2005 C&F Financial Corporation is a one-bank
holding company headquartered in West Point, Virginia,
providing a full range of banking services to individuals
and businesses through its subsidiaries.
C&F BANK (Citizens and Farmers Bank) offers quality banking
services to individuals and businesses through fourteen
retail bank branches located throughout the Newport News
to Richmond corridor in Virginia. Four new branches are
scheduled to open in 2006.
C&F MORTGAGE CORPORATION originates and sells
residential mortgages. Services are provided through twenty-
two branch offices – thirteen offices in Virginia, four offices
in Maryland, two offices in North Carolina and one each
in Delaware, Pennsylvania and New Jersey. Through its
subsidiaries, C&F Mortgage also provides ancillary mortgage
loan production services for loan settlement, residential
appraisals and private mortgage insurance.
C&F FINANCE COMPANY specializes in new and used
automobile lending in the Richmond, Hampton Roads,
Roanoke and Northern Virginia markets, as well as Tennessee
and Maryland.
C&F INVESTMENT SERVICES, INC. provides a full range
of securities brokerage, life and health insurance, and investment
planning services to individuals and businesses through the
bank’s fourteen retail branch offices.
C&F TITLE AGENCY, INC. offers title insurance and title search
services in conjunction with C&F Mortgage Corporation
and C&F Bank, as well as with other lending institutions.
The company also offers closing services through an affiliate,
Hometown Settlement Services LLC.
F O C U S E D O N Y O U
F I N A N C I A L H I G H L I G H T S
In 2005 Net Income and Earnings Per Share showed continued growth. Moreover, performance
measures continue to show that C&F Financial Corporation is a top performer in both Virginia
and National Peer Group comparisons. Our Return on Average Assets and Return on Average
Equity far surpass the average of our peers, as they have for many years running.
2 0 0 5 R E V I E W :
Strong
Performance
and
Investment
in the
Future
NET INCOME
( D O L L A R S I N T H O U S A N D S )
EARNINGS PER SHARE
( A S S U M I N G D I L U T I O N )
9
1
9
2
1
$
,
8
8
7
1,
1
$
8
9
1,1
1
$
5
6
7
9
$
,
9
8
9
7,
$
2
4
3
$
.
0
0
3
$
.
6
3
3
$
.
7
6
2
$
.
3
2
2
$
.
2001 2002 2003 2004 2005
2001 2002 2003 2004 2005
RETURN ON AVERAGE EQUITY
RETURN ON AVERAGE ASSETS
%
2
3
1.
2
%
2
6
9
1
.
%
8
7
6
1
.
%
7
5
2
1
.
%
9
0
2
1
.
%
6
8
1
1
.
%
0
7
7.
1
%
3
3
2
1
.
%
3
9
8
1
.
%
5
2
1
1
.
%
5
3
.
2
%
9
1
2
.
%
9
0
2
.
%
1
9
1.
%
2
8
1
.
%
1
1
1
.
%
8
0
1
.
%
7
0
1
.
%
1
1
1
.
%
3
0
1
.
2001 2002 2003 2004 2005
2001 2002 2003 2004 2005
Peer Comparison
Source: Federal Financial Institution Examination Council (FFIEC)
Bank Holding Company Performance Report—2005 data is through 9/30.
Peer Comparison
Source: Federal Financial Institution Examination Council (FFIEC)
Bank Holding Company Performance Report—2005 data is through 9/30.
2005 Annual Report 1
Larry G. Dillon
Chairman, President and
Chief Executive Officer
Letter
F R O M T H E P R E S I D E N T
On behalf of the Board of Directors, I am pleased to present this Annual Report for
C&F Financial Corporation for the year 2005. Our financial results for this past year continue
to place our corporation in the top of its peer group in both Virginia and the nation. While
financially successful, we were probably more successful in the long list of accomplishments
for the year. As you peruse this report, you should note a significant number of tasks were
completed to prepare the company for a successful future. In short, it was a very busy year.
Net income for 2005 was $11.8 million, vs. $11.2 million in 2004. This resulted in a
return on average equity of 17.70% and a return on average assets of 1.82%, which compares
with 16.78% and 1.91%, respectively, for 2004. These results are also significantly above those
of our peers, who, according to September 30, 2005 FFIEC statistics, showed annualized
returns on average equity of 12.33% and average assets of 1.11%. The earnings growth for
2005 is the result of improvement in the earnings for both the bank and the mortgage
company offset by a slight decline in our finance company.
Total assets, loans, deposits and mortgage loan originations all experienced double-
digit growth for the year. Assets increased from $609 million to $67 2 million; loans increased
from $394 million to $465 million; deposits increased from $447 million to $495 million; and
mortgage loan originations increased from $913 million to $1.1 billion.
We continued our active approach to capital management this past year by both
increasing dividends and by the repurchase of our common stock. Quarterly dividends were
increased 12.5% during 2005 from 24 cents per share to 27 cents per share. We also completed
the repurchase of approximately 427,000 shares, or 12%, of the corporation’s common stock.
The share repurchase has been accretive to both earnings per share and our return on equity.
Our approach to capital management gives us the ability to both exercise controlled growth
and at the same time increase shareholder value.
As mentioned above, this has been a very busy year for the company. At the bank we
implemented many initiatives that will enhance our ability to both serve the customer, as
well as remain a soundly run organization. Many of these initiatives show our eagerness to
invest for the future.
From a technological standpoint, we:
• Installed a new mainframe computer system;
• Implemented a new computer operating system;
• Set up a new high-speed data network among all of our facilities;
(Continued on page 4)
F O C U S E D O N O U R M I S S I O N
t 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
& its subsidiaries.
Maximizing long-term performance
and shareholder wealth
2 0 0 5 H I G H L I G H T S
Increased quarterly dividends by 12.5%
• Continued top performance in comparison to our
peer group
•
• Planned for four new retail branches opening in 2006
• Repurchased 12% of our outstanding common shares
increasing both earnings per share and return on equity
• Relocated C&F Finance Company headquarters to a
new facility
• Opened our new C&F Bank Operations Center in
Stonehouse Commerce Park
2
C&F Financial Corporation
2005 Annual Report 3
I
(Letter from the President continued)
• Replaced a large number of our personal computers;
• Began the installation of a new VoIP phone system throughout all of our offices;
• Began the implementation of a loan automation system that should speed up our delivery system for
both personal and small business loans; and
• Installed and began the implementation of a loan pricing system.
From an operational standpoint, we:
F O C U S E D O N B A L A N C E D G R O W T H
• Moved our internal audit function in-house, vs. outsourcing it to a third party vendor;
• Engaged a new firm to enhance our marketing efforts, specifically with the opening of our new branches in
the lower peninsula region;
• Made great strides in improving our cross-sales abilities between our various business segments,
which we believe to be a great growth opportunity
for the future;
• Attained higher profitability sooner than
projected in the lower Peninsula;
• Began construction of our two new branches on
the lower peninsula, one of which is opening in
the first quarter of 2006, with the second opening
in the second quarter;
• Purchased two branch facilities in the Richmond
market, one in Chester and one on West Patterson
Avenue, which we anticipate opening mid-year.
This will be the first time in our history in
e 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.
which we will open four branch banking offices in
one year. Historically, we have never opened more
than one in a year; however, circumstances have
given us this opportunity to expand a little faster in
2006 and so we will take advantage of the situation.
These investments, as well as the overhead
involved, will have a short-term negative impact on
earnings; however, we anticipate their long-term
enhancement to future earnings.
The most involved and probably the most
important event in 2005, however, was the design,
renovation and move to our new bank operations
center. We have seen a 60,000-square-foot shell building transition into a very inviting and warm facility that
should serve the needs of the company for many years to come. Not only was it designed to meet our current
needs, but there is approximately 25,000 square feet of space left for future expansion. As complicated as a
move of this nature is with the move of a mainframe, 27 file servers, new communications lines, loan files,
retention files, close to seventy people, etc., it went flawlessly.
We have already experienced the benefits of this new center. By having all of our operations and
administrative staff in one building (vs. three previously), we have seen our communications and coordination
greatly improve. The speed and efficiency with which we can now operate will only enhance our future
capabilities. In addition, we have found that the new facility and its location have improved our ability to
attract new talent – one of the primary reasons that we made this move.
Knowing that to many of the residents of West Point this move of a portion of our operations out of
town was controversial, we have taken various steps to help improve and expand the services at our two
offices there. It is our wish as well that we find uses for our two former operations facilities there that will be
beneficial to the residents of West Point.
C&F Mortgage and C&F Finance were busy in 2005, as well. Similar to the bank, C&F Finance moved
into a new operations center, installed a new core computer operating system, new phone system and new
high-speed data network. While going through these operational changes, C&F Finance was also able to
expand its management depth, and at the same time experience double-digit loan growth. We also renegotiated
our line of credit that is the funding source for our loan portfolio at C&F Finance, resulting in a lower
cost of debt. This initiative should have a positive impact on future earnings.
C&F Mortgage experienced its own successes
through growth. While few mortgage companies
experienced a growth in loan originations in
2005, a flat year for the mortgage industry,
C&F Mortgage, through great recruiting successes,
exceeded $1 billion for the second time in its
history. During 2005, C&F opened four new
mortgage offices: Morristown, NJ; Gastonia, NC;
Lexington, VA; and Roanoke, VA. We recently
opened a new office in Virginia Beach, VA,
and will soon open one in Lynchburg, VA. In
addition, we opened our second settlement office
in Crofton, MD, which reached profitability in
its first month of operation.
Continuing balanced growth in a year
dedicated to investing for the future
2 0 0 5 H I G H L I G H T S
• Opened new operation centers for C&F Bank and
C&F Finance which will upgrade operational efficiency,
provide significant room for planned growth and improve
ability to recruit top talent
• Balanced and controlled growth from all corporate segments:
• Significant loan and deposit growth from C&F Bank,
with particularly strong commercial growth
• Over $1 billion in mortgage production at C&F Mortgage
• Loan growth of 16% at C&F Finance
• C&F Investment Services grew to $141 million in
assets under management
As you can see, whether it be through
technology, infrastructure, or personnel, we have
made many investments in our future. Some will
initially add to our costs, but over the long
term they will enhance our ability to improve
future earnings and hence, a better return for your
investment. We continue to be excited about
the future. We believe that a company that can
keep the personalized touch with its customers,
while at the same time be progressive in its
product offerings and efficient in its operations, has a great future. That is the path we choose and we think
the future looks bright.
This year we had so many people contribute in so many ways to make this a better organization, and we
thank them for their dedication and hard work. We are also most appreciative of your support and confidence
as both shareholders and customers. We ask for your continued patronage and your referrals of prospective
customers as we strive to enhance your investment in our corporation.
Larry G. Dillon
Chairman, President and Chief Executive Officer
4
C&F Financial Corporation
2005 Annual Report 5
W
F O C U S E D O N S H A R E H O L D E R I N T E R E S T S
his 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.
Protecting shareholder and
customer interests
2 0 0 5 H I G H L I G H T S
• Continued to maintain the status of a well-
capitalized corporation
• Upgraded the main frame computer system and
networks to increase our assurance of the security
of our customers’ financial information
• Sustained our emphasis in all areas of risk
management including controls over financial
reporting, market risk, operational risk
and compliance
Directors
A N D O F F I C E R S
F O C U S E D O N Y O U
F O C U S E D O N S E R V I C E
his 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.
Providing quality financial
products and services
2 0 0 5 H I G H L I G H T S
• Continued to offer a full range of services
through banking, finance, investment and
mortgage products
• Expanded and improved delivery channels
•
including branches, ATMs and internet banking
Improved capability of the technology platform
for greater speed and delivery
• Continued to attract highly qualified,
experienced individuals
6
C&F Financial Corporation
C & F F I N A N C I A L
C O R P O R A T I O N /
C & F B A N K
B O A R D O F D I R E C T O R S
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
S A N D S T O N / V A R I N A
A D V I S O R Y B O A R D
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 B A N K / R I C H M O N D
B O A R D
Jeffery W. Jones
Chairman & CEO
WFofR, Incorporated
S. Craig Lane
President
Lane & Hamner, P.C.
J. Charles Link
President
C&F Bank/Richmond
(Front, left to right) Audrey D. Holmes, Thomas B. Whitmore Jr., Bryan E. McKernon,
Joshua H. Lawson and Paul C. Robinson (Back, left to right) Larry G. Dillon, William E.
O’Connell Jr., Barry R. Chernack, C. Elis Olsson, James H. Hudson III and J.P. Causey Jr.
William E. O’Connell Jr.
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.
C & F M O R T G A G E
C O R P O R A T I O N
B O A R D O F D I R E C T O R S
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
I N D E P E N D E N T P U B L I C
A C C O U N T A N T S
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
C O R P O R A T E C O U N S E L
Hudson & Bondurant, P.C.
West Point, Virginia
OF FI CERS A ND LOC AT IO NS
C & F B A N K
ADMINISTRATIVE OFFICES
802 Main Street
West Point, Virginia 23181
(804) 843-2360
3600 LaGrange Parkway
Toano, Virginia 23168
(757) 741-2201
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
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
Donna M. Haviland
Director of Internal Audit
Ellen M. Howard
Vice President & Loan Operations
Manager
Deborah R. Nichols
Vice President, Quality Control
Mary-Jo Rawson
Vice President & Controller
Leslie A. Scott
Vice President, Commercial Lending
Evelyn M. Townsend
Vice President, Operations
* Officers of C&F Financial Corporation
S t r o n g P e r f o r m a n c e a n d I n v e s t m e n t i n t h e F u t u r e
2005 Annual Report 7
T T
Officers
A N D L O C A T I O N S
(Continued)
MECHANICSVILLE,VIRGINIA
Ranee Blanton-Clifford
Assistant Vice President & Branch
Manager
NORGE, VIRGINIA
Robert J. Unangst
Assistant Vice President & Branch
Manager
PROVIDENCE FORGE, VIRGINIA
James D. W. King
Vice President & Branch Manager
QUINTON, VIRGINIA
Mary T. ‘‘Joy’’ Whitley
Assistant Vice President & Branch
Manager
VARINA, VIRGINIA
Timothy R. Martin
Branch Manager
Tracy E. Pendleton
Vice President & Area Credit Manager
SALUDA, VIRGINIA
Elizabeth B. Faudree
Assistant Vice President & Branch
Manager
SANDSTON, VIRGINIA
Katherine P. Buckner
Assistant Vice President & Branch
Manager
WEST POINT, VIRGINIA
Main Street
Karen T. Richardson
Assistant Vice President & Branch
Manager
WEST POINT, VIRGINIA
14th Street
WILLIAMSBURG, VIRGINIA
Jamestown Road
Alec J. Nuttall
Assistant Vice President & Branch
Manager
WILLIAMSBURG, VIRGINIA
Longhill Road
Sandra C. St. Clair
Assistant Vice President & Branch
Manager
C O N S T R U C T I O N L E N D I N G
O F F I C E
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8351
Terrence C. Gates
Vice President, Real Estate Construction
C & F B A N K / R I C H M O N D
ADMINISTRATIVE OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 378-0332
J. Charles Link
President
Charles T. Nuttle
Vice President, Commercial Lending
David L. Shaffer
Vice President, Commercial Lending
MIDLOTHIAN, VIRGINIA
Jesse E. Bullard
Vice President & Branch Manager
RICHMOND, VIRGINIA
Kevin L. Ford
Assistant Vice President & Branch
Manager
C & F B A N K / P E N I N S U L A
ADMINISTRATIVE OFFICE
City Center
698 Town Center Drive
Newport News, Virginia 23606
(757) 596-4775
Vern E. Lockwood II
President
Lorie D. Sarrett
Vice President, Commercial Lending
Bonnie S. Smith
Vice President, Real Estate Lending
HAMPTON, VIRGINIA
Clara U. Gravely
Assistant Vice President & Branch
Manager
NEWPORT NEWS, VIRGINA
City Center
Joycelyn Y. Spight
Assistant Vice President & Branch
Manager
YORKTOWN, VIRGINIA
Opening 2nd Quarter 2006
C & F I N V E S T M E N T
S E R V I C E S , I N C .
802 Main Street
West Point, Virginia 23181
(804)843-4584 or (800) 583-3863
Eric F. Nost
President
MIDLOTHIAN, VIRGINIA
Douglas L. Hartz
Vice President
WILLIAMSBURG, VIRGINIA
Douglas L. Cash Jr.
Vice President
C & F M O R T G A G E
C O R P O R A T I O N
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 & COO
Donna G. Jarratt
Senior Vice President & Chief of
Branch Administration
Kevin A. McCann
Senior Vice President & CFO
Tracy L. Bishop
Vice President & Human Resources
Manager
M. Kathy Burley
Vice President & Closing Manager
Susan L. Driver
Vice President & Underwriting Manager
Madeline M. Witty
Compliance Manager
CHARLOTTESVILLE, VIRGINIA
Waynesboro, Virginia
William E. Hamrick
Vice President & Branch Manager
RUCKERSVILLE, VIRGINIA
Brian K. Adams
Branch Manager
CHESTER, VIRGINIA
Stephen L. Fuller
Vice President & Branch Manager
FREDERICKSBURG, VIRGINIA
Culpepper, Virginia
Brian F. Whetzel
Branch Manager
R.W. Edmondson III
Branch Manager
CHARLOTTE, NORTH CAROLINA
Patrick B. Edmondson
Sales Manager
MIDLOTHIAN, VIRGINIA
Donald R. Jordan
Vice President & Branch Manager
Daniel J. Murphy
Vice President & Branch Manager
Susan P. Moore
Vice President & Operations Manager
NEWPORT NEWS, VIRGINIA
Linda H. Gaskins
Vice President & Branch Manager
Mary L. Rebholz
Production Manager
RICHMOND, VIRGINIA
Page C. Yonce
Vice President & Branch Manager
HANOVER, VIRGINIA
LEXINGTON, VIRGINIA
ROANOKE, VIRGINIA
John H. Reeves III
Vice President & Manager
GASTONIA, NORTH CAROLINA
Nancy W. Poteat
Branch Manager
VIRGINIA BEACH, VIRGINIA
Francis B. “Chip” Simkins III
Branch Manager
George Temple Jr.
Production Manager
WILLIAMSBURG, VIRGINIA
William H. Phillips
Branch Manager
CROFTON, MARYLAND
Michael J. Mazzola
Senior Vice President & Maryland
Area Manager
ANNAPOLIS, MARYLAND
William J. Regan
Vice President & Branch Manager
Jeffrey R. Schroll
Vice President & Production Manager
ELLICOTT CITY, MARYLAND
Scott B. Segrist
Branch Manager
Robert G. Menton
Branch Manager
NEWPORT, DELAWARE
Craig I. Snyder
Branch Manager
EXTON, PENNSYLVANIA
MOORESTOWN, NEW JERSEY
R. Scott Wallace
Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy
Branch Manager
C & F T I T L E A G E N C Y, I N C .
Midlothian, Virginia
Eileen A. Cherry
Vice President & Title Insurance
Underwriter
H O M E T O W N S E T T L E M E N T
S E R V I C E S L L C
Charlottesville, Virginia
Crofton, Maryland
C E R T I F I E D A P P R A I S A L S L L C
Midlothian, Virginia
H. Daniel Salomonsky
Vice President & Appraisal Manager
C & F F I N A N C E C O M P A N Y
ADMINISTRATIVE OFFICE
4660 South Laburnum Avenue
Richmond, Virginia 23231
(804) 236-9601
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
Alfred Hinkle
Vice President, Human Resources
NORTHERN VIRGINIA/MARYLAND
REGION
Gregory A. Harper
Area Sales Manager
HAMPTON, VIRGINIA
Kevin F. Jones Jr.
Area Sales Manager
RICHMOND, VIRGINIA
Pamela L. Austin
Area Sales Manager
ROANOKE, VIRGINIA
Livia P. Woodford
Area Sales Manager
VIRGINIA BEACH, VIRGINIA
Lisa A. Hoggard
Area Sales Manager
TENNESSEE
Alan Paul Esstman
Area Sales Manager
Our
V A L U E S
We Believe...
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 must conduct ourselves morally and ethically at all times
and in all relationships.
We have an obligation to the well-being of all the
communities we serve.
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, separates 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, Plaza Level,
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 documents 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
8
C&F Financial Corporation
2005 Annual Report
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, 2005
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)
(State or other jurisdiction of incorporation or organization)
Virginia
54-1680165
(I.R.S. Employer Identification No.)
802 Main Street
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ( ) No ( X )
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ( ) No ( X )
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ( )
Accelerated Filer ( X )
Non-accelerated filer ( )
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ( ) No ( X )
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30,
2005 was $128,641,646.
There were 3,150,148 shares of common stock outstanding as of February 15, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 15, 2006 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held April 18, 2006, are incorporated by reference in Part III of this report.
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS ............................................................................................................................... page 1
ITEM 1A. RISK FACTORS ...................................................................................................................... page 10
ITEM 1B. UNRESOLVED STAFF COMMENTS ................................................................................. page 12
ITEM 2.
PROPERTIES .......................................................................................................................... page 13
ITEM 3.
LEGAL PROCEEDINGS ....................................................................................................... page 14
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................... page 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES ........................................................................................................ page 15
ITEM 6.
SELECTED FINANCIAL DATA.......................................................................................... page 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................. page 17
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 83
ITEM 11. EXECUTIVE COMPENSATION.......................................................................................... page 83
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ............................... page 84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................. page 85
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ...................................................... page 85
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ..................................................... page 86
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 operating subsidiary, C&F Bank
(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 Finance Company
• C&F Investment Services, Inc.
• C&F Insurance Services, Inc. and
• C&F Title Agency, Inc.
The Corporation operates in a decentralized manner in three principal business activities: (1) retail banking
through C&F Bank, (2) mortgage banking through C&F Mortgage Corporation and (3) consumer finance through
C&F Finance Company. 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.
The Corporation also owns C&F Financial Statutory Trust I, a non-operating subsidiary that was formed in
July 2005 for the purpose of issuing $10.0 million of trust preferred capital securities in a private placement to an
institutional investor. The Trust is an unconsolidated subsidiary of the Corporation and its principal asset is $10.3
million of the Corporation’s junior subordinated debt securities (referred to herein as “trust preferred capital
notes,”) which is reported as a liability of the Corporation.
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, collection, notary public, wire service 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, 2005, assets of the Retail Banking segment totaled $571.1 million. For the year
ended December 31, 2005, income before income taxes totaled $8.1 million.
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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 13 locations in Virginia, four in Maryland, two
in North Carolina and one each in Newport, Delaware; Morristown, New Jersey; and Exton, Pennsylvania. The
Virginia offices are located one each in Charlottesville, Chester, Culpepper, Fredericksburg, Lexington, Midlothian,
Newport News, Roanoke, Ruckersville, Waynesboro, and Williamsburg, and two in Richmond. The Maryland
offices are located in Annapolis, Crofton, Waldorf and Clarksville. The North Carolina offices are located in
Charlotte and Gastonia. 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; Franklin American Mortgage
Company; Washington Mutual Bank, FA and Wells Fargo Home Mortgage. The Bank also purchases lot and
permanent loans and home equity lines of credit from C&F Mortgage. C&F Mortgage originates conventional
mortgage loans, mortgage loans 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
(Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). The remainder of the conventional
loans are non-conforming loans 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 and residential
appraisals. 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, 2005, assets of the Mortgage Banking segment totaled $47.6 million. For the year ended December 31,
2005, income before income taxes totaled $5.1 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, Hampton
Roads and Northern Virginia and in 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. As C&F Finance provides
financing in a relatively high-risk market, it 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, 2005, assets of the Consumer Finance segment totaled $119.1 million. For the
year ended December 31, 2005, income before income taxes totaled $3.7 million.
Employees
At December 31, 2005, we employed 461 full-time equivalent employees. We consider relations with our
employees to be excellent.
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Competition
Retail Banking
In the Bank’s market area, we compete with large national and regional financial institutions, savings
associations 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 Hampton 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.
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; 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, together with a
significant increase in new home construction and sales, 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 consistently high quality customer service; and pricing its products at
competitive rates.
No material part of C&F Mortgage’s 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, savings associations, credit unions and independent finance companies. Many of
these competitors have substantially greater financial resources and lower costs of funds than our finance
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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 C&F Finance’s business is dependent upon any single dealer relationship, and the loss
of any single dealer relationship would not have a materially adverse effect upon C&F Finance’s business.
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, among other things: (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. 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.
4
The Corporation is also 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,
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, 2005, the total capital to risk-weighted asset ratio of the Corporation was 12.2 percent
and the ratio of the Bank was 12.7 percent. At December 31, 2005, the Tier 1 capital to risk-weighted asset ratio was
11.0 percent for the Corporation and 11.4 percent for the Bank.
5
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, 2005, the Tier l leverage ratio was 8.9 percent for the Corporation and
9.3 percent for the Bank. The guidelines also provide that banking organizations experiencing internal growth or
making acquisitions must maintain capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
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, 2005, the Bank declared $2.5
million in dividends payable to the Corporation, and the Corporation declared $3.3 million in dividends payable 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 between $500 million and $1 billion 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 institution’s compliance with designated laws and regulations and establish an audit committee
comprised of outside directors, a majority of whom must be independent of management. The Bank is subject to
the annual audit, reporting and audit committee requirements of Section 36 of the FDIA.
Community Reinvestment Act. The Community Reinvestment Act (CRA) 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
6
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
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 2005, the Corporation paid through the Bank only the base assessment
rate, which amounted to $61,000 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 2005, 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 for member banks as an amount equal to the sum of a membership requirement and an activity-
based requirement. At December 31, 2005, the Bank held $1.9 million of FHLB stock.
USA Patriot Act. The USA Patriot Act, which became effective on October 26, 2001, amends the Bank
Secrecy Act and is intended to facilitate 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. Certain
provisions of the USA Patriot Act impose the obligation to establish anti-money laundering programs, including the
development of a customer identification program, and the screening of all customers against any government lists
of known or suspected terrorists. Although it does create a reporting obligation and there is a cost of compliance,
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
7
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
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.
Consumer Protection. The Fair and Accurate Credit Transactions Act of 2003, which amended the Fair Credit
Reporting Act, requires financial institutions to implement policies and procedures that track identity theft
incidents; provide identity-theft victims with evidence of fraudulent transactions upon request; block from
reporting to consumer reporting agencies credit information resulting from identity theft; notify customers of
adverse information concerning the customer in consumer reporting agency reports; and notify customers when
reporting negative information concerning the customer to a consumer reporting agency.
Other Safety and Soundness Regulations
Prompt Correction Action. 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. An insured
depository institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is
subject to increased regulatory oversight and is increasingly restricted in the scope of its permissible activities. As
of December 31, 2005, the Bank was considered “well capitalized.”
8
Gramm-Leach-Bliley Act of 1999 (GLBA). The 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
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 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 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
Copies of documents can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 100
F Street, N.E., 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.
9
ITEM 1A. RISK FACTORS
We are subject to interest rate risk and fluctuations in interest rates may negatively affect our financial
performance.
Our profitability depends in substantial part on our net interest margin, which is the difference between the
interest earned on loans, securities and other interest-earning assets, and interest paid on deposits and borrowings.
Changes in interest rates will affect our net interest margin in diverse ways, including the pricing of loans and
deposits, the levels of prepayments and asset quality. We are unable to predict actual fluctuations of market
interest rates because many factors influencing interest rates are beyond our control. We attempt to minimize our
exposure to interest rate risk, but we are unable to eliminate it. Based on our asset/liability position at December
31, 2005, we are vulnerable to continued increases in short-term interest rates because of our slightly liability-
sensitive balance sheet profile for the one-year time period. However, these liabilities consist predominantly of
deposits, the repricing of which historically lags behind the changes in short-term interest rates. We believe that our
current interest rate exposure is manageable and does not indicate any significant exposure to interest rate changes.
Periods of rising interest rates or a decline in real estate values in our market will adversely affect our income from
our mortgage company.
One of the components of our strategic plan is to generate significant non-interest income from our
mortgage company, C&F Mortgage. In periods of rising interest rates, consumer demand for new mortgages and
refinancings may decrease, which in turn could adversely impact our mortgage company. Because interest rates
depend on factors outside of our control, we cannot eliminate the interest rate risk associated with our mortgage
operations. In addition, there is speculation that current real estate prices in our market exceed the true values of
the properties. If this is the case, or if the market generally perceives that this is the case, then real estate prices
could become stagnant or decline, and there could be a significant reduction in real estate construction and housing
starts. This could have a significant adverse affect on demand for loan products offered by our mortgage company.
Our business is subject to various lending and other economic risks that could adversely impact our results of
operations and financial condition.
Changes in economic conditions, particularly an economic slowdown, could hurt our business. Our
business is directly affected by general economic and market conditions; broad trends in industry and finance;
legislative and regulatory changes; changes in governmental monetary and fiscal policies; and inflation, all of which
are beyond our control. A deterioration in economic conditions, in particular an economic slowdown within our
geographic region, could result in the following consequences, any of which could hurt our business materially: an
increase in loan delinquencies; an increase in problem assets and foreclosures; a decline in demand for our products
and services; and a deterioration in the value of collateral for loans made by our various business segments.
Our level of credit risk is increasing due to the concentration of our loan portfolio in commercial loans and in
consumer finance loans.
At December 31, 2005, 45 percent of our loan portfolio consisted of commercial loans. These loans generally
carry larger loan balances and involve a greater degree of financial and credit risk than home equity and residential
loans. The increased financial and credit risk associated with these types of loans is a result of several factors,
including the concentration of principal in a limited number of loans and to borrowers in similar lines of business,
10
the size of loan balances, the effects of general economic conditions on income-producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
At December 31, 2005, 24 percent of our loan portfolio consisted of consumer finance loans that provide
automobile financing for customers in the non-prime market. During periods of economic slowdown or recession,
delinquencies, defaults, repossessions and losses generally increase in this portfolio. 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 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 we focus 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 dramatically affected by a general
economic downturn. While we manage the higher risk inherent in loans made to non-prime borrowers through our
underwriting criteria and collection methods, we cannot guarantee that these criteria or methods will ultimately
provide adequate protection against these risks.
If our allowance for loan losses becomes inadequate, the results of our operations may be adversely affected.
Making loans is an essential element of our business. The risk of nonpayment is affected by a number of
factors, including but not limited to: the duration of the credit; credit risks of a particular customer; changes in
economic and industry conditions; and, in the case of a collateralized loan, risks resulting from uncertainties about
the future value of the collateral. Although we seek to mitigate risks inherent in lending by adhering to specific
underwriting practices, our loans may not be repaid. We attempt to maintain an appropriate allowance for loan
losses to provide for potential losses in our loan portfolio. Our allowance for loan losses is determined by analyzing
historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, the
opinions of our regulators, changes in the size and composition of the loan portfolio and industry information. Also
included in our estimates for loan losses are considerations with respect to the impact of economic events, the
outcome of which are uncertain. Because any estimate of loan losses is necessarily subjective and the accuracy
depends on the outcome of future events, we face the risk that charge-offs in future periods will exceed our
allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to
the allowance for loan losses would result in a decrease of our net income. Although we believe our allowance for
loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses or that our
allowance will be adequate in the future.
Competition from other financial institutions and financial intermediaries may adversely affect our profitability.
We face substantial competition in originating loans and in attracting deposits. Our competition in
originating loans and attracting deposits comes principally from other banks, mortgage banking companies,
consumer finance companies, savings associations, credit unions, insurance companies and other institutional
lenders and purchasers of loans. Additionally, banks and other financial institutions with larger capitalization and
financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to
serve the credit needs of larger clients. These institutions may be able to offer the same loan products and services
that we offer at more competitive rates and prices. Increased competition could require us to increase the rates we
pay on deposits or lower the rates we offer on loans, which could adversely affect our profitability.
11
We rely heavily on our management team and the unexpected loss of key officers may adversely affect our
operations.
We believe that our growth and future success will depend in large part on the skills of our executive
officers. We also depend upon the experience of the officers of our subsidiaries and on their relationships with the
communities they serve. The loss of the services of one or more of these officers could disrupt our operations and
impair our ability to implement our business strategy, which could adversely affect our business, financial condition
and results of operations.
The success of our growth strategy depends on our ability to identify and recruit individuals with experience and
relationships in our primary markets.
The successful implementation of our business strategy will require us to continue to attract, hire, motivate
and retain skilled personnel to develop new customer relationships as well as new financial products and services.
The market for qualified management personnel is competitive. In addition, the process of identifying and
recruiting individuals with the combination of skills and attributes required to carry out our strategy is often
lengthy. Our inability to identify, recruit and retain talented personnel to manage new offices effectively and in a
timely manner would limit our growth, which could materially adversely affect our business.
Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could
lose the beneficial aspects fostered by our culture, which could harm our business.
We believe that a critical contributor to our success has been our corporate culture, which focuses on
building personal relationships with our customers. As our organization grows, and we are required to implement
more complex organizational management structures, we may find it increasingly difficult to maintain the
beneficial aspects of our corporate culture. This could negatively impact our future success.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Corporation has no unresolved comments from the SEC staff.
12
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 a 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, a branch office of C&F Investment Services and office space for certain of the
Bank’s administrative personnel.
The Corporation owns a building located at 3600 LaGrange Parkway in Toano, Virginia. The building was
acquired in 2004 and has 60,000 square feet. Approximately 30,000 square feet were renovated in 2005 in order to
house the Bank’s operations center, which consists of the Bank’s loan, deposit and administrative functions and
staff. The buildings previously used for the Bank’s operations at Seventh and Main Streets, which is a 14,000 square
foot building remodeled by the Corporation in 1991, and at Sixth and Main Streets, which is a 5,000 square foot
building acquired and remodeled by the Corporation in 1998, 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.
Rental expense for the leased location totaled $22,000 for the year ended December 31, 2005. The Corporation
expects to complete construction of and open two new branches on the Virginia Peninsula in 2006. In addition, the
Corporation expects to complete renovations of and open two acquired branches in the Richmond area in 2006.
The Corporation has 20 leased offices, 11 in Virginia, four in Maryland, two in North Carolina and one each
in Delaware, New Jersey and Pennsylvania, for C&F Mortgage. Rental expense for leased locations totaled $691,000
for the year ended December 31, 2005.
The Corporation owns a building located at 4660 South Laburnum Avenue in Richmond, Virginia. The
building was acquired in June 2005 and has approximately 8,800 square feet. The building houses C&F Finance’s
headquarters and provides space for its loan and administrative functions and staff, which were relocated in
August 2005 from a leased facility. In addition, the Corporation has two leased offices in Virginia for C&F Finance.
Rental expense for leased locations totaled $73,000 for the year ended December 31, 2005.
All of the Corporation’s properties are in good operating condition and are adequate for the Corporation’s
present and anticipated future needs.
13
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 (53)
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 (37)
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 (55)
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 (49)
President and Chief Executive Officer of C&F Mortgage since 1995
14
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 for trading on the
NASDAQ Global Market of the NASDAQ Stock Market under the symbol “CFFI.” As of March 1, 2006, 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 2005 and 2004. 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
_________2005_________
High
$40.20
40.44
41.00
40.15
Low Dividends
$36.12
34.81
34.92
37.02
$0.24
0.24
0.25
0.27
__________2004__________
Low
High
$36.91
$43.71
32.75
41.91
33.29
40.50
37.16
40.35
Dividends
$0.22
0.22
0.22
0.24
Issuer Purchases of Equity Securities
For the Quarter Ended December 31, 2005
Total
Number
of Shares
Purchased
-
-
100
100
Average
Price
Paid Per
Share
$ -
-
37.27
$37.27
Total Number
of Shares
Purchased as
Part of Publicly
Announced Program1
-
-
100
100
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Program1
-
156,783
156,683
October 1-31, 2005
November 1-30, 2005
December 1-31, 2005
Total
1On November 4, 2005, the Corporation’s board of directors authorized the repurchase of up to 5 percent of the Corporation’s common stock
(approximately 156,783 shares) over the twelve months ending November 3, 2006. The stock will be purchased in the open market and/or by
privately negotiated transactions, as management and the board of directors deems prudent.
15
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
Noninterest income
Noninterest 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
2005
2004
2003
2002
2001
$671,957
60,086
465,039
495,438
$ 48,770
11,997
36,773
5,520
31,253
27,584
41,868
16,969
5,181
$ 11,788
$609,122
69,899
394,471
447,134
$573,546
65,384
350,170
427,635
$551,922
56,233
328,634
383,533
$404,076
44,743
246,112
323,912
$ 40,843
7,549
33,294
4,026
$ 38,671
8,828
29,843
3,167
$ 30,620
9,184
21,436
1,141
$ 28,234
11,984
16,250
400
29,268
24,689
37,753
16,204
5,006
$ 11,198
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
$3.49
$3.14
$3.58
$2.73
$2.25
3.36
1.00
3.00
.90
3.42
.72
2.67
.62
2.23
.58
3,507,912
3,729,128 3,781,843
3,652,668 3,587,307
1.82%
17.70
28.33
10.30
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
16
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 with the greatest uncertainty and that required our most difficult, subjective or complex judgments
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.
17
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.
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. As part of the impairment test, we performed sensitivity analysis by increasing the discount rate,
lowering sales multiples and reducing increases in future income. We completed the annual test for impairment
during the fourth quarter of 2005 and determined there was no impairment to be recognized in 2005. 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
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 Item 8, “Financial Statements and
Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies.”
18
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 (ROA)
2) return on average equity (ROE)
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 increased 5.3 percent to $11.8 million in fiscal 2005. Net income per diluted
share increased 12.0 percent to $3.36 in the same period. The Corporation's ROA was 1.82 percent for the year
ended December 31, 2005 compared with 1.91 percent for 2004, and its ROE was 17.70 percent for the year ended
December 31, 2005 compared with 16.78 percent for 2004. Factors influencing 2005 earnings included rising interest
rates, utilization of the Corporation’s liquidity to fund loan demand, strong mortgage loan production, new
borrowings to fund the Corporation’s repurchase of common stock and higher operating expenses to support
growth. The degree to which these factors impacted each of our business segments varied and is discussed in
“Principal Business Activities” below. The improvement in earnings per share relative to the increase in net income
for 2005, as well as the increase in the Corporation’s ROE, are attributable to the accretive effect of the tender offer
that concluded in the third quarter of 2005 and resulted in the Corporation’s repurchase of approximately 427,000 of
its outstanding shares. The decline in ROA resulted from a 10.2 percent increase in average assets, which outpaced
the growth in earnings. We have continued to make significant investments in our retail branch network,
operations facilities, technology and personnel in order to accommodate our strategic growth initiatives. These
investments have increased our operating assets and expenses. However, we expect them to enhance long-term
earnings, thus increasing shareholder value.
19
We expect the following factors to influence the Corporation’s financial performance in 2006:
•
interest rate volatility and the flat interest rate yield curve, which will likely continue to affect
demand for home mortgage loans in the Mortgage Banking segment and net interest margin
in the Retail Banking and Consumer Finance segments;
• 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 maintain and expand our loan production at the Mortgage Banking segment by
opening or acquiring new production offices;
the ability to achieve forecasted deposit and loan growth at the four Retail Banking branches
opening in 2006;
the extent to which loan demand is affected by the increased competition in each of our
business segments;
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; and
our ability to effectively deploy capital generated from operations in expanding our business
segments and repurchasing shares under the approved share repurchase program.
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 $8.1 million for the year ended
December 31, 2005, compared with $7.3 million in 2004. The increase in pretax earnings for the comparative 12-
month periods primarily resulted from an increase in both the amount and yield of earning assets. These
improvements were offset in part by an increase in operational and administrative expenses to support growth.
The Retail Banking segment’s net interest margin has benefited in the short term as variable-rate loans have
repriced as short-term interest rates have increased, and deposits have repriced at a more gradual pace. Future
earnings of the Retail Banking segment may be negatively impacted by net interest margin compression if the lag in
deposit repricing begins to diminish. The Retail Banking segment continued to expand its facilities throughout 2005
with (1) the completion of its new operations center, (2) the acquisition of two branch buildings in the Richmond
area, which we expect to open in the second quarter of 2006 and (3) the ongoing construction of two new branches
in the Peninsula region. We opened one of the Peninsula branches in Hampton, Virginia in February 2006 and
expect to open the second branch in the second quarter of 2006. This growth will increase operating expenses, but
over time we expect it to contribute to the Corporation’s profitability, improve efficiency and enhance customer
service.
Mortgage Banking: Pretax earnings for the Mortgage Banking segment were $5.1 million for the year
ended December 31, 2005, compared with $4.7 million in 2004. The increase in earnings resulted from a 19.5
percent increase in the volume of loans sold during 2005, while gains on sales of loans increased only 9.8 percent as
profit margins on loans sold declined due to changing product mix and more competitive pricing. For 2005, loan
originations at C&F Mortgage for refinancings increased slightly to $350 million from $319 million in 2004. Loans
originated for new and resale home purchases increased to $709 million in 2005 from $593 million in 2004. We
expect 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. We plan to continue
to expand in new and existing markets that provide the potential for increased loan production.
20
Consumer Finance: Pretax earnings for the Consumer Finance segment, which consists solely of C&F
Finance, totaled $3.7 million for the year ended December 31, 2005, compared with pre-tax earnings of $3.8 million
in 2004. The slight decrease in 2005 was attributable to net interest margin compression resulting from increased
variable-rate borrowings in a rising interest rate environment, a higher provision for loan losses attributable to loan
growth and higher operating expenses to support growth and technology investment, offset in large part by average
loan growth of 19.8 percent. During 2005, the Consumer Finance segment completed its conversion to a new loan
system, as well as the consolidation and relocation of its operations center to a new location in Richmond, Virginia.
Also during 2005, C&F Finance changed third-party lenders for its secured revolving line of credit with financing
terms that substantially increase the line of credit over time and provide for a rate reduction from the prior terms, as
well as lower administration fees. We believe that with these improvements, we have established a platform with
the capacity to support current operations and future growth, which will enhance long-term earnings. Future
earnings at the Consumer Finance segment will be further impacted by economic conditions including, but not
limited to, the employment market, interest rate levels and the resale market for used automobiles.
Capital Management
During 2005, total assets grew by 10.3 percent. In addition, we completed the repurchase of approximately
427,000 shares of the Corporation’s common stock for $17.6 million. The share repurchase is accretive to earnings
per share and ROE. Dividends for 2005 were $1.00 per share versus 90 cents per share in 2004, as we increased our
quarterly dividend per share by 12.5 percent during 2005. In 2006, we will continue to employ such capital
management strategies as evidenced by the Corporation’s board of directors’ approval on November 4, 2005 of the
repurchase of up to an additional 5 percent of the Corporation’s common stock (approximately 156,783 shares) over
the twelve months ending November 3, 2006.
21
RESULTS OF OPERATIONS
NET INTEREST INCOME
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, 2005, 2004
and 2003. The table also shows the amounts of interest earned on earning assets, with related yields, and interest
expense on interest-bearing liabilities, with related rates. Loans include loans held for sale. Loans placed on a
nonaccrual status are included in the balances and are included in the computation of yields, but had no material
effect. Interest on tax-exempt loans and securities is presented on a taxable equivalent basis (which converts the
income on loans and investments for which no income taxes are paid to the equivalent yield if income taxes were
paid using the federal corporate income tax rate of 35 percent in all three years presented).
(Dollars in thousands)
Assets
Securities:
Taxable
Tax-exempt
Total securities
Loans, net (1)
Interest-bearing deposits in other banks
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
2005
Average
Yield/
Income/
Balance
Rate
Expense
2004
Income/
Average
Yield/
Balance
Rate
Expense
2003
Yield/
Income/
Rate
Expense
Average
Balance
$ 12,989
56,092
69,081
507,447
17,168
593,696
(12,213)
65,107
$646,590
$ 81,885
49,909
54,656
63,432
136,779
386,661
101,355
488,016
76,172
15,808
579,996
66,594
$ 527
4,020
4,547
45,118
523
50,188
4.06% $ 16,211
54,532
7.17
$ 484
4,058
2.99% $ 8,354
49,941
7.44
6.58
8.89
3.05
70,743
424,052
43,564
8.45% 538,359
(9,675)
57,890
$586,574
4,542
37,009
527
42,078
6.42
8.73
1.21
58,295
422,237
26,221
7.82% 506,753
(7,482)
51,208
$550,479
$ 218
3,899
4,117
35,590
253
39,960
2.61%
7.81
7.06
8.43
0.96
7.89%
732
708
388
0.89% $ 80,055
42,797
1.42
55,856
0.71
495
329
328
0.62% $ 72,366
39,443
0.77
51,624
0.59
1,717
3,735
7,280
4,717
11,997
2.71
2.73
1.88
4.65
56,480
127,923
363,111
74,011
2.46% 437,122
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
622
462
428
1,118
3,482
6,112
2,733
8,845
0.86%
1.17
0.83
2.34
2.64
1.78
3.63
2.12%
69,281
13,432
519,835
66,739
54,920
16,805
489,887
60,592
$646,590
$586,574
$550,479
$38,191
$34,529
$31,115
5.99%
2.02%
6.43%
6.09%
1.40%
6.41%
5.77%
1.75%
6.14%
(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 nonaccrual status in 2004.
22
TABLE 2: Rate-Volume Recap
Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of
earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table
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 nonaccrual loans and loans held for sale.
(Dollars in thousands)
Interest income:
Loans
Securities:
Taxable
Tax-exempt
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
2005 Compared to 2004
2005 from 2004 2004 from 2003
Increase(Decrease)
Due to
Volume
Increase(Decrease)
Due to
Volume
Total
Increase
(Decrease)
Total
Increase
(Decrease)
Rate
Rate
$ 706
$7,403
$ 8,109
$ 1,265
$ 154
$ 1,419
152
(151)
454
1,161
225
317
66
486
786
1,880
1,042
2,922
(109)
113
(458)
6,949
12
62
(6)
145
198
411
1,115
1,526
$(1,761)
$5,423
43
(38)
(4)
8,110
237
379
60
631
984
2,291
2,157
4,448
$3,662
35
(188)
76
1,188
(188)
(164)
(133)
(218)
(635)
(1,338)
(168)
(1,506)
$ 2,694
231
347
198
930
61
31
33
186
(96)
215
(5)
210
$ 720
266
159
274
2,118
(127)
(133)
(100)
(32)
(731)
(1,123)
(173)
(1,296)
$ 3,414
Net interest income, on a taxable equivalent basis, for the year ended December 31, 2005 was $38.2 million
compared to $34.5 million for 2004. The higher net interest income resulted primarily from an increase of 10.3
percent in the average balance of interest-earning assets and a minimal increase in net interest margin to 6.43
percent in 2005 from 6.41 percent in 2004. The slight increase in the net interest margin was a result of a 63 basis
point increase in yield on interest-earning assets that was offset in part by a 73 basis point increase in the rate on
interest-bearing liabilities.
All of the Corporation’s principal business segments experienced loan growth during 2005. Average loans
increased $53.7 million in the Retail Banking segment, $17.2 million in the Consumer Finance segment and $12.5
million in the Mortgage Banking segment. The increase in loans in the Retail Banking segment was mainly
attributable to loan production in the Virginia Peninsula market and residential construction loan growth. The
increase in loans held for sale at the Mortgage Banking segment resulted from higher production volume. The
increase in loans at the Consumer Finance segment was mainly attributable to overall growth at existing locations.
23
The yield on loans held for investment and loans held for sale increased as a result of a general increase in interest
rates since mid-2004.
Average securities available for sale decreased slightly during 2005; however, their average yield increased by
16 basis points. The decline in the average balance resulted from the utilization of proceeds from maturities and
calls to fund the increase in loan demand. The yield increase was the result of a change in the mix of investments.
The percentage of shorter-term, lower-yielding investments decreased in 2005 as compared to 2004.
Average interest earning deposits at other banks, primarily the FHLB, decreased $26.4 million during 2005;
however, their average yield increased 184 basis points. The decline in the average balance resulted from the
liquidation of these low-yielding deposits to fund the increase in loan demand. The yield increase reflected the
increase in short-term interest rates beginning in mid-2004.
Although average interest-bearing deposits increased $23.6 million during 2005, the increase in interest on
deposits was influenced to a greater extent by the increase in deposit rates. The average cost of deposits increased
51 basis points during 2005 due to an increase in short-term interest rates. Generally, deposit interest rate increases
lag behind the increase in loan interest rates. Although short-term interest rates increased 200 basis points in 2005,
deposits will reprice more gradually as existing certificates of deposit mature in future periods.
Average borrowings increased $27.3 million during 2005. This was a result of an increase in borrowings from
a third-party lender to fund the increase in loans at the Consumer Finance segment and an increase in short-term
advances from the FHLB to fund the increase in loan production at the Mortgage Banking segment. Borrowings
increased further as a result of a line of credit from a third-party lender and the issuance of trust preferred capital
securities to fund the Corporation’s repurchase of 427,186 shares of its common stock in the third quarter of 2005.
All of these borrowings are indexed to short-term interest rates and reprice as short-term interest rates change.
Accordingly, the average cost of borrowings increased 119 basis points during 2005.
The net interest margin has benefited in the short term as variable-rate loans have repriced as short-term
interest rates have increased. However, we expect that some degree of net interest margin compression will occur
in 2006 as the favorable impact of the deposit repricing lag lessens in the longer term and the cost of borrowings
continues to increase.
2004 Compared to 2003
Net interest income, on a taxable equivalent basis, for the year ended December 31, 2004 was $34.5 million, an
increase of $3.4 million, or 11.0 percent, from $31.1 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. The increase in the net
interest margin was a result of a 39 basis point decline in the rates paid on interest-bearing liabilities offset in part
by a 7 basis point decline in the yield on interest-earning assets.
Average loans outstanding remained relatively flat during 2004, while the yield increased 30 basis points to
8.73 percent. A $28.3 million increase in loans held for investment was offset by a $26.5 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
24
mainly attributable to loan production in the Virginia Peninsula market. The increase in the Consumer Finance
segment was mainly attributable to serving new markets, in addition to overall growth at existing locations. The
decrease in average loans held for sale was a result of decreased production caused by increasing mortgage interest
rates beginning 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 impacted by the 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 $12.5 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 interest rate environment in the first half of 2004.
Average interest earning deposits at other banks, primarily the FHLB, increased $17.3 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.
The decrease in the rates paid on interest-bearing liabilities was primarily a result of a 41 basis point
decrease in the cost of deposits during 2004. This was a result of (1) the falling interest rate environment in prior
periods and (2) an increase in the average balance of lower cost deposit accounts, such as interest checking, money
market and savings accounts. The increase in lower cost interest checking, money market and savings deposits was
a result of the Bank’s efforts to attract these deposits through product offerings and an emphasis on obtaining
transactional deposit accounts. Although interest rates increased in the second half of 2004, deposits repriced more
gradually as existing certificates of deposit mature in future periods.
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 $8.0 million in debt that carried
interest rates of 6 percent to 8 percent and that was associated with the acquisition of C&F Finance.
25
NONINTEREST INCOME
TABLE 3: Noninterest 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 noninterest 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 noninterest 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 noninterest income
2005 Compared to 2004
Year Ended December 31, 2005
Retail
Banking
Mortgage
Banking
$ --
2,812
1,054
105
371
$4,342
$18,193
--
3,509
--
210
$21,912
Consumer
Finance
$ --
--
232
--
185
$ 417
Other
Total
$ 1
--
--
--
912
$ 913
$18,194
2,812
4,795
105
1,678
$27,584
Year Ended December 31, 2004
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Total
$ --
2,699
857
69
154
$3,779
$16,572
--
3,208
--
18
$19,798
$ --
--
--
--
71
$ 71
$ 3
--
--
--
1,038
$1,041
$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
Total noninterest income increased $2.9 million, or 11.7 percent, to $27.6 million for the year ended
December 31, 2005. The increase in 2005 was attributable to (1) higher service charges and fees on deposit accounts
at the Retail Banking segment resulting from deposit account growth, higher gains on calls of securities and a gain
on the sale of land located adjacent to one of the Bank branches, (2) higher gains on sales of loans and other service
charges at the Mortgage Banking segment resulting from an increase in the volume of loans closed and sold and (3)
higher income at the Consumer Finance segment resulting from fees generated from loan originations.
2004 Compared to 2003
Total noninterest income decreased $4.6 million, or 15.8 percent, to $24.7 million for the year ended
December 31, 2004. The decrease in 2004 was mainly attributable to decreases at the Mortgage Banking segment 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. 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.
26
NONINTEREST EXPENSE
TABLE 4: Noninterest Expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses
Total noninterest expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses
Total noninterest expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses
Total noninterest expense
2005 Compared to 2004
Retail
Banking
$11,368
2,292
4,303
$17,963
Retail
Banking
$ 9,982
2,144
3,662
$15,788
Retail
Banking
$ 8,589
2,263
3,616
$14,468
Year Ended December 31, 2005
Mortgage
Banking
Consumer
Finance
$13,457
1,356
3,656
$18,469
$2,766
198
1,601
$4,565
Year Ended December 31, 2004
Mortgage
Banking
Consumer
Finance
$12,624
1,167
3,066
$16,857
$2,162
220
2,077
$4,459
Year Ended December 31, 2003
Mortgage
Banking
Consumer
Finance
$13,361
1,006
3,363
$17,730
$1,860
156
1,700
$3,716
Other
$686
25
160
$871
Total
$28,277
3,871
9,720
$41,868
Other
$465
25
159
$649
Total
$25,233
3,556
8,964
$37,753
Other
$600
28
206
$834
Total
$24,410
3,453
8,885
$36,748
Total noninterest expense increased $4.1 million, or 10.9 percent, to $41.9 million for the year ended
December 31, 2005. The Retail Banking and the Consumer Finance segments reported increases in total noninterest
expenses that were primarily attributable to higher personnel and operating expenses to support growth in both
segments and technology enhancements at the Consumer Finance segment. Start-up costs associated with the
Bank’s expansion efforts continued throughout 2005 with the ongoing construction of two new retail branches on
the Virginia Peninsula, the acquisition of two retail branch buildings in the Richmond area and the relocation of the
Bank’s operations departments to a new facility in the fourth quarter of 2005. In addition, the Consumer Finance
segment relocated its loan and administrative functions and staff to a new facility owned by the Bank in the third
quarter of 2005. The Retail Banking segment will continue to incur additional expenses associated with its new
facilities throughout 2006. An increase in noninterest expenses for the Mortgage Banking segment reflected higher
production-based compensation and operating expenses due to an increase in production.
2004 Compared to 2003
Total noninterest expense increased $1.0 million, or 2.7 percent, to $37.8 million for the year ended
December 31, 2004. The Retail Banking and the Consumer Finance segments reported increases in total noninterest
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. The
27
Consumer Finance segment continued to invest in both technology and people to create efficiencies and serve new
markets. During 2004, we hired additional personnel to begin serving that segment’s Northern Virginia and
Nashville, Tennessee markets. A decrease in noninterest expenses for the Mortgage Banking segment resulted from
lower production-based compensation and operating expenses.
INCOME TAXES
Applicable income taxes on 2005 earnings amounted to $5.2 million, resulting in an effective tax rate of 30.5
percent, compared with $5.0 million, or 30.9 percent, in 2004 and $6.3 million, or 32.9 percent, in 2003. There was
minimal change in the effective tax rate for 2005 compared to 2004. The benefit of tax credits associated with the
Bank’s investment in a low-income housing equity fund was offset in part by higher earnings at the Mortgage
Banking segment. 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 in 2004.
28
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—construction
Commercial, financial and agricultural
Consumer
Consumer Finance
Total loans charged off
Recoveries of loans previously charged off:
Commercial, financial and agricultural
Consumer
Consumer Finance
Total recoveries
Net loans charged off
Acquisition of C&F Finance Company
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
2005
$11,144
Year Ended December 31,
2003
$6,722
2002
$3,684
2004
$ 8,657
400
5,120
5,520
—
20
227
4,738
4,985
200
3,826
4,026
—
7
96
2,592
2,695
49
57
1,279
1,385
3,600
—
$13,064
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
2001
$3,609
400
—
400
32
126
192
—
350
500
641
1,141
—
161
326
573
1,060
47
21
196
264
796
2,693
$6,722
—
25
—
25
325
—
$3,684
3.33%
1.78%
1.60%
1.65%
—%
.03
—
.01
.13
.11
During 2005, the provision for loan losses was $400,000 at the combined Retail and Mortgage Banking
segments. This provision resulted primarily from the impact of loan growth, rather than any deterioration in asset
quality. We believe that the current level of the allowance for loan losses at the combined Retail and Mortgage
Banking segments is adequate to absorb any losses on existing loans that may become uncollectible.
The Consumer Finance segment, consisting solely of C&F Finance, accounted for the majority of the activity in
the allowance for loan losses during 2005. In addition to maintaining the allowance for loan losses, C&F Finance
has retained dealer bad debt reserves that were established at the time certain loans were made and are specific to
each individual dealer. These dealer bad debt reserves are contractual relationships that provide for loan losses to
be first charged against them to the extent that an individual dealer has a remaining dealer bad debt reserve.
Dealer bad debt 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
29
to conform its dealer agreements to standard industry practices, C&F Finance ceased originating loans with a dealer
bad debt reserve 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 bad debt
reserves are reduced by virtue of loan charge-offs or balance pay-offs to dealers. The following table summarizes
the dealer bad debt reserves activity:
(Dollars in thousands)
Dealer bad debt reserves at the beginning of year
Reserve holdback at loan origination
Loans charged off
Recoveries of loans previously charged off
Dealer bad debt reserves at the end of year
2005
Year Ended December 31,
2003
2004
$ 2,071
$ 2,119
2,235
--
(2,412)
(1,105)
225
62
$ 2,119
$ 1,076
$ 1,076
--
(439)
--
$ 637
The increase in net charge-offs and the provision for loan losses at the Consumer Finance segment resulted
from loan growth, an overall increase in charge-offs throughout the industry and a decrease in loan losses charged
to the dealer bad debt reserves. We believe that the current level of the allowance for loan losses at the Consumer
Finance segment is adequate to absorb any losses on existing loans that may become uncollectible.
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.
30
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 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 allowance 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.
31
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
Nonperforming Assets
2005
2004
2003
2002
2001
$ 402
202
3,776
124
214
8,346
$ 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
$13,064
$11,144
$8,657
$6,722
$3,684
20%
4
45
5
2
24
21%
3
46
5
2
23
22%
3
46
4
3
22
23%
3
47
4
3
20
32%
4
55
4
5
--
100%
100%
100%
100%
100%
Table 7 summarizes nonperforming assets for the past five years.
TABLE 7: Nonperforming Assets
Retail and Mortgage Banking
(Dollars in thousands)
2005
2004
2003
2002
Total nonperforming assets
Accruing loans past due for 90 days or more
Nonaccrual loans
Real estate owned
$4,336
—
$4,336
$1,580
$4,460
1.39%
Nonperforming assets to total loans* and real estate owned
1.43
Allowance for loan losses to total loans* and real estate owned
102.88
Allowance for loan losses to nonperforming assets
*Total loans above does not include consumer finance loans at C&F Finance, which are shown directly below.
1.11%
1.29
115.56
Allowance for loan losses
$4,083
—
$4,083
$3,826
$4,718
$1,993
8
$1,656
703
2001
$1,026
—
$2,001
$2,359
$1,026
$1,092
$ 69
$ 913
$4,256
$3,765
$3,684
.72%
1.52
212.69
.88%
1.40
159.60
.41%
1.47
359.06
Consumer Finance
(Dollars in thousands)
Nonaccrual loans
Accruing loans past due for 90 days or more
Allowance for loan losses
Dealer bad debt reserves
Nonaccrual consumer finance loans to total consumer finance loans
Allowance for loan losses to total consumer finance loans
Dealer bad debt reserves to total consumer finance loans
2005
2004
2003
2002
$1,819
$1,330
$1,149
$ 688
2001
$ —
26
8,346
637
1.64%
7.51%
.57
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
—
—
—
—
—
—
32
As shown in Table 7, the nonperforming assets of the combined Retail and Mortgage Banking segments
decreased to $4.1 million as of December 31, 2005, compared with $4.3 million at December 31, 2004, while accruing
loans past due for 90 days or more increased from $1.6 million at December 31, 2004 to $3.8 million at December 31,
2005. The most significant component of nonaccrual and 90-day delinquent accruing loans in both years was one
commercial relationship, which is considered impaired and for which we have recorded a specific reserve of
$865,000 at December 31, 2005. The underlying collateral for this relationship is expected to be sold at auction by
mid-2006. We are closely monitoring this relationship and believe allocated reserves are adequate to cover any
potential losses. We believe that the current allowance for loan losses is adequate to absorb any losses on existing
loans that may become uncollectible.
Total nonaccrual loans and accruing loans past due for 90 days or more of the Consumer Finance segment as
a percentage of total consumer finance loans decreased from 1.94 percent at December 31, 2004 to 1.66 percent at
December 31, 2005. The ratio of dealer bad debt reserves to total consumer finance loans declined 58 basis points
since December 31, 2004. As previously mentioned, C&F Finance no longer originates loans with a dealer bad debt
reserve provision. The decline in the dealer bad debt reserves was offset in part by a higher provision for loan
losses that resulted in an increase in the ratio of the allowance for loans losses to total consumer finance loans from
7.15 percent at December 31, 2004 to 7.51 percent at December 31, 2005.
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 is 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
nonaccrual 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 we determine we have adequate
collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are
first applied to principal outstanding. We would have recorded additional gross interest income of $270,000 for
2005, $202,000 for 2004 and $154,000 for 2003 if nonaccrual loans had been current throughout these periods.
Interest received on nonaccrual loans was $193,000 in 2005, $55,000 in 2004 and $32,000 in 2003.
33
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 the prescribed waiting period, the repossessed
automobile is sold by a third-party auctioneer. We credit the proceeds from the sale of the automobile, and any
other recoveries, against the balance of the loan. 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.
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 $4.2 million for 2005 and $4.3 million for 2004 for
which a specific valuation allowance of $865,000 at December 31, 2005 and $965,000 at December 31, 2004 was
established. The average balance of impaired loans was $4.2 million for 2005 and $3.5 million for 2004. We believe
that allocated reserves are adequate to cover any potential losses.
34
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, 2005, the Corporation had total assets of $672.0 million, up 10.3 percent over the previous
year-end. In 2004, total assets increased 6.2 percent over year-end 2003. Asset growth in 2005 was principally a
result of increases in loans held for investment and corporate premises. These increases were offset in part by
declines in interest-bearing deposits in other banks, securities available for sale and loans held for sale. Growth in
loan demand was funded by reducing the amount the Corporation placed in lower-yielding overnight funds,
utilizing proceeds from calls and maturities of investment securities, deposit growth and additional borrowings.
The increase in premises resulted from construction during 2005 of the Bank’s new operations center and its two
new Virginia Peninsula branches, as well as the acquisition of two new branch buildings in the Richmond, Virginia
area and a new operations center for the Consumer Finance segment. Asset growth in 2004 was principally a result
of increases in loans held for sale and loans held for investment.
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, 2005, the Corporation’s loans held for investment in all categories
totaled $478.1 million and loans held for sale totaled $39.7 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,
2005
2004
2003
2002
2001
$ 96,423
20,222
216,081
24,662
9,574
111,141
478,103
(13,064)
$ 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)
$465,039
$394,471
$350,170
$328,634
$246,112
35
TABLE 9: Maturity/Repricing Schedule of Loans
December 31, 2005
Commercial, Financial,
and Agricultural
Real Estate
Construction
$81,408
29,680
1,981
40,134
39,068
23,810
$ 3,452
--
--
16,770
--
--
(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
The increase in loans held for investment occurred predominantly in (1) the variable-rate categories of real
estate-construction loans, commercial loans and equity lines of credit and (2) the fixed-rate category of consumer
loans at C&F Finance. Typically, growth in the variable-rate categories will favorably impact net interest margin in
a rising rate environment. There was also growth in fixed-rate consumer loans at C&F Finance, which are funded
by variable-rate borrowings; therefore, net interest margin will be negatively impacted in a rising interest rate
environment.
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 non-conforming
conventional 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 insured 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 20, 25 and 30 years but subject to call
after five years at the option of the Bank.
36
Loans associated with residential mortgage lending are included in the real estate—residential mortgage
category in Table 8.
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 interest rates on the Bank’s construction loans are fixed and variable.
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 conducted by an
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.
Generally, the maximum loan-to-value ratio established by the Bank for non-residential projects and multi-unit
residential projects is 80 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
37
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. In 2004, the Bank began purchasing lot loans 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 some 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. 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
the Bank’s commercial real estate loan portfolio. The Bank seeks to minimize these risks by lending to established
38
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 raw land, 75 percent for land
development and improved lots 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.
39
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. In 2004, the Bank began purchasing home equity lines of credit and
second mortgage loans 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 through which it originates automobile loans
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
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.
40
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, 2005
Amount
Percent
December 31, 2004
Amount
Percent
$ 6,118
2,562
52,524
61,204
4,097
$ 65,301
9%
4
81
94
6
100%
$ 10,722
3,067
53,671
67,460
5,327
$ 72,787
15%
4
74
93
7
100%
At year-end 2005, the total fair value of securities was $65.3 million, down 10.3 percent from $72.8 at year-
end 2004. This decline resulted from utilizing proceeds from maturities and calls of investment securities to fund
loan growth. At year-end 2004, the total fair value of securities was $72.8 million, down 29.4 percent from $103.1
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.
41
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 within 1 year
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,
2003
2005
Weighted
Average
Yield
Weighted
Average
Yield
Weighted
Average
Yield
Amortized
Cost
Amortized
Cost
Amortized
Cost
2004
$ --
2,740
3,495
6,235
348
2,240
2,588
1,103
11,192
22,592
16,242
51,129
1,451
16,172
26,087
16,242
--%
4.25
5.01
4.68
5.91
4.70
4.86
4.85
6.03
6.92
6.64
6.60
5.10
5.53
6.67
6.64
$ 6,508
2,244
1,994
10,746
--
3,039
3,039
732
6,654
21,744
21,935
51,065
7,240
11,937
23,738
21,935
3.12%
3.44
4.60
3.46
$39,987
5,620
1,498
47,105
--
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
620
5,975
18,328
20,660
45,583
40,607
13,320
19,826
20,660
$59,952
6.33% $64,850
6.18%
$94,413
1.00%
2.94
3.82
1.32
--
4.51
4.51
8.70
7.60
7.27
6.95
7.18
1.12
5.26
7.01
6.95
4.23%
Yields on tax-exempt securities have been computed on a taxable-equivalent basis.
2
Total securities excludes preferred stock at amortized cost of $4.07 million at December 31, 2005; $4.93 million at December 31, 2004 and
$5.14 million at December 31, 2003 (estimated fair value of $4.10 million at December 31, 2005; $5.33 million at December 31, 2004 and
$5.45 million at December 31, 2003).
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, 2005 increased $48.3 million, or 10.8 percent, over December 31, 2004. In
2005, the changes by deposit category were (1) a 5.0 percent increase in savings and interest-bearing demand
deposits and (2) a 21.3 percent increase in time deposits. The increase in deposits occurred in all of the Bank’s
market regions. In particular, the Bank’s newest branches in Newport News and Mechanicsville more than doubled
their period-end total deposits in 2005. Total deposits at December 31, 2004 increased $19.5 million, or 4.6 percent,
over year-end 2003. Deposit growth in 2004 was attributable to growth in transactional deposit accounts and the
opening of the new branch in Mechanicsville, Virginia at the end of 2003.
42
Table 11 presents the average deposit balances and average rates paid for the years 2005, 2004 and 2003.
Table 12 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2005.
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,
2005
Average
Balance
$ 76,172
81,885
49,909
54,656
63,432
136,779
386,661
$462,833
Average
Rate
0.89%
1.42
0.70
2.71
2.74
1.88%
2004
Average
Balance
Average
Rate
2003
Average
Balance
Average
Rate
$ 69,281
80,055
42,797
55,856
56,480
127,923
363,111
$432,392
0.62%
0.77
0.59
1.92
2.15
1.37%
$ 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%
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, 2005
$15,024
12,194
23,649
21,705
$72,572
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, as well as a short-term
line of credit with a third-party lender for general corporate purposes. Long-term borrowings consist of advances
from the FHLB and advances under a non-recourse revolving bank line of credit. All FHLB advances are secured
by a blanket floating lien on all qualifying real estate loans. The bank line of credit is non-recourse and is secured
by loans at C&F Finance. In July 2005, C&F Financial Statutory Trust I, a wholly-owned subsidiary of the
Corporation, was formed for the purpose of issuing trust preferred capital securities to partially fund the
Corporation’s repurchase of 427,186 shares of its common stock. (For further information concerning our share
repurchase, refer to “Capital Resources” on page 46.) On July 21, 2005, the Trust issued $10.0 million of trust
preferred capital securities in a private placement to an institutional investor and $310,000 in common equity to the
Corporation. The principal asset of the Trust is $10.3 million of the Corporation’s junior subordinated debt
securities (referred to herein as “trust preferred capital notes”). For further information concerning the
Corporation’s borrowings, refer to Item 8, “Financial Statements and Supplementary Data,” under the heading
“Note 7: Borrowings.”
43
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 these 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 unused loan commitments was $97.9 million at December 31, 2005 and $88.4 million at December
31, 2004.
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 $9.7 million at December 31, 2005 and $8.2 million at December 31, 2004.
At December 31, 2005, C&F Mortgage had rate lock commitments to originate mortgage loans aggregating
$42.4 million and loans held for sale of $39.7 million. C&F Mortgage has entered into corresponding commitments
with third party investors to sell loans of approximately $82.1 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. We include recourse considerations in our calculation of the Corporation’s capital adequacy. Payments
made under these recourse provisions were $29,000 in 2005, $75,000 in 2004 and $107,000 in 2003. 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.
44
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,
loan payments and payoffs, 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 $69.4 million at December 31, 2005. 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, 2005, (2) an established line with the FHLB that had
$15.0 million outstanding under a total line of $117.4 million as of December 31, 2005, (3) a revolving line of credit
with a third-party bank that had $63.5 million outstanding under a total line of $85 million as of December 31, 2005
and (4) a revolving line of credit with a third-party bank that had $7.0 million outstanding under a total line of $7.0
million as of December 31, 2005. 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 $50.9 million at December 31,
2005; certificates of deposit of $100,000 or more maturing in more than one year totaled $21.7 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, 2005:
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 lines of credit
$ 70,475
$ 7,000
15,000
--
$ --
--
$63,475
--
$ --
15,000
10,310
--
--
--
10,310
6,529
6,529
--
Operating leases
1,134
669
465
--
--
--
--
$103,448
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 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.
$25,310
$14,198
$63,475
$465
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.
45
FHLB advances1
Trust preferred
capital notes
Securities sold under
agreements to
repurchase
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 June and July 2005, the Corporation conducted a tender offer to repurchase up to 180,000 shares of
its common stock at a price of $41.00 per share. The initial expiration date of the offer was June 30, 2005. The
number of shares tendered by the expiration date far exceeded the 180,000 shares initially authorized. Therefore,
the Corporation’s Board of Directors extended the expiration date of its offer until July 22, 2005 and increased the
number of shares subject to the offer to up to 450,000 shares. The tender offer expired on July 22, 2005 and 427,186
tendered shares, or 12.07 percent of the Corporation’s common stock outstanding as of December 31, 2004, were
accepted on July 27, 2005. The total cost of the share repurchase, including transaction costs, approximated $17.6
million. On November 4, 2005, the Corporation’s board authorized the repurchase of up to an additional 5 percent
of the Corporation’s common stock through November 3, 2006. In December 2005, we repurchased 100 shares in an
open-market transaction at $37.27 per share under this stock repurchase program. During 2004, we repurchased
89,050 shares of the Corporation’s common stock, in privately negotiated and open market transactions at prices
between $35.00 and $41.50. 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 minimum 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 11.0 percent at December 31, 2005, compared with 12.1 percent at December
31, 2004. The total capital ratio was 12.2 percent at December 31, 2005, compared with 13.4 percent at December 31,
2004. The leverage ratio was 8.9 percent at December 31, 2005, compared with 9.7 percent at December 31, 2004.
These ratios are in excess of the mandated minimum requirements. The decline in these ratios in 2005 resulted from
the tender offer previously described. However, a portion of the cost of the share repurchase was funded through
the issuance of trust preferred securities, which are treated as Tier 1 capital for regulatory capital adequacy
determination purposes.
Shareholders’ equity was $60.1 million at year-end 2005 compared with $69.9 million at year-end 2004. The
dividend payout ratio was 28.3 percent in 2005, 28.6 percent in 2004 and 20.1 percent in 2003. During 2005, the
Corporation paid dividends of $1.00 per share, up 11.1 percent from 90 cents per share paid in 2004.
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.
46
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Corporation are described in Item 8, “Financial Statements
and Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies-Recent
Accounting Pronouncements.”
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.
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, James City, and in the Virginia cities of
Williamsburg and Newport News and is, therefore, subject to risks associated with these local economies. The
Consumer Finance loan portfolio is concentrated primarily in eastern, central, southwest and northern Virginia and
portions of Tennessee and Maryland and is, therefore, subject to risks associated with these local economies. As of
December 31, 2005, the Corporation does not have any hedging transactions in place such as interest rate swaps or
caps.
We enter into commitments to originate residential mortgage loans whereby the interest rate on the loan is
determined prior to funding (i.e., rate lock commitments). 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. The Corporation protects
itself from changes in interest rates by entering into loan purchase agreements with third party investors that
provide for the investor to purchase loans at the same terms (including interest rate) as committed to the borrower.
Under the contractual relationship with the purchaser of each loan, the Corporation is obligated to sell the loan to
the purchaser only if the loan closes. No other obligation exists. As a result of these contractual relationships with
purchasers of loans, 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
projected 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
47
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 in a declining interest rate environment.
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.
Table 13 sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2005, 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
Trust preferred capital notes
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
$233,732
4,779
29,562
$268,073
$ 21,986
5,751
--
$ 27,737
$ 13,300
8,012
8,077
15,024
30,032
77,004
5,155
$156,604
$111,469
$111,469
18.17%
$ 39,902
24,038
23,848
35,843
69,571
--
--
$ 193,202
$(165,465)
$ (53,996)
(8.80)%
$180,568
29,744
--
$210,312
$ 35,468
21,368
21,198
20,812
48,102
15,000
5,155
$167,103
$ 43,209
$(10,787)
(1.77)%
$517,780
65,897
29,562
$613,239
$ 88,670
53,418
53,123
72,572
148,721
92,004
10,310
$518,818
$ 81,494
25,623
--
$107,117
$ --
--
--
893
1,016
--
$ 1,909
$105,208
$ 94,421
15.39%
Table 14 provides information as of December 31, 2005 and 2004 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 dates 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 the
expected maturity dates shown in Table 14.
Changes in the maturities of interest-earning assets or interest-bearing liabilities in 2005, as shown in Table
14, that are attributable to factors other than overall growth are as follow:
1) The decrease in loans held for sale maturing within one year is a result of production flutuations at
C&F Mortgage. All loans originated at C&F Mortgage are usually sold within one month of loan
closing.
2) 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, as well as the
issuance of trust preferred capital securities to partially fund the share repurchase in 2005.
3) The increase in yields on earning assets reflected the impact of the increases in short-term interest
rates beginning in mid-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 behind 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, 2005
December 31, 2004
Average interest rate
December 31, 2005
December 31, 2004
Variable rate loans
1, 2
December 31, 2005
December 31, 2004
Average interest rate
December 31, 2005
December 31, 2004
Loans held for sale
December 31, 2005
December 31, 2004
Average interest rate
December 31, 2005
December 31, 2004
Securities
3, 4
December 31, 2005
December 31, 2004
Average interest rate
December 31, 2005
December 31, 2004
Interest-Bearing Liabilities:
Money market, savings, and interest-
5
bearing transaction accounts
December 31, 2005
December 31, 2004
Average interest rate
December 31, 2005
December 31, 2004
Certificates of deposit
December 31, 2005
December 31, 2004
Average interest rate
December 31, 2005
December 31, 2004
Borrowings
December 31, 2005
December 31, 2004
Average interest rate
December 31, 2005
December 31, 2004
Principal Amount Maturing in:
Thereafter
3 Years
2 Years
4 Years
5 Years
1 Year
Total
Fair Value
$ 78,006
$ 62,554
$36,289
$35,843
$28,700
$29,260
$43,079
$45,464
$ 40,950
$ 39,251
$ 61,006
$ 53,538
$288,030
$265,910
$285,835
$268,376
7.20%
6.69%
9.58%
9.38%
10.23%
9.92%
13.57%
12.65%
13.92%
13.87%
10.61%
9.61%
10.43%
10.07%
$ 91,147
$ 63,644
$19,731
$19,540
$12,735
$11,008
$16,397
$ 6,106
$ 4,684
$ 4,114
$ 47,855
$ 37,325
$192,549
$141,737
$198,163
$146,344
7.67%
6.37%
7.14%
6.14%
6.89%
6.21%
7.16%
6.50%
6.25%
6.43%
7.08%
6.19%
7.34%
6.29%
$ 39,677
$ 48,566
6.52%
5.87%
$ — $ — $ — $ —
$ 39,677
$ — $ 48,566
$ 41,277
$ 49,542
—
—
—
—
—
6.52%
5.87%
$ 770
$ 430
$ 870
$ 1,039
$ 1,091
$ 1,664
$ 3,314
$ 3,005
$ 3.120
$ 3,648
$ 56,732
$ 62,020
$ 65,897
$ 71,806
$ 67,177
$ 74,817
5.33%
5.23%
3.87%
5.37%
5.08%
3.59%
4.91%
4.32%
4.73%
4.81%
5.06%
4.69%
5.03%
4.67%
$117,178
$111,554
$19,509
$18,593
$19,508
$18,592
$19,508
$18,592
$19,508
$18,592
$ — $195,211
$ — $185,923
$194,223
$187,747
1.35%
0.65%
1.35%
0.65%
1.35%
0.65%
1.35%
0.65%
1.35%
0.65%
1.35%
0.65%
—
$150,116
$129,098
$44,237
$22,723
$11,420
$15,697
$ 5,760
$ 5,977
$ 7,451
$ 6,699
$ 2,309
$ 2,311
$221,293
$182,505
$221,479
$184,082
3.03%
1.77%
3.88%
2.72%
3.72%
3.37%
3.72%
3.46%
3.97%
3.71%
2.00%
1.58%
3.27%
2.15%
$ 13,529
$ 8,415
$ — $ — $63,475
$ 5,000
$49,870
$ —
$ — $ —
$ 25,310
$ 15,000
$102,314
$ 78,285
$100,898
$ 76,953
3.53%
0.91%
--
4.92%
--
2.81%
6.14%
—
--
—
4.40%
3.24%
5.36%
4.03%
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
$64,021 and $69,776, respectively
Loans held for sale, net
Loans, net of allowance for loan losses of $13,064 and $11,144,
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
Short-term borrowings
Long-term borrowings
Trust preferred capital notes
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,
3,140,868 and 3,538,554 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,
2005
2004
$ 13,316
29,562
42,878
$ 13,866
31,320
45,186
65,301
39,677
465,039
1,876
29,147
3,664
10,724
13,651
$671,957
$ 78,934
195,211
221,293
495,438
13,529
78,475
10,310
1,306
12,813
611,871
—
—
3,141
183
55,930
832
60,086
$671,957
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
8,415
69,870
—
614
13,190
539,223
—
—
3,539
80
64,323
1,957
69,899
$609,122
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Interest income
Interest and fees on loans
Interest on money market investments
Interest and dividends 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
Borrowings
Trust preferred capital notes
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest 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 noninterest income
Noninterest expenses
Salaries and employee benefits
Occupancy expenses
Other expenses
Total noninterest 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,
2005
2004
2003
$45,035
523
$37,120
528
$35,590
253
281
2,379
552
48,770
1,828
1,717
3,735
4,447
270
11,997
36,773
5,520
31,253
18,194
2,812
4,795
105
1,678
27,584
28,277
3,871
9,720
41,868
16,969
5,181
$11,788
$ 3.49
$ 3.36
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
See notes to consolidated financial statements.
52
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Balance December 31, 2002
$3,650
$ 2,506
$48,161
$ 1,916
$56,233
Common
Stock
Additional
Paid-In
Capital
Comprehensive
Income
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
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
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
$606
Comprehensive income
Cash dividends ($1.00 per share)
Balance December 31, 2005
(80)
42
(2,182)
686
3,612
1,010
(89)
16
(1,172)
242
3,539
80
(427)
29
(371)
474
$12,919
12,919
359
$13,278
(2,593)
58,487
(2,160)
$11,198
11,198
(318)
$10,880
(3,202)
64,323
(16,842)
$11,788
11,788
(2,262)
728
12,919
359
359
(2,593)
2,275
65,384
(3,421)
258
11,198
(318)
(318)
(3,202)
1,957
69,899
(17,640)
503
11,788
(1,125)
$10,663
(1,125)
(1,125)
$3,141
$ 183
$55,930
$ 832
$60,086
(3,339)
(3,339)
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 (losses) gains on securities
2005
2004
2003
$(1,057)
$(273)
$627
68
$(1,125)
45
$(318)
268
$359
See notes to consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2004
2003
2005
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 provided by (used in) 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
Investment in statutory trust
Net increase in customer loans
Purchase of corporate premises and equipment
Disposal of corporate premises and equipment
Net cash used in investing activities
Financing activities:
Net increase in demand, interest-bearing demand
and savings deposits
Net increase (decrease) in time deposits
Net increase (decrease) in borrowings
Issuance of trust preferred capital notes
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
Supplemental disclosure
Interest paid
Income taxes paid
See notes to consolidated financial statements.
54
$11,788
$ 11,198
$ 12,919
1,549
(1,115)
5,520
1,446
(1,373)
4,026
1,547
(549)
3,167
12
(105)
(1,058,804)
1,067,693
151
(69)
(912,657)
893,824
84
(412)
(1,083,414)
1,160,907
(623)
2,393
692
(377)
28,623
11,990
(6,142)
(3,234)
3,388
(310)
(76,088)
(12,461)
69
(82,788)
9,516
38,788
13,719
10,310
(17,640)
503
(3,339)
51,857
(2,308)
45,186
$ 42,878
(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
$ 11,305
6,653
$ 7,518
5,798
$ 8,959
8,008
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. In addition, C&F Financial Corporation owns
C&F Financial Statutory Trust I, an unconsolidated subsidiary. The subordinated debt owed to the trust is reported
as a liability of the Corporation. 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 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 Finance Company (“C&F Finance”), C&F Title Agency, 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 and residential appraisals. 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 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 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 16.
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 accrued benefit obligation under the
defined benefit plan, 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 3 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 2 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. Currently all of the Corporation’s
investment securities are classified as available for sale. Available for sale securities are carried at estimated fair
value with the corresponding unrealized gains and losses excluded from earnings and reported in other
55
comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the
specific security sold.
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 nonaccrual 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 nonaccrual 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 nonaccrual 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). The period of
56
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 by entering into loan purchase agreements with third
party investors that provide for the investor to purchase loans at the same terms (including interest rate) as
committed to the borrower. Under the contractual relationship with the purchaser of each loan, the Corporation is
obligated to sell the loan to the purchaser only if the loan closes. No other obligation exists. As a result of these
contractual relationships with purchasers of loans, the Corporation is not exposed to losses nor will it realize gains
related to its rate lock commitments due to changes in interest rates.
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 (“SFAS”) No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
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 SFAS No. 142, Goodwill and Other Intangible Assets, 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.
57
Stock Compensation Plans: At December 31, 2005, the Corporation has three stock-based compensation plans,
which are described more fully in Note 12. 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 SFAS 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,
2004
2003
2005
$11,788
$11,198
$12,919
(2,305)
$ 9,483
(605)
$10,593
(373)
$12,546
$ 3.49
$ 2.81
$ 3.36
$ 2.70
$ 3.14
$ 2.97
$ 3.00
$ 2.84
$ 3.58
$ 3.47
$ 3.42
$ 3.32
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,
2004
2003
2005
3.35%
8.0
8 years
25.0%
4.5%
2.9%
7.1%
8 years
25.0%
4.2%
2.0%
5.9%
8 years
26.6%
4.2%
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based
Payment, that addresses the accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or liabilities that are based on the fair
value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS
No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and
requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the
consolidated statement of income. The effective date of SFAS No. 123R (as amended by the SEC) is for annual
periods beginning after June 15, 2005. The provisions of SFAS No. 123R do not have an impact on the Corporation’s
results of operations at the present time.
Effective December 20, 2005, the Corporation accelerated the vesting of all unvested stock options outstanding
(which as of December 20, 2005 totaled 193,550) under the Corporation’s employee incentive stock compensation
plans and its non-employee director stock compensation plans. The options are held by executive officers, officers,
employees and non-employee directors and have a range of exercise prices between $19.05 and $46.20 per share and
a weighted average exercise price of $30.56 per share. All other terms of the options remained unchanged. In order
to offset unintended personal benefit to the Corporation’s executive officers and directors, shares of the
Corporation’s common stock received upon exercise of an accelerated option by an executive officer or director may
not be sold or otherwise transferred prior to the expiration of the option’s original vesting period. The Committee
accelerated the vesting period of options in order to eliminate the Corporation’s recognition of compensation
expense associated with the affected options under SFAS No. 123R, which will apply to the Corporation beginning
in the first quarter of 2006. The aggregate pre-tax compensation expense associated with the accelerated options
that will be avoided in future periods is approximately $802,000 and is included in pro forma net income and
earnings per share for the year ended December 31, 2005. The Corporation believes that it will not be required to
58
recognize any compensation expense in future periods associated with the affected options. However, there can be
no assurance that the acceleration of vesting of these options may not result in some future compensation expense.
In addition to accelerating the vesting of all unvested stock options as described above, options issued in December
2005 were vested on the grant date. Options issued in December 2004 were granted with a six-month vesting
period. The effects of these vesting periods are included in pro forma net income and earnings per share for the
year ended December 31, 2005.
These determinations with regard to the vesting period for the Corporation’s options were made as part of a broad
review of long-term incentive compensation in light of changes in market practice and changes in accounting rules.
The Board will continue reviewing the effects of SFAS No. 123R and its impact on compensation plans throughout
the Corporation.
In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107. SAB 107 expresses the views of the SEC
staff regarding the interaction of SFAS No. 123R and certain SEC rules and regulations and provides the SEC staff’s
view regarding the valuation of share-based payment arrangements for public companies. SAB 107 does not impact
the Corporation’s results of operations at the present time.
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 8.
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 June and July 2005, the Corporation conducted a tender offer to repurchase up to
180,000 shares of its common stock at a price of $41.00 per share. The initial expiration date of the offer was June 30,
2005. The number of shares tendered by the expiration date far exceeded the 180,000 shares initially authorized.
Therefore, the Corporation’s Board of Directors extended the expiration date of its offer until July 22, 2005 and
increased the number of shares subject to the offer to up to 450,000 shares. The tender offer expired on July 22, 2005
and 427,186 tendered shares of the Corporation’s common stock were accepted on July 27, 2005. The total cost of
the share repurchase, including transaction costs, approximated $17.6 million. Refer to Note 7 for a discussion of
the issuance of trust preferred capital securities and the Corporation’s related issuance of trust preferred capital
notes to partially fund this repurchase. On November 4, 2005, the Corporation’s board authorized the repurchase
of up to 5 percent of the Corporation’s common stock through November 3, 2006. In December 2005, the
Corporation repurchased 100 shares in an open-market transaction at $37.27 per share under this stock repurchase
program.
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 expired 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.
59
Recent Accounting Pronouncements:
In November 2005, FASB Staff Position (“FSP”) 115-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, was issued. The guidance in FSP 115-1 amends SFAS No. 115 and APB Opinion
No. 18, The Equity Method of Accounting for Investments in Common Stock. FSP 115-1 applies to investments in debt
and equity securities and cost-method investments. The application guidance within FSP 115-1 includes items to
consider in determining whether an investment is impaired, in evaluating if an impairment is other-than-temporary
and recognizing impairment losses equal to the difference between the investment’s cost and its fair value when an
impairment is determined. FSP 115-1 also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. FSP 115-1 is required for all reporting periods beginning after
December 15, 2005. Earlier application is permitted. The Corporation does not anticipate that FSP 115-1 will have a
material effect on its financial statements.
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, Accounting Changes and Error
Corrections – A Replacement of APB Opinion No. 20 and FASB Statement No. 3. The new standard changes the
requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS
No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period
financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154
also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted
for as a change in estimate (prospectively) that was effected by a change in accounting principle and (2) correction
of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective
for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The
Corporation does not anticipate that SFAS No. 154 will have a material effect on its financial statements.
In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public
Accountants issued Statement of Position (“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. 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. It includes loans purchased by the Corporation or acquired in
business combinations. SOP 03-3 does not apply to loans originated by the Corporation. The Corporation adopted
the provisions of SOP 03-3 effective January 1, 2005. The initial implementation had no material effect on the
Corporation’s financial statements.
60
NOTE 2: 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
(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
$ 6,235
2,588
51,129
4,069
$64,021
Amortized
Cost
$10,746
3,039
51,065
4,926
$69,776
Gross
Unrealized
Gains
December 31, 2005
Gross
Unrealized
Losses
$ (120)
(37)
(58)
(223)
$(438)
$ 3
11
1,453
251
$1,718
Gross
Unrealized
Gains
December 31, 2004
Gross
Unrealized
Losses
$ (30)
(15)
(26)
(38)
$(109)
$ 6
43
2,632
439
$3,120
Estimated
Fair Value
$ 6,118
2,562
52 524
4,097
$65,301
Estimated
Fair Value
$10,722
3,067
53,671
5,327
$72,787
The amortized cost and estimated fair value of securities at December 31, 2005, 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, 2005
Amortized
Cost
$ 1,451
16,172
26,087
16,242
4,069
$64,021
Estimated
Fair Value
$ 1,451
16,244
26,762
16,747
4,097
$65,301
Proceeds from the maturities and calls of securities available for sale in 2005 were $11.99 million, resulting in gross
realized gains of $105,000. 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 $37.85
million and $38.82 million, respectively, at December 31, 2005.
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. 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.
61
Securities in an unrealized loss position at December 31, 2005, by duration of the period of the unrealized loss, are
shown below.
(Dollars in thousands)
U.S government agencies
and corporations
Mortgage-backed securities
Obligations of states and
political subdivisions
Subtotal-debt securities
Preferred stock
Total temporarily impaired
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
$2,463
1,002
5,094
8,559
592
$ 36
10
32
78
218
$3,158
535
1,529
5,222
523
$ 84
27
26
137
5
$ 5,621
1,537
6,623
13,781
1,115
$120
37
58
215
223
$438
securities
$9,151
$296
$5,745
$142
$14,896
The primary cause of the temporary impairments in the Corporation’s investment in debt securities was the decline
in prices as interest rates have risen. There are 32 securities totaling $13.78 million in the Corporation’s debt
securites portfolio considered temporarily impaired at December 31, 2005. Because the Corporation has the ability
and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not
consider these investments to be other-than-temporarily impaired at December 31, 2005. The primary cause of the
temporary impairments in the Corporation’s investment in preferred stock was one holding in an energy company,
which suffered a liquidity crisis as a result of damage to electric and gas facilities by Hurricanes Katrina and Rita.
Despite the extent of the damage done, the energy company believes the impact will be relatively short term and
that it has sufficient liquidity to meet its current obligations and fund its restoration efforts from its parent
company’s available cash and existing credit facility. The Corporation has evaluated the prospects of the energy
company in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s
ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair
value, the Corporation does not consider this investment to be other-than-temporarily impaired at December 31,
2005.
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
62
NOTE 3: 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,
2005
2004
$ 96,850
20,222
216,081
24,662
9,574
111,141
478,530
(427)
478,103
(13,064)
$465,039
$ 85,770
13,315
185,646
18,490
9,620
93,464
406,305
(690)
405,615
(11,144)
$394,471
Loans on nonaccrual status were $5.90 million and $5.67 million at December 31, 2005 and 2004, respectively. If
interest income had been recognized on nonaccrual loans at their stated rates during fiscal years 2005, 2004 and
2003, interest income would have increased by approximately $270,000, $202,000 and $154,000, respectively.
Accruing loans past due for 90 days or more were $3.85 million and $2.06 million at December 31, 2005 and 2004,
respectively. The most significant component of nonaccrual and 90-day delinquent accruing loans was one
commercial relationship, which also comprised the balance of impaired loans of $4.22 million and $4.25 million at
December 31, 2005 and 2004, respectively. Specific valuation allowances of $865,000 and $965,000 were provided at
December 31, 2005 and 2004, respectively, for these impaired loans. The average balances of impaired loans for
2005 and 2004 were $4.22 million and $3.47 million, respectively.
NOTE 4: 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
Balance at the end of year
Year Ended December 31,
2003
2004
2005
$11,144
5,520
(4,985)
1,385
$13,064
$ 8,657
4,026
(2,695)
1,156
$11,144
$ 6,722
3,167
(1,945)
713
$ 8,657
NOTE 5: 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
63
December 31,
2005
2004
$ 6,776
21,764
16,705
45,245
(16,098)
$ 29,147
$ 6,269
12,985
13,764
33,018
(14,714)
$18,304
NOTE 6: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, $100 thousand or more
Other time deposits
December 31,
2005
2004
$ 72,572
148,721
$221,293
$ 57,602
124,903
$182,505
Remaining maturities on time deposits at December 31, 2005 are as follows (dollars in thousands):
2006
2007
2008
2009
Five years and thereafter
NOTE 7: Borrowings
$150,115
44,237
11,420
5,761
9,760
$221,293
Short-term borrowings include 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 $6.53 million on December 31, 2005 and $8.42 million on December 31, 2004. Short-term
borrowings also include a variable-rate, unsecured line of credit with a third-party lender that matures in June 2006.
The balance outstanding under this line of credit was $7.00 million on December 31, 2005. Short-term borrowings
also include advances from the FHLB, which are secured by a blanket floating lien on all qualifying real estate
loans. There were no short-term advances from the FHLB outstanding on December 31, 2005 or December 31, 2004.
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 at year end
December 31,
2005
2004
$ 13,529
$ 63,455
$ 20,924
2.68%
3.39%
$ 13,529
$ 8,415
$ 9,921
$ 8,882
0.75%
0.71%
$ 8,415
Long-term borrowings at December 31, 2005 consist of: advances from the FHLB, which are secured by a blanket
floating lien on all qualifying real estate loans; 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, 2005 consist of $10.00 million at 3.24%
and $5.00 million at 3.25%, both of which mature in 2012 with a call provision in 2007. The interest rate on the
revolving bank line of credit floats at the one-month LIBOR rate plus 180 basis points, and the outstanding balance
as of December 31, 2005 was $63.48 million, which matures in 2009. C&F Finance’s revolving bank line of credit
agreement contains convenants regarding C&F Finance’s capital adequacy, credit quality, adequacy of the
allowance for loan losses and interest expense coverage. C&F Finance satisfied all such covenants during 2005.
64
The contractual maturities of long-term borrowings, excluding call provisions, at December 31, 2005 are as follows:
(Dollars in thousands)
2006
2007
2008
2009
Thereafter
Fixed Rate
$ --
--
--
--
15,000
$15,000
Floating Rate
$ --
--
--
63,475
--
$63,475
Total
$ --
--
63,475
15,000
$78,475
The Corporation’s unused lines of credit for future borrowings total approximately $137.88 million at December 31,
2005, which consists of $102.36 million available from the FHLB, $21.52 million on the revolving bank line of credit
and $14.00 million under a federal funds agreement with a third party financial institution.
In July 2005, C&F Financial Statutory Trust I (the Trust), a wholly-owned non-operating subsidiary of the
Corporation, was formed for the purpose of issuing trust preferred capital securities to partially fund the
Corporation’s repurchase of 427,186 shares of its common stock. On July 21, 2005, the Trust issued $10.00 million of
trust preferred capital securities in a private placement to an institutional investor. The Trust issued $310,000 in
common equity to the Corporation in exchange for cash. The securities mature in September 2035, are redeemable
at the Corporation’s option beginning after five years, and require quarterly distributions by the Trust to the holder
of the securities at a fixed rate of 6.07% as to $5.00 million of the securities and at a rate equal to the three-month
LIBOR rate plus 1.57% as to the remaining $5.00 million, which rate was 6.06% at December 31, 2005. The fixed rate
portion of the securities converts to the three-month LIBOR rate plus 1.57% in September 2010. The principal asset
of the Trust is $10.31 million of the Corporation’s junior subordinated debt securities or “trust preferred capital
notes” with like maturities and like interest rates to the trust preferred capital securities. The interest payments by
the Corporation on the debt securities will be used by the Trust to pay the quarterly distributions payable by the
Trust to the holders of the trust preferred capital securities.
Subject to certain exceptions and limitations, the Corporation may elect from time to time to defer interest payments
on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related
capital securities.
NOTE 8: 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,
2004
2003
2005
$11,788
$11,198
$12,919
3,375,153
3,567,284
3,610,531
132,759
161,844
171,312
3,507,912
3,729,128
3,781,843
Options on approximately 157,000, 79,000 and 4,000 shares were not included in computing diluted earnings per
common share for the years ended December 31, 2005, 2004 and 2003, respectively, because they were anti-dilutive.
65
NOTE 9: Income Taxes
Principal components of income tax expense as reflected in the consolidated statements of income are as follows:
(Dollars in thousands)
Current taxes
Deferred taxes
Year Ended December 31,
2005
2004
$ 6,296
(1,115)
$ 5,181
$ 6,379
(1,373)
$ 5,006
$ 6,876
(549)
$ 6,327
2003
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
Tax credits
Other
Year Ended December 31,
Percent
of
Pre-tax
Income
35.0%
Percent
of
Pre-tax
Income
35.0%
Percent
of
Pre-tax
Income
35.0%
2004
$5,671
2003
2005
$6,736
$5,939
(888)
(5.2)
(910)
(5.6)
(790)
(4.1)
59
339
.3
2.0
(75)
(74)
(119)
$5,181
(.5)
(.4)
(.7)
30.5%
41
347
(80)
--
(63)
$5,006
.3
2.1
(.5)
--
(.4)
30.9%
47
542
.3
2.8
(89)
--
(119)
$6,327
(.5)
--
(.6)
32.9%
Other assets include net deferred income taxes of $4.56 million and $2.84 million at December 31, 2005 and 2004,
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 nonaccrual 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
December 31,
2004
2005
$ 4,618
1,214
97
194
6,123
(222)
(183)
(643)
(63)
(448)
(1,559)
$ 4,564
$ 3,581
1,078
70
107
4,836
(162)
(364)
(366)
(47)
(1,054)
(1,993)
$ 2,843
66
NOTE 10: Employee Benefit Plans
The Bank maintains a Defined Contribution Profit-Sharing Plan (the ‘‘Profit-Sharing Plan’’) sponsored by the
Virginia Bankers Association. The Profit-Sharing Plan 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 $515,000, $372,000 and $320,000 in 2005, 2004 and 2003,
respectively.
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 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
contributions to the plan. 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 $101,000, $455,000 and $581,000 for 2005, 2004 and 2003, respectively.
In 2005, C&F Finance adopted a Defined Contribution Profit-Sharing Plan sponsored by the Virginia Bankers
Association with plan features similar to the Profit-Sharing Plan of the Bank. The amount charged to expense under
this plan was $86,000 in 2005. In prior years, C&F Finance had a profit sharing plan for the benefit of all eligible
employees. Eligible employees included all full time employees that had at least six months of service on the
enrollment dates of July 1 or January 1. Contributions were discretionary. The allocation of the contribution was
based upon a percentage of eligible employee salaries. An employee was 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 and $84,000 in 2004 and 2003,
respectively.
Individual performance bonuses are awarded annually to certain members of management under a management
incentive bonus policy adopted by the Bank effective January 1, 1987 and the Management Incentive Plan adopted
by the Corporation on February 25, 2005. 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 senior Bank officers. In addition, the Chief Executive Officer recommends bonuses to be paid
to other officers of the Bank. 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 $586,000, $392,000 and
$307,000 in 2005, 2004 and 2003, respectively. In accordance with employment agreements for certain senior officers
of C&F Mortgage, performance bonuses of $1.46 million, $1.37 million and $2.71 million were expensed in 2005,
2004 and 2003, respectively. Performance used in determining the awards is directly related to the profitability of
C&F Mortgage.
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 Plans and to
enhance retirement benefits by providing supplemental contributions from time to time. Expenses under this plan
were $62,000, $58,000 and $36,000 in 2005, 2004 and 2003, 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)
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
Year Ended December 31,
2005
2004
$4,925
550
294
306
(46)
$6,029
$4,549
553
28
(46)
$5,084
$ (945)
1,409
(32)
92
$ 524
5.8%
8.5
4.0
$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
(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 (1)
Discount rate
Expected return on plan assets
Rate of compensation increase
(1) Net periodic benefit cost for the current year is based on assumptions determined at the
September 30 valuation date of the prior year.
Year Ended December 31,
2005
2003
2004
$ 550
294
(346)
7
(5)
45
$ 545
6.0%
8.5
4.0
$ 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
The accumulated benefit obligation was $3.87 million as of December 31, 2005. The contribution paid to the plan in
2005 was $28,000. This payment was the maximum tax-deductible contribution for 2005 allowable under the
Internal Revenue Code.
68
The benefits expected to be paid by the plan in the next ten years are as follows (dollars in thousands):
2006
2007
2008
2009
2010
2011 – 2015
$45
49
65
90
100
1,110
$1,459
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
2005
34%
66
100%
2004
35%
65
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 11: Related Party Transactions
Loans outstanding to directors and executive officers totaled $1.23 million and $1.28 million at December 31, 2005
and 2004, respectively. New advances to directors and officers totaled $134,000 and repayments totaled $183,000 in
the year ended December 31, 2005. 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 12: 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 is 500,000. As a result of the accelerated vesting of all unvested options on December 20, 2005,
all options outstanding under the 2004 Plan on December 31, 2005 are exercisable. 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 was 500,000. Options were issued to employees at a price equal to the fair market value
of common stock at the date granted. As a result of the accelerated vesting of all unvested options on December 20,
2005, all options outstanding under the 1994 Plan on December 31, 2005 are exercisable. 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. As a result of the accelerated
vesting of all unvested options on December 20, 2005, all options outstanding under the Director Plan on December
31, 2005 are exercisable. 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 (the “Regional Director 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.
As a result of the accelerated vesting of all unvested options on December 20, 2005, all options outstanding under
the Regional Director Plan on December 31, 2005 are exercisable. All options expire ten years from the grant date.
Transactions under the various plans for the periods indicated were as follows:
2005
2004
2003
Shares
Exercise
Price*
Shares
406,368
114,800
(15,033)
(32,468)
Exercise
Price*
$ 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
$ 27.58
37.72
15.35
29.29
$ 30.65
473,667
$ 27.58
406,368
$ 23.62
147,417
$9.72
106,318
$12.72
Outstanding at beginning of year
Granted
Exercised
Canceled
Outstanding at end of year
*Weighted average
Options exercisable at year-end
Weighted-average fair value of options granted during the year
473,667
137,900
(29,600)
(17,900)
564,067
564,067
$8.96
70
The following table summarizes information about stock options outstanding at December 31, 2005:
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
Number of
Outstanding and
Exercisable at
December 31, 2005
Remaining
Contractual
Life
13,100
221,717
247,400
81,850
564,067
1.6
5.5
9.5
7.9
7.5
Exercise
Price*
$11.09
19.13
38.31
41.82
$30.65
NOTE 13: Regulatory Requirements and Restrictions
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the
Corporation’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that
involve quantitative measures of the Corporation’s and the Bank’s assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation’s and the Bank’s capital amounts and
classification are subject to qualitative judgments by the regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined 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. For the
Corporation only, Tier I and total capital include trust preferred securities. Risk-weighted assets for the
Corporation and the Bank were $533.84 million and $528.64 million, respectively, at December 31, 2005 and $477.61
million and $471.91 million, respectively, at December 31, 2004. Management believes, as of December 31, 2005,
that the Corporation and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2005, 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, 2005:
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, 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
Actual
Minimum Capital
Requirements
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount Ratio
Amount
Ratio
$65,295
67,144
58,531
60,463
58,531
60,463
$63,793
57,511
57,659
51,548
57,659
51,548
12.2%
12.7
11.0
11.4
8.9
9.3
13.4%
12.2
12.1
10.9
9.7
8.8
$42,707
42,291
21,354
21,146
26,270
26,025
$38,208
37,753
19,104
18,877
23,768
23,505
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
$52,864
N/A
10.0%
N/A
31,718
N/A
32,531
N/A
6.0
N/A
5.0
N/A N/A
10.0%
$47,191
N/A N/A
6.0
28,315
N/A N/A
5.0
29,381
The capital ratios presented above for the Corporation include the effect of the Corporation’s repurchase of 427,186
shares of its common stock at $41 per share on July 27, 2005. On July 21, 2005, the Corporation issued $10.00 million
of trust preferred securities through a statutory business trust to partially fund the repurchase. The trust preferred
securities may be treated as Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier
1 capital after its inclusion. Accordingly, the entire $10.00 million of the Corporation’s trust preferred securities is
included in Tier 1 capital in the Corporation’s capital ratios presented above.
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 14: Commitments and Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include commitments to extend credit,
commitments to sell loans, and standby letters of credit. These instruments involve elements of credit and interest
rate risk in excess of the amount 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.
72
The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments. Collateral is obtained based on management’s credit assessment of the customer.
Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms
of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may
require payment of a fee by the customer. Since many of the commitments may expire without being completely
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer’s creditworthiness on a case-by-case basis. The total amount of loan commitments was
$97.85 million and $88.37 million at December 31, 2005 and 2004, 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 $9.74 million and $8.23 million at December 31, 2005 and 2004, respectively.
At December 31, 2005, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to
approximately $42.38 million and loans held for sale of $39.68 million. C&F Mortgage has entered into
corresponding commitments with third party investors to sell loans of approximately $82.06 million. Under the
contractual relationship with these investors, C&F Mortgage is obligated to sell the loans only if the loans close. No
other obligation exists. As a result of these contractual relationships with these investors, C&F Mortgage is not
exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.
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. 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 $786,000, $649,000 and $496,000, for the years ended December 31, 2005,
2004 and 2003, respectively.
Future minimum lease payments due under these leases as of December 31, 2005 are as follows (dollars in thousands):
2006
2007
2008
2009
2010
Thereafter
$ 669
343
122
--
--
--
$1,134
As of December 31, 2005, the Corporation had $37.06 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 15: Fair Market Value of Financial Instruments and Interest Rate Risk
The estimated fair value amounts have been determined by the Corporation using available market information and
appropriate valuation methodologies. 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,
2005
2004
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
$ 42,878
65,301
465,039
39,677
3,664
274,145
221,293
102,314
1,306
9,744
97,853
$ 42,878 $ 45,186
72,787
394,471
48,566
3,041
65,301
468,458
41,277
3,664
273,157
221,479
100,898
1,306
264,629
182,505
78,285
614
$ 45,186
72,787
401,544
49,542
3,041
265,820
184,082
76,953
614
—
8,232
— 88,372
—
—
(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 16: 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 segments 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 segments 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 noninterest income
Total operating income
Expenses:
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income before income taxes
Total assets
Goodwill
Capital expenditures
Year Ended December 31, 2005
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 30,857
—
4,342
35,199
8,712
11,368
6,995
27,075
$ 8,124
$571,091
$ —
$ 11,830
$ 3,178
18,193
3,719
25,090
1,532
13,457
5,012
20,001
$ 5,089
$ 47,574
$ —
$ 459
$ 17,799
—
417
18,216
$ —
—
912
912
$ (3,064)
1
—
(3,063)
4,880
2,766
6,919
14,565
—
568
185
753
$ 3,651 $ 159
$ 119,113 $ 19
$ 10,724 $ —
$ 172 $ —
(3,127)
118
—
(3,009)
$ (54)
$(65,840)
$ —
$ —
$ 48,770
18,194
9,390
76,354
11,997
28,277
19,111
59,385
$ 16,969
$671,957
$ 10,724
$ 12,461
75
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income before income taxes
Total assets
Goodwill
Capital expenditures
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Interest expense
Salaries and employee benefits
Other noninterest expenses
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
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
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 175 basis points. The Retail Banking segment acquires certain lot and
permanent loans, second mortgage 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
December 31,
2005
2004
$ 247
4,097
1,156
72,000
$77,500
$ 7,000
10,310
104
60,086
$77,500
$ 571
5,327
746
63,528
$70,172
$ —
—
273
69,899
$70,172
Year Ended December 31,
2004
2003
2005
$ 306
27
(448)
2,492
9,354
227
(170)
$11,788
$ 325
29
—
5,590
5,367
23
(136)
$11,198
$ 365
99
(262)
6,508
6,047
322
(160)
$12,919
NOTE 17: 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
Short-term borrowings
Trust preferred capital notes
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
77
(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 in other liabilities
Net cash provided by operating activities
Investing activities:
Proceeds from maturities and calls of securities
Purchase of securities
Investment in statutory trust
Net cash provided by investing activities
Financing activities:
Proceeds from (repayment of) borrowing
Issuance of trust preferred capital notes
Repurchase of common stock
Dividends paid
Proceeds from the issuance of stock
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash at beginning of year
Cash at end of year
Year Ended December 31,
2004
2003
2005
$11,788
$11,198
$12,919
(9,354)
(36)
—
(100)
(38)
2,260
1,077
(185)
(310)
582
7,000
10,310
(17,640)
(3,339)
503
(3,166)
(324)
571
$ 247
(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
NOTE 18: Quarterly Condensed Statements of Income—Unaudited
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
*The total of quarterly EPS amounts differs from EPS for the year ended
December 31, 2005 due to rounding.
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
June 30
2005 Quarter Ended
September 30 December 31
$13,097
7,740
6,767
10,589
3,918
2,760
.84
.27
March 31
$11,092
7,755
5,747
9,740
3,762
2,607
.71
.24
$12,968
8,017
8,175
11,286
4,906
3,413
1.01
.25
$11,613
7,741
6,895
10,253
4,383
3,008
.82
.24
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
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, 2005 and 2004, and the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2005. 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, 2005, 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,
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
79
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, 2005 and 2004, and the results of
its operations and its cash flows for each of the years in the three-year period ended December 31, 2005 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, 2005, 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, 2005, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Winchester, Virginia
February 14, 2006
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, 2005. 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, 2005, 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, 2005 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, 2005 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 March 6, 2006, the Compensation Committee of the Board of Directors approved the 2006 target
bonuses and performance goals for the Corporation’s named executive officers under the Corporation’s
Management Incentive Plan.
Short-Term Cash Awards. Depending on the Corporation’s weighted measure of ROE and ROA for 2006 in
relation to a peer group of Southeastern and Virginia-based banks selected by the Compensation Committee, the
Chief Executive Officer may earn a short-term cash bonus up to 78.75 percent of his annual base salary as of January
1, 2006, and the Chief Financial Officer and the Chief Operating Officer may earn a short-term cash bonus up to
61.25 percent of their annual base salaries as of January 1, 2006.
Equity-Based Awards. If the Corporation achieves a certain level of five-year total shareholder return for
2006 in relation to a peer group of banks selected by the Compensation Committee, the Chief Executive Officer may
earn an equity-based award of 45 percent of his annual base salary as of January 1, 2006, and the Chief Financial
Officer and the Chief Operating Officer may earn an equity-based award of 35 percent of their annual base salaries
as of January 1, 2006.
The Corporation’s Management Incentive Plan is attached as Exhibit 10.8 to this report.
82
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 3 through 4 of the
2006 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 19 of the 2006 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 is attached hereto as Exhibit 14.
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 15 of the 2006 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 2006 Proxy Statement under the caption, “Director Compensation,” is incorporated
herein by reference. The information on page 18 of the 2006 Proxy Statement under the caption, “Performance
Graph,” is incorporated herein by reference.
83
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained on page 2 of the 2006 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, 2005 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)
553,900
10,167
564,067
(b)
$30.70
$27.83
$30.65
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
333,350 (3)
13,000 (4)
346,350
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 283,600 shares available to be granted in the form of options, stock appreciation rights or restricted stock
under the 2004 Incentive Plan and 49,750 shares available to be granted in the form of options, stock appreciation
rights or restricted stock under the Director Plan.
Includes 13,000 shares available to be granted in the form of options under the Regional Director Plan.
84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 6 of the 2006 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 pages 16 through 17 of the 2006 Proxy Statement under the captions,
“Principal Accountant Fees” and “Audit Committee Pre-Approval Policy,” is incorporated herein by reference.
85
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(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
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)
Certain instruments relating to trust preferred securities not being registered have been omitted in
accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such
instrument to the Securities and Exchange Commission upon its request.
*10.1 Change in Control Agreement dated December 16, 1997 between C&F Financial Corporation
and Larry G. Dillon (incorporated by reference to Exhibit 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 (incorporated by reference to Exhibit 10.3 to
Form 10-K filed March 3, 2005)
*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, as amended
March 6, 2006
*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)
86
*10.11 Employment Agreement dated April 16, 2002 between C&F Mortgage Corporation and
Bryan McKernon (incorporated by reference to Exhibit 10.11 to Form 10-K filed March 3,
2005)
*10.12 Amended and Restated Change in Control Agreement dated February 15, 2005 between C&F
Financial Corporation and Robert L. Bryant (incorporated by reference to Exhibit 10.12 to
Form 10-K filed March 3, 2005)
*10.13 Amended and Restated Change in Control Agreement dated February 15, 2005 between C&F
Financial Corporation and Bryan McKernon (incorporated by reference to Exhibit 10.13 to
Form 10-K filed March 3, 2005)
*10.14 Schedule of C&F Financial Corporation Non-Employee Directors’ Annual Compensation
(incorporated by reference to Exhibit 10.14 to Form 10-K filed March 3, 2005)
*10.15 Base Salaries for Named Executive Officers of C&F Financial Corporation
10.19 Loan and Security Agreement by and between Wells Fargo Financial Preferred Capital, Inc.
and C&F Finance Company dated as of August 1, 2005 (incorporated by reference to Exhibit
10.19 to Form 10-Q filed August 5, 2005)
14
C&F Financial Corporation Code of Business Conduct and Ethics
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
87
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: March 6, 2006
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 and Accounting 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: March 6, 2006
Date: March 6, 2006
Date: March 6, 2006
Date: March 6, 2006
Date: March 6, 2006
Date: March 6, 2006
Date: March 6, 2006
Date: March 6, 2006
88
802 Main Street
P.O. Box 391
West Point, VA 23181
(804) 843-2360
www.cffc.com