3600 LaGrange Parkway
Toano, Virginia 23168
757-741-2201
802 Main Street
PO Box 391
West Point, VA 23181
www.cffc.com
B U I
L D I N G
F O R
S U C
C
E
S
S
B U I
L D I N G
F O R
S U C
C
E
S
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.
C&F Financial Corporation is a one-bank holding
company providing a full range of banking services to
individuals and businesses through its subsidiaries.
C&F Bank (Citizens and Farmers Bank) offers quality
banking services to individuals and businesses through
18 retail branches located from Hampton to Richmond.
C&F Mortgage Corporation originates and sells
residential mortgages throughout Virginia, North
Carolina, Maryland, Delaware, Pennsylvania and New
Jersey. Through its subsidiaries, C&F Mortgage provides
ancillary mortgage loan production services for loan
settlement, residential appraisals and title insurance.
C&F Finance Company specializes in new and used
automobile lending in Virginia, North Carolina,
Maryland, Kentucky, Ohio and Tennessee.
C&F Investment Services, Inc. provides a full range
of securities brokerage, life and health insurance and
investment services to individuals and businesses
through the Bank’s 18 retail branch locations.
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:
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 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
C&F Annual Report 2007
C&F Annual Report 2007
In 2007, C&F Financial Corporation held its traditional place as a top performer in Virginia and National Peer
Group Comparisons, despite the slowdown in the national economy. Our return on average assets and return on
average equity, although lower than last year, exceeded that of our peers.
2007 in Review
NET INCOME
(In Thousands)
$11,198
$11,788
$12,129
$12,919
$8,480
2003
2004
2005
2006
2007
EARNINGS PER SHARE
(Assuming Dilution)
$3.42
$3.00
$3.36
$3.71
$2.68
2003
2004
2005
2006
2007
21.32%
RETURN ON AVERAGE EQUITY
16.78%
17.70%
18.97%
12.09%
11.86%
12.33%
11.93%
2003
2004
2005
2006
RETURN ON AVERAGE ASSETS
2.35%
1.91%
1.82%
1.75%
1.08%
1.07%
1.11%
1.07%
13.03%
10.28%
2007
1.13%
.96%
2003
2004
2005
2006
2007
Peer Comparison Source: Federal Financial Institutions Examination Council (FFIEC) Bank Holding
Company Performance Report – 2007 data is through 9/30.
C&F Annual Report 2007 v Page 1
Letter from the President
On behalf of the Board of Directors, I am pleased to present C&F
Financial Corporation’s 2007 Annual Report. Without question, 2007 was one
of the most difficult years for the Corporation, as well as the entire financial
services industry, especially from an earnings standpoint. I wish that I could
state that the worst is behind us, but unfortunately, I believe that 2008 will be
as challenging. Some of the causes for our decline in earnings were anticipated
due to our growth initiatives; however, many were not and they were essentially
out of our control.
Net income for 2007 was $8.5 million vs. $12.1 million earned in 2006
(2006 includes a one-time gain of $728 thousand, after taxes, in connection
with the payoff of a previously non-performing commercial loan). This result-
ed in a return on average equity of 13.03% and a return on average assets of
1.13% for 2007 compared to 18.97% and 1.75%, respectively, for 2006. Total
assets increased from $734 million at the end of 2006 to $786 million at the
end of 2007, with loans increasing by over $68 million. This loan growth was
almost evenly split between our Bank and our Finance Company. Deposits
declined from $533 million to $528 million due to several large deposit cus-
tomers making substantial withdrawals for preplanned projects, as well as our
decision to reduce funding from high-cost certificates of deposit held by
customers that had no other financial services relationship with us.
The decline in 2007 earnings was a result of several factors. First, we
opened four new branches within a 15-month period beginning in January of
2006. Typically, it takes three to five years for a de novo branch to become
profitable. In the past, we have limited our branch openings to no more than
one per year because of the overhead burden associated with each opening.
We knew that opening four branches within such a short period would impact
earnings by approximately $1 million in the first year. In addition, we knew
C&F Annual Report 2007 v Page 2
that our new operations center, which we moved into in
could not afford to make larger payments when interest rates
December of 2005, would be a strain on earnings for several
went up.
years. Given that these facilities were investments in our
future, we decided that it was prudent to accept the negative
impact on our earnings.
These events have ultimately led to the failure of many
mortgage companies and to huge write-offs for many larger
banks and Wall Street investment firms who purchased
What we did not anticipate, however, were the issues
mortgage-backed investments. This, in turn, has resulted in a
arising from subprime and alterna-
tive mortgage loan products and
the repercussions these
issues
would have on the financial mar-
kets. For the past several years, we
have been aware that the practices
of the mortgage industry regarding
subprime loans, “low-doc” loans
(where income and assets are not
verified), variable rate loans, and no
or low down payment loans were
very risky. Even though we offered
tightening of credit and a reduction
in liquidity for all the financial
markets. This is where the problems
have had an impact on C&F.
With the Federal Reserve Bank
attempting to correct the situation,
their primary tool has been to
reduce short-term interest rates.
While this may be the correct long-
term decision, it has greatly reduced
the earnings on C&F’s loan port-
folio at the Bank because approxi-
these products through our mortgage company in order to
mately half of its loans are indexed to the Prime interest rate.
be competitive with other companies, we felt the risks
When Prime drops, our interest income immediately declines.
involved were mitigated by underwriting to criteria set by
However, our source of funding for these loans, primarily
investors who commit to purchasing these loans.
deposits, does not reprice simultaneously with the decline in
The fallout from the subprime and alternative loan
issues on our company has been minimal, thus far, relative to
the considerable repercussions to the mortgage industry. It is
now evident that many mortgage loans were made to
individuals whose credit was overextended and therefore at
default risk when real estate market values declined and
interest rates rose in 2007. When home prices started
dropping, those who had borrowed 100 percent of the price,
loan interest rates. Compounding the deposit repricing dis-
parity is the fact that larger banks, who in the past have had
other sources of funds besides deposits, have not been able to
tap into those sources of liquidity and have therefore been
more aggressive in their pricing of deposit products. Because
of this increased competition, our cost of funds has been much
higher than would normally be expected and our interest
margin has declined.
or near that, saw the debt on their homes exceed what
In addition to the pressure on margins at the Bank, the
the homes were now worth. Those with variable rate loans
outlook for production over the next year at the Mortgage
C&F Annual Report 2007 v Page 3
Company is not very optimistic, even with the lower interest
Asset quality continues to be good at the Bank.
rates, because of the reduction in home prices, as well as the
Fortunately, the Bank did not make any of the types of real
reduction in the availability of subprime and alternative loan
estate loans that are plaguing the industry; therefore, our res-
products. One might think that lower prices would automat-
idential real estate portfolio is in good shape. Our commer-
ically mean more buyer demand, but with the recent drop
cial loan customers who are involved in land development
in home prices the equity in peoples’ current homes has
and home construction have experienced a slowdown in their
been greatly diminished. This
makes fewer individuals eligible to
either refinance their home or sell
it and move up. The result is fewer
eligible borrowers and thus less
loan production.
Unlike the Bank, the interest
rate on the Finance Company’s loan
portfolio is fairly stable. However, a
significant portion of their funding
is indexed to one-month LIBOR. As
businesses; however, they appear to
have the financial stability to
weather this storm. Most saw the
issues coming early enough to cut
back on their businesses. This
protects our loan portfolio, but we
are experiencing a decline in loan
demand and thus growth.
We have continued to make
enhancements to the company,
both through market expansion as
a result of the recent interest rate cuts by the Federal Reserve,
well as product offerings. At the Bank, in 2007, we opened
the Finance Company’s cost of borrowings has declined by
our Patterson Avenue office (west of Richmond) and our
virtue of a decline in LIBOR. This will result in an increase in
Chesterfield office; at the Mortgage Company, we opened
this business segment’s margins, which positively impacts
offices in Fairfax, Fishersville and Harrisonburg; at the
earnings. In addition, due to the recent expansion of our
Finance Company, we began servicing the Northern
consumer finance business into the Northern Kentucky/
Kentucky/Cincinnati, OH and Greensboro, NC markets.
Cincinnati, OH and Greensboro, NC markets, as well as
Each of these expansions is anticipated to contribute to our
higher loan production throughout the rest of the company,
profitability on a long-term basis.
loan volumes and thus interest income have increased.
At the Bank, we have continued to increase our product
The Finance Company experienced higher loan charge-offs
offerings by expanding our cash management services for our
in 2007, which in combination with loan growth, resulted in
commercial customers and enhancing our internet banking
a higher provision for loan losses. As long as their charge-offs
services. One of our new services allows our commercial
do not increase substantially, we expect their earnings to
customers to make their non-cash deposits without leaving
increase in 2008.
their office. This service, which is often referred to as “Remote
C&F Annual Report 2007 v Page 4
Deposit Capture,” gives the customer an efficient platform
Many thanks to our dedicated staff, and the direction
for making deposits throughout the day as they are not
of our Board of Directors, both through the good times and
restricted to the standard 2 o’clock p.m. cut-off time to
now these that are challenging. Without their efforts this com-
receive same-day deposit credit.
pany could not have accomplished so much over the years.
We’ve had two recent events that bring us great sadness.
We are also grateful to you for your continued confidence.
In September, Sture G. Olsson, who had served as a director
With your support and patronage, we can accomplish much.
of the company until 2000, and had given 47 years of excep-
We look forward to serving you in 2008 and the years ahead.
tional service, died suddenly. Sture was one of those individ-
uals who gave so freely of his time and resources to help not
only the companies and foundations that he was involved
with but maybe more importantly to the West Point commu-
nity that he loved so dearly. Sture was the “E. F. Hutton” of
Larry G. Dillon
Chairman, President & Chief
Executive Officer
the C&F Board; when he spoke, everyone else listened as he
had a great ability to get right to the heart of any issue. We at
C&F are truly thankful for the many years of guidance that
he gave the Company.
We also recently accepted with regret the resignation of
Thomas B. Whitmore Jr. from the Bank’s Board. Tom had
served on the Board since 1984, giving us nearly 23 years of
guidance. Tom is truly a gentleman’s gentleman and he will
be greatly missed.
We believe that 2008 will be as challenging as 2007;
however, we are focused on managing through the issues
facing each of our core business segments. We expect that
our businesses will be affected by the continued slow down in
the housing industry and the economy in general, potential
increased unemployment and its inevitable impact on credit
quality and the effect of interest rate cuts by the Federal
Reserve. Despite this, our diversified business strategy and
our strong balance sheet will allow us to continue to invest in
and grow our company.
C&F Annual Report 2007 v Page 5
Listed left to right: Joshua H. Lawson, Audrey D. Holmes, Bryan E. McKernon, Barry R. Chernack, Larry G. Dillon,
J. P. Causey Jr., Paul C. Robinson, C. Elis Olsson, William E. O’Connell Jr., James H. Hudson III (not pictured Thomas B. Whitmore Jr.)
DIRECTORS & OFFICERS
C&F FINANCIAL CORPORATION
C&F BANK
BOARD OF DIRECTORS
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
C&F Annual Report 2007 v Page 6
Thomas B. Whitmore Jr.+
Retired President
Whitmore Chevrolet, Oldsmobile,
Pontiac Co., Inc.
* C&F Financial Corporation Board Member
+ C&F Bank Board Member
SANDSTON / VARINA
ADVISORY BOARD
Robert A. Canfield
Attorney-at-Law
Canfield Baer LLP
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 BANK RICHMOND BOARD
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 MORTGAGE CORPORATION
BOARD OF DIRECTORS
J. P. Causey Jr.
Executive Vice President,
Secretary & General Counsel
Chesapeake Corporation
Larry G. Dillon
Chairman of the Board
James H. Hudson III
Attorney-at-Law
Hudson & Bondurant, P.C.
Bryan E. McKernon
President & CEO
C&F Mortgage Corporation
William E. O’Connell Jr.
Chessie Professor of Business, Emeritus
The College of William and Mary
Paul C. Robinson
Owner & President
Francisco, Robinson & Associates,
Realtors
INDEPENDENT PUBLIC
ACCOUNTANTS
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
CORPORATE COUNSEL
Hudson & Bondurant, P.C.
West Point, Virginia
OFFICERS &
LOCATIONS
C&F BANK
ADMINISTRATIVE OFFICES
802 Main Street
West Point, Virginia 23181
(804) 843-2360
3600 LaGrange Parkway
Toano, Virginia 23168
(757) 741-2201
Larry G. Dillon *
Chairman, President & CEO
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
Vice President, 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
Laura C. Ross
Director, Treasury Solutions
Christopher A. Spillare
Vice President & Treasurer
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
Meagan L. Stevens
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
Broad Street
Kevin L. Ford
Assistant Vice President & Branch Manager
RICHMOND, VIRGINIA
Patterson Avenue
Valerie H. Boteilho
Assistant Vice President & Branch Manager
VARINA, VIRGINIA
Timothy R. Martin
Assistant Vice President & Branch Manager
Tracy E. Pendleton
Vice President & Area Credit Manager
SALUDA, VIRGINIA
Elizabeth B. Faudree
Assistant Vice President & Branch Manager
SANDSTON, VIRGINIA
Katherine P. Buckner
Assistant Vice President & Branch Manager
WEST POINT, VIRGINIA
Main Street
Karen T. Richardson
Assistant Vice President & Branch Manager
WEST POINT, VIRGINIA
14th Street
Donna T. Callis
Branch Manager
WILLIAMSBURG, VIRGINIA
Jamestown Road
Alec J. Nuttall
Assistant Vice President & Branch Manager
WILLIAMSBURG, VIRGINIA
Longhill Road
Cynthia W. Tatum
Branch Manager
YORKTOWN, VIRGINIA
Jeffrey A. Mercer
Assistant Vice President & Branch Manager
CONSTRUCTION LENDING OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8351
Terrence C. Gates
Vice President, Real Estate Construction
C&F BANK / RICHMOND
ADMINISTRATIVE OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 378-0332
J. Charles Link
President
Charles T. Nuttle
Vice President, Commercial Lending
David L. Shaffer
Vice President, Commercial Lending
C&F BANK / PENINSULA
ADMINISTRATIVE OFFICE
City Center
11815 Fountain Way, Suite 410
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 INVESTMENT SERVICES, INC.
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
C&F Annual Report 2007 v Page 7
OFFICERS & LOCATIONS
C&F MORTGAGE CORPORATION
ADMINISTRATIVE OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8300
Bryan E. McKernon
President & CEO
Mark A. Fox
Executive Vice President & 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
William E. Hamrick
Vice President & Branch Manager
CHESTER, VIRGINIA
Stephen L. Fuller
Vice President & Branch Manager
FAIRFAX, VIRGINIA
Mark C. Canniff, Sr.
Branch Manager
E. Mike Gleeson
Branch Manager
E. Rick Soper
Branch Manager
FISHERSVILLE, VIRGINIA
Vickie J. Painter
Branch Manager
FREDERICKSBURG, 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
HARRISONBURG, VIRGINIA
Gloria J. Wright
Branch Manager
C&F Annual Report 2007 v Page 8
LYNCHBURG, VIRGINIA
Shirley D. Falwell
Branch Manager
Andrew N. Shields
Branch Manager
MIDLOTHIAN, VIRGINIA
Donald R. Jordan
Vice President & Branch Manager
Daniel J. Murphy
Vice President & Branch Manager
Susan P. Burkett
Vice President & Operations Manager
NEWPORT NEWS, VIRGINIA
WILLIAMSBURG, VIRGINIA
Linda H. Gaskins
Vice President & Branch Manager
Mary L. Rebholz
Production 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
CHARLOTTE, NORTH CAROLINA
Patrick B. Edmondson
Sales Manager
GASTONIA, NORTH CAROLINA
Nancy W. Poteat
Branch Manager
ANNAPOLIS, MARYLAND
Michael J. Mazzola
Senior Vice President &
Maryland Area Manager
William J. Regan
Vice President & Branch Manager
ELLICOTT CITY, MARYLAND
Scott B. Segrist
Branch Manager
Robert G. Menton
Branch Manager
NEWPORT, DELAWARE
Craig I. Snyder
Branch Manager
MOORESTOWN, NEW JERSEY
R. Scott Wallace
Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy
Branch Manager
C&F TITLE AGENCY, INC.
Midlothian, Virginia
Eileen A. Cherry
Vice President & Title Insurance Underwriter
HOMETOWN SETTLEMENT
SERVICES LLC
Crofton, Maryland
CERTIFIED APPRAISALS LLC
Midlothian, Virginia
H. Daniel Salomonsky
Vice President & Appraisal Manager
C&F FINANCE COMPANY
ADMINISTRATIVE OFFICE
4660 South Laburnum Avenue
Richmond, Virginia 23231
(804) 236-9601
S. Dustin Crone
Executive Vice President
C. Shawn Moore
Senior Vice President
Michael K. Wilson
Senior Vice President & COO
Alfred Hinkle
Vice President, Human Resources
NORTHERN VIRGINIA/
MARYLAND REGION
Kevin F. Jones Jr.
Area Sales Manager
HAMPTON/VA BEACH, VIRGINIA
EASTERN NORTH CAROLINA
RICHMOND, VIRGINIA
Pamela L. Austin
Area Sales Manager
Mervin A. Pleasant
Branch Manager
Specialty Finance Division
ROANOKE, VIRGINIA
Timothy W. Gearheart
Area Marketing Manager
GREENSBORO, NORTH CAROLINA
Michael L. Seguin
Area Sales Manager
NASHVILLE, TN
Karen R. Hackney
Area Sales Manager
EASTERN TENNESSEE
Steven D. Croley
Area Marketing Representative
CINCINNATI/NORTHERN KENTUCKY
Michael Meister
Area Marketing Representative
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, 2007
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, a non-accelerated filer or a
smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ( )
Accelerated Filer ( X )
Non-accelerated filer ( )
(Do not check if a smaller reporting company)
Smaller reporting company ( )
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 29,
2007 was $120,177,128.
There were 3,022,091 shares of common stock outstanding as of February 25, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 15, 2008 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held April 15, 2008 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 14
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 OPERATION................................... 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 86
ITEM 9A. CONTROLS AND PROCEDURES...................................................................................... page 86
ITEM 9B. OTHER INFORMATION ..................................................................................................... page 87
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE............ page 87
ITEM 11. EXECUTIVE COMPENSATION ......................................................................................... page 88
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS............................... page 88
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 (C&F Mortgage) and (3) consumer
finance through C&F Finance Company (C&F Finance). The following general business discussion focuses on the
activities within each of these segments.
In addition, the Corporation conducts brokerage activities through C&F Investment Services, Inc., insurance
activities through C&F Insurance Services, Inc. and title insurance services through C&F Title Agency, Inc. The
financial position and operating results of any one of these subsidiaries are not significant to the Corporation as a
whole and are not considered principal activities of the Corporation at this time.
The Corporation also owns two non-operating subsidiaries, C&F Financial Statutory Trust II formed in
December 2007 and C&F Financial Statutory Trust I formed in July 2005. These trusts were formed for the purpose
of issuing $10.0 million each of trust preferred capital securities in private placements to institutional investors.
These trusts are unconsolidated subsidiaries of the Corporation and their principal assets are $10.3 million each of
the Corporation’s junior subordinated debt securities (referred to herein as “trust preferred capital notes,”) that are
reported as liabilities 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, Varina, West Point, Yorktown, and two each in Williamsburg and 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, 2007, assets of the Retail Banking
segment totaled $634.7 million. For the year ended December 31, 2007, income before income taxes for this segment
totaled $4.3 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 14 locations in Virginia, three in Maryland, two
in North Carolina and one each in Newport, Delaware and Moorestown, New Jersey. The Virginia offices are
located one each in Charlottesville, Chester, Fairfax, Fishersville, Fredericksburg, Hanover, Harrisonburg,
Lexington, Lynchburg, Midlothian, Newport News, Richmond, Roanoke and Virginia Beach. The Maryland offices
are located in Annapolis, Ellicott City 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,
Countrywide Bank, FSB; Franklin American Mortgage Company; the Virginia Housing Development Authority;
JPMorgan Chase Bank, N.A.; 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, but are eligible for sale to various other investors. 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, 2007, assets of the Mortgage Banking segment totaled $44.8 million. For the year ended December
31, 2007, income before income taxes for this segment totaled $2.8 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 through its offices in Richmond,
Roanoke and Hampton, Virginia, in Nashville, Tennessee and in Towson, Maryland. C&F Finance is an indirect
lender that provides automobile financing through lending programs that are designed to serve customers in the
“non-prime” market who have limited access to traditional automobile financing. C&F Finance generally 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 new vehicles and later model, low mileage used 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, 2007, assets of the Consumer Finance segment totaled $167.4 million. For the year ended
December 31, 2007, income before income taxes for this segment totaled $4.4 million.
Employees
At December 31, 2007, we employed 512 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 and expansion of community and regional banks into our service areas.
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 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. 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
Several factors caused rapid consolidation in the mortgage lending industry over the last decade. First, the
continuing evolution of the secondary mortgage market led to more commodity-like mortgages. Second, increased
regulation imposed on the industry resulted in significant costs and the need for higher levels of specialization.
Third, interest rate volatility resulted in an increase in mortgagors’ propensity to refinance their mortgages. These
factors, together with fluctuations in new home construction and sales, have caused relatively large swings in the
volume of loans originated from year to year and dramatically increased complexity in the business. During 2007,
there was significant contraction in both the volume of loans originated and the number of institutions and brokers
providing mortgage loans for new and resale home sales and refinancings. This contraction accompanied a
downturn in the housing markets related to declines in real estate values, coupled with increased payment defaults
by borrowers and increased loan foreclosures. To operate profitably in this environment, lenders must have a high
level of operational and risk management skills, as well as technological expertise. 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) increased penalties for existing crimes and created 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 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of
at least 4.0 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. For the Corporation only, Tier 1 and total capital include trust preferred securities. At December 31,
2007, the total capital to risk-weighted asset ratio of the Corporation was 12.8 percent and the ratio of the Bank was
12.1 percent. At December 31, 2007, the Tier 1 capital to risk-weighted asset ratio was 11.2 percent for the
Corporation and 10.8 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 4.0 percent for banks and
bank holding companies. At December 31, 2007, the Tier l leverage ratio was 9.4 percent for the Corporation and
9.0 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, 2007, the Bank declared $19.4
million in dividends payable to the Corporation, which were used to fund the Corporation’s share purchases, debt
service and $3.8 million in dividends payable to shareholders. The decline in the Bank’s capital attributable to
dividends paid to the Corporation was offset in part by the Corporation’s additional investment in the Bank of the
$10.0 million proceeds from the issuance of trust preferred securities in December 2007.
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, at least 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 specified 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 was $297,000, of which $210,000 has
been applied to offset assessments in 2007. 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
7
the members within its assigned region. Each is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. Each FHLB makes loans to members in accordance with policies and
procedures established by the Board of Directors of the FHLB. As a member, the Bank must purchase and maintain
stock in the FHLB. In 2004, the FHLB converted to its new capital structure, which established the minimum capital
stock requirement for member banks as an amount equal to the sum of a membership requirement and an activity-
based requirement. At December 31, 2007, the Bank owned $4.4 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 sends 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, 2007, 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 has not significantly increased our capital spending.
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 under “About C&F/C&F Financial Corporation/SEC Filings” 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, 2007, we are vulnerable to continued decreases in short-term interest rates because of our asset-sensitive balance
sheet profile. We believe that our current interest rate exposure is manageable and does not indicate any significant
exposure to interest rate changes. However, the interest rate cuts made by the Federal Reserve Bank since
September 2007 have immediately reduced our yield on variable-rate loans without a corresponding reduction in
deposit costs, which will result in a decline in our net interest margin. We expect more pronounced net interest
margin compression in 2008 if interest rates on our variable-rate loans continue to decline while competition for
deposits hinders a decline in rates paid for deposits.
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. In addition, rising interest rates could
create higher debt burden and default risk for borrowers who have adjustable-rate mortgage loans that reset at
higher interest rates. Because interest rates depend on factors outside of our control, we cannot eliminate the
interest rate risk associated with our mortgage operations.
Certain credit markets have experienced difficult conditions and volatility during 2007 and there has been
an increase in mortgage loan foreclosures throughout the United States. The majority of these foreclosures appear
to involve borrowers who had financed home purchases or refinanced existing home mortgage loans with so-called
subprime mortgage loans or alternative loan products. Mortgage loan foreclosures can result in increases in loan
losses and require mortgage lenders to take ownership of the foreclosed real properties in order to mitigate
potential loan losses, which can result in increased noninterest expenses.
The Corporation originates a variety of residential loan products for sale into the secondary market through
C&F Mortgage. These products include conventional residential mortgages, which are generally considered prime
loans, and alternative loan products. This latter category of loans includes loans with higher loan to value ratios
and loans with no or limited verification of a borrower’s income or assets stated on the loan application. The
general market for these alternative loan products across the country has declined as a result of moderating real
estate prices, increased payment defaults by borrowers and increased loan foreclosures. These factors may result in
potential repurchase liability to our mortgage company on residential mortgage loans originated and sold into the
secondary market. While we mitigate the risk of repurchase liability by underwriting to the purchasers’ guidelines
and do not believe that our exposure to this liability is significant at this time, we cannot be assured that a
prolonged period of payment defaults and foreclosures will not result in an increase in requests for repurchases,
which would adversely affect the Corporation’s net income.
11
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, 2007, 43 percent of our loan portfolio consisted of commercial, financial and agricultural
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, 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, 2007, 27 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. 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. In
addition, our servicing costs may increase without a corresponding increase in our finance charge income. 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
12
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.
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. While the Corporation’s Chief Operating Officer resigned effective February 29, 2008
because of family health considerations, he has agreed to assist management to assure a smooth transition.
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.
13
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Corporation has no unresolved comments from the SEC staff.
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, the main 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 owned by the Corporation and 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 owned by the Corporation and 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, has been 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 $94,000 for the year ended
December 31, 2007.
In connection with the opening of the Bank’s Newport News branch in 2007, C&F Mortgage relocated from
a leased facility to the second floor of the Bank branch building. The Corporation has 19 leased loan production
offices, 12 in Virginia, three in Maryland, two in North Carolina and one each in Delaware and New Jersey, for C&F
Mortgage. Rental expense for these leased locations totaled $1.0 million for the year ended December 31, 2007.
14
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 four leased offices, two in Virginia and one each
in Maryland and Tennessee, for C&F Finance. Rental expense for these leased locations totaled $54,000 for the year
ended December 31, 2007.
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 (55)
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 (39)
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 (57)
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 (51)
President and Chief Executive Officer of C&F Mortgage since 1995
*Mr. Bryant resigned effective February 29, 2008 because of family health considerations. Mr. Bryant has agreed to
assist management to assure a smooth transition.
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 25, 2008,
there were approximately 2,000 shareholders of record. As of that date, the closing price of our common stock on
the NASDAQ Global Select Stock Market was $31.37. Following are the high and low sales prices as reported by the
NASDAQ Stock Market, along with the dividends that were paid quarterly in 2007 and 2006.
Quarter
First
Second
Third
Fourth
_________2007_________
High
$46.00
45.00
43.50
42.98
Low Dividends
$39.60
36.10
38.05
30.25
$0.31
0.31
0.31
0.31
__________2006__________
Low
High
$37.12
$40.60
38.09
41.99
36.80
41.72
38.50
42.50
Dividends
$0.27
0.29
0.29
0.31
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, 2007
Total
Number
of Shares
Purchased
-
-
12,500
12,500
Average
Price
Paid Per
Share
$ -
-
35.47
$35.47
Total Number
of Shares
Purchased as
Part of Publicly
Announced Program1
-
-
12,500
12,500
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Program1
107,700
107,700
95,200
October 1-31, 2007
November 1-30, 2007
December 1-31, 2007
Total
1On November 4, 2006, the Corporation’s board of directors authorized the purchase of up to 150,000 shares of the Corporation’s common stock
over the twelve months ending November 3, 2007. Through June 30, 2007, 149,855 shares were purchased under this authorization. On July
17, 2007, the Corporation’s board of directors terminated this authorization and approved a new authorization to purchase up to 150,000
shares of the Corporation’s common stock over the twelve months ending July 16, 2008. The stock may be purchased in the open market or
through 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 shareholders’ equity
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
2007
2006
2005
2004
2003
$785,596
65,224
585,881
527,571
$ 64,825
23,378
41,447
7,130
34,317
25,878
48,371
11,824
3,344
$ 8,480
$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
$ 40,843
7,549
33,294
4,026
$ 38,671
8,828
29,843
3,167
29,268
24,689
37,753
16,204
5,006
$ 11,198
26,676
29,318
36,748
19,246
6,327
$ 12,919
$2.79
$3.85
$3.49
$3.14
$3.58
2.68
1.24
3.71
1.16
3.36
1.00
3.00
.90
3.42
.72
3,161,023
3,273,429
3,507,912
3,729,128 3,781,843
1.13%
13.03
44.45
8.69
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
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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
the level of net charge-offs on automobile loans
•
• 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
the real estate market
the Corporation’s expansion and technology initiatives
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 appropriate to absorb
any losses on existing loans that may become uncollectible. Our judgment in determining the level of the allowance
is based on evaluations of the collectibility of loans while taking into consideration such factors as trends in
18
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 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 2007 and determined there was no impairment to be recognized in 2007. 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
Net income for the Corporation decreased 30.1 percent to $8.5 million in fiscal 2007. Earnings per share
assuming dilution decreased 27.8 percent to $2.68 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 2007 net income decreased 25.6 percent and earnings per share
assuming dilution decreased 23.0 percent from 2006. Significant factors influencing 2007 earnings included interest
rate fluctuations, loan growth, higher loan charge-offs, a decline in mortgage loan production and higher operating
expenses associated with expansion initiatives. The degree to which these and other factors impacted each of our
business segments varied and is discussed in “Principal Business Activities” below.
The Corporation's ROE and ROA were 13.03 percent and 1.13 percent, respectively, for the year ended
December 31, 2007, compared to 18.97 percent and 1.75 percent, respective, for the year ended December 31, 2006
(17.83 percent and 1.64 percent, adjusted to exclude the effect of the commercial loan pay-off). The decline in these
measures resulted from lower earnings in 2007 coupled with asset growth. 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.
We expect the following factors to influence the Corporation’s financial performance in 2008:
• Retail Banking: We expect changes in interest rates to affect the degree to which net interest
margin compression occurs at C&F Bank. Interest rate cuts made by the Federal Reserve since
September 2007 have immediately reduced the Bank’s yields on variable rate loans without a
corresponding reduction in deposit costs. We expect more pronounced net interest margin
compression in 2008 if interest rates continue to decline while competition for deposits hinders
a decline in rates paid for these funds. General economic trends, particularly an economic
slowdown, in C&F Bank’s markets can affect the quality of the loan portfolio. Managing the
20
risks inherent in our loan portfolio will influence C&F Bank’s performance during 2008. 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: We expect the ongoing effects of lower demand for home mortgage loans
resulting from reduced demand in both the new and resale housing markets, the slowing
national economy and the fallout from the subprime and alternative loan issues to result in
lower origination volume at C&F Mortgage. While a decline in interest rates may spur
refinance activity in 2008, the decline in housing market values, coupled with the availability
of fewer mortgage loan products and tighter underwriting guidelines, will temper demand.
In addition, there is potential repurchase liability to our mortgage company on residential
mortgage loans originated and sold into the secondary market. While we mitigate the risk of
repurchase liability by underwriting to the purchasers’ guidelines and do not believe that our
exposure to this liability is significant at this time, we cannot be assured that a prolonged
period of payment defaults and foreclosures will not result in an increase in requests for
repurchases, which would adversely affect the Corporation’s net income.
• Consumer Finance: We expect changes in interest rates to be a primary factor influencing
financial performance at C&F Finance in 2008. If interest rates decline, we expect net interest
margin to improve because the majority of the funding for C&F Finance’s fixed-rate loan
portfolio is indexed to short-term interest rates and reprices each month. However, if an
economic slowdown occurs in C&F Finance’s markets, we would expect more delinquencies
and repossessions. Higher gasoline prices, unstable real estate values, reset of adjustable rate
mortgages to higher interest rates, increasing unemployment levels, general availability of
consumer credit or other factors that impact consumer confidence or disposable income could
increase loss frequency and 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.
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 $4.3 million for the year ended
December 31, 2007, compared with $8.7 million in 2006 ($7.6 million, adjusted to exclude the effect of the
commercial loan pay-off in 2006). The decline in earnings for 2007 included (1) the effects of margin compression
and competition on net interest income, (2) a higher provision for loan losses attributable to loan growth, (3) the
effects on operating expenses of the Peninsula and Richmond branch openings and the operations center relocation,
(4) higher operational and administrative personnel costs to support growth and (5) the recognition of
compensation expense, in accordance with accounting principles effective beginning in 2006, in connection with the
Corporation’s issuance of stock options to directors and the issuance of restricted stock to employees under existing
plans. Net interest margin compression occurred at the Retail Banking segment as the cost of deposits continued to
rise throughout most of 2007, while rates on interest-earning assets remained level through the third quarter of 2007
and began to decline in the fourth quarter of 2007. Approximately half of the Bank’s loans are indexed to the prime
interest rate. Therefore, interest income is immediately negatively affected when this index declines. However, the
source of funding for these loans, primarily deposits, does not reprice simultaneously with the decline in loan
interest rates. Compounding the effect of the deposit repricing disparity is the increased competition for deposits,
21
which has prevented the cost of funds from falling as quickly as the drop in the prime rate index. Growth in the
Retail Banking segment’s operations and infrastructure have increased operating expenses, but over time we expect
these expenditures will improve efficiency and enhance customer service. C&F Bank opened four new branches
within a 15-month period beginning in January 2006. As a result, the Retail Banking segment is incurring operating
expenses for these branches before they have generated sufficient new loan and deposit growth to become
profitable. Even though these costs will affect the Corporation’s short-term profits, we expect these branches will
contribute to the Corporation’s long-term profitability.
Mortgage Banking: Pretax earnings for the Mortgage Banking segment, which consists solely of C&F
Mortgage Corporation and its subsidiaries, were $2.8 million for the year ended December 31, 2007, compared with
$3.8 million in 2006. The decline in earnings for 2007 included (1) the effects of the downturn in the housing market
on loan origination volume, which declined 12.3 percent in 2007, (2) an increase in the provision for loan losses as a
result of three loans being placed on nonaccrual status and (3) higher operating expenses in 2007 related to new
offices and higher business development costs in order to generate loan production. Gains on loan sales declined
during 2007 due to lower volumes of loan sales accompanying the reduced origination volume. For 2007, loan
originations at C&F Mortgage for refinancings declined to $215 million from $283 million in 2006. Loans originated
for new and resale home purchases declined to $613 million in 2007 from $661 million in 2006. In addition to the
decrease in loan volume, the Mortgage Banking segment experienced a decrease in net interest income resulting
from a lower average balance of loans held for sale. We expect that future earnings for the Mortgage Banking
segment may continue to be negatively affected if the overall condition of the housing market results in fewer new
and resale home sales and loan refinancings. However, we plan to continue to look for expansion opportunities 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 $4.4 million for the year ended December 31, 2007, compared with pre-tax earnings of $5.0 million
in 2006. Earnings of the Consumer Finance segment have benefited from an increase in net interest income
resulting from average loan growth of 22.6 percent in 2007. However, the Consumer Finance segment’s net interest
margin for 2007 declined as a result of an increase in the cost of variable-rate borrowings throughout most of 2007,
without a corresponding increase in the fixed-rate loan portfolio. In addition, C&F Finance has entered into new
markets and strengthened its position in existing markets in 2007 resulting in an increase in overhead expenses. We
believe that the investments in new markets, technology and people at the Consumer Finance segment have
established a platform with the capacity to support current operations and future growth. The provision for loan
losses increased in 2007 as a result of higher charge-offs attributable to an increase in the number of vehicles
repossessed in 2007, which was largely a result of a weaker economy, coupled with an increasing average balance
per loan originated over the last several years. 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.
22
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. Total
shareholders’ equity decreased $2.8 million to $65.2 million at December 31, 2007, compared to $68.0 million at
December 31, 2006. This decline was attributable to dividends to shareholders of $3.8 million and the purchase of
204,520 shares of the Corporation’s common stock totaling $8.4 million during 2007, the effects of which were offset
in part by earnings in 2007. The board of directors maintained the quarterly dividend level at 31 cents per share
during 2007 despite the decline in earnings, resulting in a dividend payout ratio of 44.5 percent for 2007 compared
to 30.2 percent for 2006. The share purchases were made under a board authorization on November 4, 2006 to
purchase up to 150,000 shares over the twelve months ending November 3, 2007, which was terminated and
replaced by an authorization on July 17, 2007 to purchase up to 150,000 shares of the Corporation’s common stock
over the twelve months ending July 16, 2008.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets for each of the years ended December 31, 2007, 2006
and 2005. 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).
23
TABLE 1: Average Balances, Income and Expense, Yields and Rates
(Dollars in thousands)
Assets
Securities:
Taxable
Tax-exempt
Total securities
Loans, net
Interest-bearing deposits in other banks
Fed funds sold
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
2007
Average
Yield/
Income/
Balance
Rate
Expense
2006 2005
Average
Yield/
Balance
Rate
Income/
Expense
Income/
Expense
Average
Balance
Yield/
Rate
$ 11,659
63,280
74,939
601,685
8,238
241
685,103
(14,926)
78,217
$748,394
$ 544
4,349
4,893
60,977
432
11
66,313
4.66% $ 11,349
55,932
6.87
6.53
10.13
5.25
4.67
9.68
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%
7.17
6.58
8.89
3.05
--
8.45
$ 82,109
51,624
45,452
912
1,534
301
1.11% $ 87,074
44,820
2.97
49,644
0.66
946
987
353
1.09% $ 81,885
49,909
2.20
54,656
0.71
99,653
169,431
448,269
136,939
585,208
84,365
13,751
683,324
65,070
4,714
7,469
14,930
8,448
23,378
4.73
4.41
3.33
6.17
3.99
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
63,432
136,779
2.69
386,661
6.06
101,355
3.45
488,016
76,172
15,808
579,996
66,594
732
708
388
1,717
3,735
7,280
4,717
11,997
0.89%
1.42
0.71
2.71
2.73
1.88
4.65
2.46
$748,394
$694,315
$646,590
$42,935
$41,482
$38,191
5.69%
3.41%
6.27%
6.03%
2.92%
6.56%
5.99%
2.02%
6.43%
24
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.
TABLE 2: Rate-Volume Recap
(Dollars in thousands)
Interest income:
Loans
Securities:
Taxable
Tax-exempt
Interest-bearing deposits in other banks
Fed funds sold
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
2007 Compared to 2006
2007 from 2006 2006 from 2005
Increase (Decrease)
Due to
Volume
Increase (Decrease)
Due to
Volume
Total
Increase
(Decrease)
Total
Increase
(Decrease)
Rate
Rate
$1,119
$4,662
$5,781
$5,560
$4,518
$10,078
43
42
39
--
14
505
(61)
11
57
547
(22)
11
29
(207)
235
--
1,243
5,131
6,374
5,617
22
381
(23)
667
1,121
2,168
131
2,299
(56)
165
(29)
871
658
1,609
1,013
2,622
$(1,056)
$2,509
(34)
546
(52)
1,538
1,779
3,777
1,144
4,921
$1,453
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
Net interest income, on a taxable-equivalent basis, for the year ended December 31, 2007 was $42.9 million,
compared to $41.5 million for 2006. The net interest margin, on a taxable-equivalent basis, for the year ended
December 31, 2007 was 6.27 percent, compared to 6.56 percent for 2006. 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. An increase of 33 basis points in the adjusted yield on
interest-earning assets during 2007 was offset by an increase of 54 basis points in the rate on interest-bearing
liabilities.
Average loans held for investment increased $55.8 million during 2007. The Retail Banking segment’s
average loan portfolio increased $26.5 million compared to 2006. This increase was mainly attributable to
commercial loan growth. The Consumer Finance segment’s average loan portfolio increased $27.3 million during
2007. This increase was attributable to overall growth at existing locations and expansion into new markets. The
Mortgage Banking segment’s average loan portfolio increased $2.0 million during 2007. This increase was
25
attributable to short-term bridge loans, a new product introduced in 2007. Average loans held for sale at the
Mortgage Banking segment decreased $9.6 million during 2007. The decrease in the average balances of loans held
for sale occurred in response to loan demand, coupled with fluctuations in the timing of loan originations and sales
within the periods. The overall yield on loans held for investment and loans held for sale increased as a result of a
general increase in interest rates and an increase in higher-yielding Consumer Finance average loans relative to the
overall loan portfolio.
Average securities available for sale increased $7.7 million during 2007 and their average yield increased 16
basis points. The increase in securities available for sale occurred predominantly in the Retail Banking segment’s
municipal portfolio. Additions during 2007 focused on longer-term municipal securities. Yields for 2007 included
the receipt of dividends from one preferred stock holding, for which dividend payments had been suspended
throughout 2006.
Average interest-bearing deposits at other banks, primarily the FHLB, decreased $1.0 million during 2007.
Fluctuations in the average balance of these low-yielding deposits occurred in response to loan demand and an
increase in the securities portfolio. The average yield on interest-earning deposits at other banks increased 35 basis
points during 2007. The higher yields were due to increases in short-term interest rates through mid-2006.
Average interest-bearing deposits increased $34.0 million during 2007. However, the increase in interest on
deposits was influenced to a greater extent by the increase in deposit rates. The average cost of deposits increased
64 basis points due to the increase in short-term interest rates through mid-2006, coupled with the repricing of
maturing certificates of deposit at higher interest rates, a decrease in the proportion of transaction accounts relative
to total interest-bearing deposits, and the general competitive environment for core deposit growth.
Average borrowings increased $16.4 million during 2007 primarily from increased use of the third-party line
of credit by the Consumer Finance segment to fund loan growth and from increased use of short-term and long-
term borrowings from the FHLB by the Retail Banking segment to fund subsidiaries. These borrowings are
primarily indexed to short-term interest rates and reprice as short-term interest rates change. Accordingly, the
average cost of borrowings increased 11 basis points for 2007 as the impact of rising short-term interest rates
through mid-2006 more than offset the decline in rates in the fourth quarter of 2007. In addition, unpredictable
fluctuations in LIBOR, which are believed to have been triggered in part by the funding crisis caused by the housing
markets, temporarily increased the Consumer Finance segment’s variable-rate borrowings during the third quarter
of 2007.
Interest rates will continue to be a significant factor influencing the performance of all of the Corporation’s
business segments. We expect that net interest margin compression in the Retail Segment is likely to occur if
interest rates continue to decline as variable rate loans reprice faster than core deposits. We also expect that
declining economic conditions and the deteriorating housing and mortgage markets may result in lower overall
loan growth and increased yield pressure.
26
2006 Compared to 2005
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 the expansion into new markets in late 2006. Average loans held for sale at the
Mortgage Banking segment decreased $14.6 million during 2006. Mortgage interest rate trends during 2006
resulted in a 10.8 percent decline in 2006 loan origination volume at the Mortgage Banking segment. 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 during 2006 were indexed to short-term interest rates and
repriced as short-term interest rates changed.
27
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
2007 Compared to 2006
Year Ended December 31, 2007
Retail
Banking
Mortgage
Banking
$ --
3,684
1,364
21
342
$5,411
$15,854
--
2,572
--
218
$18,644
Consumer
Finance
$ --
--
84
--
506
$590
Other and
Eliminations
$ (21)
--
--
--
1,254
Total
$15,833
3,684
4,020
21
2,320
$ 1,233
$25,878
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 and
Eliminations
$ (51)
--
--
--
903
Total
$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 and
Eliminations
$ 1
--
--
--
912
$ 913
Total
$18,194
2,812
4,795
105
1,678
$27,584
Total noninterest income declined 5.5 percent to $25.9 million in 2007. The decrease in noninterest income
at the Mortgage Banking segment was attributable to lower gains on loan sales and lower ancillary fees due to the
ongoing effects of lower demand for home mortgage loans, tightening secondary market underwriting criteria and
increased competition. The decline in noninterest income at the Mortgage Banking segment was offset in part by an
increase in noninterest income at (1) the Retail Banking segment attributable to higher service charges and fees on
deposit accounts resulting from deposit account growth and the expansion of our overdraft protection services and
(2) the Consumer Finance segment attributable to activity-based fees and service charges. Increased revenue from
brokerage services further offset the decline in the Mortgage Banking segment.
2006 Compared to 2005
Total noninterest income declined slightly to $27.4 million during 2006. The factors affecting the change in
noninterest income during 2006 were essentially the same as those described above for 2007, albeit less pronounced.
Namely, lower loan demand at the Mortgage Banking segment, which resulted in a decline in gains on loan sales,
was offset in part by higher noninterest income at the Retail Banking and Consumer Finance segments. The
expansion of our overdraft protection services began in mid-2006 at the Retail Banking segment and higher service
28
charges and fees generated from loan processing and collections were recognized at the Consumer Finance
segment.
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
2007 Compared to 2006
Retail
Banking
$14,626
3,780
5,103
$23,509
Retail
Banking
$13,001
3,109
4,801
$20,911
Retail
Banking
$11,368
2,292
4,303
$17,963
Year Ended December 31, 2007
Mortgage
Banking
Consumer
Finance
$11,095
1,868
4,222
$17,185
$4,317
384
2,086
$6,787
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
Other
Total
$749
26
115
$890
$30,787
6,058
11,526
$48,371
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
Total noninterest expense increased 6.7 percent to $48.4 million in 2007. 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 operating expenses associated with our new Patterson
Avenue and Chester retail banking branches in the Richmond, Virginia area, which opened in the first quarter of
2007, our Hampton and Yorktown retail banking branches on the Virginia Peninsula, which opened in 2006, and
our new operations center, which opened in late 2005. 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 decreased at the
Mortgage Banking segment because of lower production-based personnel expenses as a result of the decline in loan
production.
29
2006 Compared to 2005
Total noninterest expense increased $3.5 million, or 8.3 percent, to $45.3 million during 2006. The factors
affecting the change in noninterest expense during 2006 were essentially the same as those described above for 2007.
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. Total noninterest expense declined during 2006 for the Mortgage Banking segment because
production-based costs decreased in tandem with lower origination volume. However, the decline was offset in
part by higher overhead 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.
INCOME TAXES
Applicable income taxes on 2007 earnings amounted to $3.3 million, resulting in an effective tax rate of 28.3
percent, compared with $5.4 million, or 30.9 percent, in 2006 and $5.2 million, or 30.5 percent, in 2005. The decline
in the effective tax rate during 2007 resulted from higher tax-exempt income on securities and loans as a percentage
of pretax income.
30
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
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
2007
$ 14,216
Year Ended December 31,
2005
2006
$ 13,064 $11,144
2004
$ 8,657
400
6,730
7,130
34
2
187
7,077
7,300
(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
2003
$6,722
525
2,642
3,167
—
15
86
1,844
1,945
1
125
114
1,677
1,917
5,383
$ 15,963
1
69
146
1,404
1,620
3,473
—
—
68
49
39
57
1,049
1,279
1,156
1,385
1,539
3,600
$ 14,216 $13,064 $11,144
—
34
33
646
713
1,232
$8,657
—
.03%
.03%
—
.01%
3.65%
2.76%
3.33%
1.78%
1.60%
During 2007, there was a $417,000 increase in the allowance for loan losses at the combined Retail Banking
and Mortgage Banking segments compared to December 31, 2006. This increase was attributable to loan growth at
C&F Bank and an increase in nonaccrual loans at C&F Mortgage. The Mortgage Banking segment has a $4.5 million
portfolio of loans held for investment. Three loans totaling $732,000 in this portfolio were on nonaccrual status at
December 31, 2007. There were no nonaccrual loans at the Mortgage Banking segment at December 31, 2006.
Therefore, the Mortgage Banking segment provided for a $120,000 loan loss allowance in 2007. We believe that the
current level of the allowance for loan losses at the combined Retail and Mortgage Banking segments is appropriate
to absorb any losses on existing loans that may become uncollectible.
The Consumer Finance segment, consisting solely of C&F Finance, accounted for the majority of the activity
in the allowance for loan losses during 2007. C&F Finance’s allowance for loan losses increased to $11.2 million at
December 31, 2007 from $9.9 million at December 31, 2006, and its provision for loan losses increased $1.9 million.
The increase in the provision for loan losses was primarily attributable to higher net charge-offs in 2007 resulting
31
from an increase in the number of vehicles repossessed in 2007, coupled with an increasing average balance per
loan originated over the last several years. We believe that the current level of the allowance for loan losses at the
Consumer Finance segment is appropriate 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, may be unable to finish the construction project as planned because of
financial pressure unrelated to the project.
• Commercial real estate loans may carry risks associated with the successful operation of a business or a real
estate project, in addition to other risks associated with the ownership of real estate, because the repayment
of these loans may be dependent upon the profitability and cash flows of the business or project.
• Commercial business loans carry risks associated with the successful operation of a business, which is
usually the source of loan repayment, and the value of the collateral, which may depreciate over time and
cannot be appraised with as much precision as real estate.
• Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value
of the collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are
more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or
personal bankruptcy.
32
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 may be 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
2007
2006
2005
2004
2003
$ 684
267
3,384
143
265
11,220
--
$ 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
--
$15,963
$14,216
$13,064
$11,144
20%
5
43
4
1
27
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
100%
100%
100%
100%
100%
33
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)
2007
2006
2005
2004
Total nonperforming assets
Accruing loans past due for 90 days or more
Nonaccrual loans
Real estate owned
$ 955
—
$ 955
$1,629
$4,326
0.24%
Nonperforming assets to total loans* and real estate owned
1.08
Allowance for loan losses to total loans* and real estate owned
452.98
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.
0.28%
1.07
386.55
Allowance for loan losses
$ 1,227
—
$ 1,227
$ 4,743
$ 578
$4,083
—
$4,336
—
2003
$1,993
8
$4,083
$4,336
$2,001
$3,826
$1,580
$1,092
$4,718
$4,460
$4,256
1.11%
1.29
115.56
1.39%
1.43
102.88
0.72%
1.52
212.69
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
2007
2006
2005
2004
$ 1,388
$ —
$11,220
0.87%
7.00%
$ 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%
2003
$1,149
$ 233
$4,401
1.44%
5.52%
Nonperforming assets of the combined Retail and Mortgage Banking segments at December 31, 2007
included $732,000 of nonaccrual loans at the Mortgage Banking segment, which accounted for the increase in
nonperforming assets. However, the ratio of nonperforming assets to total loans remains below one percent and we
believe that the ratio of the allowance for loan losses to total loans and the coverage ratio are indicative of an
appropriate reserve level at December 31, 2007.
Although increasing, nonaccrual loans of the Consumer Finance segment as a percentage of total consumer
finance loans remains less than one percent at December 31, 2007. While the ratio of the allowance for loan losses to
total loans declined 44 basis points since December 31, 2006, the overall allowance for loan losses increased to $11.2
million at December 31, 2007 from $9.9 million at December 31, 2006. A decline in the loan loss allowance ratio can
occur during periods of significant loan growth, such as 2007, because the purchase of a contract does not
necessarily simultaneously give rise to an allowance. We use historical charge-off experience factors, such as
delinquency status when each charge-off occurs, to determine the amount of losses inherent in the portfolio at the
reporting date. These assumptions are revised periodically and may be affected by actual performance of the loans
or other factors. Based on our experience since acquiring C&F Finance, we believe the level of the allowance for
loan losses is appropriate to cover probable losses currently inherent in our consumer finance portfolio. However,
because the allowance for loan losses is based on estimates, there can be no assurance that actual charge-off
amounts will not vary from such estimates.
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
34
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
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 appropriate to absorb any losses on existing Consumer Finance segment loans that may become
uncollectible.
We generally place loans at the Retail Banking, Mortgage Banking and Consumer Finance segments on
nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is
uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the
borrower. Loans greater than 90 days past due may remain on accrual status if we determine we have adequate
collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are
first applied to principal outstanding. We would have recorded additional gross interest income of $56,000 for
2007, $70,000 for 2006 and $270,000 for 2005 if nonaccrual loans had been current throughout these periods. Interest
received on nonaccrual loans was $219,000 in 2007, $41,000 in 2006 (adjusted to exclude $870,000 of nonaccrued and
default interest collected on the commercial loan pay-off) and $193,000 in 2005.
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 representative. After the prescribed waiting period, the
repossessed automobile is sold in a third-party auction. 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 minus collections and
repossession expenses and the principal balance of the delinquent loan. C&F Finance pursues collection of
deficiencies when it deems such action to be appropriate.
35
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 was $291,000 and $781,000 at December 31, 2007 and 2006, respectively,
for which no specific valuation allowance was deemed necessary. The average balance of impaired loans was
$557,000 for 2007, $2.24 million for 2006 and $4.2 million for 2005.
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, 2007, the Corporation had total assets of $785.6 million compared to $734.5 million at
December 31, 2006. The increase was principally a result of an increase in loans held for investment at the Retail
Banking and Consumer Finance segments and an increase in investment securities at the Retail Banking segment,
which were offset in part by a decline in interest-bearing deposits in other banks used to partially fund loan growth
and a decline in loans held for sale. Asset growth was primarily funded with increased borrowings.
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, 2007, the Corporation’s loans held for investment in all categories
totaled $601.8 million and loans held for sale totaled $34.1 million.
36
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,
2007
2006
2005
2004
2003
$ 122,705
26,719
257,951
25,282
8,991
160,196
601,844
(15,963)
$ 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)
$585,881
$517,843
$465,039
$394,471
$350,170
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, 2007
Commercial, Financial,
and Agricultural
Real Estate
Construction
$160,124
--
--
$ 15,539
52,615
29,673
$12,388
--
--
$14,331
--
--
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 negatively affect net interest margin in a declining rate environment. Fixed-rate
consumer loans at C&F Finance are predominantly funded by variable rate borrowings; therefore, net interest
margin will be favorably impacted in a declining interest rate environment.
Credit Policy
The Corporation’s credit policy establishes minimum requirements and provides for appropriate limitations
on overall concentration of credit within the Corporation. The policy provides guidance in general credit policies,
underwriting policies and risk management, credit approval, and administrative and problem asset management
policies. The overall goal of the Corporation’s credit policy is to ensure that loan growth is accompanied by
acceptable asset quality with uniform and consistently applied approval, administration, and documentation
practices and standards.
Residential Mortgage Lending – Held for Sale
The Mortgage Banking segment’s guidelines for underwriting conventional conforming loans comply with
the underwriting criteria established by Fannie Mae and/or Freddie Mac. The guidelines for non-conforming
conventional loans are based on the requirements of private investors and information provided by third-party
investors. The guidelines used by C&F Mortgage to originate FHA-insured and VA-guaranteed loans comply with
37
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. The majority of 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
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.
38
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. The Bank also purchases lot loans originated by C&F
Mortgage. These loans must satisfy the Bank’s underwriting criteria, including loan-to-value and credit score
guidelines.
Loans associated with consumer lot lending are included in the real estate—construction category in Table
8.
Commercial Real Estate Lending
The Bank’s commercial real estate loans are primarily secured by the value of real property and the income
arising from such property. The proceeds of commercial real estate loans are generally used by the borrower to
finance or refinance the cost of acquiring and/or improving a commercial property. The properties that typically
secure these loans are office and warehouse facilities, hotels, retail facilities, restaurants and other commercial
properties. The Bank’s present policy is generally to restrict the making of commercial real estate loans to
borrowers who will occupy or use the financed property in connection with their normal business operations.
However, the Bank also will consider making commercial real estate loans under the following two conditions.
First, the Bank will consider making commercial real estate loans for other purposes if the borrower is in strong
financial condition and presents a substantial business opportunity for the Bank. Second, the Bank will consider
making commercial real estate loans to creditworthy borrowers who have substantially pre-leased the
improvements to high-caliber tenants.
The Bank’s commercial real estate loans are usually amortized over a period of time ranging from 15 years
to 25 years and usually have a term to maturity ranging from five years to 15 years. These loans normally have
provisions for interest rate adjustments after the loan is three to five years old. The Bank’s maximum loan-to-value
ratio for a commercial real estate loan is 80 percent; however, this maximum can be waived for particularly strong
borrowers on an exception basis. Most commercial real estate loans are further secured by one or more
unconditional personal guarantees.
In recent years, the Bank has structured some of its commercial real estate loans as mini-permanent loans.
The amortization period, term and interest rates for these loans vary based on borrower preferences and the Bank’s
assessment of the loan and the degree of risk involved. If the borrower prefers a fixed rate of interest, the Bank
usually offers a loan with a fixed rate of interest for a term of three to five years with an amortization period of up
to 25 years. The remaining balance of the loan is due and payable in a single balloon payment at the end of the
initial term. We believe that shorter maturities for commercial real estate loans are necessary to give the Bank some
39
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.
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
40
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 a spread to the prime lending rate. 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. The Bank also purchases home equity lines of credit and second
mortgage loans originated by C&F Mortgage. These loans must satisfy the Bank’s underwriting criteria, including
loan-to-value and credit score guidelines.
Loans associated with home equity and second mortgage lending are included in the equity lines category
in Table 8.
Consumer Lending
The Bank offers a variety of consumer loans, including automobile, personal secured and personal
unsecured, credit card, and loans secured by savings accounts or certificates of deposit. The shorter terms and
generally higher interest rates on consumer loans help the Bank maintain a profitable spread between its average
loan yield and its cost of funds. Consumer loans secured by collateral other than a personal residence generally
involve more credit risk than residential mortgage loans because of the type and nature of the collateral or, in
certain cases, the absence of collateral. However, the Bank believes the higher yields generally earned on such loans
compensate for the increased credit risk associated with such loans.
Loans associated with consumer lending are included in the consumer category in Table 8.
Automobile Sales Finance
C&F Finance has an extensive automobile dealer network through which it 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
41
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. 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.
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, 2007
Amount
Percent
December 31, 2006
Amount
Percent
$ 7,467
1,771
68,150
77,388
3,867
$ 81,225
9%
2
84
95
5
100%
$
6,222
2,208
55,027
63,457
4,127
$ 67,584
9%
3
82
94
6
100%
The increase in securities available for sale occurred predominantly in the municipal portfolio. Additions
since December 31, 2006 focused on longer-term municipal securities.
42
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,
2005
2007
Weighted
Weighted
Average
Average
Yield
Yield
Weighted
Average
Yield
Amortized
Cost
Amortized
Cost
Amortized
Cost
2006
$ 250
1,998
2,973
2,225
7,446
154
1,622
1,776
4,005
18,595
28,167
16,442
67,209
4,409
22,215
31,140
18,667
3.50%
4.19
5.61
6.16
5.32
5.34
4.64
4.64
5.32
6.24
6.47
6.21
6.27
5.21
5.93
6.39
6.21
$ 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
$76,431
6.14% $62,470
6.21%
$59,952
--%
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
6.33%
Yields on tax-exempt securities have been computed on a taxable-equivalent basis.
2
Total securities excludes preferred stock at amortized cost of $4.0 million at December 31, 2007; $3.9 million at December 31, 2006; and
$4.1 million at December 31, 2005. (estimated fair value of $3.9 million at December 31, 2007; $4.1 million at December 31, 2006; and
$4.1 million at December 31, 2005).
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 principally
provided by individuals and businesses located within the communities served.
Deposits totaled $527.6 million at December 31, 2007, compared to $532.8 million at December 31, 2006.
This decrease was primarily attributable to (1) the decrease in noninterest-bearing demand deposits, which totaled
$80.0 million at December 31, 2007, compared to $90.3 million at December 31, 2006 and (2) the decrease in savings
and interest-bearing demand deposits, which totaled $184.6 million at December 31, 2007, compared to $188.5
million at December 31, 2006, which were offset in part by the increase in time deposits to $262.9 million at
December 31, 2007 from $254.1 million at December 31, 2006. The decrease in savings and interest-bearing demand
deposits resulted primarily from a decrease in municipal deposit accounts, which was partially offset by strong
money market deposit growth in the four new branches opened in 2006 and 2007. The increase in time deposits
43
resulted from the effect of our competitive rate-setting strategies and the issuance of $3.0 million of brokered
certificates of deposit. Total deposits at December 31, 2006 increased $37.4 million, or 7.5 percent, over December
31, 2005. Deposit growth in 2006 occurred in all of the Bank’s market regions in 2006.
Table 11 presents the average deposit balances and average rates paid for the years 2007, 2006 and 2005.
TABLE 11: Average Deposits and Rates Paid
(Dollars in thousands)
Noninterest-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,
2007
Average
Balance
$ 84,365
82,109
51,624
45,452
99,653
169,431
448,269
$532,634
Average
Rate
1.11%
2.97
0.66
4.73
4.41
3.33%
2006
Average
Balance
Average
Rate
2005
Average
Balance
Average
Rate
$ 79,472
87,074
44,820
49,644
79,873
152,879
414,290
$493,762
1.09%
2.20
0.71
3.98
3.72
2.69%
$ 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%
Table 12 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2007.
TABLE 12: Maturities of Certificates of Deposit with Balances of $100,000 or More
(Dollars in thousands)
3 months or less
3-6 months
6-12 months
Over 12 months
Total
BORROWINGS
December 31, 2007
$13,566
16,140
51,264
16,036
$97,006
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, an overnight fed funds
line with a regional correspondent bank, 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 December, 2007, C&F Financial Statutory Trust II (Trust II), a wholly-owned subsidiary of the
Corporation, was formed for the purpose of issuing trust preferred capital securities for general corporate purposes
including the refinancing of existing debt. On December 14, 2007, Trust II 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 Trust II is $10.3 million of the Corporation’s trust preferred capital notes. In
July 2005, C&F Financial Statutory Trust I (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
44
shares of its common stock. On July 21, 2005, Trust I 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 Trust I is $10.3 million of the Corporation’s 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 $98.0 million at December 31, 2007 and $93.3 million at December
31, 2006.
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 $7.1 million at December 31, 2007 and $8.8 million at December 31, 2006.
At December 31, 2007, C&F Mortgage had rate lock commitments to originate mortgage loans aggregating
$22.8 million and loans held for sale of $34.1 million. C&F Mortgage has entered into corresponding commitments
with third party investors to sell loans of approximately $56.9 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. We include recourse considerations in our calculation of the Corporation’s capital adequacy. Payments
made under these recourse provisions were $84,000 in 2007, $62,000 in 2006 and $29,000 in 2005. 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.
45
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 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, federal
funds sold and nonpledged securities available for sale, totaled $58.5 million at December 31, 2007. 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, 2007, (2) an established line
with the FHLB that had $66.9 million outstanding under a total line of $124.6 million as of December 31, 2007, (3) a
revolving line of credit with a third-party bank that had $86.0 million outstanding under a total line of $100.0
million as of December 31, 2007 and (4) a revolving line of credit with a third-party bank that had no outstanding
balance under a total line of $7.0 million as of December 31, 2007. We have no reason to believe these arrangements
will not be renewed at maturity.
Certificates of deposit of $100,000 or more maturing in less than a year totaled $81.0 million at December 31,
2007; certificates of deposit of $100,000 or more maturing in more than one year totaled $16.0 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, 2007:
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
$ 85,959
$ --
66,900
19,400
$85,959
--
$ --
17,500
$ --
30,000
20,620
--
--
--
20,620
FHLB advances1
Trust preferred
capital notes
Securities sold under
agreements to
repurchase
Operating leases
2,883
1,043
2,568
2,568
--
1,182
--
658
--
--
$87,141
$178,930
$23,011
Total
1FHLB advances include convertible advances of $17.5 million maturing in 2012, $12.5 million maturing in 2014 and $17.5
million maturing in 2017. These advances have fixed rates of interest unless the FHLB exercises its option to convert the
interest on these advances from fixed-rate to variable-rate (i.e., the conversion date). We can elect to repay the advances in
whole or in part on their respective conversion dates and on any interest payment dates thereafter without the payment of a
fee if the FHLB elects to convert the advances. However, we would incur a fee if we repay the advances prior to their
respective conversion dates, if the FHLB does not convert the advance on the conversion date, or, after notification of
conversion, on any date other than the conversion date or any interest payment date thereafter. For further information
concerning the Corporation’s FHLB borrowings, refer to Item 8, “Financial Statements and Supplementary Data,” under the
heading “Note 7: Borrowings.”
$50,620
$18,158
46
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 2007, the Corporation purchased 54,800 shares of its common stock in negotiated and open-market
transactions at prices ranging between $32.50 and $43.20 in accordance with a board-approved stock purchase
program that will expire in July 2008. Purchases of 149,720 shares at prices between $37.25 and $45.07 per share
were made in accordance with a board-approved stock purchase program, which was terminated in July 2007. 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.
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 1 capital, total risk-based
capital, and leverage ratios, as previously described in the “Regulation and Supervision” section of Item 1. The
Corporation’s Tier 1 capital to risk-weighted asset ratio was 11.2 percent at December 31, 2007, compared with 11.3
percent at December 31, 2006. The total capital to risk-weighted asset ratio was 12.8 percent at December 31, 2007,
compared with 12.6 percent at December 31, 2006. The Tier 1 leverage ratio was 9.4 percent at December 31, 2007,
compared with 9.6 percent at December 31, 2006. These ratios are in excess of the mandated minimum
requirements. A portion of the trust preferred securities issued in December 2007 and July 2005 are treated as Tier 1
capital for regulatory capital adequacy determination purposes.
Shareholders’ equity was $65.2 million at year-end 2007 compared with $68.0 million at year-end 2006. The
dividend payout ratio was 44.5 percent in 2007, 30.2 percent in 2006 and 28.3 percent in 2005. During 2007, the
Corporation declared dividends of $1.24 per share, up 6.9 percent from $1.16 per share per share in 2006.
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.”
47
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.
Reconciliation of Certain Non-GAAP Financial Measures
(Dollars in thousands, except for per share data)
*
2007
2006
For the Year Ended December 31,
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
$8,480
$12,129
-
-
$8,480
3,161
3,039
(565)
(163)
$11,401
3,273
3,152
B
C
D
A/C
$2.68
$3.71
B/C
A/D
$2.68
$2.79
$3.48
$3.85
loan transaction
B/D
$2.79
$3.62
48
Reconciliation of Certain Non-GAAP Financial Measures (Continued)
(Dollars in thousands, except for per share data)
*
2007
2006
For the Year Ended December 31,
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
$748,394
$694,315
A/E
1.13%
1.75%
loan transaction
B/E
1.13%
1.64%
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
$65,070
$63,949
A/F
13.03%
18.97%
loan transaction
B/F
13.03%
17.83%
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
$4,335
$8,731
-
-
(870)
(250)
to loan transaction
$4,335
$7,611
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
$41,447
1,488
42,935
$40,125
1,357
41,482
-
(870)
$42,935
$40,612
$685,103
6.27%
$632,069
6.56%
6.27%
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 a significant portion 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
49
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, 2007.
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 most 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.
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, 2007, indicate that the Corporation would expect net interest income to
decrease over the next twelve months 1.48 percent assuming an immediate downward shift in market interest rates
of 200 basis points (BP) and to decrease 1.22 percent if rates shifted upward in the same manner.
50
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
($668)
($552)
Percentage
(1.48%)
(1.22%)
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.
The EVE analysis results are presented in the table below. These results as of December 31, 2007 indicate
that the EVE would decrease 7.06 percent assuming an immediate downward shift in market interest rates of 200 BP
and would decrease 7.07 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
Percentage
Dollars
(7.06%)
($6,102)
(7.07%)
($6,106)
In the analyses above, net interest income and the EVE decline in both an immediate downward and
upward shift in interest rates. In a rising rate environment, the Corporation’s assets would take longer to reprice
than what the Corporation pays on its borrowings and deposits primarily due to the longer maturity or repricing
dates of its investment and loan portfolios. However, in a falling rate environment the analyses assume that
adjustable-rate assets will continue to reprice downward and fixed-rate assets with prepayment or callable options
will reprice at lower rates while certain deposits can not reprice any lower.
At C&F Mortgage, 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
Federal funds sold
Total cash and cash equivalents
Securities—available for sale at fair value, amortized cost of
$80,425 and $66,407, respectively
Loans held for sale, net
Loans, net of allowance for loan losses of $15,963 and $14,216,
respectively
Federal Home Loan Bank stock
Corporate premises and equipment, net
Accrued interest receivable
Goodwill
Other assets
Total assets
Liabilities
Deposits
Noninterest-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,
3,019,591 and 3,182,411 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,
2007
2006
$ 11,115
319
829
12,263
81,255
34,083
585,881
4,387
32,854
5,069
10,724
19,080
$ 785,596
$ 80,002
184,620
262,949
527,571
21,968
133,459
20,620
2,115
14,639
720,372
—
—
2,979
—
62,048
197
65,224
$ 785,596
$ 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
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,
2007
2006
2005
$ 60,938
443
$ 55,112
454
$45,035
523
296
2,608
540
64,825
2,747
4,714
7,469
7,724
724
23,378
41,447
7,130
34,317
15,833
3,684
4,020
21
2,320
25,878
30,787
6,058
11,526
48,371
11,824
3,344
$ 8,480
$ 2.79
$ 2.68
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
See notes to consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Balance December 31, 2004
Purchase of common stock
Stock options exercised
Comprehensive income
Net income
Other comprehensive income, net of tax
Unrealized holding losses on securities, net of
reclassification adjustment
Comprehensive income
Cash dividends ($1.00 per share)
Balance December 31, 2005
Purchase of common stock
Stock options exercised
Share-based compensation
Comprehensive income
Net income
Other comprehensive income, net of tax
Unrealized holding losses on securities, net of
reclassification adjustment
Comprehensive income
Adjustment to initially apply SFAS 158, net of tax
Cash dividends ($1.16 per share)
Balance December 31, 2006
Purchase of common stock
Stock options exercised
Share-based compensation
Comprehensive income
Net income
Other comprehensive income, net of tax
Changes in defined benefit plan assets and
benefit obligations, net of tax
Unrealized holding losses on securities, net of
reclassification adjustment
Comprehensive income
Cash dividends ($1.24 per share)
Balance December 31, 2007
Common
Stock
Additional
Paid-In
Capital
$3,539
(427)
29
$ 80
(371)
474
Comprehensive
Income
Retained
Earnings
$64,323
(16,842)
$11,788
11,788
Accumulated
Other
Comprehensive
Income
$1,957
Total
$69,899
(17,640)
503
11,788
3,141
(14)
32
183
(504)
548
97
3,159
(204)
24
324
(1,166)
543
299
(1,125)
$10,663
(1,125)
(1,125)
(3,339)
55,930
832
$12,129
12,129
(3,339)
60,086
(518)
580
97
12,129
(67)
$12,062
(67)
(67)
(644)
121
(3,657)
64,402
(7,065)
$ 8,480
8,480
(644)
(3,657)
68,006
(8,435)
567
299
8,480
301
(225)
$ 8,556
301
301
(225)
(225)
$2,979
$ —
(3,769)
$62,048
$ 197
(3,769)
$65,224
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
2007
$ (211)
14
$ (225)
2006
$ 1
68
$ (67)
2005
$(1,057)
68
$(1,125)
See notes to consolidated financial statements.
54
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation
Deferred income taxes
Provision for loan losses
Share-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 operating activities
Investing activities:
Proceeds from maturities and calls of securities available for sale
Purchase of securities available for sale
Net (purchases) redemptions 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 (decrease) increase in demand, interest-bearing demand
and savings deposits
Net increase 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
Year Ended December 31,
2006
2005
2007
$ 8,480
$ 12,129 $ 11,788
2,563
(1,112)
7,130
299
2,007
(970)
4,625
97
1,549
(1,115)
5,520
—
50
(21)
(828,379)
847,800
35
(105)
(944,300)
930,473
12
(105)
(1,058,804)
1,067,693
(637)
(1,106)
200
(1,554)
33,713
6,189
(20,235)
(2,294)
(310)
(75,168)
(2,251)
23
(94,046)
(768)
(2,580)
609
3,843
5,095
7,671
(9,987)
(217)
—
(57,429)
(6,120)
71
(66,011)
(623)
2,393
692
(377)
28,623
11,990
(6,142)
154
(310)
(76,088)
(12,461)
69
(82,788)
(14,088)
8,824
50,681
10,310
(8,435)
567
(3,769)
44,090
(16,243)
28,506
9,516
38,788
13,719
10,310
(17,640)
503
(3,339)
51,857
(2,308)
45,186
$ 12,263 $ 28,506 $ 42,878
4,565
32,832
12,742
--
(518)
580
(3,657)
46,544
(14,372)
42,878
$ 23,178 $ 17,848 $ 11,305
6,653
5,935
4,087
Supplemental disclosure of noncash investing and financing activities
Unrealized (losses) on securities available for sale
Pension adjustment
$ (347)
463
$ (103) $ (1,731)
--
(990)
See notes to consolidated financial statements.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of C&F
Financial Corporation and its wholly owned subsidiary, Citizens and Farmers Bank. All significant intercompany
accounts and transactions have been eliminated in consolidation. In addition, C&F Financial Corporation owns
C&F Financial Statutory Trust I and C&F Financial Statutory Trust II, which are unconsolidated subsidiaries. The
subordinated debt owed to these trusts 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, such as loan settlements, title searches and residential
appraisals. C&F Finance, acquired on September 1, 2002, is a regional finance company providing automobile loans
principally in Virginia, 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 pension 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, interest-bearing deposits in banks and federal funds sold, 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 discounts, 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 level 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.
57
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
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 less cost to sell 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. The Corporation’s goodwill
was recognized in connection with the Bank’s acquisition of C&F Finance in September 2002. The annual test for
impairment was completed during the fourth quarter of 2007 and it was determined there was no impairment to be
recognized in 2007.
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.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by
the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of
the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence, management believes it is more likely than
not that the position will be sustained upon examination, including the resolution of appeals or litigation processes,
58
if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-
likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized
tax benefits are classified as additional income taxes in the statement of income.
Retirement Plan: The compensation cost of an employee’s pension benefit under the Bank’s defined benefit
pension plan 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 is measured as the difference between plan assets at fair value and the benefit obligation. For a pension
plan, the benefit obligation is the projected 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 was 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 Bank has a non-contributory, defined benefit pension plan, which is subject to the provisions of SFAS 158. In
connection with the implementation of SFAS 158 in 2006, the Corporation recognized a $644,000 loss as a
component of accumulated other comprehensive income. A valuation of the Bank’s plan was performed as of
October 1, 2007 and it was determined that the plan was underfunded. As a result, the Corporation has recognized
a pension liability of $269,000 at December 31, 2007 and has recognized a $301,000 gain as a component of other
comprehensive income.
Share-Based Compensation: At December 31, 2007, the Corporation has three share-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, share-based 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 year ended December 31, 2005.
59
(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
$11,788
(2,305)
$ 9,483
$ 3.49
$ 2.81
$ 3.36
$ 2.70
The Corporation 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 2007 and 2006 for options granted prior to January 1, 2006.
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 years
ended December 31, 2007 and 2006 included $299,000 ($186,000 after tax) and $97,000 ($60,000 after tax),
respectively, for options and restricted stock granted during 2007 and 2006. As of December 31, 2007, there was
$1.30 million of 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 and changes in defined benefit plan assets and liabilities, 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 2007, the Corporation purchased 54,800 shares of its common stock in negotiated
and open-market transactions at prices ranging between $32.50 and $43.20 in accordance with a board-approved
stock purchase program that will expire in July 2008. Purchases of 149,720 shares at prices between $37.25 and
60
$45.07 per share were made in accordance with a board-approved stock purchase program, which was terminated
in July 2007.
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 was terminated in July 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,
which expired in November 2006.
Recent Accounting Pronouncements: 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 rather, provides enhanced guidance to other pronouncements that require or permit assets or
liabilities to be measured at fair value. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those years. The FASB approved a one-year deferral
for the implementation of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. The Corporation does not expect the
implementation of SFAS 157 to have a material effect on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.
The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The fair value option established by SFAS 159 permits all entities to choose
to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The
fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007. The Corporation is currently
evaluating the effect SFAS 159 may have on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS 141(R) will significantly change
the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for
how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination
or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for
acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The
Corporation does not expect the implementation of SFAS 141(R) to have a material effect on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an
Amendment of ARB No. 51. SFAS 160 will significantly change the financial accounting and reporting of
noncontrolling (or minority) interests in consolidated financial statements. SFAS 160 is effective as of the beginning
of an entity’s first fiscal year that begins after December 15, 2008, with early adoption permitted. The Corporation
does not expect the implementation of SFAS 160 to have a material effect on its consolidated financial statements.
In September 2006, the Emerging Issues Task Force (EITF) 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
61
future benefits in accordance with SFAS 106 (if, in substance, a postretirement benefit plan exists) 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, with
early application permitted. The Corporation does not expect the implementation of EITF 06-4 to have a material
effect on its consolidated financial statements.
In November 2006, the EITF issued EITF 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance
Arrangements. EITF 06-10 concludes that an employer should recognize a liability for the postretirement benefit
related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS 106 or APB
Opinion No. 12, as appropriate, if the employer has agreed to maintain a life insurance policy during the employee's
retirement or provide the employee with a death benefit based on the substantive agreement with the employee. A
consensus also was reached that an employer should recognize and measure an asset based on the nature and
substance of the collateral assignment split-dollar life insurance arrangement. The consensuses are effective for
fiscal years beginning after December 15, 2007, including interim periods within those fiscal years, with early
application permitted. The Corporation does not expect the implementation of EITF 06-10 to have a material effect
on its consolidated financial statements.
In February 2007, the FASB issued FSP No. FAS 158-1, Conforming Amendments to the Illustrations in FASB Statements
No. 87, No. 88 and No. 106 and to the Related Staff Implementation Guides. FSP No. FAS 158-1 provides conforming
amendments to the illustrations in SFAS 87, 88, and 106 and to related staff implementation guides as a result of the
issuance of SFAS 158. The conforming amendments made by this FSP are effective as of the effective dates of SFAS
158. The unaffected guidance that this FSP codifies into SFAS 87, 88, and 106 does not contain new requirements
and therefore does not require a separate effective date or transition method. The Corporation does not expect the
implementation of FSP No. FAS 158-1 to have a material effect on its consolidated financial statements.
In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 109,
Written Loan Commitments Recorded at Fair Value Through Earnings. SAB 109 expresses the current view of the staff
that the expected net future cash flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants
are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The Corporation does not expect the
implementation of SAB 109 to have a material effect on its consolidated financial statements.
In December 2007, the SEC issued SAB No. 110, Use of a Simplified Method in Developing Expected Term of Share
Options. SAB 110 expresses the current view of the staff that it will accept a company’s election to use the
simplified method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless
of whether the company has sufficient information to make more refined estimates. The staff noted that it
understands that detailed information about employee exercise patterns may not be widely available by December
31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified
method beyond December 31, 2007. The Corporation does not expect the implementation of SAB 110 to have a
material effect on its consolidated financial statements.
62
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
Amortized
Cost
$ 7,446
1,776
67,209
3,994
$80,425
December 31, 2007
Gross
Unrealized
Losses
Gross
Unrealized
Gains
$ 36
11
1,032
204
$1,283
Estimated
Fair Value
$ 7,467
1,771
68,150
3,867
$81,255
$ (15)
(16)
(91)
(331)
$(453)
(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
The amortized cost and estimated fair value of securities at December 31, 2007, 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, 2007
Amortized
Cost
$ 4,408
22,215
31,140
18,668
3,994
$ 80,425
Estimated
Fair Value
$ 4,413
22,497
31,636
18,842
3,867
$ 81,255
Proceeds from the maturities and calls of securities available for sale in 2007 were $6.19 million, resulting in gross
realized gains of $21,000. Securities with an aggregate amortized cost of $34.37 million and an aggregate fair value
of $35.00 million were pledged at December 31, 2007 to secure public deposits, Federal Reserve Bank treasury, tax
and loan deposits and repurchase agreements.
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.
63
Securities in an unrealized loss position at December 31, 2007, 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
$ --
--
11,323
11,323
988
$ --
--
67
67
218
$ 1,235
790
2,334
4,359
482
$ 15
16
24
55
113
$ 1,235
790
13,657
15,682
1,470
$ 15
16
91
122
331
securities
$12,311
$285
$ 4,841
$168
$17,152
$453
The primary cause of the temporary impairments in the Corporation’s investment in debt securities was attributable
to fluctuations in interest rates. There are 44 debt securities totaling $15.68 million and five equity securities totaling
$1.47 million considered temporarily impaired at December 31, 2007. 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, 2007 and no impairment has
been recognized.
Securities in an unrealized loss position at December 31, 2006, 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
$ 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
$ 94
34
59
187
29
$216
securities
$4,591
$55
$10,789
$161
$15,380
64
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,
2007
2006
$123,239
26,719
257,951
25,282
8,991
160,196
602,378
(534)
601,844
(15,963)
$585,881
$115,885
13,650
236,157
24,880
8,951
132,864
532,387
(328)
532,059
(14,216)
$517,843
Consumer loans included $231,000 and $373,000 of demand deposit overdrafts at December 31, 2007 and 2006,
respectively. Loans on nonaccrual status were $2.62 million and $1.84 million at December 31, 2007 and 2006,
respectively. If interest income had been recognized on nonaccrual loans at their stated rates during fiscal years
2007, 2006 and 2005, interest income would have increased by approximately $56,000, $70,000 and $270,000,
respectively. Accruing loans past due for 90 days or more were $578,000 and $1.64 million at December 31, 2007
and 2006, respectively. The balance of impaired loans was $291,000 and $781,000 at December 31, 2007 and 2006,
respectively, for which no specific valuation allowance was deemed necessary. The average balances of impaired
loans for 2007, 2006 and 2005 were $557,000, $2.24 million and $4.22 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,
2006
2005
2007
$14,216
7,130
(7,300)
1,917
$15,963
$13,064
4,625
(5,093)
1,620
$14,216
$11,144
5,520
(4,985)
1,385
$13,064
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
December 31,
2007
2006
$ 6,734
26,321
20,153
53,208
(20,354)
$32,854
$ 6,776
25,642
18,641
51,059
(17,870)
$33,189
65
NOTE 6: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, $100 or more
Other time deposits
December 31,
2007
2006
$ 97,006
165,943
$262,949
$ 95,180
158,945
$254,125
Remaining maturities on time deposits at December 31, 2007 are as follows (dollars in thousands):
2008
2009
2010
2011
2012
Thereafter
$211,022
38,407
9,284
2,321
1,636
279
$262,949
Time deposits at December 31, 2007 included $3.00 million of brokered deposits, which mature in 2008.
NOTE 7: Borrowings
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 $2.57 million on December 31, 2007 and $5.46 million on December 31, 2006. Short-term
borrowings also include a $14.0 million federal funds line with a regional correspondent bank, which had no
outstanding balance on December 31, 2007 and 2006. Short-term borrowings also include a variable-rate, unsecured
line of credit with a third-party lender that matures in June 2008. There was no outstanding balance under this line
of credit on December 31, 2007. The balance outstanding under this line of credit was $7.00 million on December 31,
2006. Short-term borrowings also include advances from the FHLB, which are secured by a blanket floating lien on
all qualifying real estate loans. There was $19.40 million of short-term FHLB advances outstanding on December
31, 2007. There were no short-term advances from the FHLB outstanding on December 31, 2006.
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,
2007
2006
$21,968
$78,735
$26,395
4.83%
4.15%
$21,968
$12,462
$42,165
$25,236
4.80%
4.56%
$12,462
Long-term borrowings at December 31, 2007 consist of advances under a non-recourse revolving bank line of credit
secured by loans at C&F Finance and advances from the FHLB, which are secured by a blanket floating lien on all
qualifying real estate loans. The interest rate on the revolving bank line of credit, which matures in 2010, floats at
the one-month LIBOR rate plus 175 basis points, and the outstanding balance as of December 31, 2007 was $85.96
million. 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 2007. Long-term advances from the FHLB at December 31, 2007 consist of $47.50
million of convertible advances. These advances have fixed rates of interest unless the FHLB exercises its option to
66
convert the interest on these advances from fixed rate to variable rate. The table below presents selected
information on these advances:
(Dollars in thousands)
Balance Outstanding at December 31, 2007
$5,000
$5,000
$7,500
$5,000
$7,500
$7,500
$5,000
$5,000
Interest Rate
Maturity Date
3.90%
4.08
4.15
3.95
3.69
3.70
4.06
2.93
8/30/12
8/30/12
10/19/12
11/17/14
11/28/14
10/19/17
10/25/17
11/27/17
Initial
Conversion
Option Date
2/29/08
8/29/08
10/19/09
11/17/10
11/29/10
10/20/08
10/25/11
2/27/08
The contractual maturities of long-term borrowings, excluding conversion provisions, at December 31, 2007 are as
follows:
(Dollars in thousands)
2008
2009
2010
2011
2012
Thereafter
Fixed Rate
$ --
--
--
--
17,500
30,000
$47,500
Floating Rate
$ --
--
85,959
--
--
--
$85,959
Total
$ --
--
85,959
--
17,500
30,000
$133,459
The Corporation’s unused lines of credit for future borrowings total approximately $92.71 million at December 31,
2007, which consists of $57.67 million available from the FHLB, $14.04 million on C&F Finance’s revolving bank line
of credit, $14.00 million under a federal funds agreement with a third party financial institution and $7.00 million
under a line of credit with a third-party lender.
In December 2007, C&F Financial Statutory Trust II (Trust II), a wholly-owned non-operating subsidiary of the
Corporation, was formed for the purpose of issuing trust preferred capital securities for general corporate purposes
including the refinancing of existing debt. On December 14, 2007, Trust II issued $10.00 million of trust preferred
capital securities in a private placement to an institutional investor and $310,000 in common equity to the
Corporation in exchange for cash. The securities mature in December 2037, are redeemable at the Corporation’s
option beginning after five years, and require quarterly distributions by Trust II to the holder of the securities at a
fixed rate of 7.73% as to $5.00 million of the securities and at a rate equal to the three-month LIBOR rate plus 3.15%
as to the remaining $5.00 million, which rate was 8.21% at December 31, 2007. The fixed rate portion of the
securities converts to the three-month LIBOR rate plus 3.15% in December 2012. The principal asset of Trust II is
$10.31 million of the Corporation’s 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
Trust II to pay the quarterly distributions payable by Trust II to the holders of the trust preferred capital securities.
In July 2005, C&F Financial Statutory Trust I (Trust I), 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, Trust I issued $10.00 million of trust preferred capital
securities in a private placement to an institutional investor and $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 Trust I 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 6.56% at December 31, 2007. The fixed rate portion of the securities converts to the
three-month LIBOR rate plus 1.57% in September 2010. The principal asset of Trust I is $10.31 million of the
Corporation’s trust preferred capital notes with like maturities and like interest rates to the trust preferred capital
67
securities. The interest payments by the Corporation on the debt securities will be used by Trust I to pay the
quarterly distributions payable by Trust I 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 Corporation’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:
Share-based awards
Weighted average number of common shares used in earnings per
common share—assuming dilution
December 31,
2006
2005
2007
$8,480
$12,129
$11,788
3,039,240
3,151,860
3,375,153
121,783
121,569
132,759
3,161,023
3,273,429
3,507,912
Options on approximately 98,000, 133,000 and 157,000 shares were not included in computing diluted earnings per
common share for the years ended December 31, 2007, 2006 and 2005, respectively, because they were anti-dilutive.
NOTE 9: Income Taxes
Principal components of income tax expense as reflected in the consolidated statements of income are as follows:
Year Ended December 31,
2007
2006
$ 4,456
(1,112)
$ 3,344
$ 6,296
(1,115)
$ 5,181
$6,400
(970)
$5,430
2005
(Dollars in thousands)
Current taxes
Deferred taxes
68
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
2007
2006
$5,939
$6,146
$4,139
(913)
(7.7)
(876)
(5.0)
(888)
(5.2)
115
248
1.0
2.1
(72)
(101)
(72)
$3,344
(0.6)
(0.9)
(0.6)
28.3%
84
302
(48)
(98)
(80)
$5,430
0.5
1.7
(0.3)
(0.6)
(0.4)
30.9%
59
339
0.3
2.0
(75)
(74)
(119)
$5,181
(0.5)
(0.4)
(0.7)
30.5%
Other assets include net deferred income taxes of $6.64 million and $5.57 million at December 31, 2007 and 2006,
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
Defined benefit plan
Share-based compensation
Interest on nonaccrual loans
Other
Deferred tax asset
Deferred tax liability
Depreciation
Goodwill and other intangible assets
Other
Net unrealized gain on securities available for sale
Deferred tax liability
Net deferred tax asset
December 31,
2006
2007
$6,043
1,476
94
155
10
480
8,258
(39)
(1,260)
(27)
(291)
(1,617)
$6,641
$5,409
1,367
--
38
28
234
7,076
(63)
(952)
(79)
(412)
(1,506)
$5,570
The Corporation files income tax returns in the U.S. federal jurisdiction and several states. With few exceptions, the
Corporation is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years
prior to 2004. The Corporation adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on
January 1, 2007 with no effect on the financial statements.
69
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 in the Bank’s contributions after two years of service,
40% after three years, 60% after four years, 80% after five years and fully vested after six years. The amounts
charged to expense under this plan were $420,000, $564,000 and $515,000 in 2007, 2006 and 2005, 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% in the employer’s contributions after two years of service, 50% after three years, 75% after
four years, and fully vested after five years. The amounts charged to expense under this plan were $182,000,
$211,000 and $101,000 for 2007, 2006 and 2005, 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 $94,000, $99,000 and $86,000 in 2007, 2006 and 2005, respectively.
Individual performance bonuses are awarded annually to certain members of management under a management
incentive bonus policy adopted by the Bank effective January 1, 1987 and the Management Incentive Plan adopted
by the Corporation on February 25, 2005. The Corporation’s Compensation Committee recommends to the
Corporation’s board of directors the bonuses to be paid to the Chief Executive Officer, the Chief Financial Officer
and the Chief Operating Officer of the Corporation, and recommends to the Bank’s board of directors bonuses to be
paid to certain other senior Bank officers. In addition, the Chief Executive Officer recommends bonuses to be paid
to other officers of the Bank and C&F Finance. 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 $780,000, $683,000 and $586,000 in 2007, 2006 and 2005, respectively. In accordance with employment
agreements for certain senior officers of C&F Mortgage, performance bonuses of $811,000, $1.08 million and $1.46
million were expensed in 2007, 2006 and 2005, respectively. Performance used in determining the awards is directly
related to the profitability of C&F Mortgage.
The Corporation has a nonqualified 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 Plan and to enhance
retirement benefits by providing supplemental contributions from time to time. Expenses under this plan were
$115,000, $79,000 and $62,000 in 2007, 2006 and 2005, 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.
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, 2007 and 2006.
70
(Dollars in thousands)
Plan Year Ended September 30,
2007
2006
$6,029
752
345
(460)
(228)
$6,438
$6,438
777
384
(190)
(326)
$7,083
Change in benefit obligation
Projected benefit obligation, beginning
Service cost
Interest cost
Actuarial loss
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
Amounts recognized as an other liability
Amounts recognized in accumulated other comprehensive income
Net loss
Net obligation at transition
Prior service cost
Deferred taxes
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) An employer contribution of $1.18 million was made in December 2006 and was based on amounts determined in conjunction with the
$6,438
702
--
(326)
$6,814
$ (269)
$ (269)
$ 472
(22)
78
(185)
$ 343
6.3%
8.5
4.0
$5,084
400
1,182
(228)
$6,438
$ --
$ --
$ 932
(27)
85
(346)
$ 644
6.0%
8.5
4.0
actuarial valuation prepared as of October 1, 2006.
The accumulated benefit obligation was $4.60 million and $4.20 million as of the actuarial valuation dates of
October 1, 2007 and 2006, respectively.
(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 (gain) loss
Net obligation at transition
Amortization of net obligation at transition
Prior service cost
Amortization of prior service costs
Deferred taxes
Total recognized in accumulated other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
Year Ended December 31,
2007
2005
2006
$ 777
384
(447)
7
(5)
16
732
(461)
--
5
--
(7)
162
(301)
$ 431
$ 752
345
(428)
7
(5)
45
716
932
(27)
--
85
--
(346)
644
$1,360
$ 550
294
(346)
7
(5)
45
545
--
--
--
--
--
--
--
$ 545
71
The estimated net obligation at transition and prior service cost that will be (accreted to) amortized from
accumulated other comprehensive income into net periodic benefit cost over the next year are $($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.
2006 2005 2004
6.0%
8.5
4.0
6.0%
8.5
4.0
5.8%
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
2006 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
The benefits expected to be paid by the plan in the next ten years are as follows (dollars in thousands):
2008
2009
2010
2011
2012
2013 – 2017
$ 76
91
95
117
135
1,323
$1,837
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 Bank’s defined benefit pension 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
2007
35%
60
5
100%
2006
30%
56
14
100%
72
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 $1.08 million and $1.22 million at December 31, 2007
and 2006, respectively. New advances to directors and officers totaled $453,000 and repayments totaled $589,000 in
the year ended December 31, 2007. 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.
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 2007 and 2006, all options outstanding under the 2004 Plan on December 31, 2007
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, 2007 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 and the vesting of options granted in 2006, all options
outstanding under the Director Plan on December 31, 2007, except for those granted in 2007, are exercisable. As of
December 31, 2007, there was $36,000 of total unrecognized compensation cost related to options granted under the
Director Plan. The cost is expected to be recognized during 2008. 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,
73
options to purchase common stock are granted to regional directors of the Bank. Options are issued to 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 2007 and 2006, all options outstanding under the Regional Director Plan on December 31, 2007 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
2007
Intrinsic
Exercise
Value
Price*
Shares
2006
Exercise
Price*
Shares
2005
Exercise
Price*
Shares
530,167
13,500
(24,000)
(9,450)
510,217
$31.54
37.17
21.39
31.65
564,067
13,500
(32,000)
(15,400)
$30.65
39.60
16.46
37.13
473,667
137,900
(29,600)
(17,900)
$32.17
$1,954
530,167
$31.54
564,067
$27.58
37.72
15.35
29.29
$30.65
Options exercisable at year-end
Weighted-average fair value of options granted
496,717
$1,954
516,667
564,067
during the year
$8.05
$10.10
$8.96
The total intrinsic value of in-the-money options exercised in 2007 was $488,000. Cash received from option
exercises during 2007 was $513,000. The Corporation has a policy of issuing new shares to satisfy the exercise of
stock options.
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,
2006
2005
2.9%
5.0
8
25.0%
5.2%
3.4%
8.0
8
25.0%
4.5%
2007
3.3%
5.0
8
25.0%
4.7%
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, 2007:
Options Outstanding
Options Exercisable
Number
Outstanding at
Remaining
December 31,
Contractual
Exercise
2007
178,717
256,700
74,800
510,217
Life*
3.3
7.6
5.9
5.8
Price*
$19.31
38.32
41.79
$32.17
Number
Exercisable at
December 31,
2007
178,717
243,200
74,800
496,717
Exercise
Price*
$19.31
38.38
41.79
$32.03
Range of Exercise Prices
$15.75 to $23.49
$35.20 to $39.60
$40.50 to $46.20
Total
*Weighted average
74
As permitted under the 2004 Plan, the Corporation awards shares of restricted stock to employees. These restricted
shares are subject to a five-year vesting period. As of December 31, 2007 a total of 40,500 shares of restricted stock
were outstanding, which consisted of 18,000 shares issued in 2007 and 22,500 shares issued in 2006. Compensation
is accounted for using the fair market value of the Corporation’s common stock on the date the restricted shares are
awarded, which averaged $31.83 and $39.01 per share for restricted stock issued in 2007 and 2006, respectively.
Compensation expense is charged to income ratably over the vesting period. As of December 31, 2007, there was
$1.26 million of total unrecognized compensation cost related to restricted stock granted under the 2004 Plan. The
cost is expected to be recognized through 2012.
NOTE 13: Regulatory Requirements and Restrictions
The Corporation (on a consolidated basis) 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 1 capital to risk-weighted
assets and of Tier 1 capital to average assets (all as defined in the regulations). For both the Corporation and the
Bank, Tier 1 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 1 capital and a portion of the allowance for loan losses. For the Corporation only, Tier 1 and total capital
include trust preferred securities. Risk-weighted assets for the Corporation and the Bank were $644.55 million and
$638.41 million, respectively, at December 31, 2007 and $592.67 million and $587.40 million, respectively, at
December 31, 2006. Management believes, as of December 31, 2007, that the Corporation and the Bank met all
capital adequacy requirements to which they are subject.
As of December 31, 2007, 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 1 risk-based and Tier 1
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.
75
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, 2007:
Total Capital (to Risk-Weighted Assets)
Corporation
Bank
Tier 1 Capital (to Risk-Weighted Assets)
Corporation
Bank
Tier 1 Capital (to Average Tangible Assets)
Corporation
Bank
As of December 31, 2006:
Total Capital (to Risk-Weighted Assets)
Corporation
Bank
Tier 1 Capital (to Risk-Weighted Assets)
Corporation
Bank
Tier 1 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
$82,376
76,898
72,296
68,819
72,296
68,819
$74,646
76,571
67,161
69,144
67,161
69,144
12.8%
12.1
11.2
10.8
9.4
9.0
12.6%
13.0
11.3
11.8
9.6
9.9
$51,564
51,073
25,782
25,537
30,835
30,633
$47,413
46,992
23,707
23,496
28,123
27,918
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
$63,841
N/A
10.0%
N/A
38,305
N/A
38,291
N/A
6.0
N/A
5.0
N/A N/A
10.0%
$58,740
N/A N/A
6.0
35,244
N/A N/A
5.0
34,897
On December 14, 2007, the Corporation issued $10.00 million of trust preferred securities through a statutory
business trust for general corporate purposes including the refinancing of existing debt. On July 21, 2005, the
Corporation issued $10.00 million of trust preferred securities through a statutory business trust to partially fund
the purchase of 427,186 shares of the Corporation’s common stock at $41 per share on July 27, 2005. These 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, $18.07 million and $10.00 million of the Corporation’s trust
preferred securities is included in Tier 1 capital in the Corporation’s capital ratios presented above for 2007 and
2006, respectively. The remaining $1.93 million of the Corporation’s total trust preferred securities outstanding on
December 31, 2007 is included in the Corporation’s total capital ratios presented above for 2007 as a component of
Tier 2 capital.
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by
the Bank to the Corporation. The total amount of dividends that may be paid at any date is generally limited to the
retained earnings of the Bank, and loans or advances are limited to 10 percent of the Bank’s capital stock and
surplus on a secured basis.
76
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 Corporation 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
$98.02 million and $93.26 million at December 31, 2007 and 2006, 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 $7.06 million and $8.79 million at December 31, 2007 and 2006, respectively.
At December 31, 2007, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to
approximately $22.79 million and loans held for sale of $34.08 million. C&F Mortgage has entered into
corresponding commitments with third party investors to sell loans of approximately $56.87 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 $1.19 million, $911,000 and $786,000, for the years ended December 31,
2007, 2006 and 2005, respectively.
77
Future minimum lease payments due under these leases as of December 31, 2007 are as follows (dollars in thousands):
2008
2009
2010
2011
2012
Thereafter
$1,043
661
521
490
168
--
$2,883
As of December 31, 2007, the Corporation had $6.44 million in deposits in financial institutions in excess of amounts
insured by the FDIC, the majority of which was on deposit at a correspondent bank.
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 discount rates equal to the
market rates currently charged on similar products.
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.
78
(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
December 31,
2007
2006
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
$ 12,263
81,255
585,881
34,083
5,069
$ 12,263 $ 28,506
67,584
517,843
53,504
4,432
81,255
583,467
35,073
5,069
$ 28,506
67,584
517,000
54,913
4,432
264,622
262,949
176,047
2,115
267,193
263,152
173,351
2,115
278,710
254,125
115,056
1,915
277,310
255,360
113,869
1,915
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.”
79
(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, 2007
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 40,203
—
5,411
45,614
17,490
14,626
9,163
41,279
$ 4,335
$634,722
$ —
$ 1,711
$ 2,482
15,854
2,790
21,126
992
11,095
6,210
18,297
$ 2,829
$ 44,841
$ —
$ 273
$ 26,060 $ —
—
1,254
1,254
—
590
26,650
$ (3,920)
(21)
—
(3,941)
$ 64,825
15,833
10,045
90,703
8,708
4,317
9,200
22,225
181
720
141
1,042
$ 4,425 $ 212
$ 167,400 $ 40
$ 10,724 $ —
$ 267 $ —
(3,993)
29
—
(3,964)
$ 23
$(61,407)
$ —
$ —
23,378
30,787
24,714
78,879
$ 11,824
$785,596
$ 10,724
$ 2,251
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
80
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income before income taxes
Total assets
Goodwill
Capital expenditures
Year Ended December 31, 2005
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 30,857
—
4,342
35,199
8,712
11,368
6,995
27,075
$ 8,124
$571,091
$ —
$ 11,830
$ 3,178
18,193
3,719
25,090
1,532
13,457
5,012
20,001
$ 5,089
$ 47,574
$ —
$ 459
$ 17,799
—
417
18,216
$ —
—
912
912
$ (3,064)
1
—
(3,063)
4,880
2,766
6,919
14,565
—
568
185
753
$ 3,651 $ 159
$ 119,113 $ 19
$ 10,724 $ —
$ 172 $ —
(3,127)
118
—
(3,009)
$ (54)
$(65,840)
$ —
$ —
$ 48,770
18,194
9,390
76,354
11,997
28,277
19,111
59,385
$ 16,969
$671,957
$ 10,724
$ 12,461
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 one-month 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,
2007
2006
$ 147
3,867
2,087
79,821
$85,922
$ —
20,620
78
65,224
$85,922
$ 122
4,127
1,343
79,865
$85,457
$ 7,000
10,310
141
68,006
$85,457
81
Year Ended December 31,
2006
2005
2007
$ 292
—
(874)
19,394
(10,325)
584
(591)
$ 8,480
$ 194
—
(1,106)
4,038
8,681
518
(196)
$12,129
$ 306
27
(448)
2,492
9,354
227
(170)
$11,788
Year Ended December 31,
2006
2005
2007
$ 8,480
$12,129
$11,788
10,325
299
—
(391)
4
18,717
500
(555)
(10,000)
(310)
(10,365)
(7,000)
10,310
(8,435)
(3,769)
567
(8,327)
25
122
$ 147
(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
(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
Increase (decrease) in other liabilities
Net cash provided by operating activities
Investing activities:
Proceeds from maturities and calls of securities
Purchase of securities
Investment in bank subsidiary
Investment in statutory trust
Net cash (used in) provided by investing activities
Financing activities:
Net (decrease) increase in borrowings
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 increase (decrease) in cash and cash equivalents
Cash at beginning of year
Cash at end of year
82
NOTE 18: Quarterly Condensed Statements of Income—Unaudited
2007 Quarter Ended
September 30 December 31
$16,735
8,120
6,472
12,309
2,283
1,723
0.56
0.31
March 31 June 30
$15,299
8,510
5,798
11,482
2,826
2,011
0.62
0.31
$16,821
8,936
6,446
12,197
3,185
2,284
0.73
0.31
$15,970
8,751
7,162
12,383
3,530
2,462
0.77
0.31
June 30
2006 Quarter Ended
September 30 December 31
$15,276
8,740
7,330
12,125
3,945
2,765
0.84
0.31
March 31
$13,493
8,285
5,986
10,630
3,641
2,526
0.77
0.27
$14,763
8,793
7,189
11,434
4,548
3,112
0.95
0.29
$15,050
9,682
6,882
11,139
5,425
3,726
1.14
0.29
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
*The total of quarterly EPS amounts differs from EPS for the year ended
December 31, 2006 due to rounding.
83
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 balance sheets of C&F Financial Corporation and Subsidiary as of December 31,
2007 and 2006, and the related consolidated statements of income, shareholders' equity and cash flows for the years
ended December 31, 2007, 2006 and 2005. We also have audited C&F Financial Corporation and Subsidiary's
internal control over financial reporting as of December 31, 2007, 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 included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on 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 audits of the 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, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included 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
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.
84
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, 2007 and 2006, and the results of
their operations and their cash flows for the years ended December 31, 2007, 2006 and 2005, in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, C&F Financial
Corporation and Subsidiary maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control— Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Winchester, Virginia
February 26, 2008
85
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
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
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, 2007. 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, 2007, the Corporation’s internal control over financial reporting
was effective based on those criteria.
The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2007 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 the Corporation’s internal control over financial reporting appears on pages 84
through 85 hereof.
86
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, 2007 that have materially affected, or are
reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
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
2008 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 28 of the 2008 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 four
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, C. Elis Olsson 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.
87
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 9 through 20 of the 2008 Proxy Statement under the captions,
“Compensation Committee Interlocks and Insider Participation,” “Executive Compensation” and “Compensation
Committee Report,” and the information on pages 20 through 25 of the 2008 Proxy Statement are incorporated
herein by reference. The information regarding director compensation contained on pages 7 through 8 of the 2008
Proxy Statement under the caption, “Director Compensation,” is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained on pages 2 through 3 of the 2008 Proxy Statement under the caption, “Security
Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.
The information contained on page 36 of the 2008 Proxy Statement under the caption, “Equity
Compensation Plan Information,” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information contained on pages 8 through 9 of the 2008 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 2008 Proxy Statement under the caption, “Director Independence,” is incorporated herein by
reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained on pages 27 through 28 of the 2008 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 Amended and Restated Bylaws of C&F Financial Corporation, as adopted October 16, 2007
(incorporated by reference to Exhibit 3.2 to Form 8-K filed October 22, 2007)
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 Restated VBA Executives’ Non-Qualified Deferred Compensation Plan for C&F Financial
Corporation
*10.4.1 Adoption Agreement
for
the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation dated as of January 1, 2008
*10.4.2 Attachment to the Adoption Agreement for the Restated VBA Executives’ Non-Qualified
Deferred Compensation Plan for C&F Financial Corporation dated as of January 1, 2008
*10.5 Restated VBA Directors’ Deferred Compensation Plan for C&F Financial Corporation
*10.5.1 Adoption Agreement for the Restated VBA Director’s Deferred Compensation Plan for C&F
Financial
*10.6 Amended and Restated C&F Financial Corporation 1994 Incentive Stock Plan
*10.7 Amended and Restated C&F Financial Corporation 1998 Non-Employee Director Stock
Compensation Plan
*10.8 Amended and Restated C&F Financial Corporation 1999 Regional Director Stock
Compensation Plan
*10.9 C&F Financial Corporation Management Incentive Plan dated February 25, 2005, as amended
March 6, 2006 (incorporated by reference to Exhibit 10.8 to Form 10-K filed March 9, 2006)
*10.10 Amended and Restated C&F Financial Corporation 2004 Incentive Stock Plan
89
*10.11 Form of C&F Financial Corporation Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.2 to Form 8-K filed December 29, 2004)
*10.12 Employment Agreement dated April 16, 2002 between C&F Mortgage Corporation and
Bryan McKernon, as amended December 19, 2006 (incorporated by reference to Exhibit 10.11
to Form 10-K filed March 9, 2007)
*10.13 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)
*10.14 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)
*10.15 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)
*10.16 Base Salaries for Named Executive Officers of C&F Financial Corporation
*10.17 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
(incorporated by reference to Exhibit 10.20 to Form 10-K filed March 9, 2007)
10.21 Second Amendment to the Loan and Security Agreement by and between Wells Fargo
Financial Preferred Capital, Inc. and C&F Finance Company dated as of March 16, 2007
(incorporated by reference to Exhibit 10.21 to Form 10-Q filed May 9, 2007)
10.22 Third Amendment to the Loan and Security Agreement by and between Wells Fargo
Financial Preferred Capital, Inc. and C&F Finance Company dated as of June 18, 2007
(incorporated by reference to Exhibit 10.22 to Form 10-Q filed August 3, 2007)
10.23 Fourth Amendment to the Loan and Security Agreement by and between Wells Fargo
Financial Preferred Capital, Inc. and C&F Finance Company dated as of October 31, 2007
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 5, 2008
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/ Audrey D. Holmes
Audrey D. Holmes, 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/ C. Elis Olsson
C. Elis Olsson, Director
/s/ Paul C. Robinson
Paul C. Robinson, Director
Date: March 5, 2008
Date: March 5, 2008
Date: March 5, 2008
Date: March 5, 2008
Date: March 5, 2008
Date: March 5, 2008
Date: March 5, 2008
Date: March 5, 2008
Date: March 5, 2008
Date: March 5, 2008
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 and (2) the NASDAQ Bank Index. The graph assumes $100
invested on December 31, 2002 in the Corporation, the NASDAQ Total Return Index and the NASDAQ Bank Index
and shows the total return on such an investment, assuming reinvestment of dividends as of December 31, 2007.
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
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
2002
2003
2004
2005
2006
2007
Index
C&F Financial Corporation
NASDAQ Total Return Index
NASDAQ Bank Index
2002
100
100
100
2003
164
150
130
2004
171
163
144
2005
162
165
138
2006
178
181
153
2007
139
199
119
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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.
C&F Financial Corporation is a one-bank holding
company providing a full range of banking services to
individuals and businesses through its subsidiaries.
C&F Bank (Citizens and Farmers Bank) offers quality
banking services to individuals and businesses through
18 retail branches located from Hampton to Richmond.
C&F Mortgage Corporation originates and sells
residential mortgages throughout Virginia, North
Carolina, Maryland, Delaware, Pennsylvania and New
Jersey. Through its subsidiaries, C&F Mortgage provides
ancillary mortgage loan production services for loan
settlement, residential appraisals and title insurance.
C&F Finance Company specializes in new and used
automobile lending in Virginia, North Carolina,
Maryland, Kentucky, Ohio and Tennessee.
C&F Investment Services, Inc. provides a full range
of securities brokerage, life and health insurance and
investment services to individuals and businesses
through the Bank’s 18 retail branch locations.
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:
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 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
C&F Annual Report 2007
C&F Annual Report 2007
3600 LaGrange Parkway
Toano, Virginia 23168
757-741-2201
802 Main Street
PO Box 391
West Point, VA 23181
www.cffc.com
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