A N N U A L R E P O R T
Celebrating 80 years of Integrity, Stability and Success
S T A B I L I T Y
C&F FINANCIAL CORPORATION is excited to report that 2006 was a year of continued
growth and strength for the organization and its subsidiaries. We hope you will join us in
celebrating 80 years of stability, integrity and success as you review this report.
Through the 80 years it’s been in business, C&F has had only three Presidents. We feel
that is a true testament to the stability of the organization - past, present, and future.
J. Marshall Lewis, President
January 28, 1927 – January 31, 1961
W. T. “Bill” Robinson, President
February 1, 1961 – December 1, 1989
Larry G. Dillon, President
December 2, 1989 - present
I n t e g r i t y
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)
• C&F MORTGAGE CORPORATION
• C&F FINANCE COMPANY
• C&F INVESTMENT SERVICES, INC.
• C&F TITLE AGENCY, INC.
MD
NJ
DE
OH
WV
PA
VA
NC
KY
TN
C&F Bank
C&F Title
C&F Mortgage
C&F Investment Services
C&F Finance
VA
S U C C E S S
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.
2006 REVIEW:
STR O NG P ER FOR MANCE AN D INVEST M EN T I N T HE F UT UR E
Net Income
Earnings Per Share
2002
2003
2004
2005
2006
$9,765
2002
$2.67
$12,919
2003
$3.42
$11,198
$11,788
$12,129
2004
2005
2006
$3.00
$3.36
$3.71
Return on Average Equity
Return on Average Assets
2002
12.57%
19.62%
2002
1.11%
2.19%
2003
12.09%
21.32%
2003
1.08%
2.35%
2004
11.86%
16.78%
2004
1.07%
1.91%
2005
12.33%
17.70%
2005
1.11%
1.82%
2006
11.93%
18.97%
2006
1.07%
1.75%
Peer Comparison Source: Federal Financial Institutions Examination Council (FFIEC)
Bank Holding Company Performance Report – 2006 data is through 9/30.
C&F Annual Report 2006 | Page 1
Letter from the President
Larry G. Dillon
Chairman, President and Chief Executive Officer
Once again, I am pleased to present our financial
results for this past year as well as a brief synopsis of
the state of your company. As you review this report,
you should easily see that we are no longer just a bank,
but rather a diversified and complex financial services
corporation.
Over the last decade, we have witnessed many changes
to the banking and financial services industries, most
notably in technology, competition and regulation.
We have adapted to these changes and we have been
successful. The regulatory burden of Sarbanes-Oxley,
Bank Secrecy Act, and other regulations has required
extraordinary resources and management focus. In
addition, those committing fraud are constantly finding
extremely imaginative ways in which to perpetrate their
crimes. Competition is no longer just other banking
institutions; but rather real estate companies, credit
unions, insurance companies and others, such as
Wal-Mart, who are trying to enter the financial services
arena. Technology, such as computer networks, internet
banking, VOIP phone systems, and remote image
capture, is making the industry more efficient and
convenient to our customers but is costly and difficult to
keep up with from a human standpoint.
These are just a few of the challenges that are
impacting the industry. We are very fortunate to have
the quality staff that allows us to adapt and thrive in this
environment. While we have had to face these issues,
we have also been able to grow, preserve our culture, and
maintain consistent exemplary financial performance.
Net income for 2006 totaled $12.1 million versus
$11.8 million in 2005. This resulted in a return
on average assets of 1.75% and a return on average
equity of 18.97% compared to 1.82% and 17.70%,
respectively, achieved in 2005. Our earnings also
compare favorably with those of our peers, who as
of September 2006, showed annualized returns on
average assets of 1.07% and average equity of 11.93%.
Our performance has been reflected in your investment
as your Board of Directors increased dividends twice
during 2006, from $.27 per quarter to $.31 per quarter,
resulting in a 15% increase in our dividend rate.
There are several primary reasons for the results
of 2006. The Bank’s earnings were expected to be
down from 2005 as a result of the costs involved with
the investments in our new operations center, our
new branch locations, and a decline in the mortgage
business. The additional costs of our new locations,
which will affect our earnings even more significantly in
2007, were more than offset by the recovery of past due
interest and a reduction in our loan loss reserve resulting
from the pay-off of the previously non-performing loans
of one commercial customer. In addition, the decline
in earnings at C&F Mortgage, caused by the impact of
higher interest rates on the real estate market, was offset
by earnings growth at C&F Finance, resulting from
strong loan growth and reduced charge-offs.
We typically experience the financial burden of new
branch openings for several years after their opening.
Personnel and other overhead costs are not offset until
we acquire the additional earning assets to help cover
C&F Annual Report 2006 | Page 2
While we have had to face these issues, we have also
been able to grow, preserve our culture, and maintain
consistent exemplary financial performance.
these costs. Opening four new offices within a 15-
month time period means that we will have to absorb
significantly more overhead for the next several years
than we typically do, as we have never opened that many
new branches in such a short time-frame. Even though
these costs will impact our short-term profits, we expect
these offices to be good investments for our future.
Our new Hampton office, which opened in January
of 2006, has a bank branch on its first floor and
the Hampton office of C&F Finance on its second.
Similarly, our Kiln Creek office, which opened in March
of 2006, has a bank branch on its first floor and the
Yorktown office of C&F Mortgage on its second floor.
This year, 2007, we have already opened our new bank
office on West Patterson in Richmond and expect to
open our new Chester bank office, on Rt. 10, sometime
in March.
As has previously been reported, we had an
embezzlement at C&F Mortgage that was uncovered
last summer involving its former controller and one of
his assistants. Needless to say, when two people work
together to defraud a company, it can be difficult to
discover. Fortunately, our only direct loss in this matter
was the deductible amount of our insurance policy.
While we already had what we thought were sufficient
controls in place, we have now enhanced them to help
ensure that nothing like this ever happens again. The
previous controller at C&F Mortgage has pleaded guilty
to this crime and the U.S. Attorney’s office continues to
pursue legal actions against his assistant.
During 2006, not only did C&F Mortgage move its
new Yorktown office into the new facilities mentioned
above, it also opened new offices in Virginia Beach and
Lynchburg. Recruitment of new lending officers is a
constant effort in the mortgage business and we have
been very successful over the years. As our Mortgage
Corporation has grown, the appraisal, settlement,
and title companies that we have established have also
become very successful and have grown to be important
segments of our income stream.
The recent changes in the mortgage market have
affected both C&F Mortgage and real estate lending
at the Bank. With the escalation in mortgage interest
rates, we have seen a decline in the originations at the
Mortgage Corporation, which we do not anticipate
reversing itself any time soon. While declining real
estate prices have been troublesome in certain markets
of the country, we have been fortunate in our trade
areas that the declines have been minimal. However,
to be precautionary, we have taken steps to increase
the review of all real estate loans being made and are
reemphasizing our credit quality review process to
protect ourselves from future potential problems.
At C&F Finance, we have taken the last several years
to strengthen our management and sales teams as well
as to enhance the infrastructure of our operations.
This past year, we were able to reap the benefits of these
efforts by leveraging the technology that has been put
in place and by expanding our sales markets into Ohio,
North Carolina, Kentucky and West Virginia. In 2006
Continued on page 4
C&F Annual Report 2006 | Page 3
we experienced a jump in average loans outstanding of
$16.5 million and an increase in earnings of $839,000,
proving our efforts are paying off.
As we look to the future, the growth of fraud is an
area of concern to us. With the expanded utilization of
technology over the last twenty years, those committing
fraud are becoming more and more imaginative in their
efforts to defraud banks, businesses, and individuals.
In many cases, Congress has put the major responsibility
for preventing these types of activities on the banking
industry, which has taken that responsibility and made
significant efforts in addressing the issue. However,
more has to be done and other businesses are going
to have to take more responsibility in protecting
consumers’ financial assets as well as the confidentiality
of their personal information. C&F has put significant
effort and investment into protecting the company and
those who put their trust in us and we will continue
to do so.
Although we have invested much in technology over
the years, we must continue to make future investments
that will help us better serve our customers and make
us more efficient. In the next several months, we look
forward to significant improvements to our internet
banking system which will provide our consumer
customers with a more robust product that will not
only be easier to use but will also provide them with
more information about their finances. In addition, we
will be offering what we consider to be the premier bill
payment system on the market with approximately 85%
to 90% of all payments being made electronically. There
will also be enhancements that will greatly improve cash
management services for our corporate customers.
The directors, officers, and staff of C&F Financial
Corporation are committed to supporting the
communities in which we are located and demonstrate
that support in many fashions. Most of our officers
are very active in various civic groups, but we also find
involvement in other ways, often giving many hours
1927
February 1, Farmers & Mechanics Bank opens for
business. J. Marshall Lewis, President, was elected
President of the Virginia Bankers Association
Continued on page 5
1967
Bank celebrates 40 years of service
and assets reach $13,339,750
1933
Citizens Exchange Bank Trust Company
merges with Farmers and Mechanics
Bank to form Citizens and Farmers Bank,
assets totaled $307,733
1961
W.T. “Bill” Robinson named President of Citizens
and Farmers Bank and the following year serves as
President of the Virginia Bankers Association
C&F Annual Report 2006 | Page 4
of our personal time. These activities range from
overseeing various “walkathons” to serving as a coach
at the local high school to serving on local community
boards. We are very appreciative of the communities we
serve and try to give back in ways that keep us involved
and are helpful.
Our philosophy at C&F is for us to be successful
over the long-term. In order to achieve this goal,
we have to serve and protect the interests of three
constituencies: our staff, who provide the backbone of
what we do; the communities we serve, who provide our
customers, without whom we would not exist; and our
stockholders, who provide us financial support. To look
out for one above the others would lead to failure. The
interests of all have to be well served. We look out for
our staff members by trying to assure fair compensation
and benefits packages to provide for them and their
families; we provide them growth and educational
opportunities; and, we are constantly challenging them
with the changes both within the organization as well
as the industry. We look out for our communities by
1995
C&F Investment Services, Inc. formed
to offer investment services and C&F
Mortgage Corporation formed to offer
extended mortgage services
providing the best in products and services we possibly
can and we give back both personally and financially in
as many ways as possible. And finally, we look out for
you, our stockholders, by striving to provide the best
returns possible. We are ever cognizant that to remain a
viable long-term organization we must provide you with
a solid return on your investment. We are not perfect,
but we do strive for perfection in all we do.
Our thanks and appreciation go to all of our
constituents for helping make this organization what
it is – a truly fine financial services corporation. We
thank you for your past support and continue to ask for
your ongoing patronage as we celebrate our 80th year of
providing financial services.
Larry G. Dillon
Chairman, President and Chief Executive Officer
Today
C&F Financial Corporation celebrates 80 years:
Investment and Banking services in 18 offices,
Mortgage services in 8 states and the Finance
Company in 6 states
1989
Larry G. Dillon named President,
Citizens and Farmers Bank
2001
Online banking and bill pay are introduced
and Larry Dillon is named President of the
Virginia Bankers Association
2002
C&F Financial Corporation purchases
Moore Loans, Inc. (now C&F Finance
Company) specializing in used
automobile lending
1978
First bank branch established on
14th Street in West Point
C&F Annual Report 2006 | Page 5
Directors
a n d O f f i c e r s
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
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
(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.
C&F Annual Report 2006 | Page 6
OFFICERS
a n d L O c a T i O n s
O F F I C E R S A N D L O C A T I O N S
A d m i n i s t r a t i v e O f f i c e
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
Helga H. Ridenhour
Vice President, Retail Banking
Leslie A. Scott
Vice President, Commercial Lending
Evelyn M. Townsend
Vice President, Operations
* Officers of C&F Financial Corporation
CHESTER, VIRGINIA
William C. Scott
Branch Manager
HAMPTON, VIRGINIA
Jackie W. Norman
Branch Manager
MECHANICSVILLE, VIRGINIA
Wanda N. Hassler
Vice President & Branch Manager
MIDLOTHIAN, VIRGINIA
Jesse E. Bullard
Vice President & Branch Manager
NEWPORT NEWS, VIRGINIA
Pamela A. Howard
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
Sandra C. St. Clair
Assistant Vice President & Branch Manager
RICHMOND, VIRGINIA
Patterson Avenue
Valerie H. Boteilho
Assistant Vice President & Branch Manager
RICHMOND, VIRGINIA
West Broad Street
Kevin L. Ford
Assistant Vice President & Branch Manager
RICHMOND, VIRGINIA
Varina
Timothy R. Martin
Assistant Vice President & Branch 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
Penny L. Wynn
Branch Manager
WILLIAMSBURG, VIRGINIA
Jamestown Road
Alec J. Nuttall
Assistant Vice President & Branch Manager
WILLIAMSBURG, VIRGINIA
Longhill Road
YORKTOWN, VIRGINIA
Jeff A. Mercer
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
A d m i n i s t r a t i v e O f f i c e
C&F Center
1340 Alverser Drive
Midlothian, Virginia 23113
(804) 419-1740
J. Charles Link
President
Charles T. Nuttle
Vice President, Commercial Lending
Tracy E. Pendleton
Vice President, Commercial Lending
David L. Shaffer
Vice President, Commercial Lending
C&F B A N K / P E N I N S U L A
A d m i n i s t r a t i v e O f f i c e
City Center
11815 Fountain Way, Suite 410
698 Town Center Drive
Newport News, Virginia 23606
(757) 952-1670
Vern E. Lockwood II
President
Lorie D. Sarrett
Vice President, Commercial Lending
Bonnie S. Smith
Vice President, Real Estate Lending
C&F I N V E S T M E N T
S E R V I C E S , I N C .
A d m i n i s t r a t i v e O f f i c e
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
RICHMOND, VIRGINIA
Bruce D. French
Assistant Vice President
WILLIAMSBURG, VIRGINIA
Douglas L. Cash Jr.
Vice President
Continued on page 8
C&F Annual Report 2006 | Page 7
OFFICERS
a n d L O c a T i O n s
( c O n T i n u e d )
C&F M O R T G A G E
C O R P O R A T I O N
A d m i n i s t r a t i v e O f f i c e
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
RUCKERSVILLE, VIRGINIA
William E. Hamrick
Vice President & Branch Manager
Brian K. Adams
Production 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
HANOVER, VIRGINIA
LEXINGTON, VIRGINIA
ROANOKE, VIRGINIA
John H. Reeves III
Vice President & Manager
MIDLOTHIAN, VIRGINIA
Donald R. Jordan
Vice President & Branch Manager
Daniel J. Murphy
Vice President & Branch Manager
Susan P. Moore
Vice President & Operations Manager
RICHMOND, VIRGINIA
Page C. Yonce
Vice President & Branch Manager
VIRGINIA BEACH, VIRGINIA
Francis B. “Chip” Simkins III
Branch Manager
George Temple Jr.
Production Manager
WILLIAMSBURG, VIRGINIA
William H. Phillips
Branch Manager
YORKTOWN, VIRGINIA
Linda H. Gaskins
Vice President & Branch Manager
Mary L. Rebholz
Production Manager
EXTON, PENNSYLVANIA
MOORESTOWN, NEW JERSEY
R. Scott Wallace
Branch Manager
ANNAPOLIS, MARYLAND
William J. Regan
Vice President & Branch Manager
Jeffrey R. Schroll
Vice President & Production Manager
CROFTON, MARYLAND
Michael J. Mazzola
Senior Vice President & Maryland
Area Manager
ELLICOTT CITY, MARYLAND
Scott B. Segrist
Branch Manager
Robert G. Menton
Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy
Branch Manager
CHARLOTTE, NORTH CAROLINA
Patrick B. Edmondson
Sales Manager
GASTONIA, NORTH CAROLINA
Nancy W. Poteat
Branch Manager
NEWPORT, DELAWARE
Craig I. Snyder
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
HOMETOWN SETTLEMENT
SERVICES LLC
Charlottesville, Virginia
Crofton, Maryland
CERTIFIED APPRAISALS LLC
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
A d m i n i s t r a t i v e O f f i c e
4660 South Laburnum Avenue
Richmond, Virginia 23231
(804) 236-9601
S. Dustin Crone
Senior Vice President
C. Shawn Moore
Senior Vice President
Michael K. Wilson
Senior Vice President & COO
Alfred D. Hinkle
Vice President, Human Resources
NORTHERN VIRGINIA/MARYLAND
Kevin F. Jones Jr.
Area Sales Manager
HAMPTON/VA BEACH/EASTERN
NORTH CAROLINA
Lisa H. Brickson
Area Sales Manager
RICHMOND, VIRGINIA
Pamela L. Austin
Area Sales Manager
ROANOKE, VIRGINIA
Livia P. Woodford
Area Sales Manager
NASHVILLE, TENNESSEE
Karen R. Hackney
Area Sales Manager
EASTERN TENNESSEE
Steven D. Croley
Area Marketing Representative
CINCINNATI/NORTHERN KENTUCKY
Michael D. Meister
Area Marketing Representative
Aaron B. Larscheid
Area Sales Manager
C&F Annual Report 2006 | Page 8
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, 2006
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:
Common Stock, $1.00 par value per share
Title of each class
The NASDAQ Stock Market LLC
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
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. (Check one):
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,
2006 was $117,063,726.
There were 3,188,111 shares of common stock outstanding as of February 26, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 15, 2007 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held April 17, 2007, 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 11
ITEM 1B. UNRESOLVED STAFF COMMENTS ................................................................................. page 13
ITEM 2.
PROPERTIES .......................................................................................................................... page 14
ITEM 3.
LEGAL PROCEEDINGS ....................................................................................................... page 15
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................... page 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES ........................................................................................................ page 16
ITEM 6.
SELECTED FINANCIAL DATA.......................................................................................... page 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................. page 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................................................................................... page 49
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................... page 52
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................... page 84
ITEM 9A. CONTROLS AND PROCEDURES ...................................................................................... page 84
ITEM 9B. OTHER INFORMATION...................................................................................................... page 85
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE............. page 86
ITEM 11. EXECUTIVE COMPENSATION.......................................................................................... page 86
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ............................... page 87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE ......................................................................................... page 88
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ...................................................... page 88
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ..................................................... page 89
PART I
ITEM 1.
BUSINESS
General
C&F Financial Corporation (the 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, or the 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, Foundation Home Mortgage and C&F Reinsurance LTD
• C&F Finance Company
• C&F Investment Services, Inc.
• C&F Insurance Services, Inc.
• 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,”) that are 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 17 Virginia
branches located one each in Chester, Hampton, Mechanicsville, Midlothian, Newport News, Norge, Providence
Forge, Quinton, Saluda, Sandston, West Point, Yorktown, two each in Williamsburg and three each in Richmond.
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, 2006, assets of the Retail Banking
segment totaled $591.6 million. For the year ended December 31, 2006, income before income taxes for this segment
totaled $8.7 million.
1
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 12 locations in Virginia, four in Maryland, two
in North Carolina and one each in Newport, Delaware; Moorestown, New Jersey; and Exton, Pennsylvania. The
Virginia offices are located one each in Charlottesville, Chester, Fredericksburg, Hanover, Lexington, Lynchburg,
Midlothian, Richmond, Roanoke, Virginia Beach, Williamsburg, and Yorktown. The Maryland offices are located in
Annapolis, Clarksville, Crofton and Waldorf. 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,
Citimortgage, Inc.; Countrywide Home Loans, Inc.; Franklin American Mortgage Company; the Virginia Housing
Development Authority; 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, 2006, assets of the Mortgage Banking
segment totaled $60.0 million. For the year ended December 31, 2006, income before income taxes for this segment
totaled $3.8 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 throughout Virginia and in portions
of Kentucky, Maryland, North Carolina, Ohio, Tennessee and West Virginia. 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 purchases installment
contracts from 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. 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, 2006, assets of the Consumer Finance segment totaled $140.0 million. For the
year ended December 31, 2006, income before income taxes for this segment totaled $5.0 million.
Employees
At December 31, 2006, we employed 501 full-time equivalent employees. We consider relations with our
employees to be excellent.
2
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, brokerage firms and
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
fluctuations 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.
3
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
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
4
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.
The Corporation is also subject to regulation by the Board of Governors of the Federal Reserve System (the
Federal Reserve Board). 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 the Deposit
Insurance Fund (DIF) 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 DIF. 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.
5
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, 2006, the total capital to risk-weighted asset ratio of the Corporation was 12.6 percent
and the ratio of the Bank was 13.0 percent. At December 31, 2006, the Tier 1 capital to risk-weighted asset ratio was
11.3 percent for the Corporation and 11.8 percent for the Bank.
In addition, each of the federal regulatory agencies has established leverage capital ratio guidelines for
banking organizations. These guidelines provide for a minimum Tier l leverage ratio of 4 percent for banks and
bank holding companies. At December 31, 2006, the Tier l leverage ratio was 9.6 percent for the Corporation and
9.9 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, 2006, the Bank declared $4.0
million in dividends payable to the Corporation, and the Corporation declared $3.7 million in dividends payable to
shareholders.
6
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
most recent scheduled compliance examination in July 2006, it received a CRA performance evaluation of
“satisfactory.”
Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank’s deposits are insured up to
applicable limits by the DIF of the FDIC. The DIF is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged in 2006. The FDIC recently amended its risk-based assessment
system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (FDIRA).
Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory
evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the
category to which it is assigned. Unlike the other categories, Risk Category I, which contains the least risky
depository institutions, contains further risk differentiation based on the FDIC’s analysis of financial ratios,
examination component ratings and other information. Assessment rates are determined by the FDIC and currently
range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable
deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next,
except that no single adjustment can exceed three basis points.
FDIRA also provided for a one-time credit for eligible institutions based on their assessment base as of
December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits
can be used to offset assessments until exhausted. The Bank’s one-time credit is expected to approximate $298,000.
FDIRA also provided for the possibility that the FDIC may pay dividends to insured institutions if the DIF reserve
ratio equals or exceeds 1.35 percent of estimated insured deposits.
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
7
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, 2006, the Bank owned $2.1 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
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 that is updated each time a modification is made to the lists of Specially Designated
Nationals and Blocked Persons provided by OFAC and other agencies.
8
Mortgage Banking Regulation. In addition to certain of the Bank’s regulations, 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, 2006, the Bank was considered “well capitalized.”
Check Clearing for the 21st Century Act (Check 21). Check 21 gives “substitute checks,” such as a digital image
of a check and copies made from that image, the same legal standing as the original paper check. The major
provisions of Check 21 include: allowing check truncation without making it mandatory; demanding that every
financial institution communicate to account holders in writing a description of its substitute check processing
program and their rights under the law; legalizing substitutions for and replacements of paper checks without
agreement from consumers; retaining in place the previously-mandated electronic collection and return of checks
between financial institutions only when individual agreements are in place; requiring that when account holders
request verification, financial institutions produce the original check (or a copy that accurately represents the
9
original) and demonstrate that the account debit was accurate and valid; and requiring recrediting of funds to an
individual’s account on the next business day after a consumer proves that the financial institution has erred. This
legislation will likely affect capital spending as many financial institutions assess whether technological or
operational changes are necessary to stay competitive and take advantage of the new opportunities presented by
Check 21.
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.
10
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, 2006, we are vulnerable to continued increases in short-term interest rates because of our 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 noninterest 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 markets may 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, 2006, 44 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,
11
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, 2006, 25 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 of
any estimate 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, brokerage firms, 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.
12
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.
13
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, 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 85,000 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 building previously used for the Bank’s deposit operations at Seventh & Main Streets in West Point
Virginia, which is a 14,000 square foot building remodeled by the Corporation in 1991, has been leased to the
Economic Development Authority of the Town of West Point, Virginia (Development Authority) for the purpose of
housing and operating incubator businesses under the supervision of the Development Authority. The building
previously used for the Bank’s loan operations at Sixth and Main Streets in West Point, Virginia, which is a 5,000
square foot building acquired and remodeled by the Corporation in 1998, 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. Also at
the Midlothian location, the Corporation owns an office condominium that houses a regional commercial lending
office.
The Corporation owns 15 other Bank branch locations and leases one Bank branch location and one regional
commercial lending office in Virginia. Rental expense for these leased locations totaled $22,000 for the year ended
December 31, 2006.
The Corporation has 18 leased loan productions offices, 9 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 these
leased locations totaled $874,000 for the year ended December 31, 2006.
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. In connection with the opening
of the Bank’s Hampton branch in 2006, the Hampton office of C&F Finance was relocated from a leased facility to
the second floor of the Bank branch building. The Corporation has one remaining leased office in Virginia for C&F
Finance. Rental expense for these leased locations totaled $15,000 for the year ended December 31, 2006.
14
All of the Corporation’s properties are in good operating condition and are adequate for the Corporation’s
present and anticipated future needs.
ITEM 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Corporation 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 (54)
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 (38)
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 (56)
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 (50)
President and Chief Executive Officer of C&F Mortgage since 1995
15
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 Select Market of the NASDAQ Stock Market under the symbol “CFFI.” As of February 27, 2007,
there were approximately 2,300 shareholders of record. As of that date, the closing price of our common stock on
the NASDAQ Global Select Stock Market was $43.25. 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 2006 and 2005.
Quarter
First
Second
Third
Fourth
_________2006_________
High
$40.58
41.49
41.00
42.50
Low Dividends
$37.17
38.09
37.25
38.50
$0.27
0.29
0.29
0.31
__________2005__________
Low
High
$36.12
$40.20
34.81
40.44
34.92
41.00
37.02
40.15
Dividends
$0.24
0.24
0.25
0.27
Payment of dividends is at the discretion of the Corporation’s board of directors and is subject to various
federal and state regulatory limitations. For further information regarding payment of dividends, refer to Item 1,
“Business,” under the heading “Limits on Dividends” and Item 8, “Financial Statements and Supplementary Data,”
under the heading “Note 13: Regulatory Requirements and Restrictions.”
Issuer Purchases of Equity Securities
For the Quarter Ended December 31, 2006
Total
Number
of Shares
Purchased
-
-
135
135
Average
Price
Paid Per
Share
$ -
-
39.72
$39.72
Total Number
of Shares
Purchased as
Part of Publicly
Announced Program1
-
-
135
135
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Program1
143,561
150,000
149,865
October 1-31, 2006
November 1-30, 2006
December 1-31, 2006
Total
1On November 4, 2005, the Corporation’s board of directors authorized the purchase of up to 5 percent of the Corporation’s common stock
(approximately 156,783 shares) over the twelve months ending November 3, 2006. The Corporation purchased 13,222 shares of the
Corporation’s common stock during the twelve months ending November 3, 2006. Upon expiration of this program, the Corporation’s board
of directors authorized the purchase of up to an additional 150,000 shares of the Corporation’s common stock over the twelve months ending
November 3, 2007. The stock will be purchased in the open market and/or by privately negotiated transactions, as management and the board
of directors deem prudent.
16
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
2006
2005
2004
2003
2002
$734,468
68,006
517,843
532,835
$ 58,582
18,457
40,125
4,625
35,500
27,387
45,328
17,559
5,430
$12,129
$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
$ 40,843
7,549
33,294
4,026
$ 38,671
8,828
29,843
3,167
$ 30,620
9,184
21,436
1,141
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
$3.85
$3.49
$3.14
$3.58
$2.73
3.71
1.16
3.36
1.00
3.00
.90
3.42
.72
2.67
.62
3,273,429
3,507,912
3,729,128
3,781,843 3,652,668
1.75%
18.97
30.15
9.21
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
17
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:
interest rates
•
• general economic conditions
•
• monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal
the legislative/regulatory climate
Reserve Board
the quality or composition of the loan or investment portfolios
•
• demand for loan products
• deposit flows
•
competition
• demand for financial services in the Corporation’s market area
•
technology
•
•
reliance on third parties for key services
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 require 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 trends
in delinquencies and charge-offs, 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
18
evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more
information becomes available.
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. We maintain a valuation allowance to the extent that the measure of the impaired
loan is less than the recorded investment.
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: 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 2006 and determined there was no impairment to be recognized in 2006. 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 assets, liabilities or
expense.
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.”
19
OVERVIEW
Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable
growth initiatives that will enhance long-term 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 purchases
3) dividends
Financial Performance Measures
For the Corporation, net income increased 2.9 percent to $12.1 million in fiscal 2006. Earnings per share
assuming dilution increased 10.4 percent to $3.71 in the same period. Net income for 2006 included $728,000, after
taxes, attributable to the recovery of past due interest and a reduction in the Corporation’s loan loss allowance in
connection with the pay-off of previously nonperforming loans of one commercial relationship. Excluding the after-
tax effect of this loan pay-off, the Corporation’s adjusted earnings for 2006 were $11.4 million, or $3.48 per share
assuming dilution, which represents a 3.6 percent increase in adjusted earnings per share assuming dilution over
the same period in 2005. The improvement in adjusted earnings per share relative to the decrease in adjusted net
income, excluding the effect of the commercial loan pay-off, was attributable to the accretive effect of the tender
offer that concluded in the third quarter of 2005 and resulted in the Corporation’s purchase of 427,186 of its
outstanding shares. Factors influencing 2006 earnings included interest rate fluctuations, a decline in mortgage loan
production, new borrowings to fund the Corporation’s purchase 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 Corporation's ROE and ROA were 18.97 percent and 1.75 percent, respectively, for the year ended
December 31, 2006. Excluding the effect of the commercial loan pay-off, the Corporation’s adjusted ROE was 17.83
percent for the year ended December 31, 2006, compared with 17.70 percent for 2005. The adjusted ROA, excluding
the effect of the commercial loan pay-off, was 1.64 percent for 2006, compared with 1.82 percent for 2005. The
increase in adjusted ROE for 2006 was attributable to the accretive effect of the Corporation’s share purchase in July
2005. The decline in adjusted ROA for 2006 resulted from the decline in earnings, excluding the effect of the
commercial loan pay-off, coupled with an increase in average assets, primarily loans held for investment and new
facilities. 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.
20
We expect the following factors to influence the Corporation’s financial performance in 2007:
• Retail Banking: We expect changes in interest rates to affect the degree to which net interest
margin compression occurs at C&F Bank. If interest rates stabilize or decline, we expect more
pronounced net interest margin compression than if interest rates rise because yields on loans
will stay constant or decline while deposits will continue to reprice at higher rates relative to
their maturing rates. General economic trends, particularly an economic slowdown, in C&F
Bank’s markets can affect the quality of the loan portfolio. Managing the risks inherent in our
loan portfolio will influence C&F Bank’s performance during 2007. Our ability to achieve
forecasted deposit and loan growth at our existing bank branches and in particular at our four
new bank branches will be affected by both general economic conditions and the increasing
level of competition in our markets.
• Mortgage Banking: Interest rate volatility, the flat interest rate yield curve and the slowdown
in the housing market will likely continue to negatively affect demand for home mortgage
loans. This will result in lower production at C&F Mortgage, which directly impacts the
profitability of C&F Mortgage. Production growth may become more dependent on our
ability to open or acquire new production offices.
• Consumer Finance: We expect changes in interest rates to be a primary factor influencing
financial performance at C&F Finance in 2007. If interest rates rise, we expect net interest
margin compression because the funding for C&F Finance’s loan portfolio is indexed to short-
term interest rates and reprices each month. If interest rates stabilize or decline, there will be
less pressure on the net interest margin. In addition, if an economic slowdown occurs in C&F
Finance’s markets, we would expect more delinquencies and repossessions. There would also
be the potential for a decrease in consumer demand for automobiles and a decline in the value
of automobiles securing C&F Finance’s loan portfolio, which would weaken collateral
coverage and increase the amount of loss on the disposition of repossessions.
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 $8.7 million for the year ended
December 31, 2006, compared with $8.1 million in 2005. Pretax earnings for 2006 included $1.1 million of
previously unrecorded interest and a reduction in the allowance for loan losses recognized in connection with the
pay-off of previously nonperforming loans of one commercial relationship. Excluding this amount, the Retail Bank
segment’s adjusted pre-tax income for 2006 was $7.6 million. Included in earnings for 2006 were the effects on
operating expenses of the Peninsula and Richmond branch expansions and the operations center relocation, higher
operational and administrative personnel costs to support growth, as well as interest expense on trust preferred
securities, the proceeds of which were used to partially fund the large share purchase in mid-2005. Growth in the
Retail Banking segment’s operations and infrastructure have increased operating expenses, but over time we expect
these expenditures will contribute to the Corporation’s long-term profitability, improve efficiency and enhance
customer service. Higher expenses for 2006 were offset in part by an increase in net interest income, which resulted
from an increase in both the amount of and yield on earning assets, and an increase in service charges on deposit
accounts. 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. However, future earnings of the Retail Banking segment
21
could be affected by net interest margin compression if interest rates stabilize or decline and deposits continue to
reprice at higher rates relative to their maturing rates.
Mortgage Banking: Pretax earnings for the Mortgage Banking segment, which consists solely of C&F
Mortgage Corporation, were $3.8 million for the year ended December 31, 2006, compared with $5.1 million in 2005.
The decline in earnings of the Mortgage Banking segment resulted from reduced loan volume as demand for
residential mortgage loans and refinancings has moderated as interest rates have increased and overall economic
growth has slowed. Origination volume for the year declined 10.8 percent from the 2005 level. Gains on loan sales
declined during 2006 due to lower volumes of loan sales resulting from the reduced origination volume. For 2006,
loan originations at C&F Mortgage for refinancings declined to $283 million from $350 million in 2005. Loans
originated for new and resale home purchases declined to $661 million in 2006 from $709 million in 2005. In
addition to the decrease in loan volume, the Mortgage Banking segment experienced increased overhead resulting
from new loan production offices opened during 2006 and 2005, and a decrease in net interest income resulting
from a lower average balance of loans held for sale and the effect of the flat interest rate yield curve during 2006.
We expect that future earnings for the Mortgage Banking segment may continue to be negatively affected if interest
rate trends result in fewer new and resale home sales and loan refinancings. However, we plan to continue to
expand in new and existing markets that provide the potential for increased loan production.
Consumer Finance: Pretax earnings for the Consumer Finance segment, which consists solely of C&F
Finance, totaled $5.0 million for the year ended December 31, 2006, compared with pre-tax earnings of $3.7 million
in 2005. The increase in 2006 resulted from a 16.1 percent increase in average consumer finance loans outstanding,
which more than offset the decline in C&F Finance’s net interest margin attributable to increases in the cost of
borrowings resulting from rising interest rates and higher operating expenses to support growth. Operating results
in 2006 benefited from the completion of C&F Finance’s conversion to a new loan system, the consolidation and
relocation of its operations center to a new location in Richmond, Virginia, and a change in the third-party lender
for its secured revolving line of credit with financing terms that provide for a rate reduction from the prior terms
and lower administration fees—all of which occurred in mid-2005. 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. In addition to earnings growth during 2006, nonaccrual consumer finance loans as a percentage
of total consumer finance loans was less than one percent as of December 31, 2006 compared to 1.64 percent as of
December 31, 2005, which reflected the effect of initiatives to reduce C&F Finance’s nonperforming assets. As a
result of the improvement in asset quality and a decline in net charge-offs during 2006, the provision for loan losses
declined to $4.9 million for 2006 from $5.1 million for 2005. Future earnings at the Consumer Finance segment will
be impacted by economic conditions including, but not limited to, the employment market, interest rate levels and
the resale market for used automobiles.
Capital Management
We have managed our capital through growth in assets, stock purchases and increases in dividends as
evidenced by the decline in the ratio of average equity to average total assets over the past three years. During
2006, total assets grew by 9.3 percent. A detailed discussion of the changes in our financial position since December
31, 2005 is included in the section “Financial Condition.” Dividends for 2006 were $1.16, which is a 16 percent
increase over 2005. The weighted average number of shares outstanding during 2006 was 3,151,860 compared to
3,375,153 during 2005. This decrease resulted from the purchase of 427,186 shares of the Corporation’s common
stock in mid-2005, which was accretive to earnings per share and ROE. In 2006, we purchased 13,257 shares of the
Corporation’s common stock under board-approved purchase programs. Through February 15, 2007, we have
purchased an additional 101,200 shares of the Corporation’s common stock at an average price of $41.26 per share
22
under the current board-approved program to purchase up to 150,000 shares. Shares purchased in 2007 are not
reflected in 2006 results.
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, 2006, 2005
and 2004. 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
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
2006
Average
Yield/
Income/
Balance
Rate
Expense
2005 2004
Average
Yield/
Balance
Rate
Income/
Expense
Income/
Expense
Average
Balance
Yield/
Rate
$ 11,349
55,932
67,281
555,517
9,271
632,069
(13,617)
75,863
$694,315
$ 487
3,802
4,289
55,196
454
59,939
4.29% $ 12,989
56,092
6.80
6.37
9.94
4.90
9.48
69,081
507,447
17,168
593,696
(12,213)
65,107
$646,590
$ 527
4,020
4,547
45,118
523
50,188
4.06% $ 16,211
54,532
7.17
$ 484
4,058
4,542
37,009
527
42,078
6.58
8.89
3.05
70,743
424,052
43,564
8.45% 538,359
(9,675)
57,890
$586,574
$ 87,074
44,820
49,644
946
987
353
1.09% $ 81,885
49,909
2.20
54,656
0.71
732
708
388
0.89% $ 80,055
42,797
1.42
55,856
0.71
79,873
152,879
414,290
120,498
534,788
79,472
16,106
630,366
63,949
3,176
5,690
11,152
7,305
18,457
3.98
3.72
2.69
6.06
3.45
63,432
136,779
386,661
101,355
488,016
76,172
15,808
579,996
66,594
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
69,281
13,432
519,835
66,739
495
329
328
1,086
2,751
4,989
2,560
7,549
$694,315
$646,590
$586,574
$41,482
$38,191
$34,529
5.99%
2.02%
6.43%
6.03%
2.92%
6.56%
23
2.99%
7.44
6.42
8.73
1.21
7.82%
0.62%
0.77
0.59
1.92
2.15
1.37
3.46
1.73%
6.09%
1.40%
6.41%
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
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
2006 Compared to 2005
2006 from 2005 2005 from 2004
Increase(Decrease)
Due to
Volume
Increase(Decrease)
Due to
Volume
Total
Increase
(Decrease)
Total
Increase
(Decrease)
Rate
Rate
$5,560
$4,518
$10,078
$ 706
$7,403
$ 8,109
29
(207)
235
5,617
165
357
1
940
1,476
2,939
1,593
4,532
$1,085
(69)
(11)
(304)
4,134
49
(78)
(36)
519
479
933
995
(40)
(218)
(69)
9,751
214
279
(35)
1,459
1,955
3,872
2,588
1,928
$2,206
6,460
$ 3,291
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
Net interest income, on a taxable equivalent basis, for the year ended December 31, 2006 was $41.5 million,
compared to $38.2 million for 2005. The net interest margin of 6.56 percent for 2006 included $870,000 of
nonaccrued and default interest attributable to the repayment of previously nonperforming loans of one commercial
relationship. Excluding the effect of the commercial loan pay-off, the adjusted net interest margin was 6.43 percent
for 2006, which was level with the net interest margin for 2005. An increase of 103 basis points in the yield on
interest-earning assets during 2006 was offset by an increase of 99 basis points in the rate on interest-bearing
liabilities.
Average loans held for investment increased $62.7 million during 2006. The Retail Banking segment’s
average loan portfolio increased $46.2 million compared to 2005. This increase was mainly attributable to higher
loan production in the Virginia Peninsula market and residential construction loan growth. The Consumer Finance
segment’s average loan portfolio increased $16.5 million during 2006. This increase was attributable to overall
growth at existing locations and, more recently, the expansion into new markets. Average loans held for sale at the
Mortgage Banking segment decreased $14.6 million during 2006. Mortgage interest rate trends over the last twelve
24
months have resulted in a 10.8 percent decline in loan origination volume at the Mortgage Banking segment during
2006. 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 $1.8 million during 2006. In addition, their average yield
declined 21 basis points. The decline in the average balance resulted from the utilization of proceeds from
maturities and calls to partially fund the increase in loan demand. The yield decreases reflected the impact of the
flat yield curve on long-term interest rates and thus the yield on securities purchased throughout 2006.
Average interest-bearing deposits at other banks, primarily the FHLB, decreased $7.9 million during 2006.
Fluctuations in the average balance of these low-yielding deposits occurred in response to loan demand. The
average yield on interest-earning deposits at other banks increased 185 basis points during 2006. The higher yields
were due to increases beginning in mid-2004 in short-term interest rates.
Although average time and savings deposits increased $27.6 million during 2006, the increase in interest on
deposits was influenced to a greater extent by the increase in deposit rates. The average cost of deposits increased
81 basis points for 2006 due to the increase in short-term interest rates, coupled with the repricing of maturing
deposits at higher interest rates.
Average borrowings increased $19.1 million during 2006 partially due to a new line of credit and the issuance
of trust preferred capital securities in the third quarter of 2005 to fund the Corporation’s purchase of 427,186 shares
of its common stock in mid-2005. The increase in average borrowings during 2006 was also attributable to loan
growth at the Consumer Finance segment, which was funded in part by a line of credit. The increase in interest on
borrowings was influenced to a greater extent by a higher cost of funds, which increased 141 basis points during
2006. The majority of the Corporation’s borrowings are indexed to short-term interest rates and reprice as short-
term interest rates change.
Excluding the effect of the commercial loan pay-off, the adjusted net interest margin remained constant
during 2006. The increase in the yield on loans has been able to offset the effect of the increase in the cost of
deposits and borrowings. However, we expect that net interest margin compression is likely to occur if interest
rates stabilize or decline and deposits continue to reprice at higher rates relative to their maturing rates.
2005 Compared to 2004
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 an 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
25
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.
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-bearing 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 was due to
increases beginning in mid-2004 in short-term interest rates.
Although average time and savings 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 purchase of 427,186 shares of its common stock in the third quarter of 2005. The
majority 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.
26
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
2006 Compared to 2005
Year Ended December 31, 2006
Retail
Banking
Mortgage
Banking
$ --
3,471
1,200
105
393
$5,169
$17,149
--
3,656
--
22
$20,827
Consumer
Finance
$ --
--
245
--
294
$539
Other
Total
$ (51)
--
--
--
903
$17,098
3,471
5,101
105
1,612
$ 852
$27,387
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
Total noninterest income declined slightly to $27.4 million during 2006. A $1.1 million decrease at the
Mortgage Banking segment resulted primarily from a decline in gains on loan sales due to lower sales volume
resulting from reduced loan demand. The decrease in noninterest income at the Mortgage Banking segment was
almost entirely offset by increases of $827,000 at the Retail Banking and $122,000 at the Consumer Finance segments
during 2006 because of (1) higher service charges and fees on deposit accounts at the Retail Banking segment
resulting from deposit account growth, coupled with the expansion of our overdraft protection services and (2)
higher service charges and fees at the Consumer Finance segment resulting from fees generated from loan
processing and collection.
2005 Compared to 2004
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
27
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.
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
2006 Compared to 2005
Retail
Banking
$13,001
3,109
4,801
$20,911
Retail
Banking
$11,368
2,292
4,303
$17,963
Retail
Banking
$ 9,982
2,144
3,662
$15,788
Year Ended December 31, 2006
Mortgage
Banking
Consumer
Finance
$12,137
1,671
4,550
$18,358
$3,146
282
1,767
$5,195
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
Other
Total
$723
25
116
$864
$29,007
5,087
11,234
$45,328
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
Total noninterest expense increased $3.5 million, or 8.3 percent, to $45.3 million during 2006. The Retail
Banking and the Consumer Finance segments reported increases in total noninterest expense that were primarily
attributable to higher personnel and operating expenses to support growth and technology enhancements at both
segments. Noninterest expense of the Retail Banking segment included costs associated with our new Hampton
and Yorktown retail banking branches on the Virginia Peninsula, both of which opened in 2006, our new operations
center, which opened in late 2005, and staffing and training personnel for our two new retail banking branches
opening in 2007. Noninterest expenses of the Consumer Finance segment included costs associated with building
depth in our sales force, entering new markets and increasing the administrative staff to support the increase in the
loan portfolio. Total noninterest expense declined during 2006 for the Mortgage Banking segment because of lower
production-based personnel costs due to lower origination volume in 2006. The decrease in personnel expenses was
offset in part by higher overhead, including occupancy and other expenses, associated with opening new loan
production offices in 2006 and 2005. Noninterest expenses of the Mortgage Banking segment in 2006 included
$108,000 of expenses, in excess of the Corporation’s insurance coverage, associated with a $2.2 million
embezzlement perpetrated by two former employees of C&F Mortgage.
28
2005 Compared to 2004
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 was attributable
to higher production-based compensation and operating expenses due to an increase in production.
INCOME TAXES
Applicable income taxes on 2006 earnings amounted to $5.4 million, resulting in an effective tax rate of 30.9
percent, compared with $5.2 million, or 30.5 percent, in 2005 and $5.0 million, or 30.9 percent, in 2004. We do not
consider these fluctuations in effective tax rates to be significant.
29
ASSET QUALITY
Allowance and Provision for Loan Losses
The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any
losses on existing loans that may become uncollectible. The provision for loan losses increases the allowance, and
loans charged off, net of recoveries, reduce the allowance. The following table presents the Corporation’s loan loss
experience for the periods indicated:
TABLE 5: Allowance for Loan Losses
(Dollars in thousands)
Allowance, beginning of period
Provision for loan losses:
Retail Banking and Mortgage Banking
Consumer Finance
Total provision for loan losses
Loans charged off:
Real estate—residential
Commercial, financial and agricultural
Consumer
Consumer Finance
Total loans charged off
Recoveries of loans previously charged off:
Real estate—residential
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 Retail Banking and
Mortgage Banking
Ratio of net charge-offs to average total loans
outstanding during period for Consumer Finance
2006
$ 13,064
Year Ended December 31,
2004
$ 8,657
2005
$11,144
2003
$6,722
(250)
4,875
4,625
32
97
229
4,735
5,093
400
5,120
5,520
—
20
227
4,738
4,985
200
3,826
4,026
—
7
96
2,592
2,695
525
2,642
3,167
—
15
86
1,844
1,945
2002
$3,684
500
641
1,141
—
161
326
573
1,060
1
69
146
1,404
1,620
3,473
—
$ 14,216
—
49
57
1,279
1,385
3,600
—
—
68
39
1,049
1,156
1,539
—
$13,064 $11,144
—
34
33
646
713
1,232
—
$8,657
—
47
21
196
264
796
2,693
$6,722
.03%
.03%
—
.01%
.13%
2.76%
3.33%
1.78%
1.60%
1.65%
During 2006, there was a $392,000 decline in the allowance for loan losses at the combined Retail Banking
and Mortgage Banking segments compared to December 31, 2005. The Bank’s nonperforming and accruing loans
past due 90 days or more at December 31, 2005 consisted primarily of one commercial relationship to which we had
allocated $865,000 of the allowance for loan losses. In May 2006, the borrower sold the real estate collateral for these
loans and the loans were repaid in full from the sale proceeds. The decline in the allowance for loan losses resulting
from the resolution of this nonperforming loan relationship was offset in part by the allocation of additional
amounts in the loan loss allowance to loans downgraded during 2006 and increased allocations for certain loans
based on risks associated with industry concentrations. 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.
30
The Consumer Finance segment, consisting solely of C&F Finance, accounted for the majority of the activity
in the allowance for loan losses during 2006. The decline in the provision for loan losses during 2006 resulted from
lower net charge-offs as a result of the improvement in asset quality described below. 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.
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.
31
• 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.
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
2006
2005
2004
2003
2002
$ 502
136
3,031
134
326
9,890
197
$ 402
202
3,776
124
214
8,346
--
$ 337
129
3,736
92
166
6,684
--
$14,216
$13,064
$11,144
22%
2
44
5
2
25
20%
4
45
5
2
24
21%
3
46
5
2
23
$ 615
112
3,175
98
256
4,401
--
$8,657
22%
3
46
4
3
22
$ 573
107
2,670
94
287
2,957
34
$6,722
23%
3
47
4
3
20
100%
100%
100%
100%
100%
32
Nonperforming Assets
Table 7 summarizes nonperforming assets at December 31, of each of the past five years.
TABLE 7: Nonperforming Assets
Retail and Mortgage Banking
(Dollars in thousands)
2006
2005
2004
2003
Total nonperforming assets
Accruing loans past due for 90 days or more
Nonaccrual loans
Real estate owned
$4,083
—
$4,083
$3,826
$4,718
1.11%
Nonperforming assets to total loans* and real estate owned
1.29
Allowance for loan losses to total loans* and real estate owned
115.56
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.
0.24%
1.08
452.98
Allowance for loan losses
$ 955
—
$4,326
$1,629
$ 955
$4,336
—
$1,993
8
2002
$1,656
703
$4,336
$2,001
$2,359
$1,580
$1,092
$ 69
$4,460
$4,256
$3,765
1.39%
1.43
102.88
.72%
1.52
212.69
.88%
1.40
159.60
Consumer Finance
(Dollars in thousands)
Nonaccrual loans
Accruing loans past due for 90 days or more
Allowance for loan losses
Nonaccrual consumer finance loans to total consumer finance loans
Allowance for loan losses to total consumer finance loans
2006
2005
2004
2003
$ 880
$ 8
$9,890
0.66%
7.44%
$1,819
$ 26
$8,346
1.64%
7.51%
$1,330
$ 481
$6,684
1.42%
7.15%
$1,149
$ 233
$4,401
1.44%
5.52%
2002
$ 688
$ 293
$2,957
1.02%
4.40%
Nonperforming assets and accruing loans past due 90 days or more of the combined Retail and Mortgage
Banking segments at December 31, 2005 consisted primarily of one commercial relationship. As previously
described, these loans were repaid in full in May 2006, which accounted for the majority of the decline in
nonperforming assets in 2006.
Nonaccrual loans of the Consumer Finance segment as a percentage of total consumer finance loans
declined to less than one percent since December 31, 2005. Despite the improvement in asset quality, we have
maintained the ratio of the allowance for loan losses to total loans at 7.44 percent because of cyclical behavior in
consumer finance delinquency trends and an increase in the amount of delinquent payment deferrals.
In accordance with its policies and guidelines and consistent with industry practices, C&F Finance, at times,
offers payment deferrals to borrowers, whereby the borrower is allowed to move up to two payments within a
twelve-month rolling period to the end of the loan, generally by paying a fee. An account for which all delinquent
payments are deferred is classified as current at the time the deferment is granted and therefore is not included as a
delinquent account. Thereafter, such an account is aged based on the timely payment of future installments in the
same manner as any other account. We evaluate the results of this deferment strategy based upon the amount of
cash installments that are collected on accounts after they have been deferred versus the extent to which the
collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation,
we believe that payment deferrals granted according to our policies and guidelines are an effective portfolio
management technique and result in higher ultimate cash collections from the portfolio. Payment deferrals may
affect the ultimate timing of when an account is charged off. Increased use of deferrals may result in a lengthening
33
of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and
therefore increase the allowance for loan losses and related provision for loan losses.
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. As previously discussed, interest income for 2006 included $870,000 of
nonaccrued and default interest collected on one nonperforming commercial relationship when the loans were
repaid in full in May 2006. Excluding this transaction, we would have recorded additional gross interest income of
$70,000 for 2006, $270,000 for 2005 and $202,000 for 2004 if nonaccrual loans had been current throughout these
periods. Interest received on nonaccrual loans was $41,000 in 2006, $193,000 in 2005 and $55,000 in 2004.
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. The balance of impaired loans at December 31, 2006 was $781,000 for which no specific valuation
allowance was deemed necessary. At December 31, 2005, the balance of impaired loans was $4.2 million for which
34
a specific valuation allowance of $865,000 was provided. In May 2006, the borrowers sold the real estate collateral
for these loans and paid the loans in full from the sale proceeds. The average balance of impaired loans was $2.24
million for 2006, $4.2 million for 2005 and $3.5 million for 2004.
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, 2006, the Corporation had total assets of $734.5 million compared to $672.0 million at
December 31, 2005. The increase was principally a result of an increase in loans held for sale, loans held for
investment and corporate premises and equipment, which was offset in part by a decline in interest-bearing
deposits in other banks. Growth in loan demand was funded by reducing the amount the Corporation placed in
lower-yielding overnight funds and increasing its borrowings. The increase in corporate premises resulted from
expenditures associated with the completion of the Bank’s Hampton and Yorktown branches, which opened in
2006, the Bank’s Patterson Avenue branch in Richmond, which opened in January 2007, and the ongoing renovation
of one branch building acquired in 2005 and located in the Richmond, Virginia area. Asset growth in 2005 was
principally a result of increases in loans held for investment and corporate premises.
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, 2006, the Corporation’s loans held for investment in all categories
totaled $532.1 million and loans held for sale totaled $53.5 million.
35
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,
2006
2005
2004
2003
2002
$ 115,557
13,650
236,157
24,880
8,951
132,864
532,059
(14,216)
$ 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)
$517,843
$465,039
$394,471
$350,170
$328,634
TABLE 9: Maturity/Repricing Schedule of Loans
(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
December 31, 2006
Commercial, Financial,
and Agricultural
Real Estate
Construction
$36,832
48,496
21,474
99,988
27,959
1,408
$ 1,559
--
--
12,091
--
--
The increase in loans held for investment occurred predominantly in (1) the variable-rate categories of real
estate and commercial loans and (2) the fixed-rate category of consumer loans at C&F Finance. Typically, growth in
the variable-rate categories will favorably affect net interest margin in a rising rate environment. Fixed-rate
consumer loans at C&F Finance are predominantly 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.
36
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.
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
37
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
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.
38
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
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 lower loan-to-value ratios, which are 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.
39
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.
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.
40
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 purchases installment contracts
throughout its markets. 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 contract 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 contract-to-value ratio.
C&F Finance’s underwriting and collateral guidelines form the basis for the credit decision. Exceptions to
credit policies and authorities must be approved by a designated credit officer. C&F Finance’s typical borrowers
have experienced prior credit difficulties or have modest income. Because C&F Finance serves customers who are
unable to meet the credit standards imposed by most traditional automobile financing sources, we expect C&F
Finance to sustain a higher level of credit losses than traditional automobile financing sources. However, C&F
Finance generally charges interest at higher rates than those charged by traditional financing sources. These higher
rates should more than offset the increase in the provision for loan losses for this segment of the Corporation’s loan
portfolio.
Loans associated with automobile sales finance are included in the consumer finance category in Table 8.
SECURITIES
The investment portfolio plays a primary role in the management of the Corporation’s interest rate
sensitivity and generates substantial interest income. In addition, the portfolio serves as a source of liquidity and is
used as needed to meet collateral requirements. The investment portfolio consists of securities available for sale,
which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan
demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value.
41
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, 2006
Amount
Percent
December 31, 2005
Amount
Percent
$ 6,222
2,208
55,027
63,457
4,127
$ 67,584
9%
3
82
94
6
100%
$
6,118
2,562
52,524
61,204
4,097
$ 65,301
9%
4
81
94
6
100%
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
Maturing after 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,
2004
2006
Weighted
Average
Yield
Weighted
Average
Yield
Weighted
Average
Yield
Amortized
Cost
Amortized
Cost
Amortized
Cost
2005
$ 498
2,747
2,443
625
6,313
38
2,198
2,236
1,213
16,254
24,017
12,437
53,921
1,749
21,199
26,460
13,062
2.97%
4.46
5.55
6.82
5.00
3.39
4.77
4.75
4.38
6.06
6.75
6.41
6.41
3.95
5.71
6.64
6.42
$ --
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
$62,470
6.21% $59,952
6.33%
$64,850
3.12%
3.44
4.60
--
3.46
--
4.87
4.87
7.96
6.29
7.00
6.77
6.82
3.61
5.38
6.80
6.77
6.18%
Yields on tax-exempt securities have been computed on a taxable-equivalent basis.
2
Total securities excludes preferred stock at amortized cost of $3.9 million at December 31, 2006; $4.1 million at December 31, 2005 and
$4.9 million at December 31, 2004 (estimated fair value of $4.1 million at December31, 2006; $4.1 million at December 31, 2005 and $5.3
million at December 31, 2004).
42
DEPOSITS
The Corporation’s predominant source of funds is depository accounts, which are 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.
Deposits totaled $532.8 million at December 31, 2006, compared to $495.4 million at December 31, 2005.
This increase was primarily attributable to (1) the increase in noninterest-bearing demand deposits, which totaled
$90.3 million at December 31, 2006, compared to $78.9 million at December 31, 2005 and (2) the increase in time
deposits, which totaled $254.1 million at December 31, 2006, compared to $221.3 million at December 31, 2005,
which were offset in part by the decrease in savings and interest-bearing demand deposits from $195.2 million at
December 31, 2005 to $188.5 million at December 31, 2006. The increase in noninterest-bearing deposits resulted
from an increase in municipal deposit accounts. The increase in time deposits resulted from the effect of our
competitive rate-setting strategies. Total deposits at December 31, 2005 increased $48.3 million, or 10.8 percent,
over December 31, 2004. Deposit growth in 2005 occurred in all of the Bank’s market regions and, in particular, at
the Bank’s newest branches at the time in Newport News and Mechanicsville.
Table 11 presents the average deposit balances and average rates paid for the years 2006, 2005 and 2004.
Table 12 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2006.
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,
2006
Average
Balance
$79,472
87,074
44,820
49,644
79,873
152,879
414,290
$493,762
Average
Rate
1.09%
2.20
0.71
3.98
3.72
2.69%
2005
Average
Balance
Average
Rate
2004
Average
Balance
Average
Rate
$ 76,172
81,885
49,909
54,656
63,432
136,779
386,661
$462,833
0.89%
1.42
0.70
2.71
2.74
1.88%
$ 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%
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
December 31, 2006
$12,415
20,331
53,751
8,683
$95,180
43
BORROWINGS
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 purchase of 427,186 shares of its common stock. (For further information concerning our share
purchase, 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.”
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 $93.3 million at December 31, 2006 and $97.9 million at December
31, 2005.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose
contract amounts represent credit risk, was $8.8 million at December 31, 2006 and $9.7 million at December 31, 2005.
At December 31, 2006, C&F Mortgage had rate lock commitments to originate mortgage loans aggregating
$23.8 million and loans held for sale of $53.5 million. C&F Mortgage has entered into corresponding commitments
with third party investors to sell loans of approximately $77.3 million. These commitments to sell loans are
44
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 $62,000 in 2006, $29,000 in 2005 and $75,000 in 2004. 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.
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, sales of securities, the issuance of brokered certificates of deposit 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 $54.8 million at December 31, 2006. 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, 2006, (2) an established line with the FHLB that had
$15.0 million outstanding under a total line of $131.4 million as of December 31, 2006, (3) a revolving line of credit
with a third-party bank that had $77.3 million outstanding under a total line of $100 million as of December 31, 2006
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, 2006. We have no reason to believe these arrangements will not be renewed at maturity.
45
Certificates of deposit of $100,000 or more maturing in less than a year totaled $86.5 million at December 31,
2006; certificates of deposit of $100,000 or more maturing in more than one year totaled $8.7 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, 2006:
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
$ 84,284
$ 7,000
15,000
--
$ --
--
$77,284
--
$ --
15,000
10,310
--
--
--
10,310
FHLB advances1
Trust preferred
capital notes
Securities sold under
agreements to
repurchase
Operating leases
2,165
877
5,462
5,462
--
894
--
394
--
--
$117,221
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
$13,339
$77,678
$894
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.
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 2006, we purchased 13,257 shares of the Corporation’s common stock in open-market transactions at
an average price of $39.08 per share under stock purchase programs authorized by the Corporation’s board of
directors. On July 27, 2005, the Corporation completed a tender offer and purchased 427,186 shares at $41 per
share. The total cost of the share purchase, including transaction costs, approximated $17.6 million. In December
2005, we purchased 100 shares in an open-market transaction at $37.27 per share under a board-approved stock
purchase program. The board of directors authorized these stock purchases 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 purchases are another tool that facilitates improving
shareholder return, as measured by ROE and earnings per share.
Through February 15, 2007, we have purchased 101,200 shares of the Corporation’s common stock at an
average price of $41.26 per share under the current board-approved program to purchase up to 150,000 shares. For
46
further information concerning the Corporation’s share purchases, refer to Item 5, “Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
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 11.3 percent at December 31, 2006, compared with 11.0 percent at December
31, 2005. The total capital ratio was 12.6 percent at December 31, 2006, compared with 12.2 percent at December 31,
2005. The leverage ratio was 9.6 percent at December 31, 2006, compared with 8.9 percent at December 31, 2005.
These ratios are in excess of the mandated minimum requirements. The trust preferred securities issued in
connection with the July 2005 tender offer are treated as Tier 1 capital for regulatory capital adequacy determination
purposes.
Shareholders’ equity was $68.0 million at year-end 2006 compared with $60.1 million at year-end 2005. The
dividend payout ratio was 30.2 percent in 2006, 28.3 percent in 2005 and 28.6 percent in 2004. During 2006, the
Corporation declared dividends of $1.16 per share, up 16 percent from $1.00 per share in 2005.
We are not aware of any current recommendations by any regulatory authorities that, if implemented,
would have a material effect on the Corporation’s liquidity, capital resources or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
USE OF CERTAIN NON-GAAP FINANCIAL MEASURES
In addition to results presented in accordance with United States generally accepted accounting principles
(GAAP), we have presented certain non-GAAP financial measures for the year ended December 31, 2006
throughout this Form 10-K, which are reconciled to GAAP financial measures below. We believe these non-GAAP
financial measures provide information useful to investors in understanding the Corporation’s performance trends
and facilitate comparisons with its peers. Specifically, we believe the exclusion of a significant recovery of income
recognized in a single accounting period permits a comparison of results for ongoing business operations, and it is
on this basis that we internally assess the Corporation’s performance for 2006 and establish goals for future periods.
Although we believe the non-GAAP financial measures presented in this Form 10-K enhance investors’
understandings of the Corporation’s performance, these non-GAAP financial measures should not be considered a
substitute for GAAP financial measures.
47
Reconciliation of Certain Non-GAAP Financial Measures
(Dollars in thousands, except for per share data)
Net Income and Earnings Per Share
Net income (GAAP)
Nonaccrual and default interest attributable to loan
transaction, net of income taxes (GAAP)
Reduction in loan loss allowance attributable to loan
transaction, net of income taxes (GAAP)
Net income, excluding nonaccrual and default interest
and reduction in loan loss allowance attributable
to loan transaction
Weighted average shares – assuming dilution (GAAP)
Weighted average shares – basic (GAAP)
Earnings per share – assuming dilution
GAAP
Excluding nonaccrual and default interest and
reduction in loan loss allowance attributable to
loan transaction
Earnings per share – basic
GAAP
Excluding nonaccrual and default interest and
reduction in loan loss allowance attributable to
*
A
B
C
D
For the Year Ended December 31,
2006
2005
$12,129
$11,788
(565)
(163)
$11,401
3,273
3,152
--
--
$11,788
3,508
3,375
A/C
$3.71
$3.36
B/C
A/D
$3.48
$3.85
$3.36
$3.49
loan transaction
B/D
$3.62
$3.49
Return on Average Assets
Average assets (GAAP)
Return on average assets
GAAP
Excluding nonaccrual and default interest and
reduction in loan loss allowance attributable to
E
$694,315
$646,590
A/E
1.75%
1.82%
loan transaction
B/E
1.64%
1.82%
Return on Average Equity
Average equity (GAAP)
Return on average equity
GAAP
Excluding nonaccrual and default interest and
reduction in loan loss allowance attributable to
F
$63,949
$66,594
A/F
18.97%
17.70%
loan transaction
B/F
17.83%
17.70%
Retail Banking Segment Net Income
Pretax income (GAAP)
Nonaccrual and default interest attributable to loan
transaction, net of income taxes (GAAP)
Reduction in loan loss allowance attributable to loan
transaction, net of income taxes (GAAP)
Pretax income, excluding nonaccrual and default interest
and reduction in loan loss allowance attributable
$8,731
$8,124
(870)
(250)
--
--
to loan transaction
$7,611
$8,124
48
Reconciliation of Certain Non-GAAP Financial Measures (Continued)
(Dollars in thousands, except for per share data)
Net Interest Income and Net Interest Margin
Net interest income (GAAP)
Taxable-equivalent adjustment
Taxable-equivalent net interest income (GAAP)
Nonaccrual and default interest attributable to loan
transaction (GAAP)
Taxable-equivalent net interest income, excluding
nonaccrual and default interest attributable to loan
transaction
Average interest-earning assets (GAAP)
Net interest margin (GAAP)
Net interest margin, excluding nonaccrual and default
Interest attributable to loan transaction
For the Year Ended December 31,
*
2006
2005
$40,125
1,357
41,482
$36,773
1,418
38,191
(870)
--
$40,612
$38,191
$632,069
6.56%
$593,696
6.43%
6.43%
6.43%
G
H
I
G/I
H/I
* The letters included in this column are provided to show how the various ratios presented in the Reconciliation of Certain
Non-GAAP Financial Measures are calculated.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation’s primary component of market risk is interest rate volatility. Fluctuations in interest rates
will impact the amount of interest income and expense the Corporation receives or pays on almost all of its assets
and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those
which have a very short term until maturity. The Corporation does not subject itself to foreign currency exchange
rate risk or commodity price risk due to the current nature of its operations. The Corporation did not have any
outstanding hedging transactions, such as interest rate swaps, floors or caps, at December 31, 2006.
The primary objective of the Corporation’s asset/liability management process is to maximize current and
future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital
requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate. Thus
the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest
income is maximized while risk is maintained at an acceptable level.
The Corporation assumes interest rate risk as a result of its normal operations. The fair values of the
Corporation’s financial instruments will change when interest rates 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 minimize 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.
49
We use simulation analysis to assess earnings at risk and economic value of equity (EVE) analysis to assess
economic value at risk. These methods allow management to regularly monitor both the direction and magnitude
of the Corporation’s interest rate risk exposure. These modeling techniques involve assumptions and estimates that
inherently cannot be measured with complete precision. Key assumptions in the analyses include maturity and
repricing characteristics of both assets and liabilities, prepayments on amortizing assets, other embedded options,
non-maturity deposit sensitivity and loan and deposit pricing. These assumptions are inherently uncertain due to
the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies,
among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of the
Corporation’s interest rate risk position over time.
Simulation analysis evaluates the potential effect of upward and downward changes in market interest
rates on future net interest income. The analysis involves changing the interest rates used in determining net
interest income over the next twelve months. The resulting percentage change in net interest income in various rate
scenarios is an indication of the Corporation’s shorter-term interest rate risk. The analysis utilizes a “static” balance
sheet approach, which assumes changes in interest rates without any management response to change the
composition of the balance sheet. The measurement date balance sheet composition is maintained over the
simulation time period with maturing and repayment dollars being rolled back into like instruments for new terms
at current market rates. Additional assumptions are applied to modify volumes and pricing under the various rate
scenarios. These include prepayment assumptions on mortgage assets, the sensitivity of non-maturity deposit rates,
and other factors that management deems significant.
The simulation analysis results are presented in the table below. These results, based on a measurement
date balance sheet as of December 31, 2006, indicate that the Corporation would expect net interest income to
increase over the next twelve months by .10 percent assuming an immediate downward shift in market interest
rates of 200 basis points (BP) and to decrease by 2.20 percent if rates shifted upward in the same manner.
1-Year Net Interest Income Simulation (dollars in thousands)
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Hypothetical Change in Net
Interest Income for the Year Ended
December 31, 2007
Dollars
$ 43
(977)
Percentage
0.10%
(2.20)
The EVE analysis provides information on the risk inherent in the balance sheet that might not be taken into
account in the simulation analysis due to the shorter time horizon used in that analysis. The EVE of the balance
sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of
the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected
cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate
scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.
50
The EVE analysis results are presented in the table below. These results as of December 31, 2006 indicate
that the EVE would increase 1.25 percent assuming an immediate downward shift in market interest rates of 200 BP
and would decrease 5.96 percent if rates shifted upward in the same manner.
Static EVE Change (dollars in thousands)
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Hypothetical Change in EVE
Dollars
Percentage
$ 1,314
(6,255)
1.25%
(5.96)
At our Mortgage Company, 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.
We believe that our current interest rate exposure is manageable and does not indicate any significant
exposure to interest rate changes.
51
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(Dollars 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
$66,407 and $64,021, respectively
Loans held for sale, net
Loans, net of allowance for loan losses of $14,216 and $13,064,
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,
3,182,411 and 3,140,868 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.
52
December 31,
2006
2005
$ 11,496
17,010
28,506
67,584
53,504
517,843
2,093
33,189
4,432
10,724
16,593
$ 734,468
$ 90,260
188,450
254,125
532,835
12,462
92,284
10,310
1,915
16,656
666,462
—
—
3,159
324
64,402
121
68,006
$734,468
$ 13,316
29,562
42,878
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
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,
2006
2005
2004
$ 55,112
454
$45,035
523
$37,120
528
255
2,335
426
58,582
2,287
3,176
5,690
6,640
664
18,457
40,125
4,625
35,500
17,098
3,471
5,101
105
1,612
27,387
29,007
5,087
11,234
45,328
17,559
5,430
$ 12,129
$ 3.85
$ 3.71
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
See notes to consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Balance December 31, 2003
Purchase 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
Purchase 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
Purchase of common stock
Stock options exercised
Stock-based compensation
Comprehensive income
Net income
Other comprehensive income, net of tax
Unrealized holding losses arising
during the period net of tax benefit of
$36
Comprehensive income
Adjustment to initially apply SFAS 158, net of tax
benefit of $346
Cash dividends ($1.16 per share)
Balance December 31, 2006
Common
Stock
$3,612
(89)
16
Additional
Paid-In
Capital
$ 1,010
(1,172)
242
Comprehensive
Income
Retained
Earnings
$58,487
(2,160)
$11,198
11,198
Accumulated
Other
Comprehensive
Income
$2,275
Total
$65,384
(3,421)
258
11,198
(318)
$10,880
(318)
(318)
3,539
(427)
29
80
(371)
474
(3,202)
64,323
(16,842)
1,957
$11,788
11,788
(3,202)
69,899
(17,640)
503
11,788
(1,125)
$10,663
(1,125)
(1,125)
3,141
(14)
32
183
(504)
548
97
(3,339)
55,930
832
$12,129
12,129
(3,339)
60,086
(518)
580
97
12,129
(67)
$12,062
(67)
(67)
$3,159
$ 324
(3,657)
$64,402
(644)
$ 121
(644)
(3,657)
$68,006
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 on securities
2006
$ 1
68
$ (67)
2005
$(1,057)
68
$(1,125)
2004
$(273)
45
$(318)
See notes to consolidated financial statements.
54
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2005
2004
2006
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
Stock-based compensation
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 in borrowings
Issuance of trust preferred capital notes
Purchase of common stock
Proceeds from exercise of stock options
Cash dividends
Net cash provided by financing activities
Net decrease 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.
55
$ 12,129 $ 11,788
$ 11,198
2,007
(970)
4,625
97
1,549
(1,115)
5,520
—
35
(105)
(944,300)
930,473
12
(105)
(1,058,804)
1,067,693
(768)
(2,580)
609
3,843
5,095
(623)
2,393
692
(377)
28,623
7,671
(9,987)
(5,932)
5,715
—
(57,429)
(6,120)
71
(66,011)
11,990
(6,142)
(3,234)
3,388
(310)
(76,088)
(12,461)
69
(82,788)
4,565
32,832
12,742
--
(518)
580
(3,657)
46,544
(14,372)
42,878
9,516
38,788
13,719
10,310
(17,640)
503
(3,339)
51,857
(2,308)
45,186
$ 28,506 $ 42,878
1,446
(1,373)
4,026
—
151
(69)
(912,657)
893,824
(451)
(2,380)
31
979
(5,275)
48,411
(18,719)
(638)
680
—
(48,327)
(4,408)
25
(22,976)
23,214
(3,715)
10,552
—
(3,421)
258
(3,202)
23,686
(4,565)
49,751
$ 45,186
$ 17,848 $ 11,305
6,653
5,935
$ 7,518
5,798
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, Foundation Home Mortgage 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 throughout Virginia and
in portions of Tennessee, Maryland, North Carolina, Ohio, Kentucky and West Virginia. 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 projected 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 to any one 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
56
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. Substantially
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
57
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.
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.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and
132(R). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income. The funded status of a
benefit plan will be measured as the difference between plan assets at fair value and the benefit obligation. For a
58
pension plan, the benefit obligation is the projected benefit obligation. For any other postretirement plan, the
benefit obligation is the accumulated postretirement benefit obligation. SFAS 158 also requires an employer to
measure the funded status of a plan as of the date of its year-end statement of financial position. SFAS 158 also
requires additional disclosure in the notes to financial statements about certain effects on net periodic benefit cost
for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation. The Corporation is required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employers’
fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.
The Corporation’s wholly-owned subsidiary, Citizens and Farmers Bank, has a non-contributory, defined benefit
pension plan, which is subject to the provisions of SFAS 158. A valuation of the Bank’s plan was performed as of
October 1, 2006 and it was determined that the plan was underfunded. As a result, the Bank made a $1.18 million
contribution to the plan, which fully funded the plan’s projected benefit obligation as of the valuation date. Further,
in connection with the implementation of SFAS 158, the Corporation recognized $644,000 as a component of
accumulated other comprehensive income.
Stock Compensation Plans: At December 31, 2006, the Corporation has three stock-based compensation plans,
which are described more fully in Note 12. Effective January 1, 2006, the Corporation adopted the provisions of
SFAS No. 123(R), Share-Based Payment, which requires that the Corporation recognize expense related to the fair
value of share-based compensation awards in net income.
Prior to January 1, 2006, the Corporation accounted for its share-based compensation plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, stock compensation expense was not recognized in net income because all options
granted under these plans had an exercise price equal to the fair market value of the underlying common stock on
the date of grant. However, notes to prior financial statements included pro forma disclosures of the effect on net
income and earnings per share as if the Corporation had applied the fair value recognition provision of SFAS No.
123, Accounting for Stock-Based Compensation, to share-based compensation. The following table presents the pro
forma disclosures for the years ended December 31, 2005 and 2004.
(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,
2005
2004
$11,788
$11,198
(2,305)
$ 9,483
$ 3.49
$ 2.81
$ 3.36
$ 2.70
(605)
$10,593
$ 3.14
$ 2.97
$ 3.00
$ 2.84
The Corporation has elected to follow the modified prospective transition method allowed by SFAS 123(R). Under
the modified prospective transition method, compensation expense is recognized prospectively for all unvested
options outstanding at January 1, 2006 and for all awards modified or granted after that date. On December 20,
2005, the Corporation accelerated the vesting of all unvested stock options outstanding under the Corporation’s
three share-based compensation plans. The board of directors accelerated the vesting of these options in order to
eliminate the Corporation’s recognition of compensation expense associated with these options under the SFAS
123(R) modified prospective transition method. Because there were no unvested options outstanding at January 1,
2006, no share-based compensation expense has been recognized in 2006 for options granted prior to January 1,
2006.
59
Compensation expense for grants of restricted shares is accounted for using the fair market value of the
Corporation’s common stock on the date the restricted shares are awarded. Compensation expense for grants of
stock options is accounted for using the Black-Scholes option-pricing model. Compensation expense for restricted
shares and stock options is charged to income ratably over the vesting period. Compensation expense for the year
ended December 31, 2006 included $97,000 ($60,000 after tax) for options and restricted stock granted during 2006.
As of December 31, 2006, there was $929,000 of total unrecognized compensation expense related to unvested stock
options and restricted stock that will be recognized over the remaining vesting periods. SFAS 123(R) requires the
Corporation to estimate forfeitures when recognizing compensation expense and that this estimate of forfeitures be
adjusted over the requisite service period or vesting schedule based on the extent to which actual forfeitures differ
from such estimates. Changes in estimated forfeitures in future periods, if any, will be recognized through a
cumulative catch-up adjustment in the period of change, which will impact the amount of estimated unamortized
compensation expense to be recognized in future periods.
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 to outstanding stock options and unvested restricted
shares 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 2006, the Corporation purchased 13,257 shares of its common stock in open-market
transactions. Purchases of 135 shares at prices between $39.50 and $39.99 per share were made in accordance with a
board-approved stock purchase program, which will expire in November 2007. Purchases of 13,122 shares at prices
between $37.75 and $40.00 per share were made in accordance with a board-approved stock purchase program,
which expired in November 2006.
On July 27, 2005, the Corporation completed a tender offer and purchased 427,186 shares of its common stock at $41
per share. The total cost of the share purchase, including transaction costs, approximated $17.64 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 purchase. In December 2005, the Corporation purchased 100
shares in an open-market transaction at $37.27 per share under the previously-mentioned stock purchase program.
During 2004, the Corporation purchased 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 purchases in 2004
were made in accordance with a board-approved stock purchase program, which expired in January 2005.
Recent Accounting Pronouncements:
In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No.
108. SAB 108 expresses the SEC staff’s views regarding the process of quantifying financial statement
misstatements. SAB 108 expresses the SEC staff’s view that a registrant’s materiality evaluation of an identified
unadjusted error should quantify the effects of the error on each financial statement and related financial statement
disclosures and that prior year misstatements should be considered in quantifying misstatements in current year
financial statements. SAB 108 also states that correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. Such correction may be made the next time the registrant files
the prior year financial statements. The cumulative effect of the initial application should be reported in the
carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should
be made to the opening balance of retained earnings for that year. Registrants should disclose the nature and
60
amount of each individual error being corrected in the cumulative adjustment. The SEC staff encourages early
application of the guidance in SAB 108 for interim periods of the first fiscal year ending after November 15, 2006.
The implementation of SAB 108 did not have a material effect on the Corporation’s financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment
of FASB Statements No. 133 and 140. SFAS 155 permits fair value measurement of any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation. SFAS 155 also clarifies which
interest-only strips and principal-only strips are not subject to the requirements of SFAS 133. It establishes a
requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives
or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 also
clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 is
effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins
after September 15, 2006. The Corporation does not expect the implementation of SFAS 155 to have a material effect
on its financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB
Statement No. 140. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into certain servicing contracts. SFAS 156 also
requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if
practicable. SFAS 156 permits an entity to choose between the amortization and fair value methods for subsequent
measurements. At initial adoption, SFAS 156 permits a one-time reclassification of available for sale securities to
trading securities by entities with recognized servicing rights. SFAS 156 also requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position
and additional disclosures for all separately recognized servicing assets and servicing liabilities. This Statement is
effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Corporation
does not expect the implementation of SFAS 156 to have a material effect on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but may
change current practice for some entities. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Corporation does not expect the implementation of SFAS 157 to have a
material effect on its financial statements.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of
FASB Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and
measurement principles for the financial statement recognition and measurement of tax positions taken or expected
to be taken on a tax return that are not certain to be realized. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Corporation does not expect the implementation of FIN 48 to have a material effect on its
financial statements.
In September 2006, the Emerging Issues Task Force issued EITF 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 concludes that for a
split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for
future benefits in accordance with SFAS 106 (if, in substance, a postretirement benefit plan exits) or APB Opinion
No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive
agreement with the employee. The consensus is effective for fiscal years beginning after December 15, 2007. The
Corporation is currently evaluating the effect that EITF No. 06-4 will have on its financial statements when
implemented.
In September 2006, the Emerging Issues Task Force issued EITF 06-5, Accounting for Purchases of Life Insurance-
Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4. This consensus
concludes that a policyholder should consider any additional amounts included in the contractual terms of the
insurance policy other than the cash surrender value in determining the amount that could be realized under the
61
insurance contract. A consensus also was reached that a policyholder should determine the amount that could be
realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or
certificate by certificate in a group policy). The consensuses are effective for fiscal years beginning after December
15, 2006. The Corporation is currently evaluating the effect that EITF No. 06-5 will have on its financial statements
when implemented.
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
December 31, 2006
Gross
Unrealized
Losses
Gross
Unrealized
Gains
$ 3
6
1,165
219
$1,393
$ (94)
(34)
(59)
(29)
$(216)
Amortized
Cost
$ 6,313
2,236
53,921
3,937
$66,407
Estimated
Fair Value
$ 6,222
2,208
55,027
4,127
$67,584
Gross
Unrealized
Gains
December 31, 2005
Gross
Unrealized
Losses
$ (120)
(37)
(58)
(223)
$(438)
$ 3
11
1,453
251
$1,718
Amortized
Cost
$ 6,235
2,588
51,129
4,069
$64,021
Estimated
Fair Value
$ 6,118
2,562
52,524
4,097
$65,301
The amortized cost and estimated fair value of securities at December 31, 2006, 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, 2006
Amortized
Cost
$ 1,749
21,199
26,460
13,062
3,937
$ 66,407
Estimated
Fair Value
$ 1,735
21,276
27,071
13,375
4,127
$67,584
Proceeds from the maturities and calls of securities available for sale in 2006 were $7.67 million, resulting in gross
realized gains of $105,000. Securities with an aggregate amortized cost of $40.47 million and an aggregate fair value
of $41.27 million were pledged at December 31, 2006 to secure public deposits, Federal Reserve Bank treasury, tax
and loan deposits and repurchase agreements.
62
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. 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.
Securities in an unrealized loss position at December 31, 2006, 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
$ 476
1,246
2,284
4,006
585
$ 2
33
10
45
10
$ 4,654
427
4,530
9,611
1,178
$ 92
1
49
142
19
$ 5,130
1,673
6,814
13,617
1,763
securities
$4,591
$55
$10,789
$161
$15,380
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 33 securities totaling $13.62 million in the Corporation’s debt
securites portfolio considered temporarily impaired at December 31, 2006. 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, 2006. The temporary
impairments in the Corporation’s investment in preferred stock have declined to $29,000 at December 31, 2006 from
$223,000 at December 31, 2005. The primary cause of the temporary impairment in the Corporation’s investment in
preferred stock at December 31, 2005 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. The fair value of the Corporation’s
investment in this company recovered almost entirely during 2006.
Securities in an unrealized loss position at December 31, 2005, 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)
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
$ 94
34
59
187
29
$216
$120
37
58
215
223
$438
securities
$9,151
$296
$5,745
$142
$14,896
63
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,
2006
2005
$115,885
13,650
236,157
24,880
8,951
132,864
532,387
(328)
532,059
(14,216)
$ 517,843
$ 96,850
20,222
216,081
24,662
9,574
111,141
478,530
(427)
478,103
(13,064)
$465,039
Loans on nonaccrual status were $1.84 million and $5.90 million at December 31, 2006 and 2005, respectively. If
interest income had been recognized on nonaccrual loans at their stated rates during fiscal years 2006, 2005 and
2004, interest income would have increased by approximately $70,000, $270,000 and $202,000, respectively.
Accruing loans past due for 90 days or more were $1.64 million and $3.85 million at December 31, 2006 and 2005,
respectively. The balance of impaired loans at December 31, 2006 was $781,000. The most significant component of
nonaccrual and 90-day delinquent accruing loans at December 31, 2005 was one commercial relationship, which
also comprised the balance of impaired loans of $4.22 million at December 31, 2005 and for which a specific
valuation allowance of $865,000 was provided. In May 2006, the borrowers sold the real estate collateral for these
loans and paid the loans in full from the sale proceeds. The average balances of impaired loans for 2006, 2005 and
2004 were $2.24 million, $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,
2005
2004
2006
$13,064
4,625
(5,093)
1,620
$14,216
$11,144
5,520
(4,985)
1,385
$13,064
$ 8,657
4,026
(2,695)
1,156
$11,144
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
64
December 31,
2006
2005
$ 6,776
25,642
18,641
51,059
(17,870)
$33,189
$ 6,776
21,764
16,705
45,245
(16,098)
$ 29,147
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,
2006
2005
$ 95,180
158,945
$254,125
$ 72,572
148,721
$221,293
Remaining maturities on time deposits at December 31, 2006 are as follows (dollars in thousands):
2007
2008
2009
2010
2011
Thereafter
NOTE 7: Borrowings
$220,194
18,474
6,612
5,455
2,935
455
$254,125
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 $5.46 million on December 31, 2006 and $6.53 million on December 31, 2005. Short-term
borrowings also include a variable-rate, unsecured line of credit with a third-party lender that matures in June 2007.
The balance outstanding under this line of credit was $7.00 million on December 31, 2006 and 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, 2006
or December 31, 2005.
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,
2006
2005
$12,462
$42,165
$25,236
4.80%
4.56%
$12,462
$ 13,529
$ 63,455
$ 20,924
2.68%
3.39%
$ 13,529
Long-term borrowings at December 31, 2006 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, 2006 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 175 basis points, and the outstanding balance
as of December 31, 2006 was $77.28 million, which matures in 2010. C&F Finance’s revolving bank line of credit
agreement contains covenants 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 2006.
65
The contractual maturities of long-term borrowings, excluding call provisions, at December 31, 2006 are as follows:
(Dollars in thousands)
2007
2008
2009
2010
2011
Thereafter
Fixed Rate
$ --
--
--
--
--
15,000
$15,000
Floating Rate
$ --
--
--
77,284
--
--
$77,284
Total
$ --
--
--
77,284
--
15,000
$92,284
The Corporation’s unused lines of credit for future borrowings total approximately $153.10 million at December 31,
2006, which consists of $116.38 million available from the FHLB, $22.72 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 purchase 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 6.93% at December 31, 2006. 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-based awards
Weighted average number of common shares used in earnings per
common share—assuming dilution
December 31,
2005
2004
2006
$12,129
$11,788
$11,198
3,151,860
3,375,153
3,567,284
121,569
132,759
161,844
3,273,429
3,507,912
3,729,128
Options on approximately 133,000, 157,000 and 79,000 shares were not included in computing diluted earnings per
common share for the years ended December 31, 2006, 2005 and 2004, respectively, because they were anti-dilutive.
66
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,
2006
2005
$6,400
(970)
$5,430
$ 6,296
(1,115)
$ 5,181
$ 6,379
(1,373)
$ 5,006
2004
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%
2005
2004
2006
$5,671
$5,939
$6,146
(876)
(5.0)
(888)
(5.2)
(910)
(5.6)
84
302
.5
1.7
(48)
(98)
(80)
$5,430
(.3)
(.6)
(.4)
30.9%
59
339
(75)
(74)
(119)
$5,181
.3
2.0
(.5)
(.4)
(.7)
30.5%
41
347
.3
2.1
(80)
--
(63)
$5,006
(.5)
--
(.4)
30.9%
Other assets include net deferred income taxes of $5.57 million and $4.56 million at December 31, 2006 and 2005,
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,
2005
2006
$5,409
1,367
28
272
7,076
(63)
--
(952)
(79)
(412)
(1,506)
$5,570
$ 4,618
1,214
97
194
6,123
(222)
(183)
(643)
(63)
(448)
(1,559)
$ 4,564
67
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 $564,000, $515,000 and $372,000 in 2006, 2005 and 2004, 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 $211,000, $101,000 and $455,000 for 2006, 2005 and 2004, 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 amounts charged to expense
under this plan were $99,000 in 2006 and $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 in 2004.
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 these plans were $683,000, $586,000 and
$392,000 in 2006, 2005 and 2004, respectively. In accordance with employment agreements for certain senior officers
of C&F Mortgage, performance bonuses of $1.08 million, $1.46 million and $1.37 million were expensed in 2006,
2005 and 2004, 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 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
$79,000, $62,000 and $58,000 in 2006, 2005 and 2004, 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.
68
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. The following table summarizes the projected benefit obligations, plan
assets, funded status and rate assumptions associated with the Bank’s pension plan based upon actuarial valuations
prepared as of October 1, 2006 and 2005.
(Dollars in thousands)
Change in benefit obligation
Projected benefit obligation, beginning
Service cost
Interest cost
Plan Year Ended September 30,
2006
2005
$6,029
752
345
(460)
(228)
$6,438
$4,925
550
294
306
(46)
$6,029
Actuarial (loss) gain
Benefits paid
Projected benefit obligation, ending
Change in plan assets
Fair value of plan assets, beginning
Actual return on plan assets
Employer contributions(1)
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
Amounts recognized in accumulated other comprehensive income
Net loss
Net obligation at transition
Prior service cost
Total recognized in accumulated other comprehensive income
Weighted-average assumptions for benefit obligation as of October 1
Discount rate
Expected return on plan assets
Rate of compensation increase
(1) Employer contributions of $1.18 million and $28,000 were made in December 2006 and 2005, respectively, and were based on amounts
$5,084
400
1,182
(228)
$6,438
$ --
--
--
--
$ --
$ 932
(27)
85
$ 990
$4,549
553
28
(46)
$5,084
$ (945)
1,409
(32)
92
$ 524
N/A
N/A
N/A
N/A
6.0%
8.5
4.0
5.8%
8.5
4.0
determined in conjunction with the actuarial valuations prepared as of October 1, 2006 and 2005.
The accumulated benefit obligation was $4.20 million and $3.87 million as of the actuarial valuation dates of
October 1, 2006 and 2005, respectively.
69
(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
Other changes in plan assets and benefit obligations recognized in other
comprehensive income
Net loss
Net obligation at transition
Prior service cost
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
Year Ended December 31,
2006
2004
2005
$ 752
345
(428)
7
(5)
45
716
932
(27)
85
990
$1,706
$ 550
294
(346)
7
(5)
45
545
--
--
--
--
$ 545
$ 422
255
(233)
7
(6)
36
481
--
--
--
--
$ 481
The estimated net loss, net obligation at transition and prior service cost that will be amortized from (accreted to)
accumulated other comprehensive income into net periodic benefit cost over the next year are $16,000, ($5,000) and
$7,000, respectively.
Weighted-average assumptions for net periodic benefit cost as of
October 1 (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
October 1 valuation date of the prior year.
5.8%
8.5
4.0
6.0%
8.5
4.0
6.5%
8.5
4.0
The Corporation adopted the recognition provisions of SFAS 158 in its December 31, 2006 financial statements. The
following table illustrates the incremental effect of applying SFAS 158 on individual line items in the Corporation’s
financial statements.
(Dollars in thousands)
Prepaid pension
Deferred income taxes
Total assets
Accumulated other comprehensive income
Total shareholders’ equity
Before
Application of
SFAS 158
$ 990
5,224
735,112
765
68,650
Adjustments
$(990)
346
(644)
(644)
(644)
After
Application of
SFAS 158
$ -
5,570
734,468
121
68,006
70
The benefits expected to be paid by the plan in the next ten years are as follows (dollars in thousands):
2007
2008
2009
2010
2011
2012 – 2016
$ 60
75
103
111
146
1,600
$2,095
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
Cash and equivalents
2006
30%
56
14
100%
2005
34%
66
-
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 $1.22 million and $1.23 million at December 31, 2006
and 2005, respectively. New advances to directors and officers totaled $483,000 and repayments totaled $489,000 in
the year ended December 31, 2006. These loans were 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.
71
NOTE 12: Share-Based Plans
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 and/or grants of restricted shares of
common stock may be awarded 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. Restricted shares are accounted for using
the fair market value of the Corporation’s common stock on the date the restricted shares are awarded. 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 and because no options were
granted under the 2004 Plan in 2006, all options outstanding under the 2004 Plan on December 31, 2006 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, 2006 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 awarded 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, 2006, except for those granted in 2006, 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 and because no options were
granted under the Regional Director Plan in 2006, all options outstanding under the Regional Director Plan on
December 31, 2006 are exercisable. All options expire ten years from the grant date.
Stock option transactions under the various plans for the periods indicated were as follows:
(Dollars in thousands, except for per share amounts)
Outstanding at beginning of year
Granted
Exercised
Canceled
Outstanding at end of year
*Weighted average
2006
Intrinsic
Exercise
Value
Price*
Shares
2005
Exercise
Price*
Shares
2004
Exercise
Price*
Shares
564,067
13,500
(32,000)
(15,400)
530,167
$30.65
39.60
16.46
37.13
$31.54
$4,511
473,667
137,900
(29,600)
(17,900)
564,067
$27.58
37.72
15.35
29.29
406,368
114,800
(15,033)
(32,468)
$30.65
473,667
$23.62
39.04
15.32
24.17
$27.58
Options exercisable at year-end
Weighted-average fair value of options granted
516,667
$4,509
564,067
147,417
during the year
$10.10
$8.96
$9.72
The total intrinsic value of in-the-money options exercised in 2006 was $737,000. Cash received from option
exercises during 2006 was $527,000. The Corporation has a policy of issuing new shares to satisfy the exercise of
stock options.
72
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 (years)
Expected volatility
Risk-free interest rate
Year Ended December 31,
2005
2004
3.4%
8.0
8
25.0%
4.5%
2.9%
7.1%
8
25.0%
4.2%
2006
2.9%
5.0
8
25.0%
5.2%
The dividend yield and growth rate assumptions are based on the Corporation’s history and expectation of
dividend payouts. The expected life is based on historical exercise experience. The expected volatility is based on
historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the
U.S. Treasury yield curve in effect at the time of grant.
The following table summarizes information about stock options outstanding at December 31, 2006:
Options Outstanding
Options Exercisable
Number
Outstanding at
Remaining
December 31,
Contractual
Exercise
2006
7,200
194,017
250,400
78,550
530,167
Life
1.0
4.4
8.5
6.9
6.7
Price*
$12.50
19.27
38.38
41.80
$31.54
Number
Exercisable at
December 31,
2006
7,200
194,017
236,900
78,550
516,667
Exercise
Price
$12.50
19.27
38.31
41.80
$31.33
Range of Exercise Prices
$12.50
$15.75 to $23.49
$35.20 to $39.60
$40.50 to $46.20
$12.50 to $46.20
*Weighted average
As permitted under the 2004 Plan, the Corporation awarded 22,800 shares of restricted stock to employees on
December 19, 2006. These restricted shares are subject to a five-year vesting period. Compensation is accounted for
using the fair market value of the Corporation’s common stock on the date the restricted shares are awarded, which
was $39.01 per share for restricted stock issued in 2006. Compensation expense is charged to income ratably over
the vesting period.
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 to risk-weighted
73
assets and of Tier I capital to average assets (all 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, amounts resulting from the adoption and application of SFAS 158 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 $592.67 million and
$587.40 million, respectively, at December 31, 2006 and $533.84 million and $528.64 million, respectively, at
December 31, 2005. Management believes, as of December 31, 2006, that the Corporation and the Bank met all
capital adequacy requirements to which they are subject.
As of December 31, 2006, the most recent notification from the Federal Deposit Insurance Corporation (FDIC)
categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table below. There are no conditions or events since that notification that
management believes have changed the Bank’s category.
The Corporation’s and the Bank’s actual capital amounts and ratios are presented in the following table:
(Dollars in thousands)
As of December 31, 2006:
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, 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
Actual
Minimum Capital
Requirements
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount Ratio
Amount
Ratio
$74,646
76,571
67,161
69,144
67,161
69,144
$65,295
67,144
58,531
60,463
58,531
60,463
12.6%
13.0
11.3
11.8
9.6
9.9
12.2%
12.7
11.0
11.4
8.9
9.3
$47,413
46,992
23,707
23,496
28,123
27,918
$42,707
42,291
21,354
21,146
26,270
26,025
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
$58,740
N/A
10.0%
N/A
35,244
N/A
34,897
N/A
6.0
N/A
5.0
N/A N/A
10.0%
$52,864
N/A N/A
6.0
31,718
N/A N/A
5.0
32,531
The capital ratios presented above for the Corporation include the effect of the Corporation’s purchase 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 purchase. 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
74
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.
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
$93.26 million and $97.85 million at December 31, 2006 and 2005, respectively.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts
represent credit risk, was $8.79 million and $9.74 million at December 31, 2006 and 2005, respectively.
At December 31, 2006, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to
approximately $23.77 million and loans held for sale of $53.50 million. C&F Mortgage has entered into
corresponding commitments with third party investors to sell loans of approximately $77.27 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 $911,000, $786,000 and $649,000, for the years ended December 31, 2006,
2005 and 2004, respectively.
75
Future minimum lease payments due under these leases as of December 31, 2006 are as follows (dollars in thousands):
2007
2008
2009
2010
2011
Thereafter
$ 877
602
292
196
198
--
$2,165
As of December 31, 2006, the Corporation had $22.63 million in deposits in financial institutions in excess of
amounts insured by the FDIC, the majority of which was on deposit at the FHLB.
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.
76
(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
December 31,
2006
2005
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
$ 28,506
67,584
517,843
53,504
4,432
278,710
254,125
115,056
1,915
8,794
93,263
$ 28,506 $ 42,878
65,301
465,039
39,677
3,664
67,584
517,000
54,913
4,432
277,310
255,360
113,869
1,915
274,145
221,293
102,314
1,306
$ 42,878
65,301
468,458
41,277
3,664
273,157
221,479
100,898
1,306
—
9,744
— 97,853
—
—
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.”
77
(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, 2006
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 37,743
—
5,169
42,912
13,520
13,001
7,660
34,181
$ 8,731
$591,573
$ —
$ 5,485
$ 2,737
17,149
3,678
23,564
1,428
12,137
6,221
19,786
$ 3,778
$ 60,022
$ —
$ 425
$ 21,384
—
539
21,923
$ —
—
903
903
$ (3,282)
(51)
—
(3,333)
$ 58,582
17,098
10,289
85,969
6,849
3,146
6,924
16,919
—
668
141
809
$ 5,004 $ 94
$ 140,024 $ 51
$ 10,724 $ —
$ 207 $ 3
(3,340)
55
—
(3,285)
$ (48)
$(57,202)
$ —
$ —
18,457
29,007
20,946
68,410
$ 17,559
$734,468
$ 10,724
$ 6,120
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
78
(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
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.
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
December 31,
2006
2005
$ 122
4,127
1,343
79,865
$85,457
$ 7,000
10,310
141
68,006
$85,457
$ 247
4,097
1,156
72,000
$77,500
$ 7,000
10,310
104
60,086
$77,500
79
Year Ended December 31,
2005
2004
2006
$ 194
—
(1,106)
4,038
8,681
518
(196)
$12,129
$ 306
27
(448)
2,492
9,354
227
(170)
$11,788
$ 325
29
—
5,590
5,367
23
(136)
$11,198
Year Ended December 31,
2005
2004
2006
$12,129
$11,788
$11,198
(8,681)
97
(19)
(187)
(21)
3,318
152
—
—
152
—
—
(518)
(3,657)
580
(3,595)
(125)
247
$ 122
(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
(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
(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
Stock-based compensation
Net gain on securities
Increase 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 borrowing
Issuance of trust preferred capital notes
Purchase of common stock
Cash dividends
Proceeds from exercise of stock options
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash at beginning of year
Cash at end of year
80
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
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
June 30
2006 Quarter Ended
September 30 December 31
$15,276
8,740
7,330
12,125
3,945
2,765
.84
. 31
March 31
$13,493
8,285
5,986
10,630
3,641
2,526
.77
.27
$14,763
8,793
7,189
11,434
4,548
3,112
.95
.29
$15,050
9,682
6,882
11,139
5,425
3,726
1.14
.29
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
*The total of quarterly EPS amounts differs from EPS for the years ended
December 31, 2006 and 2005 due to rounding.
NOTE 19: Subsequent Event
On February 7, 2007, the Corporation purchased 100,000 shares of its common stock for $41.25 per share. This
purchase is not reflected in 2006 results.
81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and 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, 2006 and 2005, and the related consolidated statements of income, shareholders' equity, and cash
flows for the years ended December 31, 2006, 2005 and 2004. We also have audited management's assessment,
included in the accompanying Management’s Report on Internal Control over Financial Reporting, that C&F
Financial Corporation maintained effective internal control over financial reporting as of December 31, 2006, 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
82
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, 2006 and 2005, and the results of
their operations and their cash flows for the years ended December 31, 2006, 2005 and 2004 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, management’s
assessment that C&F Financial Corporation and Subsidiary maintained effective internal control over financial
reporting as of December 31, 2006, 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, 2006, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
As described in Note 1 to the consolidated financial statements, on December 31, 2006, C&F Financial Corporation
changed its method of accounting for its pension plan to adopt FASB Statement No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.
Winchester, Virginia
February 20, 2007
83
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
Corporation’s 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, 2006. 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, 2006, the Corporation’s internal control over financial reporting
was effective based on those criteria.
Management’s assessment of the effectiveness of internal control over financial reporting as of December
31, 2006 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 82 through 83 hereof.
84
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, 2006 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 7, 2007, the Compensation Committee of the Board of Directors approved the 2007 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 2007 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 90.0 percent of his annual base salary as of January
1, 2007, and the Chief Financial Officer and the Chief Operating Officer may earn a short-term cash bonus up to 70.0
percent of their annual base salaries as of January 1, 2007. Short-term cash awards for the President of C&F
Mortgage are determined in accordance with his employment agreement and are related directly to the profitability
of C&F Mortgage.
Equity-Based Awards. If the Corporation achieves a certain level of five-year total shareholder return for
2007 in relation to a peer group of banks selected by the Compensation Committee, the Chief Executive Officer may
earn an equity-based award of 90.0 percent of his annual base salary as of January 1, 2007, and the Chief Financial
Officer and the Chief Operating Officer may earn an equity-based award of 70.0 percent of their annual base
salaries as of January 1, 2007. Equity awards for the President of C&F Mortgage are based on a recommendation by
the Chief Executive Officer based on the performance of C&F Mortgage.
The Corporation’s Management Incentive Plan was attached as Exhibit 10.8 to Form 10-K for 2005.
85
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect to the directors of the Corporation is contained on pages 3 through 4 of the
2007 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 26 of the 2007 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 after Item 4 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 including the principal executive officer, principal financial officer, principal accounting officer and
controller. 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 9 through 18 of the 2007 Proxy Statement under the captions,
“Compensation Committee Interlocks and Insider Participation,” “Executive Compensation” and “Compensation
Committee Report” is incorporated herein by reference. The information regarding director compensation
contained on pages 7 through 8 of the 2007 Proxy Statement under the caption, “Director Compensation,” is
incorporated herein by reference.
86
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained on pages 2 through 3 of the 2007 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, 2006 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)
520,000
10,167
530,167
(b)
$31.61
$27.83
$31.54
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
307,550 (3)
13,000 (4)
320,550
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 (1) the C&F Financial Corporation 2004 Incentive Stock Plan (2004 Incentive Plan), (2) the
Amended and Restated C&F Financial Corporation 1994 Incentive Stock Plan, which expired on April 30, 2004, and (3)
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 271,300 shares available to be granted in the form of options, stock appreciation rights or restricted stock
under the 2004 Incentive Plan and 36,250 shares available to be granted in the form of options under the Director Plan.
Includes 13,000 shares available to be granted in the form of options under the Regional Director Plan.
87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information contained on pages 8 through 9 of the 2007 Proxy Statement under the caption, “Interest of
Management in Certain Transactions,” is incorporated herein by reference. The information contained on pages 4
through 5 of the 2007 Proxy Statement under the caption, “Director Independence,” is incorporated herein by
reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained on pages 25 through 26 of the 2007 Proxy Statement under the captions,
“Principal Accountant Fees” and “Audit Committee Pre-Approval Policy,” is incorporated herein by reference.
88
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
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 VBA Executive’s Deferred Compensation Plan for C&F Financial Corporation (incorporated
by reference to Exhibit 10.3 to Form 10-K filed March 15, 2002)
*10.4.1 Amendment to Adoption Agreement for the VBA Executive’s Deferred Compensation Plan
for C&F Financial Corporation dated as of December 17, 2006
*10.4.2 Amendment to Attachment to the Adoption Agreement for the VBA Executive’s Deferred
Compensation Plan for C&F Financial Corporation dated as of March 7, 2007
*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
previously amended March 6, 2006 (incorporated by reference to Exhibit 10.8 to Form 10-K
filed March 9, 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)
89
*10.11 Employment Agreement dated April 16, 2002 between C&F Mortgage Corporation and
Bryan McKernon, as amended December 19, 2006
*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
*10.16 Form of C&F Financial Corporation Restricted Stock Agreement (incorporated by reference to
Exhibit 10.16 to Form 8-K filed December 18, 2006)
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)
10.20 First Amendment to the Loan and Security Agreement by and between Wells Fargo Financial
Preferred Capital, Inc. and C&F Finance Company dated as of December 1, 2006
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
90
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 7, 2007
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 7, 2007
Date: March 7, 2007
Date: March 7, 2007
Date: March 7, 2007
Date: March 7, 2007
Date: March 7, 2007
Date: March 7, 2007
Date: March 7, 2007
91
The following graph compares the yearly cumulative total shareholder return on C&F Financial
Corporation’s (the Corporation) common stock with the yearly cumulative total shareholder return on stocks
included in (1) the NASDAQ Total Return Index, (2) the NASDAQ Bank Index and (3) the Peer Group Index
prepared by SNL Financial LC. The graph assumes $100 invested on December 31, 2001 in the Corporation, the
NASDAQ Total Return Index, the NASDAQ Bank Index and the Peer Group Index and shows the total return on
such an investment, assuming reinvestment of dividends as of December 31, 2006. The Peer Group Index is the
compilation of the total return to shareholders over the past five years of a group of 25 independent community
banks located in the southeastern states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee,
Virginia and West Virginia. This index is similar to The Carson Medlin Company’s Independent Bank Index used
in previous years. The NASDAQ Bank Index will replace the Peer Group Index in future years because the
Corporation’s performance is a reflection of operations in markets beyond the southeastern states.
There can be no assurance that the Corporation’s stock performance in the future will continue with the same
or similar trends depicted in the graph below.
C&F Financial Corporation
Total Return Performance
C&F Financial Corporation
NASDAQ Total Return Index
NASDAQ Bank Index
Peer Group Index
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
2001
2002
2003
2004
2005
2006
C&F Financial Corporation
NASDAQ Total Return Index
NASDAQ Bank Index
Peer Group Index
2001
100
100
100
100
2002
127
69
107
125
2003
208
104
142
167
2004
216
113
162
188
2005
206
116
159
191
2006
225
128
181
220
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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
802 Main Street
P.O. Box 391
West Point, VA 23181
(804) 843-2360
www.cffc.com