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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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Left to Right: Laura Shreaves, Tom Cherry, Bryan McKernon, Vern Lockwood,
Larry Dillon, Matthew Steilberg, Amy Doherty, Charlie Link,
Ron Espy, Eric Nost and Dusty Crone
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
in Virginia.
C&F Mortgage Corporation originates and sells
residential mortgages throughout Virginia, North
Carolina, Maryland, Delaware 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, Indiana, North
Carolina, Maryland, Kentucky, Ohio, Tennessee and
West Virginia.
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.
WE BELIEVE
Excellence is the standard for all we do, achieved by encouraging
and nourishing:
• Respect for others
• Honest, open communication
• Individual development and satisfaction
• A sense of ownership and responsibility
for the Corporation’s success
• Participation, cooperation, and teamwork
• Creativity, innovation, and initiative
• Prudent risk-taking and
• Recognition and rewards for achievement.
We must conduct ourselves morally and ethically at all times and
in all relationships.
We have an obligation to the well-being of all the communities we serve.
That our officers and staff are our most important assets, making
the critical difference in how the Corporation performs; and,
through their work and effort, separates us from all competitors.
STOCK LISTING
Current market quotations for the common stock of C&F Financial
Corporation are available under the symbol CFFI.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company serves as transfer agent
for the Corporation.
You may write them at:
59 Maiden Lane, Plaza Level
New York, NY 10038
telephone them toll-free at:
1-800-937-5449
or visit their website at:
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
2008 C&F Annual Report
2008 C&F Annual Report
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2008 IN REVIEW
NET INCOME
(In Thousands)
$12,129
$11,198
$11,788
$8,480
$4,181
2004
2005
2006
2007
2008
EARNINGS PER SHARE
(Assuming Dilution)
$3.71
$3.00
$3.36
$2.68
$1.38
2004
2005
2006
2007
2008
RETURN ON AVERAGE EQUITY
16.78%
17.70%
18.97%
11.86%
12.33%
11.93%
2004
2005
2006
13.03%
10.28%
2007
RETURN ON AVERAGE ASSETS
1.91%
1.82%
1.75%
1.07%
1.11%
1.07%
1.13%
.96%
2004
2005
2006
2007
6.39%
5.64%
2008
0.51%
0.54%
2008
Peer Comparison Source: Federal Financial Institutions Examination
Council (FFIEC) Bank Holding Company Performance Report – 2008
data is through 9/30.
TOM CHERRY
Chief Financial Officer of
C&F Financial Corporation
As the financial crises deepened throughout
2008 it became clear to us that businesses
with capital and liquidity were going to be
the survivors. These companies would be
well-positioned when the economy and
markets began to improve – and we plan to
be one of them.
Actively managing capital is not a new
strategy here at C&F; it has been a part of
our mission statement for a long time. Over
the years we have increased our dividends,
repurchased our stock, and we grew the
bank’s assets – all of which effectively
utilized our capital. In December of 2007
we strengthened our capital by issuing an
additional $10 million in trust preferred
securities, a significant portion of which acts
as Tier 1 capital. We were also pleased that
the government decided to invest in the
healthiest banks throughout the country with
the TARP program; we decided to participate
in order to further strengthen our ability to
serve customers. As a result of all these
actions our capital position remains strong.
We also continue to be very active in manag-
ing our liquidity. While deposits will always
be our biggest source of liquidity, we realized
some time ago that financial institutions
could benefit from diversifying sources of
liquidity and we have done so. As a result
we have never had to worry about liquidity
and our current position, like our capital,
remains strong.
Our actions will allow us to grow and take
advantage of opportunities that may present
themselves in 2009.
2008 C&F Annual Report v Page 1
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LARRY G. DILLON
Letter from the President
On behalf of the Board of
Directors, I am pleased to present C&F
Financial Corporation’s 2008 Annual
Report. While I am concerned about
the economy, C&F remains profitable
and I am confident about our ability
to remain profitable. I am also opti-
mistic about our future, especially as
these economic crises we are now in
begin to subside. Without question,
the past two years have been two of the
most challenging the Company has
ever faced. Unfortunately, with the
current state of the economy, we will
most likely be experiencing more of
the same for some time. >>>>
2008 C&F Annual Report v Page 2
Many believe that this is the worst economic situation since the great
depression and I would have to agree. We are in the midst of a deepening reces-
sion and many banks have tremendous amounts of bad loans and investments
on their books, making the financial sector very vulnerable to any worsening in
the economy.
Some in Washington want to point their fingers at the banks as being the
cause of this economic mess. To a certain degree, there may be some truth in
that. However, most of that would be attributed to the mortgage banks, the
investment banks and the large banks, many of which are no longer with us –
not the “main street” banks.
Blame does not rest with just the banks. The finger could just as easily be
pointed at Washington and some of the policies that originated there. One
example is the Community Reinvestment Act. While this Act may have been
well-intentioned, it forced banks to make loans and investments to individuals
and organizations that might otherwise not have qualified. Another example of
questionable political influence was the push during the Clinton years of mak-
ing residential loans available “to all.” Again, well-intentioned, but look what
those policies may have helped precipitate. And maybe Washington’s biggest
mistake of all was failing to provide sufficient oversight to Freddie Mac and
Fannie Mae and their loose lending practices.
Many of us in the “main street” banking world could see that the lending
practices taking place until just last year would eventually come back to haunt
us: making loans to those who should not qualify; making loans to individuals
where the lender did not or could not verify the borrowers’ income or assets to
assure repayment was feasible; or making variable rate loans to individuals and
qualifying them based on payments determined by the very low teaser rate
versus a normal rate that would be effective at the end of the teaser period. The
new payment amount ended up being one that anyone could see the borrower
could not afford. Most banks did not participate in this type of lending, and
many of those who did are either no longer with us or struggling to survive.
In short, the end result is that real estate values have fallen and sales of new
homes have slowed. Investment values have fallen and that means the net
worth of millions of Americans has been greatly reduced. Some of the larger
financial institutions no longer exist; the economy is in a recession and more
and more jobs are being lost every day. Congress would like banks to lend and
banks would like to lend, but banks want to make loans that will be paid back
as agreed. Who to lend to and who not to lend to – even among financial
institutions – are tough decisions in these times. To use an analogy of the son
of a good friend of mine, it’s like you’ve locked a hundred people into a room;
two of them have a very deadly disease that if you touch them, you too, will die;
no one knows who they are, so no one in the room will touch any of the others.
That was very much the case in September of 2008 when banks stopped lending
to each other and the whole financial system all but collapsed. Today, it is still
in the minds of lenders who want to have confidence that their borrowers will
be around to pay back their loans. To rebuild that faith is going to take time.
Net income for 2008 was $4.18 million (including a loss of $976 thousand,
net of tax benefits, relating to our investments in the preferred stock of Fannie
Mae and Freddie Mac) compared to $8.48 million earned in 2007. This result-
ed in a return on average equity of 6.39% and a return on average assets of
0.51% for 2008, compared to 13.03% and 1.13%, respectively, for 2007. Total
assets increased from $786 million at the end of 2007 to $856 million at
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December 31, 2008, with loans increasing by more than $50 million. Loans
grew in the 7-8% range at both the Bank and the Finance Company. Deposits
grew 4.39% for the year, going from $528 million at the end of 2007 to $551
million at December 31, 2008.
The primary factors contributing to our earnings decline were the continued
pressure on our spread; our provisions for loan losses; expenses associated with
troubled assets; and, the impact of the losses from our Freddie Mac and Fannie
Mae investments, as mentioned above.
Our margin compression can probably best be explained by example. Over
the past two years, the Federal Reserve has aggressively dropped interest rates
in its attempt to spur the economy. The result is that the Prime Rate is now
3.25%. At C&F Bank, approximately half of our loans are indexed to this rate.
Each time the Prime Rate dropped 0.5%, our interest income declined $1 million.
And then there is the fact that we have competitors still offering 12-month CDs
at 3%, which keeps the cost of deposits higher for all banks. Therefore, the
Bank’s net interest margin has declined, making it harder to cover overhead
and return a profit.
With the decline in the economy, some of our customers’ ability to repay
their loans on a timely basis has diminished. With the drop in home prices, as
well as the drop in lot values, several of our real estate development loans,
which were once well-secured and properly performing, became nonperforming
loans. With regard to our consumer real estate loans, even though our customers’
equity values in their homes have dropped significantly, we have not yet experi-
enced a significant increase in delinquencies. However, the same cannot be said
regarding the experience at our Finance Company, where the effects of rising
unemployment have been immediately reflected in higher charge-offs.
With the decline in the overall economy as well as the decline in the real
estate market, increasing our provisions for loan losses became imperative in
2008. Overall, we increased our provisions to $13.8 million in 2008, which is
$6.6 million over the $7.1 million expensed in 2007. The majority of the increase,
$3.9 million, was made by the Finance Company due to its growth in loans
outstanding as well as significantly higher charge-offs resulting from the
deteriorating economy. At the Bank, the $2.0 million increase in provision was
necessitated by an increase in nonperforming assets to $18.6 million, consist-
ing of $17.2 million of nonaccrual loans and $1.4 million of foreclosed proper-
ties. The largest components of the nonaccrual loans are two commercial
relationships aggregating $15.6 million, which are secured by residential real
estate. Based on current appraisals of the collateral, we believe that we have
provided adequately for future loan losses. The foreclosed properties consist
primarily of $1.3 million with one commercial relationship.
The Mortgage Company provided for $1.1 million of what is known as
indemnification losses in 2008. These are losses on loans we originated that
had early payment defaults or loans sold to investors that were later found to
have been made under fraudulent circumstances (i.e., the customers gave us
fraudulent information in order to get their loans approved). Based on the
loans returned to us up to this point, we believe that we have adequately
reserved for potential losses. In addition to our provisions for loan losses at our
core business segments, expenses associated with dealing with problem loans
have increased. >>>>
LAURA SHREAVES
Senior Vice President of Human Resources
A business must foster an environment of
trust and commitment in order to recruit,
grow, and retain superior talent. And creat-
ing this high level of trust and commitment
begins and ends with the quality of the rela-
tionships we build as a team. Trust creates
loyalty, and loyal employees do a great job
for our shareholders. I am committed to this!
Like other companies, we here at C&F are
seeing a generational transition with regard
to our talent base. We value the experience of
the teammates who have been here for many
years and we are grateful for their dedication
and loyalty, and it is very important to me
that we continually invest in these relation-
ships so that these employees stay with us.
We are also adding individuals to our team
who bring new experience and skill, and
they are strengthening the bank too. Our
future depends on our ability to continue to
recruit that talent, and it is my job to make
sure that happens.
2008 C&F Annual Report v Page 3
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BRYAN MCKERNON
President of C&F Mortgage Corporation
I am proud to tell you that 2009 is already
presenting real opportunities for us to
strengthen our already strong performance
at C&F Mortgage.
The disruption in the mortgage market is pre-
senting us with the opportunity to strengthen
our talent base. Many of our mortgage
competitors are struggling or have even
disappeared; C&F is known as a quality
mortgage provider and that is helping us
attract top talent from struggling competitors.
We have proven the ability to retain talent
once we have it, and our competitors are
willing to let it go now.
Because of our reputation we are also seeing
an opportunity to negotiate favorable
product offerings, enabling us to outperform
the market.
In summary, I know that we have a power-
ful combination: the best talent delivering
the best products available from a company
with a strong reputation. We appreciate the
opportunity to serve you as our shareholder.
2008 C&F Annual Report v Page 4
While we believe the current reserves in each of our major business
segments are adequate for potential loan losses, we are constantly monitoring
the situation and may increase reserves in the future based upon changes in
our portfolios and general economic conditions.
Our capital and liquidity positions at the Bank remain strong. As we began
to see the credit markets tightening last year, we obtained several new lines of
credit that could be used during a liquidity crunch. We wanted to have many
options available to us to obtain liquidity should the credit crisis worsen. We
now feel that we are in an excellent position. Also, at year-end the Bank’s total
capital well exceeded regulatory guidelines for well-capitalized status.
Even though we knew we were well-capitalized, we took advantage of the
U.S. Treasury’s TARP (Troubled Asset Relief Program) Capital Purchase Program by
selling $20 million of preferred stock to the Treasury on January 9, 2009. Our
ultimate decision to participate in this program took several turns. Initially,
we had no interest in the Capital Purchase Program because we were well-
capitalized. As the Treasury’s discussions progressed, however, the initiative
changed to being one of assuring that the healthiest banks survived the
economic crisis by infusing them with more capital. At the encouragement
of both of our regulators, the FDIC and the State Bureau of Financial
Institutions, we reconsidered submitting an application. We certainly wanted
to be recognized as one of the healthiest banks in the country and given that
the dividend rate on the preferred stock was reasonable, we believed this to be
an appropriate way to help further assure our future.
This was not “bailout” money. We have to pay a 5% annual dividend on the
preferred stock and we issued a warrant, which allows the Treasury to purchase
approximately 168,000 shares of our common stock. The Treasury will actually
receive a reasonable return through both the dividend and the right to purchase
our stock through the warrant and then resell it at a profit. We believe that
being one of the first 200 banks in the country to sell stock under this program
has distinguished C&F as one of the healthiest banks in the country.
The picture has changed as Congress has become more involved. Congress
wants banks to leverage this capital by making more loans. At first glance this
may look like a good plan, yet we must remember that part of what got us into
this situation to begin with was their encouragement for banks to make loans
that should not have been made. Congress should remember that bankers want
to make ALL the good loans they can but bankers also want to know that they
are making loans that will be repaid as agreed. If the government continues to
change the rules of participation in the Capital Purchase Program, we may
consider the merits of paying it back sooner rather than later.
We are doing everything we can to make as many good loans as possible,
with or without the government’s encouragement. To incent buyers to act now,
we are offering special financing rates for real estate that we have acquired
through foreclosure, as well as real estate owned by our developers and builders
who are experiencing slow sales of their properties. This helps our customers
and C&F. We are also working with our customers to do everything possible to
avoid foreclosures. We want to do everything we can to help pull us all out of
this crisis – for everyone’s sake.
We know that our dividend rate and our stock price are important to all of
our shareholders. Unfortunately, our stock price has been rising and falling
with the market fluctuations of the entire financial sector. Given where bank
earnings are, I don’t see any significant changes in the near future. As to our
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dividend rate, we are trying to do whatever we can to keep it at its current level.
However, dividends deplete capital and it is very important that we have
sufficient capital for future growth as well as unexpected losses. Please know
that the Board is constantly evaluating our dividend policy and its impact on
our capital and other business activities.
Even though recent events can be depressing to some, I try to find positives
in whatever happens, and I think we can find quite a few surrounding our cur-
rent situation. First, there is a good cleansing taking place in the market. I am
hopeful the end result will be that the financial markets learn the lessons from
these events and the irresponsible lending practices of the last ten to fifteen
years will not reappear. Prudent lending should return: evaluating the ability to
repay, verifying income and assets, etc. As a part of this cleansing, some of the
players of the last few years will no longer be with us – for example, those that
took shortcuts, those that deceived customers, those that were only interested
in what they could make off the transaction, etc. From a personal perspective,
this readjustment in the real estate market should make it more feasible for our
children to have hope for owning their own homes, which is certainly more
feasible than if real estate prices had continued their upward spiral.
What can we expect for 2009? I’m not sure that the “bottom” has been
reached. Given that scenario, I would expect the Bank to have more loans go into
a nonperforming status, which would require us to continue to build our
reserves for bad debt, thereby negatively impacting income. I’m not sure that it
will be worse than 2008, but it probably will not be a whole lot better. I would
expect our Finance Company to have more charge-offs as a result of higher
unemployment. I would expect movement in the housing market if mortgage
rates continue to decline. More people will also take advantage of refinancing
their homes and purchase homes now within their financial reach due to the
lower prices in the market. This would mean more production and possibly
more income at the Mortgage Company. If interest rates increase, all bets are off.
2009 will most likely be another difficult year. However, by the fourth
quarter, I believe we will have a better understanding of the possibility of
economic improvement. I believe our future remains bright. When we can
stabilize our reserves for bad debts, when interest spreads improve to more
traditional levels, and when the housing market improves, then we will see
improvements in our earnings. I am optimistic.
It has been a tough year for all. I want to thank all of our C&F employees.
They have worked incredibly hard to help lead our company through this
highly challenging and chaotic environment. Many of these employees have
sacrificed a great deal to put in an effort of which we all should be proud. As
you read this Annual Report, you will see the names and faces, and read the
comments of several of our senior leaders; these are some of the individuals
who I am counting on to join me in leading C&F to great success as we move
forward. Many thanks also to our directors for their continued guidance and,
as always, many thanks to you for your continued support. May God’s
blessings help pull us all through these difficult times.
Larry G. Dillon
Larry G. Dillon
Chairman, President & Chief
Executive Officer
MATTHEW STEILBERG
Senior Vice President of Retail Banking
A business must have a distinct and remark-
able advantage over its competitors in order
to be successful. Our advantage in prior
years has been providing superior customer
service. And while we still feel good about
our customer service, our competitors have
improved theirs too – and so that advantage
has narrowed. That’s why we will add new
customer experience strategies this year to
build on our positive reputation, thereby
creating a compelling and distinctive
advantage for C&F.
We will also implement new business devel-
opment plans, one of which is to add more
branch teammates dedicated to proactively
servicing and growing current customer
relationships. These Relationship Bankers
will also work very hard to acquire new
customers from our competition.
Customers will also see Managers who are
even more passionate about the excellence of
their business; they will be visibly active on
the floor of their branch, leading a distinctive
customer experience.
Lastly, we will all be held accountable for
exceeding budget expectations and greatly
strengthen how we reward and recognize
our very best employees.
Please come see us!
2008 C&F Annual Report v Page 5
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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
C&F DIRECTORS & OFFICERS
C&F FINANCIAL CORPORATION / C&F BANK BOARD OF DIRECTORS
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.
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.
* C&F Financial Corporation Board Member
+ C&F Bank Board Member
SANDSTON / VARINA ADVISORY BOARD
Robert A. Canfield
Attorney-at-Law
Canfield, Shapiro, Baer, Heller & Johnston
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
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
2008 C&F Annual Report v Page 6
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.
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
Paul C. Robinson*+
Owner & President
Francisco, Robinson & Associates, Realtors
Bryan E. McKernon
President & CEO
C&F Mortgage Corporation
_976 PAGES 2/24/09 2:54 PM Page 7
C&F 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
Amy J. Doherty
Senior Vice President, Information Officer
Ronald P. Espy
Senior Vice President & Chief Lending Officer
Laura H. Shreaves
Senior Vice President & Director of
Human Resources
Matthew H. Steilberg
Senior Vice President, Retail Banking
E. Turner Coggin
Vice President, Senior Loan Underwriter
Sandra S. Fryer
Vice President, Application Support Manager
Deborah H. Hall
Vice President, Credit Administration
Donna M. Haviland
Vice President, Director of Internal Audit
Dollie M. Kelly
Vice President, Market Leader
James M. Lull
Vice President, Commercial Lending
Deborah R. Nichols
Vice President, Quality Control
Mary-Jo Rawson
Vice President & Controller
Helga H. Ridenhour
Vice President,
Retail Banking Operations Manager
Christopher A. Spillare
Vice President & Treasurer
Teresa S. Weaver
Vice President, Market Leader
*Officers of C&F Financial Corporation
NEWPORT NEWS, VIRGINIA
Cynthia W. Tatum
Branch Manager
NORGE, VIRGINIA
Taryn R. Haden
Branch Manager
PROVIDENCE FORGE, VIRGINIA
James D. W. King
Vice President & Branch Manager
QUINTON, VIRGINIA
Van N. McPherson
Assistant Vice President & Branch Manager
RICHMOND, VIRGINIA
West Broad Street
Kevin L. Ford
Assistant Vice President & Branch Manager
Patterson Avenue
T. Hurst Kelley
Branch Manager
VARINA, VIRGINIA
Tracy E. Pendleton
Vice President, Commercial Lending
SALUDA, VIRGINIA
Elizabeth B. Faudree
Vice President & Branch Manager
SANDSTON, VIRGINIA
Katherine P. Buckner
Vice President & Branch Manager
WEST POINT, VIRGINIA
Main Street
14th Street
Donna T. Callis
Branch Manager
WILLIAMSBURG, VIRGINIA
Jamestown Road
Alec J. Nuttall
Assistant Vice President & Branch Manager
Longhill Road
Marci R. Clodfelter
Assistant Vice President & Branch Manager
YORKTOWN, VIRGINIA
Barrett J. Franklin
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
1340 Alverser Drive
Midlothian, Virginia 23113
(804) 378-0332
J. Charles Link
President
Edward W. Estes III
Vice President, Commercial Lending
Charles T. Nuttle
Vice President, Commercial Lending
Tracy E. Pendleton
Vice President, Commercial Lending
David L. Shaffer
Vice President, Commercial Lending
C&F BANK / PENINSULA
ADMINISTRATIVE OFFICE
City Center
11815 Fountain Way, Suite 410
698 Town Center Drive
Newport News, Virginia 23606
(757) 952-1670
Vern E. Lockwood II
President
David S. Jolley
Vice President, Commercial Lending
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
CHESTER, VIRGINIA
Mary Schoenfelder
Vice President & Branch Manager
HAMPTON, VIRGINIA
Jackie W. Norman
Branch Manager
MECHANICSVILLE, VIRGINIA
Elliot G. Jenkins
Branch Manager
MIDLOTHIAN, VIRGINIA
Kirsten E. D. Francis
Assistant Vice President &
Branch Manager
ERIC NOST
President of C&F Investments
It goes without question that the investment business changed dramatically in 2008.
At C&F Investment Services we are adapting to meet the challenge that this change
has produced.
In 2009 and going forward we are committed to conducting proactive semi-
annual portfolio reviews with our customers. These meetings will enable us
to understand if and how each customer’s personal goals and objectives
have changed. When we understand these changes, we can recommend
the appropriate rebalancing of their portfolio to support those changes.
2008 C&F Annual Report v Page 7
_976 PAGES 2/24/09 2:54 PM Page 8
C&F 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 Witty
Compliance Manager
Michael J. Vogelbach
Manager of Information Systems
Katherine K. Watrous
Controller
CHARLOTTESVILLE, VIRGINIA
William E. Hamrick
Vice President & Branch Manager
FAIRFAX, VIRGINIA
Mark C. Canniff, Sr.
Branch Manager
FREDERICKSBURG, VIRGINIA
Brian F. Whetzel
Branch Manager
R.W. Edmondson III
Branch Manager
CHARLOTTE, NORTH CAROLINA
Patrick B. Edmondson
Sales Manager
HANOVER, VIRGINIA
ROANOKE, VIRGINIA
John H. Reeves III
Vice President & Regional Manager
FISHERSVILLE, VIRGINIA
Vickie J. Painter
Branch Manager
GASTONIA, NORTH CAROLINA
Nancy W. Poteat
Branch Manager
HARRISONBURG, VIRGINIA
Gloria J. Wright
Branch Manager
LYNCHBURG, VIRGINIA
Shirley D. Falwell
Branch Manager
Andrew N. Shields
Branch Manager
MIDLOTHIAN, VIRGINIA
Brandon W. Beswick
Branch Manager–Southside
Donald R. Jordan
Vice President &
Branch Manager–Richmond South
Susan P. Burkett
Vice President & Operations Manager
Daniel J. Murphy
Vice President & Branch Manager–Midlothian
Page C. Yonce
Vice President &
Branch Manager–Richmond Central
NEWPORT NEWS, VIRGINIA
WILLIAMSBURG, VIRGINIA
Linda H. Gaskins
Vice President & Branch Manager
Mary L. Rebholz
Production Manager
RICHMOND, VIRGINIA
William A. Brown, Jr.
Branch Manager–Richmond West
VIRGINIA BEACH, VIRGINIA
Francis B. “Chip” Simkins III
Branch Manager
George Temple Jr.
Production Manager
DUSTY CRONE
Executive Vice President of C&F Finance
As I reflect on our successes and opportunities from 2008, two signifi-
cant opportunities stood out. The first is that we have done an even
better job of being actively involved with the smallest of details that
impact C&F Finance’s performance and profitability. As a leadership
team, we analyze our operations every day for opportunities that will
reduce costs and generate revenue.
Secondly, our entire team is focused on the bottom line with an “all
hands on deck” philosophy. From a sales person collecting an account to
a manager assisting in the verification process, everyone is committed to
doing what it takes to get the job done and make a difference!
2008 C&F Annual Report v Page 8
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
WALDORF, MARYLAND
Timothy J. Murphy
Branch Manager
NEWPORT, DELAWARE
Craig I. Snyder
Branch Manager
MOORESTOWN, NEW JERSEY
R. Scott Wallace
Branch Manager
C&F TITLE AGENCY, INC.
Midlothian, Virginia
Eileen A. Cherry
Vice President & Title Insurance Underwriter
HOMETOWN SETTLEMENT
SERVICES LLC
Annapolis, 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 D. Hinkle, Jr.
Vice President, Human Resources
Thomas W. Young
Vice President, Operations
NORTHERN VIRGINIA/
MARYLAND REGION
Kevin F. Jones Jr.
Area Sales Manager
HAMPTON/VA BEACH, VIRGINIA
RICHMOND, VIRGINIA
EASTERN TENNESSEE
Pamela L. Austin
Regional Manager
GREENSBORO, NORTH CAROLINA
Michael L. Seguin
Area Sales Manager
NASHVILLE, TENNESSEE
CINCINNATI/NORTHERN KENTUCKY
J. Steven Davis
Area Sales Manager
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, 2008
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. ( )
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 30,
2008 was $66,512,458.
There were 3,039,941 shares of common stock outstanding as of February 25, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 16, 2009 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held April 21, 2009 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 12
ITEM 1B. UNRESOLVED STAFF COMMENTS................................................................................. page 16
ITEM 2.
PROPERTIES .......................................................................................................................... page 16
ITEM 3.
LEGAL PROCEEDINGS ....................................................................................................... page 17
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... page 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES........................................................................................................ page 18
ITEM 6.
SELECTED FINANCIAL DATA ......................................................................................... page 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION................................... page 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................................................................................... page 54
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................................... page 57
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE .............................................. page 94
ITEM 9A. CONTROLS AND PROCEDURES...................................................................................... page 94
ITEM 9B. OTHER INFORMATION ..................................................................................................... page 97
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE............ page 97
ITEM 11. EXECUTIVE COMPENSATION ......................................................................................... page 98
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS............................... page 98
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE......................................................................................... page 98
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ..................................................... page 98
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ..................................................... page 99
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, Citizens and Farmers Bank (C&F 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 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 (Trust II)
formed in December 2007 and C&F Financial Statutory Trust I (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, 2008, assets of the Retail Banking
segment totaled $697.9 million. For the year ended December 31, 2008, income before income taxes for this segment
totaled $931,000.
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 13 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, Fairfax, Fishersville, Fredericksburg, Hanover, Harrisonburg, Lynchburg,
Midlothian, Newport News, Roanoke and Virginia Beach and two in Richmond. 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; Wells Fargo Home Mortgage; Franklin American Mortgage Company; the Virginia Housing Development
Authority; JPMorgan Chase Bank, N.A.; and Branch Banking & Trust Company. 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, 2008, assets of the Mortgage Banking segment totaled
$45.1 million. For the year ended December 31, 2008, income before income taxes for this segment totaled $2.4
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 Indiana, Kentucky, Maryland, North Carolina, Ohio, Tennessee and West Virginia through its offices in
Richmond 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 automobile retail installment sales contracts from manufacturer-franchised dealerships with used-car
operations and through selected independent dealerships. C&F Finance selects these dealers based on the types of
vehicles sold. Specifically, C&F Finance prefers to finance later model, low mileage used vehicles because the
initial depreciation on new vehicles is extremely high. 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, 2008,
assets of the Consumer Finance segment totaled $178.7 million. For the year ended December 31, 2008, income
before income taxes for this segment totaled $4.3 million.
Employees
At December 31, 2008, we employed 497 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
C&F Mortgage competes with large national and regional banks, credit unions, smaller regional mortgage
lenders and small local broker operations. As loan volumes have decreased over the past five years, the industry
has seen a consolidation in the number of competitors in the marketplace. However, the competition with regard
to price has increased tremendously as the remaining participants struggle to achieve volume and profitability
benchmarks. The contraction in volume, accompanied by the downturn in the housing markets related to declines
in real estate values, increased payment defaults and foreclosures have had a dramatic effect on the secondary
market. The guidelines surrounding agency business (i.e., loans sold to Fannie Mae and Freddie Mac) have
become much more restrictive and the associated mortgage insurance for loans above 80 percent loan-to-value has
continued to tighten. The jumbo markets have slowed considerably and pricing has increased dramatically. These
changes in the conventional market have caused a dramatic increase in government lending and state bond
programs. To operate profitably in this environment, lenders must have a high level of operational and risk
management skills and be able to attract and retain top mortgage origination talent. C&F Mortgage competes by
attracting the top sales people in the industry, providing an operational infrastructure that manages the guideline
changes efficiently and effectively, offering a product menu that is both competitive in loan parameters as well as
price, and providing consistently high quality customer service levels.
No material part of C&F Mortgage’s business is dependent upon a single customer and the loss of any
single customer would not have a materially adverse effect upon C&F Mortgage’s business. C&F Mortgage, like all
residential mortgage lenders, would be impacted by the inability of Fannie Mae, Freddie Mac, the FHA or the VA
to purchase loans. Although C&F Mortgage sells loans to various intermediaries, the ability of these aggregators to
purchase loans would be limited if these government-sponsored entities were to cease to exist.
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.
During 2008, there was significant contraction in the number of institutions providing automobile
financing for the non-prime market. This contraction accompanied the economic downturn and the tightening of
credit, which contributed to increasing defaults, a decline in collateral values and higher charge-offs. To operate
profitably in this environment, lenders must have a high level of operational and risk management skills.
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. It is also not clear at this time what impact the Emergency Economic Stabilization Act of 2008, enacted
October 3, 2008, as amended by the American Recovery and Reinvestment Act of 2009, enacted February 17, 2009,
(the EESA) or other initiatives of the U.S. Department of the Treasury (Treasury) and other bank regulatory
agencies that have been announced, or any additional program that may be initiated in the future, will have on the
financial markets, the financial services industry, the Corporation or the Bank. 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.
4
Regulation of the Corporation
The Corporation must file annual, quarterly and other periodic reports with the Securities and Exchange
Commission (the SEC). The Corporation is directly affected by the corporate responsibility and accounting reform
legislation signed into law on July 30, 2002, known as the Sarbanes-Oxley Act of 2002 (the SOX Act), and the related
rules and regulations. The SOX Act includes provisions that, among other things: (1) require that periodic reports
containing financial statements that are filed with the SEC be accompanied by chief executive officer and chief
financial officer certifications as to their accuracy and compliance with law; (2) prohibit public companies, with
certain limited exceptions, from making personal loans to their directors or executive officers; (3) require chief
executive officers and chief financial officers to forfeit bonuses and profits if company financial statements are
restated due to misconduct; (4) require audit committees to pre-approve all audit and non-audit services provided
by an issuer’s outside auditors, except for de minimis non-audit services; (5) protect employees of public
companies who assist in investigations relating to violations of the federal securities laws from job discrimination;
(6) require companies to disclose in plain English on a “rapid and current basis” material changes in their financial
condition or operations, as well as certain other specified information; (7) require a public company’s Section 16
insiders to make Form 4 filings with the SEC within two business days following the day on which purchases or
sales of the company’s equity securities were made; and (8) 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.
5
The Federal Deposit Insurance Act (the FDIA) provides that amounts received from the liquidation or other
resolution of any insured depository institution must be distributed, after payment of secured claims, to pay the
deposit liabilities of the institution before payment of any other general creditor or stockholder. This provision
would give depositors a preference over general and subordinated creditors and stockholders if a receiver is
appointed to distribute the assets of the Bank.
The Corporation also is subject to regulation and supervision by the State Corporation Commission of
Virginia.
Capital Requirements
The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital
guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements of these
federal bank regulatory agencies, the Corporation and the Bank are required to maintain a minimum ratio of total
capital to risk-weighted assets of at least 8.0 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, 2008, the total capital to risk-weighted asset ratio of the Corporation was 12.3 percent and the ratio of
the Bank was 12.0 percent. At December 31, 2008, the Tier 1 capital to risk-weighted asset ratio was 10.8 percent for
the Corporation and 10.7 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, 2008, the Tier l leverage ratio was 8.9 percent for the Corporation and
8.7 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.
On January 9, 2009, as part of the Capital Purchase Program (Capital Purchase Program) established by the
Treasury under the EESA, the Corporation issued and sold to Treasury for an aggregate purchase price of $20.0
million in cash (1) 20,000 shares of the Corporation’s fixed rate cumulative perpetual preferred stock, Series A, par
value $1.00 per share, having a liquidation preference of $1,000 per share (Series A Preferred Stock) and (2) a ten-
year warrant to purchase up to 167,504 shares of the Corporation’s common stock, par value $1.00 per share
(Common Stock), at an initial exercise price of $17.91 per share (Warrant). The Series A Preferred Stock may be
treated as Tier 1 capital for regulatory capital adequacy determination purposes. However, because the Series A
Preferred Stock was issued in 2009, it has not been included in the December 31, 2008 capital ratios presented
above.
6
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 (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, 2008, the Bank declared $3.9
million in dividends payable to the Corporation, which were used to fund a portion of the Corporation’s debt
service and dividends payable to shareholders.
Payment of dividends is at the discretion of the Corporation’s board of directors and is subject to various
federal and state regulatory limitations. In addition, as described above, on January 9, 2009, the Corporation issued
and sold to Treasury 20,000 shares of the Corporation’s Series A Preferred Stock and a Warrant to purchase 167,504
shares of the Corporation’s Common Stock as part of the Capital Purchase Program. The purchase agreement
pursuant to which the Series A Preferred Stock and the Warrant were sold includes a limitation that prohibits, prior
to the earlier of January 9, 2012 or the date on which Treasury no longer holds any of the Series A Preferred Stock,
the payment of cash dividends in excess of the Corporation’s current quarterly cash dividend of $0.31 per share
without the Treasury’s consent.
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.
7
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 amended its risk-based assessment system in
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 $87,000 and
$210,000 was applied to offset assessments in 2008 and 2007, respectively. 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.
The EESA temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to
$250,000 per depositor. The legislation provides that the basic deposit insurance limit will return to $100,000 after
December 31, 2009. The legislation did not change coverage for retirement accounts, which continues to be
$250,000.
On October 13, 2008, the FDIC adopted the Temporary Liquidity Guarantee Program (TLGP) because of
disruptions in the credit market, particularly the interbank lending market, which reduced banks’ liquidity and
impaired their ability to lend. The goal of the TLGP is to decrease the cost of bank funding so that bank lending to
consumers and businesses will normalize. The TLGP is industry funded and does not rely on the DIF to achieve
its goals. The final rule implementing the TLGP was approved by the FDIC Board of Directors on November 21,
2008. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt (the
Debt Guarantee Program) and a temporary unlimited guarantee of funds in noninterest-bearing transaction
accounts at FDIC-insured institutions (the Transaction Account Guarantee Program). The Corporation is
participating in both of these programs and will be required to pay assessments associated with the TLGP as
follows:
8
• Under the Debt Guarantee Program, all newly-issued senior unsecured debt (as defined in the regulation)
will be charged an annualized assessment of up to 100 basis points (depending on debt term) on the
amount of debt issued, and calculated through the maturity date of that debt or June 30, 2012, whichever is
earlier. The Corporation has thus far issued no such senior unsecured debt and has incurred no
assessments under the Debt Guarantee Program.
• Under the Transaction Account Guarantee Program, amounts exceeding the existing deposit insurance
limit of $250,000 in any noninterest-bearing transaction accounts (as defined in the regulation) will be
assessed an annualized 10 basis points collected quarterly for coverage through December 31, 2009. The
Corporation has customer accounts that qualify for this coverage and has been incurring assessment
charges since November 13, 2008.
With higher levels of bank failures, the FDIC’s resolution costs have increased significantly. On December
16, 2008, the FDIC adopted a final rule increasing risk-based assessment rates uniformly by 7 basis points, on an
annual basis, for the first quarter of 2009. The FDIC also proposed changes to take effect beginning in the second
quarter of 2009 that would require riskier institutions to pay larger assessments. The comment period for these
proposed changes ended on December 17, 2008. The FDIC has not yet announced a final rule with respect to these
proposed changes.
Federal Home Loan Bank of Atlanta. The Bank is a member of the Federal Home Loan Bank (FHLB) of
Atlanta, which is one of 12 regional FHLBs that provide funding to their members for making housing loans as
well as for affordable housing and community development loans. Each FHLB serves as a reserve, or central bank,
for the members within its assigned region. Each is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. Each FHLB makes loans to members in accordance with policies and
procedures established by the Board of Directors of the FHLB. As a member, the Bank must purchase and maintain
stock in the FHLB. In 2004, the FHLB converted to its new capital structure, which established the minimum
capital stock requirement for member banks as an amount equal to the sum of a membership requirement and an
activity-based requirement. At December 31, 2008, the Bank owned $5.3 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 Treasury, 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 and contact the FBI.
9
The Office of Foreign Assets Control (OFAC), which is a division of the Treasury, 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 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.
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.
10
Other Safety and Soundness Regulations
the
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
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, 2008, the Bank was considered “well capitalized.”
in question
institution
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
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 Board 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.
11
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.
ITEM 1A. RISK FACTORS
A continuation or further deterioration of the current economic environment could adversely impact our financial
condition and results of operations.
A continuation of the recent turbulence in significant portions of the global financial markets, particularly
if it worsens, could impact the Corporation’s performance, both directly by affecting our revenues and the value of
our assets and liabilities, and indirectly by affecting our counterparties and the economy generally. Dramatic
declines in the housing market in the past year have resulted in significant write-downs of asset values by financial
institutions. The Corporation has recognized significantly higher loan loss provisions during 2008 as the level of
nonperforming real estate loans increased throughout the period. Concerns about the stability of the financial
markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening
of credit, reduction of business activity and increased market volatility. It is not clear at this time what impact the
EESA or other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been
announced, or any additional programs that may be initiated in the future, will have on the financial markets and
the financial services industry. The extreme levels of volatility and limited credit availability currently being
experienced could continue to affect the U.S. banking industry and the broader U.S. and global economies, which
would have an effect on all financial institutions, including the Corporation.
12
Deterioration in the soundness of our counterparties could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of
trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in
the financial industry, including brokers and dealers, commercial banks, and other institutional clients. As a result,
defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services
industry generally, could exacerbate the market-wide liquidity crisis and could lead to losses or defaults by us or
by other institutions. Our mortgage company would be negatively affected by the inability of Fannie Mae or
Freddie Mac to purchase loans. Although we sell loans to various intermediaries, the ability of these aggregators to
purchase loans would be limited if these government-sponsored entities were to cease to exist. Our finance
company would be negatively affected by diminishing demand for automobiles, which has already resulted in
contraction within the automobile industry and prompted government intervention in an attempt to forestall the
bankruptcy of three major automobile producers in the United States. There is no assurance that the failure of our
counterparties would not materially adversely affect the Corporation’s results of operations.
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. 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 (FRB) since September 2007 immediately reduced our yield on
variable-rate loans without a corresponding immediate reduction in deposit costs, which resulted in a decline in
our net interest margin. Net interest margin compression may continue in 2009 as we may modify loan terms to
accommodate existing borrowers who are experiencing financial difficulty and the amount of nonperforming loans
may increase as a result of the continuing economic crises in our markets. As fixed-rate deposits mature, we
expect, but cannot guarantee, them to reprice at lower interest rates, which should reduce funding costs and relieve
some pressure on the net interest margin. However, competition for deposits may hinder a decline in rates paid for
deposits.
Weakness in the secondary residential mortgage loan markets 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, which originates a variety of residential loan products for sale into the secondary market to
investors. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the
market for and liquidity of many mortgage loans. The ongoing correction in residential real estate market prices
and reduced levels of home sales have resulted in fewer loan originations. 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 2009, the
decline in housing market values, coupled with the availability of fewer mortgage loan products and tighter
underwriting guidelines, will temper demand.
13
In addition, credit markets have experienced difficult conditions and volatility during 2008 and there have
been significant increases in payment defaults by borrowers and mortgage loan foreclosures. These factors may
result in potential repurchase or indemnification liability to our mortgage company on residential mortgage loans
originated and sold into the secondary market in the event of borrower misrepresentation or early-payment
default. While we mitigate the risk of repurchase liability by underwriting to the purchasers’ guidelines, we cannot
be assured that a prolonged period of payment defaults and foreclosures will not result in an increase in requests
for repurchases or indemnifications, which could adversely affect the Corporation’s net income.
Our business is subject to various lending and other economic risks that could adversely impact our results of
operations and financial condition.
Deterioration in economic conditions, such as the deepening recession, 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 a prolonged 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, 2008, 42 percent of our loan portfolio consisted of commercial, financial and agricultural
loans, which include loans secured by real estate for builder lines, acquisition and development and commercial
development, as well as commercial loans secured by personal property. 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, 2008, 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.
14
If our allowance for loan losses becomes inadequate, the results of our operations may be adversely affected.
Making loans is an essential element of our business. The risk of nonpayment is affected by a number of
factors, including but not limited to: the duration of the credit; credit risks of a particular customer; changes in
economic and industry conditions; and, in the case of a collateralized loan, risks resulting from uncertainties about
the future value of the collateral. Although we seek to mitigate risks inherent in lending by adhering to specific
underwriting practices, our loans may not be repaid. We attempt to maintain an appropriate allowance for loan
losses to provide for potential losses in our loan portfolio. Our allowance for loan losses is determined by
analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution,
the opinions of our regulators, changes in the size and composition of the loan portfolio and industry information.
Also included in our estimates for loan losses are considerations with respect to the impact of economic events, the
outcome of which are uncertain. Because any estimate of loan losses is necessarily subjective and the accuracy of
any estimate depends on the outcome of future events, we face the risk that charge-offs in future periods will
exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required.
Additions to the allowance for loan losses would result in a decrease of our net income. Although we believe our
allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses
or that our allowance will be adequate in the future.
Competition from other financial institutions and financial intermediaries may adversely affect our profitability.
We face substantial competition in originating loans and in attracting deposits. Our competition in
originating loans and attracting deposits comes principally from other banks, mortgage banking companies,
consumer finance companies, savings associations, credit unions, brokerage firms, insurance companies and other
institutional lenders and purchasers of loans. Additionally, banks and other financial institutions with larger
capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and
are thereby able to serve the credit needs of larger clients. These institutions may be able to offer the same loan
products and services that we offer at more competitive rates and prices. Increased competition could require us to
increase the rates we pay on deposits or lower the rates we offer on loans, which could adversely affect our
profitability.
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.
15
The success of our business strategies depend 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 the Bank’s branches effectively
and in a timely manner would limit our growth, which could materially adversely affect our business.
Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could
lose the beneficial aspects fostered by our culture, which could harm our business.
We believe that a critical contributor to our success has been our corporate culture, which focuses on
building personal relationships with our customers. As our organization grows, and we are required to implement
more complex organizational management structures, we may find it increasingly difficult to maintain the
beneficial aspects of our corporate culture. This could negatively impact our future success.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Corporation has no unresolved comments from the SEC staff.
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
16
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 $102,000 for the
year ended December 31, 2008.
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 18 leased loan production
offices, 11 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 $1.1 million for the year ended December 31,
2008.
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 three leased offices, one each in
Virginia, Maryland and Tennessee, for C&F Finance. Rental expense for these leased locations totaled $61,000 for
the year ended December 31, 2008.
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.
17
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 (56)
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 (40)
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
Bryan E. McKernon (52)
President and Chief Executive Officer of C&F Mortgage since 1995
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, 2009,
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 $13.19. Following are the high and low sales prices as reported by
the NASDAQ Stock Market, along with the dividends that were paid quarterly in 2008 and 2007.
Quarter
First
Second
Third
Fourth
_________2008_________
High
$32.25
30.00
25.00
24.25
Low Dividends
$25.00
22.00
18.00
9.65
$0.31
0.31
0.31
0.31
__________2007__________
Low
High
$39.60
$46.00
36.10
45.00
38.05
43.50
30.25
42.98
Dividends
$0.31
0.31
0.31
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, including
restrictions stemming from the Corporation’s participation in the Capital Purchase Program, refer to Item 1,
“Business,” under the heading “Limits on Dividends” and Item 8, “Financial Statements and Supplementary Data,”
under the headings “Note 13: Regulatory Requirements and Restrictions” and “Note 19: Subsequent Event.”
18
There were no purchases of the Corporation’s common stock during the fourth quarter of 2008 as part of
the board-approved authorization on July 24, 2008. There are 99,000 shares that may yet be purchased under the
program in effect at December 31, 2008, which will expire in July 2009. However, in connection with the
Corporation’s sale to the Treasury of its Series A Preferred Stock under the Capital Purchase Program, as
previously described, there are certain limitations on the Corporation’s ability to purchase its common stock prior
to the earlier of January 9, 2012 or the date on which Treasury no longer holds any of the Series A Preferred Stock.
Prior to such time, the Corporation generally may not purchase any of its common stock without the consent of the
Treasury.
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
2008
2007
2006
2005
2004
$855,657
64,857
633,017
550,725
$ 64,130
21,395
42,735
13,766
28,969
25,149
49,320
4,798
617
$ 4,181
$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
$ 40,843
7,549
33,294
4,026
29,268
24,689
37,753
16,204
5,006
$ 11,198
$1.40
$2.79
$3.85
$3.49
$3.14
1.38
1.24
2.68
1.24
3.71
1.16
3.36
1.00
3.00
.90
3,020,959
3,161,023
3,273,429
3,507,912
3,729,128
0.51%
6.39
89.79
7.98
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
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATION
Cautionary Statement Regarding Forwarding-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 business conditions, as well as conditions within the financial markets
• general economic conditions, including unemployment levels
•
• monetary and fiscal policies of the U.S. Government, including policies of the Treasury and the Federal
the legislative/regulatory climate
Reserve Board
the quality or composition of the loan portfolios and the value of the collateral securing those loans
the value of securities held in the Corporation’s investment portfolios
the level of net charge-offs on loans
the strength of the Corporation’s counterparties
competition from both banks and non-banks
•
•
•
• demand for loan products
• deposit flows
•
•
• demand for financial services in the Corporation’s market area
•
•
•
•
•
technology
reliance on third parties for key services
the commercial and residential real estate markets
the Corporation’s expansion and technology initiatives
accounting principles, policies and guidelines
In addition, a continuation of the turbulence in significant portions of the global financial markets,
particularly if it worsens, could impact the Corporation’s performance, both directly by affecting the Corporation’s
revenues and the value of its assets and liabilities, and indirectly by affecting the Corporation’s counterparties and
the economy generally. Concerns about the stability of the financial markets generally have reduced the
availability of funding to certain financial institutions, leading to a tightening of credit, reduction of business
activity and increased market volatility. The EESA provides the Treasury with broad authority to implement
certain actions aimed at restoring stability and liquidity to U.S. markets. The EESA includes, among other things,
the Capital Purchase Program, the Troubled Assets Relief Program and the FDIC TLGP. It is not clear at this time
what impact these programs, or any additional programs that may be initiated in the future by the Treasury and
other bank regulatory agencies, will have on the financial markets and the financial services industry or the
Corporation’s business and financial performance.
20
Although the Corporation currently has diverse sources of liquidity and its capital ratios exceed the
minimum levels required for well-capitalized status, the Corporation applied for a $20.0 million investment by the
Treasury under its Capital Purchase Program and was approved on December 8, 2008. The transaction closed on
January 9, 2009. The Corporation also elected to participate in the FDIC Debt Guarantee Program; however, the
Corporation currently has no unsecured borrowings to which this program applies. C&F Bank is participating in
the FDIC Transaction Account Guarantee Program, under which all noninterest-bearing transaction accounts (as
defined within the program) are fully guaranteed by the FDIC for the entire amount in the account through
December 31, 2009.
Our ability to engage in routine funding transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of
trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in
the financial industry, including brokers and dealers, commercial banks, and other institutional clients. As a result,
defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services
industry generally, could exacerbate the market-wide liquidity crisis and could lead to losses or defaults by us or
by other institutions. There is no assurance that any such losses would not materially adversely affect the
Corporation’s results of operations.
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 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 and the value of collateral, 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.
21
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.
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 costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent
to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals,
general market conditions, length of time the properties have been held, and our ability and intention with regard
to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets
to fair value less costs to sell if valuations indicate a further other-than-temporary deterioration in market
conditions.
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 2008 and determined there was no impairment to be recognized in 2008. If the
underlying estimates and related assumptions change in the future, we may be required to record impairment
charges.
Retirement 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
may 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, or in the method under which benefits are calculated
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.
22
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.”
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 to $4.2 million in fiscal 2008 compared with net income of $8.5
million in fiscal 2007. Earnings per share assuming dilution decreased to $1.38 in 2008 compared with $2.68 in
2007. Net income for 2008 included $976,000 of other-than-temporary impairment charges related to the
Corporation’s investments in perpetual preferred stock of Fannie Mae and Freddie Mac. Excluding these
impairment charges, the Corporation’s earnings were $5.2 million, or $1.71 per share assuming dilution, for fiscal
2008. The impairment in the Corporation’s holdings of these government-sponsored entities resulted from the
decline in market value of these shares in connection with the federal government’s takeover of Fannie Mae and
Freddie Mac in September 2008, along with the elimination of dividends on these shares. Other significant factors
influencing 2008 earnings included (1) a declining net interest margin resulting from interest rate cuts by the FRB
and the strong competition for deposits resulting from the reduction in liquidity throughout the financial markets
and (2) significantly higher provisions for loan losses and loan indemnifications principally related to loans secured
by real estate and consumer finance loans secured by automobiles as a result of the overall deterioration of the
housing and economic environment in the United States and our market areas. The extent 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 6.39 percent and 0.51 percent, respectively, for the year ended
December 31, 2008 (7.89 percent and 0.63 percent, adjusted to exclude the net effect of the other-than-temporary
impairment charges), compared to 13.03 percent and 1.13 percent, respectively, for the year ended December 31,
2007. The decline in these measures resulted from lower earnings in 2008 coupled with asset growth. Our strategic
goals continue to focus on profitable growth that enhances long-term shareholder value. We feel our ability to
reach this goal has been enhanced by the Corporation’s participation in the Capital Purchase Program. This capital
will provide flexibility to fund loan demand from qualifying commercial and consumer borrowers in the
communities we serve and to work with existing borrowers who may be experiencing difficulty servicing their debt
during these challenging economic times. Nonetheless, the additional capital and asset growth, coupled with the
23
effect of lower net interest margins and higher provisions for loan losses on earnings, may delay improvement in
ROE and ROA in the near term.
We expect the following factors to influence the Corporation’s financial performance in 2009:
• Retail Banking: Changes in interest rates may continue to affect net interest margin at C&F
Bank. Interest rate cuts made by the Federal Reserve Board since September 2007
immediately reduced the Bank’s net interest margin because yields on adjustable-rate loans
declined faster than the cost of deposits, which are the largest source of the Bank’s funds. Net
interest margin compression may continue in 2009 as we modify loan terms for existing
borrowers who are experiencing financial difficulty and if competition for deposits hinders a
decline in rates paid for deposits. General economic trends, particularly the economic
recession that we are experiencing, in C&F Bank’s markets can affect the quality of the loan
portfolio and, therefore, our provision for loan losses, as well as the amount of our
nonperforming assets. Managing the risks inherent in our loan portfolio and expenses
associated with nonperforming assets will influence C&F Bank’s performance during 2009. In
addition, the significant increase in FDIC insurance premiums will affect the Bank’s
noninterest expenses during 2009.
• 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 2009, 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 or indemnification liability to our mortgage
company on residential mortgage loans originated and sold into the secondary market in the
event of borrower misrepresentation or early-payment default. 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 or indemnifications, which would adversely affect the Corporation’s net income.
• Consumer Finance: We expect the ongoing effects of the economic recession will result in
more delinquencies and repossessions at C&F Finance. Declining real estate values,
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.
24
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 $931,000 for the year ended
December 31, 2008, compared with $5.1 million in 2007. The decline in earnings for 2008 included (1) the effects of
margin compression and competition for loans and deposits on net interest income, (2) a 2008 year-over-year
increase in the provision for loan losses to $2.3 million from $280,000 in 2007 attributable to credit issues resulting
from three commercial relationships that have been placed on nonaccrual status, the general slow down in the
economy and loan growth, (3) higher assessments for deposit insurance resulting from the FDIC’s implementation
of its amended assessment system, (4) higher expenses associated with the enhancement of the Bank’s internet
banking services, and (5) higher loan and foreclosed properties expenses associated with nonperforming assets.
The effects of these factors were offset in part by an increase in earning assets..
The combination of declining short-term interest rates and increased competition for deposits resulted in a
pricing disparity between loans and deposits. Interest rate cuts made by the Federal Reserve Bank throughout 2008
immediately reduced the Bank’s yields on variable-rate loans without a corresponding reduction in deposit costs.
However, the Corporation has access to diverse sources of liquidity, which provides flexibility in managing funds
and responding to deposit demand and rate fluctuations. The increase in the Bank’s provision for loan losses was
attributable in part to our evaluation of the Bank’s overall loan portfolio in light of deteriorating economic
conditions, as well as three commercial relationships, which are secured by residential real estate. One of these
relationships has thus far resulted in $2.1 million in foreclosed properties, which were written down to net
realizable value at the time they were transferred to other real estate owned. Additional properties securing
nonaccrual loans totaling $766,000 associated with this relationship are expected to be conveyed to the Bank in the
first quarter of 2009. The Bank will incur ongoing maintenance expenses associated with holding foreclosed
properties, and additional write-downs in the remaining properties may be necessary if market conditions
deteriorate further.
Mortgage Banking: Pretax earnings for the Mortgage Banking segment, which consists solely of C&F
Mortgage, were $2.4 million for the year ended December 31, 2008, compared with $2.8 million in 2007. The
decline in earnings for 2008 included the effects of (1) the downturn in the housing market on loan origination
volume, which declined 6.3 percent in 2008, (2) a 2008 provision for loan losses of $796,000 in connection with loan
repurchases, compared to $120,000 in 2007, (3) a 2008 write down of $167,000 in the carrying value of foreclosed
properties to fair value less selling costs, compared to no such expense in 2007, (4) a 2008 provision for estimated
indemnification losses of $1.1 million, compared to $97,000 in 2007, and (5) higher legal expenses of $170,000,
compared to $42,000 in 2007, largely attributable to troubled loans. The negative effects of these items were offset
in part by higher gains on sales of loans in 2008 resulting from higher profit margins on loans originated and sold.
While we mitigate the risk of repurchase liability by underwriting to the purchasers guidelines, we cannot
eliminate the possibility that a prolonged period of payment defaults and foreclosures may result in an increase in
requests for loan repurchases or indemnifications and the need for additional provisions in the future.
While the mortgage banking industry has experienced significant operational problems and losses over the
past year, our Mortgage Banking segment has continued to contribute to the Corporation’s earnings. For 2008, loan
originations at C&F Mortgage for refinancings declined to $202 million from $215 million in 2007. Loans originated
for new and resale home purchases declined to $547 million in 2008 from $613 million in 2007. Despite the overall
decline in 2008 origination volume, gains on sales of loans during 2008 were higher than 2007 due to higher profit
margins on the types of products available to borrowers in the current economic environment. The decline in
housing market values, coupled with the availability of fewer mortgage loan products and tighter underwriting
25
guidelines, is expected to temper demand for the foreseeable future. However, as a result of the consolidation
within the mortgage banking industry, C&F Mortgage has been able to attract new mortgage origination talent
from struggling competitors and we believe that these additions provide the potential for increased loan
production.
Consumer Finance: Pretax earnings for the Consumer Finance segment, which consists solely of C&F
Finance, totaled $4.3 million for the year ended December 31, 2008, compared with pre-tax earnings of $4.4 million
in 2007. Earnings of the Consumer Finance segment have benefited from an approximate 15 percent increase in
average consumer finance loans outstanding and the decline in short-term interest rates in 2008. Its fixed-rate loan
portfolio is partially funded by a variable-rate line of credit indexed to LIBOR. Therefore, its cost of funds declined
and its net interest margin increased during 2008. However, C&F Finance has experienced higher loan charge-offs
in 2008 compared to 2007, which in combination with loan growth, has resulted in a $10.7 million provision for
loan losses in 2008, compared to $6.7 million in 2007. Controlling charge-offs within C&F Finance’s loan portfolio
will be the significant factor in realizing improved earnings in the future. If the current economic recession
intensifies in C&F Finance’s markets, we would expect more delinquencies and repossessions. Depending on the
severity of any further downturn in the economy, decreased consumer demand for automobiles and decline in the
value of automobiles securing outstanding loans could result, which would weaken collateral coverage and
increase the amount of losses in the event of default.
Other: The pretax loss of this segment was $2.8 million for the year ended December 31, 2008, compared to
a pretax loss of $564,000 in 2007. The loss in 2008 included the $1.6 million other-than-temporary impairment on
the Corporation’s investments in Fannie Mae and Freddie Mac perpetual preferred stock. It also included an
increase in interest expense associated with the Corporation’s issuance of additional trust preferred capital in
December 2007.
Capital Management
We have managed our capital through asset growth, stock purchases and increases in dividends. Total
shareholders’ equity decreased $367,000 to $64.9 million at December 31, 2008, compared to $65.2 million at
December 31, 2007. While the Corporation’s earnings declined in 2008, we maintained the quarterly dividend level
at 31 cents per share throughout 2008, resulting in a dividend payout ratio of 89.8 percent for 2008 compared to
44.5 percent for 2007. The board of directors continues to evaluate our dividend payout in light of changes in
economic conditions, our capital levels and our future levels of earnings. Stock purchases were not significant
during 2008 and there are 99,000 shares that may be purchased under the board-approved authorization in effect at
December 31, 2008. However, in connection with the Corporation’s participation in the Treasury’s Capital
Purchase Program, as previously described, there are limitations on the Corporation’s ability to pay cash dividends
or to repurchase its common stock prior to the earlier of January 9, 2012 or the date on which Treasury no longer
holds any of the Series A Preferred Stock. For more information regarding restrictions imposed on the Corporation
due to its participation in the Capital Purchase Program, see Item 8, “Financial Statements and Supplementary
Data,” under the heading “Note 19: Subsequent Event.”
26
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets for each of the years ended December 31, 2008, 2007
and 2006. 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).
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
2008
2007 2006
Average
Income/
Balance
Expense
Yield/
Rate
Average
Income/
Yield/
Average
Income/
Balance
Expense
Rate
Balance
Expense
Yield/
Rate
$ 16,662
$ 867
77,164
93,826
5,094
5,961
664,715
59,918
17
12
65,908
713
573
759,827
(17,182)
77,354
$819,999
6.35
9.01
2.37
2.01
8.67
5.20% $ 11,659
63,280
6.60
74,939
$ 544
4.66% $ 11,349
$ 487
4,349
4,893
6.87
6.53
55,932
67,281
3,802
4,289
601,685
60,977
10.13
555,517
55,196
8,238
241
685,103
(14,926)
78,217
$748,394
432
11
66,313
5.25
4.67
9.68
9,271
--
632,069
(13,617)
75,863
$694,315
$ 82,560
68,406
42,445
834
1,699
1.01% $ 82,109
51,624
2.48
105
0.25
45,452
99,726
167,849
460,986
193,466
654,452
83,533
16,612
754,597
65,402
4,088
6,614
13,340
8,055
21,395
4.10
3.94
2.89
4.16
3.27
99,653
169,431
448,269
136,939
585,208
84,365
13,751
683,324
65,070
912
1,534
301
4,714
7,469
14,930
8,448
23,378
1.11% $ 87,074
2.97
0.66
4.73
4.41
3.33
6.17
3.99
44,820
49,644
79,873
152,879
414,290
120,498
534,788
79,472
16,106
630,366
63,949
$819,999
$748,394
$694,315
$44,513
$42,935
$41,482
5.69%
3.41%
6.27%
5.40%
2.82%
5.86%
27
454
--
59,939
946
987
353
3,176
5,690
11,152
7,305
18,457
4.29%
6.80
6.37
9.94
4.90
--
9.48
1.09%
2.20
0.71
3.98
3.72
2.69
6.06
3.45
6.03%
2.92%
6.56%
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
2008 from 2007 2007 from 2006
Increase (Decrease)
Increase (Decrease)
Total
Total
(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
2008 Compared to 2007
Due to
Increase
Due to
Increase
Rate
Volume
(Decrease)
Rate
Volume
(Decrease)
$(7,103)
$6,044
$(1,059)
$1,119
$4,662
$5,781
69
(177)
(156)
--
(7,367)
(83)
(280)
(177)
(629)
(785)
(1,954)
(3,247)
(5,201)
$(2,166)
254
922
(259)
1
6,962
5
445
(19)
3
(70)
364
2,854
3,218
$3,744
323
745
(415)
1
(405)
(78)
165
(196)
(626)
(855)
(1,590)
(393)
(1,983)
$1,578
43
42
39
--
14
505
(61)
11
57
547
(22)
11
1,243
5,131
6,374
22
381
(23)
667
1,121
2,168
131
2,299
(56)
165
(29)
871
658
1,609
1,013
2,622
(34)
546
(52)
1,538
1,779
3,777
1,144
4,921
$(1,056)
$2,509
$1,453
Net interest income, on a taxable-equivalent basis, for the year ended December 31, 2008 was $44.5 million,
compared to $42.9 million for 2007. The higher net interest income resulted primarily from a 10.9 percent increase
in the average balance of interest-earning assets during 2008. The benefit of this growth was partially offset by a
decrease in net interest margin to 5.86 percent for 2008 from 6.27 percent for 2007. The decrease in the net interest
margin was a result of a decline in the yield on interest-earning assets that exceeded the decline in the interest rates
paid on interest-bearing liabilities. The combination of rapidly declining short-term interest rates and increased
competition for deposits in 2008 resulted in a pricing disparity between loans and deposits, which lowered net
interest margin.
Average loans held for investment increased $67.6 million during 2008. The Retail Banking segment’s
average loan portfolio increased $44.0 million during 2008 primarily as a result of residential mortgage loan and
commercial loan growth. The Consumer Finance segment’s average loan portfolio increased $22.2 million during
2008 as result of overall growth at existing locations and the expansion into new markets in 2007. The Mortgage
Banking segment’s average loan portfolio increased $1.4 million during 2008 as a result of the introduction of short-
28
term bridge loans in 2007 and repurchased loans. Average loans held for sale at the Mortgage Banking segment
decreased $4.6 million during 2008 as a result of a decline in loan demand. The overall yield on loans held for
investment at all our business segments and loans held for sale at the Mortgage Banking segment during 2008
decreased as a result of a general decrease in interest rates.
Average securities available for sale increased $18.9 million during 2008. The increase in securities available
for sale occurred predominantly in the Retail Banking segment’s municipal bond portfolio. This resulted from a
strategy to increase the Bank’s securities portfolio as a percentage of total assets. The lower yields in 2008 resulted
from the current interest rate environment in which securities purchases were made at yields less than those being
called. In addition, securities yields for 2007 included the receipt of seven quarters of previously-suspended
dividends from one preferred stock holding.
Average interest-earning deposits at other banks, primarily the FHLB, decreased $7.5 million during 2008.
Fluctuations in the average balance of these low-yielding deposits occurred in response to loan demand, an
increase in the securities portfolio, and improved cash management strategies. The average yield on interest-
earning deposits at other banks decreased in 2008 due to declines in short-term interest rates since September 2007.
Average interest-bearing customer deposits increased $12.7 million during 2008. The majority of the growth
occurred in lower-rate transaction accounts as opposed to higher-costing certificates of deposit as a result of our
deposit strategies that emphasize retention of multi-service customer relationships, coupled with depositors’
preferences for maintaining flexibility in their investing options as the value of the stock market declined during
2008. The average cost of deposits declined 44 basis points during 2008. As sources of wholesale funding available
to the financial services industry have diminished since mid-2007, competition for deposits within the industry has
intensified and rates on time deposits have been slower to decline than short-term interest rates. However, as time
deposits matured during last half of 2008, deposit rates began to decline.
Average borrowings increased $56.5 million during 2008. This increase was attributable to increased use of
the third-party line of credit by the Consumer Finance segment to fund loan growth, increased use of borrowings
from the FHLB and the FRB to fund loan growth at the Retail Banking and Consumer Finance segments, and the
issuance of trust preferred capital securities in late 2007 for general corporate purposes, including the refinancing
of existing debt. A portion of these borrowings is indexed to short-term interest rates and reprices as short-term
interest rates change. Accordingly, the average cost of borrowings decreased 201 basis points during 2008 as
interest rates fell.
Interest rates will be a significant factor influencing the performance of all of the Corporation’s business
segments during 2009. Net interest margin compression may continue in 2009 as we modify loan terms for existing
borrowers who are experiencing financial difficulty. As fixed-rate deposits mature, they are expected to reprice at
lower interest rates, which should reduce funding costs and relieve some pressure on the net interest margin.
However, competition for deposits may hinder a decline in rates paid for deposits. We also expect that declining
economic conditions may result in lower overall loan growth.
29
2007 Compared to 2006
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. An increase of 20 basis points in the 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 during 2007 primarily as a result of commercial loan growth. The
Consumer Finance segment’s average loan portfolio increased $27.3 million during 2007 as a result of overall
growth at existing locations and expansion into new markets. The Mortgage Banking segment’s average loan
portfolio increased $2.0 million during 2007 as a result of 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 customer 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.
30
NONINTEREST INCOME
TABLE 3: Noninterest Income
Year Ended December 31, 2008
(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-than-temporary impairment of available for sale
securities
Other income
Retail
Banking
Mortgage
Banking
$ --
3,907
1,550
227
--
349
$16,714
--
2,163
--
--
5
Total noninterest income
$6,033
$18,882
Consumer
Other and
Finance
$ --
--
8
--
--
580
$588
Eliminations
Total
$ (21)
$16,693
--
--
7
3,907
3,721
234
(1,575)
1,235
(1,575)
2,169
$ (354)
$25,149
(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
2008 Compared to 2007
Year Ended December 31, 2007
Retail
Banking
Mortgage
Banking
$ --
3,684
1,364
21
247
$15,854
--
2,572
--
218
$5,316
$18,644
Consumer
Other and
Finance
$ --
--
84
--
506
$590
Eliminations
Total
$ (21)
$15,833
--
--
--
1,349
3,684
4,020
21
2,320
$ 1,328
$25,878
Year Ended December 31, 2006
Retail
Banking
Mortgage
Banking
$ --
3,471
1,200
86
342
$17,149
--
3,656
--
22
$5,099
$20,827
Consumer
Other and
Finance
$ --
--
245
--
294
$539
Eliminations
Total
$ (51)
$17,098
--
--
19
954
3,471
5,101
105
1,612
$ 922
$27,387
Total noninterest income declined 2.8 percent to $25.1 million in 2008. The decrease primarily resulted
from a $1.6 million other-than-temporary impairment in the Corporation’s holdings of perpetual preferred stock of
Fannie Mae and Freddie Mac, as previously described. The impairment charge at the Corporation’s holding
company offset increases in other income in the Retail Banking and Mortgage Banking segments. Noninterest
income at the Retail Banking segment increased 13.5 percent during 2008 as a result of higher customer usage and a
pricing increase of the Bank’s overdraft protection program, higher usage of bank card and ATM services, a higher
number of investment securities calls at premium call rates, gains on sales of pre-refunded available-for-sale
securities and a gain on the sale of the Bank’s credit card portfolio. Noninterest income at the Mortgage Banking
segment increased 1.3 percent during 2008 as a result of higher gains on sales of loans, which was attributable to
higher profit margins on loans originated and sold. The increase in gains was offset in part by lower volume-
dependent ancillary fees.
31
2007 Compared to 2006
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 included in Other further offset the decline in the Mortgage Banking 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
Year Ended December 31, 2008
Retail Banking
$13,378
3,628
6,299
$23,305
Mortgage
Banking
Consumer
Finance
$8,889
1,962
6,536
$17,387
$4,662
416
2,299
$7,377
Other
Total
$795
25
431
$1,251
$27,724
6,031
15,565
$49,320
Year Ended December 31, 2007
Retail Banking
$14,626
3,780
4,811
$23,217
Mortgage
Banking
Consumer
Finance
$11,095
1,868
4,222
$17,185
$4,317
384
2,086
$6,787
Other
Total
$ 749
26
407
$1,182
$30,787
6,058
11,526
$48,371
Year Ended December 31, 2006
Retail Banking
$13,001
3,109
4,701
$20,811
Mortgage
Banking
Consumer
Finance
$12,137
1,671
4,550
$18,358
$3,146
282
1,767
$5,195
Other
Total
$723
25
216
$964
$29,007
5,087
11,234
$45,328
32
2008 Compared to 2007
Total noninterest expense increased 2.0 percent to $49.3 million in 2008. The increase at the Retail Banking
segment included the effects of higher assessments for deposit insurance resulting from the FDIC’s implementation
of its amended assessment system, higher expenses associated with the enhancement of our internet banking
service, and higher loan and foreclosed properties expenses associated with nonperforming assets. These increases
were offset in part by lower salaries and benefits resulting from personnel reductions and lower bonuses. The
increase at the Mortgage Banking segment included the effects of a write-down in the carrying value of certain
foreclosed properties, an increase in the provision for estimated indemnification losses, and higher legal expenses
related to troubled loans. These increases were offset in part by lower production-based salaries and bonuses. The
increase at the Consumer Finance segment included the effects of higher personnel costs and operating expenses to
support growth and technology enhancements.
2007 Compared to 2006
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 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 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.
INCOME TAXES
Applicable income taxes on 2008 earnings amounted to $617,000, resulting in an effective tax rate of 12.9
percent, compared with $3.3 million, or 28.3 percent, in 2007 and $5.4 million, or 30.9 percent, in 2006. The decline
in the effective tax rate during 2008 resulted from higher tax-exempt income on securities and loans as a percentage
of pretax income. C&F Bank has a large portfolio of municipal securities, which generates interest income that is
exempt from income taxes.
33
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
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
2008
$15,963
Year Ended December 31,
2006
$13,064 $11,144
2007
$14,216
2005
2,300
796
10,670
13,766
179
211
362
10,807
11,559
280
120
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
2004
$ 8,657
200
—
3,826
4,026
—
7
96
2,592
2,695
—
14
97
1,525
1,636
9,923
$19,806
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
.14%
—
.03%
.03%
—
5.46%
3.65%
2.76%
3.33%
1.78%
During 2008, there was a $2.5 million increase in the allowance for loan losses at the combined Retail
Banking and Mortgage Banking segments since December 31, 2007, and the provision for loan losses at these
combined segments increased $2.7 million in 2008. These increases were attributable to loan growth at the Bank
and an increase in nonaccrual loans at both C&F Bank and C&F Mortgage as presented in Table 7 below. In
addition, there was a 2008 year-over-year increase in net charge-offs of $658,000 at these combined segments, which
included write downs of certain loans to fair market value less costs to sell at the date of their foreclosure. We
believe that the current level of the allowance for loan losses is adequate to absorb any losses on existing loans that
may become uncollectible. Depending on the effects of current economic conditions, a higher level of
nonperforming loans may result during 2009, which may require a higher provision for loan losses.
34
The Consumer Finance segment, consisting solely of C&F Finance, accounted for a significant portion of
the activity in the allowance for loan losses during 2008. C&F Finance’s allowance for loan losses increased to $12.6
million at December 31, 2008 from $11.2 million at December 31, 2007, and its provision for loan losses increased
$3.9 million in 2008. In addition, there was a 2008 year-over-year increase in net charge-offs of $3.9 million. C&F
Finance’s originations and collections were directly affected by rising unemployment during 2008. In addition, the
level of charge-offs was affected by a decline in the recovery rate on the sale of repossessed vehicles, coupled with
an increase in the number of vehicles repossessed in 2008 mainly as a result of declining economic conditions. We
believe that the current level of the allowance for loan losses at C&F Finance is adequate to absorb any losses on
existing loans that may become uncollectible. However, if unemployment continues to rise throughout 2009,
higher provisions for loan losses may become necessary.
For further information regarding the adequacy of our allowance for loan losses, refer to “Nonperforming
Assets” within this Item 7.
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.
35
• Commercial real estate loans may carry risks associated with the successful operation of a business or a real
estate project, in addition to other risks associated with the ownership of real estate, because the repayment
of these loans may be dependent upon the profitability and cash flows of the business or project.
• Commercial business loans carry risks associated with the successful operation of a business, which is
usually the source of loan repayment, and the value of the collateral, which may depreciate over time and
cannot be appraised with as much precision as real estate.
• Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value
of the collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are
more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or
personal bankruptcy.
Loan Loss Allowance Methodology – Consumer Finance. The Consumer Finance segment’s loans consist of
non-prime automobile loans. These loans carry risks associated with (1) the continued credit-worthiness of
borrowers who 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
2008
2007
2006
2005
2004
$ 1,576
$ 684
$ 502
$ 402
$ 337
483
4,752
167
220
12,608
--
267
3,384
143
265
11,220
--
136
3,031
134
326
9,890
197
202
3,776
124
214
129
3,736
92
166
8,346
6,684
--
--
$19,806
$15,963
$14,216
$13,064
$11,144
22%
4
42
4
1
27
100%
20%
5
43
4
1
27
100%
22%
2
44
5
2
25
100%
20%
4
45
5
2
24
100%
21%
3
46
5
2
23
100%
1 Includes loans secured by real estate for builder lines, acquisition and development and commercial development, as well as commercial loans
secured by personal property.
36
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)
Nonaccrual loans*-Retail Banking
Nonaccrual loans*-Mortgage Banking
OREO**-Retail Banking
OREO**-Mortgage Banking
Total nonperforming assets
Accruing loans* past due for 90 days or more
Total loans*
Allowance for loan losses
Nonperforming assets to total loans* and OREO**
Allowance for loan losses to total loans*
Allowance for loan losses to nonaccrual loans*
* Loans exclude Consumer Finance segment loans presented below.
** OREO is recorded at its fair market value less cost to sell.
Consumer Finance
(Dollars in thousands)
Nonaccrual loans
Accruing loans past due for 90 days or more
Total loans
Allowance for loan losses
Nonaccrual consumer finance loans to total consumer finance loans
Allowance for loan losses to total consumer finance loans
2008
2007
2006
2005
2004
$ 17,222
$ 495
$ 955
$ 4,083
$ 4,336
1,460
1,370
596
732
—
—
—
—
—
—
—
—
—
—
—
$ 20,648
$ 1,227
$ 955
$ 4,083
$ 4,336
$ 3,517
$ 578
$ 1,629
$ 3,826
$ 1,580
$480,438
$441,648
$399,195
$366,962
$312,151
$ 7,198
$ 4,743
$ 4,326
$ 4,718
$ 4,460
4.28%
1.50
38.53
0.28%
1.07
0.24%
1.08
1.11%
1.29
1.39%
1.43
386.55
452.98
115.56
102.88
2008
2007
2006
2005
2004
$ 798
$ 1,388
$ 880
$ 1,819
$ 1,330
$ —
$ —
$ 8
$ 26
$ 481
$172,385
$160,196
$132,864
$111,141
$93,464
$ 12,608
$ 11,220
$ 9,890
$ 8,346
$ 6,684
0.46%
7.31%
0.87%
7.00%
0.66%
7.44%
1.64%
7.51%
1.42%
7.15%
Nonperforming assets of the Retail Banking segment totaled $18.6 million at December 31, 2008 compared
to $495,000 at December 31, 2007. The largest components of C&F Bank’s nonaccrual loans are two commercial
relationships aggregating $15.6 million, which are secured by residential real estate. We believe we have provided
adequate loan loss reserves based on current appraisals of the collateral. The largest component of C&F Bank’s
foreclosed properties is $1.3 million of residential properties associated with one commercial relationship. These
properties have been written down to their estimated fair values based upon current appraisals less selling costs.
Additional properties securing nonaccrual loans totaling $766,000 associated with this relationship are expected to
be conveyed to C&F Bank in the first quarter of 2009 and appropriate loan loss reserves have been established.
Nonperforming assets of the Mortgage Banking segment totaled $2.1 million at December 31, 2008
compared to $732,000 at December 31, 2007. This increase resulted from loans that were repurchased from
investors.
We have increased our allowance as a percentage of total loans at the combined Retail and Mortgage
Banking segment largely as a result of the increase in nonperforming loans, and the continued deterioration in the
economy, in particular the housing market. We continue to monitor all of the risk factors previously described
when establishing the loan loss allowance and may continue to make adjustments to the allowance level in the
future based upon changes in our portfolios and general economic conditions.
37
There has been a $590,000 decline in nonaccrual loans at C&F Finance since December 31, 2007, and the
allowance for loan losses increased from $11.2 million at December 31, 2007 to $12.6 million at December 31, 2008.
The higher provision for loan losses in 2008 resulted in the increase in the allowance for loan losses and an increase
in the ratio of the allowance for loan losses to total consumer finance loans to 7.31 percent at December 31, 2008
compared to 7.00 percent at December 31, 2007. The increase in the allowance for loan losses as a percentage of
total consumer finance loans is a result of the increase in net charge-offs, increasing delinquencies, continued
deterioration in collateral values as a result of declining sales prices at auction on repossessed automobiles and the
rising unemployment level. Charge-offs and delinquencies are very highly correlated to employment. While we
believe our current allowance for loan losses is adequate, C&F Finance’s loan portfolio can be immediately
adversely affected by deterioration in general economic conditions, such as an increase in the level of
unemployment. We are closely monitoring this situation and may make adjustments to our reserve level in the
future based upon changes in our portfolio and general economic conditions.
In accordance with its policies and guidelines and consistent with industry practices, C&F Finance, at
times, offers payment deferrals to borrowers, whereby the borrower is allowed to move up to two payments within
a twelve-month rolling period to the end of the loan, generally by paying a fee. An account for which all
delinquent payments are deferred is classified as current at the time the deferment is granted and therefore is not
included as a delinquent account. Thereafter, such an account is aged based on the timely payment of future
installments in the same manner as any other account. We evaluate the results of this deferment strategy based
upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent
to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on
this evaluation, we believe that payment deferrals granted according to our policies and guidelines are an effective
portfolio management technique and result in higher ultimate cash collections. 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
38
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 $439,000 for
2008, $56,000 for 2007 and $70,000 for 2006 if nonaccrual loans had been current throughout these periods. Interest
received on nonaccrual loans was $23,000 in 2008, $219,000 in 2007 and $41,000 in 2006.
At the Consumer Finance segment, the automobile repossession process is generally initiated 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 manager. 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.
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 $16.8 million and $291,000 at December 31, 2008 and 2007,
respectively, for which there was a $940,000 specific valuation allowance at December 31, 2008 and no specific
valuation allowance at December 31, 2007. The average balance of impaired loans was $5.8 million for 2008,
$557,000 for 2007 and $2.24 million for 2006.
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, 2008, the Corporation had total assets of $855.7 million compared to $785.6 million at
December 31, 2007. 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.
Asset growth was funded with increased deposits and borrowings.
39
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
the majority of the loans sold to third-party investors. At December 31, 2008, the Corporation’s loans held for
investment in all categories totaled $652.8 million and loans held for sale totaled $37.0 million.
Tables 8 and 9 present information pertaining to the composition of loans and maturity/repricing of loans.
TABLE 8: Summary of Loans Held for Investment
(Dollars in thousands)
Real estate—residential mortgage
Real estate—construction
Commercial, financial, and agricultural
1
Equity lines
Consumer
Consumer finance
Total loans
Less allowance for loan losses
December 31,
2008
2007
2006
2005
2004
$ 141,341
$ 122,705
$ 115,557
$ 96,423
$ 85,080
28,286
272,164
29,136
9,511
172,385
652,823
(19,806)
26,719
257,951
25,282
8,991
160,196
601,844
(15,963)
13,650
236,157
24,880
8,951
132,864
532,059
(14,216)
20,222
216,081
24,662
9,574
111,141
478,103
(13,064)
13,315
185,646
18,490
9,620
93,464
405,615
(11,144)
Total loans, net
1 Includes loans secured by real estate for builder lines, acquisition and development and commercial development, as well as commercial loans
secured by personal property.
$633,017
$585,881
$517,843
$465,039
$394,471
TABLE 9: Maturity/Repricing Schedule of Loans
December 31, 2008
Commercial, Financial,
Real Estate
and Agricultural
Construction
$160,729
$11,955
--
--
$ 11,172
59,738
40,525
--
--
$ 16,241
90
--
(Dollars in thousands)
Variable Rate:
Within 1 year
1 to 5 years
After 5 years
Fixed Rate:
Within 1 year
1 to 5 years
After 5 years
The increase in loans held for investment occurred predominantly in (1) the variable-rate category of
commercial loans at C&F Bank and (2) the fixed-rate categories of residential mortgage loans at C&F Bank and
consumer loans at C&F Finance. Typically, growth in the variable-rate categories will negatively affect net interest
income in a declining interest rate environment and growth in the fixed-rate categories will negatively affect net
interest income in a rising interest rate environment. However, fixed-rate consumer loans at C&F Finance are
partially funded by variable-rate borrowings; therefore, net interest income will be favorably affected in a declining
interest rate environment.
40
Credit Policy
The Corporation’s credit policy establishes minimum requirements and provides for appropriate
limitations on overall concentration of credit within the Corporation. The policy provides guidance in general
credit policies, underwriting policies and risk management, credit approval, and administrative and problem asset
management policies. The overall goal of the Corporation’s credit policy is to ensure that loan growth is
accompanied by acceptable asset quality with uniform and consistently applied approval, administration, and
documentation practices and standards.
Residential Mortgage Lending – Held for Sale
The Mortgage Banking segment’s guidelines for underwriting conventional conforming loans comply with
the underwriting criteria established by Fannie Mae and/or Freddie Mac. The guidelines for non-conforming
conventional loans are based on the requirements of private investors and information provided by third-party
investors. The guidelines used by C&F Mortgage to originate FHA-insured and VA-guaranteed loans comply with
the criteria established by HUD and the VA. The conventional loans that C&F Mortgage originates or purchases
that have loan-to-value ratios greater than 80 percent at origination are generally insured by private mortgage
insurance. The borrower pays the cost of the insurance.
Residential Mortgage Lending – Held for Investment
The Retail Banking segment originates residential mortgage loans secured by properties located in its
primary market area in southeastern and central Virginia. The Bank offers various types of residential mortgage
loans in addition to traditional long-term, fixed-rate loans. 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
41
borrower’s primary residence. The fair market value of a project is determined on the basis of an appraisal of the
project conducted by an appraiser acceptable to the Bank. For larger projects where unit absorption or leasing is a
concern, the Bank may also obtain a feasibility study or other acceptable information from the borrower or other
sources about the likely disposition of the property following the completion of construction.
Construction loans for nonresidential projects and multi-unit residential projects are generally larger and
involve a greater degree of risk to the Bank than residential mortgage loans. The Bank attempts to minimize such
risks (1) by making construction loans in accordance with the Bank’s underwriting standards and to established
customers in its primary market area and (2) by monitoring the quality, progress and cost of construction.
Generally, the maximum loan-to-value ratio established by the Bank for non-residential projects and multi-unit
residential projects is 80 percent; however, this maximum can be waived for particularly strong borrowers on an
exception basis.
Loans associated with construction lending are included in the real estate—construction category in Table
8.
Consumer Lot Lending
Consumer lot loans are loans made to individuals for the purpose of acquiring an unimproved building
site for the construction of a residence that generally will be occupied by the borrower. Consumer lot loans are
made only to individual borrowers, and each borrower generally must certify to the Bank his intention to build and
occupy a single-family residence on the lot generally within three or five years of the date of origination of the loan.
These loans typically have a maximum term of either three or five years with a balloon payment of the entire
balance of the loan being due in full at the end of the initial term. The interest rate for these loans is fixed or
variable at a rate that is slightly higher than prevailing rates for one-to-four family residential mortgage loans. We
do not believe consumer lot loans bear as much risk as land acquisition and development loans because such loans
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
42
making commercial real estate loans to creditworthy borrowers who have substantially pre-leased the
improvements to high-caliber tenants.
The Bank’s commercial real estate loans are usually amortized over a period of time ranging from 15 years
to 25 years and usually have a term to maturity ranging from five years to 15 years. These loans normally have
provisions for interest rate adjustments after the loan is three to five years old. The Bank’s maximum loan-to-value
ratio for a commercial real estate loan is 80 percent; however, this maximum can be waived for particularly strong
borrowers on an exception basis. Most commercial real estate loans are further secured by one or more
unconditional personal guarantees.
In recent years, the Bank has structured some of its commercial real estate loans as mini-permanent loans.
The amortization period, term and interest rates for these loans vary based on borrower preferences and the Bank’s
assessment of the loan and the degree of risk involved. If the borrower prefers a fixed rate of interest, the Bank
usually offers a loan with a fixed rate of interest for a term of three to five years with an amortization period of up
to 25 years. The remaining balance of the loan is due and payable in a single balloon payment at the end of the
initial term. We believe that shorter maturities for commercial real estate loans are necessary to give the Bank some
protection from changes in the borrower’s business and income as well as changes in general economic conditions.
In the case of fixed-rate commercial real estate loans, shorter maturities also provide the Bank with an opportunity
to adjust the interest rate on this type of interest-earning asset in accordance with the Bank’s asset and liability
management strategies.
Loans secured by commercial real estate are generally larger and involve a greater degree of risk than
residential mortgage loans. Because payments on loans secured by commercial real estate are usually dependent
on successful operation or management of the properties securing such loans, repayment of such loans is subject to
changes in both general and local economic conditions and the borrower’s business and income. As a result, events
beyond the control of the Bank, such as a downturn in the local economy, could adversely affect the performance of
the Bank’s commercial real estate loan portfolio. The Bank seeks to minimize these risks by lending to established
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
43
accordance with the Bank’s appraisal policies for developed lots for single-family or townhouse construction. The
Bank can waive the maximum loan-to-value ratio for particularly strong borrowers on an exception basis. The term
of land acquisition and development loans ranges from a maximum of two years for loans relating to the
acquisition of unimproved land to, generally, a maximum of three years for other types of projects. All land
acquisition and development loans generally are further secured by one or more unconditional personal
guarantees. Because these loans are usually in a larger amount and involve more risk than consumer lot loans, the
Bank carefully evaluates the borrower’s assumptions and projections about market conditions and absorption rates
in the community in which the property is located and the borrower’s ability to carry the loan if the borrower’s
assumptions prove inaccurate.
Loans associated with land acquisition and development lending are included in the commercial, financial
and agricultural category in Table 8.
Commercial Business Lending
Commercial business loan products include revolving lines of credit to provide working capital, term loans
to finance the purchase of vehicles and equipment, letters of credit to guarantee payment and performance, and
other commercial loans. In general, these credit facilities carry the unconditional guaranty of the owners and/or
stockholders.
Revolving and operating lines of credit are typically secured by all current assets of the borrower, provide
for the acceleration of repayment upon any event of default, are monitored monthly or quarterly to ensure
compliance with loan covenants, and are re-underwritten or renewed annually. Interest rates generally will float at
a spread tied to the Bank’s prime lending rate. Term loans are generally advanced for the purchase of, and are
secured by, vehicles and equipment and are normally fully amortized over a term of two to five years, on either a
fixed or floating rate basis.
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.
44
Consumer Lending
The Bank offers a variety of consumer loans, including automobile, personal secured and unsecured, 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 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 loan-to-value ratio.
C&F Finance’s underwriting and collateral guidelines form the basis for the credit decision. Exceptions to
credit policies and authorities must be approved by a designated credit officer. C&F Finance’s typical borrowers
have experienced prior credit difficulties. 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.
45
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)
December 31, 2008
Amount
Percent
December 31, 2007
Amount
Percent
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
$ 11,162
2,318
85,511
98,991
1,612
$ 100,603
11%
2
85
98
2
100%
$
7,467
1,771
68,150
77,388
3,867
$ 81,225
9%
2
84
95
5
100%
Growth in debt securities occurred in C&F Bank’s portfolio of guaranteed U.S. government agency
securities and obligations of states and political subdivisions. The decline in preferred stock was primarily
attributable to the $1.6 million other-than-temporary impairment in the Corporation’s holdings of perpetual
preferred stock of Fannie Mae and Freddie Mac.
46
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
Maturing after 10 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
Year Ended December 31,
2008
2007
2006
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Cost
Yield
Cost
Yield
Cost
Yield
$ 2,000
5.14%
$ 250
3.50%
$ 498
2.97%
--
1,249
7,859
11,108
162
1,105
997
2,264
11,106
21,618
36,223
16,895
85,842
13,268
22,723
37,472
25,751
--
5.73
5.67
5.58
4.24
4.53
5.95
5.13
6.60
6.09
6.31
6.28
6.29
6.35
6.02
6.30
6.09
1,998
2,973
2,225
7,446
154
1,622
--
4.19
5.61
6.16
5.32
5.34
4.64
--
2,747
2,443
625
6,313
38
2,198
--
4.46
5.55
6.82
5.00
3.39
4.77
--
1,776
4.64
2,236
4.75
4,005
18,595
28,167
16,442
67,209
4,409
22,215
31,140
18,667
5.32
6.24
6.47
6.21
6.27
5.21
5.93
6.39
6.21
1,213
16,254
24,017
12,437
53,921
1,749
21,199
26,460
13,062
4.38
6.06
6.75
6.41
6.41
3.95
5.71
6.64
6.42
Total securities
1
Yields on tax-exempt securities have been computed on a taxable-equivalent basis.
2
Total securities excludes preferred stock at amortized cost of $1.6 million at December 31, 2008; $4.0 million at December 31,
2007; and $3.9 million at December 31, 2006 (estimated fair value of $1.6 million at December 31, 2008; $3.9 million at December
31, 2007; and $4.1 million at December 31, 2006).
$99,214
$76,431
$62,470
6.14%
6.18%
6.21%
47
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 $550.7 million at December 31, 2008, compared to $527.6 million at December 31, 2007.
This increase occurred in lower-costing money market accounts as a result of our deposit strategies that emphasize
retention of multi-service customer relationships, coupled with depositors’ preferences for maintaining flexibility
in their investing options as the value of the stock market declined during 2008. Brokered certificates of deposit
increased from $3.0 million at December 31, 2007 to $10.0 million at December 31, 2008.
Table 11 presents the average deposit balances and average rates paid for the years 2008, 2007 and 2006.
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,
2008
2007
2006
Average
Balance
$ 83,533
82,560
68,406
42,445
99,726
167,849
460,986
$544,519
Average
Rate
1.01%
2.48
0.25
4.10
3.94
2.89%
Average
Balance
$ 84,365
82,109
51,624
45,452
99,653
169,431
448,269
$532,634
Average
Rate
Average
Average
Balance
Rate
1.11%
2.97
0.66
4.73
4.41
3.33%
$ 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%
Table 12 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2008.
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, 2008
$19,875
14,302
32,359
33,175
$99,711
In addition to deposits, the Corporation utilizes short-term borrowings from the FHLB and the FRB 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, and overnight
unsecured fed funds lines with correspondent banks. Long-term borrowings consist of advances from the FHLB,
advances under a non-recourse revolving bank line of credit and securities sold under agreements to repurchase
with a third-party broker. All FHLB advances are secured by a blanket floating lien on all qualifying real estate
loans of C&F Bank. All FRB advances are secured by loan-specific liens on qualifying loans of C&F Bank that are
48
not otherwise pledged. The bank line of credit is non-recourse and is secured by loans at C&F Finance. The
repurchase agreement is secured by a portion of C&F Bank’s securities portfolio.
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
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 $75.0 million at December 31, 2008 and $98.0 million at
December 31, 2007.
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 $7.8 million at December 31, 2008 and $7.1 million at December
31, 2007.
At December 31, 2008, C&F Mortgage had rate lock commitments to originate mortgage loans aggregating
$48.1 million and loans held for sale of $37.0 million. C&F Mortgage has entered into corresponding commitments
with third party investors to sell loans of approximately $85.1 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.
49
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 $600,000 in 2008, $84,000 in 2007 and $62,000 in 2006. 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 enter transactions with counterparties that it feels are
likely to fail to meet its obligations.
LIQUIDITY
The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to
satisfy the credit needs of our customers and the demands of our depositors, creditors and investors. Stable core
deposits and a strong capital position are the 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 $69.7 million at December 31, 2008. The
Corporation’s funding sources consist of (1) federal funds lines with correspondent banks totaling $24.0 million
that had no outstanding balance as of December 31, 2008, (2) a $135.6 million line with the FHLB that had $86.3
million outstanding as of December 31, 2008, (3) a $120.0 million revolving line of credit with a third-party bank
that had $85.3 million outstanding as of December 31, 2008 and (4) a $56.4 million line with the FRB that had $15.0
million outstanding as of December 31, 2008. 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 $66.5 million at December
31, 2008; certificates of deposit of $100,000 or more maturing in more than one year totaled $33.2 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, 2008:
50
CONTRACTUAL OBLIGATIONS
(Dollars in thousands)
Payments Due by Period
Bank lines of credit
FHLB advances1
FRB borrowings
Trust preferred
capital notes
Securities sold under
agreements to
repurchase
Operating leases
Total
Less than 1 Year
1-3 Years
3-5 Years
More than 5 Years
$ 85,316
86,300
15,000
$ --
33,800
15,000
$ --
--
--
$ 85,316
17,500
--
$ --
35,000
--
20,620
--
--
--
20,620
12,224
3,127
7,224
1,046
--
1,637
--
411
5,000
33
$1,637
$222,587
$57,070
Total
1FHLB advances include convertible advances of $17.5 million maturing in 2012, $12.5 million maturing in 2014, $17.5 million
maturing in 2017 and $5.0 million maturing in 2018. 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.”
$60,653
$103,227
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 2008, the Corporation purchased 1,600 shares of its common stock in open-market transactions at
prices ranging between $20.49 and $31.06 per share in accordance with a board-approved stock purchase program
that will expire in July 2009. 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. However, in connection with the Corporation’s
participation in the Capital Purchase Program, as previously described, certain limitations on the Corporation’s
ability to repurchase its common stock have been imposed. For more information on these restrictions, see Item 8,
“Financial Statements and Supplementary Data,” under the heading “Note 19: Subsequent Event.”.
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 10.8 percent at December 31, 2008, compared with 11.2
51
percent at December 31, 2007. The total capital to risk-weighted asset ratio was 12.3 percent at December 31, 2008,
compared with 12.8 percent at December 31, 2007. The Tier 1 leverage ratio was 8.9 percent at December 31, 2008,
compared with 9.4 percent at December 31, 2007. 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. These ratios do not include the $20.0 million of
Series A Preferred Stock sold to the Treasury under its Capital Purchase Program, which will be treated as Tier 1
capital for regulatory capital adequacy determination purposes, because the transaction closed on January 9, 2009.
Shareholders’ equity was $64.9 million at year-end 2008 compared with $65.2 million at year-end 2007.
During 2008, the Corporation maintained dividends declared at the 2007 level of $1.24 per share. The dividend
payout ratio was 89.8 percent in 2008, 44.5 percent in 2007 and 30.2 percent 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.”
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 years ended December 31, 2008 and 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 from net income of significant
impairment charges, net of tax benefit, recognized in 2008 and a significant recovery of income attributable to a
single loan transaction recognized in 2006 permit a comparison of results for ongoing business operations, and it is
on this basis that we internally assess the Corporation’s performance 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
an alternative to GAAP financial measures.
52
Reconciliation of Certain Non-GAAP Financial Measures
(Dollars in thousands, except for per share data)
*
For the Year Ended December 31,
2007
2008
2006
Net Income and Earnings Per Share
Net income (GAAP)
Other-than-temporary impairment on Fannie Mae and
Freddie Mac preferred stock, net of income tax
benefit (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 other-than-temporary impairment on
Fannie Mae and Freddie Mac preferred stock and 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 other-than-temporary impairment on
Fannie Mae and Freddie Mac preferred stock and
nonaccrual and default interest and reduction in loan
loss allowance attributable to loan transaction
Earnings per share – basic
GAAP
Excluding other-than-temporary impairment on
Fannie Mae and Freddie Mac preferred stock and
nonaccrual and default interest and reduction in loan
A
$4,181
$8,480
$12,129
976
-
-
-
(565)
(163)
-
-
B
C
D
$5,157
3,021
2,988
$8,480
3,161
3,039
$11,401
3,273
3,152
A/C
$1.38
$2.68
$3.71
B/C
A/D
$1.71
$2.68
$3.48
$1.40
$2.79
$3.85
loss allowance attributable to loan transaction
B/D
$1.73
$2.79
$3.62
Return on Average Assets
Average assets (GAAP)
Return on average assets
GAAP
Excluding other-than-temporary impairment on
Fannie Mae and Freddie Mac preferred stock and
nonaccrual and default interest and reduction in loan
E
$819,999
$748,394 $694,315
A/E
0.51%
1.13%
1.75%
loss allowance attributable to loan transaction
B/E
0.63%
1.13%
1.64%
Return on Average Equity
Average equity (GAAP)
Return on average equity
GAAP
Excluding other-than-temporary impairment on
Fannie Mae and Freddie Mac preferred stock and
nonaccrual and default interest and reduction in loan
F
$65,402
$65,070
$63,949
A/F
6.39%
13.03%
18.97%
loss allowance attributable to loan transaction
B/F
7.89%
13.03%
17.83%
* 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.
53
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 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,
2008.
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 and repricing dates of
assets and liabilities to the extent believed necessary to balance minimizing interest rate risk and increasing net
interest income in current market conditions. 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, maturities and
repricing dates of assets and liabilities and attempts to manage interest rate risk by adjusting terms of new loans,
deposits and borrowings and by investing in securities with terms that manage 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
54
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, 2008, indicate that the Corporation would expect net interest income to
decrease over the next twelve months 1.24 percent assuming an immediate downward shift in market interest rates
of 200 basis points (BP) and to decrease 3.16 percent if rates shifted upward in the same manner.
1-Year Net Interest Income Simulation (dollars in thousands)
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Hypothetical Change in Net
Interest Income for the Year Ended
December 31, 2008
Dollars
($566)
($1,439)
Percentage
(1.24%)
(3.16%)
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, 2008 indicate
that the EVE would increase 6.97 percent assuming an immediate downward shift in market interest rates of 200 BP
and would decrease 18.13 percent if rates shifted upward in the same manner.
Static EVE Change (dollars in thousands)
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Hypothetical Change in EVE
Dollars
Percentage
$5,641
($14,678)
6.97%
(18.13%)
In the analyses above, net interest income and the EVE decline in an immediate upward shift in interest
rates. However, net interest income declines while the EVE increases in an immediate downward 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, time deposits and borrowings. However, in a falling rate environment the analyses
assume that adjustable-rate assets will continue to reprice downward, subject to floors on certain loans, and fixed-
rate assets with prepayment or callable options will reprice at lower rates while certain deposits cannot reprice any
lower.
55
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.
56
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
$100,778 and $80,425, respectively
Loans held for sale, net
Loans, net of allowance for loan losses of $19,806 and $15,963,
respectively
Federal Home Loan Bank stock
Corporate premises and equipment, net
Other real estate owned
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,
3,037,441 and 3,019,591 shares issued and outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
57
December 31,
2008
2007
$ 9,727
161
—
9,888
100,603
37,042
633,017
5,284
31,131
1,967
5,096
10,724
20,905
$ 855,657
$ 77,634
204,193
268,898
550,725
56,024
142,816
20,620
1,921
18,694
790,800
—
—
2,992
551
62,361
(1,047)
64,857
$ 855,657
$ 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
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Year Ended December 31,
2007
2006
2008
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
Net gains on calls and sales of available for sale securities
Other-than-temporary impairment 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
$59,853
28
$ 60,938
443
$ 55,112
454
542
3,192
515
64,130
2,638
4,088
6,614
6,749
1,306
21,395
42,735
13,766
28,969
16,693
3,907
3,721
234
(1,575)
2,169
25,149
27,724
6,031
15,565
49,320
4,798
617
$ 4,181
$ 1.40
$ 1.38
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
See notes to consolidated financial statements.
58
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Balance December 31, 2005
Purchase of common stock
Stock options exercised
Share-based compensation
Comprehensive income
Net income
Other comprehensive loss, 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 (loss), 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
Purchase of common stock
Stock options exercised
Share-based compensation
Comprehensive income
Net income
Other comprehensive loss, 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
Reduction due to change in pension measurement date
Cash dividends ($1.24 per share)
Balance December 31, 2008
Comprehensive
Income
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
$55,930
$ 832
Common
Stock
$3,141
(14)
32
Additional
Paid-In
Capital
$ 183
(504)
548
97
$12,129
12,129
Total
$60,086
(518)
580
97
12,129
3,159
(204)
24
324
(1,166)
543
299
2,979
(1)
14
—
(39)
252
338
(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)
(3,769)
62,048
197
$ 4,181
4,181
(3,769)
65,224
(40)
266
338
4,181
(591)
(653)
$ 2,937
(591)
(591)
(653)
(653)
(114)
(3,754)
$62,361
(114)
(3,754)
$64,857
$ (1,047)
$2,992
$ 551
Disclosure of reclassification amount for the year ended December 31:
Unrealized net holding (losses) gains arising during period
Less: reclassification adjustment for net (losses) gains included in net income
Net unrealized losses on securities
2008
$ (1,538)
(885)
$ (653)
2007
$ (211)
14
$ (225)
2006
$ 1
68
$ (67)
See notes to consolidated financial statements.
59
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2007
2006
2008
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
Other-than-temporary impairment of 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, calls and sales of securities available for sale
Purchase of securities available for sale
Net purchases of FHLB stock
Investment in statutory trust
Net increase in customer loans
Purchases of corporate premises and equipment
Disposals of corporate premises and equipment
Net cash used in investing activities
Financing activities:
Net increase (decrease) in demand, interest-bearing demand
$ 4,181
$ 8,480
$ 12,129
2,381
(2,672)
13,766
338
2,563
(1,112)
7,130
299
2,007
(970)
4,625
97
55
(234)
1,575
(749,177)
746,218
50
(21)
—
(828,379)
847,800
35
(105)
—
(944,300)
930,473
(27)
2,931
(194)
2,912
22,053
18,516
(40,265)
(897)
—
(64,163)
(728)
70
(87,467)
(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)
and savings deposits
Net increase in time deposits
Net increase in borrowings
Issuance of trust preferred capital notes
Purchases 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
17,205
5,949
43,413
—
(40)
266
(3,754)
63,039
(2,375)
12,263
4,565
32,832
12,742
--
(518)
580
(3,657)
46,544
(14,372)
42,878
$ 9,888 $ 12,263 $ 28,506
(14,088)
8,824
50,681
10,310
(8,435)
567
(3,769)
44,090
(16,243)
28,506
$ 21,589 $ 23,178 $ 17,848
5,935
3,116
4,087
Supplemental disclosure of noncash investing and financing activities
Unrealized (losses) on securities available for sale
Loans transferred to other real estate owned
Pension adjustment
$ (1,005)
(3,261)
(909)
$ (347)
--
463
$ (103)
--
(990)
See notes to consolidated financial statements.
60
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, 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, Indiana 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
comprehensive income. Gains or losses are recognized in earnings on the trade date using the amortized cost of the
61
specific security sold. Purchase premiums and discounts are recognized in interest income using the interest
method over the terms of the 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 or for a period of time sufficient to allow for any anticipated recovery in fair value.
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. 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.
62
Off-Balance-Sheet Credit Related Financial Instruments: In the ordinary course of business, the Corporation has
entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded
when they are funded.
Rate Lock Commitments: The Corporation enters into commitments to originate residential mortgage loans
whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitments). The period of
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.
Allowance for Indemnifications: The allowance for indemnifications is established through charges to earnings in
the form of a provision for indemnifications, which is included in other noninterest expenses. A loss is charged
against the allowance for indemnifications when a purchaser of a loan (investor) sold by C&F Mortgage incurs a
loss due to borrower misrepresentation or early default.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses arising
from indemnification requests. Management’s judgment in determining the level of the allowance is based on the
volume of loans sold, current economic conditions and information provided by investors. This evaluation is
inherently subjective, as it requires estimates that are susceptible to significant revision as more information
becomes available.
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 2008 and it was determined there was no impairment to be
recognized in 2008.
63
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,
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: 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 was effective for fiscal years ending after December 15, 2008.
The Bank has a 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. Subsequent valuations in 2008 and 2007 determined that the plan was underfunded.
As a result, the Corporation recognized pension liabilities of $2.05 million at December 31, 2008 and $269,000 at
December 31, 2007, and recognized a net loss of $591,000 in 2008 and a net gain of $301,000 in 2007 as components
of other comprehensive income. In addition, the Corporation recognized a net adjustment to retained earnings of
$114,000 in 2008 due to the change in the measurement date.
Share-Based Compensation: The Corporation’s share-based compensation plans 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.
64
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.
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, 2008, 2007 and 2006 included $292,000 ($181,000 after tax), $299,000 ($186,000 after tax) and
$97,000 ($60,000 after tax), respectively, for options and restricted stock granted during 2008, 2007 and 2006. As of
December 31, 2008, there was $1.03 million of unrecognized compensation expense related to unvested 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. Earnings per share,
assuming dilution, 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 2008, the Corporation purchased 1,600 shares of its common stock in open-market
transactions at prices ranging between $20.49 and $31.06 per share in accordance with board-approved stock
purchase programs. The program in effect at December 31, 2008, which will expire in July 2009, replaced the
program that expired July 2008. Limitations on future share repurchases are described in Note 19.
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 expired 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.
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.
Fair Value Measurements: Effective January 1, 2008, the Corporation adopted the provisions of SFAS No. 157, Fair
Value Measurements, for financial assets and financial liabilities. SFAS 157 defines fair value, establishes a
framework for measuring fair value, establishes a valuation hierarchy for disclosure of fair value measurements
and enhances disclosure requirements for fair value measurements. The fair value hierarchy under SFAS 157 is
based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, and
65
prioritizes the inputs to valuation techniques used to measure fair value in three broad levels (Level 1, Level 2 and
Level 3).
Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs that include quoted
prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs are
unobservable inputs for the asset or liability and reflect the reporting entity’s own assumptions regarding the
inputs that market participants would use in pricing the asset or liability.
The following is a description of the valuation methodologies used for instruments measured at fair value, as well
as the general classification of such instruments pursuant to the valuation hierarchy:
Securities: Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation
hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange-
traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models,
quoted prices of securities with similar characteristics, or discounted cash flow and are classified within Level 2 of
the valuation hierarchy. Level 2 securities would include U.S. agency securities, mortgage-backed agency
securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are
classified within Level 3 of the valuation hierarchy. Currently, all of the Corporation’s securities are considered to
be Level 2 securities.
Loans Held for Sale: Loans held for sale are required to be measured at the lower of cost or fair value. Under SFAS
157, market value is to represent fair value. Management obtains contractual commitments to sell all of these loans
directly from the purchasing financial institutions. Premiums to be received under these commitments are
indicative of the fact that cost is lower than fair value. At December 31, 2008, the entire balance of the
Corporation’s loans held for sale was recorded at cost.
Impaired Loans: SFAS 157 applies to loans measured for impairment using the practical expedients permitted by
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable
market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value
of the loan’s collateral, when the loan is dependent on collateral, is determined by Level 3 valuation inputs, such as
appraisal or independent valuation, which is then adjusted for the cost related to liquidation of the collateral.
Other Real Estate Owned: Other real estate owned (“OREO”) is measured at fair value based on Level 3 valuation
inputs, in accordance with the provisions of SFAS 157, less costs to sell.
Reclassifications: Certain reclassifications have been made to prior period amounts to conform to the current year
presentation.
Recent Accounting Pronouncements: In September 2006, the FASB reached a consensus on Emerging Issues Task
Force (EITF) Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-
Dollar Life Insurance Arrangements. In March 2007, the FASB reached a consensus on EITF Issue 06-10, Accounting for
Collateral Assignment Split-Dollar Life Insurance Arrangements. Both of these standards require a company to
recognize an obligation over an employee’s service period based upon the substantive agreement with the
employee such as the promise to maintain a life insurance policy or provide a death benefit postretirement. The
Corporation’s adoption of these standards effective January 1, 2008 did not 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
66
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 adopted SFAS
159 effective January 1, 2008. The Corporation elected not to report any existing financial assets or liabilities at fair
value that are not already reported, thus the adoption of SFAS 159 did not have a material effect 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. It establishes the criteria for how an
acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction;
establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all of the information they need to
evaluate and understand the nature and financial effect of the business combination. Acquisition related costs
including finder's fees, advisory, legal, accounting valuation and other professional and consulting fees are
required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008
and early implementation is not permitted. The Corporation does not expect the implementation of SFAS 141(R) to
have a material effect on its consolidated financial statements, at this time.
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. Implementation of SAB 109
did not have a material effect on the Corporation’s 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 and is effective as of the beginning of an
entity’s first fiscal year that begins after December 15, 2008. The Corporation does not expect the implementation
of SFAS 160 to have a material effect on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an
amendment of FASB Statement No. 133. SFAS 161 requires that an entity provide enhanced disclosures related to
derivative and hedging activities. SFAS 161 is effective for the Corporation on January 1, 2009.
In April 2008, the FASB issued FASB Staff Position (FSP) 142-3, Determination of the Useful Life of Intangible Assets.
FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. The
intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R). FSP
142-3 is effective for the Corporation on January 1, 2009, and applies prospectively to intangible assets that are
acquired individually or with a group of other assets in business combinations and asset acquisitions. The
Corporation does not expect the implementation of FSP 142-3 to have a material effect on its consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162
identifies the sources of accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. SFAS 162 becomes effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles. The Corporation does not expect the
implementation of SFAS 162 to have any effect on its consolidated financial statements.
67
In June 2008, the FASB finalized FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. FSP EITF 03-6-1 affects entities that accrue cash dividends on
share-based payment awards during the awards’ service period when the dividends do not need to be returned if
the employees forfeit the awards. The FASB concluded that all outstanding unvested share-based payment awards
that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders.
Because the awards are considered participating securities, the issuing entity is required to apply the two-class
method of computing basic and diluted earnings per share. The FASB also concluded that because FSP EITF 03-6-1
applies to all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends,
changes in an entity’s forfeiture estimates from one reporting period to the next do not affect the computation of
earnings per share, other than for the increase or decrease in compensation cost as a result of the application of
SFAS 123(R). The transition guidance in FSP EITF 03-6-1 requires an entity to retroactively adjust all prior-period
earnings-per-share computations to reflect the FSP’s provisions. The retroactive adjustments encompass earnings-
per-share computations included in interim financial statements. Early adoption of the FSP is not permitted. FSP
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal
years. The Corporation does not expect the implementation of this FSP to have a material effect on its consolidated
financial statements.
In September 2008, the FASB issued FSP 133-1 and FASB Interpretation (FIN) 45-4, Disclosures about Credit
Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and
Clarification of the Effective Date of FASB Statement No. 161. FSP 133-1 and FIN 45-4 require a seller of credit
derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit
derivatives to enable users of financial statements to assess their potential effect on its financial position, financial
performance and cash flows. FSP 133-1 and FIN 45-4 were effective for the Corporation on December 31, 2008 and
did not have a material effect on its consolidated financial statements.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active. FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. This FSP was effective as of September 30, 2008 and did not have a material effect on
the Corporation’s consolidated financial statements.
In December 2008, the FASB issued FSP No. 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about
Transfers of Financial Assets and Interests in Variable Interest Entities. FSP 140-4 and FIN 46(R)-8 require enhanced
disclosures about transfers of financial assets and interests in variable interest entities. FSP 140-4 is effective for
interim and annual periods ending after December 15, 2008. Because FSP 140-4 requires only additional
disclosures concerning transfers of financial assets and interests in variable interest entities, adoption of FSP 140-4
did not affect the Corporation’s financial condition, results of operations or cash flows.
In January 2009, the FASB issued FSP EITF 99-20-1, which amends the impairment guidance in EITF Issue No. 99-
20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets, in order to achieve more consistent determination of whether
an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of
an other-than-temporary impairment assessment and the related disclosure requirements in SFAS 115 and other
related guidance. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15,
2008 and shall be applied prospectively. The FSP was effective for the Corporation as of December 31, 2008 and
did not have a material effect on its consolidated financial statements.
68
NOTE 2: Securities
Debt and equity securities are summarized as follows:
(Dollars in thousands)
Available for Sale
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Preferred stock
(Dollars in thousands)
Available for Sale
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Preferred stock
December 31, 2008
Gross
Unrealized
Losses
$ (5)
--
(1,189)
(98)
$(1,292)
Gross
Unrealized
Gains
$ 59
54
858
146
$1,117
Amortized
Cost
$ 11,108
2,264
85,842
1,564
$100,778
Estimated
Fair Value
$ 11,162
2,318
85,511
1,612
$100,603
December 31, 2007
Gross
Unrealized
Losses
$ (15)
(16)
(91)
(331)
$(453)
Gross
Unrealized
Gains
$ 36
11
1,032
204
$1,283
Amortized
Cost
$ 7,446
1,776
67,209
3,994
$80,425
Estimated
Fair Value
$ 7,467
1,771
68,150
3,867
$81,255
The amortized cost and estimated fair value of securities at December 31, 2008, 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, 2008
Amortized
Cost
$ 13,268
22,723
37,472
25,751
1,564
$ 100,778
Estimated
Fair Value
$ 13,281
22,803
37,227
25,680
1,612
$ 100,603
Proceeds from the maturities, calls and sales of securities available for sale in 2008 were $18.52 million, resulting in
gross realized gains of $253,000 and gross realized losses of $19,000. Securities with an aggregate amortized cost of
$40.57 million and an aggregate fair value of $40.84 million were pledged at December 31, 2008 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 2007 were $6.19 million, resulting in gross
realized gains of $21,000. 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.
69
Securities in an unrealized loss position at December 31, 2008, by duration of the period of the unrealized loss, are
shown below.
(Dollars in thousands)
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
U.S. government agencies
and corporations
$ 495
$ 5
Obligations of states and
political subdivisions
Subtotal-debt securities
Preferred stock
Total temporarily impaired
32,846
33,341
699
1,189
1,194
88
securities
$34,040
$ 1,282
$ --
--
--
20
$20
$ --
$ 495
$ 5
--
--
10
32,846
33,341
719
1,189
1,194
98
$ 10
$34,060
$1,292
The primary cause of the temporary impairments in the Corporation’s investment in debt securities was
attributable to fluctuations in interest rates. There are 110 debt securities totaling $33.34 million and six equity
securities totaling $719,000 considered temporarily impaired at December 31, 2008. Because the Corporation has
the ability and intent to hold these investments until a recovery of unrealized losses, which may be maturity, the
Corporation does not consider these investments to be other-than-temporarily impaired at December 31, 2008 and
no impairment has been recognized.
In 2008, the Corporation recognized a $1.58 million other-than-temporary impairment charge related to its
investments in perpetual preferred stock of the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac). The impairment in the holdings of these government-
sponsored entities resulted from the decline in market value of these shares in connection with the federal
government’s takeover of Fannie Mae and Freddie Mac in September 2008, along with the elimination of dividends
on these shares. The market value of the Corporation’s preferred shares of Fannie Mae and Freddie Mac at
December 31, 2008 after the other-than-temporary impairment charge was $12,000 and $15,000, respectively.
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
70
NOTE 3: Loans
Major classifications of loans are summarized as follows:
(Dollars in thousands)
Real estate—mortgage
Real estate—construction
Commercial, financial and agricultural1
Equity lines
Consumer
Consumer finance
Less unearned loan fees
Less allowance for loan losses
December 31,
2008
2007
$141,271
28,300
272,440
29,136
9,515
172,385
653,047
(224)
652,823
(19,806)
$633,017
$123,239
26,719
257,951
25,282
8,991
160,196
602,378
(534)
601,844
(15,963)
$585,881
1
Includes loans secured by real estate for builder lines, acquisition and development and
commercial development, as well as commercial loans secured by personal property.
Consumer loans included $221,000 and $231,000 of demand deposit overdrafts at December 31, 2008 and 2007,
respectively. Loans on nonaccrual status were $19.48 million and $2.62 million at December 31, 2008 and 2007,
respectively. If interest income had been recognized on nonaccrual loans at their stated rates during fiscal years
2008, 2007 and 2006, interest income would have increased by approximately $439,000, $56,000 and $70,000,
respectively. Accruing loans past due for 90 days or more were $3.52 million and $578,000 at December 31, 2008
and 2007, respectively. The balance of impaired loans was $16.83 million and $291,000 at December 31, 2008 and
2007, respectively, for which there was a $940,000 specific valuation allowance as of December 31, 2008. No specific
valuation allowance was deemed necessary as of December 31, 2007. The average balances of impaired loans for
2008, 2007 and 2006 were $5.82 million, $557,000 and $2.24 million, respectively. The Corporation has no obligation
to fund additional advances on its impaired loans.
Year Ended December 31,
2007
2006
2008
$15,963
13,766
(11,559)
1,636
$19,806
$14,216
7,130
(7,300)
1,917
$15,963
$13,064
4,625
(5,093)
1,620
$14,216
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
71
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
NOTE 6: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, $100 or more
Other time deposits
December 31,
2008
2007
$ 6,734
26,347
20,726
53,807
(22,676)
$31,131
$ 6,734
26,321
20,153
53,208
(20,354)
$32,854
December 31,
2008
2007
$ 99,711
169,187
$268,898
$ 97,006
165,943
$262,949
Remaining maturities on time deposits at December 31, 2008 are as follows (dollars in thousands):
2009
2010
2011
2012
2013
Thereafter
$181,028
32,385
9,632
44,612
867
374
$268,898
Time deposits at December 31, 2008 included $10.00 million of brokered deposits, which mature in 2009.
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 $7.22 million on December 31, 2008 and $2.57 million on December 31, 2007. 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 $33.80 million and $19.40 million of short-term advances from the FHLB outstanding
on December 31, 2008 and 2007, respectively. Short-term borrowings on December 31, 2008 also include $15.00
million under the Federal Reserve Bank Term Auction Facility, which is secured by a loan-specific lien on all
qualifying loans, except for those loans pledged to support advances from the FHLB and C&F Finance’s revolving
bank line of credit. Short-term borrowings also include $24.00 million in federal funds lines with correspondent
banks, which had no outstanding balances on December 31, 2008 and 2007.
72
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
2008
December 31,
2007
$21,968
$78,735
$26,395
4.83%
4.15%
$21,968
$56,024
$59,382
$35,071
2.12%
0.67%
$56,024
Long-term borrowings at December 31, 2008 consist of a repurchase agreement with a third-party broker, which is
secured by investment securities, 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 repurchase agreement, which matures in 2018, is 1.78% until September 2009,
at which time the rate will float at 7.00% minus three-month LIBOR with a maximum rate of 3.55%, and the
outstanding balance as of December 31, 2008 was $5.00 million. The interest rate on the revolving bank line of
credit, which matures in 2012, floats at the one-month LIBOR rate plus 175 basis points, and the outstanding
balance as of December 31, 2008 was $85.32 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 2008. Long-term advances
from the FHLB at December 31, 2008 consist of $52.5 million of convertible advances. 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. The table below presents selected information on these advances:
(Dollars in thousands)
Balance Outstanding at December 31, 2008
$5,000
$5,000
$7,500
$5,000
$7,500
$7,500
$5,000
$5,000
$5,000
Interest Rate
Maturity Date
3.90%
4.08
4.15
3.95
3.69
3.70
4.06
2.93
3.59
8/30/12
8/30/12
10/19/12
11/17/14
11/28/14
10/19/17
10/25/17
11/27/17
6/6/18
Initial
Conversion
Option Date
2/29/09
2/27/09
10/19/09
11/17/10
11/29/10
4/20/09
10/25/11
2/27/09
6/6/12
The contractual maturities of long-term borrowings, excluding conversion provisions, at December 31, 2008 are as
follows:
(Dollars in thousands)
2012
2013
Thereafter
Fixed Rate
$17,500
--
35,000
$52,500
Floating Rate
$85,316
--
5,000
$90,316
Total
$102,816
--
40,000
$142,816
The Corporation’s unused lines of credit for future borrowings total approximately $149.45 million at December 31,
2008, which consists of $49.33 million available from the FHLB, $34.68 million on C&F Finance’s revolving bank
line of credit, $41.44 million available from the Federal Reserve Bank and $24.00 million under federal funds
agreements with third party financial institution. Additional loans are available that can be pledged as collateral
for future borrowings from the Federal Reserve Bank above the current lendable collateral value.
73
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 5.15% at December 31, 2008. 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 3.57% at December 31, 2008. 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 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:
Stock option awards
Restricted stock awards
Weighted average number of common shares used in earnings per
common share—assuming dilution
December 31,
2007
2006
2008
$4,181
$8,480
$12,129
2,988,017
3,039,240
3,151,860
30,574
2,368
118,514
3,269
121,569
--
3,020,959
3,161,023
3,273,429
Options on approximately 372,000, 98,000 and 133,000 shares were not included in computing diluted earnings per
common share for the years ended December 31, 2008, 2007 and 2006, respectively, because they were anti-dilutive.
74
NOTE 9: Income Taxes
Principal components of income tax expense as reflected in the consolidated statements of income are as follows:
(Dollars in thousands)
Current taxes
Deferred taxes
Year Ended December 31,
2007
$ 4,456
(1,112)
$ 3,344
2008
$ 3,289
(2,672)
$ 617
$6,400
(970)
$5,430
2006
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
34.0%
2007
$4,139
2006
2008
$6,146
$1,631
(1,085)
(22.6)
(913)
(7.7)
(876)
(5.0)
122
157
2.6
3.3
(45)
(147)
(16)
$ 617
(0.9)
(3.1)
(0.4)
12.9%
115
248
(72)
(101)
(72)
$3,344
1.0
2.1
(0.6)
(0.9)
(0.6)
28.3%
84
302
0.5
1.7
(48)
(98)
(80)
$5,430
(0.3)
(0.6)
(0.4)
30.9%
The Corporation’s net deferred income taxes totaled $9.98 million and $6.64 million at December 31, 2008 and 2007,
respectively. The tax effects of each type of significant item that gave rise to deferred taxes are:
(Dollars in thousands)
December 31,
2007
2008
Deferred tax asset
Allowance for loan losses
Deferred compensation
Other-than-temporary impairment of Fannie Mae and Freddie Mac preferred stock
Defined benefit plan
Share-based compensation
Interest on nonaccrual loans
Net unrealized loss on securities available for sale
Other
Deferred tax asset
Deferred tax liability
Goodwill and other intangible assets
Depreciation
Net unrealized gain on securities available for sale
Other
Deferred tax liability
Net deferred tax asset
75
$7,715
1,557
614
369
250
88
61
899
11,553
(1,568)
(3)
--
--
(1,571)
$9,982
$6,043
1,476
--
92
155
10
--
480
8,256
(1,260)
(39)
(291)
(27)
(1,617)
$6,639
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 2005. 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.
NOTE 10: Employee Benefit Plans
The Bank maintains a Defined Contribution Profit-Sharing Plan (the Profit-Sharing Plan) sponsored by the Virginia
Bankers Association (VBA). 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 VBA. 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 $437,000, $420,000 and $564,000 in 2008, 2007 and 2006, 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 $75,000,
$182,000 and $211,000 for 2008, 2007 and 2006, respectively.
C&F Finance maintains a Defined Contribution Profit-Sharing Plan sponsored by the VBA with plan features
similar to the Profit-Sharing Plan of the Bank. The amounts charged to expense under this plan were $79,000,
$94,000 and $99,000 in 2008, 2007 and 2006, respectively.
Individual performance bonuses are awarded annually to certain members of management under a management
incentive bonus policy. The Corporation’s Compensation Committee recommends to the Corporation’s board of
directors the bonuses to be paid to the Chief Executive Officer and the Chief Financial 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 $333,000, $780,000 and $683,000 in
2008, 2007 and 2006, respectively. In accordance with employment agreements for certain senior officers of C&F
Mortgage, performance bonuses of $695,000, $811,000 and $1.08 million were expensed in 2008, 2007 and 2006,
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
$92,000, $115,000 and $79,000 in 2008, 2007 and 2006, 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 all full-time employees over 21 years of age.
Historically, benefits were generally based upon years of service and average compensation for the five highest-
76
paid consecutive years of service. Effective December, 31, 2008, this plan was converted to a non-contributory cash
balance pension plan (the Cash Balance Plan) for all full-time employees over 21 years of age. Under the Cash
Balance Plan, benefits earned by participants under the prior defined benefit pension plan through December 31,
2008 were converted to an opening account balance for each participant. This account balance for each participant
will grow each year with annual pay credits based on age and years of service and monthly interest credits based
on an amount established each year by the Compensation Committee. 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 December 31, 2008 and
October 1, 2007 and 2006.
Plan Year Ended
December 31, September 30,
2008
2007
2006
$ 7,083
1,044
550
(426)
(435)
(1,416)
$ 6,400
$ 6,814
(2,033)
--
(435)
$ 4,346
$(2,054)
$(2,054)
$ 2,798
(14)
(1,347)
(503)
$ 934
6.0%
8.5
4.0
$6,438
777
384
(190)
(326)
--
$7,083
$6,438
702
--
(326)
$6,814
$ (269)
$ (269)
$ 472
(22)
78
(185)
$ 343
6.3%
8.5
4.0
$6,029
752
345
(460)
(228)
--
$6,438
$5,084
400
1,182
(228)
$6,438
$ --
$ --
$ 932
(27)
85
(346)
$ 644
6.0%
8.5
4.0
(Dollars in thousands)
Change in benefit obligation
Projected benefit obligation, beginning
Service cost
Interest cost
Actuarial (gain)
Benefits paid
Prior service cost due to amendment
Projected benefit obligation, ending
Change in plan assets
Fair value of plan assets, beginning
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets, ending
Funded status
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 valuation date
Discount rate
Expected return on plan assets
Rate of compensation increase
77
The accumulated benefit obligation was $5.29 million and $4.60 million as of the actuarial valuation dates in 2008
and 2007, 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 (loss)
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 (loss)
Total recognized in net periodic benefit cost and
other comprehensive income (loss)
Year Ended December 31,
2008
2006
2007
$ 835
440
(576)
7
(5)
--
701
2,326
--
8
(1,416)
(9)
(318)
591
$ 777
384
(447)
7
(5)
16
732
(461)
--
5
--
(7)
162
(301)
$ 752
345
(428)
7
(5)
45
716
932
(27)
--
85
--
(346)
644
$ 1,292
$ 431
$1,360
(Dollars in thousands)
Adjustment to retained earnings due to change in measurement date
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net obligation at transition
Income tax benefit
Net periodic benefit cost
Year Ended
December
31, 2008
$ 209
110
(144)
1
(1)
(61)
$ 114
The estimated net loss, 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 $115,000, $(5,000)
and $(68,000), 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
valuation date of the prior year.
78
2007 2006 2005
5.8%
8.5
4.0
6.3%
8.5
4.0
6.0%
8.5
4.0
The benefits expected to be paid by the plan in the next ten years are as follows (dollars in thousands):
2009
2010
2011
2012
2013
2014 – 2018
$ 361
142
250
472
311
3,363
$4,899
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 December 31, 2008 and
September 30, 2007 by asset category are as follows:
Mutual funds-fixed income
Mutual funds-equity
Cash and equivalents
2008
31%
64
5
100%
2007
35%
60
5
100%
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing
return, with a targeted asset allocation of 40% fixed income and 60% equities. The investment advisor selects
investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical
performance, for the implementation of the plan’s investment strategy. The investment manager will consider both
actively and passively managed investment strategies and will allocate funds across the asset classes to develop an
efficient investment structure.
It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful
to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting
fees, transaction costs and other administrative costs chargeable to the trust.
NOTE 11: Related Party Transactions
Loans outstanding to directors and executive officers totaled $734,000 and $512,000 at December 31, 2008 and 2007,
respectively. New advances to directors and officers totaled $281,000 and repayments totaled $59,000 in the year
ended December 31, 2008. 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.
79
NOTE 12: Share-Based Plans
On April 15, 2008, the Corporation’s shareholders approved the Amended and Restated C&F Financial Corporation
2004 Incentive Stock Plan (the Amended 2004 Plan), which, among other things, expanded the group of eligible
award recipients to include certain key employees of the Corporation, as well as non-employee directors
(including non-employee regional or advisory directors). The Amended 2004 Plan authorizes an aggregate of
500,000 shares of Corporation common stock to be issued as equity awards in the form of stock options, stock
appreciation rights, restricted stock and/or restricted stock units to key employees and non-employee directors.
Since the Amended 2004 Plan’s approval, equity awards have only been issued in the form of restricted stock,
which are accounted for using the fair market value of the Corporation’s common stock on the date the restricted
shares are awarded.
Prior to the approval of the Amended 2004 Plan, the Corporation awarded options to purchase common stock
and/or grants of restricted shares of common stock to certain key employees of the Corporation under the C&F
Financial Corporation 2004 Incentive Stock Plan (the 2004 Plan), which was approved by the Corporation’s
shareholders on April 20, 2004. Options were issued to employees at a price equal to the fair market value of
common stock at the date granted. Restricted shares were 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 could be issued pursuant to awards made under the 2004 Plan was 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 2008, 2007 and 2006, all options outstanding under the 2004 Plan are exercisable on December 31, 2008.
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 are exercisable as of December 31, 2008. 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 were 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 and
2007, all options outstanding under the Director Plan are exercisable as of December 31, 2008. All options expire
ten years from the grant date. In 2008, the Corporation ceased granting awards to non-employee directors under
the Director Plan, which expired in 2008, and non-employee directors were added to the group of eligible award
recipients under the Amended 2004 Plan.
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). Options were issued to
regional directors of the Bank 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 2008, 2007 and 2006, all options outstanding under the Regional Director Plan
are exercisable as of December 31, 2008. All options expire ten years from the grant date. Upon approval of the
Amended 2004 Plan in 2008, the Corporation ceased granting awards to regional directors of the Bank under the
Regional Director Plan, which was to expire in 2009, and regional directors of the Bank were added to the group of
eligible award recipients under the Amended 2004 Plan.
80
Stock option transactions under the various plans for the periods indicated were as follows:
(Dollars in thousands, except for per share amounts)
2008
2007
2006
Exercise
Intrinsic
Exercise
Exercise
Shares
Price*
Value
Shares
Price*
Shares
Price*
Outstanding at beginning of year
510,217
$32.17
530,167
$31.54
564,067
$30.65
Granted
Exercised
Canceled
Outstanding at end of year
*Weighted average
--
(13,950)
(41,250)
455,017
--
19.05
30.65
13,500
(24,000)
(9,450)
37.17
21.39
31.65
13,500
(32,000)
(15,400)
39.60
16.46
37.13
$32.71
$ -
510,217
$32.17
530,167
$31.54
Options exercisable at year-end
455,017
$ -
496,717
516,667
Weighted-average fair value of options granted
during the year
N/A
$8.05
$10.10
The total intrinsic value of in-the-money options exercised in 2008 was $101,000. Cash received from option
exercises during 2008 was $266,000. The Corporation has a policy of issuing new shares to satisfy the exercise of
stock options.
There were no option grants during 2008. The fair value of each option granted in 2007 and 2006 was 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,
2007
3.3%
5.0
8
25.0%
4.7%
2006
2.9%
5.0
8
25.0%
5.2%
The dividend yield and growth rate assumptions were based on the Corporation’s history and expectation of
dividend payouts. The expected life was based on historical exercise experience. The expected volatility was based
on historical volatility. The risk-free interest rates for periods within the contractual life of the awards were 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, 2008:
Options Outstanding and Exercisable
Number
Outstanding at
December 31,
2008
147,967
233,750
73,300
455,017
Remaining
Contractual
Life*
2.7
6.7
4.9
5.1
Exercise
Price*
$19.40
38.29
41.79
$32.71
Range of Exercise Prices
$15.75 to $23.49
$35.20 to $39.60
$40.50 to $46.20
Total
*Weighted average
As permitted under the Amended 2004 Plan and previously the 2004 Plan, the Corporation awards shares of
restricted stock to certain key employees and non-employee directors. Restricted shares awarded to employees are
generally subject to a five-year vesting period and restricted shares awarded to non-employee directors are subject
to a three-year vesting period. As of December 31, 2008, a total of 45,700 shares of restricted stock were
outstanding, which consisted of 10,600 shares issued in 2008, 15,700 shares issued in 2007 and 19,400 shares issued
in 2006. Compensation is accounted for using the fair market value of the Corporation’s common stock on the date
81
the restricted shares are awarded, which averaged $19.66, $31.87 and $39.01 per share for restricted stock issued in
2008, 2007 and 2006, respectively, and outstanding as of December 31, 2008. Compensation expense is charged to
income ratably over the vesting periods. As of December 31, 2008, there was $1.03 million of total unrecognized
compensation cost related to restricted stock granted under the Amended 2004 Plan and the 2004 Plan. The cost is
expected to be recognized through 2013.
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 net of any related deferred
tax liability, 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 also include trust preferred securities. Risk-weighted assets for the
Corporation and the Bank were $681.25 million and $676.37 million, respectively, at December 31, 2008 and $644.55
million and $638.41 million, respectively, at December 31, 2007. Management believes that, as of December 31,
2008, the Corporation and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2008, 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.
82
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, 2008:
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, 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
Actual
Minimum Capital
Requirements
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$83,836
81,174
73,575
72,579
73,575
72,579
$82,376
76,898
72,296
68,819
72,296
68,819
12.3%
12.0
10.8
10.7
8.9
8.7
12.8%
12.1
11.2
10.8
9.4
9.0
$54,500
54,109
27,250
27,055
33,263
33,217
$51,564
51,073
25,782
25,537
30,835
30,633
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
$67,637
N/A
10.0%
N/A
40,582
N/A
41,521
N/A
6.0
N/A
5.0
N/A N/A
10.0%
$63,841
N/A N/A
6.0
38,305
N/A N/A
5.0
38,291
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, $18.39 million and $18.07 million of the Corporation’s trust
preferred securities is included in Tier 1 capital in the Corporation’s capital ratios presented above for 2008 and
2007, respectively. The remaining $1.61 million and $1.93 million of the Corporation’s total trust preferred
securities outstanding on December 31, 2008 and 2007, respectively, is included in the Corporation’s total capital
ratios presented above as a component of Tier 2 capital. Refer to Note 19 for a description of a capital transaction
that occurred after December 31, 2008, which will affect future capital amounts and ratios at the Bank and the
Corporation.
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.
83
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
$75.03 million and $98.02 million at December 31, 2008 and 2007, 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 $7.82 million and $7.06 million at December 31, 2008 and 2007, respectively.
At December 31, 2008, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to
approximately $48.13 million and loans held for sale of $37.04 million. C&F Mortgage has entered into
corresponding commitments with third party investors to sell loans of approximately $85.17 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.
C&F Mortgage maintains an indemnification reserve for potential claims made under these recourse provisions.
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 $1.30 million, $1.19 million and $911,000, for the years ended December
31, 2008, 2007 and 2006, respectively.
84
Future minimum lease payments due under these leases as of December 31, 2008 are as follows (dollars in
thousands):
2009
2010
2011
2012
2013
Thereafter
$1,046
863
774
313
98
33
$3,127
NOTE 15: Fair Value Measurements
The Corporation adopted SFAS 157 on January 1, 2008 to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is
an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants.
In February of 2008, the FASB issued FSP No. 157-2, which delayed the effective date of SFAS 157 for certain
nonfinancial assets and nonfinancial liabilities except for those items that are recognized or disclosed at fair value
in the financial statements on a recurring basis. FSP 157-2 defers the effective date of SFAS 157 for such
nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. Thus, the Corporation has only partially applied SFAS 157.
In October of 2008, the FASB issued FSP No. 157-3 to clarify the application of SFAS 157 in a market that is not
active and to provide key considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial
statements were not issued.
The fair value hierarchy under SFAS 157 is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date, and prioritizes the inputs to valuation techniques used to measure fair value
in three broad levels (Level 1, Level 2 and Level 3). Level 1 inputs are unadjusted quoted prices in active markets
(as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement
date. Level 2 inputs are inputs that include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the
financial instrument. Level 3 inputs are unobservable inputs for the asset or liability and reflect the reporting
entity’s own assumptions regarding the inputs that market participants would use in pricing the asset or liability.
The following describes the valuation techniques used by the Corporation to measure certain financial assets
recorded at fair value on a recurring basis in the financial statements.
Securities: Where quoted prices are available in an active market, securities are classified as Level 1 of the
valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and
exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics, or discounted cash flow and are classified within
Level 2 of the valuation hierarchy. Level 2 securities would include U.S. agency securities, mortgage-backed
agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other
securities. In certain cases where there is limited activity or less transparency around inputs to the valuation,
securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Corporation’s securities are
considered to be Level 2 securities.
85
Loans Held for Sale: Loans held for sale are required to be measured at the lower of cost or fair value. Under
SFAS 157, market value is to represent fair value. Management obtains contractual commitments to sell all of these
loans directly from the purchasing financial institutions. Premiums to be received under these commitments are
indicative of the fact that cost is lower than fair value. At December 31, 2008, the entire balance of the
Corporation’s loans held for sale was recorded at cost.
Impaired Loans: SFAS 157 applies to loans measured for impairment using the practical expedients permitted by
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable
market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value
of the loan’s collateral, when the loan is dependent on collateral, is determined by Level 3 valuation inputs, such as
appraisal or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. At
December 31, 2008, the Corporation’s impaired loans were valued at $15.89 million.
Other Real Estate Owned: OREO is measured at fair value based on Level 3 valuation inputs, in accordance with
the provisions of SFAS 157, less costs to sell. At December 31, 2008, the Corporation’s OREO was valued at $1.97
million.
The following describes the valuation techniques used by the Corporation to measure certain financial assets and
financial liabilities that are not recorded at fair value on a recurring basis in the financial statements:
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.
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.
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.
(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,
2008 2007
Estimated
Fair Value
Estimated
Fair Value
Carrying
Amount
Carrying
Amount
$ 9,888
100,603
633,017
37,042
5,096
281,827
268,898
219,460
1,921
$ 9,888
100,603
634,928
37,904
5,096
272,164
272,340
210,640
1,921
$ 12,263
81,255
585,881
34,083
5,069
264,622
262,949
176,047
2,115
$ 12,263
81,255
583,467
35,073
5,069
267,193
263,152
173,351
2,115
86
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 balance minimizing interest
rate risk and increasing net interest income in current market conditions. 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, maturities and repricing dates of assets and liabilities and attempts to manage interest rate risk by adjusting
terms of new loans, deposits and borrowings 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 retail installment sales contracts.
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.” Revenue and expenses of the Corporation are also included in “Other,” and consist primarily of
dividends received on the Corporation’s investment in equity securities, the Fannie Mae and Freddie Mac
impairment charge previously discussed and interest expense associated with the Corporation’s trust preferred
capital notes. Segment information for years ended December 31, 2007 and 2006 has been restated for the
reclassification of the Corporation’s revenue and expenses from the Retail Banking segment to the Other segment
in order to conform to the current year’s presentation.
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income (loss)
Expenses:
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Total assets
Goodwill
Capital expenditures
Year Ended December 31, 2008
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 36,376
—
6,033
42,409
$ 2,034
16,714
2,168
20,916
$ 28,955 $ 194
—
(333)
(139)
—
588
29,543
$ (3,429)
(21)
—
(3,450)
$ 64,130
16,693
8,456
89,279
15,873
13,378
12,227
41,478
$ 931
$697,882
$ —
$ 395
370
8,889
9,294
18,553
$ 2,363
$ 45,132
$ —
$ 215
7,178
4,662
13,385
25,225
1,459
758
456
2,673
$ 4,318 $(2,812)
$ 178,679 $ 2,521
$ 10,724 $ —
$ 114 $ 4
(3,485)
37
—
(3,448)
$ (2)
$(68,557)
$ —
$ —
21,395
27,724
35,362
84,481
$ 4,798
$855,657
$ 10,724
$ 728
87
(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
$ 39,908
—
5,316
45,224
16,616
14,626
8,871
40,113
$ 5,111
$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 $ 295
—
1,349
1,644
—
590
26,650
$ (3,920)
(21)
—
(3,941)
$ 64,825
15,833
10,045
90,703
8,708
4,317
9,200
22,225
1,055
720
433
2,208
$ 4,425 $ (564)
$ 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
$ 37,545
—
5,099
42,644
12,414
13,001
7,560
32,975
$ 9,669
$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 $ 198
—
973
1,171
—
539
21,923
$ (3,282)
(51)
—
(3,333)
$ 58,582
17,098
10,289
85,969
6,849
3,146
6,924
16,919
1,106
668
241
2,015
$ 5,004 $ (844)
$ 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
The Retail Banking segment extends a warehouse line of credit to the Mortgage Banking segment, providing a
portion of 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 by means of a
variable rate line of credit that carries interest at one-month LIBOR plus 175 basis points and fixed rate loans that
carry interest rates ranging from 5.4 percent to 8.0 percent. The Retail Banking segment acquires certain residential
real estate loans 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.
88
December 31,
2008
2007
$ 92
1,612
3,266
80,607
$85,577
$20,620
100
64,857
$85,577
$ 147
3,867
2,087
79,821
$85,922
$20,620
78
65,224
$85,922
2006
Year Ended December 31,
2007
$ 292
(874)
19,394
(10,325)
584
(591)
$ 8,480
2008
$ 189
(1,306)
3,859
2,258
1,358
(2,177)
$ 4,181
$ 194
(1,106)
4,038
8,681
518
(196)
$12,129
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
Trust preferred capital notes
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
(Dollars in thousands)
Statements of Income
Interest income on securities
Interest expense on borrowings
Dividends received from bank subsidiary
Equity in undistributed net income of subsidiary
Other income
Other expenses
Net income
89
Year Ended December 31,
2007
2006
2008
$ 4,181
$ 8,480
$12,129
(2,258)
338
(6)
1,575
(1,222)
5
2,613
860
—
—
—
860
—
—
(40)
(3,754)
266
(3,528)
(55)
147
$ 92
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
(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
Other-than-temporary impairment of 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 provided by (used in) investing activities
Financing activities:
Net decrease 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 (decrease) increase in cash and cash equivalents
Cash at beginning of year
Cash at end of year
90
NOTE 18: Quarterly Condensed Statements of Income—Unaudited
Dollars in thousands (except per share amounts)
Total interest income
Net interest income after provision for loan losses
Other income
Other expenses
Income before income taxes
Net income
Earnings per common share—assuming dilution
Dividends per common share
Dollars in thousands (except per share amounts)
Total interest income
Net interest income after provision for loan losses
Other income
Other expenses
Income before income taxes
Net income
Earnings per common share—assuming dilution
Dividends per common share
NOTE 19: Subsequent Event
2008 Quarter Ended
September 30 December 31
$15,932
5,868
6,076
11,732
212
1,037
0.35
0.31
March 31 June 30
$15,904
7,808
6,068
12,053
1,823
1,428
0.47
0.31
$15,908
7,371
7,182
12,723
1,830
1,417
0.47
0.31
$16,386
7,922
5,823
12,812
933
299
0.10
0.31
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
On January 9, 2009, as part of the Capital Purchase Program (Capital Purchase Program) established by the U.S.
Department of the Treasury (Treasury) under the Emergency Economic Stabilization Act of 2008 (EESA), the
Corporation issued and sold to Treasury for an aggregate purchase price of $20.00 million in cash (1) 20,000 shares
of the Corporation’s fixed rate cumulative perpetual preferred stock, Series A, par value $1.00 per share, having a
liquidation preference of $1,000 per share (Series A Preferred Stock) and (2) a ten-year warrant to purchase up to
167,504 shares of the Corporation’s common stock, par value $1.00 per share (Common Stock), at an initial exercise
price of $17.91 per share (Warrant). The Series A Preferred Stock may be treated as Tier 1 capital for regulatory
capital adequacy determination purposes.
Cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per
annum for the first five years, and at a rate of 9% per annum thereafter. The Series A Preferred Stock has no
maturity date and ranks senior to the Common Stock with respect to the payment of dividends. Under the terms of
the certificate of designations of the Series A Preferred Stock in the Corporation’s articles of incorporation, the
Corporation may redeem the Series A Preferred Stock at 100% of their liquidation preference (plus any accrued and
unpaid dividends) beginning on February 15, 2012. Prior to this date, the Corporation may redeem the Series A
Preferred Stock at 100% of their liquidation preference (plus any accrued and unpaid dividends) if (i) the
Corporation has raised aggregate gross proceeds in one or more “qualified equity offerings” of at least $5 million,
and (ii) the aggregate redemption price does not exceed the aggregate net proceeds from such qualified equity
offerings. The phrase “qualified equity offering” means the sale and issuance for cash by the Corporation, to
persons other than the Corporation or any Corporation subsidiary after January 9, 2009, of shares of perpetual
preferred stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be
included in Tier 1 capital of the Corporation at the time of issuance under the applicable risk-based capital
guidelines of the FDIC (other than any such sales and issuances made pursuant to agreements or arrangements
entered into, or pursuant to financing plans which were publicly announced, on or prior to October 13, 2008).
However, the American Recovery and Reinvestment Act of 2009 appears to change these provisions to provide that
the Corporation may redeem the Series A Preferred Stock at any time, at its option, from any source of funds. Any
such redemption would be at 100% of the Series A Preferred Stock liquidation preference, plus any unpaid
91
dividends for all prior dividend periods, plus a pro rata portion of the dividend for the then-current dividend
period to the redemption date. In either event, any redemption is subject to the consent of the FDIC.
The purchase agreement pursuant to which the Series A Preferred Stock and the Warrant were sold contains
limitations on the payment of dividends or distributions on the Common Stock (including the payment of the cash
dividends in excess of the Corporation’s current quarterly cash dividend of $0.31 per share) and on the
Corporation’s ability to repurchase, redeem or acquire its Common Stock or other securities, and subjects the
Corporation to certain of the executive compensation limitations included in the EESA until such time as Treasury
no longer owns any Series A Preferred Stock acquired through the Capital Purchase Program.
92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
C&F Financial Corporation and Subsidiary
West Point, Virginia
We have audited the accompanying consolidated balance sheets of C&F Financial Corporation and Subsidiary as of
December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and cash
flows for the years ended December 31, 2008, 2007 and 2006. These financial statements are the responsibility of
the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of C&F Financial Corporation and Subsidiary as of December 31, 2008 and 2007, and the results
of their operations and their cash flows for the years ended December 31, 2008, 2007 and 2006, in conformity with
U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), C&F Financial Corporation and Subsidiary’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 2009 expressed an
unqualified opinion on the effectiveness of C&F Financial Corporation and Subsidiary’s internal control over
financial reporting.
Winchester, Virginia
March 2, 2009
93
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. 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 were effective as of December 31, 2008 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 SEC rules and forms 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 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 adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States of America.
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, 2008. 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, 2008, 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, 2008 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 95
through 96 hereof.
Changes in Internal Controls. There were no changes in the Corporation’s internal control over financial
reporting during the Corporation’s quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
C&F Financial Corporation and Subsidiary
West Point, Virginia
We have audited C&F Financial Corporation and Subsidiary’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. C&F Financial Corporation and Subsidiary’s
management is responsible 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 the Corporation’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
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 audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
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 (a) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (b) 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 (c) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
95
In our opinion, C&F Financial Corporation and Subsidiary maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets and the related consolidated statements of income, shareholders’
equity and cash flows of C&F Financial Corporation and Subsidiary and our report dated March 2, 2009 expressed
an unqualified opinion.
Winchester, Virginia
March 2, 2009
96
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 5 of the
2009 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 29 of the 2009 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 (Code) that applies to its directors, executives
and employees including the principal executive officer, principal financial officer, principal accounting officer and
controller, or persons performing similar functions. We will either post this Code on our Internet website at
http://www.cffc.com under “About C&F/C&F Financial Corporation/Corporate Governance” or, if not so posted,
provide a copy of the Code to any person without charge upon written request to C&F Financial Corporation, c/o
Secretary, P.O. Box 391, West Point, Virginia 23181. We intend to provide any required disclosure of any
amendment to or waiver from the Code that applies to our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions, on http://www.cffc.com under
“About C&F/C&F Financial Corporation/Corporate Governance” promptly following the amendment or waiver.
We may elect to disclose any such amendment or waiver in a report on Form 8-K filed with the SEC either in
addition to or in lieu of the website disclosure. The information contained on or connected to our Internet website
is not incorporated by reference in this report and should not be considered part of this or any other report that we
file or furnish to the SEC.
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
97
be referred, unopened, to that member. Correspondence not directed to a particular board member will be
referred, unopened, to the Chairman of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 9 through 21 of the 2009 Proxy Statement under the captions,
“Compensation Committee Interlocks and Insider Participation,” “Executive Compensation” and “Compensation
Committee Report,” and the information on pages 22 through 26 of the 2009 Proxy Statement are incorporated
herein by reference. The information regarding director compensation contained on pages 7 through 8 of the 2009
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 2009 Proxy Statement under the caption, “Security
Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.
The information contained on page 30 of the 2009 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 2009 Proxy Statement under the caption, “Interest of
Management in Certain Transactions,” is incorporated herein by reference. The information contained on page 5 of
the 2009 Proxy Statement under the caption, “Director Independence,” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained on pages 28 through 29 of the 2009 Proxy Statement under the captions,
“Principal Accountant Fees” and “Audit Committee Pre-Approval Policy,” is incorporated herein by reference.
98
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)
3.1.1 Amendment to Articles of Incorporation of C&F Financial Corporation (incorporated by
reference to Exhibit 3.1.1 to Form 8-K filed January 14, 2009)
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.
4.1
4.2
*10.1
*10.3
*10.4
Certificate of Designations for 20,000 shares of Fixed Rate Cumulative Perpetual Preferred
Stock, Series A (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed January 14,
2009)
Warrant to Purchase up to 167,504 shares of Common Stock, dated January 9, 2009
(incorporated by reference to Exhibit 4.2 to Form 8-K filed January 14, 2009)
Amended and Restated Change in Control Agreement dated December 30, 2008 between
C&F Financial Corporation and Larry G. Dillon
Amended and Restated Change in Control Agreement dated December 30, 2008 between
C&F Financial Corporation and Thomas F. Cherry
Restated VBA Executives’ Non-Qualified Deferred Compensation Plan for C&F Financial
Corporation (incorporated by reference to Exhibit 10.4 to Form 10-K filed March 7, 2008)
*10.4.1 Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation dated as of December 31, 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
(incorporated by reference to Exhibit 10.4.2 to Form 10-K filed March 7, 2008)
*10.4.3 Amendment to Adoption Agreement for the Restated VBA Executives’ Non-Qualified
Deferred Compensation Plan for C&F Financial Corporation effectively dated as of
December 31, 2008
*10.5
Restated VBA Directors’ Deferred Compensation Plan for C&F Financial Corporation
(incorporated by reference to Exhibit 10.5 to Form 10-K filed March 7, 2008)
*10.5.1 Adoption Agreement for the Restated VBA Director’s Deferred Compensation Plan for
C&F Financial dated as of December 31, 2008
*10.5.2 Amendment to Adoption Agreement for the Restated VBA Directors’ Deferred
Compensation Plan for C&F Financial Corporation effectively dated as of December 31,
2008
99
*10.6
*10.7
*10.8
*10.9
Amended and Restated C&F Financial Corporation 1994
(incorporated by reference to Exhibit 10.6 to Form 10-K filed March 7, 2008)
Incentive Stock Plan
Amended and Restated C&F Financial Corporation 1998 Non-Employee Director Stock
Compensation Plan (incorporated by reference to Exhibit 10.7 to Form 10-K filed March 7,
2008)
Amended and Restated C&F Financial Corporation 1999 Regional Director Stock
Compensation Plan (incorporated by reference to Exhibit 10.8 to Form 10-K filed March 7,
2008)
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
(incorporated by reference to Exhibit 10.10 to Form 10-K filed March 7, 2008)
*10.10.1 Form of C&F Financial Corporation Restricted Stock Agreement (incorporated by reference
to Exhibit 10.10.1 to Form 10-Q filed August 8, 2008)
*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)
*10.12.1 Amendment to Employment Agreement between C&F Mortgage Corporation and Bryan
McKernon, dated December 30, 2008.
*10.14 Amended and Restated Change in Control Agreement dated December 30, 2008 between
C&F Financial Corporation and Bryan McKernon
*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 Amended and Restated Loan and Security Agreement by and between Wells Fargo
Preferred Capital, Inc., various financial institutions and C&F Finance Company dated as
of August 25, 2008 (incorporated by reference to Exhibit 10.19 to Form 8-K filed August 28,
2008)
10.24 Letter Agreement, dated January 9, 2009, including the Securities Purchase Agreement-
Standard Terms incorporated by reference therein, between C&F Financial Corporation
and the United States Depart of the Treasury (incorporated by reference to Exhibit 10.24 to
Form 8-K filed January 14, 2009)
*10.25
Form of Waiver executed by each of Larry G. Dillon, Thomas F. Cherry and Bryan E.
McKernon (incorporated by reference to Exhibit 10.25 to Form 8-K filed January 14, 2009)
100
*10.26 Omnibus Benefit Plan Amendment dated January 9, 2009, and Form of Consent executed
by each of Larry G. Dillon, Thomas F. Cherry and Bryan E. McKernon (incorporated by
reference to Exhibit 10.26 to Form 8-K filed January 14, 2009)
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
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 6, 2009
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.
Date: March 6, 2009
Date: March 6, 2009
Date: March 6, 2009
Date: March 6, 2009
Date: March 6, 2009
Date: March 6, 2009
Date: March 6, 2009
Date: March 6, 2009
Date: March 6, 2009
Date: March 6, 2009
/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
102
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, 2003 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, 2008.
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 Composite
NASDAQ Bank
160
140
120
100
80
60
40
e
u
l
a
V
x
e
d
n
I
20
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
Index
C&F Financial Corporation
NASDAQ Composite
NASDAQ Bank
Period Ending
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
46.86
78.72
69.88
108.26
120.56
117.87
100.00
100.00
100.00
104.03
108.59
110.99
98.93
110.08
106.18
84.95
132.39
91.85
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39d09_976 full cvr 2/24/09 12:46 PM Page 2
Left to Right: Laura Shreaves, Tom Cherry, Bryan McKernon, Vern Lockwood,
Larry Dillon, Matthew Steilberg, Amy Doherty, Charlie Link,
Ron Espy, Eric Nost and Dusty Crone
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
in Virginia.
C&F Mortgage Corporation originates and sells
residential mortgages throughout Virginia, North
Carolina, Maryland, Delaware 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, Indiana, North
Carolina, Maryland, Kentucky, Ohio, Tennessee and
West Virginia.
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.
WE BELIEVE
Excellence is the standard for all we do, achieved by encouraging
and nourishing:
• Respect for others
• Honest, open communication
• Individual development and satisfaction
• A sense of ownership and responsibility
for the Corporation’s success
• Participation, cooperation, and teamwork
• Creativity, innovation, and initiative
• Prudent risk-taking and
• Recognition and rewards for achievement.
We must conduct ourselves morally and ethically at all times and
in all relationships.
We have an obligation to the well-being of all the communities we serve.
That our officers and staff are our most important assets, making
the critical difference in how the Corporation performs; and,
through their work and effort, separates us from all competitors.
STOCK LISTING
Current market quotations for the common stock of C&F Financial
Corporation are available under the symbol CFFI.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company serves as transfer agent
for the Corporation.
You may write them at:
59 Maiden Lane, Plaza Level
New York, NY 10038
telephone them toll-free at:
1-800-937-5449
or visit their website at:
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
2008 C&F Annual Report
2008 C&F Annual Report
39d09_976 full cvr 2/24/09 12:46 PM Page 1
3600 LaGrange Parkway
Toano, Virginia 23168
757-741-2201
802 Main Street
PO Box 391
West Point, VA 23181
www.cffc.com