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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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OUR VALUES
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.
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 vis-
iting 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 infor-
mation 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
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
C&F Annual Report // 2009
C&F Annual Report // 2009
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FINANCIAL HIGHLIGHTS
(Dollars in thousands, except
share and per share amounts)
Selected Year-End Balances:
2009
2008
2007
2006
2005
Total assets
$ 883,430
$ 855,657
$785,596
$734,468
$671,957
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:
88,876
613,004
606,630
64,857
633,017
550,725
65,224
585,881
527,571
68,006
517,843
532,835
60,086
465,039
495,438
$ 64,971
$ 64,130
$ 64,825
$ 58,582
$ 48,770
15,459
49,512
18,563
30,949
36,689
60,167
7,471
1,945
21,395
42,735
13,766
28,969
25,149
49,320
4,798
617
23,378
41,447
7,130
34,317
25,878
48,371
11,824
3,344
18,457
40,125
4,625
35,500
27,387
45,328
17,559
5,430
11,997
36,773
5,520
31,253
27,584
41,868
16,969
5,181
$
5,526
$
4,181
$ 8,480
$ 12,129
$ 11,788
Earnings per common share—basic
Earnings per common share—
assuming dilution
Cash dividends–common stock
1.44
1.44
1.06
1.38
1.37
1.24
2.77
2.67
1.24
3.85
3.71
1.16
3.49
3.36
1.00
Weighted average number of common shares—
assuming dilution
3,048,491
3,058,274
3,181,445
3,273,429
3,507,912
Significant Ratios:
Return on average assets
Return on average equity
Dividend payout ratio
0.50%
0.51%
1.13%
1.75%
1.82%
6.60
73.48
6.39
89.79
13.03
44.45
18.97
30.15
17.70
28.33
1 // C&F Annual Report // 2009
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the returns of our peers across the country,
which as of September 30th earned a return on
average equity of 1.72% and a return on average
assets of 0.10%.
Assets grew from $856 million at year-end 2008
to $888 million at year-end 2009 and deposits
increased from $551 million to $607 million. As
would be expected during times like these, loans
decreased, dropping from $633 million at year-end
2008 to $613 million at year-end 2009, as demand,
especially for commercial and small business
loans, greatly diminished and nonperforming
loans that were already on our books either had
to be written down or reclassified as “real estate
owned” due to foreclosures on the properties
securing those loans.
Capital jumped from $65 million at the end
of 2008 to $89 million at the end of 2009,
primarily as a result of taking advantage of the
government’s Capital Purchase Program. This was
an opportunity to increase capital that we saw as a
relatively inexpensive means to insure against
unforeseen events given the great turmoil in the
financial markets these past eighteen months.
Our Mortgage and Finance Companies
experienced solid profitability in 2009. While not
completely immune to the issues revolving around
the real estate crisis, our Mortgage Company
experienced a 42% increase in loan production
during 2009, going from $749 million in closed
loans in 2008 to $1.1 billion closed in 2009, as
they were bolstered by the wave of refinancing
and the sales of lower priced homes. This increase
in volume resulted in a jump in net income of
over 200%, going from $1.5 million in 2008 to
$3.4 million in 2009.
While one would think that our Finance
Company’s business, primarily non-prime auto
lending, would be negatively impacted by the
current economic conditions, it has actually
thrived. Our Finance Company enjoyed a strong
year in 2009 with net income of $4.8 million ver-
sus $2.7 million in 2008. Positively impacting this
Letter from the President
Larry G. Dillon
On behalf of the Board of Directors, I welcome
this opportunity to report the financial results of
your corporation and discuss the difficulties of
this past year, as well as the challenges and oppor-
tunities facing us in the year ahead. Without
question, 2009 was a difficult year for the United
States economy, the banking industry and C&F
Financial Corporation. At no time since the Great
Depression have we seen the near financial melt-
down experienced in the second half of 2008, with
the resulting negative impact on the 2009 econo-
my extending to such a wide range of businesses
and individuals, especially those having any
connection to real estate. This, in turn, had a very
negative effect on the financial sector.
Despite all of the difficulties, I am pleased to
report that your corporation has continued to
experience overall positive financial results. Our
strategy of diversification served us well in 2009 as
our Mortgage and Finance Companies produced
strong earnings, while the results of our Retail
Bank reflected the negative effects of the signifi-
cant downturn in the real estate market, higher
FDIC assessments and lower fee income.
Net income was $5.5 million for the year versus
$4.2 million in 2008 producing a return on
average equity of 6.60% versus 6.39% in 2008 and
a return on average assets of 0.50% versus 0.51% in
2008. While these results are well below those that
we would typically hope to achieve, they reflect
favorably on the Corporation when compared to
2 // C&F Annual Report // 2009
The greatest success
stories are the ones
achieved when times
are tough. Teams and
individuals that rise to
the occasion, facing
challenges head on, are
the ones that will be
the leaders going
forward. Our finance
company delivered
an outstanding
performance in a tough
economic year and
we’re fortunate to have
many such leaders
on our team.
S. Dustin Crone
Executive Vice President
C&F Finance Company
past year were several things: our cost of funds
was significantly lower due to the decline in
short- term interest rates; our average loans out-
standing increased from $170 million to $179
million; despite that growth, our net charge-offs
declined slightly due to improvements in under-
writing criteria (an initiative implemented several
years ago) and enhanced collection efforts; and,
the used car market was strong, thereby reducing
the loss per loan for repossessed vehicles. Our
Finance Company’s ratio of reserve for loan
losses to loans outstanding increased, going
from 7.31 percent at the end of 2008 to 7.89
percent at the end of 2009.
Our Retail Bank experienced a $2.2 million
loss for 2009 due to the effects of nonperforming
loans on interest income; a higher provision for
loan losses attributable to credit quality issues;
lower overdraft charges on deposit accounts
resulting from heightened customer sensitivity to
incurring such fees during these economic times;
higher assessments for FDIC deposit insurance;
and higher expenses related to nonperforming
loans and foreclosed properties.
The Bank’s nonperforming assets (on which
we do not accrue interest) decreased from $18.6
million at year-end 2008 to $17.2 million at the
end of 2009. This decrease was the result of pay
downs from the sale of the real estate securing the
loans; direct charge-offs; and the sale of foreclosed
properties. The largest component of the Bank’s
nonperforming loans was commercial loans
secured by residential real estate. We actively
monitor the credit risks within our loan portfolio
and when we deem ourselves to be inadequately
collateralized, attempt to obtain additional
collateral from the customer, have the customer
pay down the loan, or when necessary, write off a
sufficient portion of the asset to where the then-
current market value adequately covers the carry-
ing value on our books plus all selling costs. We
also regularly evaluate the appropriate level of the
reserve for losses for our loan portfolio. During
2009, despite charging off $3.9 million of loans,
we increased the size of the Bank’s reserve by $2.5
million. At year-end 2009, the ratio of our reserve
for loan losses to total loans increased to 2.01
percent from 1.36 percent at the end of 2008. We
believe that our higher reserve level is appropriate
for the estimated losses inherent in our loan
portfolio and are cautiously optimistic that our
credit actions taken during this past year will
contribute to lower loss provisions in 2010,
provided economic conditions do not deteriorate.
We, as well as all other banks, also experienced
a significant decline in our overdraft fee income
this past year as customers became more proactive
in managing financial transactions that could cost
them fees. This is an appreciated service to many
of our customers, and it is a service the customer
has the ability to avoid if he/she so chooses.
Should Congress greatly restrict this product
offering, which it is strongly considering, I believe
that other services banks give away today, for
example internet banking or bill-pay, may no
longer be free, as banks will have to find some
other means to replace that lost income.
Another increased expense impacting our
Retail Bank this past year, as well as all other
banks, has been FDIC deposit insurance
premiums. Three years ago, we expensed $60,000
for sour FDIC costs. During 2009, we paid the
FDIC $4.5 million to help replenish their reserves
which had been depleted by all the recent bank
failures. We expensed $1.3 million of that amount
in 2009, with the rest paid in advance for 2010
through 2012 and we may well be assessed
amounts beyond that.
When the FDIC announces the closing of a
bank and the subsequent pay off of depositors,
many in the public believe that it is the government
that is bearing that cost. It is not the government;
it is the banks that have paid the money in to the
FDIC deposit insurance fund. And it will be the
surviving banks that are left with the burden of
replenishing those reserves to adequate levels. The
government does serve as a “backstop,” but it is
3 // C&F Annual Report // 2009
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time of near panic to save the most safe and sound
banks, but it was not a bail-out. When we decided
to participate, we viewed it solely as an inexpensive
insurance policy for unforeseen events. Several
banks have repaid their Capital Purchase Program
funds; however, we continue to monitor the situa-
tion. Even though we are well-capitalized without
the Capital Purchase Program funds, we believe
it is our responsibility to ensure that our
Corporation is not put at risk. Until we are
confident that the financial crisis has passed, we
continue to believe that these funds are an eco-
nomical “insurance policy” for unforeseen events.
There is much discussion in Congress today
about the need for more regulatory oversight of
the banking industry and the need to create
another agency to protect the consumer. We
would agree that something needs to be done to
address the “too big to fail” banks, the oversight
of the derivatives markets, and the “financial”
institutions that are not subject to the consumer
regulations under which community banks
operate. In fact, there are many in Washington
who have no idea as to the consumer laws with
which community banks already must comply and
the extensive examinations that we already must
endure. Congress needs to understand the rules
that are already in place and who has to comply
with them and who does not before it legislates
new ones. If it is not careful, Congress will burden
community banks with so many regulations that
it will drive many of the smaller ones out of
business, as it will be too expensive to employ all
the staff necessary to know, understand and
comply with those regulations. We agree that new
regulations may be necessary, but it is for those
areas of the financial markets that currently are
under-regulated, not community banks.
While it is easy to dwell on the negatives
during times like these, there are many positives.
As mentioned earlier, our Mortgage and Finance
Companies had very strong results in 2009. In fact,
our Finance Company had record earnings and we
are optimistic that the trend will continue. We
the banking industry that has always funded the
FDIC to cover all bank closures.
While 2009 was a very tough year for the
banking industry, 2010 is not expected to be
significantly better. Foreclosures are predicted to
increase and unemployment is unfortunately
predicted to be high for the next several years, as
it is expected that this recovery will be a very slow
one with employment picking up at probably the
slowest pace of any recession in the last 50 years.
Although we believe that housing prices may have
reached their bottom in our trade area, some are
predicting that they could still go a bit lower in
other parts of the country.
It may not happen until late 2010 or early
2011, but inevitably short-term interest rates are
going to rise. This will negatively affect our
Finance Company as a significant portion of our
cost of funds is directly tied to short-term interest
rates. This will also impact the earnings at our
Retail Bank because the costs of our funding will
go up quicker than the increase in income on our
earning assets. And, it will impact the earnings
at our Mortgage Company as a rise in rates will
reduce refinancing activity and potentially
home purchases.
Perhaps as troubling as anything to us is the
damage that has been done over the last eighteen
months to the image of community banking.
Little distinction has been made between
community banks and the large investment banks,
mortgage banks and the “too big to fail” banks
that created this crisis. Those institutions may
have been “bailed out,” but not community banks.
Certainly some, such as ours, participated in the
Capital Purchase Program, which was initiated at a
I am proud that C&F
Mortgage has weathered
the first half of a storm
that began in 2009;
the second half of that
storm is yet to come in
2010, and I believe we
have a talented group
of employees who are
focused on navigating
our customers and our
company through the
changes and challenges
of our industry. This
commitment will make
C&F Mortgage the best
place to get a mortgage,
to work as an employee,
and it will make
possible the best return
for shareholders.
Bryan E. McKernon
President
C&F Mortgage Corporation
4 // C&F Annual Report // 2009
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The C&F Investment
Services team was
pleased to see the
recovery of the markets
in 2009 after the 2008
decline, which was
among the worst in
history. Our team of
Financial Advisors
worked hard with their
clients to achieve asset
diversification and
reduced risk. Many
challenges still face all
investors; now, more
than ever, the C&F
team is well-prepared to
help our clients mitigate
these challenges.
Eric F. Nost
President
C&F Investment
Services, Inc.
believe that our charge-offs will hold steady if not
decline; loans outstanding should continue to
grow; and, there are opportunities to grow our
business in existing and new markets. While the
economic environment may not be as favorable for
the Mortgage Company for 2010, we continue to
strengthen our origination platform and to recruit
and hire new loan officers.
Our interest margins continued to improve
throughout 2009 at our Retail Bank. With interest
rates stabilizing, deposits have re-priced at lower
rates and we have been able to implement interest
rate floors on adjustable rate commercial loans
thereby increasing our loan yields. While we
expect real estate losses will remain elevated
for the near term, we believe our loan portfolio
will perform relatively well due to the actions
initiated during 2009.
Our Retail Bank has always been known for
an accurate, convenient, and friendly customer
experience. We’ve been known for great service,
but we must get even better if we are to achieve
our goal of being the premier financial services
company in the markets we serve. A big part of
great service is having highly knowledgeable
employees, and that’s why efforts are underway to
strengthen our training curriculum and expecta-
tions. We are also continuing to explore strategies
to make it easier to do business with us.
Small businesses are the backbone of the
communities we serve, and that’s why we will also
work very hard to improve our service to them and
grow the bank by earning more of their business.
We know that when we help a small business
succeed, we also help the community succeed
through the employees that are hired and the
taxes that are collected to pay for local infra-
structure like schools and roads.
Continued focus on expense control will
also be a key part of further strengthening our
financial results. While it is important for us to
make sound investments for our future through
new markets, products, systems, talent, etc., it is
equally important to treat every dollar spent as if
it were our own. I am proud of the history our
Corporation has for being “tight” with the dollar
and I’ve asked our managers throughout the
corporation to continue this tradition.
As we have worked our way through these
troubling times, the Corporation’s Board of
Directors continued its policy of paying dividends
in 2009. While the quarterly rate was decreased
from 31 cents per share to 25 cents per share, our
dividend return to our shareholders compares very
favorably to that of our peer group.
Although we are not through this crisis, we are
beginning to believe that we can see the light at
the end of the tunnel regarding our lending issues.
We may still experience a few surprises; however,
we feel that we have most of our problem loans
identified and given the information we have
today, properly reserved for. Barring any unfore-
seen events, we should see our need to put large
amounts into our reserve for loan losses
diminish, resulting in better income levels at
the Retail Bank.
We are going to be one of the surviving banks.
Although our results may not show it as well as
we would like, much was accomplished in 2009
to get us to where we are today. We are greatly
appreciative to our officers and staff throughout
the entire company for their dedication and hard
work and to our directors for their patience and
guidance. Thanks to you, our stockholders, as
well, for your support and loyalty as we guide this
company through these troubling times.
Sincerely,
Larry G. Dillon
Chairman, President & CEO
5 // C&F Annual Report // 2009
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C&F BANK RICHMOND BOARD
Jeffery W. Jones
Chairman & CEO
WFofR, Incorporated
S. Craig Lane
President
Lane & Hamner, P.C.
Harold M. McLeod III
Senior Vice President, Regional 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
Canal Corporation
Larry G. Dillon
Chairman of the Board
James H. Hudson III
Attorney-at-Law
Hudson & Bondurant, P.C.
Bryan E. McKernon
President & CEO
C&F Mortgage Corporation
William E. O’Connell Jr.
Chessie Professor of Business, Emeritus
The College of William and Mary
Paul C. Robinson
Owner & President
Francisco, Robinson & Associates,
Realtors
INDEPENDENT PUBLIC
ACCOUNTANTS
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
CORPORATE COUNSEL
Hudson & Bondurant, P.C.
West Point, Virginia
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
J. P. Causey Jr.*+
Executive Vice President,
Secretary & General Counsel
Canal 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
Joshua H. Lawson*+
President
Thrift Insurance Corporation
Bryan E. McKernon+
President & CEO
C&F Mortgage Corporation
William E. O’Connell Jr.*+
Chessie Professor of Business, Emeritus
The College of William and Mary
C. Elis Olsson*+
Director of Operations
Martinair, Inc.
Paul C. Robinson*+
Owner & President
Francisco, Robinson & Associates, Realtors
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
6 // C&F Annual Report // 2009
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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
Ronald P. Espy
Senior Vice President & Chief Lending Officer
Rodney W. Overby
Senior Vice President, Chief Information Officer
Laura H. Shreaves
Senior Vice President & Director of
Human Resources
Matthew H. Steilberg
Senior Vice President, Retail Banking
Christopher A. Spillare
First Vice President & Treasurer
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
Maureen B. Medlin
Vice President, Marketing
Deborah R. Nichols
Vice President, Quality Control
Graham S. Parlow
Vice President, Financial Reporting
Mary-Jo Rawson
Vice President & Controller
Helga H. Ridenhour
Vice President,
Operations Manager
Teresa S. Weaver
Vice President, Market Leader
*Officers of C&F Financial Corporation
CHESTER, VIRGINIA
Mary Schoenfelder
Vice President & Branch Manager
HAMPTON, VIRGINIA
Holmes E. “Marty” Martin Jr.
Assistant Vice President & Branch Manager
MECHANICSVILLE, VIRGINIA
Elliot G. Jenkins
Branch Manager
MIDLOTHIAN, VIRGINIA
Kirsten E. D. Francis
Assistant Vice President & Branch Manager
NEWPORT NEWS, VIRGINIA
Jennifer D. Acevedo
Assistant 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
Patterson Avenue
T. Hurst Kelley
Branch Manager
VARINA, VIRGINIA
Mary Long
Assistant Vice President & Branch Manager
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
Samuel G. Poole
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
Harold M. McLeod III
Senior Vice President, Regional President
J. Charles Link
Senior Vice President, Commercial Lending
Tracy E. Pendleton
Vice President, Commercial Lending
David L. Shaffer
Vice President, Commercial Lending
C&F BANK / PENINSULA
ADMINISTRATIVE OFFICE
One City Center
11815 Fountain Way, Suite 410
Newport News, Virginia 23606
(757) 952-1670
Vern E. Lockwood II
Senior Vice President, Regional President
David S. Jolley
Vice President, Commercial Lending
Lorie D. Sarrett
Vice President, Commercial Lending
Bonnie S. Smith
Vice President, Real Estate Lending
Joycelyn Spight
Vice President, Commercial 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
7 // C&F Annual Report // 2009
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C&F OFFICERS & LOCATIONS
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
WEST VIRGINIA
NORTH CAROLINA
Pamela L. Austin
Regional Manager
NASHVILLE, TENNESSEE
CINCINNATI/NORTHERN KENTUCKY
ATLANTA, GEORGIA
INDIANA
J. Steven Davis
Area Sales Manager
LYNCHBURG, VIRGINIA
Shirley D. Falwell
Branch Manager
Andrew N. Shields
Branch Manager
MIDLOTHIAN, VIRGINIA
Brandon W. Beswick
Branch Manager–Southside
Glenda D. Steele
Branch Manager–Roanoke West
Susan P. Burkett
Vice President & Operations Manager
Donald R. Jordan
Vice President &
Branch Manager–Richmond South
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
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
YORK, PENNSYLVANIA
Timothy C. Leiphart
Branch Manager
NEWPORT, DELAWARE
Craig I. Snyder
Branch Manager
MOORESTOWN, NEW JERSEY
R. Scott Wallace
Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy
Branch Manager
C&F 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
CHESTER, VIRGINIA
Christopher M. Harper
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 & Manager
FISHERSVILLE, VIRGINIA
Vickie J. Painter
Branch Manager
GASTONIA, NORTH CAROLINA
Nancy W. Poteat
Branch Manager
HARRISONBURG, VIRGINIA
Gloria J. Wright
Branch Manager
8 // C&F Annual Report // 2009
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, 2009
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ( ) 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,
2009 was $47,805,747.
There were 3,075,166 shares of common stock outstanding as of February 26, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 15, 2010 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held April 20, 2010 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 13
ITEM 1B. UNRESOLVED STAFF COMMENTS ............................................................................... page 18
ITEM 2.
PROPERTIES ........................................................................................................................ page 18
ITEM 3.
LEGAL PROCEEDINGS ..................................................................................................... page 19
ITEM 4.
[RESERVED] ......................................................................................................................... page 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES ...................................................................................................... page 20
ITEM 6.
SELECTED FINANCIAL DATA ....................................................................................... page 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................... page 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................................................................................. page 57
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................................. page 60
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ............................................ page 98
ITEM 9A. CONTROLS AND PROCEDURES .................................................................................... page 98
ITEM 9B. OTHER INFORMATION ................................................................................................... page 101
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ........... page 101
ITEM 11. EXECUTIVE COMPENSATION ....................................................................................... page 102
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ............................. page 102
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE ....................................................................................... page 102
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ................................................... page 102
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ................................................... page 103
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 and
Certified Appraisals LLC
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 and 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, 2009, assets of the
Retail Banking segment totaled $739.4 million. For the year ended December 31, 2009, the net loss for this segment
totaled $2.2 million.
1
Mortgage Banking
We conduct mortgage banking activities through C&F Mortgage, which was organized in September 1995.
C&F Mortgage provides mortgage loan origination services through 11 locations in Virginia, three in Maryland,
two in North Carolina and one each in Newport, Delaware; Moorestown, New Jersey; and York, Pennsylvania.
The Virginia offices are located one each in Charlottesville, Fishersville, Fredericksburg, Hanover, Harrisonburg,
Lynchburg, Midlothian, Newport News, Roanoke, Chester and Williamsburg. 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 generally to the
following investors: Bank of America, N.A.; Wells Fargo Home Mortgage; Franklin American Mortgage Company;
the Virginia Housing Development Authority; and JPMorgan Chase Bank, N.A. C&F Mortgage does not securitize
loans. The Bank also purchases lot and permanent loans 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 to investors in the secondary mortgage market, loan origination fee income
and interest earned on mortgage loans held for sale. At December 31, 2009, assets of the Mortgage Banking
segment totaled $40.5 million. For the year ended December 31, 2009, net income for this segment totaled $3.4
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, Georgia 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, 2009,
assets of the Consumer Finance segment totaled $193.8 million. For the year ended December 31, 2009, net income
for this segment totaled $4.8 million.
Employees
At December 31, 2009, we employed 509 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 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 or materially limit
their purchases of mortgage loans.
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.
Over the past two years, there has been 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 currently applicable federal and state laws
and certain regulations and the potential impact of such provisions on the Corporation and the Bank. This
summary is not complete, and we refer you to the particular statutory or regulatory provisions or proposals for
more information. Because federal regulation of financial institutions changes regularly and is the subject of
constant legislative debate, we cannot forecast how federal regulation of financial institutions may change in the
future and affect the Corporation’s and the Bank’s operations.
Regulation of the Corporation
The Corporation must file annual, quarterly and other periodic reports with the Securities and Exchange
Commission (the SEC). The Corporation is directly affected by the corporate responsibility and accounting reform
legislation signed into law on July 30, 2002, known as the Sarbanes-Oxley Act of 2002 (the SOX Act), and the related
rules and regulations. The SOX Act includes provisions that, among other things: (1) require that periodic reports
containing financial statements that are filed with the SEC be accompanied by chief executive officer and chief
financial officer certifications as to their accuracy and compliance with the 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
4
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.
The Federal Deposit Insurance Act (the FDIA) provides that amounts received from the liquidation or other
resolution of any insured depository institution must be distributed, after payment of secured claims, to pay the
deposit liabilities of the institution before payment of any other general creditor or stockholder. This provision
would give depositors a preference over general and subordinated creditors and stockholders if a receiver is
appointed to distribute the assets of the Bank.
The Corporation also is subject to regulation and supervision by the State Corporation Commission of
Virginia.
5
Capital Requirements
The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital
guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements of these
federal bank regulatory agencies, the Corporation and the Bank are required to maintain a minimum ratio of total
capital to risk-weighted assets of at least 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets
of at least 4.0 percent. At least half of the total capital must be Tier 1 capital, which includes common equity,
retained earnings and qualifying perpetual preferred stock, less certain intangibles and other adjustments. The
remainder may consist of Tier 2 capital, such as a limited amount of subordinated and other qualifying debt
(including certain hybrid capital instruments), other qualifying preferred stock and a limited amount of the general
loan loss allowance. For the Corporation only, Tier 1 and total capital include trust preferred securities. At
December 31, 2009, the total capital to risk-weighted assets ratio of the Corporation was 15.9 percent and the ratio
of the Bank was 15.4 percent. At December 31, 2009, the Tier 1 capital to risk-weighted assets ratio was 14.6 percent
for the Corporation and 14.1 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, 2009, the Tier l leverage ratio was 11.5 percent for the Corporation and
11.1 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
U.S. Department of the Treasury (Treasury) under the Emergency Economic Stabilization Act of 2008 (the EESA), as
discussed below, 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 has been treated as Tier 1
capital for regulatory capital adequacy determination purposes as of December 31, 2009.
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.
6
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, 2009, the Bank declared $4.2
million in dividends payable to the Corporation, which were used to fund a portion of the Corporation’s debt
service and dividends payable to common and preferred 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. 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 quarterly cash dividend at the time of issuance of the Series A Preferred Stock of $0.31 per share
without the Treasury’s consent.
Economic Emergency Stabilization Act of 2008 (EESA) and the American Recovery & Reinvestment Act of 2009
(ARRA)
In October 2008, the EESA was signed into law, which provided immediate authority and facilities that the
Treasury could use to restore liquidity and stability to the financial system. Specifically, Section 101 of EESA
established the Troubled Asset Relief Program (TARP) to purchase, and to make and fund commitments to
purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the
Secretary of the Treasury, and in accordance with EESA and the policies and procedures developed and published
by the Secretary of the Treasury. Section 111 of EESA provides that entities that receive financial assistance from
Treasury under TARP will be subject to specified executive compensation and corporate governance standards to
be established by the Secretary of the Treasury. The statutory language in EESA includes three limitations on
executive compensation for TARP recipients involved in a direct purchase. On February 17, 2009, the President
signed the ARRA into law. ARRA contains a number of restrictions on executive and highly-paid employee
compensation for those institutions that have received, or will receive, government assistance under TARP that are
considerably more restrictive and far-reaching than the limited restrictions included in EESA.
On June 10, 2009, the Treasury released regulations in an Interim Final Rule (IFR) that sets standards for
complying with the executive compensation and corporate governance provisions for TARP recipients contained in
EESA, as amended by ARRA. The standards for compensation and corporate governance established in the IFR
are: (1) prohibits the payment or accrual of bonus, retention award and incentive compensation (with the
exception of limited amounts of restricted stock) for specified individuals, depending upon the level of government
assistance received by the institution; (2) prohibits making any golden parachute payments to a senior executive
officer (SEO) or any of the next five most highly compensated employees (MHCE); (3) prohibits tax gross-ups to
SEOs and any of the next 20 MHCEs; (4) provides for the recovery of any bonus, incentive compensation, or
retention award paid to a SEO or the next 20 MHCEs based on materially inaccurate statements of earnings,
revenues, gains, or other criteria (clawback); (5) requires the establishment of a compensation committee of
independent directors to meet semi-annually to review employee compensation plans and the risks posed by these
plans to the institution; (6) limits compensation to exclude incentives for SEOs to take unnecessary and excessive
risk that threaten the value of the institution and eliminate features of employee compensation plans that pose
unnecessary risks to the institution; (7) prohibits employee compensation plans that would encourage
manipulation of earnings to enhance an employee’s compensation; (8) requires the adoption of an excessive or
luxury expenditures policy; (9) requires compliance with federal securities laws and regulations regarding non-
binding resolution on SEO compensation to shareholders; (10) requires disclosure of perquisites offered to SEOs
7
and certain highly compensated employees; and (11) requires disclosures related to compensation consultant
engagements.
Regulation of the Bank and Other Subsidiaries
The Bank is subject to supervision, regulation and examination by the Virginia State Corporation
Commission Bureau of Financial Institutions (VBFI) and the FDIC. The various laws and regulations administered
by the regulatory agencies affect corporate practices, such as the payment of dividends, the incurrence of debt and
the acquisition of financial institutions and other companies, and affect business practices, such as the payment of
interest on deposits, the charging of interest on loans, the types of business conducted and the location of offices.
FDIA and Associated Regulations. Section 36 of the FDIA and associated regulations require management of
every insured depository institution with total assets between $500 million and $1 billion at the beginning of a
fiscal year to obtain an annual audit of its financial statements by an independent public accountant, report to the
banking agencies on the institution’s compliance with designated laws and regulations and establish an audit
committee comprised of outside directors, at least a majority of whom must be independent of management. The
Bank is subject to the annual audit, reporting and audit committee requirements of Section 36 of the FDIA.
Community Reinvestment Act. The Community Reinvestment Act (CRA) imposes on financial institutions
an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and
moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial
institution’s efforts in meeting community credit needs are assessed based on specified factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a branch or facility. Following the
Bank’s most recent completed 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 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, for calendar 2008, assessments ranged
from five to 43 basis points of each institution’s deposit assessment base. Due to losses incurred by the DIF in 2008
from failed institutions, and anticipated future losses, the FDIC adopted an across the board seven basis point
increase in the assessment range for the first quarter of 2009. The FDIC made further refinements to its risk-based
assessment that were effective April 1, 2009, and effectively made the range seven to 771/2 basis points. 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, all of which was
applied to offset assessments in 2008 and 2007. FDIRA also provided for the possibility that the FDIC may pay
8
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 originally provided that the basic deposit insurance limit would return to
$100,000 after December 31, 2009. However, Congress extended the temporary increase in the standard insurance
coverage limit to $250,000 until December 31, 2013. The legislation did not change coverage for retirement
accounts, which continues to be $250,000.
In November 2008, the FDIC adopted a final rule implementing 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 TLGP consists of two components: a temporary guarantee of certain
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:
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 earlier of the maturity date of that debt or December 31,
2012 (extended by subsequent amendment from June 30, 2012). 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. This
program has been extended until June 30, 2010 and participating institutions will be assessed an
annualized 15 basis points for coverage in 2010. The Corporation has customer accounts that qualify for
this coverage and has opted to continue its participation until June 30, 2010. The Corporation has been
incurring assessment charges since November 13, 2008.
On May 22, 2009, the FDIC adopted a final rule imposing a five basis point special assessment on each
insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The assessment was part of the
FDIC’s efforts to rebuild the DIF and help maintain public confidence in the banking system. The Corporation was
assessed $391,000, all of which was expensed in 2009.
On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012,
on December 31, 2009, along with each institution’s risk-based deposit insurance assessment for the third quarter of
2009. The prepayment was based on an institution’s assessment rate and assessment base for the third quarter of
2009, assuming a five percent annual growth in deposits each year. While the FDIC plan would maintain current
assessment rates through 2010, effective January 1, 2011, the rates would increase by three basis points across the
board. On December 30, 2009, the Corporation prepaid $3.2 million of FDIC assessments.
9
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. In 2009, the FHLB imposed a temporary suspension of repurchases of excess capital.
At December 31, 2009, the Bank owned $3.9 million of FHLB stock.
USA Patriot Act. The USA Patriot Act, which became effective on October 26, 2001, amends the Bank
Secrecy Act and is intended to facilitate information sharing among governmental entities and financial institutions
for the purpose of combating terrorism and money laundering. Among other provisions, the USA Patriot Act
permits financial institutions, upon providing notice to the 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.
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.
10
In addition to other federal laws, mortgage origination activities are subject to the Equal Credit Opportunity Act,
Truth-in-Lending Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, and Home
Ownership Equity Protection Act, and the regulations promulgated under these acts. These laws prohibit
discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement
costs, limit payment for settlement services to the reasonable value of the services rendered and require the
maintenance and disclosure of information regarding the disposition of mortgage applications based on race,
gender, geographical distribution and income level.
Consumer Financing Regulation. The Corporation’s Consumer Finance segment also is regulated by the
VBFI. The VBFI regulates and enforces laws relating to consumer lenders and sales finance agencies such as C&F
Finance. Such rules and regulations generally provide for licensing of sales finance agencies; limitations on
amounts, duration and charges, including interest rates, for various categories of loans; requirements as to the form
and content of finance contracts and other documentation; and restrictions on collection practices and creditors’
rights.
Consumer Protection. The Fair and Accurate Credit Transactions Act of 2003, which amended the Fair
Credit Reporting Act, requires financial institutions to implement policies and procedures that track identity theft
incidents; provide identity-theft victims with evidence of fraudulent transactions upon request; block from
reporting to consumer reporting agencies credit information resulting from identity theft; notify customers of
adverse information concerning the customer in consumer reporting agency reports; and notify customers when
reporting negative information concerning the customer to a consumer reporting agency.
Other Safety and Soundness Regulations
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
is “well capitalized,” “adequately capitalized,”
depends upon whether
“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, 2009, the Bank was considered “well capitalized.”
in question
institution
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
11
intention to become a financial holding company. While the Corporation satisfies these requirements, the
Corporation has not elected to be treated as a financial holding company under the GLBA.
The GLBA has not had a material adverse impact on the Corporation’s or the Bank’s operations. To the
extent that it allows banks, securities firms and insurance firms to affiliate, the financial services industry may
experience further consolidation. The GLBA may have the result of increasing competition that we face from larger
institutions and other companies that offer financial products and services and that may have substantially greater
financial resources than the Corporation or the Bank.
The GLBA and certain regulations issued by federal banking agencies also provide protections against the
transfer and use by financial institutions of consumer nonpublic personal information. A financial institution must
provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution’s
policies and procedures regarding the handling of customers’ nonpublic personal financial information. These
privacy provisions generally prohibit a financial institution from providing a customer’s personal financial
information to unaffiliated third parties unless the institution discloses to the customer that the information may be
so provided and the customer is given the opportunity to opt out of such disclosure.
Future Regulation
Regulatory Restructuring Legislation. In June 2009, the U.S. President’s administration proposed a wide
range of regulatory reforms that, if enacted, may have significant effects on the financial services industry in the
United States. Significant aspects of the administration’s proposals included, among other things, proposals: (i) to
reassess and increase capital requirements for banks and bank holding companies and examine the types of
instruments that qualify as regulatory capital; (ii) to create a federal consumer financial protection agency to be the
primary federal consumer protection supervisor with broad examination, supervision and enforcement authority
with respect to consumer financial products and services; (iii) to further limit the ability of banks to engage in
transactions with affiliates; and (iv) to subject all “over-the-counter” derivatives markets to comprehensive
regulation.
The U.S. Congress, state lawmaking bodies and federal and state regulatory agencies continue to consider a
number of wide-ranging and comprehensive proposals for altering the structure, regulation and competitive
relationships of the nation’s financial institutions, including rules and regulations related to the administration’s
proposals. Separate comprehensive financial reform bills intended to address the proposals set forth by the
administration were introduced in both houses of Congress in the second half of 2009 and remain under review by
both the U.S. House of Representatives and the U.S. Senate. In addition, both the Treasury and the Basel
Committee have issued policy statements regarding proposed significant changes to the regulatory capital
framework applicable to banking organizations as discussed above. The Corporation cannot predict whether or in
what form future legislation or regulations may be adopted or the extent to which the Corporation may be affected
thereby.
Incentive Compensation. On October 22, 2009, the Federal Reserve issued a comprehensive proposal on
incentive compensation policies intended to ensure that the incentive compensation policies of banking
organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-
taking. Banking organizations are instructed to review their incentive compensation policies to ensure that they do
not encourage excessive risk-taking and implement corrective programs as needed. The Federal Reserve Board will
review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of
banking organizations, such as the Bank, that are not “large, complex banking organizations.” These reviews will
12
be tailored to each organization based on the scope and complexity of the organization’s activities and the
prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in
reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can
affect the organization’s ability to make acquisitions and take other actions.
In addition, on January 12, 2010, the FDIC announced that it would seek public comment on whether banks
with compensation plans that encourage risky behavior should be charged at higher deposit assessment rates than
such banks would otherwise be charged.
The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to
develop and are likely to continue evolving in the near future. It cannot be determined at this time whether
compliance with such policies will adversely affect the Bank’s ability to hire, retain and motivate its key employees.
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 that began in 2008 have resulted in significant write-downs of asset values by
financial institutions. The Corporation has recognized significantly higher loan loss provisions during 2008 and
2009 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. While we have seen some
stabilization during the latter half of 2009, it is not yet clear that the U.S. economy has recovered. 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.
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
13
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 create another market-wide liquidity crisis similar to that experienced in late 2008 and
early 2009 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 or a material reduction in the
volume of such purchases. 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 or materially limit
their purchases of mortgage loans. There is no assurance that the failure of our counterparties would not
materially adversely affect the Corporation’s results of operations.
Compliance with laws, regulations and supervisory guidance, both new and existing, may adversely impact our
business, financial condition and results of operations.
We are subject to numerous laws, regulations and supervision from both federal and state agencies.
During the past few years, there has been an increase in legislation related to and regulation of the financial
services industry. We expect this increased level of oversight to continue. Failure to comply with these laws and
regulations could result in financial, structural and operational penalties, including receivership. In addition,
establishing systems and processes to achieve compliance with these laws and regulations may increase our costs
and/or limit our ability to pursue certain business opportunities.
Proposals under consideration by the U.S. Congress include extensive changes to the laws regulating the
financial services industry. Among these proposals is the creation of a new independent Consumer Financial
Protection Agency (CFPA) that would regulate consumer financial services and products, including any loan,
deposit account or other financial product. The CFPA, as proposed, may have an adverse impact on our results of
operations.
During 2009, the FDIC imposed a special deposit insurance assessment on all institutions which it
regulates, including the Bank. This special assessment was imposed due to the significant number of bank failures
in the U.S. and the need to replenish the DIF. In addition, the FDIC required regulated institutions to prepay their
fourth quarter 2009, and full year 2010, 2011 and 2012 assessments in December 2009. Additional measures taken
by the FDIC to maintain or replenish the DIF may have an adverse affect on our results of operations.
Laws and regulations, and any interpretations and applications with respect thereto, generally are
intended to benefit consumers, borrowers and depositors, not stockholders. The legislative and regulatory
environment is beyond our control, may change rapidly and unpredictably and may negatively influence our
revenue, costs, earnings, and capital levels. Our success depends on our ability to maintain compliance with both
existing and new laws and regulations.
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
14
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 Board 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 during 2008 and early 2009. Net interest margin partially recovered during 2009 as we
were able to reprice fixed-rate deposits. There is no guarantee we will continue to be able to reprice deposits as
competition for deposits from both local and national financial services institutions is intense.
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 C&F
Mortgage, which originates a variety of residential loan products for sale into the secondary market to investors.
Significant disruptions in the secondary market for residential mortgage loans have limited the market for and
liquidity of many mortgage loans. The correction in residential real estate market prices may not have reached
bottom. 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 keep pressure on loan origination volume at C&F Mortgage. At the same time as market
conditions were negatively impacting loan origination volume, efforts by the Federal Reserve Board to keep
interest rates low and government initiatives, such as the homebuyer tax credits, have caused some increase in loan
originations and refinancing activity. There is no guarantee that these programs will continue in 2010 and that they
will have a positive impact on loan originations. These factors may cause our revenue from our mortgage
company to be volatile from quarter to quarter.
In addition, credit markets have continued to experience difficult conditions and volatility. 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 C&F Mortgage on residential mortgage loans
originated and sold into the secondary market in the event of claims by investors of borrower misrepresentation,
fraud or early-payment default as investors attempt to minimize their losses. 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,
or that established reserves will be adequate, 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 ongoing recession and continuing high unemployment,
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.
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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, 2009, 39 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, 2009, 30 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 may increase in this portfolio. Significant increases in the
inventory of used automobiles during periods of economic recession may also depress the prices at which we may
sell repossessed automobiles or delay the timing of these sales. Because we focus on non-prime borrowers, the
actual rates of delinquencies, defaults, repossessions and losses on these loans are higher than those experienced in
the general automobile finance industry and could be dramatically affected by a general economic downturn. In
addition, our servicing costs may increase without a corresponding increase in our finance charge income. While
we manage the higher risk inherent in loans made to non-prime borrowers through our underwriting criteria and
collection methods, we cannot guarantee that these criteria or methods will ultimately provide adequate protection
against these risks.
If our allowance for loan losses becomes inadequate, the results of our operations may be adversely affected.
Making loans is an essential element of our business. The risk of nonpayment is affected by a number of
factors, including but not limited to: the duration of the credit; credit risks of a particular customer; changes in
economic and industry conditions; and, in the case of a collateralized loan, risks resulting from uncertainties about
the future value of the collateral. Although we seek to mitigate risks inherent in lending by adhering to specific
underwriting practices, our loans may not be repaid. We attempt to maintain an appropriate allowance for loan
losses to provide for potential losses in our loan portfolio. Our allowance for loan losses is determined by
analyzing historical loan losses, current trends in delinquencies and charge-offs, current economic conditions that
may affect a borrower’s ability to repay and the value of collateral, 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,
16
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 are subject to restrictions and obligations as a participant in the Treasury’s Capital Purchase Program.
In January 2009, as part of the Capital Purchase Program, we issued and sold to the Treasury Series A
Preferred Stock and a Warrant for an aggregate purchase price of approximately $20.0 million. Participation in the
Capital Purchase Program subjects us to specific restrictions under the terms of the Capital Purchase Program,
including limits on our ability to pay dividends (quarterly dividends on our common stock are limited to $0.31 per
share or less) and repurchase our capital stock, limitations on executive compensation, and increased oversight by
the Treasury, regulators and Congress under the EESA.
Recently, many recipients under the Capital Purchase Program have repaid the Treasury and are no longer
subject to the restrictions imposed under the Capital Purchase Program. Withdrawing from the Capital Purchase
Program requires approval of banking regulators and we may not be able to obtain such approval, or a condition of
obtaining such approval may require us to raise additional capital. Unanticipated consequences of participation in
the Capital Purchase Program could materially and adversely affect our business, results of operations, financial
condition, access to funding and the trading price of our common stock.
We rely heavily on our management team and the unexpected loss of key officers may adversely affect our
operations.
We believe that our growth and future success will depend in large part on the skills of our executive
officers. We also depend upon the experience of the officers of our subsidiaries and on their relationships with the
communities they serve. The loss of the services of one or more of these officers could disrupt our operations and
impair our ability to implement our business strategy, which could adversely affect our business, financial
condition and results of operations.
The success of our business strategies depends on our ability to identify and recruit individuals with experience
and relationships in our primary markets.
The successful implementation of our business strategy will require us to continue to attract, hire, motivate
and retain skilled personnel to develop new customer relationships as well as new financial products and services.
The market for qualified management personnel is competitive. In addition, the process of identifying and
recruiting individuals with the combination of skills and attributes required to carry out our strategy is often
lengthy. Our inability to identify, recruit and retain talented personnel to manage our operations effectively and in
a timely manner could limit our growth, which could materially adversely affect our business.
17
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.
Changes in accounting standards and management’s selection of accounting methods, including assumptions and
estimates, could materially impact our financial statements.
From time to time the SEC and the Financial Accounting Standards Board (FASB) change the financial
accounting and reporting standards that govern the preparation of the Corporation’s financial statements. These
changes can be hard to predict and can materially impact how the Corporation records and reports its financial
condition and results of operations. In some cases, the Corporation could be required to apply a new or revised
standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to
retained earnings. In addition, management is required to use certain assumptions and estimates in preparing our
financial statements, including determining the fair value of certain assets and liabilities, among other items. If the
assumptions or estimates are incorrect, the Corporation may experience unexpected material consequences.
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 and the main office of C&F Investment Services.
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
18
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 $114,000 for the
year ended December 31, 2009.
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 17 leased loan production
offices, 11 in Virginia, three in Maryland, two in North Carolina and one each in Delaware, Pennsylvania and New
Jersey, for C&F Mortgage. Rental expense for these leased locations totaled $1.05 million for the year ended
December 31, 2009.
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 $63,000 for
the year ended December 31, 2009.
All of the Corporation’s properties are in good operating condition and are adequate for the Corporation’s
present and anticipated future needs.
ITEM 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Corporation or any of its subsidiaries is a
party or to which the property of the Corporation or any of its subsidiaries is subject.
ITEM 4.
[RESERVED]
19
Name (Age)
Present Position
Larry G. Dillon (57)
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 (41)
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 (53)
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 26, 2010,
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 $20.68. Following are the high and low sales prices as reported by
the NASDAQ Stock Market, along with the dividends that were paid quarterly in 2009 and 2008.
_________2009_________
Quarter High
$19.00
First
18.00
Second
21.45
Third
20.97
Fourth
Low
$10.30
12.80
14.55
16.00
Dividends High
$0.31
$32.25
0.25
30.00
0.25
25.00
0.25
24.25
_________2008_________
Low
$25.00
22.00
18.00
9.65
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 heading “Note 9: Shareholders’ Equity, Other Comprehensive Income and Earnings Per Common
Share.”
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. In the fourth quarter of 2009, the Corporation did not purchase any of its
Common Stock.
20
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
Effective dividends on preferred stock
Net income available to common shareholders
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 – common shares
Average common equity to average assets
2009
2008
2007
2006
2005
$888,430
88,876
613,004
606,630
$ 64,971
15,459
49,512
18,563
30,949
36,689
60,167
7,471
1,945
5,526
1,130
$ 4,396
$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
--
$ 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
--
$ 8,480
$734,468
68,006
517,843
532,835
$671,957
60,086
465,039
495,438
$ 58,582
18,457
40,125
4,625
35,500
27,387
45,328
17,559
5,430
12,129
--
$ 12,129
$ 48,770
11,997
36,773
5,520
31,253
27,584
41,868
16,969
5,181
11,788
--
$ 11,788
$1.44
$1.38
$2.77
$3.85
$3.49
1.44
1.06
1.37
1.24
2.67
1.24
3.71
1.16
3.36
1.00
3,048,491
3,058,274
3,181,445
3,273,429
3,507,912
0.50%
6.60
73.48
7.61
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
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This report contains statements concerning the Corporation’s expectations, plans, objectives, future
financial performance and other statements that are not historical facts. These statements may constitute “forward-
looking statements” as defined by federal securities laws. These statements may address issues that involve
estimates and assumptions made by management and risks and uncertainties. Actual results could differ
materially from historical results or those anticipated by such statements. Factors that could have a material
adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in:
interest rates
general business conditions, as well as conditions within the financial markets
general economic conditions, including unemployment levels
the legislative/regulatory climate, including the effect of restrictions imposed on us as a participant in the
Capital Purchase Program
monetary and fiscal policies of the U.S. Government, including policies of the Treasury and the Federal
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 and the adequacy of our allowance for loan losses
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
demand in the secondary residential mortgage loan markets
the Corporation’s expansion and technology initiatives
accounting principles, policies and guidelines
technology
reliance on third parties for key services
the commercial and residential real estate markets
These risks are exacerbated by the turbulence during 2008 and 2009 in significant portions of the global
financial markets, which if it continues or 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. During 2008 and 2009, the capital and credit markets
have experienced extended volatility and disruption, and unemployment has risen to, and remained at, high levels.
There can be no assurance that these unprecedented recent developments will not continue to materially and
adversely affect our business, financial condition and results of operations, as well as our ability to raise capital for
liquidity and business purposes.
Although the Corporation had, and continues to have, diverse sources of liquidity and its capital ratios
exceeded, and continue to exceed, the minimum levels required for well-capitalized status, the Corporation issued
and sold its Series A Preferred Stock and Warrant for a $20.0 million investment from Treasury under the Capital
22
Purchase Program 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. The
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 June 30, 2010.
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 institutions. As a result,
defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services
industry generally, could create another market-wide liquidity crisis similar to that experienced in late 2008 and
early 2009 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.
Further, there can be no assurance that the actions taken by the federal government and regulatory
agencies will stabilize the U.S. financial system or alleviate the industry or economic factors that may adversely
affect the Corporation’s business and financial performance.
These risks and uncertainties should be considered in evaluating the forward-looking statements contained
herein. We caution readers not to place undue reliance on those statements, which speak only as of the date of this
report.
The following discussion supplements and provides information about the major components of the results
of operations, financial condition, liquidity and capital resources of the Corporation. This discussion and analysis
should be read in conjunction with the accompanying consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires us to make estimates and assumptions. Those accounting
policies with the greatest uncertainty and that require our most difficult, subjective or complex judgments affecting
the application of these policies, and the likelihood that materially different amounts would be reported under
different conditions, or using different assumptions, are described below.
Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the
form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the
collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are
credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb
any losses on existing loans that may become uncollectible. Our judgment in determining the 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
review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are
susceptible to significant revision as more information becomes available.
23
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 under certain conditions when a purchaser of a loan (investor)
sold by C&F Mortgage incurs a loss due to borrower misrepresentation, fraud 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.
Impairment of Loans: 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 measure
impairment on a loan by loan basis for commercial, construction and residential loans in excess of $500,000 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. 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 securities occurs when the fair value of a security is less than its
amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety
in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to
sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it
is not more-likely-than-not that we will be required to sell the security before recovery, we must determine what
portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security
exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss,
there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and
the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in
other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on
our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an
equity security results in a write-down that must be included in net income. We regularly review each investment
security for other-than-temporary 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, our
best estimate of the present value of cash flows expected to be collected from debt securities, our intention with
regard to holding the security to maturity and the likelihood that we would be required to sell the security before
recovery.
Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at the lower of the loan balance or the fair value less costs to sell at the date of foreclosure.
Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated
appraisals, general market conditions, recent sales of like properties, 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 by applying a fair value based test. 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
Company in September 2002, we must make assumptions in order to determine the fair value of the respective
24
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 a 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 2009 and determined
there was no impairment to be recognized in 2009. 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 interest crediting 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.
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
25
Financial Performance Measures
Net income for the Corporation was $5.5 million in 2009, compared with net income of $4.2 million in 2008
($5.2 million, adjusted to exclude the $976,000 net effect of the impairment of the Corporation’s investments in
perpetual preferred stock of Fannie Mae and Freddie Mac). Net income available to common shareholders for 2009
was $4.4 million, or $1.44 per common share assuming dilution, compared with $4.2 million, or $1.37 per common
share assuming dilution, ($5.2 million, or $1.69 per common share assuming dilution, adjusted to exclude the
$976,000 net effect of the impairment charge) for 2008. The difference between reported net income and net income
available to common shareholders in 2009 is a result of the Series A Preferred Stock dividends and accretion of the
discount related to the Corporation’s participation in the Capital Purchase Program. The Series A Preferred Stock
and Warrant were issued in the first quarter of 2009 and, therefore, did not affect net income available to common
shareholders for 2008. Significant factors influencing 2009 earnings included (1) the positive effects of the
sustained lower interest rate environment on net interest margin and the production of loans originated for sale in
the secondary market, (2) the negative effects of the continued downturn in the real estate markets on provisions
for losses and expenses associated with nonperforming loans secured by real estate and automobiles, as well as real
estate acquired through foreclosure, (3) the negative effects of lower consumer spending on fee income, and (4) the
additional expense associated with higher FDIC assessments, the special FDIC assessment and required
prepayments to replenish the DIF, which has been depleted by bank failures resulting from the overall
deterioration of the housing and economic environment in the United States. 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 6.60 percent and 0.50 percent, respectively, for the year ended
December 31, 2009, compared to 6.39 percent and 0.51 percent (7.89 percent and 0.63 percent, adjusted to exclude
the net effect of the impairment charge) for the year ended December 31, 2008. In 2009, these ratios include the
effects of the Series A Preferred Stock dividends and accretion of the discount on net income available to common
shareholders, as well as asset growth since the end of 2008. 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 provides 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. As
the Bank was well-capitalized before participating in the Capital Purchase Program, it also provides insurance for
unforeseen events in these turbulent financial times. Nonetheless, the additional capital and asset growth may
delay improvement in ROE and ROA in the near term.
We expect the following factors to influence the Corporation’s financial performance in 2010:
Retail Banking: Managing the risks inherent in our loan portfolio and expenses associated
with nonperforming assets will influence the Bank’s performance during 2010. General
economic trends, particularly the economic recession that we are experiencing in the 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. In addition, the extent to which
the FDIC charges higher premiums or special assessments in order to maintain the adequacy
of the DIF will affect the Bank’s noninterest expenses during 2010. Further, actions that may
be taken by the federal government to restrict products offered by banks, such as overdraft
protection, may affect the Bank’s noninterest income during 2010.
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 to influence the
origination volume at C&F Mortgage. While continued lower interest rates and incentives for
26
homebuyers may spur activity in 2010, the decline in housing market values, coupled with
the availability of fewer mortgage loan products and tighter underwriting guidelines, will
temper demand. Any rise in interest rates would ultimately reduce refinancing activity and
potentially new and resale home purchases, thus reducing loan originations. In addition,
there is potential repurchase or indemnification liability to C&F Mortgage on residential
mortgage loans originated and sold into the secondary market in the event of borrower
misrepresentation, fraud or early-payment default. While we mitigate the risk of repurchase
liability by underwriting to the purchasers’ guidelines, and establishing appropriate reserves,
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: Changes in interest rates may affect net interest margin at C&F Finance in
2010. A significant portion of C&F Finance’s funding is indexed to short-term interest rates
and reprices as short-term interest rates change. An upward movement in interest rates may
result in an unfavorable pricing disparity between its fixed rate loan portfolio and its
adjustable-rate borrowings, thus causing margin compression and adversely affecting the
Corporation’s net income. The ongoing effects of the economic recession, including sustained
unemployment levels, may result in more delinquencies and repossessions at C&F Finance.
The general availability of consumer credit or other factors that impact consumer confidence
or disposable income could increase loss frequency and may be accompanied by decreased
consumer demand for automobiles and declining values of automobiles securing outstanding
loans, which weakens collateral coverage and increases the amount of loss in the event of
default.
Principal Business Activities
An overview of the financial results for each of the Corporation’s principal segments is presented below. A
more detailed discussion is included in the section “Results of Operations.”
Retail Banking: The Retail Banking segment, which consists of the Bank, reported a net loss of $2.2 million
for the year ended December 31, 2009, compared to net income of $1.7 million for the year ended December 31,
2008. The decline in earnings for 2009 included the effects of (1) nonperforming loans on interest income, (2) a
significant increase in the provision for loan losses attributable to credit quality issues identified in the loan
portfolio, (3) a $573,000 year-over-year decline in overdraft charges on deposit accounts resulting from economic
conditions over the past year, which have heightened customer sensitivity to incurring such fees, (4) a $973,000
year-over-year increase in assessments for deposit insurance resulting from the FDIC’s increased annual
assessments for all banks, coupled with its special assessment in the second quarter of 2009 to help restore the DIF,
and (5) higher expenses related to nonaccrual loans and foreclosed properties. Deposit repricing at lower interest
rates and the implementation of interest rate floors on adjustable rate loans upon origination or renewal mitigated,
to a large degree, the effects of the lower interest rate environment and nonperforming loans on the Bank’s net
interest margin.
The Bank’s credit management team directed significant effort throughout 2009 to real estate loan
workouts and restructurings and, when necessary, foreclosures. After thoroughly evaluating the credit quality of
the Bank’s loan portfolio and the carrying values of real estate acquired through foreclosure, we have charged off
loans, written down foreclosed properties and increased reserves as we considered necessary. These credit actions
27
resulted in a $4.1 million year-over-year increase in the Bank’s provision for loan losses and a $2.2 million year-
over-year increase in expenses for foreclosed properties.
Mortgage Banking: The Mortgage Banking segment, which consists of C&F Mortgage, reported net
income of $3.4 million for the year ended December 31, 2009, compared to net income of $1.5 million for the year
ended December 31, 2008. Earnings in 2009 included the positive effects of lower interest rates and federal home
buyer tax credits. Loan origination volume increased 41.9 percent for 2009 over 2008, resulting in $25.0 million of
gains on sales of loans for 2009, compared to $16.7 million for 2008. This revenue growth was offset in part by
year-over-year increases of (1) $1.4 million in the provision for indemnification losses resulting from a higher
number of claims by investors pursuant to recourse provisions as the continued deterioration of the U.S. economy
caused an increase in defaults on mortgages by homeowners and (2) $6.5 million in personnel costs, principally for
variable compensation associated with the increase in loan production and income. 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 two years, our Mortgage Banking segment has continued to contribute to the Corporation’s earnings. Loan
originations for 2009 approximated $1.1 billion. For 2009, loan originations at C&F Mortgage for refinancings
increased to $499.7 million from $202.3 million in 2008 as customers took advantage of the low interest rate
environment. Loans originated for new and resale home purchases increased to $563.4 million from to $546.9
million in 2008. The decline in housing market values, coupled with the availability of fewer mortgage loan
products and tighter underwriting 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 and we believe that these additions provide the potential for future increased loan
production.
Consumer Finance: The Consumer Finance segment, which consists of C&F Finance, reported net income
of $4.8 million for the year ended December 31, 2009, compared to net income of $2.7 million for the year ended
December 31, 2008. Earnings of the Consumer Finance segment have benefited from an approximate 5 percent
increase in average consumer finance loans outstanding and the sustained lower short-term interest rate
environment in 2009. 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 2009. These benefits were
offset in part by a year-over-year increase of $930,000 in the provision for loan losses resulting from loan growth
and the overall condition of the economic environment. 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 and unemployment worsens, we would expect more delinquencies
and repossessions. Depending on the severity of any further downturn in the economy, decreased consumer
demand for automobiles and a 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 and Eliminations The net loss for the year ended December 31, 2009 for this combined segment was
$554,000, compared to a net loss of $1.7 million for the year ended December 31, 2008 (a net loss of $718,000,
adjusted to exclude the $976,000 net effect of the impairment charge). Revenue and expense of this combined
segment include dividends received on the Corporation’s investment in equity securities and interest expense
associated with the Corporation’s trust preferred capital notes. The decline in the year-over-year loss resulted
primarily from lower interest expense on the Corporation’s trust preferred capital notes, a portion of which are
indexed to short-term interest rates.
28
Capital Management
During 2009, we have managed our capital through asset growth and lower dividends on common shares
outstanding. Total shareholders’ equity increased $24.0 million to $88.9 million at December 31, 2009, compared to
$64.9 million at December 31, 2008. This increase primarily occurred in connection with the Corporation’s
participation in the Capital Purchase Program, as previously described. As of December 31, 2009, the Corporation
is “well capitalized” (as defined in the regulations). We believe the Corporation’s strong capital and liquidity
positions will allow for profitable growth should there be sufficient consumer spending and economic activity. It is
our ultimate intention to redeem the Series A Preferred Stock issued to the Treasury preferably before January 9,
2014, at which time the dividend rate on the Series A Preferred Stock will increase. We are currently analyzing the
possibility of repayment in light of the Corporation’s overall financial condition, capitalization and liquidity. Our
considerations include whether repayment will require raising new capital and the cost of that capital, our future
capital needs and the potential sources of capital, and the likelihood of continued government shareholder and
public scrutiny of compensation practices even after the Series A Preferred Stock redemption.
Another means by which we manage our capital is through dividends. The Corporation’s board of
directors continued its policy of paying dividends in 2009. The quarterly rate was decreased from 31 cents per
common share in the first quarter of 2009 to 25 cents per common share for the remaining three quarters of 2009.
The dividend payout ratio for 2009 was 73.5 percent based on net income available to common shareholders for the
year ended December 31, 2009. The board of directors continues to evaluate our dividend payout in light of
changes in economic conditions, our capital levels and our expected future levels of earnings. However, in
connection with the Corporation’s participation in the Capital Purchase Program, as previously described, there are
limitations on the Corporation’s ability to pay quarterly cash dividends in excess of $0.31 per share 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 9: Shareholders’ Equity, Other Comprehensive Income and Earnings Per Common Share.”
29
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets for each of the years ended December 31, 2009, 2008
and 2007. 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)
Balance
Expense
Rate
Balance
Expense
Rate
Balance
Expense
Rate
2009
2008 (1)
2007 (1)
Average
Income/
Yield/
Average
Income/
Yield/
Average
Income/
Yield/
Assets
Securities:
Taxable
Tax-exempt
Total securities
Loans, net
$ 15,839
$ 549
98,596
114,435
694,760
6,502
7,051
60,179
3.46% $ 16,662
77,164
6.59
93,826
6.16
8.66
Interest-bearing deposits in other banks and
Fed funds sold
Total earning assets
Allowance for loan losses
Total non-earning assets
Total assets
6
67,236
0.15
8.27
3,936
813,131
(21,615)
84,457
$875,973
$ 867
5.20% $ 11,659
$ 544
5,094
5,961
63,280
74,939
4,349
4,893
4.66%
6.87
6.53
664,715
59,918
28
65,907
1,286
759,827
(17,182)
77,354
$819,999
601,685
60,977
10.13
443
66,313
5.22
9.68
8,479
685,103
(14,926)
78,217
$748,394
6.60
6.35
9.01
2.18
8.67
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
$ 86,478
66,562
41,449
640
1,027
0.74% $ 82,560
68,406
1.54
44
0.11
42,445
834
1.01% $ 82,109
1,699
105
2.48
0.25
51,624
45,452
119,246
176,657
490,392
191,201
681,593
85,811
22,378
789,782
86,191
3,433
5,174
10,318
5,141
15,459
2.88
2.93
2.10
2.69
2.27
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
$875,973
$819,999
$748,394
$51,777
$44,512
$42,935
6.00%
1.90%
6.37%
5.40%
2.82%
5.86%
1.11%
2.97
0.66
4.73
4.41
3.33
6.17
3.99
5.69%
3.41%
6.27%
(1) Certain amounts have been reclassified to conform to the current year presentation.
30
Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of
earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table
shows the direct causes of the year-to-year changes in the components of net interest income on a taxable-
equivalent basis. We calculated the rate and volume variances using a formula prescribed by the SEC.
Rate/volume variances, the third element in the calculation, are not shown separately in the table, but are allocated
to the rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in
each. Loans include both nonaccrual loans and loans held for sale.
TABLE 2: Rate-Volume Recap
(Dollars in thousands)
Interest income:
Loans
Securities:
Taxable
Tax-exempt
Interest-bearing deposits in other banks and Fed funds sold
Total interest income
Interest expense:
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 expense
Change in net interest income
2009 from 2008
2008 from 2007(1)
Increase (Decrease)
Total
Increase (Decrease)
Due to
Increase
Due to
Total
Increase
Rate
Volume
(Decrease)
Rate
Volume
(Decrease)
$(2,390)
$2,651
$261
$(7,103)
$6,044
$(1,059)
(273)
(6)
(28)
(2,697)
(229)
(627)
(59)
(1,360)
(1,772)
(4,047)
(2,821)
(6,868)
$ 4,171
(45)
1,414
6
4,026
35
(45)
(2)
705
332
1,025
(93)
932
$3,094
(318)
1,408
(22)
1,329
(194)
(672)
(61)
(655)
(1,440)
(3,022)
(2,914)
(5,936)
$7,265
69
(177)
(156)
(7,367)
(83)
(280)
(177)
(629)
(785)
(1,954)
(3,247)
(5,201)
$(2,166)
254
922
(259)
6,961
5
445
(19)
3
(70)
364
2,854
3,218
$3,743
323
745
(415)
(406)
(78)
165
(196)
(626)
(855)
(1,590)
(393)
(1,983)
$1,577
(1) Certain amounts have been reclassified to conform to the current year presentation.
2009 Compared to 2008
Net interest income, on a taxable-equivalent basis, for the year ended December 31, 2009 was $51.8 million,
compared to $44.5 million for 2008. The higher net interest income resulted from a year-over-year 7.0 percent
increase in the average balance of interest-earning assets, coupled with a 51 basis point increase in the net interest
margin for 2009 over 2008. The increase in the net interest margin occurred primarily at C&F Finance as its fixed-
rate loan portfolio is partially funded by a variable-rate line of credit indexed to LIBOR, which has been
significantly lower throughout 2009. At the Bank, deposit repricing at lower interest rates and the implementation
of interest rate floors on adjustable rate loans upon origination or renewal throughout 2009 have mitigated, to a
large degree, the effects of the lower interest rate environment and nonperforming loans on its net interest margin.
Total average loans increased $30.0 million for 2009 over 2008. Average loans held for investment
increased $9.6 million for 2009 over 2008. The Bank’s average loan portfolio increased only slightly during 2009, by
$2.3 million, in relation to 2008. The Bank’s residential mortgage loan growth throughout 2009 was offset to a large
degree by $16.1 million of transfers of commercial loans secured by residential real estate to foreclosed properties
in 2009. C&F Finance’s average loan portfolio increased $8.9 million during 2009 as a result of the purchase of a
31
portfolio of seasoned loans in the Virginia market from an unrelated finance company, as well as increased
production within existing markets. C&F Mortgage’s average loan portfolio of short-term bridge loans and
repurchased loans decreased $1.6 million in 2009 as a result of charge-offs and transfers to foreclosed properties.
Average loans held for sale at C&F Mortgage increased $20.4 million during 2009 as a result of higher loan
demand, in particular for refinancing products, in the lower interest rate environment in 2009. The overall yield on
loans held for investment at the Bank and C&F Mortgage and loans held for sale at C&F Mortgage decreased
during 2009 in relation to 2008 as a result of a general decrease in interest rates. The yield on C&F Finance’s loan
portfolio increased during 2009 in relation to 2008 as a result of higher rates on loans originated in 2009 and higher
loan origination fee income.
Average securities available for sale increased $20.6 million for 2009 over 2008. The increase in securities
available for sale occurred predominantly in the Bank’s municipal bond portfolio, which resulted from a strategy to
increase the Bank’s securities portfolio as a percentage of total assets. The lower investment portfolio yields in 2009
in relation to 2008 resulted from the current interest rate environment in which portfolio growth has occurred at
lower yields and higher-yielding securities were called or matured, coupled with a decline in dividends on FHLB
stock in 2009.
Average interest-earning deposits at other banks, primarily the Federal Reserve Bank in 2009 and the FHLB
in 2008, and federal funds sold increased $2.7 million for 2009 over 2008. Fluctuations in the average balance of
these low-yielding assets occurred in response to loan demand. The lower yield on interest-earning deposits at
other banks in 2009 in relation to 2008 resulted from the decline in short-term interest rates that began in late 2007.
Average interest-bearing time and savings deposits increased $29.4 million for 2009 over 2008. Growth in
lower-rate retail transaction accounts resulted from our deposit strategies that emphasize retention of multi-service
customer relationships including larger-balance business accounts. Growth in time deposits occurred in deposits
of municipalities in our market areas and retail depositors who are maintaining flexibility in their investing options
due to the unpredictability in the stock market. The average cost of deposits declined 79 basis points during 2009
in relation to 2008 as a result of repricing transaction accounts as interest rates declined throughout 2008 and the
more gradual repricing of time deposits throughout 2008 and 2009 to interest rates that are lower than their
maturing rates.
Average borrowings decreased $2.3 million during 2009 in relation to 2008 as the increase in deposits and
reductions in loans held for investment reduced the need for additional funding sources. The average cost of
borrowings decreased 147 basis points during 2009 in relation to 2008 because a portion of the Corporation’s
borrowings is indexed to short-term interest rates, which remained low throughout 2009.
Interest rates will be a significant factor influencing the performance of all of the Corporation’s business
segments during 2010. The continued repricing of time deposits to lower interest rates should reduce funding costs
and relieve net interest margin compression, unless competition for deposits hinders a decline in rates paid for
deposits.
2008 Compared to 2007
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
32
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 over 2007. The Bank’s average loan
portfolio increased $44.0 million during 2008 primarily as a result of residential mortgage loan and commercial
loan growth. C&F Finance’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. C&F Mortgage’s average loan portfolio increased
$1.4 million during 2008 as a result of the introduction of short-term bridge loans in 2007 and repurchased loans.
Average loans held for sale at C&F Mortgage 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 C&F
Mortgage 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 over 2007. The increase in securities
available for sale occurred predominantly in the Bank’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 in relation to 2007
resulted from the 2008 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
from 2007. 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 in relation to 2007 due to declines in short-term interest
rates beginning in September 2007 and continuing throughout 2008.
Average interest-bearing customer deposits increased $12.7 million during 2008 over 2007. 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 to retain cash to maintain 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 in relation to 2007.
As sources of wholesale funding available to the financial services industry diminished beginning in 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 over 2007. This increase was attributable to
increased use of the third-party line of credit by C&F Finance to fund loan growth, increased use of borrowings
from the FHLB and the Federal Reserve Bank to fund loan growth at the Bank and C&F Finance, 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 in relation to 2007 as
interest rates fell.
33
NONINTEREST INCOME
TABLE 3: Noninterest Income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other income
Total noninterest income
Year Ended December 31, 2009
Retail
Banking
$ --
3,303
1,650
44
807
Mortgage
Banking
$24,976
--
3,359
--
852
$5,804
$29,187
Consumer
Other and
Finance
$ --
--
9
--
594
$603
Eliminations
Total
$ --
$24,976
--
--
(22)
1,117
3,303
5,018
22
3,370
$ 1,095
$36,689
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
2009 Compared to 2008
Year Ended December 31, 2007
Retail
Banking
$ --
3,684
1,364
21
247
Mortgage
Banking
$15,854
--
2,57
--
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
Total noninterest income increased 45.9 percent to $36.7 million in 2009 from $25.1 million in 2008. The
increase primarily resulted from (1) increased gains on sales of loans and ancillary fees associated with higher loan
originations in the Mortgage Banking segment in 2009, (2) higher bank card interchange fees and a fee received in
connection with a change in the debit card processor in the Retail Banking segment and (3) 2009 not having the $1.6
million other-than-temporary impairment in the Corporation’s holdings of perpetual preferred stock of Fannie Mae
and Freddie Mac that was recognized in 2008. The increase was offset in part by a $573,000 decline in overdraft
fees at the Retail Banking segment as a result of economic conditions over the past year, which have heightened
customer sensitivity to incurring such fees.
2008 Compared to 2007
Total noninterest income declined 2.8 percent to $25.1 million in 2008 in relation to 2007. 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 in the Other
34
segment offset increases in other income in the Retail Banking and Mortgage Banking segments. Noninterest
income at the Retail Banking segment increased during 2008 as a result of higher customer usage and a pricing
increase in 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 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.
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
2009 Compared to 2008
Year Ended December 31, 2009
Retail
Banking
$13,881
3,471
9,001
$26,353
Mortgage
Banking
Consumer
Finance
$15,381
1,808
7,566
$24,755
$5,183
408
2,305
$7,896
Other
$ 673
27
463
$1,163
Total
$35,118
5,714
19,335
$60,167
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
Total noninterest expense increased 22.0 percent to $60.2 million in 2009 as compared to $49.3 million in
2008. The Mortgage Banking segment reported higher variable personnel and operating expenses as a result of the
increase in loan production in 2009, as well as a $1.4 million increase in the provision for indemnification losses.
The Retail Banking segment reported higher operating expense predominantly arising from a $973,000 increase in
FDIC deposit insurance premiums, including the special assessment in 2009 to help replenish the DIF, and a $2.2
million increase in foreclosed property expenses and write-downs in 2009. Increases in personnel costs and
operating expenses at the Consumer Finance segment during 2009 resulted from staff additions to support loan
growth and operating expenses associated with loan production.
35
2008 Compared to 2007
Total noninterest expense increased 2.0 percent to $49.3 million in 2008 in relation to 2007. 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.
INCOME TAXES
Applicable income taxes on 2009 earnings amounted to $1.9 million, resulting in an effective tax rate of 26.0
percent, compared with $617,000, or 12.9 percent, in 2008 and $3.3 million, or 28.3 percent, in 2007. The increase in
the effective rate in 2009 in relation to 2008 resulted from higher pre-tax earnings at the non-bank business
segments, which are not exempt from state income taxes, which was offset in part by the increase in the Bank’s
municipal bond portfolio, which generates tax-exempt interest income. The decrease in the effective rate in 2008 in
relation to 2007 resulted from higher tax-exempt income on securities and loans as a percentage of pretax income.
36
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 mortgage
Real estate—construction
Commercial, financial and agricultural
Consumer
Consumer Finance
Total loans charged off
Recoveries of loans previously charged off:
Real estate—residential mortgage
Real estate—construction
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
2009
$19,806
Year Ended December 31,
2006
2007
2008
$13,064 $11,144
$14,216
$15,963
2005
6,400
563
11,600
18,563
1,655
2,234
1,110
190
10,988
16,177
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
3
11
27
63
1,731
1,835
14,342
$24,027
—
—
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
—
—
49
57
1,279
1,385
3,600
$14,216 $13,064
1.09%
.14%
—
.03%
.03%
5.18%
5.46%
3.65%
2.76%
3.33%
During 2009, there was a $1.9 million increase in the allowance for loan losses at the combined Retail
Banking and Mortgage Banking segments since December 31, 2008, and the provision for loan losses at these
combined segments increased $3.9 million in 2009 over 2008. These increases were attributable to the level of
nonperforming assets of the combined Retail Banking and Mortgage Banking segments as discussed below. Net
charge-offs for these combined segments increased $4.4 million year-over-year, which included write downs at the
Bank of several collateral-dependent commercial real estate relationships based on impairment analyses, which
indicated that their respective carrying values exceeded the fair market value of the underlying real estate
collateral. We believe that the current level of the allowance for loan losses at the combined Retail Banking and
Mortgage Banking segments is adequate to absorb any losses on existing loans that may become uncollectible. If
37
current economic conditions continue or worsen, a higher level of nonperforming loans may be experienced in
future periods, which may then require a higher provision for loan losses.
The Consumer Finance segment’s allowance for loan losses increased to $15.0 million at December 31, 2009
from $12.6 million at December 31, 2008, and its provision for loan losses increased $930,000 in 2009 over 2008. The
increase in the provision for loan losses was primarily attributable to loan growth and the current overall economic
environment. Net charge-offs at the Consumer Finance segment declined slightly during 2009 in relation to 2008
due to modifications in underwriting criteria that had been implemented several years ago, enhanced collection
efforts and improved resale values of repossessed vehicles. We believe that the current level of the allowance for
loan losses at the Consumer Finance segment is adequate to absorb any losses on existing loans that may become
uncollectible. However, if unemployment persists at or near current levels and if weakening consumer demand for
automobiles results in declining values of automobiles securing outstanding loans, a higher provision 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 Banking 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 or
management identifying problem loans to be reviewed on an individual basis for impairment. In addition to these
loans, all substandard commercial, construction and residential loans in excess of $500,000 are evaluated for
individual impairment testing. Impairment is measured 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. We then establish a specific allowance based on the difference between the
carrying value of the loan and its estimated 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
38
may not be a loan customer, may be unable to finish the construction project as planned because of
financial pressure unrelated to the project.
Commercial real estate loans may carry risks associated with the successful operation of a business or a real
estate project, in addition to other risks associated with the ownership of real estate, because the repayment
of these loans may be dependent upon the profitability and cash flows of the business or project.
Commercial business loans carry risks associated with the successful operation of a business, which is
usually the source of loan repayment, and the value of the collateral, which may depreciate over time and
cannot be appraised with as much precision as real estate.
Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value
of the collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are
more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or
personal bankruptcy.
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
2009
2008
2007
2006
2005
$ 1,295
$ 1,576
$ 684
$ 502
$ 402
281
7,022
211
267
14,951
--
483
4,752
167
220
267
3,384
143
265
12,608
11,220
--
--
136
3,031
134
326
9,890
197
202
3,776
124
214
8,346
--
$24,027
$19,806
$15,963
$14,216
$13,064
23%
2
39
5
1
30
100%
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%
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.
39
Nonperforming Assets
Table 7 summarizes nonperforming assets at December 31, of each of the past five years.
TABLE 7: Nonperforming Assets
Retail Banking 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.
2009
2008
2007
2006
2005
$ 4,812
$ 17,222
$ 495
$ 955
$ 4,083
204
12,360
440
1,460
1,370
596
732
—
—
—
—
—
—
—
—
$ 17,816
$ 20,648
$ 1,227
$ 955
$ 4,083
$ 451
$ 3,517
$ 578
$ 1,629
$ 3,826
$447,592
$480,438
$441,648
$399,195
$366,962
$ 9,076
$ 7,198
$ 4,743
$ 4,326
$ 4,718
3.87%
2.03
180.94
4.28%
1.50
38.53
0.28%
1.07
386.55
0.24%
1.08
1.11%
1.29
452.98
115.56
** Other real estate owned (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
2009
2008
2007
2006
2005
$ 387
$ 798
$ 1,388
$ 880
$ 1,819
$ —
$ —
$ —
$ 8
$ 26
$189,439
$172,385
$160,196
$132,864
$111,141
$ 14,951
$ 12,608
$ 11,220
$ 9,890
$ 8,346
0.20%
7.89%
0.46%
7.31%
0.87%
7.00%
0.66%
7.44%
1.64%
7.51%
Nonperforming assets of the Retail Banking segment totaled $17.2 million at December 31, 2009 compared
to $18.6 million at December 31, 2008. While there was a slight decrease of $1.4 million overall, the composition of
the Bank’s nonperforming assets shifted from nonaccrual loans to other real estate owned (OREO) assets. As
nonaccrual loans were charged-off during 2009, the Bank foreclosed and took possession of the underlying
collateral. The largest components of the Bank’s nonaccrual loans are three commercial relationships and one
individual borrower aggregating $4.3 million, which are secured by residential real estate, and for which specific
reserves totaling $1.1 million have been established. We believe we have provided adequate loan loss reserves
based on current appraisals of the collateral. In some cases, appraisals have been adjusted to reflect current trends
including sales prices, expenses, absorption periods and other current relevant factors. Nonaccrual loans also
include certain loans that have been modified in troubled debt restructurings (TDRs) where economic concessions
have been granted to borrowers who have experienced or are expected to experience financial difficulties. These
concessions typically are made for loss mitigation purposes and could include reductions in the interest rate,
payment extensions, forgiveness of principal, forbearance or other actions. At December 31, 2009, the Bank’s
nonaccrual loans, as presented in Table 7: Nonperforming Assets, included $277,000 of TDRs. TDRs that were
performing in accordance with their modified terms and excluded from nonperforming loans in Table 7:
Nonperforming Loans, were $2.8 million at December 31, 2009. There were no TDRs prior to 2009. The largest
component of the Bank’s foreclosed properties is $11.04 million of residential properties associated with five
commercial relationships. These properties have been written down to their estimated fair values based upon
40
current appraisals less selling costs. As with nonaccrual loans, in some cases appraisals were adjusted to reflect
current trends including sales prices, expenses, absorption periods and other current relevant factors.
Nonperforming assets of the Mortgage Banking segment totaled $644,000 at December 31, 2009 compared
to $2.1 million at December 31, 2008. This decrease resulted from sales of OREO, loan charge-offs and write-downs
of the carrying value of foreclosed properties to their fair values less costs to sell.
We have increased our allowance as a percentage of total loans at the combined Retail Banking and
Mortgage Banking segments largely as a result of the sustained deterioration in the economy, in particular the
housing market. We may continue to make adjustments to the allowance level in the future based upon changes in
our portfolios and general economic conditions.
Nonaccrual loans at the Consumer Finance segment have declined from $798,000 at December 31, 2008 to
$387,000 at December 31, 2009. Nonetheless, the allowance for loan losses increased from $12.6 million at
December 31, 2008 to $15.0 million at December 31, 2009, and the ratio of the allowance for loan losses to total
consumer finance loans increased 58 basis points, as a result of loan growth and our concern about general
employment levels and economic conditions. The Consumer Finance segment’s loan portfolio could be
immediately adversely affected by the ongoing effects of the economic recession. High unemployment levels,
decreased consumer demand for automobiles and declining values of automobiles securing outstanding loans
could increase the level of charge-offs. We may make adjustments to our allowance level in the future based upon
changes in our loan 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
41
methods will afford adequate protection against these risks. However, we believe that the current allowance for
loan losses is appropriate to absorb any losses on existing Consumer Finance segment loans that may become
uncollectible.
We generally place loans at the Retail Banking, Mortgage Banking and Consumer Finance segments on
nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is
uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the
borrower. Loans greater than 90 days past due may remain on accrual status if we determine we have adequate
collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are
first applied to principal outstanding. We would have recorded additional gross interest income of $668,000 for
2009, $439,000 for 2008 and $56,000 for 2007 if nonaccrual loans had been current throughout these periods.
Interest received on nonaccrual loans was $13,000 in 2009, $23,000 in 2008 and $219,000 in 2007.
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 once
engaged by C&F Finance. 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 $5.0 million and $16.8 million at December 31, 2009 and 2008,
respectively, for which there was a $1.1 million and $940,000 specific valuation allowance at December 31, 2009 and
2008, respectively. The average balance of impaired loans was $12.4 million for 2009, $5.8 million for 2008 and
$557,000 for 2007.
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, 2009, the Corporation had total assets of $888.4 million compared to $855.7 million at
December 31, 2008. The increase was principally a result of increases in interest-earning deposits in other banks,
42
investment securities available for sale, loans held for investment at C&F Finance and other assets including the
amount prepaid to the FDIC for insurance premiums through 2012 and the growth in the Corporation’s deferred
tax asset. These increases were offset in part by a decline in loans held for investment at the Bank and loans held
for sale at C&F Mortgage.
LOAN PORTFOLIO
General
Through the Retail Banking segment, we engage in a wide range of lending activities, which include the
origination, primarily in the Retail 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, 2009, the
Corporation’s loans held for investment in all categories totaled $637.0 million and loans held for sale totaled $28.8
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,
2009
2008
2007
2006
2005
$ 147,850
$ 141,341
$ 122,705
$ 115,557
$ 96,423
14,053
245,759
32,220
7,710
189,439
637,031
(24,027)
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)
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.
$613,004
$517,843
$633,017
$585,881
$465,039
(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
TABLE 9: Maturity/Repricing Schedule of Loans
December 31, 2009
Commercial, Financial,
Real Estate
and Agricultural
Construction
$120,156
$8,978
--
--
$ 19,914
71,139
34,550
--
--
$5,075
--
--
43
The decline in total loans occurred primarily in the consumer real estate-construction and commercial
categories as a result of the slowdown in new residential construction, coupled with the foreclosure of residential
real estate securing several commercial relationships.
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, Freddie Mac and/or the applicable third party investor. 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, the VA and/or the applicable third party
investor. 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, 15 and 30 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: Summary of Loans Held for Investment.
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
44
variable. The Bank does not generally finance the construction of commercial real estate projects built on a
speculative basis. For residential builder loans, the Bank limits the number of models and/or speculative units
allowed depending on market conditions, the builder’s financial strength and track record and other factors.
Generally, the maximum loan-to-value ratio for one-to-four family residential construction loans is 80 percent of
the property’s fair market value, or 85 percent of the property’s fair market value if the property will be the
borrower’s primary residence. The fair market value of a project is determined on the basis of an appraisal of the
project conducted by an appraiser acceptable to the Bank. For larger projects where unit absorption or leasing is a
concern, the Bank may also obtain a feasibility study or other acceptable information from the borrower or other
sources about the likely disposition of the property following the completion of construction.
Construction loans for nonresidential projects and multi-unit residential projects are generally larger and
involve a greater degree of risk to the Bank than residential mortgage loans. The Bank attempts to minimize such
risks (1) by making construction loans in accordance with the Bank’s underwriting standards and to established
customers in its primary market area and (2) by monitoring the quality, progress and cost of construction.
Generally, the maximum loan-to-value ratio established by the Bank for non-residential projects and multi-unit
residential projects is 80 percent; however, this maximum can be waived for particularly strong borrowers on an
exception basis.
Loans associated with construction lending are included in the real estate—construction category in Table
8: Summary of Loans Held for Investment.
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 his or her intention to build and
occupy a single-family residence on the lot. 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: Summary of Loans Held for Investment.
Commercial Real Estate Lending
The Bank’s commercial real estate loans are primarily secured by the value of real 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
45
commercial real estate loans under the following two conditions. First, the Bank will consider making commercial
real estate loans for other purposes if the borrower is in strong financial condition and presents a substantial
business opportunity for the Bank. Second, the Bank will consider making commercial real estate loans to
creditworthy borrowers who have substantially pre-leased the improvements to high-caliber tenants.
The Bank’s commercial real estate loans are usually amortized over a period of time ranging from 15 years
to 25 years and usually have a term to maturity ranging from five years to 15 years. These loans normally have
provisions for interest rate adjustments after the loan is three to five years old. The Bank’s maximum loan-to-value
ratio for a commercial real estate loan is 80 percent; however, this maximum can be waived for particularly strong
borrowers on an exception basis. Most commercial real estate loans are further secured by one or more
unconditional personal guarantees.
In recent years, the Bank has structured some of its commercial real estate loans as mini-permanent loans.
The amortization period, term and interest rates for these loans vary based on borrower preferences and the Bank’s
assessment of the loan and the degree of risk involved. If the borrower prefers a fixed rate of interest, the Bank
usually offers a loan with a fixed rate of interest for a term of three to five years with an amortization period of up
to 25 years. The remaining balance of the loan is due and payable in a single balloon payment at the end of the
initial term. We believe these loan terms 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: Summary of Loans Held for Investment.
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
46
development and improved lots and 80 percent of the discounted appraised value of the property as determined in
accordance with the Bank’s appraisal policies for developed lots for single-family or townhouse construction. The
Bank can waive the maximum loan-to-value ratio for particularly strong borrowers on an exception basis. The term
of land acquisition and development loans ranges from a maximum of two years for loans relating to the
acquisition of unimproved land to, generally, a maximum of three years for other types of projects. All land
acquisition and development loans generally are further secured by one or more unconditional personal
guarantees. Because these loans are usually in a larger amount and involve more risk than consumer lot loans, the
Bank carefully evaluates the borrower’s assumptions and projections about market conditions and absorption rates
in the community in which the property is located and the borrower’s ability to carry the loan if the borrower’s
assumptions prove inaccurate.
Loans associated with land acquisition and development lending are included in the commercial, financial
and agricultural category in Table 8: Summary of Loans Held for Investment.
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: Summary of Loans Held for Investment.
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. 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: Summary of Loans Held for Investment.
47
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: Summary of
Loans Held for Investment.
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:
Summary of Loans Held for Investment.
48
SECURITIES
The investment portfolio plays a primary role in the management of the Corporation’s interest rate
sensitivity. 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.
Table 10 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.
TABLE 10: Securities Available for Sale
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Total debt securities
Preferred stock
Total available for sale securities
December 31, 2009
Percent
Amount
$ 9,743
2,709
104,867
117,319
1,251
$ 118,570
9%
2
88
99
1
100%
December 31, 2008
Amount
$ 11,162
2,318
85,511
98,991
1,612
$100,603
Percent
11%
2
85
98
2
100%
Growth in debt securities occurred in the Bank’s portfolio of obligations of states and political subdivisions
as a result of the Bank’s strategy to increase the securities portfolio as a percentage of total assets.
49
Table 11 presents additional information pertaining to the composition of the securities portfolio by the earlier of
contractual maturity or expected maturity. Expected maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without call or prepayment penalties.
TABLE 11: 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 5 years, but within 10 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,
2009
2008
2007
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Cost
Yield
Cost
Yield
Cost
Yield
$ 4,534
2.90% $ 2,000
5.14%
$ 250
3.50%
3,616
3.62
--
1,622
9,772
686
1,137
805
--
--
5.56
3.61
4.32
4.12
4.43
--
--
1,249
7,859
11,108
162
1,105
--
997
2,628
4.27
2,264
7,463
22,338
46,606
26,690
103,097
12,683
27,091
47,411
28,312
6.24
5.95
6.29
6.30
6.22
4.94
5.56
6.26
6.26
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
--
--
1,776
4.64
4,005
18,595
28,167
16,442
5.32
6.24
6.47
6.21
67,209
6.27
4,409
22,215
31,140
18,667
5.21
5.93
6.39
6.21
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 $1.3 million at December 31, 2009, $1.6 million at December 31,
2008 and $4.0 million at December 31, 2007 (estimated fair value of $1.3 million at December 31, 2009, $1.6 million at December
31, 2008 and $3.9 million at December 31, 2007).
$115,497
$99,214
$76,431
5.95%
6.18%
6.14%
50
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 $606.6 million at December 31, 2009, compared to $550.7 million at December 31, 2008,
with the increase primarily due to a $45.6 million increase in time deposits. The increase in noninterest-bearing
demand and lower-costing transaction accounts occurred due to our deposit strategies that emphasize retention of
multi-service customer relationships. Growth in time deposits occurred in the shorter-term time deposits of
municipalities and retail depositors through-out our branch network. The increase in time deposits for our retail
depositors was a result of overall growth at the branches and the fact that many customers are holding cash to
maintain flexibility in their investing options due to the volatility in the stock market. The Corporation had no
brokered certificates of deposit outstanding at December 31, 2009, compared to $10.0 million outstanding at
December 31, 2008.
Table 12 presents the average deposit balances and average rates paid for the years 2009, 2008 and 2007.
TABLE 12: Average Deposits and Rates Paid
Year Ended December 31,
2009
2008
2007
(Dollars in thousands)
Noninterest-bearing demand deposits
Interest-bearing transaction accounts
Money market deposit accounts
Savings accounts
Certificates of deposit, $100 thousand or more
Other certificates of deposit
Total interest-bearing deposits
Total deposits
Average
Balance
$ 85,811
86,478
66,562
41,449
119,246
176,657
490,392
$576,203
Average
Rate
0.74%
1.54
0.11
2.88
2.93
2.10%
Average
Balance
$ 83,533
82,560
68,406
42,445
99,726
167,849
460,986
$544,519
Average
Rate
Average
Average
Balance
Rate
1.01%
2.48
0.25
4.10
3.94
2.89%
$ 84,365
82,109
51,624
45,452
99,653
169,431
448,269
$532,634
1.11%
2.97
0.66
4.73
4.41
3.33%
Table 13 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2009.
TABLE 13: Maturities of Certificates of Deposit with Balances of $100,000 or More
(Dollars in thousands)
3 months or less
3-6 months
6-12 months
Over 12 months
Total
December 31, 2009
$ 15,795
24,784
49,514
52,944
$143,037
51
BORROWINGS
In addition to deposits, the Corporation utilizes short-term borrowings from the Federal Reserve Bank, and
to a lesser extent the FHLB, to fund its day-to-day operations. Short-term borrowings also include securities sold
under agreements to repurchase, which are secured transactions with customers and generally mature the day
following the day sold, 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 of the Bank’s qualifying closed-end and revolving, open-end loans secured by 1-4 family residential
properties. All Federal Reserve Bank advances are secured by loan-specific liens on certain qualifying loans of C&F
Bank that are 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 the Bank’s securities portfolio.
In December, 2007, 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, 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 8: 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 $74.0 million at December 31, 2009 and $75.0 million at
December 31, 2008.
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,
52
whose contract amounts represent credit risk, was $8.9 million at December 31, 2009 and $7.8 million at December
31, 2008.
At December 31, 2009, C&F Mortgage had rate lock commitments to originate mortgage loans aggregating
$47.7 million and loans held for sale of $28.8 million. C&F Mortgage has entered into corresponding commitments
with third party investors to sell loans of approximately $76.4 million. Under the contractual relationship with
these investors, C&F Mortgage is obligated to sell the loans, and the investor is obligated to purchase 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 loss due to borrower misrepresentation, fraud or
early default. 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 $554,000 in 2009, $600,000 in 2008 and
$84,000 in 2007. Risks also arise from the possible inability of counterparties to meet the terms of their contracts.
C&F Mortgage has procedures in place to evaluate the credit risk of investors and does not expect any counterparty
to fail to meet its obligations.
LIQUIDITY
The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to
satisfy the credit needs of our customers and the demands of our depositors, creditors and investors. Stable core
deposits and a strong capital position are the components of a solid foundation for the Corporation’s liquidity
position. Additional sources of liquidity available to the Corporation include cash flows from operations, loan
payments and payoffs, deposit growth, sales of securities, the issuance of brokered certificates of deposit and the
capacity to borrow additional funds.
Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and
nonpledged securities available for sale, totaled $67.7 million at December 31, 2009. The Corporation’s funding
sources consist of (1) federal funds lines with correspondent banks totaling $36.0 million that had no outstanding
balance as of December 31, 2009, (2) a $93.5 million line with the FHLB that had $52.5 million outstanding as of
December 31, 2009, (3) a $120.0 million revolving line of credit with a third-party bank that had $81.6 million
outstanding as of December 31, 2009 and (4) a $65.2 million line with the Federal Reserve Bank that had $5.0
million outstanding as of December 31, 2009. We have no reason to believe these arrangements will not be
renewed at maturity.
53
Certificates of deposit of $100,000 or more, maturing in less than a year, totaled $90.1 million at December
31, 2009; certificates of deposit of $100,000 or more, maturing in more than one year, totaled $52.9 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, 2009:
CONTRACTUAL OBLIGATIONS
(Dollars in thousands)
Payments Due by Period
Bank lines of credit
FHLB advances1
Federal Reserve Bank
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
$ 81,630
52,500
$ --
--
$ 81,630
17,500
$ --
12,500
$ --
22,500
5,000
5,000
--
--
--
20,620
--
--
--
20,620
11,082
2,432
6,082
1,091
--
1,210
--
131
5,000
--
$100,340
$173,264
$12,173
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 8: Borrowings.”
$48,120
$12,631
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.
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 9: Shareholders’ Equity, Other Comprehensive Income and Earnings Per Common Share.”
54
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 assets ratio was 14.6 percent at December 31, 2009, compared with
10.8 percent at December 31, 2008. The total capital to risk-weighted assets ratio was 15.9 percent at December 31,
2009, compared with 12.3 percent at December 31, 2008. The Tier 1 leverage ratio was 11.5 percent at December 31,
2009, compared with 8.9 percent at December 31, 2008. These ratios are in excess of the mandated minimum
requirements. These ratios include the trust preferred securities issued in December 2007 and July 2005, as well as
the $20.0 million of Series A Preferred Stock sold to the Treasury under its Capital Purchase Program in January
2009, in Tier 1 capital for regulatory capital adequacy determination purposes.
Shareholders’ equity was $88.9 million at year-end 2009 compared with $64.9 million at year-end 2008.
During 2009, the Corporation declared common stock dividends of $1.06 per share, compared to $1.24 per share
declared in 2008 and in 2007. The dividend payout ratio, based on net income available to common shareholders,
was 73.5 percent in 2009, 89.8 percent in 2008 and 44.5 percent in 2007.
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 Significant Accounting Pronouncements.”
EFFECTS OF INFLATION
The effect of changing prices is typically different for financial institutions than for other entities because a
financial institution’s assets and liabilities are monetary in nature. Interest rates are significantly impacted by
inflation, but neither the timing nor the magnitude of the changes is directly related to price-level indices. The
consolidated financial statements reflect the impacts of inflation on interest rates, loan demands and deposits.
USE OF CERTAIN NON-GAAP FINANCIAL MEASURES
In addition to results presented in accordance with United States generally accepted accounting principles
(GAAP), we have presented certain non-GAAP financial measures for the year ended December 31, 2008
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 permits 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.
55
Reconciliation of Certain Non-GAAP Financial Measures
(Dollars in thousands, except for per share data)
For the Year Ended
December 31, 2008
Net Income and Earnings Per Share
Net income available to common shareholders (GAAP)
Other-than-temporary impairment on Fannie Mae and
Freddie Mac preferred stock, net of income tax
benefit (GAAP)
Net income, excluding other-than-temporary impairment on
Fannie Mae and Freddie Mac preferred stock
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
Earnings per share – basic
GAAP
Excluding other-than-temporary impairment on
Fannie Mae and Freddie Mac preferred stock
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
Return on Average Common Equity
Average common equity (GAAP)
Return on average common equity
GAAP
Excluding other-than-temporary impairment on
Fannie Mae and Freddie Mac preferred stock
Other and Eliminations Segment
Net income (loss) (GAAP)
Other-than-temporary impairment on Fannie Mae and
Freddie Mac preferred stock, net of income tax
benefit (GAAP)
Net income (loss), excluding other-than-temporary
impairment on Fannie Mae and Freddie Mac preferred
stock
*
A
B
C
D
A/C
B/C
A/D
B/D
$4,181
976
$5,157
3,058
3,028
$1.37
$1.69
$1.38
$1.70
E
$819,999
A/E
B/E
F
A/F
B/F
0.51%
0.63%
$65,402
6.39%
7.89%
$ (1,694)
976
$ (718)
* 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.
56
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,
2009.
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
57
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, 2009, indicate that the Corporation would expect net interest income to
decrease over the next twelve months 2.59 percent assuming an immediate downward shift in market interest rates
of 200 basis points (BP) and to increase 0.50 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, 2010
Dollars
($1,364)
$262
Percentage
(2.59%)
0.50%
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, 2009 indicate
that the EVE would increase 5.81 percent assuming an immediate downward shift in market interest rates of 200 BP
and would decrease 13.14 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
$5,965
($13,499)
5.81%
(13.14%)
In the net interest income simulation above, net interest increases over the next twelve months in the event
of an immediate upward shift in interest rates, but declines in the event of an immediate downward shift in interest
rates. In a rising rate environment, the Corporation’s assets would reprice quicker than what the Corporation pays
on its borrowings and deposits primarily due to the shorter maturity or repricing dates of its cash equivalents and
loan portfolios. However, in a falling rate environment the simulation assumes 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.
The EVE analysis above indicates a decline in the EVE in an immediate upward shift in interest rates, but
an increase in the EVE in an immediate downward shift in interest rates. Given the longer time horizon of the
analysis, the Corporation’s assets would take longer to reprice than what the Corporation pays on its borrowings
and due to the longer maturity or repricing dates of its investment and loan portfolios as compared to time deposits
and borrowings.
58
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, and the investor is obligated to purchase the loan, 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.
59
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share and per share amounts)
Assets
Cash and due from banks
Interest-bearing deposits in other banks
Total cash and cash equivalents
Securities—available for sale at fair value, amortized cost of
$116,774 and $100,778, respectively
Loans held for sale, net
Loans, net of allowance for loan losses of $24,027 and $19,806, respectively
Federal Home Loan Bank stock, at cost
Corporate premises and equipment, net
Other real estate owned, net of valuation allowance of $2,402 and $73, respectively
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
December 31,
2009
2008
$ 8,434
29,627
38,061
$ 9,727
161
9,888
118,570
28,756
613,004
3,887
29,490
12,800
5,408
10,724
27,730
$ 888,430
$ 83,708
208,388
314,534
606,630
11,082
139,130
20,620
1,569
20,523
799,554
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
Commitments and contingent liabilities
—
—
Shareholders’ Equity
Preferred stock ($1.00 par value, 3,000,000 shares authorized,
20,000 and 0 shares issued and outstanding, respectively)
Common stock ($1.00 par value, 8,000,000 shares authorized,
3,067,666 and 3,037,441 shares issued and outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
20
--
3,009
21,210
63,669
968
88,876
$ 888,430
2,992
551
62,361
(1,047)
64,857
$ 855,657
60
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2008
2007
2009
$60,116
6
$59,853
28
$ 60,938
443
418
4,208
223
64,971
1,711
3,433
5,174
4,071
1,070
15,459
49,512
18,563
30,949
24,976
3,303
5,018
22
—
3,370
36,689
35,118
5,714
19,335
60,167
7,471
1,945
5,526
1,130
$ 4,396
$ 1.44
$ 1.44
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
—
$ 4,181
$ 1.38
$ 1.37
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
—
$ 8,480
$ 2.77
$ 2.67
(Dollars in thousands, except per share amounts)
Interest income
Interest and fees on loans
Interest on money market investments
Interest and dividends on securities
U.S. government agencies and corporations
Tax-exempt obligations of states and political subdivisions
Corporate bonds and other
Total interest income
Interest expense
Savings and interest-bearing deposits
Certificates of deposit, $100 thousand 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
Effective dividends on preferred stock
Net income available to common shareholders
Earnings per common share—basic
Earnings per common share—assuming dilution
See notes to consolidated financial statements.
61
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Balance December 31, 2006
Comprehensive income:
Net income
Other comprehensive income (loss), net
Changes in defined benefit plan assets and benefit
obligations, net
Unrealized holding losses on securities, net of
reclassification adjustment
Other comprehensive income, net
Comprehensive income
Purchase of common stock
Stock options exercised
Share-based compensation
Cash dividends paid ($1.24 per share)
Balance December 31, 2007
Comprehensive income:
Net income
Other comprehensive loss, net
Changes in defined benefit plan assets and benefit
obligations, net
Unrealized holding losses on securities, net of
reclassification adjustment
Other comprehensive loss, net
Comprehensive income
Purchase of common stock
Stock options exercised
Share-based compensation
Reduction due to change in pension measurement date
Cash dividends paid ($1.24 per share)
Balance December 31, 2008
Comprehensive income:
Net income
Other comprehensive income, net
Changes in defined benefit plan assets and benefit
obligations, net
Unrealized holding gains on securities, net of
reclassification adjustment
Other comprehensive income, net
Comprehensive income
Stock options exercised
Share-based compensation
Issuance of preferred stock and warrant
Accretion of preferred stock discount
Cash dividends paid – common stock ($1.06 per share)
Cash dividends paid – preferred stock (5% per annum)
Balance December 31, 2009
$ 20
See notes to consolidated financial statements.
Preferred
Stock
$ —
Common
Stock
$ 3,159
Additional
Paid-In
Capital
$ 324
Retained
Earnings
$ 64,402
Accumulated Other
Comprehensive
Income (Loss)
$ 121
Total
Shareholders’
Equity
$ 68,006
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20
—
—
—
—
—
301
(225)
76
—
—
—
—
—
197
—
—
(591)
(653)
(1,244)
—
—
—
—
—
—
(1,047)
—
—
734
1,281
2,015
—
—
—
—
—
—
—
$ 968
8,480
76
8,556
(8,435)
567
299
(3,769)
65,224
4,181
(1,244)
2,937
(40)
312
292
(114)
(3,754)
64,857
5,526
2,015
7,541
326
318
19,914
—
(3,230)
(850)
$ 88,876
8,480
—
—
—
—
—
(7,065)
—
—
(3,769)
62,048
4,181
—
—
—
—
—
—
—
—
(114)
(3,754)
62,361
5,526
—
—
—
—
—
—
—
—
(138)
(3,230)
(850)
$ 63,669
—
—
—
—
—
—
(204)
24
—
—
2,979
—
—
—
—
—
—
(1)
14
—
—
—
2,992
—
—
—
—
—
—
—
—
—
(1,166)
543
299
—
—
—
—
—
—
—
—
(39)
298
292
—
—
551
—
—
—
—
—
—
17
—
—
—
—
—
$ 3,009
—
—
—
309
318
19,894
138
—
—
$ 21,210
62
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation
Deferred income taxes
Provision for loan losses
Provision for other real estate owned losses
Share-based compensation
Accretion of discounts and amortization of premiums on securities, net
Net realized gain on securities
Net realized loss on sale of other real estate owned
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 redemptions (purchases) of FHLB stock
Investment in statutory trust
Net increase in customer loans
Proceeds from sales of other real estate owned
Purchases of corporate premises and equipment, net
Net cash used in investing activities
Financing activities:
Net increase (decrease) in demand, interest-bearing demand
and savings deposits
Net increase in time deposits
Net (decrease) increase in borrowings
Issuance of trust preferred capital notes
Issuance of preferred stock
Purchases of common stock
Proceeds from exercise of stock options
Cash dividends
Net cash provided by financing activities
Net increase (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
Supplemental disclosure of noncash investing and financing activities
Unrealized gains (losses) on securities available for sale
Loans transferred to other real estate owned
Pension adjustment
See notes to consolidated financial statements.
63
Year Ended December 31,
2008
2009
2007
$ 5,526
$ 4,181
$ 8,480
2,067
(3,477)
18,563
2,614
318
172
(22)
93
—
(1,063,108)
1,071,394
(312)
(4,579)
(352)
2,944
31,841
23,139
(39,286)
1,397
—
(15,424)
3,495
(426)
(27,105)
10,269
45,636
(48,628)
—
19,914
—
326
(4,080)
23,437
28,173
9,888
$ 38,061
2,381
(2,672)
13,766
296
292
55
(234)
8
1,575
(749,177)
746,218
(27)
1,637
(194)
2,912
21,017
18,516
(40,265)
(897)
—
(64,163)
990
(658)
(86,477)
2,563
(1,112)
7,130
—
299
50
(21)
—
—
(828,379)
847,800
(637)
(1,106)
200
(1,554)
33,713
6,189
(20,235)
(2,294)
(310)
(75,168)
—
(2,228)
(94,046)
17,205
5,949
43,413
—
—
(40)
312
(3,754)
63,085
(2,375)
12,263
$ 9,888
(14,088)
8,824
50,681
10,310
—
(8,435)
567
(3,769)
44,090
(16,243)
28,506
$ 12,263
$ 15,811
4,231
$ 21,589
3,116
$ 23,178
4,087
$ 1,970
(16,874)
1,129
$ (1,005)
(3,261)
(909)
$ (347)
--
463
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 (U.S. GAAP) 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 and Certified Appraisals LLC, 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. 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 17.
Basis of Presentation: The preparation of financial statements in conformity with U.S. GAAP 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 allowance for indemnifications, impairment of loans, impairment of securities, the valuation of other real
estate owned, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred
taxes and goodwill impairment. In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial
statements, have been made. Certain reclassifications have been made to prior period amounts to conform to the
current year presentation.
Significant Group Concentrations of Credit Risk: Substantially all of the Corporation’s lending activities are with
customers located in Virginia, Maryland, Tennessee and North Carolina. At December 31, 2009, 38.6 percent of the
Corporation’s 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. In addition, 30% of the Corporation’s loan portfolio consisted of non-prime
consumer finance loans to individuals, secured by automobiles. The Corporation does not have any significant
loan concentrations to any one customer. 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. The Corporation does not have any significant securities concentrations in any one industry
or to any one issuer. Note 2 discusses the Corporation’s investment activities.
64
Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, cash and cash equivalents
include cash, balances due from banks and interest-bearing deposits in banks, all of which mature within 90 days.
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31,
2009 and 2008, these reserve balances amounted to $147,000 and $315,000, respectively.
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
specific security sold. Purchase premiums and discounts are recognized in interest income using the interest
method over the terms of the securities.
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities,
impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend
to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its
amortized cost basis. If, however, we do not intend to sell the security and it is not more-likely-than-not that we
will be required to sell the security before recovery, we must determine what portion of the impairment is
attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of
the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary
impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be
recognized in net income and the remaining portion of impairment must be recognized in other comprehensive
income. For equity securities, impairment is considered to be other-than-temporary based on our ability and intent
to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security
results in a write-down that must be included in net income. We regularly review each investment security for
other-than-temporary 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, our best estimate of the
present value of cash flows expected to be collected from debt securities, our intention with regard to holding the
security to maturity and the likelihood that we would be required to sell the security before recovery.
Loans Held for Sale: Loans held for sale are carried at the lower of cost or estimated fair value, determined in the
Fair value considers commitment agreements with investors and prevailing market prices.
aggregate.
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, construction and residential loans in excess of $500,000 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
65
identify individual consumer, residential and certain small commercial 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 trends in
delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions
which may affect a borrower’s ability to repay and the value of collateral, 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 impaired, and 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 those loans classified as doubtful, substandard or special mention, and is based on historical
loss experience adjusted for qualitative factors, such as current economic conditions.
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, and the purchaser is obligated to buy the loan, 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 demonstrated borrower misrepresentation, fraud 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 Financial Accounting Standards Board (FASB) Topic 320-10: Investments – Debt and Equity Securities.
Other Real Estate Owned (OREO): Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at the lower of the loan balance or the fair value less costs to sell at the date of foreclosure.
66
Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated
appraisals, general market conditions, recent sales of like properties, 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. Revenue and expenses from operations and changes in the property
valuations 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 included in income.
Goodwill: Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test.
Additionally, 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 2009 and it was determined there
was no impairment to be recognized in 2009.
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: The Corporation recognizes the overfunded or underfunded status of its defined benefit
postretirement plan as an asset or liability in the balance sheet and recognizes changes in the plan’s 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 the Corporation’s
pension plan, the benefit obligation is the projected benefit obligation as of December 31. In addition, enhanced
disclosures 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 are presented in
the notes to financial statements. Valuations in 2009 and 2008 determined that the Corporation’s pension plan was
67
underfunded. As a result, the Corporation recognized pension liabilities of $431,000 at December 31, 2009 and
$2.05 million at December 31, 2008, and recognized a net gain of $734,000 in 2009, 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 of
the funded status of the plan. The Corporation’s pension plan is described more fully in Note 11.
Share-Based Compensation: 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, 2009, 2008 and 2007 included $318,000 ($197,000 after tax), $292,000
($181,000 after tax) and $299,000 ($186,000 after tax), respectively, for options and restricted stock granted during
2006 through 2009. As of December 31, 2009, there was $931,000 of unrecognized compensation expense related to
unvested restricted stock that will be recognized over the remaining vesting periods. The Corporation estimates
forfeitures when recognizing compensation expense and this estimate of forfeitures is 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. The Corporation’s share-based compensation plans are described more
fully in Note 13.
Earnings Per Common Share: In June 2008, the FASB concluded that all outstanding unvested share-based
payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common
shareholders. This conclusion 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.
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 (EPS). The transition guidance requires an entity to
retroactively adjust all prior-period EPS computations. The Corporation adopted the two-class method of
computing basic and diluted EPS effective January 1, 2009, and has applied it to its EPS calculations for the years
ended December 31, 2009, 2008 and 2007 because the Corporation’s unvested restricted shares outstanding contain
rights to nonforfeitable dividends. Accordingly, the weighted average number of common shares used in the
calculation of basic and diluted EPS includes both vested and unvested common shares outstanding. The
retroactive adjustments made to the EPS computations resulted in a reduction of $0.02 in basic EPS and a reduction
of $0.01 in diluted EPS for both 2008 and 2007. EPS calculations are presented in Note 9.
Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and
losses on available for sale securities 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. See also Note 9 for further information.
Recent Significant Accounting Pronouncements:
Adoption of New Accounting Standards:
In June 2009, the FASB issued new accounting guidance related to U.S. GAAP (FASB Accounting Standards
Codification (FASB ASC) 105, Generally Accepted Accounting Principles). This guidance establishes FASB ASC as the
source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws
are also sources of authoritative U.S. GAAP for SEC registrants. FASB ASC supersedes all existing non-SEC
accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in
FASB ASC has become nonauthoritative. FASB will no longer issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(ASUs), which will serve to update FASB ASC, provide background information about the guidance and provide
68
the basis for conclusions on the changes to FASB ASC. FASB ASC is not intended to change U.S. GAAP or any
requirements of the SEC.
The Corporation adopted new guidance impacting ASC Topic 805: Business Combinations (“Topic 805”) on
January 1, 2009. This guidance requires the acquiring entity in a business combination to recognize the full fair
value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes
the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires
expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other
users all of the information needed to evaluate and understand the nature and financial effect of the business
combination. The adoption of the new guidance did not have a material effect on the Corporation’s consolidated
financial statements.
In April 2009, the FASB issued new guidance affecting Topic 805. This guidance addresses application issues
raised by preparers, auditors and members of the legal profession on initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a
business combination. This guidance was effective for business combinations entered into on or after January 1,
2009. This guidance did not have a material effect on the Corporation’s consolidated financial statements.
In December 2008, the FASB issued new guidance affecting ASC Topic 715-20: Compensation Retirement Benefits –
Defined Benefit Plans – General. The objectives of this guidance are to provide users of the financial statements with
more detailed information related to the major categories of plan assets, the inputs and valuation techniques used
to measure the fair value of plan assets and the effect of fair value measurements using significant unobservable
inputs (Level 3) on changes in plan assets for the period, as well as how investment allocation decisions are made,
including the factors that are pertinent to an understanding of investment policies and strategies. The disclosures
about plan assets required by this guidance are included in Note 11.
In April 2009, the FASB issued new guidance impacting ASC Topic 820: Fair Value Measurements and Disclosures
(Topic 820). This interpretation provides additional guidance for estimating fair value when the volume and level
of activity for the asset or liability have significantly decreased. This also includes guidance on identifying
circumstances that indicate a transaction is not orderly and requires additional disclosures of valuation inputs and
techniques in interim periods and defines the major security types that are required to be disclosed. This guidance
was effective for interim and annual periods ending after June 15, 2009, and should be applied prospectively. The
adoption of the standard did not have a material effect on the Corporation’s consolidated financial statements.
In April 2009, the FASB issued new guidance impacting ASC Topic 320-10: Investments – Debt and Equity Securities.
This guidance amends U.S. GAAP for debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial
statements. This guidance was effective for interim and annual periods ending after June 15, 2009, with earlier
adoption permitted for periods ending after March 15, 2009. The Corporation did not have any cumulative effect
adjustment related to the adoption of this guidance.
In May 2009, the FASB issued new guidance impacting ASC Topic 855: Subsequent Events. This update provides
guidance on management’s assessment of subsequent events that occur after the balance sheet date through the
date that the financial statements are issued. This guidance is generally consistent with current accounting practice.
This guidance was effective for periods ending after June 15, 2009 and had no effect on the Corporation’s
consolidated financial statements.
In August 2009, the FASB issued new guidance impacting Topic 820. This guidance is intended to reduce
ambiguity in financial reporting when measuring the fair value of liabilities. This guidance was effective for the
first reporting period (including interim periods) after issuance and had no effect on the Corporation’s consolidated
financial statements.
In September 2009, the FASB issued new guidance impacting Topic 820. This creates a practical expedient to
measure the fair value of an alternative investment that does not have a readily determinable fair value. This
69
guidance also requires certain additional disclosures. This guidance is effective for interim and annual periods
ending after December 15, 2009. The adoption of this guidance did not have a material effect on its consolidated
financial statements.
Accounting Standards Not Yet Effective:
In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new
guidance, which was issued as Statement of Financial Accounting Standard (SFAS) No. 166, Accounting for Transfers
of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the
issuance of ASU 2009-16. The new standard provides guidance to improve the relevance, representational
faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer
of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets. The Corporation will adopt the new
guidance in 2010 and is evaluating the effect it will have, if any, on its consolidated financial statements.
In June 2009, the FASB issued new guidance relating to the variable interest entities. The new guidance, which was
issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December
2009 through the issuance of ASU 2009-17 and updates ASC Topic 810: Consolidation (ASC Topic 810). The objective
of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to
provide more relevant and reliable information to users of financial statements. ASC Topic 810 is effective as of
January 1, 2010. The Corporation does not expect the adoption of the new guidance to have a material effect on its
consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 amends Subtopic 820-10 to clarify existing
disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures
about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after
December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. The Corporation does not expect the adoption
of ASU 2010-06 to have a material effect on its consolidated financial statements.
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
70
Amortized
Cost
$ 9,772
Gross
Unrealized
Gains
December 31, 2009
Gross
Unrealized
Losses
$ (62)
--
(374)
(85)
$(521)
$ 33
2,628 81
2,144
59
$2,317
103,097
1,277
$116,774
Estimated
Fair Value
$ 9,743
2,709
104,867
1,251
$118,570
(Dollars in thousands)
Available for Sale
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Preferred stock
Amortized
Cost
$ 11,108
2,264
85,842
1,564
$100,778
Gross
Unrealized
Gains
December 31, 2008
Gross
Unrealized
Losses
$ (5)
--
(1,189)
(98)
$(1,292)
$ 59
54
858
146
$1,117
Estimated
Fair Value
$ 11,162
2,318
85,511
1,612
$100,603
The amortized cost and estimated fair value of securities at December 31, 2009 and 2008, by the earlier of
contractual maturity or expected 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, 2009
December 31, 2008
Amortized
Cost
$ 12,683
27,091
47,411
28,312
1,277
$116,774
Estimated
Fair Value
$ 12,762
27,356
48,236
28,965
1,251
$118,570
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 2009 were $23.14 million, resulting in
gross realized gains of $48,000 and gross realized losses of $26,000, in 2008 were $18.52 million, resulting in gross
realized gains of $253,000 and gross realized losses of $19,000, and in 2007 were $6.19 million, resulting in gross
realized gains of $21,000.
The Corporation pledges securities to secure public deposits, Federal Reserve Bank treasury, tax and loan deposits
and repurchase agreements. Securities with an aggregate amortized cost of $87.44 million and an aggregate fair
value of $88.90 million were pledged at December 31, 2009. 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.
Securities in an unrealized loss position at December 31, 2009, by duration of the period of the unrealized loss, are
shown below.
(Dollars in thousands)
U.S. government agencies
and corporations
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
$ 3,298
$ 62
$ --
$ --
$ 3,298
$ 62
18,872
22,170
401
255
317
13
2,853
2,853
408
119
119
72
21,725
25,023
809
374
436
85
securities
$22,571
$ 330
$3,261
$ 191
$25,832
$ 521
There are 80 debt securities totaling $25.02 million considered temporarily impaired at December 31, 2009. The
primary cause of the temporary impairments in the Corporation’s investments in debt securities was fluctuations in
interest rates. Because the Corporation intends to hold these investments in debt securities to maturity and it is
more likely than not that the Corporation will not be required to sell these investments before a recovery of
71
unrealized losses, the Corporation does not consider these investments to be other-than-temporarily impaired at
December 31, 2009 and no impairment has been recognized. There are four equity securities totaling $809,000
considered temporarily impaired at December 31, 2009. The Corporation has the intent and ability to hold these
equity securities until a recovery of unrealized losses and therefore does not consider these investments to be other-
than-temporarily impaired at December 31, 2009.
The Corporation’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $3.9 million at December 31,
2009. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is
carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore,
when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value
rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of repurchases
of excess capital stock in 2009, the Corporation does not consider this investment to be other-than-temporarily
impaired at December 31, 2009 and no impairment has been recognized. FHLB stock is shown as a separate line
item on the balance sheet and is not a part of the available for sale securities portfolio.
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
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. At December 31, 2009, the fair value of the Corporation’s investment in the preferred shares of
Fannie Mae and Freddie Mac was $17,000 and $40,000, respectively.
72
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,
2009
2008
$147,850
14,053
245,759
32,220
7,710
189,439
637,031
--
637,031
(24,027)
$613,004
$141,271
28,300
272,440
29,136
9,515
172,385
653,047
(224)
652,823
(19,806)
$633,017
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 $266,000 and $221,000 of demand deposit overdrafts at December 31, 2009 and 2008,
respectively. Loans on nonaccrual status were $5.40 million and $19.48 million at December 31, 2009 and 2008,
respectively. If interest income had been recognized on nonaccrual loans at their stated rates during years 2009,
2008 and 2007, interest income would have increased by approximately $668,000, $439,000 and $56,000,
respectively. Accruing loans past due for 90 days or more were $451,000 and $3.52 million at December 31, 2009
and 2008, respectively. The balance of impaired loans was $5.01 million and $16.83 million at December 31, 2009
and 2008, respectively, for which there were specific valuation allowances of $1.12 million and $940,000 as of
December 31, 2009 and 2008. The average balances of impaired loans for 2009, 2008 and 2007 were $12.43 million,
$5.82 million and $557,000, respectively. The Corporation has no obligation to fund additional advances on its
impaired loans.
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
NOTE 5: Other Real Estate Owned
Year Ended December 31,
2008
$15,963
13,766
(11,559)
1,636
$19,806
2009
$19,806
18,563
(16,177)
1,835
$24,027
2007
$14,216
7,130
(7,300)
1,917
$15,963
At December 31, 2009 and 2008, OREO was $12.8 million and $2.0 million, respectively. During the years ended
December 31, 2009 and 2008, the Corporation transferred $16.9 million and $3.3 million, respectively, from loans to
OREO. OREO is primarily comprised of residential properties associated with commercial relationships and is
located primarily in the state of Virginia. During 2009 and 2008, the Corporation had sales proceeds of $3.5 million
and $990,000, respectively, and recognized a loss of $93,000 and $8,000, respectively.
73
OREO is presented net of an allowance for losses. Changes in the allowance for OREO losses are as follows:
(Dollars in thousands)
Balance at the beginning of year
Provision for losses
Charge-offs
Recoveries of OREO previously charged off
Balance at the end of year
Year Ended December 31,
2008
$ --
296
(223)
2007
--
--
--
2009
$ 73
2,614
(285)
-
-
$ 2,402
--
$ 73
--
--
Expenses applicable to OREO, other than the provision for losses, were $129,000, $82,000 and zero for the years
ended December 31, 2009, 2008 and 2007, respectively.
NOTE 6: Corporate Premises and Equipment
Major classifications of corporate premises and equipment are summarized as follows:
(Dollars in thousands)
Land
Buildings
Equipment, furniture and fixtures
Less accumulated depreciation
NOTE 7: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, $100 thousand or more
Other time deposits
Remaining maturities on time deposits at December 31, 2009 are as follows:
(Dollars in thousands)
2010
2011
2012
2013
2014
Thereafter
74
December 31,
2009
$ 6,734
26,357
20,925
54,016
(24,526)
$29,490
2008
$ 6,734
26,347
20,726
53,807
(22,676)
$31,131
December 31,
2009
$ 143,037
171,497
$314,534
2008
$ 99,711
169,187
$268,898
$196,344
42,174
62,203
1,802
11,593
418
$314,534
NOTE 8: 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 $6.08 million on December 31, 2009 and $7.22 million on December 31, 2008. Short-term
borrowings also include borrowings from the Federal Reserve Bank under its discount window lending programs
which are secured by a loan-specific lien on certain qualifying loans. There was $5.00 million outstanding under
the Federal Reserve Bank discount window lending programs on December 31, 2009 and $15.00 million
outstanding on December 31, 2008. Short-term borrowings also include advances from the FHLB, which are
secured by a blanket floating lien on all qualifying closed-end and revolving, open-end loans secured by 1-4 family
residential properties. There were no short-term FHLB advances outstanding on December 31, 2009, compared to
$33.80 million outstanding on December 31, 2008. Short-term borrowings can also include advances against $36.00
million in federal funds lines with correspondent banks. There were no outstanding federal funds purchased on
December 31, 2009 and 2008.
The table below presents selected information on short-term borrowings:
(Dollars in thousands)
Balance outstanding at year end
Maximum balance at any month end during the year
Average balance for the year
Weighted average rate for the year
Weighted average rate on borrowings at year end
Estimated fair value at year end
December 31,
2009
$11,082
$61,655
$31,328
0.60%
0.84%
$11,082
2008
$56,024
$59,382
$35,071
2.12%
0.67%
$56,024
Long-term borrowings at December 31, 2009 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 closed-
end and revolving, open-end loans secured by 1-4 family residential properties. The interest rate on the repurchase
agreement, which matures in 2018, is 3.55% (7.00% minus three-month LIBOR with a maximum rate of 3.55%) and
the outstanding balance as of December 31, 2009 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, 2009 was $81.63 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 2009. Long-term advances
from the FHLB at December 31, 2009 consist of $52.50 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 the FHLB advances:
(Dollars in thousands)
Balance Outstanding at December 31, 2009
$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
08/30/12
08/30/12
10/19/12
11/17/14
11/28/14
10/19/17
10/25/17
11/27/17
06/06/18
Next
Conversion
Option Date
02/26/10
02/26/10
10/19/10
11/17/10
11/29/10
01/19/10
10/25/11
02/26/10
06/06/12
75
The contractual maturities of long-term borrowings at December 31, 2009 are as follows:
(Dollars in thousands)
2012
2013
2014
Thereafter
Fixed Rate
Floating Rate
$17,500
--
12,500
22,500
$52,500
$81,630
--
--
5,000
$86,630
Total
$ 99,130
--
12,500
27,500
$139,130
The Corporation’s unused lines of credit for future borrowings total approximately $175.56 million at December 31,
2009, which consists of $40.99 million available from the FHLB, $38.37 million on C&F Finance’s revolving bank
line of credit, $60.20 million available from the Federal Reserve Bank and $36.00 million under federal funds
agreements with a 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.
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 3.40% at December 31, 2009. 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 1.82% at December 31, 2009. 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 9: Shareholders’ Equity, Other Comprehensive Income and Earnings Per Common
Share
Shareholders’ Equity
Preferred Shares. 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
76
(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. The Corporation
may redeem the Series A Preferred Stock at 100% of their liquidation preference (plus any accrued and unpaid
dividends), subject to the consent of the Federal Deposit Insurance Corporation.
The Warrant has a 10-year term and was immediately exercisable upon issuance, with an exercise price, subject to
anti-dilution adjustments, equal to $17.91 per share of Common Stock. Of the aggregate amount of $20.00 million
received, approximately $19.21 million was attributable to the Series A Preferred Stock and approximately $792,000
was attributable to the Warrant, based on the relative fair values of these instruments on the date of issuance. The
Corporation used a discounted cash flow analysis to determine the fair value of the Series A Preferred Stock, which
included the following key assumptions: (i) a discount rate of 10 percent, (ii) a dividend rate for the first five years
of 5 percent and (iii) a dividend rate after five years of 9 percent. The Corporation used the Black-Scholes option-
pricing model to determine the fair value of the Warrant, which included the following key assumptions: (i)
volatility of 30 percent, (ii) an exercise price of $17.91, (iii) a dividend yield of 4.0 percent and (iv) the five-year risk-
free rate of 2.4 percent. The resulting fair values of the Series A Preferred Stock and the Warrant were used to
allocate the aggregate purchase price of $20.00 million on a relative fair value basis. As the Series A Preferred Stock
was initially valued at $19.21 million, the difference between the initial value and the par value of the Series A
Preferred Stock will be accreted over a period of five years through a reduction to retained earnings on an effective
yield basis. While this accretion does not affect net income, it, along with the dividends, reduces the amount of net
income available to common shareholders, and thus reduces both basic and diluted earnings per common share.
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 quarterly cash dividend at the time of issuance of the Series A Preferred
Stock 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.
Common Shares. 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, expired in July 2009. Limitations on future share
repurchases are described above.
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.
77
Other Comprehensive Income
The following table presents the cumulative balances of the components of other comprehensive income, net of
deferred tax assets (liabilities) of $521,000, $(565,000) and $105,000 as of December 31, 2009, 2008 and 2007,
respectively.
(Dollars in thousands)
Net unrealized gains (losses) on securities
Net unrecognized gains (losses) on defined benefit plans
Total cumulative other comprehensive income (loss)
2009
$ 1,168
(200)
$ 968
December 31,
2008
$ (113)
(934)
$ (1,047)
2007
$ 540
(343)
$ 197
The Corporation reclassified net gains (losses) of $14,000, $(885,000) and $14,000 from other comprehensive income
to earnings for the years ended December 31, 2009, 2008 and 2007, respectively.
Earnings Per Common Share
The components of the Corporation’s earnings per common share calculations are as follows:
(Dollars in thousands)
Net income
Accumulated dividends on Series A Preferred Stock
Amortization of Series A Preferred Stock discount
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 and warrant
Weighted average number of common shares used in earnings per
common share—assuming dilution
December 31,
2008
$4,181
--
--
$4,181
2009
$5,526
(992)
(138)
$4,396
2007
$8,480
--
--
$8,480
3,044,009
3,027,700
3,062,932
4,482
30,574
118,513
3,048,491
3,058,274
3,181,445
Potential common shares that may be issued by the Corporation for its stock option awards and Warrant are
determined using the treasury stock method. Options, including the Warrant in 2009, on approximately 548,000,
372,000 and 98,000 shares were not included in computing diluted earnings per common share for the years ended
December 31, 2009, 2008 and 2007, respectively, because they were anti-dilutive.
NOTE 10: Income Taxes
Principal components of income tax expense as reflected in the consolidated statements of income are as follows:
(Dollars in thousands)
Current taxes
Deferred taxes
78
Year Ended December 31,
2008
$ 3,289
(2,672)
$ 617
2009
$ 5,422
(3,477)
$ 1,945
2007
$ 4,456
(1,112)
$ 3,344
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)
Year Ended December 31,
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
Compensation in excess of deductible limits
Tax credits
Other
Percent of
Pre-tax
Income
Percent of
Pre-tax
Income
Percent of
Pre-tax
Income
2007
2008
34.0% $ 1,631
34.0% $ 4,139
35.0%
2009
$ 2,540
(1,431)
(19.2)
(1,085)
(22.6)
(913)
(7.7)
115
665
1.5
8.9
122
157
2.6
3.3
115
248
(22)
219
(118)
(23)
$ 1,945
(45)
(0.2)
--
2.9
(147)
(1.6)
(16)
(0.3)
26.0% $ 617
(72)
(0.9)
--
--
(101)
(3.1)
(0.4)
(72)
12.9% $ 3,344
1.0
2.1
(0.6)
--
(0.9)
(0.6)
28.3%
The Corporation’s net deferred income taxes totaled $12.37 million and $9.98 million at December 31, 2009 and
2008, respectively. The tax effects of each type of significant item that gave rise to deferred taxes are:
(Dollars in thousands)
Deferred tax asset
Allowance for loan losses
Deferred compensation
Other-than-temporary impairment of Fannie Mae and Freddie Mac preferred stock
Defined benefit plan
Share-based compensation
Interest on nonaccrual loans
Depreciation
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
Deferred tax liability
Net deferred tax asset
December 31,
2009
2008
$10,823
1,655
614
151
367
124
51
--
1,094
14,879
(1,877)
--
(628)
(2,505)
$12,374
$7,715
1,557
614
369
250
88
--
61
899
11,553
(1,568)
(3)
--
(1,571)
$9,982
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 (ASC
Topic 740 – Income Taxes), on January 1, 2007 with no effect on the financial statements.
79
NOTE 11: 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 $409,000, $437,000 and $420,000 in 2009, 2008 and 2007, 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 $18,000, $75,000
and $182,000 for 2009, 2008 and 2007 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 $89,000,
$79,000 and $94,000 in 2009, 2008 and 2007, 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 of Directors
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 $418,000, $333,000 and
$780,000 in 2009, 2008 and 2007, respectively. In accordance with employment agreements for certain senior
officers of C&F Mortgage, performance bonuses of $1.8 million, $695,000 and $811,000 were expensed in 2009, 2008
and 2007, 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 a non-
contributory cash balance pension plan (Cash Balance Plan) and to enhance retirement benefits by providing
supplemental contributions from time to time. Expenses under this plan were $90,000, $92,000 and $115,000 in
2009, 2008 and 2007, 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-
paid consecutive years of service. Effective December, 31, 2008, this plan was converted to a 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
80
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, 2009 and
2008 and October 1, 2007.
(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
Period Ended
December 31,
2009
2008
September 30,
2007
$ 6,400
504
373
(13)
(448)
--
$ 6,816
$ 4,346
1,487
1,000
(448)
$ 6,385
$ (431)
$ (431)
$ 1,595
(9)
(1,279)
(107)
$ 200
$ 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
$6,438
777
384
(190)
(326)
--
$7,083
$6,438
702
--
(326)
$6,814
$ (269)
$ (269)
$ 472
(22)
78
(185)
$ 343
6.0%
8.0
4.0
6.0%
8.5
4.0
6.3%
8.5
4.0
The accumulated benefit obligation was $6.81 million and $5.29 million as of the actuarial valuation dates in 2009
and 2008, respectively.
81
(Dollars in thousands)
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net obligation at transition
Recognized net actuarial loss
Net periodic benefit cost
Other changes in plan assets and benefit obligations recognized in other
comprehensive income
Net (gain) loss
Net obligation at transition
Amortization of net obligation at transition
Prior service cost
Amortization of prior service costs
Deferred taxes
Total recognized in accumulated other comprehensive income
other
Total recognized in net periodic benefit cost and
Year Ended December 31,
2008
2009
2007
$ 504
373
(413)
(68)
(5)
115
506
(1,203)
--
5
--
68
396
(734)
$ 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)
comprehensive income
$ (228)
$ 1,292
$ 431
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 $48,000, $(5,000) and
$(68,000), respectively.
Weighted-average assumptions for net periodic benefit cost as of
Discount rate
Expected return on plan assets
Rate of compensation increase
January 1, (1)
2009
October 1, (1)
2007
2006
6.0%
8.0
4.0
6.3%
8.5
4.0
6.0%
8.5
4.0
(1) Net periodic benefit cost is based on assumptions determined at the valuation date of the prior year. The Corporation changed the valuation date
during 2008 from a 10/1 to a 1/1 date. As such, the October 1, 2007 and 2006 valuation dates were applicable to the years ended December 31, 2008
and 2007, respectively.
The benefits expected to be paid by the plan in the next ten years are as follows:
(Dollars in thousands)
2010
2011
2012
2013
2014
2015 – 2019
$ 413
192
519
103
603
3,285
$ 5,115
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.
82
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 by asset category are as follows:
Mutual funds-fixed income
Mutual funds-equity
Cash and equivalents
December 31,
2009
38%
61
1
100%
2008
31%
64
5
100%
As of December 31, 2009, the fair value of plan assets is as follows:
December 31, 2009
(Dollars in thousands)
Mutual funds-fixed income (1)
Mutual funds-equity (2)
Cash and equivalents (3)
Total pension assets
Fair Value Measurements Using
Level 2
---
---
---
---
Level 1
$ 2,441
3,879
65
$ 6,385
Level 3
---
---
---
---
Assets at Fair
Value
$ 2,441
3,879
65
$ 6,385
(1) This category includes investments in mutual funds focused on fixed income securities with both short-
term and long-term investments. The funds are valued using the net asset value method in which an
average of the market prices for the underlying investments is used to value the funds.
(2) This category includes investments in mutual funds focused on equity securities with a diversified
portfolio and includes investments in large cap and small cap funds, growth funds, international focused
funds and value funds. The funds are valued using the net asset value method in which an average of the
market prices for the underlying investments is used to value the funds.
(3) This category comprises cash and short-term cash equivalent funds. The funds are valued at cost which
approximates fair value.
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.
83
NOTE 12: Related Party Transactions
Loans outstanding to directors and executive officers totaled $683,000 and $734,000 at December 31, 2009 and 2008,
respectively. New advances to directors and officers totaled $18,000 and repayments totaled $69,000 in the year
ended December 31, 2009. These loans were made in the ordinary course of business on substantially the same
terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable
transactions with unrelated persons, and, in the opinion of management, do not involve more than normal risk or
present other unfavorable features.
NOTE 13: 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 were awarded. The maximum aggregate number of
shares that could be issued pursuant to awards made under the 2004 Plan was 500,000. 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, 2009. 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. All options outstanding under the 1994 Plan are exercisable as of December
31, 2009. 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. All options
outstanding under the Director Plan are exercisable as of December 31, 2009. 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. All
options outstanding under the Regional Director Plan are exercisable as of December 31, 2009. 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.
84
Stock option transactions under the various plans for the periods indicated were as follows:
(Dollars in thousands, except for per share amounts)
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
*Weighted average
Intrinsic
Value
2009
Exercise
Price*
$32.71
--
16.91
25.35
$33.71 $ 108
Shares
455,017
--
(17,100)
(20,200)
417,717
2008
2007
Exercise
Price*
Exercise
Price*
Shares
Shares
510,217 $32.17 530,167 $31.54
37.17
--
21.39
(13,950)
(41,250)
31.65
455,017 $32.71 510,217 $32.17
13,500
(24,000)
(9,450)
--
19.05
30.65
Options exercisable at year-end
Weighted-average fair value of options
granted during the year
417,717
N/A
455,017
496,717
N/A
$8.05
The total intrinsic value of in-the-money options exercised in 2009 was $46,000. Cash received from option
exercises during 2009 was $289,000. The Corporation has a policy of issuing new shares to satisfy the exercise of
stock options.
There were no option grants during 2009. The fair value of each option granted in 2007 was estimated on the date
of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend
yield of 3.3 percent, dividend growth rate of 5.0 percent, expected life of eight years, expected volatility of 25.0
percent, and a risk-free interest rate of 4.7 percent. 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, 2009:
Range of Exercise Prices
$15.75 to $23.49
$35.20 to $39.60
$40.50 to $46.20
Total
*Weighted average
Options Outstanding and Exercisable
Number Outstanding
at December 31, 2009
116,767
228,850
72,100
417,717
Remaining
Contractual Life*
2.1
5.7
4.3
4.4
Exercise Price*
$19.77
38.28
41.78
$33.71
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. A summary of 2009 activity for restricted stock awards is presented below:
Unvested, January 1, 2009
Granted
Vested
Cancelled
Unvested, December 31, 2009
85
Weighted-
Average
Grant Date
Fair Value
$32.07
$16.63
$31.50
$18.02
$28.59
Shares
45,700
14,425
(100)
(1,300)
58,725
Compensation is accounted for using the fair market value of the Corporation’s common stock on the date the
restricted shares are awarded. The weighted-average grant date fair value of restricted stock granted for the years
2009, 2008 and 2007 was $16.63, $19.66 and $31.87, respectively. Compensation expense is charged to income
ratably over the vesting periods. As of December 31, 2009, there was $931,000 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 2014.
NOTE 14: 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 changes in the funded status of the pension plan 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 $678.12 million and $673.82 million, respectively, at December 31, 2009 and $681.25
million and $676.37 million, respectively, at December 31, 2008. Management believes that, as of December 31,
2009, the Corporation and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2009, 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.
86
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, 2009:
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, 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
Actual
Minimum Capital
Requirements
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$107,724
103,693
15.9%
15.4
$54,250
53,906
99,056
95,078
99,056
95,078
$83,836
81,174
73,575
72,579
73,575
72,579
14.6
14.1
11.5
11.1
12.3%
12.0
10.8
10.7
8.9
8.7
27,125
26,953
34,450
34,258
$54,500
54,109
27,250
27,055
33,263
33,217
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
$67,382
N/A
10.0%
N/A
40,429
N/A
42,822
N/A
6.0
N/A
5.0
N/A N/A
10.0%
$67,637
N/A N/A
6.0
40,582
N/A N/A
5.0
41,521
On January 9, 2009, as part of the Capital Purchase Program, the Corporation issued and sold to Treasury 20,000
shares of the Corporation’s Series A Preferred Stock having a liquidation preference of $1,000 per share and a
Warrant for the purchase of up to 167,504 shares of the Corporation’s Common Stock, for a total price of $20.0
million. The Series A Preferred Stock and the Warrant has been treated as Tier 1 capital for regulatory capital
adequacy determination purposes as of December 31, 2009.
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, $20.00 million and $18.39 million of the Corporation’s trust
preferred securities is included in Tier 1 capital in the Corporation’s capital ratios presented above for 2009 and
2008, respectively. The remaining $1.61 million of the Corporation’s total trust preferred securities outstanding on
December 31, 2008 is included in the Corporation’s total capital ratios presented above as a component of Tier 2
capital.
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by
the Bank to the Corporation. The total amount of dividends that may be paid at any date is generally limited to the
retained earnings of the Bank, and loans or advances are limited to 10 percent of the Bank’s capital stock and
surplus on a secured basis.
87
NOTE 15: Commitments and Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include commitments to extend credit,
commitments to sell loans, and standby letters of credit. These instruments involve elements of credit and interest
rate risk in excess of the amount on the balance sheet. The contract amounts of these instruments reflect the extent
of involvement the 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
$73.97 million and $75.03 million at December 31, 2009 and 2008, respectively.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract
amounts represent credit risk, was $8.92 million and $7.82 million at December 31, 2009 and 2008, respectively.
At December 31, 2009, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to
approximately $47.68 million and loans held for sale of $28.76 million. C&F Mortgage has entered into
corresponding commitments with third party investors to sell loans of approximately $76.44 million. Under the
contractual relationship with these investors, C&F Mortgage is obligated to sell the loans, and the investors are
obligated to purchase 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 loss due to borrower misrepresentation, fraud or early
default. 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 $1.23 million, $1.30 million and $1.19 million, for the years ended
December 31, 2009, 2008 and 2007, respectively.
88
Future minimum lease payments due under these leases as of December 31, 2009 are as follows (dollars in
thousands):
2010
2011
2012
2013
2014
Thereafter
$1,091
850
360
98
33
--
$2,432
NOTE 16: Fair Value of Assets and Liabilities
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of
observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy
which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value
measurement in its entirety is reported in one of the three levels. These levels are:
Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1
assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S.
Treasury securities.
Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model based valuation techniques for
which all significant assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level 3—Valuation is determined using model-based techniques with significant assumptions not
observable in the market.
U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and
subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation
has not made any fair value option elections as of December 31, 2009.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the balances of financial assets measured at fair value on a recurring basis. There were
no liabilities measured at fair value on a recurring basis at December 31, 2009 or 2008.
December 31, 2009
(Dollars in thousands)
Securities Available for Sale
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Preferred stock
Total Securities Available for Sale
Assets at Fair
Value
$ 9,743
2,709
104,867
1,251
$ 118,570
Fair Value Measurements Using
Level 2
Level 1
Level 3
$ 9,743
2,709
104,867
1,251
$ 118,570
---
---
---
---
---
---
---
---
---
---
89
(Dollars in thousands)
Securities Available for Sale(1)
December 31, 2008
Fair Value Measurements Using
Level 2
$ 100,603
Level 1
---
Level 3
---
Assets at Fair
Value
$ 100,603
(1)
Securities available for sale were not broken out by security type at December 31, 2008, as the fair value and disclosure requirements are
applied prospectively.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Corporation is also required to measure and recognize certain other financial assets at fair value on a
nonrecurring basis in the consolidated balance sheet. For assets measured at fair value on a nonrecurring basis and
still held on the consolidated balance sheets, the following table provides the fair value measures by level of
valuation assumptions used. Fair value adjustments for OREO are recorded in other non-interest expense, and fair
value adjustments for loans held for investment are recorded in the provision for loan losses in the consolidated
statements of income.
(Dollars in thousands)
Loans, net
OREO
Total
(Dollars in thousands)
Loans, net
Fair Value of Financial Instruments
December 31, 2009
Fair Value Measurements Using
Level 2
$ 3,893
12,800
$ 16,693
Level 3
---
---
---
Level 1
---
---
---
December 31, 2008
Fair Value Measurements Using
Level 2
$ 15,894
Level 3
---
Level 1
---
Assets at Fair
Value
$ 3,893
12,800
$ 16,693
Assets at Fair
Value
$ 15,894
The following reflects the fair value of financial instruments whether or not recognized on the consolidated balance
sheet at fair value.
(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,
2009
2008
Carrying
Amount
Estimated
Carrying
Fair Value Amount
Estimated
Fair Value
$ 38,061
118,570
613,004
28,756
5,408
$ 38,061
118,570
611,420
29,032
5,408
$ 9,888
100,603
633,017
37,042
5,096
$ 9,888
100,603
634,928
37,904
5,096
292,096
314,534
170,832
1,569
276,935
319,593
166,533
1,569
281,827
268,898
219,460
1,921
272,164
272,340
210,640
1,921
90
The following describes the valuation techniques used by the Corporation to measure financial assets and financial
liabilities at fair value as of December 31, 2009 and 2008.
Cash and short-term investments. The nature of these instruments and their relatively short maturities provide for
the reporting of fair value equal to the historical cost.
Securities Available for Sale. Securities available for sale are recorded at fair value on a recurring basis. 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.
Loans, net. 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.
Certain loans are accounted for under ASC Topic 310 - Receivables, 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).
Collateral may be in the form of real estate or business assets including equipment, inventory and accounts
receivable. A significant portion of the collateral securing the Corporation’s impaired loans is real estate. The fair
value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal
conducted by an independent, licensed appraiser outside of the Corporation using observable market data (Level
2). However, if an appraisal of the real estate property is over two years old, then the fair value is considered Level
3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value
on the applicable business’s financial statements if not considered significant using observable market data.
Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging
reports (Level 3). At December 31, 2009 and 2008, the Corporation’s impaired loans were valued at $3.89 million
and $15.89 million, respectively.
Loans Held for Sale. Loans held for sale are required to be measured at the lower of cost or fair value. These loans
currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price
secondary markets are currently offering for similar loans using observable market data, which is not generally
materially different than cost due to the short duration between origination and sale (Level 2). As such, the
Corporation records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments
were recorded on loans held for sale during the year ended December 31, 2009.
Accrued interest receivable. The carrying amount of accrued interest receivable approximates fair value.
Deposits. The fair value of all demand deposit accounts is the amount payable at the report date. For all other
deposits, the fair value is determined using the discounted cash flow method. The discount rate was equal to the
rate currently offered on similar products.
Borrowings. The fair value of borrowings is determined using the discounted cash flow method. The discount
rate was equal to the rate currently offered on similar products.
Accrued interest payable. The carrying amount of accrued interest payable 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.
91
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.
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 17: Business Segments
The Corporation operates in a decentralized fashion in three principal business segments: Retail Banking,
Mortgage Banking and Consumer Finance. Revenues from Retail Banking operations consist primarily of interest
earned on loans and investment securities and service charges on deposit accounts. Mortgage Banking operating
revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and
interest earned on mortgage loans held for sale. Revenues from Consumer Finance consist primarily of interest
earned on automobile 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 and interest expense
associated with the Corporation’s trust preferred capital notes
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income (loss)
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Total assets
Goodwill
Capital expenditures
Year Ended December 31, 2009
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 31,590
—
603
32,193
$ 259
—
1,095
1,354
$ (3,370)
—
—
(3,370)
11,600
4,881
5,183
2,713
24,377
7,816
3,022
$ 4,794
$ 193,817
$ 10,724
$ 66
—
1,124
673
490
2,287
(933)
(379)
$ (554)
$ 2,579
$ —
$ 1
—
(3,401)
—
—
(3,401)
31
11
$ 20
$ (87,879)
$ —
$ —
$ 64,971
24,976
11,713
101,660
18,563
15,459
35,118
25,049
94,189
7,471
1,945
$ 5,526
$ 888,430
$ 10,724
$ 474
$ 34,021
—
5,804
39,825
6,400
12,588
13,881
12,472
45,341
(5,516)
(3,352)
$ (2,164)
$ 739,390
$ —
$ 155
$ 2,471
24,976
4,211
31,658
563
267
15,381
9,374
25,585
6,073
2,643
$ 3,430
$ 40,523
$ —
$ 252
92
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income (loss)
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Total assets
Goodwill
Capital expenditures
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
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
2,300
15,873
13,378
9,927
41,478
931
(764)
$ 1,695
$697,882
$ —
$ 395
796
370
8,889
8,498
18,553
2,363
898
$ 1,465
$ 45,132
$ —
$ 215
10,670
7,178
4,662
2,715
25,225
4,318
1,603
—
1,459
758
456
2,673
(2,812)
(1,119)
$ 2,715 $ (1,693)
$ 178,679 $ 2,521
$ 10,724 $ —
$ 114 $ 4
—
(3,485)
37
—
(3,448)
(2)
(1)
$ (1)
$(68,557)
$ —
$ —
13,766
21,395
27,724
21,596
84,481
4,798
617
$ 4,181
$855,657
$ 10,724
$ 728
Year Ended December 31, 2007
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$ 39,908
—
5,316
45,224
280
16,616
14,626
8,591
40,113
5,111
871
$ 4,240
$634,722
$ —
$ 1,711
$ 2,482
15,854
2,790
21,126
120
992
11,095
6,090
18,297
2,829
1,075
$ 1,754
$ 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
6,730
8,708
4,317
2,470
22,225
4,425
1,681
—
1,055
720
433
2,208
(564)
(292)
$ 2,744 $ (272)
$ 167,400 $ 40
$ 10,724 $ —
$ 267 $ —
—
(3,993)
29
—
(3,964)
23
9
$ 14
$(61,407)
$ —
$ —
7,130
23,378
30,787
17,584
78,879
11,824
3,344
$ 8,480
$785,596
$ 10,724
$ 2,251
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.
93
NOTE 18: Parent Company Condensed Financial Information
Financial information for the parent company is as follows:
(Dollars in thousands)
Balance Sheets
Assets
Cash
Securities available for sale
Other assets
Investments in subsidiary
Total assets
Liabilities and shareholders’ equity
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
December 31,
2009
2008
$ 510
1,251
2,917
104,889
$109,567
$ 20,620
71
88,876
$109,567
$ 92
1,612
3,266
80,607
$85,577
$20,620
100
64,857
$85,577
Year Ended December 31,
2007
2008
2009
$ 92
$ 292
$ 189
(1,070)
(1,306)
(874)
4,220
19,394
3,859
2,293
(10,325)
2,258
675
584
1,358
(684)
(2,177)
(591)
$ 5,526
$ 8,480
$ 4,181
94
(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 loss (gain) on securities
Other-than-temporary impairment of securities
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
Investing activities:
Proceeds from maturities and calls of securities
Purchase of securities
Investment in bank subsidiary
Investment in statutory trust
Net cash (used in) provided by investing activities
Financing activities:
Net decrease in borrowings
Issuance of trust preferred capital notes
Net proceeds from issuance of preferred stock
Purchase of common stock
Cash dividends
Proceeds from exercise of stock options
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash at beginning of year
Cash at end of year
NOTE 19: Other Noninterest Expenses
Year Ended December 31,
2008
2009
2007
$ 5,526
$ 4,181
$ 8,480
(2,293)
318
22
—
349
(2)
3,920
265
—
(19,927)
—
(19,662)
—
—
19,914
—
(4,080)
326
16,160
418
92
$ 510
(2,258)
292
(6)
1,575
(1,222)
5
2,567
860
—
—
—
860
—
—
—
(40)
(3,754)
312
(3,482)
(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
The following table presents the significant components in the statements of income line “Noninterest Expenses-
Other Expenses.”
Year Ended December 31,
2008
$ 369
1,091
749
1,108
906
641
1,895
8,806
$15,565
2009
$ 1,341
2,490
3,267
1,057
614
1,018
2,122
7,426
$19,335
2007
$ 62
97
74
1,107
1,224
658
1,531
6,773
$11,526
(Dollars in thousands)
FDIC expenses
Provision for indemnification losses
Loan and OREO expenses
Telecommunication expenses
Marketing and advertising expenses
Tax service and investor fees
Data processing fees
All other noninterest expenses
Total Other Noninterest Expenses
95
NOTE 20: 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
Net income available to common shareholders
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 available to common shareholders
Earnings per common share—assuming dilution
Dividends per common share
NOTE 21: Subsequent Event
March 31
$15,437
7,152
9,241
14,486
1,907
1,508
1,248
0.41
0.31
March 31
$15,904
7,808
6,068
12,053
1,823
1,428
0.46
0.31
2009 Quarter Ended
June 30 September 30 December 31
$16,784
$16,625
$16,125
7,525
8,535
7,737
8,930
8,560
9,958
15,655
14,721
15,305
800
2,374
2,390
610
1,658
1,750
319
1,367
1,462
0.10
0.45
0.48
0.25
0.25
0.25
2008 Quarter Ended
June 30 September 30 December 31
$15,932
$16,386
$15,908
5,868
7,922
7,371
6,076
5,823
7,182
11,732
12,812
12,723
933
1,830
212
1,037
299
1,417
0.34
0.10
0.46
0.31
0.31
0.31
The Corporation evaluates subsequent events that have occurred after the balance sheet date but before the
financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide
additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent
in the process of preparing financial statements, and (2) nonrecognized, or those that provide evidence about
conditions that did not exist at the date of the balance sheet but arose after that date.
Based on the evaluation, the Corporation did not identify any recognized or nonrecognized subsequent events that
would have required adjustment to or disclosure in the consolidated financial statements.
96
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, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and cash
flows for the years ended December 31, 2009, 2008 and 2007. 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, 2009 and 2008, and the results
of their operations and their cash flows for the years ended December 31, 2009, 2008 and 2007, 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, 2009, 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 3, 2010 expressed an
unqualified opinion on the effectiveness of C&F Financial Corporation and Subsidiary’s internal control over
financial reporting.
Winchester, Virginia
March 3, 2010
97
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Corporation’s management, with the participation of the
Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the
Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act)) 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, 2009 to ensure that information required to be
disclosed by the Corporation in reports that it files or submits under the Exchange Act 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 also
responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act). 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, 2009. 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, 2009, 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, 2009 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 99
and 100 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, 2009 that have materially affected, or are
reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
98
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, 2009, 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.
99
In our opinion, C&F Financial Corporation and Subsidiary maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, 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 3, 2010 expressed
an unqualified opinion.
Winchester, Virginia
March 3, 2010
100
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 4 through 7 of the
2010 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 40 of the 2010 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.
This Code is posted on our Internet website at
http://www.cffc.com under “About C&F/C&F Financial Corporation/Corporate Governance.” We will 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
101
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 13 through 31 of the 2010 Proxy Statement under the captions,
“Compensation Committee Interlocks and Insider Participation,” “Compensation Policies and Practices as They
Relate to Risk Management,” “Executive Compensation” and “Compensation Committee Report,” and the
information on pages 31 through 36 of the 2010 Proxy Statement are incorporated herein by reference. The
information regarding director compensation contained on pages 11 and 12 of the 2010 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 page 3 of the 2010 Proxy Statement under the caption, “Security Ownership
of Certain Beneficial Owners and Management,” is incorporated herein by reference.
The information contained on page 40 of the 2010 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 12 and 13 of the 2010 Proxy Statement under the caption, “Interest of
Management in Certain Transactions,” is incorporated herein by reference. The information contained on page 8 of
the 2010 Proxy Statement under the caption, “Director Independence,” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained on page 39 of the 2010 Proxy Statement under the captions, “Principal
Accountant Fees” and “Audit Committee Pre-Approval Policy,” is incorporated herein by reference.
102
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
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 (incorporated by reference to Exhibit 10.1
to Form 10-K filed March 9, 2009)
Amended and Restated Change in Control Agreement dated December 30, 2008 between
C&F Financial Corporation and Thomas F. Cherry (incorporated by reference to Exhibit
10.3 to Form 10-K filed March 9, 2009)
*10.4
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
(incorporated by reference to Exhibit 10.4.1 to Form 10-K filed March 9, 2009)
*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 (incorporated by reference to Exhibit 10.4.3 to Form 10-K filed March 9,
2009)
*10.4.4 Amendment to Adoption Agreement for the Restated VBA Executives’ Non-Qualified
Deferred Compensation Plan for C&F Financial Corporation effectively dated as of
January 1, 2009
103
*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 Corporation dated as of December 31, 2008 (incorporated by reference to
Exhibit 10.5.1 to Form 10-K filed March 9, 2009)
*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 (incorporated by reference to Exhibit 10.5.2 to Form 10-K filed March 9, 2009)
*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)
*10.10.2 Form of C&F Financial Corporation Restricted Stock Agreement (incorporated by reference
to Exhibit 10.10.2 to Form 8-K filed December 8, 2009)
*10.10.3 Form of C&F Financial Corporation TARP-Compliant Restricted Stock Agreement
(incorporated by reference to Exhibit 10.10.3 to Form 8-K filed December 8, 2009)
*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 (incorporated by reference to Exhibit 10.12.1 to Form
10-K filed March 9, 2009)
*10.14 Amended and Restated Change in Control Agreement dated December 30, 2008 between
C&F Financial Corporation and Bryan McKernon (incorporated by reference to Exhibit
10.14 to Form 10-K filed March 9, 2009)
*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)
104
*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)
*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
23
Subsidiaries of the Registrant
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
99.1
Certification of CEO pursuant to 31 C.F.R. Section 30.15
99.2
Certification of CFO pursuant to 31 C.F.R. Section 30.15
*Indicates management contract
105
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 3, 2010
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 3, 2010
Date: March 3, 2010
Date: March 3, 2010
Date: March 3, 2010
Date: March 3, 2010
Date: March 3, 2010
Date: March 3, 2010
Date: March 3, 2010
Date: March 3, 2010
Date: March 3, 2010
/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
106
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, 2004 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, 2009.
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
140
120
100
80
60
40
e
u
l
a
V
x
e
d
n
I
C&F Financial Corporation
NASDAQ Composite
NASDAQ Bank
20
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
Index
C&F Financial Corporation
NASDAQ Composite
NASDAQ Bank
Period Ending
12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
58.01
104.31
51.31
104.07
111.03
106.20
100.00
100.00
100.00
81.67
121.92
82.76
95.10
101.37
95.67
45.05
72.49
62.96
39d09_1058 cvr rev:Layout 1 3/4/10 12:19 PM Page 2
OUR VALUES
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.
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 vis-
iting 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 infor-
mation 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
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
C&F Annual Report // 2009
C&F Annual Report // 2009
39d09_1058 cvr rev:Layout 1 3/4/10 12:19 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