branch or facility. Following the Bank’s
most recent scheduled compliance examination in July 2003, it received a CRA performance evaluation of
“satisfactory.”
Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank also is subject to insurance
assessments imposed by the FDIC. There is a base assessment for all institutions. In addition, the FDIC has
implemented a risk-based assessment schedule, potentially imposing an additional assessment ranging from zero to
0.27 percent of an institution’s average assessment base. The actual assessment to be paid by each BIF member is
based on the institution’s assessment risk classification, which is determined by whether the institution is
6
considered well capitalized, adequately capitalized or undercapitalized, as these terms have been defined in
applicable federal regulations, and whether the institution is considered by its supervisory agency to be financially
sound or to have supervisory concerns. In 2004, the Corporation paid through the Bank only the base assessment
rate, which amounted to $63,000 in deposit insurance premiums.
FDIC premiums also are influenced by the size of the FDIC insurance fund in relation to total deposits in
FDIC-insured banks. The FDIC has the authority to impose special assessments from time to time. During 2004, no
special assessments were imposed on the Bank.
Federal Home Loan Bank of Atlanta. The Bank is a member of the Federal Home Loan Bank (FHLB) of
Atlanta, which is one of 12 regional FHLBs that provide funding to their members for making housing loans as well
as for affordable housing and community development loans. Each FHLB serves as a reserve or central bank for the
members within its assigned region. Each is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. Each FHLB makes loans to members in accordance with policies and procedures
established by the Board of Directors of the FHLB. As a member, the Bank must purchase and maintain stock in the
FHLB. In 2004, the FHLB converted to its new capital structure, which established the minimum capital stock
requirement as an amount equal to the sum of a membership requirement and an activity-based requirement. At
December 31, 2004, the Bank held $2.03 million of FHLB stock.
USA Patriot Act. The USA Patriot Act became effective on October 26, 2001 and provides for the facilitation
of information sharing among governmental entities and financial institutions for the purpose of combating
terrorism and money laundering. Among other provisions, the USA Patriot Act permits financial institutions, upon
providing notice to the United States Department of the Treasury (Treasury Department), to share information with
one another in order to better identify and report to the federal government activities that may involve money
laundering or terrorists’ activities. The USA Patriot Act is considered a significant banking law in terms of
information disclosure regarding certain customer transactions. Although it does create a reporting obligation, the
USA Patriot Act does not materially affect the Bank’s products, services or other business activities.
Reporting Terrorist Activities. The Federal Bureau of Investigation (FBI) has sent, and will send, banking
regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The Bank has been
requested, and will be requested, to search its records for any relationships or transactions with persons on those
lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report with the Treasury
Department and contact the FBI.
The Office of Foreign Assets Control (OFAC), which is a division of the Treasury Department, is responsible
for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as
defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, banking regulatory
agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If
the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such
account, file a suspicious activity report with the Treasury Department and notify the FBI. The Bank has appointed
an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank
actively checks high-risk areas such as new accounts, wire transfers and customer files. The Bank performs these
checks utilizing software, which is updated each time a modification is made to the lists of Specially Designated
Nationals and Blocked Persons provided by OFAC and other agencies.
Mortgage Banking Regulation. The Corporation’s Mortgage Banking segment is subject to the rules and
regulations of, and examination by the Department of Housing and Urban Development (HUD), the FHA, the VA
7
and state regulatory authorities with respect to originating, processing and selling mortgage loans. Those rules and
regulations, among other things, establish standards for loan origination, prohibit discrimination, provide for
inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, restrict
certain loan features, and fix maximum interest rates and fees. In addition to other federal laws, mortgage
origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, and Home Ownership Equity Protection Act, and the
regulations promulgated under these acts. These laws prohibit discrimination, require the disclosure of certain
basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the
reasonable value of the services rendered and require the maintenance and disclosure of information regarding the
disposition of mortgage applications based on race, gender, geographical distribution and income level.
Consumer Financing Regulation. The Corporation’s Consumer Finance segment also is regulated by the VBFI.
The VBFI regulates and enforces laws relating to consumer lenders and sales finance agencies such as C&F Finance.
Such rules and regulations generally provide for licensing of sales finance agencies; limitations on amounts,
duration and charges, including interest rates, for various categories of loans; requirements as to the form and
content of finance contracts and other documentation; and restrictions on collection practices and creditors’ rights.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current federal law to take prompt corrective action
to resolve problems of insured depository institutions. The extent of these powers depends upon whether the
institution
in question
is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” These terms are defined under uniform regulations issued by
each of the federal banking agencies regulating these institutions.
The Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (GLBA) implemented major changes to the statutory framework for
providing banking and other financial services in the United States. The GLBA, among other things, eliminated
many of the restrictions on affiliations among banks and securities firms, insurance firms and other financial service
providers. A bank holding company that qualifies and elects to be a financial holding company is permitted to
engage in activities that are financial in nature or incident or complimentary to financial activities. The activities
that the GLBA expressly lists as financial in nature include insurance underwriting, sales and brokerage activities,
financial and investment advisory services, underwriting services and limited merchant banking activities.
To become eligible for these expanded activities, a bank holding company must qualify as a financial
holding company. To qualify as a financial holding company, each insured depository institution controlled by the
bank holding company must be well-capitalized, well-managed and have at least a satisfactory rating under the
CRA. In addition, the bank holding company must file with the Federal Reserve a declaration of its intention to
become a financial holding company. While the Corporation satisfies these requirements, the Corporation has not
elected to be treated as a financial holding company under the GLBA.
The GLBA has not had a material adverse impact on the Corporation’s or the Bank’s operations. To the
extent that it allows banks, securities firms and insurance firms to affiliate, the financial services industry may
experience further consolidation. The GLBA may have the result of increasing competition that we face from larger
8
institutions and other companies that offer financial products and services and that may have substantially greater
financial resources than the Corporation or the Bank.
The GLBA and certain new regulations issued by federal banking agencies also provide protections against
the transfer and use by financial institutions of consumer nonpublic personal information. A financial institution
must provide to its customers, at the beginning of the customer relationship and annually thereafter, the
institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information.
These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial
information to unaffiliated third parties unless the institution discloses to the customer that the information may be
so provided and the customer is given the opportunity to opt out of such disclosure.
Available Information
The Corporation’s SEC filings are filed electronically and are available to the public over the Internet at the
SEC’s web site at http://www.sec.gov. In addition, any document filed by the Corporation with the SEC can be
read and copied at the SEC’s public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
documents can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Corporation’s SEC filings also are available through our web site
at http://www.cffc.com as of the day they are filed with the SEC. Copies of documents also can be obtained free of
charge by writing to the Corporation’s secretary at P.O. Box 391, West Point, VA 23181 or by calling 804-843-2360.
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ITEM 2. PROPERTIES
The following describes the location and general character of the principal offices and other materially
important physical properties of the Corporation.
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 Bank’s Main Office branch and office space for certain of the Bank’s administrative
personnel.
The Corporation owns a building located at Seventh and Main Streets in West Point, Virginia. The building
provides space for the Bank’s operations functions and staff. The building was originally constructed prior to 1935
and remodeled by the Corporation in 1991. The two-story building has 14,000 square feet.
The Corporation owns a building located at Sixth and Main Streets in West Point, Virginia. The building
provides space for the Bank’s loan operations functions and staff. The building was bought and remodeled by the
Corporation in 1998. The building has 5,000 square feet.
The Corporation acquired a facility in 2004 located at 3600 LaGrange Parkway in James City County,
Virginia for the relocation of its operations departments in 2005. The building has 60,000 square feet, of which
approximately 30,000 square feet will be renovated in 2005. The buildings currently used for operations in West
Point, Virginia will initially be retained as back-up facilities for the new operations center. Management has not yet
determined the long-term utilization of these properties.
The Corporation owns a building located at 1400 Alverser Drive in Midlothian, Virginia. The building
provides space for a branch office of the Bank and for a C&F Mortgage branch office, as well as C&F Mortgage’s
main administrative offices. This two-story building has 25,000 square feet and was constructed in 2001.
The Corporation owns 11 other Bank branch locations and leases one Bank branch location in Virginia. In
addition, the Corporation expects to open two branches on the Virginia Peninsula in 2005. The Bank has acquired
land for one new branch location in Tabb, Virginia and a contract has been negotiated for the acquisition of land for
one new branch location in Hampton, Virginia Rental expense for the leased location totaled $19,927 for the year
ended December 31, 2004.
The Corporation has 17 leased offices, 10 in Virginia, four in Maryland and one each in Delaware, New
Jersey and North Carolina, for C&F Mortgage. Rental expense for these locations totaled $524,113 for the year
ended December 31, 2004.
The Corporation has four leased offices in Virginia for C&F Finance. Rental expense for these locations
totaled $105,234 for the year ended December 31, 2004.
All of the Corporation’s properties are in good operating condition and are adequate for the Corporation’s
present and anticipated future needs.
10
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Corporation or any of its subsidiaries is a party
or to which the property of the Corporation or any of its subsidiaries 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.
Name (Age)
Present Position
Larry G. Dillon (52)
Chairman, President and
Chief Executive Officer
EXECUTIVE OFFICERS OF THE REGISTRANT
Business Experience
During Past Five Years
Chairman, President and Chief Executive Officer of the Corporation and
the Bank since 1989
Thomas F. Cherry (36)
Executive Vice President,
Chief Financial Officer
and Secretary
Secretary of the Corporation and the Bank since 2002; Executive Vice President
and Chief Financial Officer of the Corporation and the Bank since
December 2004; Senior Vice President and Chief Financial Officer
of the Corporation and the Bank from December 1998 to November 2004
Robert L. Bryant (54)
Executive Vice President
and Chief Operating
Officer
Executive Vice President and Chief Operating Officer of the Corporation
since February 2005; Executive Vice President and Chief Operating Officer
of the Bank since December 2004; Senior Vice President and Chief Operating
Officer of the Bank from May 2004 to November 2004; President of
Renaissance Resources, a business consulting practice located in Richmond,
Virginia, from 1996 to 2004
Bryan E. McKernon (48)
President and Chief Executive Officer of C&F Mortgage since 1995
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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 1, 2005, there were approximately 2,100 shareholders of
record. Following are the high and low closing sales prices as reported by the NASDAQ Stock Market, along with
the dividends that were paid quarterly in 2004 and 2003. Over-the-counter market quotations reflect interdealer
prices, without retail mark up, mark down, or commission, and may not necessarily represent actual transactions.
Quarter
First
Second
Third
Fourth
__________2004_________
High
$43.71
41.91
40.50
40.35
Low Dividends
$36.91
32.75
33.29
37.16
$0.22
0.22
0.22
0.24
__________2003__________
Low
High
$24.65
$34.40
34.00
45.81
38.71
46.11
38.52
46.50
Dividends
$0.16
0.18
0.18
0.20
Issuer Purchases of Equity Securities
For the Quarter Ended December 31, 2004
Total
Number
Of Shares
Purchased
500
16,000
-
16,500
Average
Price
Paid Per
Share
$38.25
38.63
-
$38.61
Total Number
of Shares
Purchased as
Part of Publicly
Announced Program1
500
16,000
-
16,500
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Program1
107,579
91,579
91,579
October 1-31, 2004
November 1-30, 2004
December 1-31, 2004
Total
1On January 20, 2004, the Corporation’s board of directors authorized the repurchase of up to 5 percent of the Corporation’s common stock
(approximately 180,629 shares) over the twelve months ending January 19, 2005. The stock was purchased in the open market and/or in
privately negotiated transactions, as management and the board of directors deemed prudent. This stock repurchase program has expired.
12
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
(Dollars in thousands, except share and per share amounts)
Selected Year-End Balances:
Total assets
Total capital
Total loans (net)
Total deposits
Summary of Operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Other operating income
Other operating expenses
Income before taxes
Income tax expense
Net income
Per share
Earnings per common share—basic
Earnings per common share—assuming
dilution
Dividends
Weighted average number of shares—
assuming dilution
Significant Ratios
Return on average assets
Return on average equity
Dividend payout ratio
Average equity to average assets
2004
2003
2002
2001
2000
$609,122
69,899
394,471
447,134
$ 40,843
7,549
33,294
4,026
29,268
24,689
37,753
16,204
5,006
$ 11,198
$573,546
65,384
350,170
427,635
$551,922
56,233
328,634
383,533
$404,076
44,743
246,112
323,912
$347,472
38,780
229,944
290,688
$ 38,671
8,828
29,843
3,167
$ 30,620
9,184
21,436
1,141
$ 28,234
11,984
16,250
400
$ 26,421
11,309
15,112
400
26,676
29,318
36,748
19,246
6,327
$ 12,919
20,295
21,453
27,846
13,902
4,137
$ 9,765
15,850
17,421
21,964
11,307
3,318
$ 7,989
14,712
8,945
15,998
7,659
1,823
$ 5,836
$3.14
$3.58
$2.73
$2.25
$1.62
3.00
.90
3.42
.72
2.67
.62
2.23
.58
1.60
.53
3,729,128
3,781,843 3,652,668
3,587,307 3,640,314
1.91%
16.78
28.59
11.38
2.35%
21.32
20.07
11.01
2.19%
19.62
22.80
11.15
2.09%
18.93
25.74
11.05
1.76%
15.99
32.74
10.99
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements concerning the Corporation’s expectations, plans, objectives, future financial
performance and other statements that are not historical facts. These statements may constitute “forward-looking
statements” as defined by federal securities laws. These statements may address issues that involve estimates and
assumptions made by management and risks and uncertainties. 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 Corporation include, but are not limited to, changes in:
1)
interest rates
2) general economic conditions
3)
the legislative/regulatory climate
4) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board
5)
the quality or composition of the loan or investment portfolios
6) demand for loan products
7) deposit flows
8) competition
9) demand for financial services in the Corporation’s market area
10)
technology and
11) accounting principles, policies and guidelines
These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein.
We caution readers not to place undue reliance on those statements, which speak only as of the date of this report.
The following discussion supplements and provides information about the major components of the results
of operations, financial condition, liquidity and capital resources of the Corporation. This discussion and analysis
should be read in conjunction with the accompanying consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires us to make estimates and assumptions. Those accounting
policies that required our most difficult, subjective or complex judgments and uncertainties affecting the application
of these policies, and the likelihood that materially different amounts would be reported under different conditions,
or using different assumptions, are described below.
Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the
form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the
collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are
credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb
any losses on existing loans that may become uncollectible. Our judgment in determining the adequacy of the
allowance 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 that may affect a borrower’s
ability to repay, overall portfolio quality and specific potential losses. This evaluation is inherently subjective
because it requires estimates that are susceptible to significant revision as more information becomes available.
14
Impairment of Loans: We measure impaired loans 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. We consider 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. We do not consider a loan impaired during a period of delay in payment if we expect the ultimate
collection of all amounts due. A valuation allowance is maintained to the extent that the measure of the impaired
loan is less than the recorded investment. The loans currently designated as impaired are being valued based on
collateral. The reserves that we have established are based on appraisals of the collateral and have been adjusted
for items such as selling costs and current conditions. We believe these adjustments are reasonable.
Impairment of Securities: Impairment of investment securities results in a write-down that must be
included in net income when a market decline below cost is other-than-temporary. We regularly review each
investment security for impairment based on criteria that include the extent to which cost exceeds market price, the
duration of that market decline, the financial health of and specific prospects for the issuer and our ability and
intention with regard to holding the security to maturity.
Valuation of Derivatives: The Corporation enters into rate lock commitments to originate mortgage loans
whereby the interest rate on the loan is determined prior to funding. Rate lock commitments on mortgage loans
that are originated for resale are considered to be derivatives. The period of time between issuance of a loan
commitment and closing and sale of the loan generally ranges from 15 to 90 days. For such rate lock commitments,
we protect the Corporation from changes in interest rates through the use of best efforts forward delivery
commitments, whereby an investor commits to buy the loan at the time the borrower commits to an interest rate
with the intent that the investor has assumed the interest rate risk on the loan. As a result, the Corporation is not
exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.
The market values of rate lock commitments and best efforts contracts are not readily ascertainable with
precision because rate lock commitments and best efforts contracts are not actively traded. Because of the high
correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock
commitments.
Goodwill: On January 1, 2002, the Corporation adopted SFAS No. 142, Goodwill and Other Intangible Assets.
Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an
annual assessment for impairment using a two-step process that begins with an estimation of the fair value of the
reporting unit. In assessing the recoverability of the Corporation’s goodwill, all of which was recognized in
connection with the Bank’s acquisition of C&F Finance in September 2002, we must make assumptions in order to
determine the fair value of the respective assets. Major assumptions used in determining impairment were
increases in future income, sales multiples in determining terminal value and the discount rate applied to future
cash flows. We completed the annual test for impairment during the fourth quarter of 2004 and determined there
was no impairment to be recognized in 2004. As part of the impairment test, we performed sensitivity analysis by
increasing the discount rate, lowering sales multiples and reducing increases in future income. Based on the
sensitivity analysis performed, no charge for impairment was determined to be necessary. If the underlying
estimates and related assumptions change in the future, we may be required to record impairment charges.
Defined Benefit Pension Plan: The Bank maintains a non-contributory, defined benefit pension plan for
eligible full-time employees as specified by the plan. Plan assets, which consist primarily of marketable equity
securities and corporate and government fixed income securities, are valued using market quotations. The Bank’s
actuary determines plan obligations and annual pension expense using a number of key assumptions. Key
15
assumptions include the discount rate, the estimated future return on plan assets and the anticipated rate of future
salary increases. Changes in these assumptions in the future, if any, may impact pension expense as measured in
accordance with SFAS No. 87, Employers’ Accounting for Pensions.
Accounting for Income Taxes: Determining the Corporation’s effective tax rate requires judgment. In the
ordinary course of business, there are transactions and calculations for which the ultimate tax outcomes are
uncertain. In addition, the Corporation’s tax returns are subject to audit by various tax authorities. Although we
believe that the estimates are reasonable, no assurance can be given that the final tax outcome will not be materially
different than that which is reflected in the income tax provision and accrual.
For further information concerning accounting policies, refer to Note 1 of the Corporation’s Consolidated
Financial Statements.
OVERVIEW
Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable
growth initiatives that will enhance shareholder value. We track three primary financial performance measures in
order to assess the level of success in achieving these goals:
1) return on average assets
2) return on average equity
3) growth in earnings
In addition to these financial performance measures, we track the performance of the Corporation’s three
principal business activities:
1) retail banking
2) mortgage banking
3) consumer finance
We also actively manage our capital through:
1) growth
2) stock repurchases
3) dividends
Financial Performance Measures
For the Corporation, net income declined 13.3 percent to $11.20 million in fiscal 2004. Net income per
diluted share declined 12.3 percent to $3.00 in the same period. The Corporation's ROA was 1.91 percent for the
year ended December 31, 2004 compared with 2.35 percent for 2003, and its ROE was 16.78 percent for the year
ended December 31, 2004 compared with 21.32 percent for 2003. Although all of our financial performance
measures declined in 2004, net income reflected the complementary balance of the Corporation’s business segments.
For the year, our Mortgage Banking segment’s net income declined, as anticipated, after the record year that
resulted from 2003’s strong mortgage loan demand. This decline was partly offset by increased net income in both
the Retail Banking and Consumer Finance segments. These increases reflected economic growth that boosted
commercial and consumer loan demand, as well as interest rates, in the second half of 2004.
16
We expect the following factors to influence the Corporation’s financial performance in 2005:
•
interest rate volatility, which will likely continue to affect demand for home mortgage loans in
the Mortgage Banking segment and affect the net interest margin in the Retail Banking
segment;
• general economic trends in our markets, which can affect the quality of the loan portfolios in
•
•
•
•
•
•
the Retail Banking and Consumer Finance segments;
the ability to expand the Mortgage Banking segment by opening or acquiring new production
offices, in conjunction with the expansion of the segment’s product offerings in cooperation
with the Retail Banking segment;
the ability to expand the Retail Banking segment by opening or acquiring new branches;
loan demand at the Retail Banking segment;
the extent to which deposit and loan growth at the Retail Banking branch in Newport News,
Virginia, along with the new branches projected to open in 2005, create market penetration on
the Virginia Peninsula;
the extent to which loan demand is affected by the increased competition in the Consumer
Finance segment; and
the effectiveness of updated technology at the Consumer Finance segment in enhancing dealer
relationships, improving operational efficiencies and expanding capacity for new business in
existing and new markets.
Principal Business Activities
An overview of the financial results for each of the Corporation’s principal segments is presented below. A
more detailed discussion is included in the section “Results of Operations.”
Retail Banking: Pretax earnings for the Retail Banking segment were $7.30 million for the year ended
December 31, 2004, compared with $5.87 million in 2003. The increase in pretax earnings for the comparative 12-
month periods primarily resulted from (1) higher average earning assets, which were principally funded by growth
in deposits, (2) an increase in net interest margin, (3) a lower provision for loan losses and (4) an increase in non-
interest income. These improvements were offset in part by an increase in non-interest expense. The increase in
average earning assets and the net interest margin resulted from a higher average balance of loans to third-party
customers by the Retail Banking segment. A lower provision for loan losses was required in 2004 because we
decreased reserve allocation percentages based on historical charge-offs and current economic conditions. The
increase in non-interest income reflected the effect of deposit growth on deposit service charges, which was partially
offset by a decline in calls of securities that resulted from the rising interest rate environment in 2004. The increase
in non-interest expense reflected an increase in salaries and benefits for Bank operations and administrative
personnel to support growth and the expansion of the Retail Banking segment into the Peninsula and Hanover
markets of Virginia.
Mortgage Banking: Pretax earnings for the Mortgage Banking segment were $4.75 million for the year
ended December 31, 2004, compared with $9.43 million in 2003. The decrease in earnings resulted from (1) declines
in loan refinancings, (2) lower gains on sales of a proportionately higher volume of variable-rate loans versus fixed-
rate loans and (3) the lower interest rate spread on loans held for sale. For 2004, loan originations at C&F Mortgage
for refinancings declined to $319 million from $487 million in 2003. Loans originated for new and resale home
purchases declined slightly to $593 million from $596 million in 2003. The volume of mortgage loan applications,
closings, fundings and the level of the mortgage loan pipeline followed a more seasonal pattern in 2004. We expect
17
that future earnings for the Mortgage Banking segment will be negatively affected if the upward trend in interest
rates continues and there are fewer new and resale home sales and loan refinancings.
Consumer Finance: Pretax earnings for the Consumer Finance segment, which consists solely of C&F
Finance, totaled $3.77 million for the year ended December 31, 2004, compared with pre-tax earnings of $3.49
million in 2003. A 16.1 percent increase in average loans outstanding favorably impacted earnings in 2004.
However, earnings also included a $1.18 million increase in the provision for loan losses as a result of higher
charge-offs against the allowance for loan losses versus dealer reserves in 2004. Effective January 1, 2004, the
Consumer Finance segment no longer originated loans that provided for dealer reserves. In addition, earnings for
2004 included an increase in the cost of borrowings and in operating expenses to support growth and technology
investments. We expect the continuing investments in technology to create future efficiencies and to expand
capacity. In addition, we expect the initial salary costs associated with the expansion of the Consumer Finance
segment into the Northern Virginia and Nashville, Tennessee markets will affect short-term earnings of the
Consumer Finance segment. Future earnings at the Consumer Finance segment will be impacted by economic
conditions including, but not limited to, the employment market, interest rates and the resale market for used
automobiles.
Capital Management
During 2004, our total assets grew by 6.2 percent. A detailed discussion of the changes in our financial
position is included in the section “Financial Condition.” Our dividend pay-out increased to 28.59 percent in 2004
from 20.07 percent in 2003. We increased the quarterly dividend per share by 25.0 percent in 2004 and by 50.0
percent over the past two years. In 2004, we repurchased 89,050 of the Corporation’s common stock and in 2003 we
repurchased 80,000 shares. In 2005, we will continue to employ capital management strategies that are similar to
those employed in recent years.
18
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, 2004, 2003
and 2002. The table also shows 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 are included in the computation of yields, but had no material
effect. Interest on tax-exempt securities is presented on a taxable-equivalent basis (which converts the income on
loans and investments for which no taxes are paid to the equivalent yield if taxes were paid), which is computed
using the federal corporate income tax rate of 35 percent in 2004 and 2003 and 34 percent in 2002.
(Dollars in thousands)
Assets
Securities:
Taxable
Tax-exempt
Total securities
Loans, net (1)
Interest-bearing deposits
in other banks and federal funds
Total earning assets
Allowance for loan losses
Total non-earning assets
Total assets
Liabilities and Shareholders’ Equity
Time and savings deposits:
Interest-bearing deposits
Money market deposit accounts
Savings accounts
Certificates of deposit,
$100 thousand or more
Other certificates of deposit
Total time and savings deposits
Borrowings
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest income
Interest rate spread
Interest expense to
average earning assets
Net interest margin
2004
Average
Yield/
Income/
Balance
Rate
Expense
2003
Income/
Average
Yield/
Balance
Rate
Expense
2002
Yield/
Income/
Rate
Expense
Average
Balance
$ 16,211
54,532
70,743
424,052
43,564
538,359
(9,675)
57,890
$586,574
$ 484
4,058
4,542
37,009
2.99% $ 8,354
49,941
7.44
6.42
8.73
58,295
422,237
$ 218
3,899
4,117
35,590
2.61% $ 6,888
52,765
7.81
7.06
8.43
59,653
334,336
$ 268
4,142
4,410
27,240
3.89%
7.85
7.39
8.15
527
1.21
26,221
253
0.96
20,492
42,078
7.82% 506,753
(7,482)
51,208
$550,479
39,960
7.89% 414,481
(4,733)
36,620
$446,368
341
31,991
1.66
7.72%
$ 80,055
42,797
55,856
495
329
328
0.62% $ 72,366
0.77
39,443
0.59
51,624
622
462
428
0.86% $ 61,760
37,021
1.17
45,252
0.83
56,480
127,923
363,111
74,011
437,122
69,281
13,432
519,835
66,739
1,086
2,751
4,989
2,560
7,549
1.92
2.15
1.37
3.46
47,741
131,646
342,820
75,342
1.73% 418,162
1,118
3,482
6,112
2,733
8,845
2.34
2.64
1.78
3.63
38,163
122,238
304,434
34,215
2.12% 338,649
54,920
16,805
489,887
60,592
45,246
12,707
396,602
49,766
677
695
667
1,266
4.592
7,897
1,287
9,184
1.10%
1.88
1.47
3.32
3.76
2.59
3.76
2.71%
$586,574
$550,479
$446,368
$34,529
$31,115
$22,807
6.09%
1.40%
6.41%
5.77%
1.75%
6.14%
5.01%
2.22%
5.50%
(1) For purposes of yield, interest rate spread and net interest margin calculations, interest income in 2004 excluded $221 of interest previously
recognized as principal curtailments on loans removed from non-accrual status in 2004.
19
RESULTS OF OPERATIONS
NET INTEREST INCOME
2004 Compared to 2003
Net interest income, on a taxable equivalent basis, for the year ended December 31, 2004 was $34.53 million,
an increase of $3.41 million, or 11.0 percent, from $31.12 million for the comparable period in 2003. The higher net
interest income resulted from (1) an increase of 6.2 percent in the average balance of interest-earning assets and (2)
an increase in the net interest margin to 6.41 percent in 2004 from 6.14 percent in 2003.
Average loans outstanding remained relatively flat during 2004, while the yield increased 30 basis points to
8.73%. A $28.30 million increase in loans held for investment was offset by a $26.48 million decrease in the average
loans held for sale. The increase in average loans held for investment resulted from an increase in loans at the Retail
Banking and Consumer Finance segments. The increase in loans at the Retail Banking segment was mainly
attributable to loan production in the Virginia Peninsula market. The increase in the Consumer Finance segment
was mainly attributable to the new markets this segment serves, in addition to overall growth at existing locations.
The decrease in average loans held for sale was a result of the increase in mortgage interest rates that began in the
third quarter of 2003. The yield on loans held for investment at the Retail Banking segment and the Consumer
Finance segment increased 15 basis points and 79 basis points, respectively. These increases were a result of the
impact of a 125-basis-point increase in the prime rate during the second half of 2004. The yield on loans held for
sale remained relatively flat. This was mainly a result of the shift in originations to lower-yielding adjustable-rate
mortgages versus fixed-rate products.
Average securities available for sale increased $12.45 million during 2004, and the average yield on these
securities declined by 64 basis points. The decline in the taxable-equivalent yields resulted from (1) the maturities
and calls of higher-yielding securities during 2003 and 2004 and (2) the reinvestment of proceeds in lower-yielding
securities as a result of the lower rate environment in the first half of 2004.
Average interest earning deposits at other banks, primarily the FHLB, increased $17.34 million and their
average yield increased by 25 basis points as a result of the increase in short-term interest rates during the second
half of 2004. The increase in average interest earning deposits at other banks reflected (1) deposit growth and (2)
the decrease in average loans held for sale, which resulted in excess funds in lower-yielding accounts.
A 41-basis-point decrease in the cost of deposits during 2004 was a result of (1) the falling interest rate
environment in prior periods and (2) the increase in non-interest-bearing demand deposits as a percentage of total
average deposits. The lower rate environment resulted in decreases in the rates paid on savings and interest-
bearing checking accounts and the repricing of maturing certificates of deposit at lower rates. The increase in non-
interest-bearing demand deposits was a result of the Bank’s efforts to attract these deposits through product
offerings and an emphasis on obtaining transactional deposit accounts from its commercial customers. Although
interest rates increased in the second half of 2004, deposits will reprice gradually as existing certificates of deposit
mature in future periods.
20
The decrease in the rate on other borrowings in 2004 resulted from (1) a lower LIBOR-based rate on C&F
Finance’s line of credit with an unrelated third party and (2) the repayment of $8 million in debt that carried interest
rates of 6 percent to 8 percent and that was associated with the acquisition of C&F Finance.
We expect that the net interest margin will benefit in the short term as prime-based loans reprice as the
prime rate changes. However, we also expect that the favorable impact of the deposit repricing lag will neutralize
in the longer term and the cost of other borrowings will continue to increase as short-term interest rates rise.
2003 Compared to 2002
During 2003, net interest income, on a taxable-equivalent basis, increased 36.4 percent to $31.12 million from
$22.81 million in 2002. The higher net interest income resulted from (1) an increase of 22.3 percent in the average
balance of interest-earning assets and (2) an increase in the net interest margin to 6.14 percent in 2003 from 5.50
percent in 2002. The increase in average earning assets reflected an $87.90 million increase in the average balance of
loans and a $5.73 million increase in the average balance of interest-earning deposits at other banks, primarily the
FHLB, offset in part by a slight decrease in the average balance of securities.
The increase in average loans resulted from (1) an increase in loans at the Bank, (2) the acquisition of C&F
Finance and (3) an increase in loans held for sale at C&F Mortgage. The increase in average loans at the Bank
approximated $19.72 million in 2003. The increase in average loans at C&F Finance, which was acquired September
1, 2002, approximated $51.98 million. The increase in average loans held for sale at C&F Mortgage approximated
$16.20 million in 2003, and resulted from an increase in originations at C&F Mortgage. Loans originated at C&F
Mortgage totaled $1.08 billion in 2003 and $782.97 million in 2002; loans sold at C&F Mortgage totaled $1.16 billion
in 2003 and $745.01 million in 2002.
Average interest-earning deposits at other banks increased because (1) our deposit growth exceeded loan
demand and (2) calls of investment securities in the low interest rate environment resulted in excess funds in lower-
yielding accounts.
The increase in the Corporation’s taxable equivalent net interest margin reflected (1) an increase in the yield
on interest-earning assets to 7.89 percent in 2003 from 7.72 percent in 2002, coupled with (2) a decrease in the cost of
funds to 2.12 percent in 2003 from 2.71 percent in 2002. The yield on interest-earning assets was favorably impacted
by the higher yield on average loans at C&F Finance relative to the Bank and C&F Mortgage. For 2003, C&F
Finance had average loans of $74.8 million with individual loan rates ranging from 15 percent to 20 percent. The
favorable impact of C&F Finance’s yield was partly offset by a decrease in the yield on loans held by the Bank,
which resulted from the low interest rate environment, and by an increase in the average balance of lower yielding
loans held for sale at C&F Mortgage.
The taxable-equivalent yield on the Corporation’s securities portfolio declined to 7.06 percent for 2003 from
7.39 percent for 2002 as a result of the maturities and calls of higher-yielding securities, coupled with the
reinvestment of proceeds in lower-yielding securities.
The decrease in the cost of funds for 2003 reflected lower rates on interest-bearing deposits, money market
deposits and savings accounts and the repricing of maturing certificates of deposit at lower rates, offset in part by
higher-cost funds related to C&F Finance. C&F Finance has a line of credit with an unrelated third party. This line
of credit bears interest at LIBOR plus 250 basis points. As part of the acquisition of C&F Finance, the Corporation
borrowed $20 million from the FHLB at rates between 2.8 percent and 3.3 percent and $5 million from an unrelated
third party at 6.0 percent interest. As part of the purchase price of C&F Finance, the Bank issued $3 million in
21
subordinated debt at 8.0 percent to the former shareholders of C&F Finance. The $5 million loan and the $3 million
in subordinated debt were repaid in the fourth quarter of 2003.
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. Table 2 shows the
direct causes of the year-to-year changes in the components of net interest income on a taxable-equivalent basis. We
calculated the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third
element in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances
in proportion to the relationship of the absolute dollar amounts of the change in each. Loans include both non-
accrual loans and loans held for sale.
TABLE 2: Rate-Volume Recap
(Dollars in thousands)
Interest income:
Loans
Securities:
Taxable
Tax-exempt
Total securities
Interest-bearing deposits in other banks
and fed funds
Total interest income
Interest expense:
Time and savings deposits:
Interest-bearing deposits
Money market deposit accounts
Savings accounts
Certificates of deposit, $100M or more
Other certificates of deposit
Total time and savings deposits
Other borrowings
Total interest expense
Change in net interest income
2004 from 2003 2003 from 2002
Increase(Decrease)
Due to
Volume
Increase(Decrease)
Due to
Volume
Total
Increase
(Decrease)
Total
Increase
(Decrease)
Rate
Rate
$ 1,265
$ 154
$ 1,419
$ 970
$7,380
$ 8,350
35
(188)
(153)
76
1,188
(188)
(164)
(133)
(218)
(635)
(1,338)
(168)
(1,506)
$ 2,694
231
347
578
198
930
61
31
33
186
(96)
215
(5)
210
$ 720
266
159
425
274
2,118
(127)
(133)
(100)
(32)
(731)
(1,123)
(173)
(1,296)
$ 3,414
(100)
(22)
(122)
(167)
681
(160)
(276)
(323)
(423)
(1,442)
(2,624)
(47)
(2,671)
50
(221)
(171)
79
7,288
105
43
84
275
332
839
1,493
2,332
(50)
(243)
(293)
(88)
7,969
(55)
(233)
(239)
(148)
(1,110)
(1,785)
1,446
(339)
$ 3,352
$ 4,956
$ 8,308
22
NON-INTEREST INCOME
TABLE 3: Non-Interest Income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other income
Total non-interest income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other income
Total non-interest income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other income
Total non-interest income
2004 Compared to 2003
Year Ended December 31, 2004
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other and
Eliminations
$ --
2,699
857
69
154
$3,779
$16,572
--
3,208
--
18
$19,798
$--
--
--
--
71
$71
$ 3
--
--
--
1,038
$1,041
Total
$16,575
2,699
4,065
69
1,281
$24,689
Year Ended December 31, 2003
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Total
$ --
2,274
727
412
138
$3,551
$20,584
--
3,761
--
80
$24,425
$--
--
--
--
41
$41
$ --
--
--
--
1,301
$20,584
2,274
4,488
412
1,560
$1,301
$29,318
Year Ended December 31, 2002
Retail
Banking
$ --
1,987
662
43
406
$3,098
Mortgage
Banking
$ 13,929
--
3,130
--
142
$ 17,201
Consumer
Finance
$--
--
--
--
21
$21
Other
Total
$ --
--
--
--
1,133
$1,133
$13,929
1,987
3,792
43
1,702
$21,453
Total non-interest income decreased $4.63 million, or 15.8 percent, to $24.69 million for the year ended
December 31, 2004. The decrease in 2004 was mainly attributable to decreases in (1) gains on sales of loans and (2)
other service charges and fees resulting from decreases in the volume of loans closed and sold by the Mortgage
Banking segment. The decline in volume at the Mortgage Banking segment also contributed to lower title insurance
revenue, which is included in other income. In addition, gains on calls of available for sale securities at the Retail
Banking segment decreased as a result of fewer calls in 2004. These decreases were offset in part by higher service
charge income resulting from deposit account growth.
2003 Compared to 2002
Total non-interest income increased by $7.87 million, or 36.7 percent, in 2003. The increase was attributable
to an increase in (1) gains on sales of loans and (2) other service charges and fees resulting from an increase in the
volume of loans closed and sold by the Mortgage Banking segment. The 2003 increase also included an increase in
service charges at the Retail Banking segment, resulting from the Bank’s overdraft program that was started at the
beginning of 2002. The increase in gains on calls of available-for-sale securities reflected calls of securities at
premiums due to the low interest rate environment during 2003.
23
NON-INTEREST EXPENSE
TABLE 4: Non-Interest Expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses
Total non-interest expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses
Total non-interest expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses
Total non-interest expense
2004 Compared to 2003
Retail
Banking
$ 9,982
2,144
3,662
$15,788
Retail
Banking
$ 8,589
2,263
3,616
$14,468
Retail
Banking
$ 7,157
2,304
3,387
$12,848
Year Ended December 31, 2004
Mortgage
Banking
Consumer
Finance
Other and
Eliminations
$12,624
1,167
3,066
$16,857
$2,162
220
2,077
$4,459
$465
25
159
$649
Total
$25,233
3,556
8,964
$37,753
Year Ended December 31, 2003
Mortgage
Banking
Consumer
Finance
$13,361
1,006
3,363
$17,730
$1,860
156
1,700
$3,716
Year Ended December 31, 2002
Mortgage
Banking
Consumer
Finance
$ 9,934
808
2,619
$13,361
$505
44
445
$994
Other
$600
28
206
$834
Total
$24,410
3,453
8,885
$36,748
Other
$440
27
176
$643
Total
$18,036
3,183
6,627
$27,846
Total non-interest expense increased $1.01 million, or 2.7 percent, to $37.75 million for the year ended
December 31, 2004. The Retail Banking and the Consumer Finance segments reported increases in total non-interest
expenses that were primarily attributable to higher personnel and operating expenses to support growth at both
segments and technology enhancements at the Consumer Finance segment. The Retail Banking segment opened a
branch in Mechanicsville, Virginia at the end of 2003 and a branch in Newport News, Virginia in January 2004.
Start-up costs associated with the Bank’s expansion efforts will continue throughout 2005 as we expect the Bank to
begin construction of two new branches on the Virginia Peninsula. We will also incur additional costs as the Retail
Banking segment relocates its operations departments to a new facility in 2005. The Consumer Finance segment
continues to invest in both technology and people to create efficiencies and serve new markets. We have hired
additional personnel to begin serving that segment’s Northern Virginia and Nashville, Tennessee markets. A
decrease in non-interest expenses for the Mortgage Banking segment resulted from lower production-based
compensation and operating expenses.
24
2003 Compared to 2002
Non-interest expense in 2003 increased $8.90 million, or 32.0 percent, over 2002. This increase was
attributable to (1) the acquisition of C&F Finance in September 2002, (2) higher variable compensation costs and
other operating expenses at the Mortgage Banking segment resulting from the increase in loan production and (3)
the increase in personnel expenses at the Retail Banking segment resulting from an increase in operations and
administrative personnel, as well as higher employee benefits expense. The increase in benefits costs was
attributable to higher pension and health care costs and an increase in the average number of full-time equivalent
employees.
INCOME TAXES
Applicable income taxes on 2004 earnings amounted to $5.01 million, resulting in an effective tax rate of
30.9 percent, compared with $6.33 million, or 32.9 percent, in 2003 and $4.14 million, or 29.8 percent, in 2002. The
decrease in the effective tax rate for 2004 resulted from a higher proportion of earnings from tax-exempt assets, such
as obligations of states and political subdivisions. The change in the composition of earnings mainly reflected the
lower earnings at the Mortgage Banking segment. Conversely, the increase in the effective tax rate for 2003 as
compared to 2002 resulted from a decrease in earnings from tax-exempt assets as a percentage of total income
mainly resulting from the increased earnings at the Mortgage Banking and the Consumer Finance segments.
25
ASSET QUALITY
Allowance and Provision for Loan Losses
The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any
losses on existing loans that may become uncollectible. The provision for loan losses increases the allowance, and
loans charged off, net of recoveries, reduce the allowance. The following table presents the Corporation’s loan loss
experience for the periods indicated:
TABLE 5: Allowance for Loan Losses
(Dollars in thousands)
Allowance, beginning of period
Provision for loan losses:
Retail Banking and Mortgage Banking
Consumer Finance
Total provision for loan losses
Loans charged off:
Real estate—residential mortgage
Real estate—construction
Commercial, financial and agricultural
Consumer
Consumer Finance
Total loans charged off
Recoveries of loans previously charged off:
Real estate—residential mortgage
Commercial, financial and agricultural
Consumer
Consumer Finance
Total recoveries
Net loans charged off
Acquisition of Moore Loans
Allowance, end of period
Ratio of net charge-offs to average total loans
outstanding during period for Consumer Finance
Ratio of net charge-offs to average total loans
outstanding during period for Retail Banking and
Mortgage Banking
Year Ended December 31,
2002
$3,684
2001
$3,609
2003
$6,722
2004
$ 8,657
200
3,826
4,026
—
—
7
96
2,592
2,695
—
68
39
1,049
1,156
1,539
—
$11,144
525
2,642
3,167
—
—
15
86
1,844
1,945
—
34
33
646
713
1,232
—
$8,657
500
641
1,141
—
—
161
326
573
1,060
—
47
21
196
264
796
2,693
$6,722
2000
$3,302
400
—
400
—
31
—
71
—
102
400
—
400
—
32
126
192
—
350
—
—
25
—
25
325
—
$3,684
—
—
9
—
9
93
—
$3,609
1.78%
1.60%
1.65%
—%
—%
—
.01
.13
.11
.04
During 2004, the allowance for loan losses at the combined Retail Banking and Mortgage Banking segments
remained basically unchanged.
The Consumer Finance segment, consisting solely of C&F Finance, accounted for the majority of the activity in
the allowance for loan losses during 2004. In addition to maintaining the allowance for loan losses, C&F Finance
has retained dealer reserves that were established at the time loans were made and are specific to each individual
dealer. Loans charged off at C&F Finance have first been charged to the dealer reserves, to the extent that an
individual dealer had reserves, and the remainder has been charged to the allowance for loan losses. Dealer
reserves are a liability of C&F Finance and payable to individual dealers upon the termination of the relationship
with C&F Finance and the payment of outstanding loans associated with a specific dealer. In order to conform its
dealer agreements to standard industry practices, C&F Finance ceased originating loans with a dealer reserve
26
provision at January 1, 2004. However, existing dealer reserves at December 31, 2003 were retained to absorb future
losses for each specific dealer. The provision for loan losses and the corresponding allowance for loan losses at the
Consumer Finance segment will increase in future periods as dealer reserves are reduced by virtue of loan charge-
offs or balance pay-offs to dealers. The following table summarizes the dealer reserves activity:
(Dollars in thousands)
Dealer reserves at the beginning of year
Reserve holdback at loan origination
Loans charged off
Recoveries of loans previously charged off
Acquisition of C&F Finance
Dealer reserves at the end of year
Year Ended December 31,
2003
2002
2004
$ 2,119
--
(1,105)
62
--
$ 1,076
$ 2,071
2,235
(2,412)
225
--
$ 2,119
$ --
443
(672)
4
2,296
$2,071
C&F Finance serves customers who have limited access to traditional automobile financing. C&F Finance’s
typical borrowers have experienced prior credit difficulties or have modest income. Because C&F Finance serves
customers who are unable to meet the credit standards imposed by most traditional automobile financing sources,
we expect C&F Finance to sustain a higher level of credit losses than traditional automobile financing sources.
Throughout 2003, we implemented changes to the loan underwriting guidelines to improve asset quality on new
loans. As a result, aggregate charge-offs to the allowance for loan losses and dealer reserves declined in 2004.
Because C&F Finance provides financing in a relatively higher risk market, C&F Finance generally charges interest
at higher rates than those charged by traditional financing sources.
Loan Loss Allowance Methodology-Retail and Mortgage Banking. We conduct an analysis of the loan portfolio
on a regular basis. We use this analysis to assess the sufficiency of the allowance for loan losses and to determine
the necessary provision for loan losses. The review process generally begins with loan officers identifying problem
loans to be reviewed on an individual basis for impairment. In addition to these loans, all commercial loans are
considered for individual impairment testing. Impairment testing includes consideration of the current collateral
value for each loan, as well as any known internal or external factors that may affect collectibility. When we
identify a loan as impaired, we may establish a specific allowance based on the difference between the carrying
value of the loan and its computed fair value. We segregate the loans meeting the criteria for special mention,
substandard, doubtful and loss, as well as impaired loans, from performing loans within the portfolio. We then
group loans by loan type (e.g., commercial, consumer) and by risk rating (e.g., substandard, doubtful). We assign
each loan type an allowance factor based on the associated risk, complexity and size of the individual loans within
the particular loan category. We assign classified loans a higher allowance factor than non-rated loans within a
particular loan type based on our concerns regarding collectibility or our knowledge of particular elements
surrounding the borrower. Our allowance factors increase with the severity of classification. Allowance factors
used for unclassified loans are based on our analysis of charge-off history and our judgment based on the overall
analysis of the lending environment including the general economic conditions. The allowance for loan losses is the
aggregate of specific allowances, the calculated allowance required for classified loans by category and the general
allowance for each portfolio type.
27
In conjunction with the methodology described above, we consider the following risk elements that are
inherent in the loan portfolio:
• Residential real estate loans and equity lines of credit carry risks associated with the continued credit-
worthiness of the borrower and changes in the value of the collateral.
• Construction loans carry risks that the project will not be finished according to schedule, the project will not
be finished according to budget and the value of the collateral may at any point in time be less than the
principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or
may not be a Bank loan customer, is unable to finish the construction project as planned because of financial
pressure unrelated to the project.
• Commercial real estate loans may carry risks associated with the successful operation of a business or a real
estate project, in addition to other risks associated with the ownership of real estate, because the repayment
of these loans may be dependent upon the profitability and cash flows of the business or project.
• Commercial business loans carry risks associated with the successful operation of a business, which is
usually the source of loan repayment, and the value of the collateral, which may depreciate over time and
cannot be appraised with as much precision as residential real estate.
• Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value
of the collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are
more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or
personal bankruptcy.
Loan Loss Allowance Methodology – Consumer Finance. The Consumer Finance segment’s loans consist of non-
prime automobile loans. These loans carry risks associated with (1) the continued credit-worthiness of borrowers
who are unable to meet the credit standards imposed by most traditional automobile financing sources and (2) the
value of rapidly-depreciating collateral. These loans do not lend themselves to a classification process because of
the short duration of time between delinquency and repossession. Therefore, the loan loss analysis review process
generally focuses on the rates of delinquencies, defaults, repossessions and losses. Allowance factors also include
an analysis of charge-off history and our judgment based on the overall analysis of the lending environment.
28
The allocation of the allowance at December 31 for the years indicated and the ratio of related outstanding
loan balances to total loans are as follows:
TABLE 6: Allocation of Allowance for Loan Losses
(Dollars in thousands)
Allocation of allowance for loan losses, end of year:
Real estate—residential mortgage
Real estate—construction
Commercial, financial and agricultural1
Equity lines
Consumer
Consumer finance
Unallocated
Balance, December 31
Ratio of loans to total year-end loans:
Real estate—residential mortgage
Real estate—construction
Commercial, financial and agricultural1
Equity lines
Consumer
Consumer finance
1Includes loans secured by real estate
Non-Performing Assets
2004
2003
2002
2001
2000
$ 337
129
3,736
92
166
6,684
--
$ 615
112
3,175
98
256
4,401
--
$ 573
107
2,670
94
287
2,957
34
$ 619
263
2,203
113
290
--
196
$ 743
251
2,005
116
267
--
227
$11,144
$8,657
$6,722
$3,684
$3,609
21%
3
46
5
2
23
22%
3
46
4
3
22
23%
3
47
4
3
20
32%
4
55
4
5
--
37%
4
49
5
5
--
100%
100%
100%
100%
100%
Table 7 summarizes non-performing assets for the past five years.
TABLE 7: Non-Performing Assets
Retail and Mortgage Banking
(Dollars in thousands)
2004
2003
2002
Total non-performing assets
Accruing loans past due for 90 days or more
Non-accrual loans
Real estate owned
$1,993
8
$2,001
$1,092
$4,256
.72%
Non-performing assets to total loans* and real estate owned
1.52
Allowance for loan losses to total loans* and real estate owned
212.69
Allowance for loan losses to non-performing assets
*Total loans above does not include consumer finance loans at C&F Finance, which are shown directly below.
1.39%
1.43
102.88
Allowance for loan losses
$4,336
—
$4,336
$4,460
$1,580
$1,656
703
2001
$1,026
—
$2,359
$1,026
$ 69
$ 913
$3,765
$3,684
.88%
1.40
159.60
.41%
1.47
359.06
2000
$ 473
47
$ 520
$1,586
$3,609
.20%
1.55
694.04
Consumer Finance
(Dollars in thousands)
Non-accrual loans
Accruing loans past due for 90 days or more
Allowance for loan losses
Dealer reserves
Non-accrual consumer finance loans to total consumer finance loans
Allowance for loan losses to total consumer finance loans
Dealer reserves to total consumer finance loans
Total allowance for loans losses and dealer reserves to total consumer finance
loans
2004
2003
2002
$1,330
$1,149
$ 688
2001
$ —
2000
$ —
481
6,684
1,076
1.42%
7.15%
1.15
233
4,401
2,119
1.44%
5.52%
2.66
293
2,957
2,071
1.02%
4.40%
3.08
8.30%
8.18%
7.48%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
29
As shown in Table 7, the non-performing assets of the combined Retail and Mortgage Banking segments
increased to $4.34 million as of December 31, 2004, compared with $2.00 million at December 31, 2003. This increase
resulted primarily from one commercial real estate loan relationship that became more than 90 days delinquent and
was placed on non-accrual status in the first quarter of 2004. The non-accrual principal balance outstanding of this
relationship is $2.93 million for which we have recorded a specific reserve of $965,000 at December 31, 2004. We are
closely monitoring this relationship. The increase in non-accrual loans attributable to this relationship was offset in
part by the removal of another commercial loan relationship approximating $996,000 from non-accrual status.
Although this relationship was contractually past due more than 90 days at December 31, 2004, we have determined
that a return to accrual status was appropriate based on an evaluation of the net realizable value of the collateral,
the improved financial strength of the borrower and a sustained period of contractual repayment performance. The
decrease in the ratio of the allowance for loan losses to total loans resulted from a review of the loan loss calculation
and the reserve allocation percentages used in the calculation. In several instances, we decreased these allocation
percentages based on historical charge-offs and current economic conditions. We believe that the current allowance
for loan losses is adequate to absorb any losses that may become uncollectible.
As shown in Table 7, non-performing assets of the Consumer Finance segment increased to $1.33 million at
December 31, 2004 from $1.15 million at December 31, 2003, and was accompanied by an increase in the ratio of the
allowance for loan losses and dealer reserves to non-accrual loans to 8.30 percent at December 31, 2004 from 8.18
percent at December 31 2003. Throughout 2003, we implemented changes to the loan underwriting guidelines to
improve asset quality on new loans. Charge-offs during the first half of 2004 included loans that were originated
under previous guidelines and that were non-performing at December 31, 2003. As previously mentioned, effective
January 1, 2004, C&F Finance no longer originates loans with a dealer reserve provision. Therefore, the ratio of
dealer reserves to total consumer finance loans declined from 2.66 percent at December 31, 2003 to 1.15 percent at
December 31, 2004. The decline in the dealer reserves is offset in part by a higher provision for loan losses that
resulted in an increase in the ratio of the allowance for loan losses to total consumer finance loans from 5.52 percent
at December 31, 2003 to 7.15 percent at December 31, 2004.
During periods of economic slowdown or recession, delinquencies, defaults, repossessions and losses
generally increase at the Consumer Finance segment. These periods also may be accompanied by decreased
consumer demand for automobiles and declining values of automobiles securing outstanding loans, which weakens
collateral coverage and increases the amount of a loss in the event of default. Significant increases in the inventory
of used automobiles during periods of economic recession may also depress the prices at which we may sell
repossessed automobiles or delay the timing of these sales. Because C&F Finance focuses on non-prime borrowers,
the actual rates of delinquencies, defaults, repossessions and losses on these loans are higher than those experienced
in the general automobile finance industry and could be more dramatically affected by a general economic
downturn. While we manage the higher risk inherent in loans made to non-prime borrowers through the
underwriting criteria and collection methods employed by C&F Finance, we cannot guarantee that these criteria or
methods will afford adequate protection against these risks. However, we believe that the current allowance for
loan losses and the dealer reserves are adequate to absorb any losses on existing Consumer Finance segment loans
that may become uncollectible.
We generally place loans at the Retail Banking, Mortgage Banking and Consumer Finance segments on non-
accrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is
uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the
30
borrower. Loans greater than 90 days past due may remain on accrual status if we determine we have adequate
collateral to cover the principal and interest. For those loans that are carried on non-accrual status, payments are
first applied to principal outstanding.
At the Consumer Finance segment, automobiles securing the loans are generally repossessed after a loan
becomes more than 60 days delinquent. Repossessions are handled by independent repossession firms engaged by
C&F Finance and must be approved by a collections officer. After any prescribed waiting period, the repossessed
automobile is sold by a third-party auctioneer. C&F Finance does not sell any vehicles on a retail basis. We credit
the proceeds from the sale of the automobile at auction, and any other recoveries, against the balance of the loan.
Auction proceeds from the sale of the repossessed vehicle and other recoveries are usually not sufficient to cover the
outstanding balance of the loan, and the resulting deficiency is charged off. The charge-off represents the difference
between the actual net sale proceeds and the amount of the delinquent loan. C&F Finance pursues collection of
deficiencies when it deems such action to be appropriate.
For those loans that are carried on non-accrual status, payments are first applied to principal balances
outstanding. We would have recorded additional gross interest income of $202,000 for 2004, $154,000 for 2003 and
$157,000 for 2002 if non-accrual loans had been current throughout these periods. Interest received on non-accrual
loans was $55,000 in 2004, $32,000 in 2003 and $15,000 in 2002.
We measure impaired loans 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. We consider a loan impaired when it is probable that we will be
unable to collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan
impaired during a period of delay in payment if we expect the ultimate collectibility of all amounts due. We
maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded
investment. At December 31, the balances of impaired loans were $4.25 million for 2004 and $4.95 million for 2003
for which a specific valuation allowance of $965,000 at December 31, 2004 and $465,000 at December 31, 2003 was
established. The average balance of impaired loans was $3.47 million for 2004 and $1.85 million for 2003. We
believe that the allowance for loan losses is adequate to absorb any losses on existing loans that may become
uncollectible.
31
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 December 31, 2004, the Corporation had total assets of $609.12 million, up 6.2 percent over the previous
year-end. In 2003, total assets increased $21.62 million, or 3.9 percent over year-end 2002. Asset growth in 2004
was principally a result of increases in loans held for sale and loans held for investment. These increases were offset
in part by a decline in securities available for sale. At December 31, 2003, the Bank invested in short-term securities
that had a slight effective yield advantage to the Bank’s overnight interest-bearing account at the FHLB. These
securities matured in the first quarter of 2004, and, to the extent these funds were not used to fund the increase in
loans held for sale, loans held for investment and additional securities purchases, they were held in the Bank’s
overnight interest-bearing account at the FHLB at December 31, 2004. Asset growth in 2003 was principally
attributable to increased interest-bearing deposits in other banks and increased securities available for sale resulting
from growth in deposits in excess of loan demand at the end of 2003.
LOAN PORTFOLIO
General
Through the Retail Banking segment, we engage in a wide range of lending activities, which include the
origination, primarily in the Banking segment’s market area, of (1) one-to-four family and multi-family residential
mortgage loans, (2) commercial real estate loans, (3) construction loans, (4) land acquisition and development loans,
(5) consumer loans and (6) commercial business loans. We engage in non-prime automobile lending through the
Consumer Finance segment and in residential mortgage lending through the Mortgage Banking segment with loans
sold to third-party investors. At December 31, 2004 the Corporation’s loans held for investment in all categories
totaled $405.62 million and loans held for sale totaled $48.57 million.
Tables 8 and 9 present information pertaining to the composition of loans and maturity/repricing of loans.
TABLE 8: Summary of Loans Held for Investment
(Dollars in thousands)
Real estate—residential mortgage
Real estate—construction
Commercial, financial, and agricultural
Equity lines
Consumer
Consumer finance
1
Total loans
Less allowance for loan losses
Total loans, net
1 Includes loans secured by real estate
December 31,
2004
2003
2002
2001
2000
$ 85,080
13,315
185,646
18,490
9,620
93,464
405,615
(11,144)
$ 77,878
9,591
167,207
13,044
11,405
79,702
358,827
(8,657)
$ 75,684
8,572
158,350
12,181
13,375
67,194
335,356
(6,722)
$ 80,977
8,819
137,374
11,284
11,342
--
249,796
(3,684)
$ 86,453
9,099
113,570
11,616
12,815
--
233,553
(3,609)
$394,471
$350,170
$328,634
$246,112
$229,944
32
TABLE 9: Maturity/Repricing Schedule of Loans
December 31, 2004
Commercial, Financial,
and Agricultural
Real Estate
Construction
$56,253
20,691
3,223
33,948
46,451
25,080
$ --
--
--
13,315
--
--
(Dollars in thousands)
Variable Rate:
Within 1 year
1 to 5 years
After 5 years
Fixed Rate:
Within 1 year
1 to 5 years
After 5 years
Credit Policy
The Corporation’s credit policy establishes minimum requirements and provides for appropriate limitations
on overall concentration of credit within the Corporation. The policy provides guidance in general credit policies,
underwriting policies and risk management, credit approval, and administrative and problem asset management
policies. The overall goal of the Corporation’s credit policy is to ensure that loan growth is accompanied by
acceptable asset quality with uniform and consistently applied approval, administration, and documentation
practices and standards.
Residential Mortgage Lending – Held for Sale
The Mortgage Banking segment’s guidelines for underwriting conventional conforming loans comply with
the underwriting criteria established by Fannie Mae and/or Freddie Mac. The guidelines for conventional non-
conforming loans are based on the requirements of private investors and information provided by third-party
investors. The guidelines used by C&F Mortgage to originate FHA-insured and VA-guaranteed loans comply with
the criteria established by HUD and the VA. The conventional loans that C&F Mortgage originates or purchases
that have loan-to-value ratios greater than 80 percent at origination are generally covered by private mortgage
insurance. The borrower pays the cost of the insurance.
Residential Mortgage Lending – Held for Investment
The Retail Banking segment originates residential mortgage loans secured by properties located in its
primary market area in southeastern and central Virginia. The Bank offers various types of residential mortgage
loans in addition to traditional long-term, fixed-rate loans. Such loans include 10 and 15 year amortizing mortgage
loans with fixed rates of interest and fixed-rate mortgage loans with terms of 30 years but subject to call after five,
seven or 10 years at the option of the Bank. The Bank underwrites the loans on terms consistent with pre-existing
secondary mortgage market standards.
Loans associated with residential mortgage lending are included in the real estate—residential mortgage
category in Table 8.
33
Construction Lending
The Retail Banking segment has an active construction lending program. The Bank makes loans primarily
for the construction of one-to-four family residences and, to a lesser extent, multi-family dwellings. The Bank also
makes construction loans for office and warehouse facilities and other nonresidential projects, generally limited to
borrowers that present other business opportunities for the Bank.
The amounts, interest rates and terms for construction loans vary, depending upon market conditions, the
size and complexity of the project, and the financial strength of the borrower and any guarantors of the loan. The
term for the Bank’s typical construction loan ranges from nine months to 15 months for the construction of an
individual residence and from 15 months to a maximum of three years for larger residential or commercial projects.
The Bank does not typically amortize its construction loans, and the borrower pays interest monthly on the
outstanding principal balance of the loan. The Bank’s construction loans generally have a floating or variable rate of
interest but occasionally have a fixed interest rate. The Bank does not generally finance the construction of
commercial real estate projects built on a speculative basis. For residential builder loans, the Bank limits the
number of models and/or speculative units allowed depending on market conditions, the builder’s financial
strength and track record and other factors. Generally, the maximum loan-to-value ratio for one-to-four family
residential construction loans is 80 percent of the property’s fair market value, or 85 percent of the property’s fair
market value if the property will be the borrower’s primary residence. The fair market value of a project is
determined on the basis of an appraisal of the project usually conducted by an independent, outside appraiser
acceptable to the Bank. For larger projects where unit absorption or leasing is a concern, the Bank may also obtain a
feasibility study or other acceptable information from the borrower or other sources about the likely disposition of
the property following the completion of construction.
Construction loans for nonresidential projects and multi-unit residential projects are generally larger and
involve a greater degree of risk to the Bank than residential mortgage loans. The Bank attempts to minimize such
risks (1) by making construction loans in accordance with the Bank’s underwriting standards and to established
customers in its primary market area and (2) by monitoring the quality, progress and cost of construction. The
maximum loan-to-value ratio established by the Bank for non-residential projects and multi-unit residential projects
is 75 percent; however, this maximum can be waived for particularly strong borrowers on an exception basis.
Loans associated with construction lending are included in the real estate—construction category in Table 8.
Consumer Lot Lending
Consumer lot loans are loans made to individuals for the purpose of acquiring an unimproved building site
for the construction of a residence that generally will be occupied by the borrower. Consumer lot loans are made
only to individual borrowers, and each borrower generally must certify to the Bank his intention to build and
occupy a single-family residence on the lot generally within three or five years of the date of origination of the loan.
These loans typically have a maximum term of either three or five years with a balloon payment of the entire
balance of the loan being due in full at the end of the initial term. The interest rate for these loans is fixed or
variable at a rate that is slightly higher than prevailing rates for one-to-four family residential mortgage loans. We
do not believe consumer lot loans bear as much risk as land acquisition and development loans because such loans
are not made for the construction of residences for immediate resale, are not made to developers and builders, and
are not concentrated in any one subdivision or community. Beginning in 2004, the Bank began purchasing lot loans
34
originated by C&F Mortgage. These loans must satisfy the Bank’s underwriting criteria, including loan-to-value
and credit score guidelines.
Loans associated with consumer lot lending are included in the real estate—construction category in Table
8.
Commercial Real Estate Lending
The Bank’s commercial real estate loans are primarily secured by the value of real property and the income
arising from such property. The proceeds of commercial real estate loans are generally used by the borrower to
finance or refinance the cost of acquiring and/or improving a commercial property. The properties that typically
secure these loans are office and warehouse facilities, hotels, retail facilities, restaurants and other commercial
properties. The Bank’s present policy is generally to restrict the making of commercial real estate loans to
borrowers who will occupy or use the financed property in connection with their normal business operations.
However, the Bank also will consider making commercial real estate loans under the following two conditions.
First, the Bank will consider making commercial real estate loans for other purposes if the borrower is in strong
financial condition and presents a substantial business opportunity for the Bank. Second, the Bank will consider
making commercial real estate loans to creditworthy borrowers who have substantially pre-leased the
improvements to high-caliber tenants.
The Bank’s commercial real estate loans are usually amortized over a period of time ranging from 15 years
to 25 years and usually have a term to maturity ranging from five years to 15 years. These loans normally have
provisions for interest rate adjustments after the loan is three to five years old. The Bank’s maximum loan-to-value
ratio for a commercial real estate loan is 80 percent; however, this maximum can be waived for particularly strong
borrowers on an exception basis. Most commercial real estate loans are further secured by one or more
unconditional personal guarantees.
In recent years, the Bank has structured many of its commercial real estate loans as mini-permanent loans.
The amortization period, term and interest rates for these loans vary based on borrower preferences and the Bank’s
assessment of the loan and the degree of risk involved. If the borrower prefers a fixed rate of interest, the Bank
usually offers a loan with a fixed rate of interest for a term of three to five years with an amortization period of up
to 25 years. The remaining balance of the loan is due and payable in a single balloon payment at the end of the
initial term. In addition, the Bank offers a fixed rate of interest for up to 15 years for loans that fully amortize
during the 15-year term. If the borrower prefers a variable or floating rate of interest, the Bank usually offers a loan
with an interest rate indexed to the Bank’s prime rate plus a margin for a term of five years with the remaining
balance of the loan due and payable in a single balloon payment at the end of five years. We believe that shorter
maturities for commercial real estate loans are necessary to give the Bank some protection from changes in the
borrower’s business and income as well as changes in general economic conditions. In the case of fixed-rate
commercial real estate loans, shorter maturities also provide the Bank with an opportunity to adjust the interest rate
on this type of interest-earning asset in accordance with the Bank’s asset and liability management strategies.
Loans secured by commercial real estate are generally larger and involve a greater degree of risk than
residential mortgage loans. Because payments on loans secured by commercial real estate are usually dependent on
successful operation or management of the properties securing such loans, repayment of such loans is subject to
changes in both general and local economic conditions and the borrower’s business and income. As a result, events
beyond the control of the Bank, such as a downturn in the local economy, could adversely affect the performance of
35
the Bank’s commercial real estate loan portfolio. The Bank seeks to minimize these risks by lending to established
customers and generally restricting its commercial real estate loans to its primary market area. Emphasis is placed
on the income producing characteristics and capacity of the collateral.
Loans associated with commercial real estate lending are included in the commercial, financial and
agricultural category in Table 8.
Land Acquisition and Development Lending
Land acquisition and development loans are made to builders and developers for the purpose of acquiring
unimproved land to be developed for residential building sites, residential housing subdivisions, multi-family
dwellings and a variety of commercial uses. The Bank’s policy is to make land acquisition loans to borrowers for
the purpose of acquiring developed lots for single-family, townhouse or condominium construction. The Bank will
make both land acquisition and development loans to residential builders, experienced developers and others in
strong financial condition to provide additional construction and mortgage lending opportunities for the Bank.
The Bank underwrites and processes land acquisition and development loans in much the same manner as
commercial construction loans and commercial real estate loans. For land acquisition and development loans, the
Bank uses a lower loan-to-value ratio, which is a maximum of 65 percent for unimproved land and 80 percent of the
discounted appraised value of the property as determined in accordance with the Bank’s appraisal policies for
developed lots for single-family or townhouse construction. The Bank can waive the maximum loan-to-value ratio
for particularly strong borrowers on an exception basis. The term of land acquisition and development loans ranges
from a maximum of two years for loans relating to the acquisition of unimproved land to, generally, a maximum of
three years for other types of projects. All land acquisition and development loans generally are further secured by
one or more unconditional personal guarantees. Because these loans are usually in a larger amount and involve
more risk than consumer lot loans, the Bank carefully evaluates the borrower’s assumptions and projections about
market conditions and absorption rates in the community in which the property is located and the borrower’s
ability to carry the loan if the borrower’s assumptions prove inaccurate.
Loans associated with land acquisition and development lending are included in the commercial, financial
and agricultural category in Table 8.
Commercial Business Lending
Commercial business loan products include revolving lines of credit to provide working capital, term loans
to finance the purchase of vehicles and equipment, letters of credit to guarantee payment and performance, and
other commercial loans. In general, these credit facilities carry the unconditional guaranty of the owners and/or
stockholders.
Revolving and operating lines of credit are typically secured by all current assets of the borrower, provide
for the acceleration of repayment upon any event of default, are monitored monthly or quarterly to ensure
compliance with loan covenants, and are re-underwritten or renewed annually. Interest rates generally will float at
a spread tied to the Bank’s prime lending rate. Term loans are generally advanced for the purchase of, and are
secured by, vehicles and equipment and are normally fully amortized over a term of two to five years, on either a
fixed or floating rate basis.
36
Loans associated with commercial business lending are included in the commercial, financial and
agricultural category in Table 8.
Home Equity and Second Mortgage Lending
The Bank offers its customers home equity lines of credit and second mortgage loans that enable customers
to borrow funds secured by the equity in their homes. Currently, home equity lines of credit are offered with
adjustable rates of interest that are generally priced at the prime lending rate plus a spread. Second mortgage loans
are offered with fixed and adjustable rates. Call option provisions are included in the loan documents for some
longer-term, fixed-rate second mortgage loans, and these provisions allow the Bank to make interest rate
adjustments for such loans. Second mortgage loans are granted for a fixed period of time, usually between five and
20 years, and home equity lines of credit are made on an open-end, revolving basis. Home equity loans, second
mortgage loans and other consumer loans secured by a personal residence generally do not present as much risk to
the Bank as other types of consumer loans. Beginning in 2004, the Bank began purchasing home equity lines of
credit originated by C&F Mortgage. These loans must satisfy the Bank’s underwriting criteria, including loan-to-
value and credit score guidelines.
Loans associated with home equity and second mortgage lending are included in the equity lines category
in Table 8.
Consumer Lending
The Bank offers a variety of consumer loans, including automobile, personal secured and personal
unsecured, credit card, and loans secured by savings accounts or certificates of deposit. The shorter terms and
generally higher interest rates on consumer loans help the Bank maintain a profitable spread between its average
loan yield and its cost of funds. Consumer loans secured by collateral other than a personal residence generally
involve more credit risk than residential mortgage loans because of the type and nature of the collateral or, in
certain cases, the absence of collateral. However, the Bank believes the higher yields generally earned on such loans
compensate for the increased credit risk associated with such loans.
Loans associated with consumer lending are included in the consumer category in Table 8.
Automobile Sales Finance
C&F Finance has an extensive automobile dealer network from which it buys automobile loan contracts
through its branch offices. Branch personnel have a specific credit authority based upon their experience and
historical loan portfolio results, as well as established underwriting criteria. Although the credit approval process is
decentralized, C&F Finance’s application processing system includes controls designed to ensure that credit
decisions comply with its underwriting policies and procedures.
Finance contract application packages completed by prospective borrowers are submitted by the
automobile dealers electronically through a third-party online automotive sales and finance platform to C&F
Finance’s automated origination and application scoring system, which processes the credit bureau report,
generates all relevant loan calculations and recommends the loan structure. C&F Finance personnel with credit
authority review the system-generated recommendations and determine whether to approve or deny the
37
application. The credit decision is based primarily on the applicant’s credit history with emphasis on prior auto
loan history, current employment status, income, collateral type and mileage, and the loan-to-value ratio.
C&F Finance’s underwriting and collateral guidelines form the basis for the credit decision. Exceptions to
credit policies and authorities must be approved by a designated credit officer. C&F Finance’s typical borrowers
have experienced prior credit difficulties or have modest income. Because C&F Finance serves customers who are
unable to meet the credit standards imposed by most traditional automobile financing sources, we expect C&F
Finance to sustain a higher level of credit losses than traditional automobile financing sources. However, C&F
Finance generally charges interest at higher rates than those charged by traditional financing sources. These higher
rates should more than offset the increase in the provision for loan losses for this segment of the Corporation’s loan
portfolio.
Loans associated with automobile sales finance are included in the consumer finance category in Table 8.
SECURITIES
The investment portfolio plays a primary role in the management of the Corporation’s interest rate
sensitivity 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 securities available for sale,
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. These securities are carried at estimated
fair value. The following table sets forth the composition of the Corporation’s securities available for sale in dollar
amounts at fair value and as a percentage of the Corporation’s total securities available for sale at the dates
indicated:
(Dollars in thousands)
U.S. government agencies and
corporations
Mortgage-backed securities
Obligations of states and
political subdivisions
Total debt securities
Preferred stock
Total available for sale securities
December 31, 2004
Amount
Percent
December 31, 2003
Amount
Percent
$ 10,722
3,067
53,671
67,460
5,327
$ 72,787
15%
4
74
93
7
100%
$ 47,088
1,763
48,754
97,605
5,445
$ 103,050
46%
2
47
95
5
100%
At year-end 2004, the total fair value of securities was $72.79 million, down 29.4 percent from $103.05
million at year-end 2003. The decrease in 2004 reflected the January 2004 maturation of the Bank’s investment in
short-term securities of U.S. Government agencies and corporations. At year-end 2003, the total fair value of
securities was $103.05 million, up 70.0 percent from $60.63 million at year-end 2002. The increase in 2003 reflected
our decision to invest our excess liquidity in short-term securities that had a slight effective yield advantage to the
Bank’s overnight interest-bearing account at the FHLB.
38
Table 10 presents additional information pertaining to the composition of the securities portfolio by
contractual maturity.
TABLE 10: Maturity of Securities
(Dollars in thousands)
U.S. government agencies and corporations:
Maturing within 1 year
Maturing after 1 year, but within 5 years
Maturing after 5 years, but within 10 years
Total U.S. government agencies and corporations
Mortgage backed securities:
Maturing after 1 year, but within 5 years
Total mortgage backed securities
1
States and municipals:
Maturing within 1 year
Maturing after 1 year, but within 5 years
Maturing after 5 years, but within 10 years
Maturing after 10 years
Total states and municipals
2
Total securities:
Maturing within 1 year
Maturing after 1 year, but within 5 years
Maturing after 5 years, but within 10 years
Maturing after 10 years
Total securities
1
Year Ended December 31,
2002
2004
Weighted
Average
Yield
Weighted
Average
Yield
Weighted
Average
Yield
Amortized
Cost
Amortized
Cost
Amortized
Cost
2003
$ 6,508
2,244
1,994
10,746
3.12%
3.44
4.60
3.46
$39,987
5,620
1,498
47,105
1.00% $ —
2.94
—
3.82
—
1.32
—
3,039
3,039
732
6,654
21,744
21,935
51,065
7,240
11,937
23,738
21,935
4.87
4.87
7.96
6.29
7.00
6.77
6.82
3.61
5.38
6.80
6.77
1,725
1,725
4.51
4.51
4,295
4,295
620
5,975
18,328
20,660
45,583
40,607
13,320
19,826
20,660
8.70
7.60
7.27
6.95
7.18
1.12
5.26
7.01
6.95
1,205
5,308
19,222
21,971
47,706
1,205
9,603
19,222
21,971
$64,850
6.18% $94,413
4.23%
$52,001
—%
—
—
—
4.86
4.86
8.29
7.69
7.48
7.09
7.34
8.29
6.44
7.48
7.09
7.14%
Yields on tax-exempt securities have been computed on a taxable-equivalent basis.
2
Total securities excludes preferred stock at amortized cost of $4.93 million at December 31, 2004; $5.14 million at December 31, 2003 and
$5.72 million at December 31, 2002 (estimated fair value of $5.33 million at December 31, 2004; $5.45 million at December 31, 2003 and
$5.62 million at December 31, 2002).
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 at December 31, 2004 increased $19.50 million, or 4.6 percent, over December 31, 2003. In
2004, the changes by deposit category were (1) a 21.7 percent increase in non-interest-bearing deposits, (2) a 5.2
percent increase in savings and interest-bearing demand deposits and (3) a 2.0 percent decrease in time deposits.
The increase in non-interest-bearing deposits resulted from the Bank’s efforts to attract these deposits through
product offerings and an emphasis on obtaining transactional deposit accounts from its commercial customers. In
addition, the Bank opened a branch in Mechanicsville, Virginia at the end of 2003 and a branch in Newport News,
Virginia in January 2004. The decrease in time deposits can be attributed to investors preferring short-term, no
penalty deposits in order to maintain flexibility in their investing options as the value of the stock market improves.
39
Total deposits at December 31, 2003 increased $44.1 million, or 11.5 percent, from 2002. Deposit growth in 2003
over 2002 was attributable to growth at existing branch locations.
Table 11 presents the average deposit balances and average rates paid for the years 2004, 2003 and 2002.
Table 12 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2004.
TABLE 11: Average Deposits and Rates Paid
(Dollars in thousands)
Non-interest-bearing demand deposits
Interest-bearing transaction accounts
Money market deposit accounts
Savings accounts
Certificates of deposit, $100M or more
Other certificates of deposit
Total interest-bearing deposits
Total deposits
Year Ended December 31,
2004
Average
Balance
$ 69,281
80,055
42,797
55,856
56,480
127,923
363,111
$432,392
Average
Rate
0.62%
0.77
0.59
1.92
2.15
1.37%
2003
Average
Balance
Average
Rate
2002
Average
Balance
Average
Rate
$ 54,920
72,366
39,443
51,624
47,741
131,646
342,820
$397,740
0.86%
1.17
0.83
2.34
2.64
1.78%
$ 45,246
61,760
37,021
45,252
38,163
122,238
304,434
$349,680
1.10%
1.88
1.47
3.32
3.76
2.59%
TABLE 12: Maturities of Certificates of Deposit with Balances of $100,000 or More
(Dollars in thousands)
3 months or less
3-6 months
6-12 months
Over 12 months
Total
BORROWINGS
December 31, 2004
$ 8,023
9,519
26,677
13,383
$57,602
In addition to deposits, the Corporation utilizes short-term borrowings from the FHLB to fund its day-to-
day operations. Short-term borrowings also include securities sold under agreements to repurchase, which are
secured transactions with customers and generally mature the day following the day sold.
Long-term borrowings consist of advances from the FHLB and advances under a non-recourse revolving
bank line of credit, which were used to fund a portion of outstanding loans at C&F Finance. FHLB advances are
secured by a blanket floating lien on all qualifying real estate mortgage loans secured by one-to-four family
residential properties and by a blanket floating lien on all qualifying real estate mortgage loans secured by
commercial properties. The bank line of credit is non-recourse and is secured by loans at C&F Finance. During
2003, the Corporation had additional long-term borrowings outstanding that were used to partially fund the
acquisition of C&F Finance. These borrowings consisted of $3.7 million of subordinated notes to the previous
owners of C&F Finance and a $5.0 million loan from a third-party financial institution. These borrowings were
repaid in 2003 utilizing a portion of the Corporation’s excess liquidity because they carried interest rates of 8.0
percent and 6.0 percent, respectively. See Note 8 to Consolidated Financial Statements.
40
OFF-BALANCE-SHEET ARRANGEMENTS
To meet the financing needs of customers, the Corporation is a party, in the normal course of business, to
financial instruments with off-balance-sheet risk. These financial instruments include commitments to extend
credit, commitments to sell loans and standby letters of credit. These instruments involve elements of credit and
interest rate risk in addition to the amount on the balance sheet. The Corporation’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. We use the same
credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. We
obtain collateral based on our credit assessment of the customer in each circumstance.
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
total amount of loan commitments was $88.37 million at December 31, 2004 and $64.56 million at December 31,
2003.
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 $8.23 million at December 31, 2004 and $6.77 million at December 31,
2003.
At December 31, 2004, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to
$60.00 million and loans held for sale of $48.57 million. C&F Mortgage has entered into corresponding mandatory
commitments, on a best-efforts basis, to sell loans of $108.57 million. These commitments to sell loans are designed
to eliminate C&F Mortgage’s exposure to fluctuations in interest rates in connection with rate lock commitments
and loans held for sale.
C&F Mortgage 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 loans. Recourse periods vary from 90 days up to one year and conditions for repurchase vary with the
investor. Mortgages subject to recourse are collateralized by single-family residences and generally either have
loan-to-value ratios of 80 percent or less or have private mortgage insurance or are insured or guaranteed by an
agency of the U.S. Government. We include recourse considerations in our calculation of the Corporation’s capital
adequacy. Payments made under these recourse provisions were $75,000 in 2004, $107,000 in 2003 and $8,000 in
2002. Risks also arise from the possible inability of counterparties to meet the terms of their contracts. C&F
Mortgage has procedures in place to evaluate the credit risk of investors and does not expect any counterparty to
fail to meet its obligations.
41
In connection with the purchase of C&F Finance on September 1, 2002, the Corporation guaranteed a stock
price of $30 per share for the Corporation’s shares still held by the sellers on the three-year anniversary date of the
transaction. As of December 31, 2004, the Corporation’s stock price was $40.35, and the previous owners of C&F
Finance still held 17,020 shares of the Corporation’s common stock.
LIQUIDITY
The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to
satisfy the credit needs of our customers and the demands of our depositors, creditors and investors. Stable core
deposits and a strong capital position are the current components of a solid foundation for the Corporation’s
liquidity position. Additional sources of liquidity available to the Corporation include cash flows from operations,
such as loan payments and payoffs and deposit growth, and the capacity to borrow additional funds.
Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and
nonpledged securities available for sale, totaled $86.67 million at December 31, 2004. The Corporation’s funding
sources consist of (1) an established federal funds line with a regional correspondent bank that had no outstanding
balance under a total line of $14.0 million as of December 31, 2004, (2) an established line with the FHLB that had
$20.0 million outstanding under a total line of $113.95 million as of December 31, 2004 and (3) a revolving line of
credit with a third-party bank that had $49.87 million outstanding under a total line of $60 million as of December
31, 2004. We have no reason to believe these arrangements will not be renewed at maturity.
Certificates of deposit of $100,000 or more maturing in less than a year totaled $44.22 million at December
31, 2004; certificates of deposit of $100,000 or more maturing in more than one year totaled $13.38 million. The
following table presents the Corporation’s contractual obligations and scheduled payment amounts due at various
intervals over the next five years and beyond as of December 31, 2004:
CONTRACTUAL OBLIGATIONS
(Dollars in thousands)
Payments Due by Period
Total
Less than 1 Year
1-3 Years
3-5 Years
More than 5 Years
Bank line of credit
$49,870
$ --
FHLB advances1
Securities sold under
agreements to
repurchase
20,000
--
8,415
8,415
$49,870
5,000
$ --
--
$ --
15,000
--
--
--
--
Operating leases
780
487
293
$79,065
Total
1The FHLB advances include an early conversion option for the FHLB, at its discretion, to convert the existing fixed-rate
advances into three-month LIBOR-based floating rate advances. The conversion option for the $5.0 million advance due
within one-to-three years can be exercised in 2005. The conversion options for the $15.0 million advances due in more than
five years can be exercised in 2007. We can elect to repay the advances on the conversion dates, but may incur a prepayment
penalty depending on actions taken by the FHLB with regard to the conversion options.
$15,000
$55,163
$8,902
$ --
As a result of the Corporation’s management of liquid assets and the ability to generate liquidity through
liability funding, we believe that we maintain overall liquidity sufficient to satisfy the Corporation’s operational
requirements and contractual obligations.
42
CAPITAL RESOURCES
The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings
performance, and changing competitive conditions and economic forces. We regularly review the adequacy of the
Corporation’s capital. We maintain a structure that will assure an adequate level of capital to support anticipated
asset growth and to absorb potential losses.
During 2004, we repurchased 89,050 shares of the Corporation’s common stock, or 2.5 percent of the shares
outstanding as of December 31, 2003, in privately negotiated and open market transactions at prices between $35.00
and $41.50. During 2003, we repurchased 80,000 shares of the Corporation’s common stock, or 2.2 percent of the
shares outstanding as of December 31, 2002, in privately negotiated transactions at prices between $28.00 and $28.50
per share. No shares were repurchased in 2002. The board of directors authorized these stock repurchases because
the Corporation’s capital level exceeded its ongoing operational needs and regulatory requirements. While we will
continue to look for opportunities to invest capital in profitable growth, share repurchases are another tool that
facilitates improving shareholder return, as measured by ROE and earnings per share.
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, as previously described in the “Regulation and Supervision” section of Item 1. The Corporation’s
Tier I capital ratio was 12.1 percent at December 31, 2004, compared with 12.4 percent at December 31, 2003. The
total capital ratio was 13.4 percent at December 31, 2004, compared with 13.7 percent at December 31, 2003. The
leverage ratio was 9.7 percent at December 31, 2004, compared with 9.6 percent at December 31, 2003. These ratios
are in excess of the mandated minimum requirements.
Shareholders’ equity was $69.90 million at year-end 2004 compared with $65.38 million at year-end 2003.
The dividend payout ratio was 28.6 percent in 2004, 20.1 percent in 2003 and 22.8 percent in 2002. During 2004, the
Corporation paid dividends of 90 cents per share, up 25.0 percent from 72 cents per share paid in 2003.
We are not aware of any current recommendations by any regulatory authorities that, if implemented,
would have a material effect on the Corporation’s liquidity, capital resources or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation
of Variable Interest Entities.” FIN 46 provides guidance with respect to the identification of variable interest entities
when the assets, liabilities, non-controlling interests, and results of operations of a variable interest entity need to be
included in a company’s consolidated financial statements. An entity is deemed a variable interest entity, subject to
the interpretation, if the equity investment at risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, or in cases in which the equity investors lack one or
more of the essential characteristics of a controlling financial interest, which include the ability to make decisions
about the entity’s activities through voting rights, the obligation to absorb the expected losses of the entity if they
occur, or the right to receive the expected residual returns of the entity if they occur. Due to significant
implementation issues, the FASB modified the work of FIN 46 and issued FIN 46R in December of 2003. FIN 46R
deferred the effective date for the provisions of FIN 46 to entities other than Special Purpose Entities (SPEs) until
financial statements issued for periods ending after March 15, 2004. SPEs were subject to the provisions of either
43
FIN 46 or FIN 46R as of December 15, 2003. The adoption of FIN 46 and FIN 46R did not have a material effect on
the Corporation’s consolidated financial position or consolidated results of operation.
In December 2003, the Accounting Standards Executive Committee of the American Institution of Certified
Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The scope of
SOP 03-3 applies to unhealthy “problem” loans that have been acquired, either individually, in a portfolio, or in a
business acquisition. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows
expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if
those differences are attributable, at least in part, to credit quality. The SOP does not apply to loans originated by
the Corporation. We intend to adopt the provision of SOP 03-3 effective January 1, 2005, and do not expect the
initial implementation to have a significant effect on the Corporation’s consolidated financial position or
consolidated results of operations.
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles
to Loan Commitments. SAB 105 clarifies existing accounting practices relating to the valuation of issued loan
commitments, including interest rate lock commitments, subject to SFAS No. 149 and Derivative Implementation
Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133. Furthermore,
SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible
assets in the initial and subsequent interest rate lock commitment valuation. The provisions of SAB 105 were
effective for loan commitments entered into after March 31, 2004. We have adopted SAB 105. Because the
provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, we do not anticipate
that this guidance will have a material effect on either the Corporation’s consolidated financial position or
consolidated results of operations.
Effective March 31, 2004, Emerging Issues Task Force Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, was issued. EITF 03-1 provides guidance for determining the
meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within the
scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and investments accounted for
under the cost method. The guidance requires that investments which have declined in value due to credit concerns
or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless we can assert
and demonstrate our intention to hold the securities for a period of time sufficient to allow for a recovery of fair
value up to or beyond the cost of the investments, which might mean maturity. This issue also requires disclosures
assessing the ability and intent to hold investments in instances in which an investor determines than an investment
with a fair value less than cost is not other-than-temporarily impaired.
On September 30, 2004, the FASB decided to delay the effective date for the measurement and recognition
guidance contained in EITF 03-1. This delay does not suspend the requirement to recognize other-than-temporary
impairments as required by existing authoritative literature. The disclosure guidance in EITF 03-1 was not delayed.
We do not anticipate that this guidance will have a material effect on either the Corporation’s consolidated financial
position or consolidated results of operations.
EITF No. 03-16, Accounting for Investments in Limited Liability Companies, was ratified by the FASB and is
effective for reporting periods beginning after June 15, 2004. APB Opinion No. 18, The Equity Method of Accounting
for Investments in Common Stock, prescribes the accounting for investments in common stock of corporations that are
44
not consolidated. AICPA Accounting Interpretation 2, Investments in Partnership Ventures, of APB 18, indicates that
“many of the provisions of the Opinion would be appropriate in accounting” for partnerships. In EITF Abstracts
Topic No. D-46, Accounting for Limited Partnership Investments, the SEC staff clarified its view that investments of
more than 3 percent to 5 percent are considered to be more than minor and, therefore, should be accounted for
using the equity method. Limited liability companies have characteristics of both corporations and partnerships,
but are dissimilar from both in certain respects. Because of those similarities and differences, diversity in practice
exists with respect to accounting for non-controlling investments in LLCs. The consensus reached was that an LLC
should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a non-
controlling investment should be accounted for using the cost method or the equity method of accounting. We do
not anticipate that this requirement will have a material effect on either the Corporation’s consolidated financial
position or consolidated results of operations.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment”. SFAS 123R establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs in
exchange for goods or services liabilities that are based on the fair value of the entity’s equity instruments or that
may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires
a public entity to measure the cost of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange for the award—the requisite service
period (usually the vesting period). The entity will initially measure the cost of employee services received in
exchange for an award of liability instruments based on its the award’s current fair value; the fair value of that
award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value
during the requisite service period will be recognized as compensation cost over that period. The grant-date fair
value of employee share options and similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of those instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. SFAS 123R is effective for the Corporation as of the beginning
of the first interim or annual reporting period that begins after June 15, 2005. Under the transition method,
compensation cost is recognized on or after the required effective date for the portion of outstanding awards for
which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated
under SFAS 123 for either recognition or pro forma disclosures. For periods before the required effective date,
entities may elect to apply a modified version of retrospective application under which financial statements for
prior periods are adjusted on a basis consistent with the pro forma disclosure required for those periods by SFAS
123. We will begin recognizing compensation expense in the third quarter of 2005 for options that have been issued
but not yet vested prior to July 1, 2005. We project the compensation expense associated with adopting SFAS 123R
will approximate $180,000 in 2005 and $319,000 in 2006. This estimate applies only to options issued but not yet
vested prior to July 1, 2005. Options issued after the effective date will increase compensation expense above these
estimates for 2005 and 2006.
Options approved by the Compensation Committee of the board of directors and issued in December 2004
were granted with a six-month vesting period. The effect of the six-month vesting is disclosed in the pro forma
earnings per share calculations in Note 1 of the Corporation’s Consolidated Financial Statements. This vesting
45
period was determined as part of a broad review of long-term incentive compensation in light of changes in market
practice and changes in accounting rules. The issuance of SFAS 123R allowed only a very limited period for
evaluating the Corporation’s compensation plans and we believe the decision for a six-month vesting period on
options granted in December 2004 was in the best interest of the Corporation and the shareholders. We will
continue reviewing the effects of SFAS 123R and its impact on compensation plans throughout the Corporation.
EFFECTS OF INFLATION
The effect of changing prices is typically different for financial institutions than for other entities because a
financial institution’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 is directly related to price-level indices. The
consolidated financial statements reflect the impacts of inflation on interest rates, loan demands and deposits.
46
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 affect the level of both income and expense
recorded on a large portion of the Corporation’s assets and liabilities and the market value of all interest-earning
assets and interest-bearing liabilities, other than those that possess a short term to maturity. Based on the nature of
the Corporation’s operations, it is not subject to foreign currency exchange or commodity price risk. The Retail
Banking 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 these local economies. The Consumer Finance loan portfolio is concentrated primarily in
eastern, central and southwest Virginia and portions of Tennessee and Maryland and is, therefore, subject to risks
associated with these local economies. As of December 31, 2004, the Corporation does not have any hedging
transactions in place such as interest rate swaps or caps.
We enter into rate lock commitments, under which the Corporation, through the Mortgage Banking
segment, originates residential mortgage loans with interest rates determined prior to funding. Rate lock
commitments on mortgage loans that we intend to sell in the secondary market are considered derivatives. The
period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15
days to 90 days. For these rate lock commitments, we protect the Corporation from changes in interest rates
through the use of best efforts forward delivery commitments, whereby the Corporation commits to sell a loan at
the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the
loan. As a result, the Corporation is not exposed to losses nor will it realize gains related to its rate lock
commitments due to changes in interest rates.
The Corporation’s interest rate management strategy is designed to stabilize net interest income and preserve
capital. We manage interest rate risk through the use of a simulation model that measures the sensitivity of future
net interest income and the net portfolio value to changes in interest rates. In addition, we monitor the
Corporation’s interest rate sensitivity through analysis, measuring the terms to maturity or the 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 same time period. A gap is considered positive when the amount of
interest-rate-sensitive assets maturing or repricing within a specific time period exceeds the amount of interest-rate-
sensitive liabilities maturing or repricing within that same time period. During a period of rising interest rates, a
positive gap would tend to result in an increase in net interest income while a negative gap would tend to result in a
decrease in net interest income. In a declining interest rate environment, an institution with a positive gap would
generally be expected to experience a greater decrease in the yield on interest-earning assets relative to the cost of
its liabilities and thus a decrease in net interest income. An institution with a negative gap would be expected to
experience the opposite results.
47
Certain shortcomings are inherent in any method of 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 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 interest 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 also is 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.
The methodologies used for interest rate management estimate various rates of withdrawal for money
market deposits, savings, and checking accounts, which may vary significantly from actual experience.
As part of the Corporation’s borrowings, we may utilize, from time to time, daily, convertible, fixed 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, for a conversion feature that enables 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, 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. The interest rates paid on borrowings with convertible features may
or may not change depending on their interest rates relative to market interest rates. Also, the Corporation has an
adjustable rate revolving line of credit with a third-party bank that partially funds the lending activities of C&F
Finance.
Table 13 sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2004, that are subject to repricing or that mature in each of the time periods shown. In addition,
loans, securities and borrowings with call or convertible 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.
48
TABLE 13: Interest Sensitivity Analysis
(Dollars in thousands)
Earning assets:
Loans, net of unearned income
Securities
Other short-term investments
Total earning assets
Interest-bearing liabilities:
Interest-bearing transaction accounts
Savings accounts
Money market deposit accounts
Certificates of deposit, $100M or more
Other certificates of deposit
Borrowings
Total interest-bearing liabilities
Period gap
Cumulative gap
Ratio of cumulative gap to total earning assets
Interest-Sensitive Periods
Within
90 Days
91-365
Days
1-5
Years
Over
5 Years
Total
$190,989
9,721
31,320
$232,030
$ 13,052
8,314
6,522
8,023
25,257
58,285
$119,453
$112,577
$112,577
20.20%
$ 18,648
7,042
--
$ 25,690
$ 39,157
24,942
19,567
36,196
60,136
5,000
$ 184,998
$(159,308)
$ (46,731)
(8.39)%
$167,741
29,294
--
$197,035
$ 34,806
22,171
17,392
12,416
38,567
15,000
$140,352
$ 56,683
$ 9,952
1.79%
$454,181
71,806
31,320
$557,307
$ 87,015
55,427
43,481
57,602
124,903
78,285
$446,713
$ 76,803
25,749
--
$102,552
$ --
--
--
967
943
--
$ 1,910
$100,642
$110,594
19.84%
Table 14 provides information as of December 31, 2004 and 2003 about the Corporation’s financial
instruments that are sensitive to changes in interest rates based on the information and assumptions set forth in the
notes. We believe that the assumptions utilized are reasonable. We calculated the expected maturity date values
for loans by adjusting the instruments’ contractual maturity date for expectations of prepayments, as set forth in the
notes. Similarly, we calculated expected maturity date values for interest-bearing core deposits 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, we utilize both maturity and repricing dates, as opposed to solely using expected maturity
dates as shown in Table 14.
Changes in the maturities of interest-earning assets or interest-bearing liabilities in 2004, as shown in Table
14, that are attributable to factors other than overall growth are as follow:
1) The increase in loans held for sale maturing within one year is a result of production at C&F
Mortgage in the later part of the fourth quarter of 2004 compared with the same period in 2003. All
loans originated at C&F Mortgage are usually sold within one month of loan closing.
2) The decrease in securities maturing within one year and the increase in the corresponding yield is a
result of the 2003 year-end deployment of excess liquidity from overnight interest-bearing accounts
into short-term investments.
3) The increase in borrowings and the corresponding cost of funds resulted from C&F Finance’s loan
growth, which was partially funded through a variable-rate revolving line of credit.
4) The increase in yields on earnings assets reflected the impact of the increases in short-term interest
rates during the second half of 2004.
We believe that our current interest rate exposure is manageable and does not indicate any significant
exposure to interest rate changes. Although Table 13 shows a negative cumulative gap for the one-year time period,
a large portion of the interest-bearing liabilities repricing is based on broad assumptions. In addition, although
these liabilities are subject to repricing, historically the repricing lags the changes in short-term interest rates.
49
TABLE 14: Maturity of Interest-Earning Assets/Interest-Bearing Liabilities
(Dollars in thousands)
Interest-Earning Assets:
Fixed rate loans
1, 2
December 31, 2004
December 31, 2003
Average interest rate
December 31, 2004
December 31, 2003
Variable rate loans
1, 2
December 31, 2004
December 31, 2003
Average interest rate
December 31, 2004
December 31, 2003
Loans held for sale
December 31, 2004
December 31, 2003
Average interest rate
December 31, 2004
December 31, 2003
Securities
3, 4
December 31, 2004
December 31, 2003
Average interest rate
December 31, 2004
December 31, 2003
Interest-Bearing Liabilities:
Money market, savings, and interest-
5
bearing transaction accounts
December 31, 2004
December 31, 2003
Average interest rate
December 31, 2004
December 31, 2003
Certificates of deposit
December 31, 2004
December 31, 2003
Average interest rate
December 31, 2004
December 31, 2003
Borrowings
December 31, 2004
December 31, 2003
Average interest rate
December 31, 2004
December 31, 2003
Principal Amount Maturing in:
Thereafter
3 Years
2 Years
4 Years
5 Years
1 Year
Total
Fair Value
$ 62,554
$ 53,722
$35,843
$35,247
$29,260
$29,306
$45,464
$40,886
$ 39,251
$ 37,497
$ 53,538
$ 40,619
$265,910
$237,277
$268,376
$242,958
6.69%
6.83%
9.38%
9.76%
9.92%
10.33%
12.65%
13.06%
13.87%
13.55%
9.61%
7.75%
10.07%
9.99%
$ 63,644
$ 57,175
$19,540
$17,041
$11,008
$ 8,939
$ 6,106
$ 5,904
$ 4,114
$ 4,449
$ 37,325
$ 28,799
$141,737
$122,307
$146,344
$125,116
6.37%
5.60%
6.14%
6.10%
6.21%
6.30%
6.50%
6.59%
6.43%
6.54%
6.19%
6.35%
6.29%
5.98%
$ 48,566
$ 29,733
$ — $ — $ — $ —
$ — $ — $ — $ —
$ — $ 48,566
$ — $ 29,733
$ 49,542
$ 30,353
5.87%
5.70%
—
—
—
—
—
—
—
—
—
—
5.87%
5.70%
$ 430
$ 40,607
$ 1,039
$ 430
$ 1,664
$ 1,318
$ 3,005
$ 1,645
$ 3,648
$ 9,927
$ 62,020
$ 47,695
$ 71,806
$101,622
$ 74,817
$105,122
5.23%
1.08%
5.37%
5.23%
3.59%
5.37%
4.32%
5.00%
4.81%
4.45%
4.69%
4.50%
4.67%
3.16%
$111,554
$106,039
$18,593
$17,674
$18,592
$17,673
$18,592
$17,673
$18,592
$17,673
$ — $185,923
$ — $176,732
$187,747
$176,732
0.65%
0.64%
0.65%
0.64%
0.65%
0.64%
0.65%
0.64%
0.65%
0.64%
—
—
0.65%
0.64%
$129,098
$140,678
$22,723
$25,017
$15,697
$ 7,867
$ 5,977
$ 4,704
$ 6,699
$ 7,954
$ 2,311
$ --
$182,505
$186,220
$184,082
$188,286
1.77%
1.98%
2.72%
2.74%
3.37%
3.54%
3.46%
4.30%
3.71%
2.92%
1.58%
--
2.15%
2.25%
$ 8,415
$ 8,133
$49,870
$39,601
$ 5,000
$ — $ 5,000
$ — $ —
$ —
$ 15,000
$ 15,000
$ 78,285
$ 67,734
$ 76,953
$ 67,194
0.91%
0.67%
4.92%
3.65%
2.81%
—
—
2.81%
—
—
3.24%
3.24%
4.03%
3.14%
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 percent. 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 percent for year 1 and 10 percent for each of the years 2 through 5.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts)
Assets
Cash and due from banks
Interest-bearing deposits in other banks
Total cash and cash equivalents
Securities—available for sale at fair value, amortized cost of
$69,776 and $99,550, respectively
Loans held for sale, net
Loans, net of allowance for loan losses of $11,144 and $8,657,
respectively
Federal Home Loan Bank stock
Corporate premises and equipment, net
Accrued interest receivable
Goodwill
Other assets
Total assets
Liabilities
Deposits
Non-interest-bearing demand deposits
Savings and interest-bearing demand deposits
Time deposits
Total deposits
Borrowings
Accrued interest payable
Other liabilities
Total liabilities
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,
3,538,554 and 3,612,571 shares issued and outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
51
December 31,
2003
2004
$ 13,866
31,320
45,186
72,787
48,566
394,471
2,030
18,304
3,041
10,228
14,509
$609,122
$ 78,706
185,923
182,505
447,134
78,285
614
13,190
539,223
—
—
3,539
80
64,323
1,957
69,899
$609,122
$ 15,457
34,294
49,751
103,050
29,733
350,170
2,072
15,367
2,590
9,071
11,742
$573,546
$ 64,683
176,732
186,220
427,635
67,733
583
12,211
508,162
—
—
3,612
1,010
58,487
2,275
65,384
$573,546
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Interest income
Interest and fees on loans
Interest on money market investments
Interest on securities
U.S. government agencies and corporations
Tax-exempt obligations of states and political subdivisions
Corporate bonds and other
Total interest income
Interest expense
Savings and interest-bearing deposits
Certificates of deposit, $100M or more
Other time deposits
Short-term borrowings and other
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gain on calls of available for sale securities
Other income
Total other operating income
Other operating expenses
Salaries and employee benefits
Occupancy expenses
Other expenses
Total other operating expenses
Income before income taxes
Income tax expense
Net income
Earnings per common share—basic
Earnings per common share—assuming dilution
Year Ended December 31,
2004
2003
2002
$37,120
528
$35,590
253
$27,240
341
351
2,386
458
40,843
1,152
1,086
2,751
2,560
7,549
33,294
4,026
29,268
16,575
2,699
4,065
69
1,281
24,689
25,233
3,556
8,964
37,753
16,204
5,006
$11,198
$ 3.14
$ 3.00
54
2,245
529
38,671
1,512
1,118
3,482
2,716
8,828
29,843
3,167
26,676
20,584
2,274
4,488
412
1,560
29,318
24,410
3,453
8,885
36,748
19,246
6,327
$12,919
$ 3.58
$ 3.42
—
2,402
637
30,620
2,039
1,266
4,592
1,287
9,184
21,436
1,141
20,295
13,929
1,987
3,792
43
1,702
21,453
18,036
3,183
6,627
27,846
13,902
4,137
$ 9,765
$ 2.73
$ 2.67
See notes to consolidated financial statements.
52
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Balance December 31, 2001
$3,526
$ 47
$40,622
$ 548
$44,743
Common
Stock
Additional
Paid-In
Capital
Comprehensive
Income
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Issuance of common stock in connection with
acquisition
Stock options exercised
Comprehensive income
Net income
Other comprehensive income, net of tax
Unrealized holding gains arising
during the period net of tax of
$705
Comprehensive income
Cash dividends ($.62 per share)
Balance December 31, 2002
Repurchase of common stock
Stock options exercised
Comprehensive income
Net income
Other comprehensive income, net of tax
Unrealized holding gains arising
during the period net of tax of
$193
Comprehensive income
Cash dividends ($.72 per share)
Balance December 31, 2003
Repurchase of common stock
Stock options exercised
Comprehensive income
Net income
Other comprehensive income, net of tax
Unrealized holding losses arising
during the period net of tax benefit of
$171
Comprehensive income
Cash dividends ($.90 per share)
Balance December 31, 2004
100
24
2,189
270
$ 9,765
9,765
2,289
294
9,765
3,650
2,506
(80)
42
(2,182)
686
1,368
$11,133
1,368
1,368
(2,226)
48,161
(2,226)
1,916
56,233
$12,919
12,919
(2,262)
728
12,919
3,612
1,010
(89)
16
(1,172)
242
359
$13,278
(2,593)
58,487
(2,160)
$11,198
11,198
359
359
(2,593)
2,275
65,384
(3,421)
258
11,198
(318)
$10,880
(318)
(318)
$3,539
$ 80
(3,202)
$64,323
(3,202)
$1,957
$69,899
Disclosure of reclassification amount for the year ended December 31:
Unrealized net holding (losses) gains arising during period
Less: reclassification adjustment for gains
included in net income
Net unrealized gains on securities
See notes to consolidated financial statements.
53
2004
2003
2002
$(273)
$627
$1,396
45
$(318)
268
$359
28
$1,368
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2003
2002
2004
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation
Deferred income taxes
Provision for loan losses
Accretion of discounts and amortization of premiums
on securities, net
Net realized gain on securities
Origination of loans held for sale
Sale of loans
Change in other assets and liabilities:
Accrued interest receivable
Other assets
Accrued interest payable
Other liabilities
Net cash (used in) provided by operating activities
Investing Activities:
Proceeds from maturities and calls of securities available for
sale
Purchase of securities available for sale
Purchase of FHLB stock
Redemption of FHLB stock
Net increase in customer loans
Purchase of corporate premises and equipment
Sale of corporate premises and equipment
Acquisition of subsidiary
Net cash used in investing activities
Financing Activities:
Net increase in demand, interest-bearing demand
and savings deposits
Net (decrease) increase in time deposits
Net increase (decrease) in borrowings
Repurchase of common stock
Proceeds from exercise of stock options
Cash dividends
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See notes to consolidated financial statements.
54
$ 11,198
$ 12,919
$ 9,765
1,446
(1,373)
4,026
1,547
(549)
3,167
151
(69)
(912,657)
893,824
84
(412)
(1,083,414)
1,160,907
(451)
(2,380)
31
979
(5,275)
48,411
(18,719)
(638)
680
(48,327)
(4,408)
25
—
(22,976)
(320)
(2,489)
(131)
(4,752)
86,557
13,020
(54,517)
—
688
(24,703)
(2,861)
7
—
(68,366)
23,214
(3,715)
10,552
(3,421)
258
(3,202)
23,686
(4,565)
49,751
$ 45,186
27,011
17,091
(26,746)
(2,262)
728
(2,593)
13,229
31,420
18,331
$ 49,751
1,550
(348)
1,141
84
(43)
(782,972)
745,008
(136)
(1,212)
(97)
6,215
(21,045)
6,818
(11,462)
(1,165)
—
(18,734)
(925)
16
(11,000)
(36,452)
44,406
15,215
7,082
—
294
(2,226)
64,771
7,274
11,057
$ 18,331
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Continued
Year Ended December 31,
2003
2002
2004
Supplemental disclosure
Interest paid
Income taxes paid
Transactions related to the acquisition of subsidiary:
Increase in assets and liabilities:
Loans
Other assets
Borrowings
Other liabilities
Issuance of debt
Issuance of common stock
$ 7,518
5,798
$ 8,959
8,008
$ 9,281
4,380
$ --
--
--
--
--
--
$ --
--
--
--
--
--
$64,729
12,095
57,193
3,342
3,000
2,289
See notes to consolidated financial statements.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies
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 significant intercompany
accounts and transactions have been eliminated in consolidation. 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 and its subsidiaries offer a wide range of banking and related financial services to both
individuals and businesses.
The Bank has five wholly owned subsidiaries: C&F Mortgage Corporation and Subsidiaries (“C&F Mortgage”),
C&F Title Agency, Inc., C&F Finance Company (“C&F Finance,” formerly Moore Loans, Inc.), C&F Investment
Services, Inc. and C&F Insurance Services, Inc., all incorporated under the laws of the Commonwealth of Virginia.
C&F Mortgage, organized in September 1995, was formed to originate and sell residential mortgages and through
its subsidiaries, Hometown Settlement Services, LLC, Certified Appraisals, LLC and C&F Reinsurance, LTD,
provides ancillary mortgage loan production services for loan settlement, residential appraisals and private
mortgage insurance. C&F Title Agency, Inc., organized in October 1992, primarily sells title insurance to the
mortgage loan customers of the Bank and C&F Mortgage. C&F Finance, acquired on September 1, 2002, is a
regional finance company providing automobile loans in Richmond, Roanoke and Hampton Roads, Virginia, in
Northern Virginia and in portions of Tennessee and Maryland. C&F Investment Services, Inc., organized in April
1995, is a full-service brokerage firm offering a comprehensive range of investment services. C&F Insurance
Services, Inc., organized in July 1999, owns an equity interest in an insurance agency that sells insurance products to
customers of the Bank, C&F Mortgage and other financial institutions that have an equity interest in the agency.
Business segment data is presented in Note 17.
Use of 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. Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, the valuation of deferred taxes and
goodwill impairment.
Significant Group Concentrations of Credit Risk: Substantially all of the Corporation’s lending activities are with
customers located in Virginia, Maryland and portions of Tennessee. Note 4 discusses the Corporation’s lending
activities. The Corporation invests in a variety of securities, principally obligations of U.S. government agencies
and obligations of states and political subdivisions. Note 3 presents the Corporation’s investment activities. The
Corporation does not have any significant concentrations in any one industry or customer.
Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, cash and cash equivalents
include cash, balances due from banks and interest-bearing deposits in banks, all of which mature within 90 days.
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 excluded from earnings and
reported in other comprehensive income. Gains or losses are recognized on trade date using the amortized cost of
the specific security sold.
56
Loans Held for Sale: Loans held for sale are carried at the lower of cost or estimated fair value, determined in the
aggregate. Fair value considers commitment agreements with investors and prevailing market prices. Principally
all loans originated by C&F Mortgage are held for sale to outside investors.
Loans: The Corporation makes mortgage, commercial and consumer loans to customers. Loans that management
has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at
their unpaid principal balances adjusted for charges-offs, unearned discount, any deferred fees or costs on
originated loans, and the allowance for loan losses. Interest on loans is credited to operations based on the principal
amount outstanding. Unearned discounts on certain installment loans are recognized as income over the terms of
the loans by a method that approximates the effective interest method. 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.
Loans are generally placed on non-accrual status when the collection of principal or interest is 90 days or more past
due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the
financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if
management determines it has adequate collateral to cover the principal and interest. For those loans that are
carried on non-accrual status, payments are first applied to principal outstanding.
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. Impairment is measured on
a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows
discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if
the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans
for impairment disclosures. Consistent with the Corporation’s method for non-accrual loans, payments on
impaired loans are first applied to principal outstanding.
Allowance for Loan Losses: The allowance for loan losses is established through charges to earnings in the form of
a provision for loan losses. Loan losses are charged against the allowance for loan losses when management
believes that the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses on
existing loans that may become uncollectible. Management’s judgment in determining the adequacy of the
allowance 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. This evaluation is inherently
subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are
classified as loss, doubtful, substandard or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and
is based on historical loss experience adjusted for qualitative factors.
Off Balance Sheet Credit Related Financial Instruments: In the ordinary course of business, the Corporation has
entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded
when they are funded.
Rate Lock Commitments: The Corporation enters into commitments to originate residential mortgage loans
whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitments). Such rate lock
commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. The period of
time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days.
The Corporation protects itself from changes in interest rates through the use of best efforts forward delivery
57
commitments, whereby the Corporation commits to sell a loan at the time the borrower commits to an interest rate
with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Corporation is not exposed
to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.
The market values of rate lock commitments and best efforts contracts are not readily ascertainable with precision
because rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation
between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments.
Federal Home Loan Bank Stock: Federal Home Loan Bank (“FHLB”) stock is carried 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 a
market value that is equal to cost. In addition, such stock is not considered a debt or equity security in accordance
with Statement of Financial Accounting Standards No. 115.
Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially
recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
management periodically performs valuations and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included
in net expenses from foreclosed assets.
Corporate Premises and Equipment: Land is carried at cost. Buildings 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.
Goodwill: The Corporation adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”), effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization
over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value
based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are
separately recognized if the benefit of the asset can be sold, transferred, licensed, rented or exchanged, and are
amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS 142 and,
accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142.
Sale of Loans: Transfers of loans are accounted for as sales when control over the loans has been surrendered.
Control over transferred loans is deemed to be surrendered when (1) the loans have been isolated from the
Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred loans and (3) the Corporation does not maintain effective control over
the transferred loans through an agreement to repurchase them before their maturity.
Income Taxes: The Corporation determines deferred income tax assets and liabilities using the liability (or balance
sheet) method. Under this method, the net deferred tax asset or liability is determined 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.
Retirement Plan: The compensation cost of an employee’s pension benefit is recognized on the projected unit credit
method over the employee’s approximate service period. The aggregate cost method is utilized for funding
purposes.
58
Stock Compensation Plans: At December 31, 2004, the Corporation has three stock-based compensation plans,
which are described more fully in Note 13. The Corporation accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
No stock-based compensation cost is reflected in net income, as all options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.
(Dollars in thousands, except per share amounts)
Net income, as reported
Total stock-based compensation expense determined
under fair value based method for all awards
Pro forma net income
Earnings per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
Year Ended December 31,
2003
2002
2004
$11,198
$12,919
$9,765
(605)
$10,593
(373)
$12,546
$ 3.14
$ 2.97
$ 3.00
$ 2.84
$ 3.58
$ 3.47
$ 3.42
$ 3.32
(252)
$9,513
$ 2.73
$ 2.66
$ 2.67
$ 2.60
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
Dividend yield
Dividend growth rate
Expected life
Expected volatility
Risk-free interest rate
Year Ended December 31,
2003
2002
2004
2.9%
7.1%
8 years
25.0%
4.2%
2.0%
5.9%
8 years
26.6%
4.2%
2.8%
.1%
8 years
35.0%
4.2%
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 potentially-dilutive 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. Earnings per share calculations are presented in Note 9.
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. These components are
presented in the Corporation’s Consolidated Statements of Shareholders’ Equity.
Shareholders’ Equity: During 2004, the Corporation repurchased 26,200 shares of its common stock in privately
negotiated transactions and 62,850 shares in open-market transactions at prices between $35.00 and $41.50 per
share. The repurchases in 2004 were made in accordance with a board-approved stock repurchase program, which
expires in January 2005. During 2003, the Corporation repurchased 80,000 shares of its common stock in privately
negotiated transactions at prices between $28.00 and $28.50 per share. No shares were repurchased in 2002.
Reclassifications: Certain reclassifications have been made to prior period amounts to conform to the current year
presentation.
59
NOTE 2: Acquisition
On September 1, 2002, the Corporation acquired Moore Loans, Inc. (hereinafter referred to as “C&F Finance”). C&F
Finance is a regional finance company providing automobile loans in Richmond, Roanoke and Hampton Roads,
Virginia, in Northern Virginia and in portions of Tennessee and Maryland. Under the terms of the acquisition, the
outstanding shares of C&F Finance’s common stock were purchased for $11,000,000 in cash, $3,000,000 in
subordinated notes of the Bank, 100,000 shares of the Corporation’s common stock and up to an additional
$3,000,000 in consideration contingent on C&F Finance attaining certain financial goals for the period beginning
September 1, 2002 and ending December 31, 2005, of which $1.16 million, $1.01 million and $337,000 was earned in
2004, 2003 and 2002, respectively. Also, the Corporation has guaranteed a stock price of $30 per share for shares
still held by the sellers on the three-year anniversary date of the transaction. As of December 31, 2004, the
Corporation’s stock price was $40.35, and the previous owners of C&F Finance held 17,020 shares of the
Corporation’s common stock. The transaction was accounted for using the purchase method of accounting. The
initial purchase price of $16.29 million was allocated to the assets acquired and liabilities assumed as follows (dollars
in thousands):
Loans
Other assets
Goodwill
Liabilities assumed
Total purchase price
$ 64,729
4,372
7,723
(60,535)
$ 16,289
The results of operations are included in the financial statements from the date of the acquisition. The entire
amount of the goodwill resulting from this acquisition is expected to be deductible for tax purposes.
The following table presents pro forma combined results of operations of C&F Financial Corporation and C&F
Finance for the year ended December 31, 2002 as if the business combination had been completed as of the
beginning of 2002 (dollars in thousands, except per share amount):
Net interest income
Net income
Earnings per share – assuming dilution
$27,103
11,434
3.06
NOTE 3: Securities
Debt and equity securities are summarized as follows:
(Dollars in thousands)
Available for Sale
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Preferred stock
Amortized
Cost
$10,746
3,039
51,065
4,926
$69,776
60
Gross
Unrealized
Gains
December 31, 2004
Gross
Unrealized
Losses
$ (30)
(15)
(26)
(38)
$(109)
$ 6
43
2,632
439
$3,120
Estimated
Fair Value
$10,722
3,067
53,671
5,327
$72,787
(Dollars in thousands)
Available for Sale
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Preferred stock
Amortized
Cost
$47,105
1,725
45,584
5,136
$99,550
Gross
Unrealized
Gains
December 31, 2003
Gross
Unrealized
Losses
$ (18)
(2)
(8)
(78)
$(106)
$ 1
40
3,178
387
$3,606
Estimated
Fair Value
$ 47,088
1,763
48,754
5,445
$103,050
The amortized cost and estimated fair value of securities at December 31, 2004, 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.
(Dollars in thousands)
Available for Sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Preferred stock
December 31, 2004
Amortized
Cost
$ 7,240
11,937
23,738
21,935
4,926
$69,776
Estimated
Fair Value
$ 7,248
12,102
24,937
23,173
5,327
$72,787
Securities in an unrealized loss position at December 31, 2004, by duration of the period of the unrealized loss, are
shown below. No impairment has been recognized on any of the securities in a loss position because of
management’s intent and demonstrated ability to hold securities to scheduled maturity or call dates.
(Dollars in thousands)
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
U.S government agencies
and corporations
Mortgage-backed securities
Obligations of states and
political subdivisions
Subtotal-debt securities
Preferred stock
Total temporarily impaired
securities
$ 7,714
653
1,966
10,333
321
$10,654
$30
15
17
62
22
$84
$ --
--
267
267
171
$438
$ --
--
9
9
16
$25
Fair
Value
$7,714
653
2,233
10,600
492
$11,092
Total
Unrealized
Loss
$ 30
15
26
71
38
$109
61
Securities in an unrealized loss position at December 31, 2003, by duration of the period of the unrealized loss, are
shown below. No impairment has been recognized on any of the securities in a loss position because of
management’s intent and demonstrated ability to hold securities to scheduled maturity or call dates.
(Dollars in thousands)
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
U.S government agencies
and corporations1
Mortgage-backed securities
Obligations of states and
political subdivisions
Subtotal-debt securities
Preferred stock
Total temporarily impaired
securities
$43,042
341
763
44,146
488
$44,634
$18
2
8
28
5
$33
$ --
--
$ --
--
$43,042
341
--
--
--
--
991
$991
73
$73
763
44,146
1,479
$45,625
$ 18
2
8
28
78
$106
1Included in this category at December 31, 2003 were securities with an aggregate fair value of $39.97 million and an aggregate
unrealized loss of $15,000 that matured in January 2004.
Proceeds from the maturities and calls of securities available for sale in 2004 were $48.41 million, resulting in gross
realized gains of $69,000. The amortized cost and estimated fair value of securities pledged to secure public
deposits, Federal Reserve Bank treasury, tax and loan deposits and repurchase agreements amounted to $29.61
million and $31.31 million, respectively, at December 31, 2004.
Proceeds from the maturities and calls of securities available for sale in 2003 were $13.02 million, resulting in gross
realized gains of $412,000. Proceeds from the maturities and calls of securities available for sale in 2002 were $6.82
million, resulting in gross realized gains of $43,000.
NOTE 4: Loans
Major classifications of loans are summarized as follows:
(Dollars in thousands)
Real estate—mortgage
Real estate—construction
Commercial, financial and agricultural
Equity lines
Consumer
Consumer Finance
Less unearned loan fees
Less allowance for loan losses
December 31,
2004
2003
$ 85,770
13,315
185,646
18,490
9,620
93,464
406,305
(690)
405,615
(11,144)
$394,471
$ 78,634
9,591
167,207
13,044
11,405
79,702
359,583
(756)
358,827
(8,657)
$350,170
62
Loans on non-accrual status were $5.67 million and $3.14 million at December 31, 2004 and 2003, respectively. If
interest income had been recognized on non-accrual loans at their stated rates during fiscal years 2004, 2003 and
2002, interest income would have increased by approximately $202,000, $154,000 and $157,000, respectively. The
balance of impaired loans at December 31, 2004 and 2003 was $4.25 million and $4.95 million, respectively.
Impaired loans at December 31, 2004 consisted of one commercial real estate relationship for which a specific
valuation allowance of $965,000 was provided at December 31, 2004. Impaired loans at December 31, 2003
consisted of $1.99 million of non-accrual loans and $2.95 million attributable to one commercial real estate
relationship that was not more than 90 days delinquent at year end. A specific valuation allowance of $465,000 was
provided for this relationship at December 31, 2003. The average balances of impaired loans for 2004 and 2003 were
$3.47 million and $1.85 million, respectively.
Accruing loans past due for 90 days or more were $2.06 million and $1.33 million at December 31, 2004 and 2003,
respectively. Accruing loans past due for 90 days or more at December 31, 2004 included a commercial loan
relationship approximating $949,000, which had been in non-accrual status at December 31, 2003. This relationship
was removed from non-accrual status in 2004 based on an evaluation of the net realizable value of the collateral, the
improved financial strength of the borrower and a sustained period of contractual repayment performance.
NOTE 5: Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
(Dollars in thousands)
Balance at the beginning of year
Provision charged to operations
Loans charged off
Recoveries of loans previously charged off
Acquisition of C&F Finance
Balance at the end of year
Year Ended December 31,
2002
2003
2004
$ 8,657
4,026
(2,695)
1,156
--
$11,144
$ 6,722
3,167
(1,945)
713
--
$ 8,657
$ 3,684
1,141
(1,060)
264
2,693
$ 6,722
NOTE 6: Corporate Premises and Equipment
Major classifications of corporate premises and equipment are summarized as follows:
(Dollars in thousands)
Land
Buildings
Equipment, furniture and fixtures
Less accumulated depreciation
December 31,
2004
2003
$ 6,269
12,985
13,764
33,018
(14,714)
$18,304
$ 4,143
11,714
12,805
28,662
(13,295)
$15,367
63
NOTE 7: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, $100M or more
Other time deposits
December 31,
2004
2003
$ 57,602
124,903
$182,505
$ 54,520
131,700
$186,220
Remaining maturities on time deposits at December 31, 2004 are as follows (dollars in thousands):
2005
2006
2007
2008
Five years and thereafter
NOTE 8: Borrowings
$129,098
22,723
15,697
5,977
9,010
$182,505
Short-term borrowings consist of securities sold under agreements to repurchase, which are secured transactions
with customers and generally mature the day following the day sold. Balances outstanding under repurchase
agreements were $8.42 million on December 31, 2004 and $8.13 million on December 31, 2003. Short-term
borrowings also include advances from the FHLB, which are secured by a blanket floating lien on all qualifying real
estate mortgage loans secured by one-to-four family residential properties and by a blanket floating lien on all
qualifying real estate mortgage loans secured by commercial properties. There were no short-term advances from
the FHLB outstanding on December 31, 2004 or December 31, 2003.
The table below presents selected information on short-term borrowings:
(Dollars in thousands)
Balance outstanding at year end
Maximum balance at any month end during the year
Average balance for the year
Weighted average rate for the year
Weighted average rate on borrowings at year end
Estimated fair value
December 31,
2004
2003
$ 8,415
$ 9,921
$ 8,882
0.75%
0.71%
$ 8,415
$ 8,132
$32,965
$11,786
1.61%
0.67%
$ 8,132
Long-term borrowings at December 31, 2004 consist of: advances from the FHLB, which are secured by a blanket
floating lien on all qualifying real estate mortgage loans secured by one-to-four family residential properties and by
a blanket floating lien on all qualifying real estate mortgage loans secured by commercial properties and advances
under a non-recourse revolving bank line of credit secured by loans at C&F Finance.
Advances from the FHLB at December 31, 2004 consist of $5 million at 2.8% which matures in three years with a
two year call provision, $10 million at 3.24% which matures in eight years with a four year call provision and $5
million at 3.25% which matures in eight years with a four year call provision. The interest rate on the revolving
bank line of credit floats at LIBOR plus 250 basis points, and the outstanding balance as of December 31, 2004 was
$49.87 million, which matures in two years.
64
The contractual maturities of long-term borrowings, excluding call provisions, at December 31, 2004 are as follows:
(Dollars in thousands)
2005
2006
2007
2008
Thereafter
Fixed Rate
$ --
--
5,000
--
15,000
$20,000
Floating Rate
$ --
--
49,870
--
--
$49,870
Total
$ --
--
54,870
--
15,000
$69,870
The Corporation’s unused lines of credit for future borrowings total approximately $118.08 million at December 31,
2004, which consists of $93.95 million available from the FHLB, $10.13 million on the revolving bank line of credit
and $14.00 million under a federal funds agreement with a third party financial institution.
NOTE 9: Earnings Per Share
The Corporation calculates its basic and diluted earnings per share (“EPS”) in accordance with SFAS No. 128-
Earnings Per Share. The components of the Company’s EPS calculations are as follows:
(Dollars in thousands)
Net income available to common shareholders
Weighted average number of common shares used in earnings per
common share—basic
Effect of dilutive securities:
Stock options
Weighted average number of common shares used in earnings per
common share—assuming dilution
December 31,
2003
2002
2004
$11,198
$12,919
$9,765
3,567,284
3,610,531
3,571,057
161,844
171,312
81,611
3,729,128
3,781,843
3,652,668
Options on approximately 79,000, 4,000 and 2,000 shares were not included in computing diluted earnings per
common share for the years ended December 31, 2004, 2003 and 2002, respectively, because they were anti-dilutive.
NOTE 10: Income Taxes
Principal components of income tax expense as reflected in the consolidated statements of income are as follows:
Year Ended December 31,
2004
2003
$6,379
(1,373)
$5,006
$6,876
(549)
$6,327
$4,485
(348)
$4,137
2002
(Dollars in thousands)
Current taxes
Deferred taxes
65
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:
(Dollars in thousands)
Income tax computed at federal statutory rates
Tax effect of exclusion of interest income on
obligations of states and political subdivisions
Reduction of interest expense incurred to carry tax-
exempt assets
State income taxes, net of federal tax benefit
Tax effect of dividends-received deduction on
preferred stock
Other
Year Ended December 31,
Percent
of
Pre-tax
Income
34.0%
Percent
of
Pre-tax
Income
35.0%
Percent
of
Pre-tax
Income
35.0%
2002
$4,727
2003
$6,736
2004
$5,671
(910)
(5.6)
(790)
(4.1)
(831)
(6.0)
41
347
.3
2.1
(80)
(63)
$5,006
(.5)
(.4)
30.9%
47
542
(89)
(119)
$6,327
.3
2.8
(.5)
(.6)
32.9%
68
315
.5
2.3
(88)
(54)
$4,137
(.6)
(.4)
29.8%
Other assets include deferred income taxes of $2.84 million and $1.30 million at December 31, 2004 and 2003,
respectively. The tax effects of each type of significant item that gave rise to deferred taxes are:
(Dollars in thousands)
Deferred tax asset
Allowance for loan losses
Deferred compensation
Interest on non-accrual loans
Other
Deferred tax asset
Deferred tax liability
Depreciation
Accrued pension
Goodwill and other intangible assets
Other
Net unrealized gain on securities available for sale
Deferred tax liability
Net deferred tax asset
NOTE 11: Employee Benefit Plans
December 31,
2003
2004
$ 3,581
1,078
70
107
4,836
(162)
(364)
(366)
(47)
(1,054)
(1,993)
$ 2,843
$ 2,048
837
127
135
3,147
(92)
(382)
(119)
(30)
(1,225)
(1,848)
$ 1,299
The Bank maintains a Defined Contribution Profit-Sharing Plan (the ‘‘Profit-Sharing Plan’’) sponsored by the
Virginia Bankers Association. The Profit-Sharing Plan includes a 401(k) savings provision that authorizes a
maximum voluntary salary deferral of up to 95% 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 salaried 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. An employee is 20% vested after two years of service, 40% after three
years, 60% after four years, 80% after five years and fully vested after six years in the Bank’s contributions. The
amounts charged to expense under this plan were $372,000, $320,000 and $382,000, in 2004, 2003 and 2002,
respectively.
66
C&F Mortgage maintains a Defined Contribution 401(k) Savings Plan that authorizes a voluntary salary deferral of
from 1% to 100% of compensation (with a discretionary partial company match), subject to statutory limitations.
Substantially all employees who have attained the age of eighteen are eligible to participate on the first day of the
next month following employment date. The plan provides for an annual discretionary contribution to the account
of each eligible employee based in part on C&F Mortgage’s profitability for a given year, and on each participant’s
yearly earnings. Contributions may be invested in various investment funds offered under the plan. 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 in the employer’s contributions. The amounts charged to expense under this plan were
$455,000, $581,000 and $412,000 for 2004, 2003 and 2002, respectively.
C&F Finance has a profit sharing plan for the benefit of all eligible employees. Eligible employees include all full
time employees that have at least six months of service on the enrollment dates of July 1 or January 1. Contributions
are discretionary. The allocation of the contribution is based upon a percentage of eligible employee salaries. An
employee is 20% vested after two years of service, 40% after three years, 60% after four years, 80% after five years
and fully vested after six years in C&F Finance’s contributions. The amount charged to expense under this plan was
$72,000, $84,000 and $12,000 in 2004, 2003 and 2002, respectively.
Individual performance bonuses are awarded annually to selected members of management under a management
incentive bonus policy adopted by the Bank effective January 1, 1987. The Corporation’s Compensation Committee
recommends to the Corporation’s board of directors the bonuses to be paid to the Chief Executive Officer, the Chief
Financial Officer and the Chief Operating Officer of the Corporation, and recommends to the Bank’s board of
directors bonuses to be paid to certain other Bank officers. In determining the awards, performance, including the
Corporation’s growth rate, returns on average assets and equity, and absolute levels of income are considered. In
addition, the Bank’s board considers the individual performance of the members of management who may receive
awards. The expense for these bonus awards is accrued in the year of performance. Expenses under this plan were
$392,000, $307,000 and $287,000, in 2004, 2003 and 2002, respectively.
The Corporation 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 $58,000, $36,000 and $35,000 in 2004, 2003 and 2002, respectively. Investments for this plan are
held in a Rabbi trust. These investments are included in other assets and the related liability is included in other
liabilities.
67
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:
(Dollars in thousands)
Year Ended December 31,
2003
2004
Change in Benefit Obligation
Benefit obligation, beginning
Service cost
Interest cost
Actuarial loss
Benefits paid
Benefit obligation, ending
Change in Plan Assets
Fair value of plan assets, beginning
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets, ending
Funded status
Unrecognized net actuarial loss
Unrecognized net obligation at transition
Unrecognized prior service cost
Prepaid benefit cost
Weighted-Average Assumptions for Benefit Obligation as of September 30
Discount rate
Expected return on plan assets
Rate of compensation increase
$3,939
422
255
385
(76)
$4,925
$3,831
332
462
(76)
$4,549
$ (376)
1,356
(38)
99
$1,041
6.0%
8.5
4.0
$3,082
317
215
479
(154)
$3,939
$2,328
377
1,280
(154)
$3,831
$ (108)
1,105
(43)
106
$1,060
6.5%
8.5
4.0
(Dollars in thousands)
Components of Net Periodic Benefit Cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net obligation at transition
Recognized net actuarial loss
Net periodic benefit cost
Weighted-Average Assumptions for Net Periodic Benefit Cost as of
September 30
Discount rate
Expected return on plan assets
Rate of compensation increase
Year Ended December 31,
2004
2002
2003
$ 422
255
(233)
7
(6)
36
$ 481
6.5%
8.5
4.0
$ 317
215
(192)
7
(6)
25
$ 366
7.0%
9.0
4.0
$ 239
176
(183)
3
(6)
--
$ 229
7.5%
9.0
4.0
The accumulated benefit obligation was $3.15 million as of December 31, 2004. The contribution paid to the plan in
2004 was $462,000. This payment was the maximum tax-deductible contribution for 2004 allowable under the
Internal Revenue Code.
68
The benefits expected to be paid by the plan in future periods are as follows (dollars in thousands):
2005
2006
2007
2008
2009
2010 – 2014
$ 35
37
37
53
80
843
$1,085
The Bank selects the expected long-term rate-of-return-on-assets in consultation with its investment advisors and
actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or
to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of
return (net of inflation), for the major asset classes held or anticipated to be held by the trust and for the trust itself.
Undue weight is not given to recent experience, which may not continue over the measurement period. Higher
significance is placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this
purpose, the plan is assumed to continue in force and not terminate during the period during which assets are
invested. However, consideration is given to the potential impact of current and future investment policy, cash
flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets
(to the extent such expenses are not explicitly within periodic costs).
The Corporation’s defined benefit plan’s weighted average asset allocations as of September 30 by asset category
are as follows:
Mutual funds-fixed income
Mutual funds-equity
2004
35%
65
100%
2003
40%
60
100%
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing
return, with a targeted asset allocation of 40% fixed income and 60% equities. The investment advisor selects
investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical
performance, for the implementation of the plan’s investment strategy. The investment manager will consider both
actively and passively managed investment strategies and will allocate funds across the asset classes to develop an
efficient investment structure.
It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful
to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting
fees, transaction costs and other administrative costs chargeable to the trust.
NOTE 12: Related Party Transactions
Loans outstanding to directors and officers totaled $1.28 million and $1.18 million at December 31, 2004 and 2003,
respectively. New advances to directors and officers totaled $682,000 and repayments totaled $584,000 in the year
ended December 31, 2004. These loans are made in the ordinary course of business on substantially the same terms
and conditions, including interest rates and collateral, as those prevailing at the same time for comparable
transactions with unrelated persons, and, in the opinion of management, do not involve more than normal risk or
present other unfavorable features.
69
NOTE 13: Stock Options
On April 20, 2004, the Corporation’s shareholders approved the C&F Financial Corporation 2004 Incentive Stock
Plan (the “2004 Plan”). Under the 2004 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. The maximum aggregate number of shares that may be issued pursuant to awards made
under the 2004 Plan shall not exceed 500,000. Options granted prior to December 21, 2004 become exercisable five
years after grant date. Options granted on December 21, 2004 become exercisable in six months. All options expire
ten years from the grant date.
Prior to the approval of the 2004 Plan, the Corporation granted options to purchase common stock under the
Amended and Restated C&F Financial Corporation 1994 Incentive Stock Plan (the “1994 Plan’’). The 1994 Plan
expired on April 30, 2004. The maximum aggregate number of shares that could be issued pursuant to awards
made under the 1994 Plan could not exceed 500,000. Options were 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 were 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
exercisable five years after the grant date. 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 C&F Financial
Corporation 1998 Non-Employee Director Stock Compensation 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 twelve 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 C&F Financial
Corporation 1999 Regional Director Stock Compensation Plan. Under this plan, options to purchase common stock
are granted to non-employee regional directors 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.
Transactions under the various plans for the periods indicated were as follows:
Outstanding at beginning of year
Granted
Exercised
Canceled
Outstanding at end of year
*Weighted average
2004
2003
2002
Shares
Exercise
Price*
406,368
114,800
(15,033)
(32,468)
$ 23.62
39.04
15.32
24.17
Shares
366,895
92,750
(42,712)
(10,565)
Exercise
Price*
$ 17.78
41.84
14.83
16.38
Shares
311,311
82,450
(22,066)
(4,800)
Exercise
Price*
$ 15.97
22.70
10.89
16.13
473,667
$ 27.58
406,368
$ 23.62
366,895
$ 17.78
Options exercisable at year-end
Weighted-average fair value of options granted during the year
147,417
$9.72
106,318
$12.72
134,395
$7.57
70
The following table summarizes information about stock options outstanding at December 31, 2004:
Options Outstanding
Options Exercisable
Number
Outstanding
at December 31,
2004
Remaining
Contractual
Life
23,800
249,817
114,800
85,250
473,667
2.3
6.4
9.9
8.9
7.5
Exercise
Price*
$11.01
19.04
39.04
41.83
$27.58
Number
Exercisable at
December 31,
2004
23,800
109,117
--
14,500
147,417
Exercise
Price*
$11.01
18.28
--
40.60
$19.30
Range of Exercise Prices
$9.13 to $12.50
$15.75 to $23.49
$35.41 to $39.29
$40.50 to $46.20
$9.13 to $46.20
*Weighted average
NOTE 14: 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 in the regulations), and of Tier I capital (as defined in the
regulations) to average assets (as defined in the regulations). 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 and
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 $477.61 million and $471.91 million, respectively, at December 31,
2004 and $434.42 million and $428.48 million, respectively, at December 31, 2003. Management believes, as of
December 31, 2004, that the Corporation and the Bank met all capital adequacy requirements to which they are
subject.
As of December 31, 2004, 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.
71
The Corporation’s and the Bank’s actual capital amounts and ratios are presented in the following table:
(Dollars in thousands)
As of December 31, 2004:
Total Capital (to Risk-Weighted Assets)
Corporation
Bank
Tier I Capital (to Risk-Weighted Assets)
Corporation
Bank
Tier I Capital (to Average Tangible Assets)
Corporation
Bank
As of December 31, 2003:
Total Capital (to Risk-Weighted Assets)
Corporation
Bank
Tier I Capital (to Risk-Weighted Assets)
Corporation
Bank
Tier I Capital (to Average Tangible Assets)
Corporation
Bank
Actual
Minimum Capital
Requirements
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount Ratio
Amount
Ratio
$63,793
57,511
57,659
51,548
57,659
51,548
$59,320
52,602
53,850
47,206
53,850
47,206
13.4%
12.2
12.1
10.9
9.7
8.8
13.7 %
12.3
12.4
11.0
9.6
8.5
$38,208
37,753
19,104
18,877
23,768
23,505
$34,753
34,279
17,377
17,151
22,505
22,202
8.0%
8.0
4.0
4.0
4.0
4.0
8.0%
8.0
4.0
4.0
4.0
4.0
N/A
$47,191
N/A
10.0%
N/A
28,315
N/A
29,381
N/A
6.0
N/A
5.0
N/A N/A
10.0%
$42,848
N/A N/A
6.0
25,709
N/A N/A
5.0
27,753
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by
the Bank to the Corporation. The total amount of dividends that may be paid at any date is generally limited to the
retained earnings of the Bank, and loans or advances are limited to 10 percent of the Bank’s capital stock and
surplus on a secured basis.
NOTE 15: Commitments and Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include commitments to extend credit,
commitments to sell loans, and standby letters of credit. These instruments involve elements of credit and interest
rate risk in excess of the amount 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
72
evaluates each customer’s creditworthiness on a case-by-case basis. The total amount of loan commitments was
$88.37 million and $64.56 million at December 31, 2004 and 2003, 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 $8.23 million and $6.77 million at December 31, 2004 and 2003, respectively.
At December 31, 2004, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to
approximately $60.00 million and loans held for sale of $48.57 million. C&F Mortgage has entered into
corresponding mandatory commitments, on a best-efforts basis, to sell loans of approximately $108.57 million.
These commitments to sell loans are designed to eliminate C&F Mortgage’s exposure to fluctuations in interest rates
in connection with rate lock commitments and loans held for sale.
C&F Mortgage 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 loans.
Recourse periods vary from 90 days up to one year and conditions for repurchase vary with the investor.
Mortgages subject to recourse are collateralized by single-family residences and generally either have loan-to-value
ratios of 80 percent or less or have private mortgage insurance or are insured or guaranteed by an agency of the U.S.
Government. Risks also arise from the possible inability of counterparties to meet the terms of their contracts. C&F
Mortgage has procedures in place to evaluate the credit risk of investors and does not expect any counterparty to
fail to meet its obligations.
The Corporation is committed under noncancelable operating leases for certain office locations. Rent expense
associated with these operating leases was $649,000, $496,000 and $401,000, for the years ended December 31, 2004,
2003 and 2002, respectively.
Future minimum lease payments due under these leases as of December 31, 2004 are as follows (dollars in thousands):
2005
2006
2007
2008
2009
Thereafter
$487
193
100
--
--
--
$780
As of December 31, 2004, the Corporation had $35.82 million in deposits in financial institutions in excess of
amounts insured by the FDIC, the majority of which was on deposit at the FHLB.
73
NOTE 16: 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. 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.
Letters of credit. The estimated fair value of letters of credit is based on estimated fees the Corporation would pay
to have another entity assume its obligation under the outstanding arrangements. These fees are not considered
material.
Unused portions of lines of credit. The estimated fair value of unused portions of lines of credit is based on
estimated fees the Corporation would pay to have another entity assume its obligation under the outstanding
arrangements. These fees are not considered material.
December 31,
2004
2003
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
$ 45,186
72,787
394,471
48,566
3,041
264,629
182,505
78,285
614
8,232
88,372
$ 45,186 $ 49,751
103,050
350,170
29,733
2,590
72,787
401,544
49,542
3,041
265,820
184,082
76,953
614
241,414
186,220
67,734
583
$ 49,751
103,050
358,661
30,353
2,590
238,870
188,286
67,194
583
—
6,766
— 44,814
—
—
(Dollars in thousands)
Financial assets:
Cash and short-term investments
Securities
Net loans
Loans held for sale, net
Accrued interest receivable
Financial liabilities:
Demand deposits
Time deposits
Borrowings
Accrued interest payable
Off-balance-sheet items:
Letters of credit
Unused portions of lines of credit
74
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
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 17: Business Segments
The Corporation operates in a decentralized fashion in three principal business segments: Retail Banking, Mortgage
Banking and Consumer Finance. Revenues from Retail Banking operations consist primarily of interest earned on
loans and investment securities and service charges on deposit accounts. Mortgage Banking operating revenues
consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest
earned on mortgage loans held for sale. Revenues from Consumer Finance consist primarily of interest earned on
automobile loans.
The Corporation’s other subsidiaries include:
•
•
•
an investment company that derives revenues from brokerage services,
an insurance company that derives revenues from insurance services, and
a title company that derives revenues from title insurance services.
The results of these other subsidiaries are not significant to the Corporation as a whole and have been included in
“Other.”
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other
Total operating income
Expenses:
Interest expense
Salaries and employee benefits
Other
Total operating expenses
Income before income taxes
Total assets
Goodwill
Capital expenditures
Year Ended December 31, 2004
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 25,208
—
3,779
28,987
5,703
9,982
6,006
21,691
$ 7,296
$523,035
$ —
$ 4,029
$ 2,373
16,572
3,226
22,171
569
12,624
4,233
17,426
$ 4,745
$ 56,845
$ —
$ 295
$ 15,113
—
71
15,184
$ —
—
1,038
1,038
$ (1,851)
3
—
(1,848)
3,133
2,162
6,123
11,418
—
408
184
592
$ 3,766 $ 446
$ 103,654 $ 17
$ 10,228 $ —
$ 84 $ —
(1,856)
57
—
(1,799)
$ (49)
$(74,429)
$ —
$ —
$ 40,843
16,575
8,114
65,532
7,549
25,233
16,546
49,328
$ 16,204
$609,122
$ 10,228
$ 4,408
75
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other
Total operating income
Expenses:
Interest expense
Salaries and employee benefits
Other
Total operating expenses
Income before income taxes
Total assets
Goodwill
Capital expenditures
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other
Total operating income
Expenses:
Interest expense
Salaries and employee benefits
Other
Total operating expenses
Income before income taxes
Total assets
Goodwill
Capital expenditures
Year Ended December 31, 2003
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 24,727
—
3,551
28,278
7,419
8,589
6,404
22,412
$ 5,866
$485,397
$ —
$ 2,600
$ 3,763
20,584
3,841
28,188
1,033
13,361
4,369
18,763
$ 9,425
$ 36,990
$ —
$ 245
$ 12,433 $ —
—
1,301
1,301
—
41
12,474
2,628
1,860
4,498
8,986
—
600
234
834
$ 3,488 $ 467
$ 89,963 $ 810
$ 9,071 $ —
$ 16 $ —
$ (2,252)
—
—
(2,252)
(2,252)
—
—
(2,252)
$ —
$(39,614)
$ —
$ —
$ 38,671
20,584
8,734
67,989
8,828
24,410
15,505
48,743
$ 19,246
$573,546
$ 9,071
$ 2,861
Year Ended December 31, 2002
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 24,858 $ 3,376 $ 3,756 $ —
—
1,133
1,133
13,929
3,272
20,577
—
3,098
27,956
—
21
3,777
929
505
1,130
2,564
8,622
7,157
6,191
21,970
1,003
9,934
3,427
14,364
—
440
203
643
$ 5,986 $ 6,213 $ 1,213 $ 490
$ 496,265 $ 112,770 $ 76,307 $ 32
$ — $ — $ 7,860 $ —
$ 645 $ 256 $ 16 $ 8
$ (1,370) $ 30,620
13,929
7,524
52,073
—
—
(1,370)
(1,370)
—
—
9,184
18,036
10,951
(1,370) $ 38,171
$ — $ 13,902
$(133,452) $ 551,922
$ — $ 7,860
$ — $ 925
The Retail Banking segment extends a warehouse line of credit to the Mortgage Banking segment, providing the
funds needed to originate mortgage loans. The Retail Banking segment charges the Mortgage Banking segment
interest at the daily FHLB advance rate plus 50 basis points. The Retail Banking segment also provides the
Consumer Finance segment with a portion of the funds needed to originate loans and charges the Consumer
Finance segment interest at LIBOR plus 250 basis points. The Retail Banking segment acquires certain lot and
permanent loans and home equity lines of credit from the Mortgage Banking segment at prices similar to those paid
by third-party investors. 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, Consumer Finance and
Other segments.
76
NOTE 18: Parent Company Condensed Financial Information
Financial information for the parent company is as follows:
(Dollars in thousands)
Balance Sheets
Assets
Cash
Securities available for sale
Other assets
Investments in subsidiary
Total assets
Liabilities and shareholders’ equity
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
(Dollars in thousands)
Statements of Income
Interest income on securities
Interest income on loans
Interest expense on borrowings
Dividends received from bank subsidiary
Equity in undistributed net income of subsidiary
Other income
Other expenses
Net income
December 31,
2004
2003
$ 571
5,327
746
63,528
$70,172
$ 273
69,899
$70,172
$ 1,163
5,445
500
58,539
$65,647
$ 263
65,384
$65,647
Year Ended December 31,
2002
2003
$ 369
164
(98)
2,226
7,265
16
(177)
$9,765
2004
$ 325
29
—
5,590
5,367
23
(136)
$11,198
$ 365
99
(262)
6,508
6,047
322
(160)
$12,919
(Dollars in thousands)
Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary
Net gain on securities
Provision for losses on preferred stock
(Increase) decrease in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
Investing activities:
Increase in investment in subsidiary
Proceeds from maturities and calls of securities
Purchase of securities
Net cash provided by (used in) investing activities
Financing activities:
(Repayment of) proceeds from borrowing
Repurchase of common stock
Dividends paid
Proceeds from the issuance of stock
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash at beginning of year
Cash at end of year
Year Ended December 31,
2003
2002
2004
$11,198
$12,919
$9,765
(5,367)
(2)
—
(246)
(24)
5,559
—
676
(462)
214
—
(3,421)
(3,202)
258
(6,365)
(592)
1,163
$ 571
(6,047)
(319)
(40)
2,035
(53)
8,495
—
1,504
(558)
946
(5,000)
(2,262)
(2,593)
728
(9,127)
314
849
$ 1,163
(7,265)
(8)
40
(2)
16
2,546
(5,000)
524
(381)
(4,857)
5,000
—
(2,226)
294
3,068
757
92
$ 849
77
NOTE 19: Quarterly Condensed Statements of Income—Unaudited
June 30
2004 Quarter Ended
September 30 December 31
$10,798
7,429
6,586
9,884
4,131
2,860
.77
.24
March 31
$9,585
6,870
4,862
8,419
3,313
2,347
.62
.22
$10,504
7,616
6,590
9,635
4,571
3,102
.84
.22
$9,956
7,353
6,651
9,815
4,189
2,889
.77
.22
June 30
2003 Quarter Ended
September 30 December 31
$9,502
6,632
6,391
9,025
3,998
2,747
.72
.20
March 31
$9,538
6,685
6,844
8,681
4,848
3,264
.87
.16
$9,715
6,555
7,988
9,477
5,066
3,364
.89
.18
$9,916
6,804
8,095
9,565
5,334
3,544
.94
.18
Dollars in thousands (except per share amounts)
Total interest income
Net interest income after provision for loan losses
Other income
Other expenses
Income before income taxes
Net income
Earnings per common share—assuming dilution
Dividends per common share
Dollars in thousands (except per share amounts)
Total interest income
Net interest income after provision for loan losses
Other income
Other expenses
Income before income taxes
Net income
Earnings per common share—assuming dilution
Dividends per common share
78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
C&F Financial Corporation
West Point, Virginia
We have audited the accompanying consolidated balance sheets of C&F Financial Corporation and subsidiary as of
December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2004. We also have audited management's
assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting
appearing under Item 9A, that C&F Financial Corporation and subsidiary maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). C&F
Financial Corporation and subsidiary's management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on
management's assessment, and an opinion on the effectiveness of the Corporation's internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audit of financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A corporation's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A corporation's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
79
accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the corporation are being
made only in accordance with authorizations of management and directors of the corporation; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the corporation's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
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, 2004 and 2003, and the results of
its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
management’s assessment that C&F Financial Corporation and subsidiary maintained effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Furthermore, in our opinion, C&F Financial Corporation and subsidiary maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Winchester, Virginia
February 8, 2005
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Corporation, under the supervision and with the participation of the
Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has
evaluated the effectiveness of the Corporation’s disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that the Corporation’s disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Corporation in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange
Commission rules and regulations and that such information is accumulated and communicated to the
Corporations’ management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls
and procedures will detect or uncover every situation involving the failure of persons within the Corporation or its
subsidiary to disclose material information otherwise required to be set forth in the Corporation’s periodic reports.
Management’s Report on Internal Control over Financial Reporting. Management of the Corporation is
responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934. The Corporation’s internal control over financial reporting is
designed to provide reasonable assurance to the Corporation’s management and board of directors regarding the
preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of
December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based
on our assessment, we believe that, as of December 31, 2004, the Corporation’s internal control over financial
reporting is effective based on those criteria.
Management’s assessment of the effectiveness of internal control over financial reporting as of December
31, 2004 has been audited by Yount, Hyde & Barbour, P.C., the independent registered public accounting firm who
also audited the Corporation’s consolidated financial statements included in this Annual Report on Form 10-K.
Yount, Hyde & Barbour, P.C.’s attestation report on management’s assessment of the Corporation’s internal control
over financial reporting appears on pages 79 through 80 hereof.
81
Changes in Internal Controls. There were no changes in the Corporation’s internal control over financial
reporting during the Corporation’s fourth quarter ended December 31, 2004 that have materially affected, or are
reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Item 1.01
Entry into a Material Definitive Agreement.
On February 25, 2005, on the recommendation of the Compensation Committee, the Company’s Board of
Directors adopted a new management incentive plan (MIP). The purpose of the MIP is to attract, retain and
motivate key employees by providing short-term cash-based incentive awards and long-term equity-based
incentive awards to designated executive, managerial and professional employees of the Company and its direct or
indirect subsidiaries. The MIP is designed to link key employee interests more closely with the interests of the
Company’s shareholders and to create value for the Company by maximizing achievement of corporate, business
unit and individual performance goals.
The MIP is an annual plan, is first effective January 1, 2005 and shall remain in effect until amended or
terminated. A new plan year will commence on each January 1. The MIP will be administered by the
Compensation Committee, which will review the MIP annually and make any amendments or revisions thereto
which it deems appropriate or desirable.
Persons eligible to participate in the MIP are key employees of the Company and its direct or indirect
subsidiaries who are recommended by the Chief Executive Officer and approved by the Compensation Committee.
To be eligible for the MIP in any particular year, key employees must be employees of the Company or a subsidiary
as of January 1st of that plan year. Employees who are either hired as key employees or are promoted and become
key employees after the beginning of a plan year may be designated as participants for the plan year and assigned a
prorated target in the Compensation Committee’s discretion. The President and Chief Executive Officer of C&F
Mortgage has an employment agreement and does not participate in the MIP.
Under the MIP, the Compensation Committee will establish MIP performance objectives for the Company
and any subsidiary (“Corporate Goals”), appropriate business units of the Company (“Business Unit Goals”) and
individuals (“Individual Goals”), and the award formula or matrix by which all incentive awards under the MIP
shall be calculated. The Chief Executive Officer’s incentive awards (whether cash or in the form of equity awards)
will be determined solely by the Compensation Committee, taking into account the overall Company performance
relative to the established business plan (“Corporate Goal”). Each year, the Compensation Committee will review
the previously established Corporate Goals, Business Unit Goals and Individual Goals and make any changes to
such performance objectives as it deems appropriate for the new plan year.
Each participant shall be assigned a Cash Award target, which shall be paid if the participant achieves his
or her Cash Award targeted performance goal(s). Participants may also be awarded Equity Based Awards
consisting of restricted stock, stock options, stock appreciation rights or other stock equivalent awards under the
MIP if the participant achieves his or her Equity Based Award targeted performance goal(s). All Equity Based
Awards granted under the MIP which are payable in or entail the issuance of Company stock will be awarded
pursuant to the Company’s 2004 Incentive Stock Plan unless the Compensation Committee specifically determines
otherwise.
82
Target awards may be weighted between Corporate, Business Unit and Individual Goals on such basis as
the Compensation Committee determines. Separate performance objectives and award formulas or matrixes maybe
established for Cash Awards and Equity Based Awards.
The Business Unit Goals and Individual Goals will be established by the Compensation Committee based
on specific business unit and individual objectives to be reviewed by the Compensation Committee annually. These
include but are not limited to loan and deposit growth, margins, productivity, soundness, and customer satisfaction.
Cash Awards will be settled in cash. Equity Based Awards will be settled in cash and/or Company stock as
determined by the Compensation Committee.
With respect to Cash Awards, except as provided below, no earned award will be payable to a participant
unless that participant is an employee of the Company and/or any subsidiary from January 1st of that plan year (or
if later, the date he or she is designated as a participant for that plan year) either through the last day of that plan
year or, if so provided by the Compensation Committee prior to the end of the plan year to which the award relates,
through the date the award for that plan year is paid (“Vesting Date”).
With respect to Equity Based Awards, no grant evidencing the Equity Based Award will be granted unless
the participant is employed by the Company or any subsidiary on the date of grant.
In the event of a participant’s death, total and permanent disability, retirement or involuntary termination
without cause during a plan year, earned awards shall be calculated for that plan year and then pro-rated by
multiplying the earned annual award by a fraction, the numerator of which is the number of full months, including
the month in which the terminating event occurred, in the plan year and the denominator of which is twelve.
Otherwise, a participant who is not employed by the Company or a subsidiary for any other reason on the Vesting
Date for a plan year shall forfeit his or her award for that plan year unless otherwise determined by the
Compensation Committee.
This summary is a general description of the MIP and is qualified in its entirety by reference to Exhibit 10.8
to this report on Form 10-K, which is incorporated by reference herein.
Also on February 25, 2005, the Corporation’s Board of Directors adopted initial targets and performance
goals for the Corporation’s executive officers under the MIP.
The Cash Award targets for a plan year of the Chief Executive Officer and other named executive officers
are based solely on achievement of the Corporate Goal. The Corporate Goal for the Cash Awards for the named
executive officers is based on the Company’s return on equity (“ROE”) and return on assets (“ROA”) for the plan
year for which the Cash Award is made compared to a peer group of banks selected by the Compensation
Committee. If 100% of the Cash Award Corporate Goal is achieved for a plan year, the Chief Executive Officer and
other named executive officers will earn a Cash Award equal to his or her individual Cash Target Award. If greater
than or less than 100% (but at least the Minimum Award Level designated by the Compensation Committee) of the
Cash Award Corporate Goal is achieved for a plan year, the Chief Executive Officer and other named executive
officers will earn a Cash Award equal to more or less than 100% of his or her individual Cash Target Award (but in
83
no event more than the Maximum Award Level designated by the Compensation Committee) based on an award
matrix designated by the Compensation Committee.
The Equity Based Award targets for a plan year for the Chief Executive Officer and other named executive
officers, are based solely on achievement of the Corporate Goal. The Corporate Goal for the Equity Based Awards
for these named executive officers is based on the 5-Year Total Shareholder Return (“TSR”) of the Company
through September 30 of the plan year for which the Equity Based Award is made compared to the TSR for the
same period of the group of banks that make up the Independent Bank Index that would be used in the stock
performance graph contained in Company’s annual meeting proxy statement for the following year if such graph
reflected performance through September 30 rather than through December 31. If 100% of the Equity Based Award
Corporate Goal is achieved for a plan year, the Chief Executive Officer and other named executive officers will earn
an Equity Based Award equal to his or her individual Equity Based Target Award. If greater than or less than 100%
(but at least the Minimum Award Level designated by the Compensation Committee) of the Equity Based Award
Corporate Goal is achieved for a plan year, the Chief Executive Officer and other named executive officers will earn
an Equity Based Award equal to more or less than 100% of his or her individual Equity Based Target Award (but in
no event more than the Maximum Award Level designated by the Compensation Committee) based on an award
matrix designated by the Compensation Committee. The Compensation Committee will determine the appropriate
valuation methodology for determining the fair market value of such equity award on the date of grant.
Item 5.02(c) Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal
Officers.
On February 25, 2005, the Corporation’s Board of Directors appointed Robert L. Bryant (54) Executive Vice
President and Chief Operating Officer of the Corporation, effective February 25, 2005. Mr. Bryant has been
employed since December 2004 as Executive Vice President and Chief Operating Officer of the Bank, and will retain
that position as well. Prior to December 2004, Mr. Bryant served as Senior Vice President and Chief Operating
Officer of the Bank beginning in May 2004. Prior to joining the Bank, from 1996 to 2004, Mr. Bryant was President
of Renaissance Resources, a business consulting practice located in Richmond, Virginia.
Mr. Bryant does not have a written employment agreement with the Company, but the Company has
agreed to pay him an annual base salary of $155,000 for 2005. Mr. Bryant is also eligible to participate in the
Company’s MIP described in Item 1.01 above and receives insurance and other benefits commensurate with those
furnished to other Company employees. Mr. Bryant has a pre-existing change in control agreement with the
Company which was entered into effective February 15, 2005 and is identical in all material respects to the change
in control agreement the Company has entered into with the Company’s Chief Financial Officer. A copy of this
change in control agreement is attached as Exhibit 10.12 to this report on Form 10-K and incorporated by reference
herein.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the Directors of the Corporation is contained on pages 4 through 5 of the
2005 Proxy Statement under the caption, “Election of Directors,” and is incorporated herein by reference. The
information regarding the Section 16(a) reporting requirements of the Directors and Executive Officers is contained
on page 18 of the 2005 Proxy Statement under the caption, “Section 16(a) Beneficial Ownership Reporting
Compliance,” and is incorporated herein by reference. The information concerning Executive Officers of the
Corporation is included in Part I of this Form 10-K under the caption, “Executive Officers of the Registrant.” The
Corporation has adopted a Code of Business Conduct and Ethics that applies to its directors, executives and
employees. The Corporation’s Code was filed as Exhibit 14 to the Corporation’s 2003 Form 10-K.
The Board of Directors of the Corporation has a standing Audit Committee, which is comprised of three
directors who satisfy all of the following criteria: (i) meet the independence requirements of the NASDAQ Stock
Market’s (NASDAQ) listing standards, (ii) have not accepted directly or indirectly any consulting, advisory, or
other compensatory fee from the Corporation or any of its subsidiaries, (iii) are not an affiliated person of the
Corporation or any of its subsidiaries and (iv) are competent to read and understand financial statements. In
addition, at least one member of the Audit Committee has past employment experience in finance or accounting or
comparable experience that results in the individual’s financial sophistication. The members of the Audit
Committee are Messrs. J. P. Causey Jr., Barry R. Chernack and William E. O’Connell, Jr. The Board of Directors has
determined that the chairman of the Audit Committee, Mr. Barry R. Chernack, qualifies as an “audit committee
financial expert” within the meaning of applicable regulations of the SEC, promulgated pursuant to the SOX Act.
Mr. Chernack is independent of management based on the independence requirements set forth in the NASDAQ’s
listing standards’ definition of “independent director.”
The Corporation provides an informal process for security holders to send communications to its board of
directors. Security holders who wish to contact the board of directors or any of its members may do so by
addressing their written correspondence to C&F Financial Corporation, Board of Directors, c/o Corporate Secretary,
P.O. Box 391, West Point, Virginia 23181. Correspondence directed to an individual board member will be referred,
unopened, to that member. Correspondence not directed to a particular board member will be referred, unopened,
to the Chairman of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 7 through 14 of the 2005 Proxy Statement under the captions,
“Executive Compensation,” “Employment and Change in Control Agreements,” “Employee Benefit Plans,”
“Compensation Committee Report on Executive Compensation” and “Compensation Committee Interlocks and
Insider Participation,” is incorporated herein by reference. The information regarding Director compensation
contained on page 6 of the 2005 Proxy Statement under the caption, “Directors Compensation,” is incorporated
herein by reference. The information on page 17 of the 2005 Proxy Statement under the caption, “Performance
Graph,” is incorporated herein by reference.
85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 2 through 3 of the 2005 Proxy Statement under the caption, “Security
Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.
The following table sets forth information as of December 31, 2004 with respect to compensation plans
under which equity securities of the Corporation are authorized for issuance:
Equity Compensation Plan Information
Number of securities to
be issued upon exercise
of outstanding options
Weighted-average
exercise price of
outstanding options
(a)
463,500
10,167
473,667
(b)
$27.57
$27.83
$27.58
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
465,950 (3)
13,000 (4)
478,950
Plan Category
Equity compensation plans
approved by shareholders (1)
Equity compensation plan
not approved by shareholders (2)
Total
(1)
(2)
(3)
(4)
This plan category consists of (i) the C&F Financial Corporation 2004 Incentive Stock Plan (“2004 Incentive Plan), (ii)
the Amended and Restated C&F Financial Corporation 1994 Incentive Stock Plan (“1994 Incentive Plan”), which
expired on April 30, 2004 and (iii) the C&F Financial Corporation 1998 Non-Employee Director Stock Compensation
Plan (“Director Plan”).
This plan category consists solely of the C&F Financial Corporation 1999 Regional Director Stock Compensation Plan
(“Regional Director Plan”). The Board of Directors of the Corporation adopted the Regional Director Plan on October
19, 1999. This plan will expire on October 18, 2009, unless sooner terminated by the Corporation’s Board of Directors.
The Regional Director Plan makes available up to 25,000 shares of common stock for awards to eligible members of the
regional boards of the Bank, or any other regional board of the Corporation, the Bank, any other division of the Bank
or any other affiliate of the Corporation approved for participation in the Regional Director Plan, in the form of stock
options. The purpose of the Regional Director Plan is to promote a greater identity of interest between regional
directors and the Corporation’s shareholders by increasing the ownership of the regional directors in the Corporation’s
equity securities through the receipt of awards in the form of options. All regional directors who are not employees or
directors of the Corporation, the Bank or any other affiliate of the Corporation are eligible for awards under the
Regional Director Plan. This plan is administered by the Corporation’s Compensation Committee, which acts as a
Stock Option Committee.
Includes 402,700 shares available to be granted in the form of options under the 2004 Incentive Plan and 63,250 shares
available to be granted in the form of options under the Director Plan.
Includes 13,000 shares to be granted in the form of options under the Regional Director Plan.
86
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 7 of the 2005 Proxy Statement under the caption, “Interest of
Management in Certain Transactions,” is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained on page 16 of the 2005 Proxy Statement under the captions, “Principal
Accountant Fees” and “Audit Committee Pre-Approval Policy,” is incorporated herein by reference.
87
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
15 (a)
Exhibits:
2.1
Stock Purchase Agreement by and between Citizens and Farmers Bank, C&F Financial
Corporation, Moore Loans, Inc., Abby W. Moore, Joanne Moore and John D. Moore dated as
of August 30, 2002 (incorporated by reference to Exhibit 2.1 to Form 8-K filed September 3,
2002)
3.1 Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit
No. 3.1 to Form 10-KSB filed March 29, 1996)
3.2 Bylaws of C&F Financial Corporation (incorporated by reference to Exhibit 3.2 to Form 10-
KSB filed March 29, 1996)
*10.1 Change in Control Agreement dated December 16, 1997 between C&F Financial Corporation
and Larry G. Dillon (incorporated by reference to Exhibit No. 10 to Form 10-K filed March 23,
1998)
*10.1.1 Amendment to Change in Control Agreement dated July 23, 2003 between C&F Financial
Corporation and Larry G. Dillon (incorporated by reference to Exhibit 10.1.1 to Form 10-Q
filed November 13, 2003)
*10.3 Amended and Restated Change in Control Agreement dated February 15, 2005 between C&F
Financial Corporation and Thomas F. Cherry
*10.4 C&F Executive’s Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 to
Form 10-K filed March 15, 2002)
*10.5 Amended and Restated C&F Financial Corporation 1994 Incentive Stock Plan (incorporated
by reference to Exhibit 4.3 to Form S-8 filed May 1, 2000)
*10.6 C&F Financial Corporation 1998 Non-Employee Director Stock Compensation Plan
(incorporated by reference to Exhibit 4.3 to Form S-8 filed September 18, 1998)
*10.7 C&F Financial Corporation 1999 Regional Director Stock Compensation Plan (incorporated
by reference to Exhibit 4.3 to Form S-8 filed October 22, 1999)
*10.8 C&F Financial Corporation Management Incentive Plan dated February 25, 2005
*10.9 C&F Financial Corporation 2004 Incentive Stock Plan (incorporated by reference to Exhibit
10.9 to Form 10-Q filed May 6, 2004)
*10.10 Form of C&F Financial Corporation Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.2 to Form 8-K filed December 29, 2004)
*10.11 Employment Agreement dated April 16, 2002 between C&F Mortgage Corporation and
Bryan McKernon
*10.12 Amended and Restated Change in Control Agreement dated February 15, 2005 between C&F
Financial Corporation and Robert L. Bryant
88
*10.13 Amended and Restated Change in Control Agreement dated February 15, 2005 between C&F
Financial Corporation and Bryan McKernon
*10.14 Schedule of C&F Financial Corporation Non-Employee Directors’ Annual Compensation
*10.15 Base Salaries for Named Executive Officers of C&F Financial Corporation
13
C&F Financial Corporation 2004 Annual Report to Shareholders
14
C&F Financial Corporation Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 14 to Form 10-K filed March 12, 2004)
21
Subsidiaries of the Registrant
23
Consent of Yount, Hyde & Barbour, P.C.
31.1 Certification of CEO pursuant to Rule 13a-14(a)
31.2 Certification of CFO pursuant to Rule 13a-14(a)
32
Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350
*Indicates management contract
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
Date: February 25, 2005
C&F FINANCIAL CORPORATION
(Registrant)
By: /s/ Larry G. Dillon
Larry G. Dillon
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
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/ Larry G. Dillon
Larry G. Dillon, Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas F. Cherry
Thomas F. Cherry, Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/ J. P. Causey Jr.
J. P. Causey Jr., Director
/s/ Barry R. Chernack
Barry R. Chernack, Director
/s/ James H. Hudson III
James H. Hudson III, Director
/s/ Joshua H. Lawson
Joshua H. Lawson, Director
/s/ William E. O’Connell Jr.
William E. O’Connell Jr., Director
/s/ Paul C. Robinson
Paul C. Robinson, Director
Date: February 25, 2005
Date: February 25, 2005
Date: February 25, 2005
Date: February 25, 2005
Date: February 25, 2005
Date: February 25, 2005
Date: February 25, 2005
Date: February 25, 2005
90
Our Values
C F F I
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.
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 59 Maiden Lane,
New York, NY 10038, telephone them toll-free
at 1-800-937-5449 or visit their website at
http://www.amstock.com.
Investor Relations &
Financial Statements
C&F Financial Corporation’s Annual Report
on Form 10-K and quarterly reports on Form
10-Q, as filed with the Securities and Exchange
Commission, may be obtained without charge
by visiting the Corporation’s website at
http://www.cffc.com. Copies of these docu-
ments can also be obtained without charge
upon written request. Requests for this or
other financial information about C&F
Financial Corporation should be directed to:
Thomas Cherry
Executive Vice President, CFO & Secretary
C&F Financial Corporation
P.O. Box 391
West Point, VA 23181
C&F Financial Corporation
802 Main Street • PO Box 391
West Point, Virginia 23181
(804) 843-2360
www.cffc.com