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Focused on You
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
forthe 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.
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Corporation
Focused on You
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except
share and per share amounts)
Selected Year-End Balances:
2010
2009
2008
2007
2006
Total assets
$904,137
$ 888,430
$ 855,657
; 785,596
$734,468
Total shareholders' equity
Total loans (net)
Total deposits
S u m m a ry of O p e r a t i o n s:
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 s h a r e:
1
92,777
606,744
625,134
88,876
613,004
606,630
64,857
65,224
633,017
585,881
550,725
527,571
69,848
$ 64,971
13,235
56,613
14,959
41,654
29,700
60,295
11,059
2,949
15,459
49,512
18,563
30,949
36,689
60,167
7,471
1,945
64,130
21,395
64,825
23,378
42,735
41,447
13,766
7,130
28,969
25,149
49,320
4,798
617
34,317
25,878
48,371
11,824
3,344
68,006
517,843
532,835
58,582
18,457
40,125
4,625
35,500
27,387
45,328
17,559
5,430
$
8,110
$
5,526
$
4,181
$
8,480
$ 12,129
Earnings per c o m m on share—basic ;
$2.26
$1.44
$1.38
$2.77
$3.85
Earnings per c o m m on share—
assuming dilution
Cash dividends-common stock
Weighted average number of
2.24
1.00
1.44
1.06
1.37
1.24
2.67
1.24
3.71
1.16
common shares—assuming dilution
3,103,469
3,048,491
3,058,274
3,273,429
Significant Ratios:
Return on average assets
0.78%
0.50%
Return on average c o m m on equity
Dividend payout ratio-common shares
9.74
44.25
6.60
73.48
0.51%
6.39
89.79
1.13%
1.75%
13.03
44.45
18.97
30.15
2010 C&F ANNUAL REPORT
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are able to get us back on track without a strong back
lash of inflation. I also hope that Washington soon
realizes that it does not have all the answers or the abil
ity to oversee all areas of the economy; that good and
fair competition is what gives consumers the most
goods and services for the least cost; and that over-
regulation is not good for companies or consumers.
Despite the difficulties that we have had and have
yet to face, your Corporation has continued to experi
ence overall good results. Our strategy of diversification
served us very well in 2010, as our Finance Company
experienced
record earnings and our Mortgage
Company was able to remain profitable despite some
hurdles, which I'll discuss later. Combined, the income
from these two subsidiaries greatly exceeded the nega
ON BEHALF OF THE BOARD OF DIRECTORS,
tive results experienced by our Bank, as it continued to
I am pleased to be able to present our financial results
struggle with the adverse effects of the economy and
for the past year, 2010. This is now the fourth year in a
the resulting asset quality issues.
row in which I have opened my remarks by referencing
the difficulties faced due to the economic conditions.
Back in my 2007 letter, I noted that we were experienc
ing "challenging times," but none of us then had any
idea as to the depth of our country's and the world's
financial problems, nor how close we would come to a
worldwide financial collapse in 2008.
Net income for 2010 was $8.1 million compared to
$5.5 million for 2009, which resulted in a return on
average common equity of 9.74% and a return on aver
age assets of 0.78% for 2010, compared to 6.60% and
0.50%, respectively, for 2009. Both returns compare
favorably to those of our peers, who experienced a
return on average equity of 4.10% and return on aver
Although economic data would suggest that we are
age assets of 0.42% for 2010. Total assets increased
now officially out ofthe deepest recession since WWII,
from $888 million at year-end 2009 to $904 million at
it certainly does not feel like it due to the continued
year-end 2010 and deposits increased $ 18 million from
high unemployment, the continued depreciation of
$607 million in 2009 to $625 million in 2010.
the real estate market and linked effects and the con
tinued impact on the banking industry as so many cus
tomers, who have struggled for so long to survive, find
they can no longer do so. Times are still very tough for
many. This has necessitated additional loan charge
offs and increases to reserves for losses on loans and
foreclosed properties.
The Corporation's capital continues to remain
strong as it increased from $88.9 million at year-end
2009 to $92.8 miUion at year-end 2010. This level
keeps us significantly above the "well-capitalized"
threshold, the most important capital ratio tracked by
the banking regulatory agencies, even if you exclude
the Capital Purchase Program ("CPP") funds that we
While I hope that we have reached the "bottom" of
accepted from the government two years ago to bolster
this cycle, I know that it is going to take a long time for
our capital. As we have related before, we saw the CPP
us to return to normalcy. I'm hopeful that those in
funds as an inexpensive means to insure against
Washington come to realize the dangers of such high
unforeseen events given all the turmoil that has been
national debt to our long-term economic health and
going on in the financial markets the last several years.
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Audrey D. Holmes, Attorney-at-Law
James H. Hudson III*+
Attomey-at-LatP
Hudson & Bondurant, P.C.
Joshua H. Lawson*+
President
Thrift Insurance Corporation
Bryan E. McKernon+
President & CEO
C&F Mortgage Corporation
William E. 0'ConneIIJr.*+
Chessie Professor of Business, Emeritus
The College of William and Mary
C. Elis Olsson*+
Director ofoperations
Martinair, Inc.
Paul C. Robinson*+
Ou>ner & President
Francisco, Robinson & Associates, Realtors
* C&F Financial Corporation Board Member
+ C&F Bank Board Member
SANDSTON / VARINA ADVISORY BOARD
E. Rayjernigan
Business Owner
Citizens Irrigation Inc.
James M. Mehfoud
President
Maypar Corporation
Robert F. Nelson Jr.
Professional Engineer
Engineering Design Associates
Reginald H. Nelson IV
Senior Partner
Colonial Acres Farm
John G. Ragsdale II
Business Owner
Sandston Cleaners
Philip T.Rutledge Jr.
Retired Deputy County Manager
County of Henrico
Sandra W. Seelmann
Real Estate Broker/Owner
Varina & Seelmann Realty
2010 C&F ANNUAL REPORT
C&F OFFICERS & LOCATIONS
C&F B A NK
A D M I N I S T R A T I VE 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
Terrence C. Gates
Vice President
Deborah H. Hall
Vice President, Credit Administration
Donna M. Haviland
Vice President, Director of Internal Audit
Anita W. Hazelwood
Vice President, Treasury Solutions Consultant
Ellen M. Howard
Vice President, Loan Operations
DoUie M. Kelly
Vice President, Retail Risk Manager
James M. Lull
Vice President, Commercial Lending
Maureen B. Medlin
Vice President, Marketing
Deborah R. Nichols
Vice President, Quality Control
Matthew J. Ohlschlager
Vice President, Portfolio Manager
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
CHESTER, VIRGINIA
Mary Schoenfelder
Vice President & Branch Manager
HAMPTON, VIRGINIA
Barrett J. Franklin
Metro Market Manager
MECHANICSVILLE, VIRGINIA
Elliot G. Jenkins
Branch Manager
MIDLOTHIAN, VIRGINIA
T. Hurst KeUey
Branch Manager
NEWPORT NEWS, VIRGINIA
Maria J. Kressley
Branch Manager
NORGE, VIRGINIA
Taryn R. Haden
Assistant Vice President & Branch Manager
PROVIDENCE FORGE, VIRGINIA
James D. W. King
Vice President & Branch Manager
QUINTON, VIRGINIA
Van N. McPherson
Branch Manager
RICHMOND, VIRGINIA
Brian M. Noel
Metro Market Manager
West Broad Street
Cathy Breitenbach
Assistant Branch Manager
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. CaUis
Branch Manager
WILLIAMSBURG, VIRGINIA
Jamestown Road
Jennifer D. Acevedo
Branch Manager
*Officers of C&F Financial Corporation
2010 C&F ANNUAL REPORT
Longhill Road
Vicky L. Wilt
Branch Manager
YORKTOWN, VIRGINIA
Brooke Eidson
Assistant Branch Manager
CONSTRUCTION LENDING OFFICE
One City Center
11815 Fountain Way, Suite 410
Newport News, Virginia 23606
(757) 952-1673
Bonnie S. Smith
Vice President, Real Estate Construction
C&F B A NK / R I C H M O ND
A D M I N I S T R A T I VE OFFICE
C&F Center
1340 Alverser Plaza
Midlothian, Virginia 23113
(804) 378-0332
Harold M. McLeod III
Senior Vice President, Regional President
Tracy E. Pendleton
Vice President, Commercial Banking
David L. Shaffer
Vice President, Commercial Banking
C&F B A NK / PENINSULA
A D M I N I S T R A T I VE OFFICE
One City Center
11815 Fountain Way, Suite 410
Newport News, Virginia 23606
(757) 952-1670
Vem E. Lockwood II
Senior Vice President, Regional President
David S. JoIIey
Vice President, Commercial Banking
Lorie D. Sarrett
Vice President, Commercial Banking
Joycelyn Spight
Vice President, Commercial Banking
C&F I N V E S T M E NT SERVICES, INC.
802 Mam Street
West Point, Virginia 23181
(804) 843-4584 or (800) 583-3863
Eric F. Nost
President
MIDLOTHIAN, VIRGINIA
Douglas L. Hartz
Vice President
RICHMOND, VIRGINIA
Bruce D. French
Assistant Vice President
WILLIAMSBURG, VIRGINIA
Douglas L. Cash Jr.
Vice President
C&F OFFICERS & LOCATIONS
C&F M O R T G A GE C O R P O R A T I ON
A D M I N I S T R A T I VE 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
Susan L. Driver
Vice President & Underwriting Manager
MadeUne Witty
Compliance Manager
Michael J. Vogelbach
Manager of Information Systems
Katherine K. Watrous
Controller
CHARLOTTESVILLE, VIRGINIA
WiUiam 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
HARRISONBURG, VIRGINIA
Gloria J. Wright
Branch Manager
LYNCHBURG, VIRGINIA
Shirley D. Falwell
Branch Manager
Andrew N. Shields
Branch Manager
MIDLOTHIAN, VIRGINIA
Brandon W. Beswick
Branch Manager-Southside, Roanoke West
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
Susan P. Burkett
Vice President &
Operations 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
WILMINGTON, DELAWARE
Craig I. Snyder
Branch Manager
GASTON I A, NORTH CAROLINA
Nancy W. Poteat
Branch Manager
MOORESTOWN, NEW JERSEY
R. Scott Wallace
Branch Manager
2010 C&F ANNUAL REPORT
BALTIMORE, MARYLAND
Kelly J. Williamson
Branch Manager
Lurry S. McMillan
Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy
Branch Manager
C&F TITLE AGENCY, INC.
Midlothian, Virginia
Eileen A. Cherry
Vice President & Title Insurance Underwriter
H O M E T O WN SETTLEMENT
SERVICES LLC
Annapolis, Maryland
Midlothian, Virginia
CERTIFIED APPRAISALS LLC
Midlothian, Virginia
H. Daniel Salomonsky
Vice President & Appraisal Manager
C&F FINANCE C O M P A NY
A D M I N I S T R A T I VE OFFICE
4660 South Laburnum Avenue
Richmond, Virginia 23231
(804) 236-9601
S. Dustin Crone
President
C. Shawn Moore
Senior Vice President
Michael K. Wilson
Senior Vice President & COO
Kevin F. Jones Jr.
Regional Vice President, Originations
Pamela L. Austin
Regional Vice President, Sales
Thomas W. Young
Vice President, Operations
Alfred D.Hinkle Jr.
Vice President, Human Resources
Serving the foUowing states
ALABAMA, GEORGIA, INDIANA
KENTUCKY, MARYLAND
NORTH CAROLINA, OHIO
TENNESSEE, VIRGINIA
WEST VIRGINIA
CFFI 10-K 12/31/2010
Section 1: 10-K (FORM 10-K)
Table of Contents
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, 2010
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)
Virginia
(State or other jurisdiction of
incorporation or organization)
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
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Accelerated Filer
Smaller reporting company
¨
x
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, 2010 was $52,766,298.
There were 3,125,416 shares of common stock outstanding as of February 25, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 15, 2011 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 19, 2011
are incorporated by reference in Part III of this report.
TABLE OF CONTENTS
Table of Contents
PART I
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
PART II
[REMOVED AND RESERVED]
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
page 1
page 12
page 16
page 16
page 17
page 17
page 17
page 18
page 19
page 48
page 50
page 88
page 88
page 90
page 90
page 90
page 91
page 91
page 91
page 92
Table of Contents
ITEM 1.
BUSINESS
General
PART I
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 and credit cards, 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, 2010, assets of the Retail Banking segment totaled $756.3 million. For the year ended December 31, 2010, the net loss for this
segment totaled $1.5 million.
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
15 locations in Virginia, four in Maryland, two in North Carolina and one each in Wilmington, Delaware; Moorestown, New Jersey; and York, Pennsylvania. The Virginia offices are
located one each in Charlottesville, Chester, Fishersville, Fredericksburg, Glen Allen, Hanover, Harrisonburg, Lynchburg, Newport News and Williamsburg, two in Roanoke and three in
Midlothian. The Maryland offices are located in Annapolis, Baltimore, 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
1
Table of Contents
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, 2010, assets of the Mortgage Banking
segment totaled $78.6 million. For the year ended December 31, 2010, net income for this segment totaled $782,000.
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 Alabama, 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, 2010, assets of the Consumer Finance segment totaled $224.2 million. For the year ended December 31, 2010, net income for this
segment totaled $9.4 million.
Employees
At December 31, 2010, we employed 544 full-time equivalent employees. We consider relations with our employees to be excellent.
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, efficiencies through economies of scale 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.
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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 cease to exist
or materially limit their purchases of mortgage loans.
Consumer Finance
The non-prime automobile finance business is highly competitive. The automobile finance market is highly fragmented and is served by a variety of financial entities, including
the captive finance affiliates of major automotive manufacturers, banks, savings associations, credit unions and independent finance companies. Many of these competitors have
substantially greater financial resources and lower costs of funds than our finance subsidiary. In addition, competitors often provide financing on terms that are more favorable to
automobile purchasers or dealers than the terms C&F Finance offers. Many of these competitors also have long-standing relationships with automobile dealerships and may offer
dealerships or their customers other forms of financing, including dealer floor plan financing and leasing, which we do not.
During 2008 and 2009, there was a 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. As these issues have abated,
institutions with access to capital have begun to re-enter the market. To continue to operate profitably, lenders must have a high level of operational and risk management skills and
access to competitive costs of funds.
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, by offering flexible loan terms and by quickly funding loans purchased from dealers.
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 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 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.
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When enacted in 2002, Section 404(b) of the SOX Act required public companies to include in their annual reports on Form 10-K an assessment from management of the
effectiveness of the company’s internal control over financial reporting, and required the company’s auditor to attest to and report on management’s assessment. From 2002 through
2010, the SEC had delayed implementation of Section 404(b) of the SOX Act for public companies with a public float below $75 million (i.e. companies that are smaller reporting
companies or non-accelerated filers). In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) permanently exempted smaller reporting
companies and non-accelerated filers from Section 404(b) of the SOX Act, and the SEC made conforming amendments to certain of its rules and forms in September 2010. The
Corporation has voluntarily provided an attestation by the Corporation’s auditor on management’s assessment of the Corporation’s internal control over financial reporting in this
Annual Report on Form 10-K.
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.
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, 2010, the total capital to risk-weighted assets ratio of the Corporation was
16.5 percent and the ratio of the Bank was 16.3 percent. At December 31, 2010, the Tier 1 capital to risk-weighted assets ratio was 15.3 percent for the Corporation and 15.0 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, 2010, the Tier l leverage ratio was 11.6 percent for the Corporation and 11.4 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 or CPP) 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.
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In December 2010, the Basel Committee on Banking Supervision (the Basel Committee) released its final framework for strengthening international capital and liquidity regulation,
now officially identified by the Basel Committee as “Basel III.” Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and
their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. Implementation is presently scheduled to be phased in between 2014 and 2019,
although it is possible that implementation may be delayed as a result of multiple factors including the current condition of the banking industry within the U.S. and abroad.
The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (CET1), (ii) specifies that Tier 1 capital consists of
CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made
to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.
When fully phased in on January 1, 2019, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at
least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted
assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as
that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-
weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total
capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance
sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).
Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated
with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers
of between 2.5% and 5%).
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets
above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face
constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital
ratios:
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3.5% CET1 to risk-weighted assets.
4.5% Tier 1 capital to risk-weighted assets.
8.0% Total capital to risk-weighted assets.
The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights,
deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such
category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over a five-year period (20% per year). The implementation
of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it
reaches 2.5% on January 1, 2019).
The U.S. banking agencies have indicated informally that they expect to propose regulations implementing Basel III in mid-2011 with final adoption of implementing regulations
in mid-2012. Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III, including the imposition of
additional capital surcharges on globally systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act requires or permits the federal banking agencies to
adopt regulations affecting banking institutions’ capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important
financial institutions. Accordingly, the regulations ultimately applicable to the Corporation may be substantially different from the Basel III final framework as published in December
2010. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Corporation’s net income and return on equity.
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Limits on Dividends
The Corporation is a legal entity, separate and distinct from the Bank. A significant portion of the revenues of the Corporation result from dividends paid to it by the Bank. Both
the Corporation and the Bank are subject to laws and regulations that limit the payment of dividends, including requirements to maintain capital at or above regulatory minimums.
Banking regulators have indicated that Virginia banking organizations should generally pay dividends only (1) from net undivided profits of the bank, after providing for all expenses,
losses, interest and taxes accrued or due by the bank and (2) if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and
overall financial condition. In addition, the FDIA prohibits insured depository institutions such as the Bank from making capital distributions, including the payment of dividends, if,
after making such distribution, the institution would become undercapitalized as defined in the statute.
We do not expect that any of these laws, regulations or policies will materially affect the ability of the Corporation or the Bank to pay dividends. During the year ended
December 31, 2010, the Bank declared $2.6 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.
The Dodd-Frank Act
On July 21, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act) was signed into law.
The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:
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Centralize significant aspects of consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing,
examining and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and, to a lesser extent, smaller institutions.
As a smaller institution, most consumer protection aspects of the Dodd-Frank Act will continue to be applied to the Corporation by the Federal Reserve and to the Bank
by the FDIC.
Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks from availing themselves of such preemption.
Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies
Require bank holding companies and banks to be both well capitalized and well managed in order to acquire banks located outside their home state.
Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the
size of the DIF and increase the floor of the size of the DIF.
Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository
institutions from conducting certain derivatives businesses in the institution itself.
Require large, publicly traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management.
Require loan originators to retain 5 percent of any loan sold or securitized, unless it is a “qualified residential mortgage”, which must still be defined by the regulators.
FHA, VA and Rural Housing Service loans are specifically exempted from the risk retention requirements.
Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders that apply to all public companies not just
financial institutions.
Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to
$250,000 and provide unlimited federal deposit insurance until December 31, 2012 for non-interest bearing demand transaction accounts at all insured depository
institutions.
Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and
other accounts.
Amend the Electronic Fund Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for
electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and
proportional to the actual cost of a transaction to the issuer.
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Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the
Corporation, its subsidiaries, its customers or the financial industry more generally. Provisions in the legislation that affect the payment of interest on demand deposits and interchange
fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the
Tier 1 capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of the Corporation and C&F Bank could require the Corporation and C&F
Bank to seek other sources of capital in the future. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank Act’s mandates are
discussed further below.
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: (1) prohibit 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) prohibit making any golden parachute payments to a senior executive officer (SEO) or any of the next five most highly
compensated employees (MHCE); (3) prohibit tax gross-ups to SEOs and any of the next 20 MHCEs; (4) provide 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) require 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) limit
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) prohibit employee compensation plans that would encourage manipulation of earnings to enhance an employee’s compensation;
(8) require the adoption of an excessive or luxury expenditures policy; (9) require compliance with federal securities laws and regulations regarding non-binding resolution on SEO
compensation to shareholders; (10) require disclosure of perquisites offered to SEOs and certain highly compensated employees; and (11) require disclosures related to compensation
consultant engagements.
Incentive Compensation
In June 2010, the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC issued a comprehensive final guidance on incentive compensation 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. The
guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles
that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively
identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective
oversight by the organization’s board of directors.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the
Corporation, that are not “large, complex banking organizations.” These reviews will 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. Enforcement actions may be taken against a banking
organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the
organization is not taking prompt and effective measures to correct the deficiencies.
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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. In
2010, the FDIC issued C&F Bank’s 2009 Community Reinvestment Act Performance Evaluation (the 2009 CRA Evaluation). C&F Bank received “Satisfactory” ratings on the Investment
Test component and the Service Test component evaluated as part of the 2009 CRA Evaluation. Based on issues identified at one of C&F Bank’s subsidiaries, C&F Mortgage, C&F
Bank received a “Needs to Improve” rating on the Lending Test component, and as a result, a “Needs to Improve” rating on its overall rating. In its evaluation, the FDIC concluded that
C&F Mortgage violated the Equal Credit Opportunity Act (the ECOA), Federal Reserve Regulation B, and the Fair Housing Act in connection with certain of its lending practices. While
C&F Bank’s board of directors and management strongly disagree with the FDIC’s conclusion that C&F Mortgage violated the ECOA, Federal Reserve Regulation B or the Fair
Housing Act, C&F Mortgage has strengthened and continues to strengthen its policies, procedures and monitoring of its lending practices to address the issues raised by the FDIC.
C&F Mortgage is and will continue to be committed to fair lending.
By statute, a bank such as C&F Bank with a “Needs to Improve” CRA rating has limitations on certain future business activities, including the ability to open new branches and
to make acquisitions, until its CRA rating improves. Management does not believe that these limitations will have a significant effect on C&F Bank’s current business plans. As also
required by statute, the FDIC referred its conclusions regarding the alleged violations to the Department of Justice (DOJ), and the DOJ has notified C&F Mortgage that it is
investigating the matter. Management has met with the DOJ regarding the investigation. At this time, it is not anticipated that the results of the investigation will have a material adverse
impact on C&F Financial Corporation’s results of operations or financial condition.
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 year 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
became effective April 1, 2009, and effectively made the range seven to 77.5 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 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. The legislation did not change coverage for retirement accounts, which continues to be $250,000. In July 2010,
the Dodd-Frank Act made permanent the $250,000 limit for federal deposit insurance.
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In November 2008, the FDIC adopted a final rule implementing the Temporary Liquidity Guarantee Program (TLGP) because of disruptions in the credit markets, 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, 2010 (extended twice from
December 31, 2009 and June 30, 2010, respectively). The Corporation has customer accounts that qualify for this coverage and continued its participation until
December 31, 2010. The Corporation has been incurring assessment charges since November 13, 2008.
In May 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.
In November 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. The FDIC has elected to forgo this increase
under a new DIF restoration plan adopted in October 2010 as discussed below. On December 30, 2009, the Corporation prepaid $3.2 million of FDIC assessments.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35 percent by September 30, 2020, as required by the Dodd-Frank
Act. Under the new restoration plan, the FDIC will forego the uniform three-basis point increase in initial assessment rates scheduled to take place on January 1, 2011 and maintain the
current schedule of assessment rates for all depository institutions. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase
or decrease assessment rates, following notice-and-comment rulemaking if required.
In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act that provide for temporary unlimited coverage for noninterest-bearing transaction
accounts beginning January 1, 2011 and continuing through December 2012. For purposes of this extension, the definition of noninterest-bearing transaction accounts excludes
negotiable order of withdraw consumer checking accounts (NOW accounts) and Interest on Lawyer Trust Accounts (IOLTAs). The extended program is not optional and will no longer
be funded by separate premiums.
In February 2011, the FDIC approved a final rule that changes the assessment base from domestic deposits to average consolidated total assets minus average tangible equity
(defined as Tier 1 capital); adopts a new large-bank pricing assessment scheme; and sets a target size for the DIF. The changes will go into effect beginning with the second quarter of
2011 and will be payable at the end of September 2011. The rule, as mandated by the Dodd-Frank Act, finalizes a target size for the DIF at 2 percent of insured deposits. It also
implements a lower assessment rate schedule when the fund reaches 1.15 percent and, in lieu of dividends, provides for a lower rate schedule when the reserve ration reaches 2 percent
and 2.5 percent.
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, 2010, the Bank owned $3.9 million of FHLB stock.
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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. In addition to other federal laws, mortgage
origination activities are subject to the ECOA, 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. As noted above under “Community Reinvestment Act”, the FDIC concluded
that C&F Mortgage violated the ECOA with certain of its lending practices. C&F Mortgage is and will continue to be committed to fair lending and has strengthened its policies,
procedures and monitoring of its lending practices to address the issues raised by the FDIC.
Interagency Appraisal and Evaluation Guidelines. In December 2010, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC, jointly with other
federal regulatory agencies, issued the Interagency Appraisal and Evaluation Guidelines. This guidance, which updates guidance originally issued in 1994, sets forth the minimum
regulatory standards for appraisals. The guidance incorporates previous regulatory issuances affecting appraisals, addresses advances in information technology used in collateral
evaluation, and clarifies standards for use of analytical methods and technological tools in developing evaluations. The guidance also requires institutions to use strong internal
controls to ensure reliable appraisals and evaluations and to monitor and periodically update valuations of collateral for existing real estate loans and transactions.
Consumer Financing Regulation. The Corporation’s Consumer Finance segment also is regulated by the VBFI and the states and jurisdictions in which it operates. 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.
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Other Safety and Soundness Regulations
Prompt Correction Action. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” These terms are defined under uniform regulations issued by each of the federal banking agencies regulating these institutions. An
insured depository institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight and is
increasingly restricted in the scope of its permissible activities. As of December 31, 2010, the Bank was considered “well capitalized.”
Gramm-Leach-Bliley Act of 1999 (GLBA). The GLBA implemented major changes to the statutory framework for providing banking and other financial services in the United
States. The GLBA, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms and other financial service providers. A bank
holding company that qualifies and elects to be a financial holding company is permitted to engage in activities that are financial in nature or incident or complimentary to financial
activities. The activities that the GLBA expressly lists as financial in nature include insurance underwriting, sales and brokerage activities, financial and investment advisory services,
underwriting services and limited merchant banking activities.
To become eligible for these expanded activities, a bank holding company must qualify as a financial holding company. To qualify as a financial holding company, each insured
depository institution controlled by the bank holding company must be well-capitalized, well-managed and have at least a satisfactory rating under the CRA. In addition, the bank
holding company must file with the Federal Reserve Board a declaration of its intention to become a financial holding company. As noted above under “Community Reinvestment Act”
the Bank received a “Needs to Improve” rating on its latest CRA rating. As such, at this time, the Corporation is not eligible 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
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include
proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system.
Such legislation could change banking statutes and the operating environment of the Corporation in substantial and unpredictable ways. If enacted, such legislation could increase or
decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial
institutions. The Corporation cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial
condition or results of operations of the Corporation. A change in statutes, regulations or regulatory policies applicable to the Corporation or C&F Bank, or any of its subsidiaries,
could have a material effect on the business of the Corporation.
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.
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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 or further deterioration of the current economic environment could adversely 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 during the recession
have resulted in significant write-downs of asset values by financial institutions. The Corporation has recognized significantly higher loan loss provisions and write-downs and other
expenses associated with foreclosed properties during 2008, 2009 and 2010 as the level of nonperforming assets increased throughout the period. The economic recovery has been less
than robust and the continued high levels of unemployment coupled with the continued downward pressure in the housing market has and may continue to have an adverse impact on
the Corporation’s results of operations.
Deterioration in the soundness of our counterparties could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in the financial industry,
including brokers and dealers, commercial banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions,
or the financial services industry generally, could 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 the FHA, 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 the FHA, Fannie Mae or Freddie Mac
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.
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 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 and 2010 as we were able to reprice fixed-rate deposits at lower rates as well as implement policies that established floors on variable rate loans. 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.
In addition, 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 C&F Finance’s fixed rate loan portfolio and its adjustable-rate borrowings.
Weakness in the secondary residential mortgage loan markets will adversely affect 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
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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 as well as fluctuations in mortgage
rates 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 which expired in the second quarter of 2010, have caused some increase in loan
originations and refinancing activity. There is no guarantee that the efforts by the Federal Reserve Board 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, early-payment default, or underwriting error, as investors attempt to minimize their losses. While we
entered into an agreement with our largest purchaser of loans that resolved all known and unknown indemnification obligations related to loans sold to this investor through 2010, and
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 recent recession, continuing high unemployment, and rate of further declines in real estate values, could hurt our business.
Our business is directly affected by general economic and market conditions; broad trends in industry and finance; legislative and regulatory changes; changes in governmental
monetary and fiscal policies; and inflation, all of which are beyond our control. A deterioration in economic conditions, in particular a prolonged economic slowdown within our
geographic region, could result in the following consequences, any of which could hurt our business materially: an increase in loan delinquencies; an increase in problem assets and
foreclosures; a decline in demand for our products and services; and a deterioration in the value of collateral for loans made by our various business segments.
Our level of credit risk is increasing due to the concentration of our loan portfolio in commercial loans and in consumer finance loans.
At December 31, 2010, 34 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, 2010, 35 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, our results of 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
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outcome of which are uncertain. Because any estimate of loan losses is necessarily subjective and the accuracy of any estimate depends on the outcome of future events, we face the
risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance
for loan losses would result in a decrease of our net income. Although we believe our allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot
predict such losses or that our allowance will be adequate in the future.
Competition from other financial institutions and financial intermediaries may adversely affect our profitability.
We face substantial competition in originating loans and in attracting deposits. Our competition in originating loans and attracting deposits comes principally from other banks,
mortgage banking companies, consumer finance companies, savings associations, credit unions, brokerage firms, insurance companies and other institutional lenders and purchasers of
loans. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and
are thereby able to serve the credit needs of larger clients. These institutions may be able to offer the same loan products and services that we offer at more competitive rates and prices.
Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans, which could adversely affect our profitability.
The recent repeal of federal prohibitions on payment of interest on demand deposits could increase interest expense.
As part of the Dodd-Frank Act, the prohibition on the ability of financial institutions to pay interest on demand deposit accounts was repealed. As a result, beginning on July 21,
2011 financial institutions may offer interest on demand deposits. The Corporation does not yet know what interest rates other institutions may offer. If we offer interest on demand
deposit accounts to attract new customers or retain existing customers, our interest expense will increase and our net interest margin will decline, which could have a material adverse
effect on the Corporation’s business, financial condition and results of operations.
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.
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.
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.
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The Dodd-Frank Act could increase our regulatory compliance burden and associated costs, place restrictions on certain products and services, and limit our future capital
raising strategies.
A wide range of regulatory initiatives directed at the financial services industry have been proposed in recent months. One of those initiatives, the Dodd-Frank Act, was signed
into law on July 21, 2010. The Dodd-Frank Act represents a sweeping overhaul of the financial services industry within the United States and mandates significant changes in the
financial regulatory landscape that will impact all financial institutions, including the Corporation. The Dodd-Frank Act will likely increase our regulatory compliance burden and may
have a material adverse effect on us, by increasing the costs associated with our regulatory examinations and compliance measures. The federal regulatory agencies, and particularly
bank regulatory agencies, are given significant discretion in drafting the Dodd-Frank Act’s implementing rules and regulations and, consequently, many of the details and much of the
impact of the Dodd-Frank Act will depend on the final implementing rules and regulations. Accordingly, it remains too early to fully assess the impact of the Dodd-Frank Act and
subsequent regulatory rulemaking processes on our business, financial condition or results of operations.
Among the Dodd-Frank Act’s significant regulatory changes, the Dodd-Frank Act creates a new financial consumer protection agency that could impose new regulations on us
and include its examiners in our routine regulatory examinations conducted by the FDIC, which could increase our regulatory compliance burden and costs and restrict the financial
products and services we can offer to our customers. This agency, named the Consumer Financial Protection Bureau, may reshape the consumer financial laws through rulemaking and
enforcement of the Dodd-Frank Act’s prohibitions against unfair, deceptive and abusive business practices, which may directly impact the business operations of financial institutions
offering consumer financial products or services, including the Corporation. This agency’s broad rulemaking authority includes identifying practices or acts that are unfair, deceptive or
abusive in connection with any consumer financial transaction or consumer financial product or service. Although the Consumer Financial Protection Bureau has jurisdiction over
banks with $10 billion or greater in assets, rules, regulations and policies issued by the Bureau may also apply to the Corporation or its subsidiaries by virtue of the adoption of such
policies and best practices by the Federal Reserve and FDIC. The costs and limitations related to this additional regulatory agency and the limitations and restrictions that will be placed
upon the Corporation with respect to its consumer product and service offerings have yet to be determined. However, these costs, limitations and restrictions may produce significant,
material effects on our business, financial condition and results of operations
The Dodd-Frank Act also increases regulatory supervision and examination of bank holding companies and their banking and non-banking subsidiaries, which could increase
our regulatory compliance burden and costs and restrict our ability to generate revenues from non-banking operations. The Dodd-Frank Act imposes more stringent capital
requirements on bank holding companies, which could limit our future capital strategies. The Dodd-Frank Act also increases regulation of derivatives and hedging transactions, which
could limit our ability to enter into, or increase the costs associated with, interest rate hedging transactions.
Our deposit insurance premiums could increase in the future, which may adversely affect our future financial performance.
The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a certain
level. Economic conditions since 2008 have increased the rate of bank failures and expectations for further bank failures, requiring the FDIC to make payments for insured deposits from
the DIF and prepare for future payments from the DIF.
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
need to replenish the DIF, as a result of increased bank failures and expected future bank failures. In addition, the FDIC required regulated institutions to prepay their fourth quarter
2009, and full year 2010, 2011 and 2012 assessments in December 2009. Any similar, additional measures taken by the FDIC to maintain or replenish the DIF may have an adverse effect
on our financial condition and results of operations.
On February 7, 2011, the FDIC adopted final rules to implement changes required by the Dodd-Frank Act with respect to the FDIC assessment rules that will be effective April 1,
2011. Once these changes are effective, a depository institution’s deposit insurance assessment will be calculated based on the institution’s total assets less tangible equity, rather than
the previous base of total deposits. The Corporation expects that these changes will not increase the Corporation’s FDIC insurance assessments for comparable asset and deposit
levels. However, if the Bank’s asset size increases or the FDIC takes other actions to replenish the DIF, the Bank’s FDIC insurance premiums could increase.
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
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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 remodeled by the Corporation in 1998, has been retained as back-up
facilities for the Toano 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 $109,000 for the year ended December 31, 2010.
C&F Mortgage’s Newport News loan production office is located on the second floor of the Bank’s Newport News branch building. The Corporation has 21 leased loan
production offices, 12 in Virginia, four 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 $1.07 million for the year ended December 31, 2010.
Until December 30, 2010, the Corporation owned a building located at 4660 South Laburnum Avenue in Richmond, Virginia. The building was acquired in June 2005 and had
approximately 8,800 square feet. The building has been sold to an unrelated third party and leased back under a short-term lease from the buyer. The building currently houses C&F
Finance’s headquarters and provides space for its loan and administrative functions and staff. The Corporation has entered into a five-year lease agreement with an unrelated third
party for approximately 15,000 square feet of office space in Richmond, Virginia. Upon completion of the improvements to the leased premises, which the Corporation expects to occur
within the next three months, C&F Finance’s headquarters and its loan and administrative functions and staff will relocate from 4660 South Laburnum Avenue to this new leased
location. The Hampton office of C&F Finance is located on the second floor of the Bank’s Hampton 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 $79,000 for the year ended December 31, 2010.
All of the Corporation’s properties are in good operating condition and are adequate for the Corporation’s present and anticipated future needs.
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ITEM 3.
LEGAL PROCEEDINGS
The Corporation and its subsidiaries may be involved in certain litigation matters arising in the ordinary course of business. Although the ultimate outcome of these matters
cannot be ascertained at this time, and the results of legal proceedings cannot be predicted with certainty, we believe, based on current knowledge, that the resolution of any such
matters arising in the ordinary course of business will not have a material adverse effect on the Corporation.
ITEM 4.
[REMOVED AND RESERVED]
EXECUTIVE OFFICERS OF THE REGISTRANT
Name (Age)
Present Position
Larry G. Dillon (58)
Chairman, President and
Chief Executive Officer
Chairman, President and Chief Executive Officer of the Corporation and the Bank since 1989
Business Experience
During Past Five Years
Thomas F. Cherry (42)
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 (54)
President and Chief Executive Officer of C&F Mortgage since 1995
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation’s Common Stock is traded on the over-the-counter market and is listed for trading on the NASDAQ Global Select Market of the NASDAQ Stock Market under
the symbol “CFFI.” As of February 25, 2011, 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 $22.65. Following are the high and low sales prices as reported by the NASDAQ Stock Market, along with the dividends that were paid quarterly in 2010 and
2009.
PART II
Quarter
First
Second
Third
Fourth
$21.36 $19.00 $
High
22.69
19.70
23.00
2010
Low Dividends
0.25
0.25
0.25
0.25
16.51
17.05
17.78
High
$19.00
18.00
21.45
20.97
2009
Low Dividends
0.31
$
0.25
0.25
0.25
$10.30
12.80
14.55
16.00
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 2010, the Corporation did
not purchase any of its Common Stock.
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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 common equity
Dividend payout ratio – common shares
Average common equity to average assets
2010
2009
2008
2007
2006
$ 904,137
92,777
606,744
625,134
$ 888,430
88,876
613,004
606,630
$ 855,657
64,857
633,017
550,725
$ 785,596
65,224
585,881
527,571
$ 734,468
68,006
517,843
532,835
$
$
69,848
13,235
56,613
14,959
41,654
29,700
60,295
11,059
2,949
8,110
1,149
6,961
$
$
64,971
15,459
49,512
18,563
30,949
36,689
60,167
7,471
1,945
5,526
1,130
4,396
$
$
64,130
21,395
42,735
13,766
28,969
25,149
49,320
4,798
617
4,181
—
4,181
$
$
64,825
23,378
41,447
7,130
34,317
25,878
48,371
11,824
3,344
8,480
—
8,480
$
$
58,582
18,457
40,125
4,625
35,500
27,387
45,328
17,559
5,430
12,129
—
12,129
$
2.26
2.24
1.00
3,103,469
$
1.44
1.44
1.06
3,048,491
$
1.38
1.37
1.24
3,058,274
$
2.77
2.67
1.24
3,181,445
$
3.85
3.71
1.16
3,273,429
0.78%
9.74
44.25
8.01
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
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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 and may include, but are not limited to, statements regarding profitability, liquidity,
the Corporation’s and each business segment’s loan portfolio, allowance for loan losses, trends regarding the provision for loan losses, trends regarding net loan charge-offs, trends
regarding levels of nonperforming assets and troubled debt restructurings and expenses associated with nonperforming assets, provision for indemnification losses, levels of
noninterest income and expense, interest rates and yields, interest rate sensitivity, market risk, regulatory developments, capital requirements, growth strategy and financial and other
goals. 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 Dodd-Frank Act and regulations promulgated thereunder and 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 level of indemnification losses related to mortgage loans sold
demand for loan products
deposit flows
the strength of the Corporation’s counterparties
competition from both banks and non-banks
demand for financial services in the Corporation’s market area
technology
reliance on third parties for key services
the commercial and residential real estate markets
demand in the secondary residential mortgage loan markets
the Corporation’s expansion and technology initiatives
accounting principles, policies and guidelines
These risks are exacerbated by the turbulence during 2008, 2009 and portions of 2010 in the global and United States financial markets. Continued weakness in the global and
United States financial markets could further affect 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 in general. While there are some signs of improvement in the economic environment, there was a prolonged
period of volatility and disruption in the markets, and unemployment has risen to, and remains at, high levels. There can be no assurance that these unprecedented 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 Purchase Program on
January 9, 2009.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in the financial industry,
including brokers and dealers, commercial banks, and other institutions. As a result, defaults by, or even rumors or questions about defaults by, 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.
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Further, there can be no assurance that the actions taken by the federal government and regulatory agencies will stabilize the United States financial system or alleviate the
industry or economic factors that may adversely affect the Corporation’s business and financial performance. It also is not clear what effects the Dodd-Frank Act, the regulations
promulgated thereunder or other future regulatory reforms may have on financial markets, the financial services industry and depository institutions, and consequently on 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. For more
information see the section titled “Asset Quality” within Item 7.
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, or underwriting error. 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. Troubled debt restructurings (TDRs) are also
considered impaired loans. A TDR occurs when we agree to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower. For more
information see the section titled “Asset Quality” within Item 7.
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
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regularly review each investment security for other-than-temporary impairment based on criteria that includes 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 (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. 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 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 2010 and determined there was no
impairment to be recognized in 2010. 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 mutual funds invested in 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.
Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance
sheet. The derivative financial instruments have been designated as and qualify as cash flow hedges. The effective portion of the gain or loss on the cash flow hedges is reported as a
component of other comprehensive income, net of deferred taxes, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
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: (i) return on average assets (ROA), (ii) return on average common
equity (ROE), and (iii) growth in earnings. In addition to these financial performance measures, we track the performance of the Corporation’s three principal business activities: retail
banking, mortgage banking, and consumer finance. We also actively manage our capital through growth and dividends, while considering the need to maintain a strong regulatory
capital position.
Financial Performance Measures
Net income for the Corporation was $8.1 million in 2010, compared with net income of $5.5 million in 2009. Net income available to common shareholders for 2010 was $7.0 million,
or $2.24 per common share assuming dilution, compared with $4.4 million, or $1.44 per common share assuming dilution for 2009. The difference between reported net income and net
income available to common shareholders 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 financial results for 2010 were affected by continued loan growth, lower net charge-offs and the effect of the low interest rate environment on variable rate
borrowings in the Consumer Finance segment; higher net interest margin, higher provisions for loan and foreclosed properties losses, and higher general operating expenses associated
with problem assets in the Retail Banking segment; and reduced loan production and higher provisions for indemnification losses in the Mortgage Banking segment. See “Principal
Business Activities” below for additional discussion.
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The Corporation’s ROE and ROA were 9.74 percent and 0.78 percent, respectively, for the year ended December 31, 2010, compared to 6.60 percent and 0.50 percent for the year
ended December 31, 2009. The increase in these ratios during 2010 was a result of an increase in net income available to common shareholders primarily due to the performance of the
Consumer Finance segment, which more than offset the results of the Retail Banking and Mortgage Banking segments that continue to be negatively affected by the challenging
economic environment and issues facing the financial services industry in general. See “Principal Business Activities” below for additional information.
While management believes that the Corporation is well positioned to see earnings improvement in 2011, the following factors could influence the Corporation’s financial
performance in 2011:
•
Retail Banking: Managing the risks inherent in our loan portfolio and expenses associated with nonperforming assets will once again influence the Bank’s performance
during 2011. General economic trends in the Bank’s markets will continue to affect the quality of the loan portfolio and, therefore, our provision for loan losses, as well as
the amount of our nonperforming assets. We expect to continue to see elevated expenses associated with properties that the Bank has taken possession of and from
future foreclosures. We do not expect significant loan growth in the loan portfolio due to the current economic environment. Further actions that may be taken by the
federal government to restrict or control pricing on products offered by banks, such as overdraft protection and interchange income, may affect the Bank’s noninterest
income during 2011. Increases in noninterest expense are expected as a result of the increased cost associated with managing the ever increasing complexity of routine
compliance, regulatory and asset quality issues.
•
•
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 may spur activity in 2011, the continued decline in housing market values,
coupled with the availability of fewer mortgage loan products and tighter underwriting guidelines, will temper demand for home mortgage loans. In addition, the absence
of the home buyer tax credits, which expired early in 2010, may have a negative effect on demand. Any rise in interest rates would ultimately reduce refinancing activity
and potentially new and resale home purchases, thus reducing loan originations. While the indemnification provision should decrease in 2011 as a result of the settlement
agreement reached in 2010 with C&F Mortgage’s largest investor as discussed further below, there will continue to be 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.
Consumer Finance: If short-term interest rates remain low, 2011 should be another good year for C&F Finance. However, changes in interest rates may affect net interest
margin at C&F Finance in 2011. 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 C&F Finance’s fixed rate loan portfolio and its adjustable-rate borrowings, thus
causing margin compression and adversely affecting the Corporation’s net income. While delinquencies and charge-offs remain low entering 2011, the ongoing effects of
the recent 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 affect consumer confidence or disposable income could increase loan defaults 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 $1.5 million for the year ended December 31, 2010, compared to a net loss of $2.2
million for the year ended December 31, 2009. The results for 2010 included the effects of (1) improved net interest margins attributable to the establishment of interest rate floors on new
loans and loans at renewal and lower rates paid on deposits as higher priced certificates of deposit repriced downward during the year, (2) a slightly higher provision for loan losses due
to continued weakness in the economy and increases in nonaccrual loans, (3) a higher provision for losses on foreclosed properties and general operating expenses associated with
problem assets as property values continued to be depressed and (4) higher personnel costs, including health care costs, due to slight increases in staffing levels to manage the
complexity of routine compliance, regulatory and asset quality issues and the rising costs of employee benefits.
The Bank’s nonperforming assets were $18.1 million at December 31, 2010, compared to $17.2 million at December 31, 2009. Nonperforming assets at December 31, 2010 included
$7.8 million in nonaccrual loans and $10.3 million in foreclosed properties. Troubled debt restructurings were $9.8 million at December 31, 2010 compared to $3.1 million at December 31,
2009. The increase in troubled debt restructurings is primarily a result of restructuring a note with one large commercial developer. Nonaccrual loans
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primarily consist of five relationships totaling $6.7 million secured by residential properties and commercial loans secured by non-residential properties. Specific reserves of $1.6 million
have been established for these loans. Management believes it has provided adequate loan loss reserves for nonaccrual loans based on the current estimated fair values of the
collateral. Foreclosed properties at December 31, 2010 consist of both residential and non-residential properties. These properties have been written down to their estimated fair values
less selling costs. The Bank’s credit management team directed significant effort throughout 2009 and 2010 to real estate loan workouts and restructurings and, when necessary,
foreclosures. We are continually evaluating the credit quality of the Bank’s loan portfolio and the carrying values of real estate acquired through foreclosure, and we have charged off
loans, written down foreclosed properties and increased reserves as we considered necessary.
Mortgage Banking: The Mortgage Banking segment, which consists of C&F Mortgage, reported net income of $782,000 for the year ended December 31, 2010, compared to net
income of $3.4 million for the year ended December 31, 2009. The reduced earnings in 2010 was primarily a result of a decline in gains on sales of loans to $18.6 million in 2010 from $25.0
million in 2009 and an increase in the provision for indemnification losses to $3.7 million in 2010 from $2.5 million in 2009. Loan origination volumes for 2010 declined to $748.3 million
compared to $1.1 billion for 2009. The decrease in loan originations was a result of fluctuations in mortgage rates, a continued overall weakness in the housing market due to the
challenging economic environment, the expiration of the home buyer tax credits during the first half of 2010 and loan officer turnover. Loans originated for new and resale home
purchases in 2010 decreased to $493.9 million compared to $563.4 million in 2009. Loans originations for refinancings in 2010 were $254.4 million compared to $499.7 million for 2009.
Foreclosures and payment defaults have continued to remain elevated in the marketplace, resulting in increased demands for loan repurchases and indemnification requests. An
indemnification obligation arises when a purchaser of a loan (an investor) sold by the Mortgage Banking segment incurs a loss due to demonstrated borrower misrepresentation, fraud,
or early default, or underwriting errors. The increase in the provision for indemnification losses for 2010 was primarily due to an agreement reached during the second quarter of 2010
with C&F Mortgage’s largest investor that resolved all known and unknown indemnification obligations for loans sold to this investor prior to 2010. With this agreement in place, we
expect a reduction in future indemnification obligations as the majority of our indemnification issues at the time involved the types of loans originated for and sold to this investor.
The decline in revenue from gains on sales of loans and the increase in the provision for indemnification losses were partially offset by (1) a decrease for 2010 in commission-
based and profitability-based personnel costs and (2) a decrease in the provision for loan losses resulting from a decrease in loans held for investment, decreases in loan origination
volume and lower net charge-offs, compared to 2009.
Consumer Finance: The Consumer Finance segment, which consists of C&F Finance, reported net income of $9.4 million for the year ended December 31, 2010, compared to net
income of $4.8 million for the year ended December 31, 2009. The Consumer Finance segment continues to benefit from sustained loan growth, lower net charge-offs and the current low
interest rate environment. Long-standing productive dealer relationships, along with new relationships established in current and new markets, and a higher volume of auto sales in the
markets we serve have resulted in increased loan production. Our underwriting policies, collection efforts and higher values received when repossessed vehicles are sold have all
contributed to an annualized net charge-off ratio that has declined over the past two years. The sustained loan production has resulted in an increase in average loans of 15.0 percent
for the year ended December 31, 2010 as compared to 2009, while lower delinquencies and lower net charge-offs resulted in a $3.2 million decrease in the provision for loan losses. In
addition, the sustained low interest rate environment has resulted in lower funding costs on the Consumer Finance segment’s variable-rate borrowings. These items were partially offset
by an increase in personnel costs of $879,000 for the year ended December 31, 2010 which was a result of an increase in personnel to generate and manage the growth in loans
outstanding, as well as an increase in variable compensation. The allowance for loan losses as a percentage of loans remained approximately the same, 7.90 percent at December 31, 2010
compared to 7.89 percent at December 31, 2009. Management believes that the current allowance for loan losses is adequate to absorb probable losses in the loan portfolio. If the
economy continues to struggle 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 borrower default.
Other and Eliminations The net loss for the year ended December 31, 2010 for this combined segment was $580,000, compared to a net loss of $534,000 for the year ended
December 31, 2009. Revenue and expenses of this combined segment include the results of operations of our investment, insurance and title subsidiaries, dividends received on the
Corporation’s investment in equity securities, interest expense associated with the Corporation’s trust preferred capital notes, other general corporate expenses and the effects of
intercompany eliminations.
Capital Management
Total shareholders’ equity increased $3.9 million to $92.8 million at December 31, 2010, compared to $88.9 million at December 31, 2009. Earnings during 2010 principally
contributed to this growth.
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We have continued to manage our capital through asset growth and dividends on common shares outstanding. The capital and liquidity positions of the Corporation remain
strong. The Corporation continues to participate in the CPP, which was seen as an opportunity to inexpensively increase capital and to insure against unforeseen events given the
turmoil in the financial markets. Even though the Corporation’s capital has continued to increase, and has and continues to exceed current regulatory capital standards for being well-
capitalized, the Corporation has not yet repurchased these securities. We are currently analyzing the possibility of full or partial 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 a potential 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 2010. The dividend
payout ratio for 2010 was 44.2 percent based on net income available to common shareholders. 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 CPP 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 CPP, see Item 8, “Financial
Statements and Supplementary Data,” under the heading “Note 9: Shareholders’ Equity, Other Comprehensive Income and Earnings Per Common Share.”
24
Table of Contents
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets for each of the years ended December 31, 2010, 2009 and 2008. 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
34 percent in all three years presented).
TABLE 1: Average Balances, Income and Expense, Yields and Rates
(Dollars in thousands)
Assets
Securities:
Taxable
Tax-exempt
Total securities
Loans, net
Interest-bearing deposits in other banks and Fed funds sold
Total earning assets
Allowance for loan losses
Total non-earning assets
Total assets
Liabilities and Shareholders’ Equity
Time and savings deposits:
Interest-bearing deposits
Money market deposit accounts
Savings accounts
Certificates of deposit, $100 thousand or more
Other certificates of deposit
Total time and savings deposits
Borrowings
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income
Interest rate spread
Interest expense to average earning assets
Net interest margin
2010
Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
2009
Income/
Expense
Yield/
Rate
Average
Balance
2008
Income/
Expense
Yield/
Rate
$
383
6,786
7,169
65,003
43
72,215
1.87%
6.43
5.69
9.49
0.37
8.78
537
563
42
3,161
3,935
8,238
4,997
13,235
0.57%
0.88
0.10
2.21
2.20
1.58
2.97
1.92
$ 20,531
105,526
126,057
684,667
11,628
822,352
(25,893)
95,431
$891,890
$ 95,005
64,085
41,685
142,918
178,569
522,262
167,984
690,246
89,430
20,776
800,452
91,438
$891,890
$ 15,839
98,596
114,435
694,760
3,936
813,131
(21,615)
84,457
$875,973
$ 86,478
66,562
41,449
119,246
176,657
490,392
191,201
681,593
85,811
22,378
789,782
86,191
$875,973
$
549
6,502
7,051
60,179
6
67,236
3.46%
6.59
6.16
8.66
0.15
8.27
640
1,027
44
3,433
5,174
10,318
5,141
15,459
0.74%
1.54
0.11
2.88
2.93
2.10
2.69
2.27
$
867
5,094
5,961
59,918
28
65,907
5.20%
6.60
6.35
9.01
2.18
8.67
834
1,699
105
4,088
6,614
13,340
8,055
21,395
1.01%
2.48
0.25
4.10
3.94
2.89
4.16
3.27
$ 16,662
77,164
93,826
664,715
1,286
759,827
(17,182)
77,354
$819,999
$ 82,560
68,406
42,445
99,726
167,849
460,986
193,466
654,452
83,533
16,612
754,597
65,402
$819,999
$58,980
$51,777
$44,512
6.86%
1.61%
7.17%
6.00%
1.90%
6.37%
5.40%
2.82%
5.86%
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.
25
Table of Contents
(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
2010 Compared to 2009
TABLE 2: Rate-Volume Recap
2010 from 2009
2009 from 2008
Increase (Decrease)
Due to
Rate
Volume
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Rate
Volume
Total
Increase
(Decrease)
$ 5,710
$ (886)
$ 4,824
$(2,390)
$2,651
$
261
(299)
(165)
15
5,261
133
449
22
(282)
(166)
284
37
4,979
(273)
(6)
(28)
(2,697)
(45)
1,414
6
4,026
(318)
1,408
(22)
1,329
(161)
(427)
(2)
(881)
(1,295)
(2,766)
516
(2,250)
$ 7,511
58
(37)
—
609
56
686
(660)
26
$ (308)
(103)
(464)
(2)
(272)
(1,239)
(2,080)
(144)
(2,224)
$ 7,203
(229)
(627)
(59)
(1,360)
(1,772)
(4,047)
(2,821)
(6,868)
$ 4,171
35
(45)
(2)
705
332
1,025
(93)
932
$3,094
(194)
(672)
(61)
(655)
(1,440)
(3,022)
(2,914)
(5,936)
$ 7,265
Net interest income, on a taxable-equivalent basis, for the year ended December 31, 2010 was $59.0 million, compared to $51.8 million for 2009. The higher net interest income
resulted from a 80 basis point increase in net interest margin coupled with a 1.1 percent increase in average earning assets for 2010 compared to 2009. The increase in net interest margin
was principally a result of an increase in the yield on loans and a decrease in the rates paid on time and savings deposits partially offset by an increase in the rates paid on borrowings.
The increase in the yield on loans was primarily a result of the changing mix of loans resulting from a decrease in lower yielding average loans at the Retail Banking and Mortgage
Banking segments and an increase in the higher yielding loans at the Consumer Finance segment. In addition, an increase in the yields on loans at the Retail Banking segment resulted
from the repricing of loans and implementation of interest rate floors on loans at renewal. The decrease in rates paid on time and savings deposits was primarily a result of a reduction in
interest paid on interest bearing deposits and money market deposit accounts, resulting from the sustained low interest rate environment and the repricing of higher rate certificates of
deposit as they matured. The increase in rates paid on borrowings was a result of the change in the mix of borrowings with a decline in average lower cost short-term borrowings
primarily a result of deposit growth, as well as the effect of a 25 basis point increase in our variable rate revolving line of credit beginning in July 2010.
Average loans, which includes both loans held for investment and loans held for sale, decreased $10.1 million to $684.7 million in 2010 from $694.8 million in 2009.
Average loans held for investment decreased $5.7 million during 2010 compared to 2009. The Retail Banking segment’s portfolio of average loans held for investment decreased
$31.8 million in 2010, compared to 2009, primarily as current economic conditions reduced loan demand and caused an increase in loan charge-offs and foreclosures. Despite the
reduction in average loans, the Retail Banking segment was able to increase its yield for 2010, compared to 2009, through increases in interest rates and the implementation of interest
rate floors on new or renewing adjustable rate loans in the latter half of 2009 and throughout 2010. The Consumer Finance segment’s portfolio of average loans held for investment
increased $26.8 million during 2010, compared to 2009, as a result of robust demand in existing and new markets. The Consumer Finance segment’s loans are typically higher yielding
than other loans in our portfolio due to higher risks inherent in the portfolio.
Average loans held for sale at the Mortgage Banking segment decreased $4.4 million during 2010, compared to 2009, as loan origination volumes have declined since 2009. The
decline in origination volumes are a result of fluctuations in mortgage rates, a continued overall weakness in the housing market due to the challenging economic conditions, the
expiration of the home buyer tax credits during the first half of 2010 and loan officer turnover. The yield on the Mortgage Banking segment’s loans has decreased in 2010, compared to
2009, as residential mortgage loan interest rates on average have declined since 2009.
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Table of Contents
The overall yield on average loans increased 83 basis points to 9.49 percent for 2010, compared to 2009, principally as a result of the shift in the mix of the portfolio from lower
yielding loans held in our Retail Banking and Mortgage Banking segments to higher yielding loans in our Consumer Finance segment.
Average securities available for sale increased $11.6 million during 2010, compared to 2009. The increase in securities available for sale occurred predominantly in the Retail
Banking segment’s municipal bond portfolio in conjunction with the strategy to increase the investment portfolio as a percentage of total assets. This strategy is based on the
investment portfolio’s role of managing interest rate sensitivity, providing liquidity and serving as an additional source of interest income. The funding of this strategy has come from
the growth in deposits, coupled with reduced loan demand in the Retail Banking segment. The lower yields on securities available for sale in 2010, compared to 2009, resulted from
purchases of securities in the current low interest rate environment as well as purchases of shorter-term securities.
Average interest-bearing deposits in other banks increased $7.7 million during 2010, compared to 2009. The increase resulted from reduced loan demand, coupled with deposit
growth.
Average interest-bearing time and savings deposits increased $31.9 million during 2010, compared to 2009. The mix in interest-bearing time and savings deposits has been
shifting from shorter-term, lower rate money market deposits to longer-term, higher rate certificates of deposits. The average cost of deposits declined 52 basis points during 2010,
compared to 2009 as time deposits that matured and repriced throughout 2009 and into 2010 were at lower interest rates and an increase in shorter-term interest-bearing deposits which
pay a lower interest rate.
Average borrowings decreased $23.2 million during 2010, compared to 2009. This decrease was attributable to reduced funding needs as the growth in average earning assets
has primarily been met through the growth in average deposits. The average cost of borrowings increased 28 basis points during 2010, compared to 2009, as a result of a change in the
composition of borrowings, whereby lower-cost short-term variable-rate borrowings were repaid from excess liquidity provided by lower loan demand and deposit growth. In addition, a
25 basis point increase in the Consumer Finance segments variable rate revolving line of credit, which began in July 2010, contributed to the increase.
Interest rates will be a significant factor influencing the performance of all of the Corporation’s business segments during 2011. 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.
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 was
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 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 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 occurred at lower yields and higher-yielding securities were called or matured, coupled with a decline in
dividends on FHLB stock in 2009.
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Table of Contents
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 were 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 was indexed to short-
term interest rates, which remained low throughout 2009.
NONINTEREST INCOME
TABLE 3: Noninterest Income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other income
Total noninterest income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains (losses) on calls of available for sale securities
Other income
Total noninterest income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other-than-temporary impairment of available for sale securities
Other income
Total noninterest income
2010 Compared to 2009
Retail
Banking
$ —
3,511
1,920
58
604
$6,093
Retail
Banking
$ —
3,303
1,650
44
807
$ 5,804
Retail
Banking
$ —
3,907
1,550
227
—
349
$ 6,033
Year Ended December 31, 2010
Mortgage
Banking
$18,567
—
2,795
—
470
$21,832
Consumer
Finance
$ —
—
8
—
681
689
$
Other and
Eliminations
(3)
$
—
190
12
887
1,086
$
Year Ended December 31, 2009
Mortgage
Banking
$ 24,976
—
3,359
—
852
$ 29,187
Consumer
Finance
$ —
—
9
—
594
603
$
Other and
Eliminations
—
$
—
—
(22)
1,117
1,095
$
Year Ended December 31, 2008
Mortgage
Banking
$ 16,714
—
2,163
—
—
5
$ 18,882
Consumer
Finance
$ —
—
8
—
—
580
588
$
Other and
Eliminations
(21)
$
—
—
7
(1,575)
1,235
(354)
$
Total
$18,564
3,511
4,913
70
2,642
$29,700
Total
$ 24,976
3,303
5,018
22
3,370
$ 36,689
Total
$ 16,693
3,907
3,721
234
(1,575)
2,169
$ 25,149
Total noninterest income decreased $7.0 million, or 19.0 percent, to $29.7 million during 2010 compared to 2009. The decrease primarily resulted from (1) decreased gains on sales
of loans and ancillary fees associated with lower loan originations in the Mortgage Banking segment and (2) a one-time fee received in 2009 and recorded in other income, in connection
with a change in the debit card processor in the Retail Banking segment. These decreases were partially offset by increases in (1) services charges on deposit accounts as higher
overdraft protection and returned check charges were incurred by customers and (2) other service charges primarily due to higher bank card interchange fees in the Retail Banking
segment. In future periods, the Corporation’s ability to
28
Table of Contents
generate revenue through service charges and fees, including deposit account service charges and fees (including overdraft fees) and bank card interchange fees, may be limited by
legislative or regulatory restrictions on fees related to consumer financial products and services.
2009 Compared to 2008
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) the non-recurring $1.6 million other-than-temporary impairment in 2008 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 during 2009, which heightened customer sensitivity to incurring such fees.
NONINTEREST EXPENSE
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses:
OREO expenses
Provision for indemnification losses
Other expenses
Total other expenses
Total noninterest expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses:
OREO expenses
Provision for indemnification losses
Other expenses
Total other expenses
Total noninterest expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses:
OREO expenses
Provision for indemnification losses
Other expenses
Total other expenses
Total noninterest expense
2010 Compared to 2009
TABLE 4: Noninterest Expense
Retail
Banking
$14,661
3,397
3,088
—
6,627
9,715
$27,773
Retail
Banking
$ 13,881
3,471
2,414
—
6,587
9,001
$ 26,353
Retail
Banking
$ 13,378
3,628
211
—
6,088
6,299
$ 23,305
Year Ended December 31, 2010
Consumer
Finance
$ 6,062
409
Mortgage
Banking
$13,448
1,932
Other
$ 718
30
23
3,745
3,192
6,960
$22,340
—
—
2,484
2,484
$ 8,955
—
—
479
479
$1,227
Year Ended December 31, 2009
Consumer
Finance
$ 5,183
408
Mortgage
Banking
$ 15,381
1,808
$
Other
673
27
15
2,490
5,061
7,566
$ 24,755
—
—
2,305
2,305
$ 7,896
—
—
463
463
$ 1,163
Year Ended December 31, 2008
Consumer
Finance
$ 4,662
416
Mortgage
Banking
8,889
$
1,962
$
Other
795
25
167
1,091
5,278
6,536
$ 17,387
—
—
2,299
2,299
$ 7,377
—
—
431
431
$ 1,251
Total
$34,889
5,768
3,111
3,745
12,782
19,638
$60,295
Total
$ 35,118
5,714
2,429
2,490
14,416
19,335
$ 60,167
Total
$ 27,724
6,031
378
1,091
14,096
15,565
$ 49,320
Total noninterest expense increased $128,000, or 0.2 percent, to $60.3 million during 2010 compared to 2009. Salaries and employee benefits expense for the Mortgage Banking
segment for 2010 compared to 2009 were significantly lower as a result of a decline in loan originations and profitability. In addition, 2010 included an increase in the provision for
indemnification losses of $1.3 million to $3.7 million due primarily to an agreement entered into during the second quarter of 2010 with the Mortgage Banking segment’s largest
purchaser of loans. The agreement resolves all known and unknown indemnification obligations for loans sold to this investor prior to 2010. With this agreement in place, we expect a
reduction in future indemnification obligations as the majority
29
Table of Contents
of our indemnification issues were with the types of loans originated for and sold to this investor. Salaries and employee benefits expense in the Retail Banking segment increased for
2010 compared to 2009 as a result of higher staffing levels and health care costs. The increase in staffing levels is primarily as result of an increase in the number of personnel to manage
the complexity of routine compliance, regulatory and asset quality issues. Other expenses in the Retail Banking segment include higher costs and provisions for losses associated with
foreclosed properties for 2010, offset by the 2009 FDIC special assessment and higher bank card processing expenses in 2009. An increase in salaries and employee benefits expense for
2010 at the Consumer Finance segment was a result of staff additions to support loan growth.
2009 Compared to 2008
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 expenses 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.
INCOME TAXES
Applicable income taxes on 2010 earnings amounted to $2.9 million, resulting in an effective tax rate of 26.7 percent, compared with $1.9 million, or 26.0 percent, in 2009 and
$617,000, or 12.9 percent, in 2008. The increase in the effective rate in 2010 in relation to 2009 and the increase in the effective rate in 2009 compared 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.
ASSET QUALITY
Allowance and Provision for Loan Losses
Allowance for Loan Losses 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 and all troubled debt restructurings are considered for individual impairment testing. 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. A loan is not considered impaired during a period of delay in payment if the ultimate collectibility of all amounts due
is expected. If a loan is considered impaired, 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. When a loan is determined to be impaired, we follow a consistent process to measure that
impairment in our loan portfolio. We then establish a specific allowance for impaired loans based on the difference between the carrying value of the loan and its estimated fair value.
For collateral dependent loans we obtain an updated appraisal if we do not have a current one on file. Appraisals are performed by independent third party appraisers with relevant
industry experience. We may make adjustments to the appraised value based on recent sales of like properties or general market conditions when appropriate. 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, special mention). 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 (e.g., special mention, substandard, doubtful, loss) 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. Our analysis of charge-off history also considers economic cycles and the trends during those cycles. Those cycles that more
closely match the current environment are considered more relevant during our review. 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:
•
Real estate residential mortgage loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.
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•
•
•
•
Real estate construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of
the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not
be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
Commercial, financial and agricultural loans 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. In addition,
there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.
Equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.
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.
As discussed above we segregate loans meeting the criteria for special mention, substandard, doubtful and loss from non-classified, or pass rated, loans. We review the
characteristics of each rating at least annually, generally during the first quarter. The characteristics of these ratings are as follows:
•
•
•
•
•
•
Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing
loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When
necessary, acceptable personal guarantors support the loan.
Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The
borrower’s recent payment history is characterized by late payments. The Corporation’s risk exposure is mitigated by collateral supporting the loan. The collateral is
considered to be well-margined, well maintained, accessible and readily marketable.
Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Corporation’s credit extension. The payment history
for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of
the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Corporation. There is a distinct possibility that the
Corporation will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our
definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the
Corporation will be unable to collect all amounts due.
Substandard nonaccrual loans have the same characteristics as substandard loans; however they have a non-accrual classification.
Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.
Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are
fully charged off.
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Allowance for Loan Losses 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. Loans are segregated between performing and nonperforming loans. Performing loans are
those that have made timely payments in accordance with the terms of the loan agreement and are not past due 90 days or more. Nonperforming loans are those that do not accrue
interest and are greater than 90 days past due.
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 segment
Mortgage Banking segment
Consumer Finance segment
Total provision for loan losses
Loans charged off:
Real estate—residential mortgage
Real estate—construction
Commercial, financial and agricultural
1
Equity lines
Consumer
Consumer finance
Total loans charged off
Recoveries of loans previously charged off:
Real estate—residential mortgage
Real estate—construction
Commercial, financial and agricultural
1
Equity lines
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
2010
$24,027
6,500
34
8,425
14,959
334
—
3,787
44
189
7,976
12,330
6
—
21
32
83
2,042
2,184
10,146
$28,840
Year Ended December 31,
2008
$15,963
2009
$19,806
6,400
563
11,600
18,563
1,655
2,234
1,110
—
190
10,988
16,177
3
11
27
—
63
1,731
1,835
14,342
$24,027
2,300
796
10,670
13,766
179
—
211
—
362
10,807
11,559
—
—
14
—
97
1,525
1,636
9,923
$19,806
2007
$14,216
280
120
6,730
7,130
34
—
2
—
187
7,077
7,300
1
—
125
—
114
1,677
1,917
5,383
$15,963
2006
$13,064
(250)
—
4,875
4,625
32
—
97
—
229
4,735
5,093
1
—
69
—
146
1,404
1,620
3,473
$14,216
0.97%
2.89%
1.09%
5.18%
.14%
5.46%
—
3.65%
.03%
2.76%
1
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.
For further information regarding the adequacy of our allowance for loan losses, refer to “Nonperforming Assets” within this Item 7.
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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 agricultural
1
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 agricultural
1
Equity lines
Consumer
Consumer finance
2010
2009
December 31,
2008
2007
2006
$ 1,442
581
8,688
380
307
17,442
—
$28,840
$ 1,295
281
7,022
211
267
14,951
—
$24,027
$ 1,576
483
4,752
167
220
12,608
—
$19,806
$
684
267
3,384
143
265
11,220
—
$15,963
$
502
136
3,031
134
326
9,890
197
$14,216
23%
2
34
5
1
35
100%
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%
1
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.
Loans by credit quality indicators as of December 31, 2010 were as follows:
(Dollars in thousands)
Real estate—residential mortgage
Real estate—construction
Commercial, financial and agricultural
2
Equity lines
Consumer
TABLE 7: Credit Quality Indicators
Pass
$140,651
7,368
171,569
31,562
4,804
$355,954
Special
Mention
$ 1,344
—
25,674
263
11
$27,292
Substandard
3,889
$
4,727
14,708
96
400
23,820
$
Substandard
Nonaccrual
189
$
—
7,275
266
35
7,765
$
1
Total
$146,073
12,095
219,226
32,187
5,250
$414,831
(Dollars in thousands)
Consumer finance
Performing
$ 220,602
Non-performing
151
$
Total
$220,753
1
2
At December 31, 2010, the Corporation does not have any loans classified as Doubtful or Loss.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.
During 2010, there was a $2.3 million increase in the allowance for loan losses at the combined Retail Banking and Mortgage Banking segments since December 31, 2009, while
the provision for loan losses at these combined segments decreased slightly by $429,000 to $6.5 million. These changes in the combined Retail Banking and Mortgage Banking
segments were attributable to an increase in criticized loans and higher reserves associated with nonaccrual loans, which increased in 2010 as shown in Table 8: Nonperforming Assets.
The allowance for loan losses to total loans increased to 2.75 percent at December 31, 2010, compared to 2.03 percent at December 31, 2009. Net charge-offs for these combined
segments decreased $873,000 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. While charge-offs declined in 2010, the increase in the
allowance for loan losses was due to increases in nonaccrual and criticized loans as discussed above. We believe that the current level of the allowance for loan losses at the combined
Retail Banking and Mortgage Banking
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segments is adequate to absorb any losses on existing loans that may become uncollectible. If 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 $17.4 million at December 31, 2010 from $15.0 million at December 31, 2009, and its provision for loan
losses decreased $3.2 million in 2010, compared to 2009. The increase in the allowance for loan losses was primarily due to the growth in the loan portfolio. The allowance for loan losses
to total loans was essentially flat at 7.90 percent at December 31, 2010 compared to 7.89 percent in 2009. The decrease in the provision for loan losses was primarily attributable to lower
delinquencies and net charge-offs. The decreases in delinquencies and net charge-offs are a result of prudent underwriting practices, enhanced collection efforts and a stronger used
vehicle market which results in higher resale values for repossessed vehicles. The Consumer Finance segments loan portfolio can be immediately adversely affected by the ongoing
effects of the recent economic recession and less than robust recovery. 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 levels remain elevated or increase in the future, or if consumer demand for automobiles
falls and results in declining values of automobiles securing outstanding loans, a higher provision for loan losses may become necessary.
Nonperforming Assets
A loan’s past due status is based on the contractual due date of the most delinquent payment due. 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. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of
repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies
are applied consistently across our loan portfolio.
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. We 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 and improvements are capitalized.
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. The average
amounts deferred, based on loans outstanding, was 1.03 percent in 2010, 1.60 percent in 2009 and 2.30 percent in 2008.
During periods of economic slowdown or recession, delinquencies, defaults, repossessions and losses generally increase at the Consumer Finance segment. These periods also
may be accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding loans, which weakens collateral coverage and
increases the amount of a loss in the event of default. Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at
which we may sell repossessed automobiles or delay the timing of these sales. Because C&F Finance focuses on non-prime borrowers, the actual rates of delinquencies, defaults,
repossessions and losses on these loans are higher than those experienced in the general automobile finance industry and could be more dramatically affected by a general economic
downturn. While we manage the higher risk inherent in loans made to non-prime borrowers through the underwriting criteria and collection methods employed by C&F Finance, we
cannot guarantee that these criteria or methods will afford adequate protection against these risks. However, we believe that the current allowance for loan losses is appropriate to
absorb any losses on existing Consumer Finance segment loans that may become uncollectible.
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Table of Contents
At the Consumer Finance segment, the automobile repossession process is generally initiated after a loan becomes more than 60 days delinquent. Repossessions are handled by
independent repossession firms engaged by C&F Finance. 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.
Table 8 summarizes nonperforming assets at December 31 of each of the past five years.
TABLE 8: 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
Troubled debt restructurings
Total loans
Allowance for loan losses
Nonperforming assets to total loans and OREO*
Allowance for loan losses to total retail banking and mortgage banking loans
Allowance for loan losses to nonaccrual loans
* 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
Table 9 presents the changes in the OREO balance for 2010 and 2009:
$
2010
7,765
—
10,295
379
$ 18,439
$
1,030
9,769
$
$414,831
$ 11,398
4.33%
2.75
146.79
$
2009
4,812
204
12,360
440
$ 17,816
$
451
3,111
$
$447,592
9,076
$
3.87%
2.03
180.94
2008
$ 17,222
1,460
1,370
596
$ 20,648
$
3,517
$ —
$480,438
7,198
$
4.28%
1.50
38.53
2007
$
495
732
—
—
1,227
$
$
578
$ —
$441,648
4,743
$
0.28%
1.07
386.55
2006
955
$
—
—
—
955
$
$
1,629
$ —
$399,195
4,326
$
0.24%
1.08
452.98
2010
151
$
$
—
$220,753
$ 17,442
2009
$
387
$ —
$189,439
$ 14,951
2008
$
798
$ —
$172,385
$ 12,608
2007
$
1,388
$ —
$160,196
$ 11,220
0.07%
7.90
0.20%
7.89
0.46%
7.31
0.87%
7.00
2006
880
$
$
8
$132,864
9,890
$
0.66%
7.44
TABLE 9: OREO Changes
(Dollars in thousands)
Balance at the beginning of year, gross
Transfers from loans
Capitalized costs
Charge-offs
Sales proceeds
Gain (loss) on disposition
Balance at the end of year, gross
Less allowance for losses
Balance at the end of year, net
Year Ended December 31,
2009
2010
$
$ 15,202
2,040
16,874
5,265
—
218
(124)
(585)
(3,495)
(5,492)
(93)
45
15,202
14,653
(2,402)
(3,979)
$ 12,800
$ 10,674
Nonperforming assets of the Retail Banking segment totaled $18.1 million at December 31, 2010 compared to $17.2 million at December 31, 2009. Nonperforming assets of the
Retail Banking segment at December 31, 2010 included $7.8 million of nonaccrual loans and $10.3 million of foreclosed, or OREO, properties. The largest components of the Bank’s
nonaccrual loans are five
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relationships totaling $6.7 million, which are secured by residential and non-residential real estate, and for which specific reserves totaling $1.6 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. Foreclosed properties at December 31, 2010 primarily consisted of residential and non-residential properties associated
with commercial relationships. These properties have been written down to their estimated fair values less cost to sell. 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.
Foreclosed properties of the Mortgage Banking segment totaled $379,000 at December 31, 2010, compared to $440,000 in 2009 and resulted primarily from loans that were
repurchased from investors because of documentation issues. The decrease resulted from charge-offs and write-downs of the carrying value of the foreclosed properties to the
estimated fair value less costs to sell.
Accruing loans past due for 90 days or more at the combined Retail Banking and Mortgage Banking segments increased $579,000 to $1.0 million at December 31, 2010.
Nonaccrual loans at the Consumer Finance segment have declined from $387,000 at December 31, 2009 to $151,000 at December 31, 2010. As noted above, the allowance for loan
losses increased from $15.0 million at December 31, 2009 to $17.4 million at December 31, 2010, and the ratio of the allowance for loan losses to total consumer finance loans remained
approximately the same at 7.90 percent. The increase in the allowance for loan losses was primarily due to the growth in the loan portfolio. Nonaccrual consumer finance loans remain
relatively low compared to the allowance for loan losses because the Consumer Finance segment frequently initiates repossession of loan collateral once a loan is 60 days or more past
due but before the loan reaches 90 days or more past due and is evaluated for nonaccrual status.
If nonaccrual loans had been current we would have recorded additional gross interest income of $624,000 for 2010, $668,000 for 2009 and $439,000 for 2008. Interest received on
nonaccrual loans was $24,000 in 2010, $13,000 in 2009 and $23,000 in 2008.
As discussed above, 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 maintain a valuation allowance to the extent that the measure of
the impaired loan is less than the recorded investment. TDRs occur when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration
in the financial condition of the borrower. TDRs are considered impaired loans. 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.
Impaired loans, which include TDRs of $9.8 million, and the related allowance at December 31, 2010, were as follows:
TABLE 10: Impaired Loans
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition & development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Total
Recoded
Investment in
Loans
$
3,110
5,760
5,919
—
1,142
148
338
16,417
$
Unpaid
Principal
Balance
$ 3,110
6,816
5,919
—
1,267
150
338
$17,600
Related
Allowance
466
$
1,263
400
—
404
49
51
$ 2,633
Average
Balance Total
Loans
$
2,689
3,582
1,038
1,014
613
149
333
9,418
$
Interest
Income
Recognized
137
$
30
30
—
—
4
14
215
$
The balance of impaired loans was $16.4 million, including $9.8 million of TDRs at December 31, 2010, for which there were specific valuation allowances of $2.6 million. At
December 31, 2009, the balance of impaired loans was $8.1 million, including $3.1 million of TDRs, for which there were specific valuation allowances of $1.5 million. The average balance
of impaired loans was $9.4 million for 2010, $12.4 million for 2009 and $5.8 million for 2008. The Corporation has no obligation to fund additional advances on its impaired loans. The
increase in impaired loans was primarily due to the restructuring of a note in the fourth quarter of 2010 with one large commercial developer that was considered a TDR. At renewal, the
rate on this loan was not increased even though the credit profile had changed because of the financial difficulties the developer and project were experiencing.
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TDRs at December 31, 2010 and 2009 were as follows:
(Dollars in thousands)
Accruing TDRs
Nonaccrual TDRs
1
Total TDRs
2
1
2
Included in nonaccrual loans in Table 8: Nonperforming Assets.
Included in impaired loans in Table 10: Impaired Loans.
TABLE 11: Troubled Debt Restructurings
December 31,
2010
$9,367
402
$9,769
2009
$2,827
284
$3,111
At the time of a TDR, we consider the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan. If a loan was accruing
prior to being modified as a TDR and if we conclude that the borrower is able to make such payments and there are no other factors or circumstances that would cause us to conclude
otherwise, we will maintain the loan on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan remains on nonaccrual status following the modification. A
loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is
reasonable assurance the borrower will continue to make payments as agreed.
Allowance and Provision for Indemnification Losses
We establish an allowance for indemnifications through charges to earnings in the form of a provision for indemnifications, which is included in other noninterest expenses.
Losses are charged against the allowance for indemnifications when a purchaser of a loan (investor) sold by C&F Mortgage incurs a loss due to borrower misrepresentation, fraud, or
early default, or underwriting error. We determine the level of the allowance based on the volume of loans sold, current economic conditions and information provided by investors. The
allowance represents an amount that we believe will be adequate to absorb any losses arising from indemnification requests. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information becomes available. Foreclosures and payment defaults have continued to remain elevated in the marketplace,
resulting in increased demands for loan repurchases and indemnification requests. Recourse periods for early payment default vary from 90 days up to one year. Recourse periods for
borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. The following table presents the changes in the allowance for indemnification losses for the
periods presented:
TABLE 12: Allowance for Indemnification Losses
(Dollars in thousands)
Allowance, beginning of period
Provision for indemnification losses
Payments
Allowance, end of period
Year Ended December 31,
2010
$2,538
3,745
4,992
$1,291
2009
$ 603
2,490
555
$2,538
2008
$ 112
1,091
600
$ 603
The increase in the provision for indemnification losses and payments for 2010 were primarily due to an agreement reached during the second quarter of 2010 with C&F
Mortgage’s largest investor that resolved all known and unknown indemnification obligations for loans sold to this investor prior to 2010. With this agreement in place, we expect a
reduction in future indemnification obligations as the majority of our indemnification issues at the time involved the types of loans originated for and sold to this investor.
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FINANCIAL CONDITION
SUMMARY
A financial institution’s primary sources of revenue are generated by its earning assets and sales of financial assets, while its major expenses are produced by the funding of
those assets with interest-bearing liabilities, provisions for loan losses and compensation to employees. 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, 2010, the Corporation had total assets of $904.1 million compared to $888.4 million at December 31, 2009. The increase was principally a result of increases in
investment securities available for sale, loans held for sale at C&F Mortgage, loans held for investment at C&F Finance and other assets, including 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 interest-bearing deposits in other banks.
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, 2010, the Corporation’s loans held for investment in all categories totaled $635.6 million
and loans held for sale totaled $67.2 million.
Tables 13 and 14 present information pertaining to the composition of loans and maturity/repricing of loans.
TABLE 13: 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
Total loans, net
2010
2009
2006
2007
December 31,
2008
$ 146,073 $ 147,850 $ 141,341 $ 122,705 $ 115,557
13,650
236,157
24,880
8,951
132,864
532,059
(14,216)
$ 606,744 $ 613,004 $ 633,017 $ 585,881 $ 517,843
12,095
219,226
32,187
5,250
220,753
635,584
(28,840)
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)
1
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.
TABLE 14: Maturity/Repricing Schedule of Loans
(Dollars in thousands)
Variable Rate:
Within 1 year
1 to 5 years
After 5 years
Fixed Rate:
Within 1 year
1 to 5 years
After 5 years
December 31, 2010
Commercial, Financial,
and Agricultural
Real Estate
Construction
$
$
92,728
3,292
4,522
22,023
68,967
27,694
$
$
9,035
—
—
3,060
—
—
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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 13: Summary of Loans Held for Investment.
Construction Lending
The Retail Banking segment has a construction lending program. The Bank makes loans primarily for the construction of one-to-four family residences and, to a lesser extent,
multi-family dwellings. The Bank also makes construction loans for office and warehouse facilities and other nonresidential projects, generally limited to borrowers that present other
business opportunities for the Bank.
The amounts, interest rates and terms for construction loans vary, depending upon market conditions, the size and complexity of the project, and the financial strength of the
borrower and any guarantors of the loan. The term for the Bank’s typical construction loan ranges from nine months to 15 months for the construction of an individual residence and
from 15 months to a maximum of three years for larger residential or commercial projects. The Bank does not typically amortize its construction loans, and the borrower pays interest
monthly on the outstanding principal balance of the loan. The interest rates on the Bank’s construction loans are fixed and variable. The Bank does not generally finance the
construction of commercial real estate projects built on a speculative basis. For residential builder loans, the Bank limits the number of models and/or speculative units allowed
depending on market conditions, the builder’s financial strength and track record and other factors. Generally, the maximum loan-to-value ratio for one-to-four family residential
construction loans is 80 percent of the property’s fair market value, or 85 percent of the property’s fair market value if the property will be the borrower’s primary residence. The fair
market value of a project is determined on the basis of an appraisal of the project conducted by an appraiser acceptable to the Bank. For larger projects where unit absorption or leasing
is a concern, the Bank may also obtain a feasibility study or other acceptable information from the borrower or other sources about the likely disposition of the property following the
completion of construction.
Construction loans for nonresidential projects and multi-unit residential projects are generally larger and involve a greater degree of risk to the Bank than residential mortgage
loans. The Bank attempts to minimize such risks (1) by making construction loans in accordance with the Bank’s underwriting standards and to established customers in its primary
market area and (2) by monitoring the quality, progress and cost of construction. Generally, the maximum loan-to-value ratio established by the Bank for non-residential projects and
multi-unit residential projects is 80 percent; however, this maximum can be waived for particularly strong borrowers on an exception basis.
Loans associated with construction lending are included in the real estate—construction category in Table 13: Summary of Loans Held for Investment.
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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 13: 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 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 quality of the collateral.
Loans associated with commercial real estate lending are included in the commercial, financial and agricultural category in Table 13: 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.
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The Bank underwrites and processes land acquisition and development loans in much the same manner as commercial construction loans and commercial real estate loans. For
land acquisition and development loans, the Bank uses lower loan-to-value ratios, which are a maximum of 65 percent for raw land, 75 percent for land development and improved lots
and 80 percent of the discounted appraised value of the property as determined in accordance with the Bank’s appraisal policies for developed lots for single-family or townhouse
construction. The Bank can waive the maximum loan-to-value ratio for particularly strong borrowers on an exception basis. The term of land acquisition and development loans ranges
from a maximum of two years for loans relating to the acquisition of unimproved land to, generally, a maximum of three years for other types of projects. All land acquisition and
development loans generally are further secured by one or more unconditional personal guarantees. Because these loans are usually in a larger amount and involve more risk than
consumer lot loans, the Bank carefully evaluates the borrower’s assumptions and projections about market conditions and absorption rates in the community in which the property is
located and the borrower’s ability to carry the loan if the borrower’s assumptions prove inaccurate.
Loans associated with land acquisition and development lending are included in the commercial, financial and agricultural category in Table 13: 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 13: 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 13: Summary of Loans Held for Investment.
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 13: Summary of Loans Held for Investment.
Consumer Finance
C&F Finance has an extensive automobile dealer network through which it purchases installment contracts throughout its markets. Credit approval is centralized in two
locations, which along with the application processing system, ensures that credit decisions comply with C&F Finance’s underwriting policies and procedures.
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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 13: Summary of Loans Held for Investment.
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 15 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 15: 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 at fair value
* Less than one percent
December 31, 2010
December 31, 2009
Amount
$ 13,656
2,300
114,288
130,244
31
$130,275
Percent
10%
2
88
100
*
100%
Amount
9,743
$
2,709
104,867
117,319
1,251
$118,570
Percent
9%
2
88
99
1
100%
Growth in debt securities occurred in both the Bank’s portfolio of U.S. government agencies and corporations and 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. The growth was a result of excess funding provided by the increase in deposits and decreased
loan demand in the Retail Banking segment.
During the fourth quarter of 2010, the municipal bond sector, which is included in the Corporation’s obligations of states and political subdivisions category, came under
significant pressure resulting in falling securities prices. The sell-off was largely due to a surge in supply as issuers took advantage of expiring government programs before the end of
the year. In addition, the slow economic recovery from the recent recession and the resulting state and local budget deficits has created public concern about a widespread increase in
default risk. The vast majority of the Corporation’s municipal bond portfolio is made up of securities where the issuing municipalities have unlimited taxing authority to support their
debt servicing obligations. At December 31, 2010 approximately 96% of the Corporation’s obligations of states and political subdivisions, as measured by market value, were rated “A”
or better by Standard & Poor’s or Moody’s Investors Service. Of those in a net unrealized loss position, approximately 96% were rated “A” or better at December 31, 2010. 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 unrealized losses, the Corporation does not consider these investments to be other-than-temporarily impaired at December 31, 2010 and no impairment has been recognized.
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Table 16 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 16: 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
States and municipals:
1
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
Total securities:
2
Maturing within 1 year
Maturing after 1 year, but within 5 years
Maturing after 5 years, but within 10 years
Maturing after 10 years
Total securities
Year Ended December 31,
2010
2009
2008
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
$ 10,707
2,922
—
—
13,629
1.17%
2.64
—
—
1.49
$
4,534
3,616
—
1,622
9,772
2.90%
3.62
—
5.56
3.61
$ 2,000
—
1,249
7,859
11,108
5.14%
—
5.73
5.67
5.58
9
2,220
—
—
2,229
6.42
3.49
—
—
3.50
686
1,137
805
—
2,628
4.32
4.12
4.43
—
4.27
162
1,105
—
997
2,264
4.24
4.53
—
5.95
5.13
14,148
27,706
45,244
26,522
113,620
24,864
32,848
45,244
26,522
$129,478
5.27
5.69
6.13
6.32
5.96
3.50
5.27
6.13
6.32
5.45%
7,463
22,338
46,606
26,690
103,097
12,683
27,091
47,411
28,312
$115,497
6.24
5.95
6.29
6.30
6.22
4.94
5.56
6.26
6.26
5.95%
11,106
21,618
36,223
16,895
85,842
13,268
22,723
37,472
25,751
$ 99,214
6.60
6.09
6.31
6.28
6.29
6.35
6.02
6.30
6.09
6.18%
1
2
Yields on tax-exempt securities have been computed on a taxable-equivalent basis.
Total securities exclude preferred stock at amortized cost of $27,000 at December 31, 2010, $1.3 million at December 31, 2009 and $1.6 million at December 31, 2008 (estimated fair value
of $31,000 at December 31, 2010, $1.3 million at December 31, 2009 and $1.6 million at December 31, 2008).
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 $625.1 million at December 31, 2010, compared to $606.6 million at December 31, 2009, with the increase primarily due to a $19.8 million increase in savings and
interest-bearing demand deposits. However, as shown in Table 17: Average Deposits and Rates Paid, on an average basis, certificates of deposits have increased as a result of
consumers wanting to get more yield on longer-term, higher yielding certificates of deposit as rates on shorter-term deposits have remained low. The Corporation had no brokered
certificates of deposit outstanding at December 31, 2010 or 2009.
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Table 17 presents the average deposit balances and average rates paid for the years 2010, 2009 and 2008.
TABLE 17: Average Deposits and Rates Paid
(Dollars in thousands)
Noninterest-bearing demand deposits
Interest-bearing transaction accounts
Money market deposit accounts
Savings accounts
Certificates of deposit, $100 thousand or more
Other certificates of deposit
Total interest-bearing deposits
Total deposits
2010
Average
Balance
$ 89,430
95,005
64,085
41,685
142,918
178,569
522,262
$611,692
Year Ended December 31,
2009
2008
Average
Rate
0.57%
0.88
0.10
2.21
2.20
1.58%
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
1.01%
2.48
0.25
4.10
3.94
2.89%
Table 18 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2010.
TABLE 18: 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, 2010
14,271
$
19,812
38,377
69,738
142,198
$
BORROWINGS
In addition to deposits, the Corporation utilizes short-term borrowings from the Federal Reserve Bank and 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 correspondent bank. 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.
44
Table of Contents
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 $83.4 million at December 31, 2010 and $74.0 million
at December 31, 2009.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit
risk, was $7.1 million at December 31, 2010 and $8.9 million at December 31, 2009.
At December 31, 2010, C&F Mortgage had rate lock commitments to originate mortgage loans aggregating $45.0 million and loans held for sale of $67.2 million. C&F Mortgage
has entered into corresponding commitments with third party investors to sell loans of approximately $112.2 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 for early payment default vary from 90 days up to one year. Recourse for borrower misrepresentation or fraud, or underwriting error does not have a
stated time limit. We include recourse considerations in our calculation of the Corporation’s capital adequacy. Payments made under these recourse provisions were $5.0 million in 2010,
$555,000 in 2009 and $600,000 in 2008. The large increase in 2010 was primarily due to an agreement reached with C&F Mortgage’s largest investor in the second quarter of 2010 that
resolves all known and unknown indemnification obligations for loans sold to this investor prior to 2010. An allowance for indemnifications is established through charges to earnings.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses arising from indemnification requests. 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 $45.7 million at December 31,
2010. The Corporation’s funding sources, including capacity, amount outstanding and amount available at December 31, 2010 are presented in Table 19.
TABLE 19: Funding Sources
(Dollars in thousands)
Federal funds purchased
Repurchase agreements
Borrowings from FHLB
Borrowings from Federal Reserve Bank
Revolving line of credit
1
Total
Capacity
$ 36,000
5,000
107,085
67,183
120,000
$335,268
December 31, 2010
Outstanding
3,770
$
5,000
52,500
—
75,402
$ 136,672
Available
$ 32,230
—
54,585
67,183
44,598
$198,596
1
The Corporation amended the revolving line of credit agreement effective July 1, 2010. Among other changes, the amendment extended the maturity date from July 31, 2012 to
July 31, 2014 and increased the rate of interest from LIBOR plus a range of 175 basis points to 180 basis points to LIBOR plus a range of 200 basis points to 225 basis points,
depending upon the average balance outstanding on the line.
45
Table of Contents
We have no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are available that can be pledged as collateral for future
borrowings from the Federal Reserve Bank or the FHLB above the current lendable collateral value.
Certificates of deposit of $100,000 or more, maturing in less than a year, totaled $72.5 million at December 31, 2010; certificates of deposit of $100,000 or more, maturing in more
than one year, totaled $69.7 million. The Corporation’s contractual obligations and scheduled payment amounts due at various intervals over the next five years and beyond as of
December 31, 2010 are presented in Table 20.
(Dollars in thousands)
Bank lines of credit
FHLB advances
1
Federal Reserve Bank borrowings
2
Federal funds purchased
Trust preferred capital notes
Securities sold under agreements to repurchase
Operating leases
Total
Table 20: Contractual Obligations
Total
$ 75,402
52,500
—
3,770
20,620
11,848
3,600
$167,740
Less than 1 Year
—
$
—
—
3,770
—
6,848
1,453
12,071
$
Payments Due by Period
1-3 Years
$75,402
22,500
—
—
—
—
1,464
$99,366
3-5 Years
$ —
7,500
—
—
—
—
610
$ 8,110
More than 5 Years
—
$
22,500
—
—
20,620
5,000
73
48,193
$
1
2
FHLB advances include convertible advances of $10.0 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.”
At December 31, 2010 there were no outstanding borrowings from the Federal Reserve Bank.
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.”
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 15.3 percent at December 31, 2010, compared with 14.6 percent at December 31, 2009. The total capital to risk-weighted assets ratio was 16.5 percent at
December 31, 2010, compared with 15.9 percent at December 31, 2009. The Tier 1 leverage ratio was 11.6 percent at December 31, 2010, compared with 11.5 percent at December 31, 2009.
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.
46
Table of Contents
Shareholders’ equity was $92.8 million at year-end 2010 compared with $88.9 million at year-end 2009. During 2010, the Corporation declared common stock dividends of $1.00 per
share, compared to $1.06 per share declared in 2009 and $1.24 per share in 2008. The dividend payout ratio, based on net income available to common shareholders, was 44.2 percent in
2010, 73.5 percent in 2009 and 89.8 percent in 2008.
In December 2010, the Basel Committee on Banking Supervision (the Basel Committee) released its final framework for strengthening international capital and liquidity regulation,
now officially identified by the Basel Committee as “Basel III”. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and
their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. As discussed in Item 1. “Business” under the heading “Regulation and
Supervision”, Basel III will be initially phased in on January 1, 2013 and fully phased in on January 1, 2019. The U.S. banking agencies have indicated informally that they expect to
propose regulations implementing Basel III in mid-2011 with final adoption of implementing regulations in mid-2012.
In addition to Basel III, Dodd-Frank requires or permits the U.S. banking agencies to adopt regulations affecting banking institutions’ capital requirements in a number of
respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately applicable to the Corporation
may be substantially different from the Basel III final framework as published in December 2010. Requirements to maintain higher levels of capital or to maintain higher levels of liquid
assets could adversely impact the Corporation’s net income and return on equity.
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 AND CHANGING PRICES
The Corporation’s financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP
presently requires the Corporation to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or
recession are generally not considered. The primary effect of inflation on the operations of the Corporation is reflected in increased operating costs. In management’s opinion, changes
in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in
the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the
control of the Corporation, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United
States government, its agencies and various other governmental regulatory authorities.
47
Table of Contents
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 had two outstanding interest rate swaps used as hedging transactions at December 31, 2010. The interest rate swaps were entered into to fix the rate of interest paid on
$10.0 million of the Corporation’s variable rate trust preferred capital notes. The interest rate swaps mature in 2015.
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 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, 2010, indicate that the
Corporation would expect net interest income to decrease over the next twelve months 4.11 percent assuming an immediate downward shift in market interest rates of 200 basis points
(BP) and to increase 0.84 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
48
Hypothetical Change in Net
Interest Income for the Year Ended
December 31, 2011
Dollars
$
$
(2,409)
492
Percentage
(4.11)%
0.84%
Table of Contents
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, 2010 indicate that the EVE would decrease 2.92 percent assuming an immediate
downward shift in market interest rates of 200 BP and would decrease 1.82 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
$
$
(3,626)
(2,264)
Percentage
(2.92)%
(1.82)%
In the net interest income simulation above, net interest income 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 loan portfolios, cash on hand and short-term investments. 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 decrease in the EVE in an immediate upward shift in interest rates, and a decrease in the EVE in an immediate downward shift in interest rates.
In a rising rate environment, the Corporation’s assets would take longer to reprice over time than what the Corporation pays on its borrowings and deposits due to the longer maturity
or repricing dates of its investment and loan portfolios as compared to time deposits and borrowings. In a falling rate environment, the Corporation’s borrowings and deposits would be
limited in their repricing given the current exceptionally low interest rate environment, while fixed-rate assets that mature or those with prepayment or callable options will reprice lower.
At C&F Mortgage, we enter into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock
commitments). The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 days to 90 days. The Corporation protects itself from
changes in interest rates by entering into loan purchase agreements with third party investors that provide for the investor to purchase loans at the same terms (including interest rate)
as committed to the borrower. Under the contractual relationship with the purchaser of each loan, the Corporation is obligated to sell the loan to the purchaser, 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.
49
Table of Contents
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 $129,505 and $116,774, respectively
Loans held for sale, net
Loans, net of allowance for loan losses of $28,840 and $24,027, respectively
Federal Home Loan Bank stock, at cost
Corporate premises and equipment, net
Other real estate owned, net of valuation allowance of $3,979 and $2,402, 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
Commitments and contingent liabilities
Shareholders’ Equity
Preferred stock ($1.00 par value, 3,000,000 shares authorized, 20,000 shares issued and outstanding, respectively)
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,118,066 and 3,067,666 shares issued and outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
50
December 31,
2010
2009
$
7,150
2,530
9,680
130,275
67,153
606,744
3,887
28,743
10,674
5,073
10,724
31,184
$ 904,137
$
8,434
29,627
38,061
118,570
28,756
613,004
3,887
29,490
12,800
5,408
10,724
27,730
$ 888,430
$ 87,263
228,185
309,686
625,134
10,618
132,902
20,620
1,160
20,926
811,360
$ 83,708
208,388
314,534
606,630
11,082
139,130
20,620
1,569
20,523
799,554
—
—
20
3,032
22,112
67,542
71
92,777
$ 904,137
20
3,009
21,210
63,669
968
88,876
$ 888,430
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Interest income
Interest and fees on loans
Interest on money market investments
Interest and dividends on securities
U.S. government agencies and corporations
Tax-exempt obligations of states and political subdivisions
Corporate bonds and other
Total interest income
Interest expense
Savings and interest-bearing deposits
Certificates of deposit, $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.
51
Year Ended December 31,
2009
2010
2008
$ 64,941
43
$60,116
6
$59,853
28
281
4,459
124
69,848
418
4,208
223
64,971
542
3,192
515
64,130
1,142
3,161
3,935
3,998
999
13,235
56,613
14,959
41,654
18,564
3,511
4,913
70
—
2,642
29,700
34,889
5,768
19,638
60,295
11,059
2,949
8,110
1,149
$ 6,961
$
$
2.26
2.24
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
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
Table of Contents
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
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
Comprehensive income:
Net income
Other comprehensive loss, net:
Changes in defined benefit plan assets and benefit obligations, net
Unrealized loss on cash flow hedging instruments, net
Unrealized holding losses on securities, net of reclassification adjustment
Other comprehensive loss, net
Comprehensive income
Stock options exercised
Share-based compensation
Accretion of preferred stock discount
Cash dividends paid – common stock ($1.00 per share)
Cash dividends paid – preferred stock (5% per annum)
Balance December 31, 2010
Preferred
Stock
$ —
Common
Stock
$ 2,979
Additional
Paid-In
Capital
$ —
Retained
Earnings
$ 62,048
Accumulated
Other
Comprehensive
Income (Loss)
197
$
Total
Shareholders’
Equity
$
65,224
—
—
—
4,181
—
4,181
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
14
—
—
—
2,992
—
—
—
—
(39)
298
292
—
—
551
—
—
—
—
—
—
—
(114)
(3,754)
62,361
(591)
(653)
(1,244)
—
—
—
—
—
—
(1,047)
(1,244)
2,937
(40)
312
292
(114)
(3,754)
64,857
—
—
—
5,526
—
5,526
—
—
—
—
—
—
20
—
—
—
20
—
—
—
—
17
—
—
—
—
—
3,009
—
—
—
—
309
318
19,894
138
—
—
21,210
—
—
—
—
—
—
—
(138)
(3,230)
(850)
63,669
734
1,281
2,015
—
—
—
—
—
—
—
968
2,015
7,541
326
318
19,914
—
(3,230)
(850)
88,876
—
—
—
8,110
—
8,110
—
—
—
—
—
—
—
—
—
—
20
$
—
—
—
—
—
23
—
—
—
—
$ 3,032
—
—
—
—
—
386
367
149
—
—
$ 22,112
—
—
—
—
—
—
—
(149)
(3,088)
(1,000)
$67,542
$
(139)
(90)
(668)
(897)
—
—
—
—
—
—
71
(897)
7,213
409
367
—
(3,088)
(1,000)
92,777
$
See notes to consolidated financial statements.
52
Table of Contents
(Dollars in thousands)
Operating activities:
CONSOLIDATED STATEMENTS OF CASH FLOWS
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation
Deferred income taxes
Provision for loan losses
Provision for indemnifications
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 (gain) 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 (used in) 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
Net increase in customer loans
Other real estate owned improvements
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 in demand, interest-bearing demand and savings deposits
Net (decrease) increase in time deposits
Net (decrease) increase in borrowings
Issuance of preferred stock
Purchases of common stock
Proceeds from exercise of stock options
Cash dividends
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure
Interest paid
Income taxes paid
Supplemental disclosure of noncash investing and financing activities
Unrealized (losses) gains on securities available for sale
Loans transferred to other real estate owned
Pension adjustment
See notes to consolidated financial statements.
53
2010
Year Ended December 31,
2009
2008
$
8,110
$
5,526
$
4,181
1,887
(2,553)
14,959
3,745
2,180
367
615
(70)
(45)
—
(748,263)
709,866
335
(938)
(409)
(3,194)
(13,408)
28,693
(41,969)
—
(13,964)
(218)
5,492
(1,140)
(23,106)
23,352
(4,848)
(6,692)
—
—
409
(4,088)
8,133
(28,381)
38,061
9,680
$
$ 13,644
4,070
$
(1,026)
(5,265)
215
2,067
(3,477)
18,563
2,490
2,614
318
172
(22)
93
—
(1,063,108)
1,071,394
(312)
(4,579)
(352)
454
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
15,811
4,231
1,970
(16,874)
1,129
$
$
$
2,381
(2,672)
13,766
1,091
296
292
55
(234)
8
1,575
(749,177)
746,218
(27)
1,637
(194)
1,821
21,017
18,516
(40,265)
(897)
(64,163)
—
990
(658)
(86,477)
17,205
5,949
43,413
—
(40)
312
(3,754)
63,085
(2,375)
12,263
9,888
$
$ 21,589
3,116
$
(1,005)
(3,261)
(909)
Table of Contents
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, 2010, 34.5 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, 34.7 percent 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. While the Corporation does have a significant portion of its securities classified as obligations of states and political subdivisions, there are no
concentrations in any one state of greater than 10.0 percent and no individual issuer greater than 1.5 percent. The Corporation does not have any other significant securities
concentrations in any one industry or geographic region, or to any one issuer. Note 2 discusses the Corporation’s securities portfolio and investment activities.
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, 2010 and 2009, these reserve
balances amounted to $220,000 and $147,000, 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.
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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 aggregate, net of deferred fees or costs. Fair value considers
commitment agreements with investors and prevailing market prices. Substantially all loans originated by C&F Mortgage are held for sale to outside investors.
Loans: The Corporation makes mortgage, commercial and consumer loans to customers. Our recorded investment in 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.
A loan’s past due status is based on the contractual due date of the most delinquent payment due. 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. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment
performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied
consistently across our loan portfolio.
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 identify individual consumer, residential and certain small commercial loans that are less than $500,000 for impairment
disclosures, except for troubled debt restructurings (TDRs) as noted below. Consistent with the Corporation’s method for nonaccrual loans, payments on impaired loans are first applied
to principal outstanding.
TDRs occur when the Corporation agrees to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered
impaired loans. Upon designation as a TDR, the Corporation evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the
loan. If a loan was accruing prior to being modified as a TDR and if the Corporation concludes that the borrower is able to make such payments, and there are no other factors or
circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on
nonaccrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. As of December 31, 2010
and 2009, the Corporation had $9.77 million and $3.11 million of loans classified as TDRs.
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 for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when:
•
•
•
•
Management believes that the collectibility of the principal is unlikely regardless of delinquency status.
The loan is a consumer loan and is 120 days past due.
The loan is a non-consumer loan and is 180 days past due, unless the loan is well secured and recovery is probable.
The borrower is in bankruptcy, unless the debt has been reaffirmed, is well secured and recovery is probable.
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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 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, as it requires estimates that are susceptible to significant revision as more information becomes available.
The evaluation also considers the following risk characteristics of each loan portfolio:
•
•
•
•
•
•
Real estate residential mortgage loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.
Real estate construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of
the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not
be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
Commercial, financial and agricultural loans 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. In addition,
there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.
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.
Equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.
Consumer finance loans carry risks associated with the continued credit-worthiness of borrowers who may be unable to meet the credit standards imposed by most
traditional automobile financing sources and the value of rapidly-depreciating collateral.
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. For collateral dependent loans, an updated appraisal will be ordered if a
current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on
recent sales of like properties or general market conditions when appropriate. The general component covers non-classified, or performing, loans and those loans classified as doubtful,
substandard or special mention that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic
conditions, including current home sales and foreclosures, unemployment rates and retail sales. Non-impaired classified loans are assigned a higher allowance factor which increases
with the severity of classification than non-classified loans. The characteristics of the loan ratings are as follows:
•
•
•
Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing
loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When
necessary, acceptable personal guarantors support the loan.
Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The
borrower’s recent payment history is characterized by late payments. The Corporation’s risk exposure is mitigated by collateral supporting the loan. The collateral is
considered to be well-margined, well maintained, accessible and readily marketable.
Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Corporation’s credit extension. The payment history
for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of
the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Corporation. There is a distinct possibility that the
Corporation will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our
definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the
Corporation will be unable to collect all amounts due.
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•
•
•
Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a non-accrual classification.
Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.
Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are
fully charged off.
The consumer finance loans are segregated between performing and nonperforming loans. Performing loans are those that have made timely payments in accordance with the terms of
the loan agreement and are not past due 90 days or more. Nonperforming loans are those that do not accrue interest and are greater than 90 days past due.
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 an indemnified loss due to
demonstrated borrower misrepresentation, fraud, or early default, or underwriting error.
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. Management reviews FHLB stock for impairment based on the ultimate recoverability of the cost basis.
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. 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 and improvements are capitalized.
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. 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 2010 and it was determined there was no impairment to
be recognized in 2010.
Transfer of Financial Assets: 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.
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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 will 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 will 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 for 2010 and 2009 determined that the Corporation’s pension plan was underfunded. As a
result, the Corporation recognized pension liabilities of $654,000 at December 31, 2010 and $431,000 at December 31, 2009, and recognized a net loss of $139,000 in 2010, a net gain of
$734,000 in 2009 and a net loss of $591,000 in 2008 as components of other comprehensive income (loss). 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, 2010, 2009 and 2008 included $409,000 ($254,000
after tax), $318,000 ($197,000 after tax) and $292,000 ($181,000 after tax), respectively, for options and restricted stock granted during 2006 through 2010. As of December 31, 2010, there
was $1.10 million 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 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, 2010, 2009 and 2008 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. 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, changes in defined benefit plan assets and liabilities, and unrealized gains and losses on cash flow
hedging instruments 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.
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Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet.
The derivative financial instruments have been designated as and qualify as cash flow hedges. The effective portion of the gain or loss on cash flow hedges is reported as a component
of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. See also
Note 18 for further information.
Recent Significant Accounting Pronouncements:
Adoption of New Accounting Standards:
In June 2009, the Financial Accounting Standards Board (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 Accounting Standards Update (ASU) 2009-16 (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. ASU 2009-16 was effective January 1, 2010. The adoption of this
guidance did not have a material effect on the Corporation’s 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 was effective as of January 1, 2010. The adoption of this guidance did not have a material effect on the Corporation’s 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 were effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years. The adoption of ASU 2010-06 did not have a material effect on the Corporation’s consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). The new
disclosure guidance significantly expands the existing disclosure requirements and is intended to lead to greater transparency into a company’s exposure to credit losses from lending
arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending after
December 15, 2010. Specific items regarding activity that occurred before the issuance of the ASU, such as the allowance rollforward and modification disclosures, will be required for
periods beginning after December 15, 2010. The adoption of ASU 2010-20 did not have a material effect on the Corporation’s consolidated financial statements. The required disclosures
have been included in the Corporation’s consolidated financial statements.
In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this
ASU temporarily delay the effective date of the disclosures about TDRs in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on
what constitutes a TDR. The effective date of the new disclosures about TDRs for public entities and the guidance for determining what constitutes a TDR will then be coordinated.
Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.
In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The
amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. For public entities, the amendments in this ASU are effective for fiscal years,
and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance is not expected to have a material impact
on the Corporation’s consolidated financial statements.
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NOTE 2: Securities
The Corporation’s debt and equity securities, all of which are classified as available for sale, at December 31, 2010 and 2009 are summarized as follows:
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Preferred stock
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Preferred stock
Amortized
Cost
$ 13,629
2,229
113,620
27
$129,505
Amortized
Cost
$
9,772
2,628
103,097
1,277
$ 116,774
December 31, 2010
Gross
Unrealized
Gains
$
57
78
1,694
7
$ 1,836
Gross
Unrealized
Losses
$
(30)
(7)
(1,026)
(3)
$ (1,066)
December 31, 2009
Gross
Unrealized
Gains
$
$
33
81
2,144
59
2,317
Gross
Unrealized
Losses
$
(62)
—
(374)
(85)
(521)
$
Estimated
Fair Value
$ 13,656
2,300
114,288
31
$130,275
Estimated
Fair Value
9,743
$
2,709
104,867
1,251
$ 118,570
The amortized cost and estimated fair value of securities, all of which are classified as available for sale, at December 31, 2010 and 2009, 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)
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, 2010
December 31, 2009
Amortized
Cost
$ 24,864
32,848
45,244
26,522
27
$129,505
Estimated
Fair Value
$ 24,929
33,050
45,450
26,815
31
$130,275
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
Proceeds from the maturities, calls and sales of securities available for sale in 2010 were $28.69 million, resulting in gross realized gains of $88,000 and gross realized losses of $18,000, in
2009 were $23.14 million, resulting in gross realized gains of $48,000 and gross realized losses of $26,000, and in 2008 were $18.52 million, resulting in gross realized gains of $253,000 and
gross realized losses of $19,000.
The Corporation pledges securities to primarily secure public deposits, Federal Reserve Bank treasury, tax and loan deposits and repurchase agreements. Securities with an aggregate
amortized cost of $93.56 million and an aggregate fair value of $94.28 million were pledged at December 31, 2010. 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.
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Securities in an unrealized loss position at December 31, 2010, by duration of the period of the unrealized loss, are shown below.
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Subtotal-debt securities
Preferred stock
Total temporarily impaired securities
$
Unrealized
Loss
Less Than 12 Months
Fair
Value
$ 4,345
590
38,585
43,520
8
$43,528
30
7
925
962
3
965
$
12 Months or More
Fair
Value
$ —
—
1,178
1,178
—
$1,178
Unrealized
Loss
$ —
—
101
101
—
101
$
Total
Fair
Value
$ 4,345
590
39,763
44,698
8
$44,706
Unrealized
Loss
$
30
7
1,026
1,063
3
$ 1,066
There are 133 debt securities totaling $44.71 million considered temporarily impaired at December 31, 2010. The primary cause of the temporary impairments in the Corporation’s
investments in debt securities was fluctuations in interest rates. During the fourth quarter of 2010, the municipal bond sector, which is included in the Corporation’s obligations of
states and political subdivisions category, came under significant pressure resulting in falling securities prices. The sell-off was largely due to a surge in supply as issuers took
advantage of expiring government programs before the end of the year. In addition, the slow economic recovery from the recent recession and the resulting state and local budget
deficits has created public concern about a widespread increase in default risk. The vast majority of the Corporation’s municipal bond portfolio is made up of securities where the
issuing municipalities have unlimited taxing authority to support their debt servicing obligations. At December 31, 2010 approximately 96% of the Corporation’s obligations of states
and political subdivisions, as measured by market value, were rated “A” or better by Standard & Poor’s or Moody’s Investors Service. Of those in a net unrealized loss position,
approximately 96% were rated “A” or better at December 31, 2010. 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 unrealized losses, the Corporation does not consider these investments to be other-than-
temporarily impaired at December 31, 2010 and no impairment has been recognized. There is one equity security totaling $8,000 considered temporarily impaired at December 31, 2010.
The Corporation has the intent and ability to hold this equity security until a recovery of the unrealized loss and therefore does not consider this investment to be other-than-
temporarily impaired at December 31, 2010.
The Corporation’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $3.89 million at December 31, 2010. 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. The Corporation does not consider this
investment to be other-than-temporarily impaired at December 31, 2010 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, 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 securities
Unrealized
Loss
$
Less Than 12 Months
Fair
Value
$ 3,298
18,872
22,170
401
$22,571
$
62
255
317
13
330
12 Months or More
Fair
Value
$ —
2,853
2,853
408
$3,261
Unrealized
Loss
$ —
119
119
72
191
$
Total
Fair
Value
$ 3,298
21,725
25,023
809
$25,832
Unrealized
Loss
$
$
62
374
436
85
521
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.
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NOTE 3: Loans
Major classifications of loans are summarized as follows:
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction
Commercial, financial and agricultural
1
Equity lines
Consumer
Consumer finance
Less allowance for loan losses
Loans, net
December 31,
2010
$146,073
12,095
219,226
32,187
5,250
220,753
635,584
(28,840)
$606,744
2009
$147,850
14,053
245,759
32,220
7,710
189,439
637,031
(24,027)
$613,004
1
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.
Consumer loans included $378,000 and $266,000 of demand deposit overdrafts at December 31, 2010 and 2009, respectively.
Loans on nonaccrual status were as follows:
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction:
Construction lending
1
Consumer lot lending
1
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition & development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
Total loans on nonaccrual status
December 31,
2010
$ 189
2009
$1,360
—
—
5,760
—
67
1,448
266
35
151
$7,916
—
—
333
720
2,191
377
32
3
387
$5,403
1
– At December 31, 2010 and 2009 there were no real estate construction lending loans or real estate consumer lot lending loans on nonaccrual status.
If interest income had been recognized on nonaccrual loans at their stated rates during years 2010, 2009 and 2008, interest income would have increased by approximately $624,000,
$668,000 and $439,000, respectively.
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The past due status of loans as of December 31, 2010 was as follows:
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction:
Construction lending
Consumer lot lending
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition & development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
Total
30-59 Days
Past Due
1,605
$
60-89 Days
Past Due
826
$
90+ Days
Past
Due
$
751
Total Past
Due
$ 3,182
Current
$142,891
Total Loans
$ 146,073
90+ Days
Past Due and
Accruing
676
$
—
—
—
—
—
—
—
—
10,744
1,351
10,744
1,351
59
—
—
9
223
1
4,913
6,810
$
—
—
1,450
—
115
11
829
3,231
$
2,840
—
195
1,383
35
38
151
$ 5,393
2,899
—
1,645
1,392
373
50
5,893
$ 15,434
108,418
34,314
23,171
47,387
31,814
5,200
214,860
$620,150
111,317
34,314
24,816
48,779
32,187
5,250
220,753
$ 635,584
$
—
—
186
—
128
—
35
5
—
1,030
Accruing loans past due 90 days or more were $451,000 at December 31, 2009.
Impaired loans, which include TDRs of $9.77 million, and the related allowance at December 31, 2010 were as follows:
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition & development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Total
Recorded
Investment in
Loans
$
3,110
5,760
5,919
—
1,142
148
338
16,417
$
Unpaid
Principal
Balance
$ 3,110
6,816
5,919
—
1,267
150
338
$17,600
Related
Allowance
466
$
1,263
400
—
404
49
51
$ 2,633
Average
Balance Total
Loans
$
2,689
3,582
1,038
1,014
613
149
333
9,418
$
Interest
Income
Recognized
137
$
30
30
—
—
4
14
215
$
The balance of impaired loans was $8.12 million, including $3.11 million of TDRs, at December 31, 2009, for which there were specific valuation allowances of $1.51 million. The average
balance of impaired loans for 2009 and 2008 were $12.43 million and $5.82 million, 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
2010
$ 24,027
14,959
(12,330)
2,184
$ 28,840
Year Ended December 31,
2009
$ 19,806
18,563
(16,177)
1,835
$ 24,027
2008
$ 15,963
13,766
(11,559)
1,636
$ 19,806
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The following table presents, as of December 31, 2010, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or
collectively evaluated for impairment), the total loans and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).
(Dollars in thousands)
Allowance for loan losses:
Balance at the beginning of year
Provision charged to operations
Loans charged off
Recoveries of loans previously charged off
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans by credit quality indicators as of December 31, 2010 were as follows:
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction:
Construction lending
Consumer lot lending
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition & development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
(Dollars in thousands)
Consumer finance
Real Estate
Residential
Mortgage
Real Estate
Construction
Commercial,
Financial &
Agricultural Equity Lines Consumer
Consumer
Finance
Total
$
$
$
$
1,295 $
475
(334)
6
1,442 $
466 $
976 $
281 $
300
—
—
581 $
7,022 $
5,432
(3,787)
21
8,688 $
211 $
181
(44)
32
380 $
267 $ 14,951 $ 24,027
14,959
8,425
146
(12,330)
(7,976)
(189)
83
2,184
2,042
307 $ 17,442 $ 28,840
— $
2,067 $
49 $
51 $ — $
2,633
581 $
6,621 $
331 $
256 $ 17,442 $ 26,207
$ 146,073 $
12,095 $ 219,226 $
32,187 $ 5,250 $220,753 $635,584
$
3,110 $
— $
12,821 $
148 $
338 $ — $ 16,417
$ 142,964 $
12,095 $ 206,405 $
32,039 $ 4,911 $220,753 $619,167
Pass
$140,651
Special
Mention
$ 1,344
Substandard
3,889
$
Substandard
Nonaccrual
189
$
1
Total
$146,073
6,017
1,351
—
—
93,235
21,642
13,827
42,865
31,562
4,804
$355,954
12,002
3,394
6,112
4,166
263
11
$27,292
4,727
—
320
9,278
4,810
300
96
400
23,820
$
$
—
—
10,744
1,351
5,760
—
67
1,448
266
35
7,765
111,317
34,314
24,816
48,779
32,187
5,250
$414,831
Performing
$ 220,602
Non-Performing
151
$
Total
$220,753
1
– At December 31, 2010, the Corporation does not have any loans classified as Doubtful or Loss.
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Table of Contents
NOTE 5: Other Real Estate Owned
At December 31, 2010 and 2009, OREO was $10.67 million and $12.80 million, respectively. OREO is primarily comprised of residential properties and non-residential properties associated
with commercial relationships, and are located primarily in the state of Virginia. Changes in the balance for OREO are as follows:
(Dollars in thousands)
Balance at the beginning of year, gross
Transfers from loans
Capitalized costs
Charge-offs
Sales proceeds
Gain (loss) on disposition
Balance at the end of year, gross
Less allowance for losses
Balance at the end of year, net
Changes in the allowance for OREO losses are as follows:
(Dollars in thousands)
Balance at the beginning of year
Provision for losses
Charge-offs, net
Balance at the end of year
Year Ended December 31,
2009
2010
$
$ 15,202
2,040
16,874
5,265
—
218
(124)
(585)
(3,495)
(5,492)
(93)
45
15,202
14,653
(2,402)
(3,979)
$ 12,800
$ 10,674
Year Ended December 31,
2010
$2,402
2,180
(603)
$3,979
2009
$
73
2,614
(285)
$2,402
2008
$ —
296
(223)
$ 73
Expenses applicable to OREO, other than the provision for losses, were $931,000, $129,000 and $82,000 for the years ended December 31, 2010, 2009 and 2008, 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
65
December 31,
2010
$ 6,506
25,769
21,455
53,730
(24,987)
$ 28,743
2009
$ 6,734
26,357
20,925
54,016
(24,526)
$ 29,490
December 31,
2010
$142,198
167,488
$309,686
2009
$143,037
171,497
$314,534
Table of Contents
Remaining maturities on time deposits at December 31, 2010 are as follows:
(Dollars in thousands)
2011
2012
2013
2014
2015
Thereafter
NOTE 8: Borrowings
The table below presents selected information on short-term borrowings:
(Dollars in thousands)
Customer repurchase agreements
1
Federal Reserve Bank discount window
2
FHLB advances
3
Federal funds purchased
4
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
$165,520
85,520
16,269
14,668
26,923
786
$309,686
December 31,
2010
$ 6,848
—
—
3,770
$10,618
$31,530
$ 9,341
2009
$ 6,082
5,000
—
—
$11,082
$61,655
$31,328
0.78%
0.52%
0.60%
0.84%
$10,618
$11,082
1
2
3
4
Secured transactions with customers, which generally mature the day following the day sold.
Short-term borrowings through the Federal Reserve Bank’s discount window lending programs, which are secured by a loan-specific lien on certain qualifying loans.
Short-term borrowings from the FHLB secured by a blanket floating lien on certain loans secured by 1-4 family residential properties. At December 31, 2010 and 2009 there were no
short-term FHLB advances outstanding.
Advances against $36 million in federal funds lines with correspondent banks.
Long-term borrowings at December 31, 2010 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, 2010 was $5.00 million. The interest rate on the revolving bank line of credit, which matures in 2014, floats at the
one-month LIBOR rate plus a range of 200 basis points to 225 basis points, depending upon the average balance outstanding on the line, and the outstanding balance as of
December 31, 2010 was $75.40 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 2010. Long-term advances from the FHLB at December 31, 2010 consist of
$45.00 million of convertible advances and a $7.50 million fixed rate hybrid advance. The convertible 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 fixed rate hybrid advance provides fixed-rate funding until the stated maturity date with a one-time option to
embed interest rate caps, floors and swaptions.
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The table below presents selected information on the FHLB advances:
(Dollars in thousands)
Balance Outstanding at December 31, 2010
Fixed Rate Hybrid Advance
$7,500
Convertible Advances
$5,000
$5,000
$5,000
$7,500
$7,500
$5,000
$5,000
$5,000
The contractual maturities of long-term borrowings at December 31, 2010 are as follows:
(Dollars in thousands)
2011
2012
2013
2014
2015
Thereafter
Interest Rate
Maturity Date
3.39%
08/10/15
3.90%
4.08
3.95
3.69
3.70
4.06
2.93
3.59
Fixed Rate
$ —
10,000
—
12,500
7,500
22,500
$ 52,500
08/30/12
08/30/12
11/17/14
11/28/14
10/19/17
10/25/17
11/27/17
06/06/18
Floating Rate
—
$
—
—
75,402
—
5,000
80,402
$
Next
Conversion
Option Date
02/28/11
02/28/11
02/17/11
02/28/11
04/19/11
10/25/11
02/28/11
06/06/12
Total
$
—
10,000
—
87,902
7,500
27,500
$132,902
The Corporation’s unused lines of credit for future borrowings total approximately $198.59 million at December 31, 2010, which consists of $54.58 million available from the FHLB, $44.60
million on C&F Finance’s revolving bank line of credit, $67.18 million available from the Federal Reserve Bank and $32.23 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 or the FHLB 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 3.45% at December 31, 2010. 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 rate equal to the three-month LIBOR rate plus 1.57%.
During 2010, in order to mitigate the effect of rising interest rates in the future, the Corporation entered into two interest rate swap agreements whereby the effective fixed interest rate on
$5.00 million of the securities became 3.48% and the effective fixed interest rate on the remaining $5.00 million of the securities became 4.31%. The interest rate swaps mature in
September 2015. 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.
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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 (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 its 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.
Other Comprehensive Income
The following table presents the cumulative balances of the components of other comprehensive income, net of deferred tax assets (liabilities) of $30,000, $521,000 and $(565,000) as of
December 31, 2010, 2009 and 2008, respectively.
(Dollars in thousands)
Net unrealized gains (losses) on securities
Net unrecognized loss on cash flow hedges
Net unrecognized losses on defined benefit plan
Total cumulative other comprehensive income (loss)
2010
$ 500
(90)
(339)
$ 71
December 31,
2009
$1,168
—
(200)
$ 968
2008
$ (113)
—
(934)
$(1,047)
The Corporation reclassified net gains (losses) from securities of $46,000, $14,000 and $(885,000) from other comprehensive income (loss) to earnings for the years ended December 31,
2010, 2009 and 2008, respectively.
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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
2010
8,110
(1,000)
(149)
6,961
$
$
December 31,
2009
$
$
5,526
(992)
(138)
4,396
2008
4,181
—
—
4,181
$
$
3,085,025
3,044,009
3,027,700
18,444
4,482
30,574
3,103,469
3,048,491
3,058,274
Potential common shares that may be issued by the Corporation for its stock option awards and Warrant are determined using the treasury stock method. Approximately 361,000,
548,000 and 372,000 shares issuable upon exercise of options and the Warrant were not included in computing diluted earnings per common share for the years ended December 31,
2010, 2009 and 2008, 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
Year Ended December 31,
2010
$ 5,202
(2,253)
$ 2,949
2009
$ 5,422
(3,477)
$ 1,945
2008
$ 3,289
(2,672)
617
$
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The income tax provision is less than would be obtained by application of the statutory federal corporate tax rate to pre-tax accounting income as a result of the following items:
(Dollars in thousands)
Income tax computed at federal statutory rates
Tax effect of exclusion of interest income on obligations of states and political subdivisions
Reduction of interest expense incurred to carry tax-exempt assets
State income taxes, net of federal tax benefit
Tax effect of dividends-received deduction on preferred stock
Compensation in excess of deductible limits
Tax credits
Other
Percent of
Pre-tax
Income
34.0%
(13.7)
0.9
7.1
(0.1)
—
(1.2)
(0.3)
26.7%
2010
$ 3,760
(1,516)
100
787
(5)
—
(135)
(42)
$ 2,949
2009
$ 2,540
(1,431)
115
665
(22)
219
(118)
(23)
$ 1,945
Percent of
Pre-tax
Income
34.0%
(22.6)
2.6
3.3
(0.9)
—
(3.1)
(0.4)
12.9%
2008
$ 1,631
(1,085)
122
157
(45)
—
(147)
(16)
617
$
34.0%
(19.2)
1.5
8.9
(0.2)
2.9
(1.6)
(0.3)
26.0%
Year Ended December 31,
Percent of
Pre-tax
Income
The Corporation’s net deferred income taxes totaled $15.12 million and $12.37 million at December 31, 2010 and 2009, 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
Reserve for indemnification losses
OREO expenses
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
Other
Deferred tax asset
Deferred tax liability
Goodwill and other intangible assets
Net unrealized gain on securities available for sale
Deferred tax liability
Net deferred tax asset
December 31,
2010
2009
$10,797
491
1,842
1,791
614
229
499
132
27
1,140
17,562
(2,174)
(270)
(2,444)
$15,118
$ 9,012
965
954
1,655
614
151
367
124
51
986
14,879
(1,877)
(628)
(2,505)
$12,374
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 2007.
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 $372,000, $409,000 and $437,000 in 2010, 2009 and 2008, respectively.
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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. There was no expense under this plan in 2010. The amounts
charged to expense under this plan were $18,000 and $75,000 for 2009 and 2008 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 $108,000, $89,000 and $79,000 in 2010, 2009 and 2008, respectively.
Individual performance bonuses are awarded annually to certain members of management under a management incentive bonus plan. 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 and C&F Finance 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 $816,000, $418,000 and $333,000 in 2010, 2009 and 2008, respectively. In accordance with
employment agreements for certain senior officers of C&F Mortgage, performance bonuses of $336,000, $1.8 million and $695,000 were expensed in 2010, 2009 and 2008, 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 $124,000,
$90,000 and $92,000 in 2010, 2009 and 2008, 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 Cash Balance Plan for all full-time employees
over 21 years of age. Under the Cash Balance Plan, benefits earned by participants under the prior defined benefit pension plan through December 31, 2008 were converted to an
opening account balance for each participant. This account balance for each participant will grow each year with annual pay credits based on age and years of service and monthly
interest credits based on the prior year’s December average yield on 30-year Treasuries plus 150 basis points. The Bank funds pension costs in accordance with the funding provisions
of the Employee Retirement Income Security Act.
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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.
(Dollars in thousands)
Change in benefit obligation
Projected benefit obligation, beginning
Service cost
Interest cost
Actuarial loss (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 at valuation date
Discount rate
Expected return on plan assets
Rate of compensation increase
2010
$ 6,816
531
397
523
(352)
—
$ 7,915
$ 6,385
828
400
(352)
$ 7,261
$ (654)
$ (654)
$ 1,738
(4)
(1,212)
(183)
339
$
December 31,
2009
$ 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
$
2008
$ 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
$
5.5%
8.0
4.0
6.0%
8.0
4.0
6.0%
8.5
4.0
The accumulated benefit obligation was $7.91 million and $6.81 million as of the actuarial valuation dates in 2010 and 2009, respectively.
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Table of Contents
(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
Amortization of net obligation at transition
Prior service cost
Amortization of prior service costs
Deferred taxes
Total recognized in accumulated other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
Year Ended December 31,
2010
2009
2008
$ 531
397
(495)
(68)
(5)
48
408
142
5
—
68
(76)
139
$ 547
$
504
373
(413)
(68)
(5)
115
506
(1,203)
5
—
68
396
(734)
$ (228)
$
835
440
(576)
7
(5)
—
701
2,326
8
(1,416)
(9)
(318)
591
$ 1,292
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 $50,000, $(4,000) 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)
2010
2009
October 1,
2007
(1)
6.0%
8.0
4.0
6.0%
8.0
4.0
6.3%
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 valuation date was applicable to the year ended December 31, 2008.
The benefits expected to be paid by the plan in the next ten years are as follows:
(Dollars in thousands)
2011
2012
2013
2014
2015
2016 – 2020
$ 325
213
587
132
793
4,830
$6,880
The Bank selects the expected long-term rate of return on assets in consultation with its investment advisors and actuary. This rate is intended to reflect the average rate of earnings
expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of
inflation), for the major asset classes held or anticipated to be held by the trust and for the trust itself. Undue weight is not given to recent experience, which may not continue over the
measurement period. Higher significance is placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate
during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust,
and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly within periodic costs).
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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
* Less than one percent.
As of December 31, 2010 and 2009, the fair value of plan assets is as follows:
(Dollars in thousands)
Mutual funds-fixed income
Mutual funds-equity
(2)
Cash and equivalents
(3)
(1)
Total pension assets
(Dollars in thousands)
Mutual funds-fixed income
Mutual funds-equity
(2)
Cash and equivalents
(3)
(1)
Total pension assets
December 31,
2010
37%
63
*
100%
2009
38%
61
1
100%
December 31, 2010
Fair Value Measurements Using
Level 1
2,665
4,591
5
7,261
Level 2
—
—
—
—
Level 3
—
—
—
—
December 31, 2009
Fair Value Measurements Using
Level 1
2,441
3,879
65
6,385
Level 2
—
—
—
—
Level 3
—
—
—
—
$
$
$
$
Assets at
Fair
Value
$ 2,665
4,591
5
$ 7,261
Assets at
Fair
Value
$ 2,441
3,879
65
$ 6,385
(1)
(2)
(3)
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.
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.
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.
NOTE 12: Related Party Transactions
Loans outstanding to directors and executive officers totaled $350,000 and $683,000 at December 31, 2010 and 2009, respectively. New advances to directors and officers totaled $250,000
and repayments totaled $583,000 in the year ended December 31, 2010. 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.
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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 2010, 2009 and 2008. All options outstanding under the 2004 Plan are exercisable as of December 31, 2010. 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, 2010. 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, 2010. 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, 2010. 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.
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 and exercisable at end of year
* Weighted average
Shares
417,717
—
(23,100)
(4,000)
390,617
Intrinsic
Value
2010
Exercise
Price*
$33.71
—
15.90
15.75
$34.95 $ 142
2009
2008
Shares
455,017
—
(17,100)
(20,200)
417,717
Exercise
Price*
$ 32.71
—
16.91
25.35
$ 33.71
Shares
510,217
—
(13,950)
(41,250)
455,017
Exercise
Price*
$ 32.17
—
19.05
30.65
$ 32.71
The total intrinsic value of in-the-money options exercised in 2010 was $128,000. Cash received from option exercises during 2010 was $367,000. The Corporation has a policy of issuing
new shares to satisfy the exercise of stock options.
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The following table summarizes information about stock options outstanding at December 31, 2010:
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, 2010
89,667
228,850
72,100
390,617
Remaining
Contractual
Life*
1.5
4.7
3.3
3.7
Exercise Price*
20.95
$
38.28
41.78
34.95
$
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 the activity for restricted stock awards for the periods indicated is presented below:
Nonvested at beginning of year
Granted
Vested
Cancelled
Nonvested at end of year
2010
Weighted-
Average
Grant Date
Fair Value
$ 28.59
$ 20.70
$ —
$ 31.40
$ 25.89
Shares
58,725
28,850
—
(1,550)
86,025
2009
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 2010, 2009 and 2008 was $20.70, $16.63 and $19.66, respectively. Compensation expense is charged to income ratably over the vesting periods,
and was $367,000 in 2010, $318,000 in 2009 and $292,000 in 2008. As of December 31, 2010, there was $1.10 million of total unrecognized compensation cost related to restricted stock
granted under the Amended 2004 Plan and the 2004 Plan. The cost is expected to be recognized through 2015.
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 and exclude the unrealized loss on cash flow hedging instruments. Risk-weighted assets for the Corporation and the Bank were $683.09 million and
$680.42 million, respectively, at December 31, 2010 and $678.12 million and $673.82 million, respectively, at December 31, 2009. Management believes that, as of December 31, 2010, the
Corporation and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2010, 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.
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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, 2010:
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, 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
Actual
Amount
Ratio
Minimum Capital
Requirements
Amount Ratio
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$112,947
110,685
16.5%
16.3
$54,647
54,434
8.0%
8.0
N/A
$68,042
N/A
10.0%
104,158
101,929
15.3
15.0
27,324
27,217
4.0
4.0
N/A
40,825
N/A
6.0
104,158
101,929
11.6
11.4
35,843
35,838
4.0
4.0
N/A
44,798
N/A
5.0
$ 107,724
103,693
15.9%
15.4
$ 54,250
53,906
8.0%
8.0
N/A
$ 67,382
N/A
10.0%
99,056
95,078
14.6
14.1
27,125
26,953
4.0
4.0
N/A
40,429
N/A
6.0
99,056
95,078
11.5
11.1
34,450
34,258
4.0
4.0
N/A
42,822
N/A
5.0
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.
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. Based on the Corporation’s Tier 1 capital, the entire $20.00 million of trust preferred securities was eligible for
inclusion in Tier 1 capital for both 2010 and 2009.
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Corporation. The total amount of dividends that may
be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10 percent of the Bank’s capital stock and surplus on a secured basis.
NOTE 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 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. The Corporation 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 amount of loan
commitments was $83.37 million and $73.97 million at December 31, 2010 and 2009, respectively.
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Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk,
was $7.12 million and $8.92 million at December 31, 2010 and 2009, respectively.
At December 31, 2010, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to approximately $44.99 million and loans held for sale of $67.15 million. C&F
Mortgage has entered into corresponding commitments with third party investors to sell loans of approximately $112.14 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 may 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 for early payment default vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a
stated time limit. C&F Mortgage maintains an indemnification reserve for potential claims made under these recourse provisions. During the second quarter of 2010, C&F Mortgage
reached an agreement with its largest third-party investor that resolved all known and unknown indemnification obligations for loans sold to this investor prior to 2010. 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 following table presents the changes in the allowance for indemnification losses for the periods presented:
(Dollars in thousands)
Allowance, beginning of period
Provision for indemnification losses
Payments
Allowance, end of period
Year Ended December 31,
2010
$2,538
3,745
4,992
$1,291
2009
$ 603
2,490
555
$2,538
2008
$ 112
1,091
600
$ 603
As part of a recent evaluation of the Bank under the Community Reinvestment Act by the FDIC, the Bank received a “Needs to Improve” rating as the FDIC concluded that the Bank’s
subsidiary, C&F Mortgage, violated the Equal Credit Opportunity Act (the ECOA), Federal Reserve Regulation B, and the Fair Housing Act in connection with certain of its lending
practices. While the Bank’s board of directors and management strongly disagree with the FDIC’s conclusion that C&F Mortgage violated the ECOA, Federal Reserve Regulation B or
the Fair Housing Act, C&F Mortgage has strengthened and continues to strengthen its policies, procedures and monitoring of its lending practices to address the issues raised by the
FDIC.
By statute, a bank such as the Bank with a “Needs to Improve” CRA rating has limitations on certain future business activities, including the ability to open new branches and to make
acquisitions, until its CRA rating improves. Also required by statute, the FDIC referred its conclusions regarding the alleged violations to the Department of Justice (DOJ), and the DOJ
has notified C&F Mortgage that it is investigating the matter. Management has met with the DOJ regarding the investigation. At this time, it is not anticipated that the results of the
FDIC findings or the investigation will have a material adverse effect on C&F Financial Corporation’s results of operations or financial condition.
The Bank is a defendant in a lawsuit seeking the return of tax credits transferred to the Bank by a customer for payment of principal, interest and operating reserves related to an existing
loan and the extension of an additional loan in the period prior to the customer entering bankruptcy. The lawsuit seeks a judgment against the Bank for the face value of the tax credits
transferred. The Bank intends to vigorously defend the lawsuit. Discovery has recently commenced and, after consultation with counsel, management at this time cannot reasonably
estimate the amount of possible loss.
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The Corporation is committed under noncancelable operating leases for certain office locations. Rent expense associated with these operating leases was $1.26 million, $1.23 million and
$1.30 million, for the years ended December 31, 2010, 2009 and 2008, respectively.
Future minimum lease payments due under these leases as of December 31, 2010 are as follows (dollars in thousands):
2011
2012
2013
2014
2015
Thereafter
$1,453
878
586
317
293
73
$3,600
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. Valuations of other real estate owned are based upon appraisals by independent, licensed appraisers, general market
conditions and recent sales of like properties.
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, 2010.
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.
(Dollars in thousands)
Assets:
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
Liabilities:
Derivative payable
Total liabilities
79
December 31, 2010
Fair Value Measurements Using
Level 1
Level 2
Level 3
Assets at
Fair
Value
—
—
—
—
—
—
—
$
$
$
$
13,656
2,300
114,288
31
130,275
—
—
—
—
—
$ 13,656
2,300
114,288
31
$130,275
148
148
—
—
$
$
148
148
Table of Contents
(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
December 31, 2009
Fair Value Measurements Using
Level 1
Level 2
Level 3
—
—
—
—
—
$
$
9,743
2,709
104,867
1,251
118,570
—
—
—
—
—
Assets at
Fair
Value
$
9,743
2,709
104,867
1,251
$118,570
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)
Impaired loans, net
OREO, net
Total
(Dollars in thousands)
Impaired loans, net
OREO, net
Total
December 31, 2010
Fair Value Measurements Using
Level 1
—
—
—
Level 2
$
$
13,784
10,674
24,458
Level 3
—
—
—
December 31, 2009
Fair Value Measurements Using
Level 1
—
—
—
Level 2
$
$
6,610
12,800
19,410
Level 3
—
—
—
Fair Value of Financial Instruments
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
Loans, net
Loans held for sale, net
Accrued interest receivable
Financial liabilities:
Demand deposits
Time deposits
Borrowings
Derivative payable
Accrued interest payable
December 31,
2010
2009
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
9,680
$
130,275
606,744
67,153
5,073
315,448
309,686
164,140
148
1,160
9,680
$
130,275
607,264
67,314
5,073
315,448
315,009
160,398
148
1,160
$ 38,061
118,570
613,004
28,756
5,408
292,096
314,534
170,832
—
1,569
80
Assets at
Fair
Value
$13,784
10,674
$24,458
Assets at
Fair
Value
$
6,610
12,800
$ 19,410
Estimated
Fair
Value
$ 38,061
118,570
611,420
29,032
5,408
292,096
319,593
166,533
—
1,569
Table of Contents
The following describes the valuation techniques used by the Corporation to measure financial assets and financial liabilities at fair value as of December 31, 2010 and 2009.
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.
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, which in some cases may be adjusted to reflect current
trends, including sales prices, expenses, absorption periods and other current relevant factors (Level 2). 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 (Level 2). At December 31, 2010 and
December 31, 2009, the Corporation’s impaired loans were valued at $13.78 million and $6.61 million, respectively.
Loans held for sale, net. 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 generally not 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, 2010.
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.
Derivative payable. The fair value of derivatives is determined using the discounted cash flow method.
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.
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 interest 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.
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Table of Contents
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 segment includes 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 the other segment 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 and other general corporate expenses.
(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
Retail
Banking
Mortgage
Banking
Year Ended December 31, 2010
Consumer
Finance
Other
Eliminations
Consolidated
$ 33,922
—
6,093
40,015
$ 2,210
18,567
3,265
24,042
$ 37,382
—
689
38,071
$ 184
—
1,089
1,273
$
(3,850)
(3)
—
(3,853)
$ 69,848
18,564
11,136
99,548
6,500
10,452
14,661
13,112
44,725
(4,710)
(3,216)
$ (1,494)
$756,250
—
$
1,333
$
34
365
13,448
8,892
22,739
1,303
521
$
782
$78,550
$ —
411
$
8,425
5,278
6,062
2,893
22,658
15,413
6,011
$
9,402
$224,233
$ 10,724
131
$
—
1,031
717
509
2,257
(984)
(380)
$ (604)
$2,840
$ —
$ —
—
(3,891)
1
—
(3,890)
37
13
$
24
$(157,736)
—
$
—
$
14,959
13,235
34,889
25,406
88,489
11,059
2,949
$
8,110
$ 904,137
$ 10,724
1,875
$
82
Table of Contents
(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 (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
Retail
Banking
Mortgage
Banking
Year Ended December 31, 2009
Consumer
Finance
Other
Eliminations
Consolidated
(3,370)
—
—
(3,370)
$
64,971
24,976
11,713
101,660
$ 34,021
—
5,804
39,825
$ 2,471
24,976
4,211
31,658
$ 31,590
—
603
32,193
$
259
—
1,095
1,354
6,400
12,588
13,881
12,472
45,341
(5,516)
(3,352)
$ (2,164)
$739,390
$ —
155
$
563
267
15,381
9,374
25,585
6,073
2,643
$ 3,430
$40,523
$ —
252
$
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)
—
—
Retail
Banking
Mortgage
Banking
Year Ended December 31, 2008
Consumer
Finance
Other
Eliminations
$ 36,376
—
6,033
42,409
$ 2,034
16,714
2,168
20,916
$ 28,955
—
588
29,543
$
194
—
(333)
(139)
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
$
2,715
$178,679
$ 10,724
114
$
—
1,459
758
456
2,673
(2,812)
(1,119)
$(1,693)
$ 2,521
$ —
4
$
$
$
$
$
$
(3,429)
(21)
—
(3,450)
—
(3,485)
37
—
(3,448)
(2)
(1)
(1)
(68,557)
—
—
18,563
15,459
35,118
25,049
94,189
7,471
1,945
5,526
888,430
10,724
474
$
$
$
$
Consolidated
$
$
$
$
$
64,130
16,693
8,456
89,279
13,766
21,395
27,724
21,596
84,481
4,798
617
4,181
855,657
10,724
728
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.
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Table of Contents
NOTE 18: Derivatives
The Corporation uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps. Interest rate swaps involve the exchange of fixed and variable rate
interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. The Corporation’s interest
rate swaps qualify as cash flow hedges. The Corporation’s cash flow hedges effectively modify a portion of the Corporation’s exposure to interest rate risk by converting variable rates
of interest on $10.0 million of the Corporation’s trust preferred capital notes to fixed rates of interest until September 2015.
The cash flow hedges total notional amount is $10.0 million. At December 31, 2010, the cash flow hedges had a fair value of ($148,000), which is recorded in other liabilities. The cash
flow hedges were fully effective at December 31, 2010 and therefore the loss on the cash flow hedges was recognized as a component of other comprehensive income (loss), net of
deferred income taxes.
NOTE 19: 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
84
December 31,
2010
2009
$
328
31
2,642
110,636
$113,637
$
510
1,251
2,917
104,889
$109,567
$ 20,620
240
92,777
$113,637
$ 20,620
71
88,876
$109,567
Year Ended December 31,
2010
2009
2008
$
22
(999)
2,551
6,573
684
(721)
$8,110
$
92
(1,070)
4,220
2,293
675
(684)
$ 5,526
$
189
(1,306)
3,859
2,258
1,358
(2,177)
$ 4,181
Table of Contents
(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
Share-based compensation
Net (gain) loss on securities
Other-than-temporary impairment of securities
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Investing activities:
Proceeds from maturities and calls of securities
Investment in bank subsidiary
Net cash provided by (used in) investing activities
Financing activities:
Net proceeds from issuance of preferred stock
Purchase of common stock
Cash dividends
Proceeds from exercise of stock options
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash at beginning of year
Cash at end of year
Year Ended December 31,
2009
2010
2008
$ 8,110
$ 5,526
$ 4,181
(6,573)
367
(12)
—
322
21
2,235
1,262
—
1,262
—
—
(4,088)
409
(3,679)
(182)
510
328
$
(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
$
NOTE 20: Other Noninterest Expenses
The following table presents the significant components in the statements of income line “Noninterest Expenses-Other Expenses.”
(Dollars in thousands)
Provision for indemnification losses
Loan and OREO expenses
Professional fees
Data processing fees
Telecommunication expenses
FDIC expenses
Tax service and investor fees
All other noninterest expenses
Total Other Noninterest Expenses
85
2010
$ 3,745
3,631
1,898
1,869
1,086
952
743
5,714
$19,638
Year Ended December 31,
2009
$ 2,490
3,267
1,825
2,122
1,057
1,341
1,018
6,215
$19,335
2008
$ 1,091
749
1,311
1,895
1,108
369
641
8,401
$15,565
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NOTE 21: 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
Net income available to common shareholders
Earnings per common share—assuming dilution
Dividends per common share
86
March 31
$16,592
10,016
5,882
13,592
2,306
1,730
1,443
0.47
0.25
March 31
$ 15,437
7,152
9,241
14,486
1,907
1,508
1,248
0.41
0.31
2010 Quarter Ended
June 30
$17,362
10,744
7,194
16,206
1,732
1,417
1,130
0.36
0.25
September 30
17,736
$
10,683
7,824
14,804
3,703
2,586
2,298
0.74
0.25
2009 Quarter Ended
June 30
$ 16,125
7,737
9,958
15,305
2,390
1,750
1,462
0.48
0.25
September 30
16,625
$
8,535
8,560
14,721
2,374
1,658
1,367
0.45
0.25
December 31
$ 18,158
10,210
8,800
15,692
3,318
2,378
2,090
0.67
0.25
December 31
16,784
$
7,525
8,930
15,655
800
610
319
0.10
0.25
Table of Contents
To the Board of Directors and Shareholders
C&F Financial Corporation and Subsidiary
West Point, Virginia
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of C&F Financial Corporation and Subsidiary as of December 31, 2010 and 2009, and the related consolidated
statements of income, shareholders’ equity, and cash flows for the years ended December 31, 2010, 2009 and 2008. 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, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010, 2009 and 2008, 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, 2010, 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, 2011 expressed an unqualified opinion on the effectiveness of C&F Financial Corporation and Subsidiary’s
internal control over financial reporting.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 3, 2011
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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, 2010 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, 2010. 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, 2010, 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, 2010 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 the following page.
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, 2010
that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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To the Board of Directors and Shareholders
C&F Financial Corporation and Subsidiary
West Point, Virginia
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited C&F Financial Corporation and Subsidiary’s internal control over financial reporting as of December 31, 2010, 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.
In our opinion, C&F Financial Corporation and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, 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, 2011 expressed an unqualified
opinion.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 3, 2011
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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 2011 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 41 of the 2011 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 of 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, (iv) have not participated in the preparation of the financial
statements of the Corporation or any of its current subsidiaries at any time during the past three years, and (v) 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.”
Mr. O’Connell has reached the Corporation’s mandatory retirement age and will retire from the Board of Directors at the Annual Meeting, thus reducing the size of the Audit Committee
from four to three directors.
The Corporation provides an informal process for security holders to send communications to its board of directors. Security holders who wish to contact the board of directors
or any of its members may do so by addressing their written correspondence to C&F Financial Corporation, Board of Directors, c/o Corporate Secretary, P.O. Box 391, West Point,
Virginia 23181. Correspondence directed to an individual board member will be referred, unopened, to that member. Correspondence not directed to a particular board member will be
referred, unopened, to the Chairman of the Board.
ITEM 11.
EXECUTIVE COMPENSATION
The information contained on pages 13 through 32 of the 2011 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 32
through 37 of the 2011 Proxy Statement are incorporated herein by reference. The information regarding director compensation contained on pages 10 through 12 of the 2011 Proxy
Statement under the caption, “Director Compensation,” is incorporated herein by reference.
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ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information contained on page 3 of the 2011 Proxy Statement under the caption, “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein
by reference.
The information contained on page 41 of the 2011 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 page 12 of the 2011 Proxy Statement under the caption, “Interest of Management in Certain Transactions,” is incorporated herein by reference. The
information contained on page 8 of the 2011 Proxy Statement under the caption, “Director Independence,” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained on page 40 of the 2011 Proxy Statement under the captions, “Principal Accountant Fees” and “Audit Committee Pre-Approval Policy,” is incorporated
herein by reference.
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Table of Contents
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
PART IV
3.1
3.1.1
3.2
Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit 3.1 to Form 10-KSB filed March 29, 1996)
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)
Amended and Restated Bylaws of C&F Financial Corporation, as adopted October 16, 2007 (incorporated by reference to Exhibit 3.2 to Form 8-K filed October 22, 2007)
Certain instruments relating to trust preferred securities not being registered have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a
copy of any such instrument to the Securities and Exchange Commission upon its request.
4.1
4.2
*10.1
*10.3
*10.4
*10.4.1
*10.4.2
*10.4.3
*10.4.4
*10.5
*10.5.1
*10.5.2
*10.6
*10.7
*10.8
*10.9
*10.10
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)
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)
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)
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)
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)
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 (incorporated by reference to Exhibit 10.4.4 to Form 10-K filed March 3, 2010)
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)
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)
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)
Amended and Restated C&F Financial Corporation 1994 Incentive Stock Plan (incorporated by reference to Exhibit 10.6 to Form 10-K filed March 7, 2008)
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 January 18, 2011
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)
92
Table of Contents
*10.10.1
*10.10.2
*10.10.3
*10.11
*10.12
*10.12.1
*10.14
*10.15
*10.16
*10.17
10.19
10.19.1
10.24
*10.25
*10.26
21
23
31.1
31.2
32
99.1
99.2
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)
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)
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)
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)
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)
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)
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)
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)
Base Salaries for Named Executive Officers of C&F Financial Corporation
Form of C&F Financial Corporation Restricted Stock Agreement (incorporated by reference to Exhibit 10.16 to Form 8-K filed December 18, 2006)
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)
First Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Preferred Capital, Inc., various financial institutions and C&F
Finance Company dated as of July 1, 2010 (incorporated by reference to Exhibit 10.19.1 to Form 10-Q filed August 6, 2010)
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)
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)
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)
Subsidiaries of the Registrant
Consent of Yount, Hyde & Barbour, P.C.
Certification of CEO pursuant to Rule 13a-14(a)
Certification of CFO pursuant to Rule 13a-14(a)
Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350
Certification of CEO pursuant to 31 C.F.R. Section 30.15
Certification of CFO pursuant to 31 C.F.R. Section 30.15
*
Indicates management contract
93
Table of Contents
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.
C&F FINANCIAL CORPORATION
(Registrant)
Date: March 3, 2011
By:
/S/ LARRY G. DILLON
Larry G. Dillon
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
/S/ LARRY G. DILLON
Larry G. Dillon, Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/S/ THOMAS F. CHERRY
Thomas F. Cherry, Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/S/ J. P. CAUSEY JR.
J. P. Causey Jr., Director
/S/ BARRY R. CHERNACK
Barry R. Chernack, Director
/S/ AUDREY D. HOLMES
Audrey D. Holmes, Director
/S/ JAMES H. HUDSON III
James H. Hudson III, Director
/S/ JOSHUA H. LAWSON
Joshua H. Lawson, Director
/S/ WILLIAM E. O’CONNELL JR.
William E. O’Connell Jr., Director
/S/ C. ELIS OLSSON
C. Elis Olsson, Director
/S/ PAUL C. ROBINSON
Paul C. Robinson, Director
Date: March 3, 2011
Date: March 3, 2011
Date: March 3, 2011
Date: March 3, 2011
Date: March 3, 2011
Date: March 3, 2011
Date: March 3, 2011
Date: March 3, 2011
Date: March 3, 2011
Date: March 3, 2011
(Back To Top)
94
Section 2: EX-10.9 (C&F FINANCIAL CORPORATION MANAGEMENT INCENTIVE
PLAN)
Exhibit 10.9
C&F FINANCIAL CORPORATION
MANAGEMENT INCENTIVE PLAN
ARTICLE I
OBJECTIVE OF THE PLAN
The purpose of the Management Incentive Plan (“MIP”) is to attract, retain and motivate key employees by providing incentive awards to designated executive, managerial and
professional employees of C&F Financial Corporation (“Company”) and its direct or indirect subsidiaries.
The MIP is designed to link key employee interests more closely with the interests of the Company’s shareholders and to create value for the Company by maximizing achievement of
corporate, business unit and individual performance goals.
Each Participant’s award under this MIP will take into account corporate performance as well as, where appropriate, his or her own business unit’s performance. Awards under the MIP
may also reflect individual performance.
ARTICLE II
PLAN ADMINISTRATION
The MIP will be administered by the Compensation Committee (“Committee”) which will have the power and authority to interpret the MIP, select employees to participate in the MIP,
establish target awards and performance objectives under the MIP, and establish guidelines for determining individual awards and rules for the operation and administration of the MIP.
Notwithstanding the restrictions contained in Article V below, the Committee will also have the power and authority to adjust upward or downward any target award earned, in its
discretion, in light of such considerations as the Committee may deem relevant (but subject to applicable limitations of the Company’s 2004 Incentive Stock Plan).
Except as expressly otherwise provided herein in the case of Named Executive Officers (as defined below) or as prohibited by any national securities exchange or system on which the
Company’s stock is then listed or reported, by any regulatory body having jurisdiction with respect thereto or under any other applicable laws, rules or regulations, the Committee may
delegate one or more of its powers or responsibilities to one or more of its members and/or to one or more officers of the Company.
The Chief Executive Officer’s incentive awards (whether cash or in the form of equity awards) will be determined solely by the Committee, taking into account the overall Company
performance relative to the established business plan (“Corporate Goal”) and the Chief Executive Officer shall not be present during such deliberations or voting.
The MIP is an annual plan, is first effective January 1, 2005 and shall remain in effect until amended or terminated by the Board of Directors. A new plan year shall commence on the first
business day of each fiscal year of the Company. The Committee shall review the MIP annually and recommend any amendments or revisions thereto which it deems appropriate or
desirable, for approval by the Board of Directors.
ARTICLE III
PARTICIPANTS
Persons who may participate in the MIP are limited to key employees of the Company and its direct or indirect subsidiaries who are recommended by the Chief Executive Officer and
approved by the Committee (“Participants”).
To be eligible for the MIP in any particular year, key employees must be employees of the Company or a subsidiary as of January 1st of that plan year. In addition, employees who are
either hired as key employees or are promoted and become key employees after the beginning of a plan year may be designated as Participants for the plan year and assigned a prorated
target in the Committee’s discretion.
ARTICLE IV
PERFORMANCE OBJECTIVES
In connection with the administration of the MIP, the Committee shall establish:
(i) MIP performance objectives for the Company and any subsidiary (“Corporate Goals”), appropriate business units of the Company (“Business Unit Goals”), and individuals
(“Individual Goals”) based upon such criteria as may be agreed upon by the Committee and
(ii) The award formula or matrix by which all incentive awards under the MIP shall be calculated.
Except as provided herein in the case of Named Executive Officers, the selection of such performance objective(s) and the award formula or matrix may vary on a Participant by
Participant basis.
Prior to or within the first 90 days of each plan year after 2005, the Committee shall review the previously established Corporate Goals, Business Unit Goals and Individual Goals and
make any changes to such performance objectives as it deems appropriate for the new plan year.
ARTICLE V
AWARDS
The MIP provides for cash incentive awards (“Cash Awards”) and/or equity incentive awards (“Equity Based Awards”). Except as provided herein in the case of Named Executive
Officers, target awards may be weighted between Corporate, Business Unit and Individual Goals on such basis as the Committee determines and the weighting may vary on a Participant
by Participant basis. Separate performance objectives and award formulas or matrixes maybe established for Cash Awards and Equity Based Awards. Cash Awards shall be settled in
cash. Equity Based Awards shall be settled in cash and/or Company stock as determined by the Committee.
Each Participant shall be assigned a Cash Award target, which shall be paid or provided if the Participant achieves his or her Cash Award targeted performance goal(s). All cash
incentive awards made to the President of C&F Mortgage Corporation (“C&F Mortgage”) shall be made pursuant to such President’s Employment Agreement, as in effect from time to
time, with C&F Mortgage or the Company, and not pursuant to this MIP, for any year for which such Employment Agreement provides for an annual incentive arrangement.
Unless otherwise provided by the Committee, the Cash Award targets for a plan year of the Chief Executive Officer and each executive officer whose compensation for the prior plan
year will appear in the Company’s annual meeting proxy statement for the relevant plan year (“Named Executive Officers”) will be based solely on achievement of the Corporate Goal,
and the Corporate Goal for the Cash Awards for the Named Executive Officers is based on the Company’s return on equity (“ROE”) and return on assets (“ROA”) for the plan year for
which the Cash Award is made compared to a peer group of banks selected by the Committee. If 100% of the Cash Award Corporate Goal is achieved for a plan year, the Chief Executive
Officer and other Named Executive Officers will earn a Cash Award equal to his or her individual Cash Target Award designated by the Committee. If greater than or less than 100% (but
at least the Minimum Award Level designated by the Committee) of the Cash Award Corporate Goal is achieved for a plan year, the Chief Executive Officer and other Named Executive
Officers will earn a Cash Award equal to more or less than 100% of his or her individual Cash Target Award (but in no event more than the Maximum Award Percentage designated by
the Committee) based on an Award Matrix designated by the Committee. Any award earned by the Named Executive Officers may be adjusted by the Committee, solely at its discretion,
based on measures including, but not limited to, asset quality of the Company. The measures are listed in the Cash Award Targets and Goals for Named Executive Officers which are set
pursuant to Article IV of this document. As mentioned above, all cash incentive awards made to the President of C&F Mortgage Corporation (“C&F Mortgage”) shall be made pursuant
to such President’s Employment Agreement, as in effect from time to time, with C&F Mortgage or the Company, and not pursuant to this MIP, for any year for which such Employment
Agreement provides for an annual incentive arrangement.
Participants may also be awarded Equity Based Awards consisting of restricted stock, stock options, stock appreciation rights or other stock equivalent awards under the MIP if the
Participant achieves his or her Equity Based Award targeted performance goal(s). If 100% or more of the Equity Based Award Corporate Goal is achieved for a plan year, the Chief
Executive Officer and other Named Executive Officers will earn an Equity Based Award equal to his or her individual Equity Based Target Award designated by the Committee. If
achievement is less than the Equity Based Award Corporate Goal, Equity Based Award will be adjusted. All Equity Based Awards granted under the MIP which are payable in or entail
the issuance of Company stock will be awarded pursuant to the Company’s 2004 Incentive Stock Plan unless the Committee specifically determines otherwise (“Stock Plan”).
Unless otherwise provided by the Committee, Equity Based Awards for a plan year for the Chief Executive Officer and other Named Executive Officers, will be based on the achievement
of the Corporate Goal, and the Corporate Goal for the Equity Based Awards for these Named Executive Officers is based on 5-year total shareholder return of the Company compared to
that of a peer group designated by the Committee. The Committee will determine the appropriate valuation methodology for determining the fair market value of such equity award on
the date of grant.
The Cash Award targets and Equity Based Award targets for all Participants other than the Named Executive Officers shall be as determined by the Committee based on the applicable
Corporate Goals, Business Unit Goals or Individual Goals or any combination thereof. The Business Unit Goals and Individual Goals shall be established by the Committee based on
specific business unit and individual objectives to be reviewed by the Committee annually. These include but are not limited to loan and deposit growth, asset quality, margins,
productivity, soundness, and customer satisfaction.
ARTICLE VI
ENTITLEMENT TO EARNED AWARDS
With respect to Cash Awards, except as provided below, no earned award shall be payable to a Participant unless that Participant is an employee of the Company and/or any subsidiary
from January 1st of that plan year (or if later, the date he or she is designated as a Participant for that plan year) either through the last day of that plan year or, if so provided by the
Committee prior to the end of the plan year to which the award relates, through the date the award for that plan year is paid (the “Vesting Date”).
With respect to Equity Based Awards, no grant evidencing the Equity Based Award will be granted unless the Participant is employed by the Company or any subsidiary on the date of
grant.
In the event of a Participant’s death, total and permanent disability, retirement or involuntary termination without cause during a plan year, earned awards shall be calculated for that
plan year and then pro-rated by multiplying the earned annual award by a fraction, the numerator of which is the number of full months, including the month in which the terminating
event occurred, in the plan year and the denominator of which is twelve. In such event, payout will occur at the same time all other earned and vested award payments are made for that
plan year. Otherwise, a Participant who is not employed by the Company or a subsidiary for any other reason on the Vesting Date for a plan year shall forfeit his or her award for that
plan year unless otherwise determined by the Committee.
ARTICLE VII
PAYMENT OR PROVISION OF EARNED AND VESTED AWARDS
Earned and vested Cash Awards shall be paid as soon as practicable following the end of the plan year, however, in no event shall such awards be paid later than March 15th following
the end of the plan year, allowing the Company adequate time to formally analyze its financial results according to the regulations and procedures of a public company.
Earned Equity Based Awards shall be evidenced by an equity compensation grant under the Stock Plan made at such times as may be determined by the Committee, but in no event
later than March 15th following the end of each plan year. Such grants may entail such further service based and/or performance based vesting as the Committee may determine.
ARTICLE VIII
NO ENTITLEMENT TO BONUS
Participants are entitled to a distribution under the MIP only upon the determination by the Committee that the award is earned, vested and payable, and no Participant shall be entitled
to an award under the MIP unless the award is subject to the attainment of performance objectives defined under the MIP, and such award may be adjusted by the Committee in its
discretion.
ARTICLE IX
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors reserves the right to amend or terminate the MIP at any time, based on the recommendation of the Committee.
In the event the MIP is amended by the Board of Directors more than 90 days after the beginning of a plan year in a manner which could reduce the award payable to a Participant for
that plan year, the Participant shall continue to be eligible for incentive awards, if earned, for the plan year in which the amendment of the MIP occurs, with incentive awards being
prorated as of the date of the MIP amendment based on the old and new provision of the MIP, unless otherwise agreed by the Participant.
In the event the MIP is terminated by the Board of Directors, unless otherwise agreed by a Participant, Participants shall continue to be eligible for incentive awards, if earned, for the
plan year in which the termination of the MIP occurs, with incentive awards being prorated as of the date of the MIP termination.
ARTICLE X
NO RIGHT OF ASSIGNABILITY
Participant awards shall not be subject to assignment, pledge or other disposition, nor shall such amounts be subject to garnishment, attachment, transfer by operation of law, or any
legal process.
Nothing contained in the MIP shall confer upon employees any right to continued employment, nor interfere with the right of the Company to terminate a MIP Participant’s employment
with the Company or any subsidiary. Participation in the MIP does not confer rights to participation in other Company programs, including non-qualified retirement or deferred
compensation plans or other executive perquisite programs.
The MIP is intended to constitute an “unfunded” plan for incentive compensation. With respect to any award as to which a Participant has an earned and vested interest but which is
not yet paid to the Participant, nothing contained herein shall give any such Participant any rights that are greater than those of a general unsecured creditor of the Company.
ARTICLE XI
GOVERNING LAW
The MIP shall be governed, construed, and administered in accordance with the laws of the Commonwealth of Virginia.
In the event any provision of the MIP shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the MIP.
As amended by the Board of Directors on January 18, 2011.
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Section 3: EX-10.16 (BASE SALARIES FOR NAMED EXECUTIVE OFFICERS OF C&F
FINANCIAL CORPORATION)
BASE SALARIES FOR NAMED EXECUTIVE OFFICERS
OF
C&F FINANCIAL CORPORATION
Exhibit 10.16
The following are the base salaries (on an annual basis) in effect as of January 1, 2011 of the named executive officers of C&F Financial Corporation:
Larry G. Dillon
Chairman, President and Chief Executive Officer
Thomas F. Cherry
Executive Vice President, Chief Financial Officer and Secretary
Bryan E. McKernon
President and Chief Executive Officer of C&F Mortgage Corporation
$ 268,000
$ 220,000
$ 195,000
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Section 4: EX-21 (SUBSIDIARIES OF THE REGISTRANT)
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
Citizens and Farmers Bank, incorporated in Virginia
C&F Mortgage Corporation, incorporated in Virginia
Hometown Settlement Services LLC, organized in Virginia
Certified Appraisals LLC, organized in Virginia
C&F Title Agency, Inc., incorporated in Virginia
C&F Finance Company, incorporated in Virginia
C&F Investment Services, Inc., incorporated in Virginia
C&F Insurance Services, Inc., incorporated in Virginia
C&F Financial Statutory Trust I, organized in Delaware
C&F Financial Statutory Trust II, organized in Delaware
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Section 5: EX-23 (CONSENT OF YOUNT, HYDE & BARBOUR, P.C.)
We consent to the incorporation by reference in Registration Statements on Form S-8 (No.333-63699, No. 333-67535, No. 333-89551, No. 333-89505, No. 333-35996 and No. 333-125881)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
and Form S-3 (No. 333-156944, No. 333-100701, No. 333-60877 and No. 333-30497) of C&F Financial Corporation and Subsidiary of our report, dated March 3, 2011, relating to our audits
of the consolidated financial statements and internal control over financial reporting, included in and incorporated by reference in the Annual Report to Shareholders on Form 10-K of
C&F Financial Corporation and Subsidiary for the year ended December 31, 2010.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March 3, 2011
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Section 6: EX-31.1 (SECTION 302 CEO CERTIFICATION)
CERTIFICATIONS
I, Larry G. Dillon, certify that:
1. I have reviewed this annual report on Form 10-K of C&F Financial Corporation;
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date
March 3, 2011
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/s/ Larry G. Dillon
Larry G. Dillon, President and Chief Executive Officer
Section 7: EX-31.2 (SECTION 302 CFO CERTIFICATION)
CERTIFICATIONS
I, Thomas F. Cherry, certify that:
1. I have reviewed this annual report on Form 10-K of C&F Financial Corporation;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date
March 3, 2011
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/s/ Thomas F. Cherry
Thomas F. Cherry, Executive Vice President and
Chief Financial Officer
Section 8: EX-32 (SECTION 906 CEO AND CFO CERTIFICATION)
The undersigned, as the chief executive officer and the chief financial officer of C&F Financial Corporation, respectively, certify that to the best of their knowledge and belief the
Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of C&F Financial
Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to §906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), and shall not be relied
upon for any other purpose. The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.
CERTIFICATION
Exhibit 32
Date:
Date:
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March 3, 2011
/s/ Larry G. Dillon
Larry G. Dillon
President and Chief Executive Officer
March 3, 2011
/s/ Thomas F. Cherry
Thomas F. Cherry
Executive Vice President and Chief Financial Officer
Section 9: EX-99.1 (CERTIFICATION OF CEO PURSUANT TO 31 C.F.R. SECTION 30.15)
Exhibit 99.1
I, Larry G. Dillon, the President and Chief Executive Officer of C&F Financial Corporation, certify, based on my knowledge, that:
CERTIFICATION
(i) The compensation committee of C&F Financial Corporation has discussed, reviewed and evaluated with senior risk officers at least once every six months during the fiscal
year ended December 31, 2010, the senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to C&F Financial
Corporation;
(ii) During the fiscal year ended December 31, 2010, the compensation committee of C&F Financial Corporation did not identify any features of the SEO compensation plans that
could lead SEOs to take unnecessary and excessive risks that could threaten the value of C&F Financial Corporation or of the employee compensation plans that pose risks to C&F
Financial Corporation. The compensation committee of C&F Financial Corporation will, at least once every six months during the TARP period identify and limit any features of the SEO
compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of C&F Financial Corporation, and identify any features of the employee
compensation plans that pose risks to C&F Financial Corporation, and limit those features to ensure that C&F Financial Corporation is not unnecessarily exposed to risks;
(iii) The compensation committee of C&F Financial Corporation has reviewed at least once every six months during the fiscal year ended December 31, 2010 the terms of each
employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of C&F Financial Corporation to enhance the
compensation of an employee and limited any such features. The compensation committee of C&F Financial Corporation will, at least once every six months during the TARP period,
review the terms of each employee compensation plan, and identify any features of the plan that could encourage the manipulation of reported earnings of C&F Financial Corporation to
enhance the compensation of an employee, and limit any such features;
(iv) The compensation committee of C&F Financial Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under
paragraphs (i) and (iii) above;
(v) The compensation committee of C&F Financial Corporation will provide a narrative description of how it limited during the fiscal year ended December 31, 2010 the features
in:
employee;
(A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of C&F Financial Corporation;
(B) Employee compensation plans that unnecessarily expose C&F Financial Corporation to risks; and
(C) Employee compensation plans that could encourage the manipulation of reported earnings of C&F Financial Corporation to enhance the compensation of an
(vi) C&F Financial Corporation has required that bonus payments, as defined in the regulations and guidance established under Section 111 of EESA (bonus payments), of the
SEOs and twenty next most highly compensated employees be subject to a recovery or “clawback” provision during any part of the fiscal year ended December 31, 2010 if the bonus
payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
(vii) C&F Financial Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under Section 111 of EESA, to an SEO or
any of the next five most highly compensated employees during the fiscal year ended December 31, 2010;
(viii) C&F Financial has limited bonus payments to its applicable employee in accordance with Section 111 of EESA and the regulations and guidance established thereunder
during the fiscal year ended year ended December 31, 2010;
(ix) C&F Financial Corporation and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under
Section 111 of EESA, during the fiscal year ended December 31, 2010; and any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the
board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;
(x) C&F Financial Corporation will permit a non-binding shareholder resolution in compliance with applicable federal securities rules and regulations on the disclosures provided
under the federal securities laws related to SEO compensation paid or accrued during the fiscal year ended December 31, 2010;
(xi) C&F Financial Corporation will disclose the amount, nature, and justification for the offering during the fiscal year ended December 31, 2010 of any perquisites, as defined in
the regulations and guidance established under Section 111 of EESA, whose total value exceeds $25,000 for the employee who is subject to the bonus payment limitations identified in
paragraph (viii);
(xii) C&F Financial Corporation will disclose whether C&F Financial Corporation, the board of directors of C&F Financial Corporation, or the compensation committee of C&F
Financial Corporation engaged during the fiscal year ended December 31, 2010, a compensation consultant; and the services the compensation consultant or any affiliate of the
compensation consultant provided during this period;
(xiii) C&F Financial Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under Section 111 of EESA, to the SEOs
and the next twenty most highly compensated employees during the fiscal year ended December 31, 2010;
(xiv) C&F Financial Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between C&F
Financial Corporation and Treasury, including any amendments;
(xv) C&F Financial Corporation will submit to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal
year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee
identified; and
(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for
example, 18 USC 1001.)
Date
March 3, 2011
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/s/ Larry G. Dillon
Larry G. Dillon, President and Chief Executive Officer
Section 10: EX-99.2 (CERTIFICATION OF CFO PURSUANT TO 31 C.F.R. SECTION 30.15)
CERTIFICATION
Exhibit 99.2
I, Thomas F. Cherry, the Executive Vice President and Chief Financial Officer of C&F Financial Corporation, certify, based on my knowledge, that:
(i) The compensation committee of C&F Financial Corporation has discussed, reviewed and evaluated with senior risk officers at least once every six months during the fiscal
year ended December 31, 2010, the senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to C&F Financial
Corporation;
(ii) During the fiscal year ended December 31, 2010, the compensation committee of C&F Financial Corporation did not identify any features of the SEO compensation plans that
could lead SEOs to take unnecessary and excessive risks that could threaten the value of C&F Financial Corporation or of the employee compensation plans that pose risks to C&F
Financial Corporation. The compensation committee of C&F Financial Corporation will, at least once every six months during the TARP period identify and limit any features of the SEO
compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of C&F Financial Corporation, and identify any features of the employee
compensation plans that pose risks to C&F Financial Corporation, and limit those features to ensure that C&F Financial Corporation is not unnecessarily exposed to risks;
(iii) The compensation committee of C&F Financial Corporation has reviewed at least once every six months during the fiscal year ended December 31, 2010 the terms of each
employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of C&F Financial Corporation to enhance the
compensation of an employee and limited any such features. The compensation committee of C&F Financial Corporation will, at least once every six months during the TARP period,
review the terms of each employee compensation plan, and identify any features of the plan that could encourage the manipulation of reported earnings of C&F Financial Corporation to
enhance the compensation of an employee, and limit any such features;
(iv) The compensation committee of C&F Financial Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under
paragraphs (i) and (iii) above;
(v) The compensation committee of C&F Financial Corporation will provide a narrative description of how it limited during the fiscal year ended December 31, 2010 the features
in:
employee;
(A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of C&F Financial Corporation;
(B) Employee compensation plans that unnecessarily expose C&F Financial Corporation to risks; and
(C) Employee compensation plans that could encourage the manipulation of reported earnings of C&F Financial Corporation to enhance the compensation of an
(vi) C&F Financial Corporation has required that bonus payments, as defined in the regulations and guidance established under Section 111 of EESA (bonus payments), of the
SEOs and twenty next most highly compensated employees be subject to a recovery or “clawback” provision during any part of the fiscal year ended December 31, 2010 if the bonus
payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
(vii) C&F Financial Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under Section 111 of EESA, to an SEO or
any of the next five most highly compensated employees during the fiscal year ended December 31, 2010;
(viii) C&F Financial has limited bonus payments to its applicable employee in accordance with Section 111 of EESA and the regulations and guidance established thereunder
during the fiscal year ended December 31, 2010;
(ix) C&F Financial Corporation and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under
Section 111 of EESA, during the fiscal year ended December 31, 2010; and any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the
board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;
(x) C&F Financial Corporation will permit a non-binding shareholder resolution in compliance with applicable federal securities rules and regulations on the disclosures provided
under the federal securities laws related to SEO compensation paid or accrued during the fiscal year ended December 31, 2010;
(xi) C&F Financial Corporation will disclose the amount, nature, and justification for the offering during the fiscal year ended December 31, 2010 of any perquisites, as defined in
the regulations and guidance established under Section 111 of EESA, whose total value exceeds $25,000 for the employee who is subject to the bonus payment limitations identified in
paragraph (viii);
(xii) C&F Financial Corporation will disclose whether C&F Financial Corporation, the board of directors of C&F Financial Corporation, or the compensation committee of C&F
Financial Corporation engaged during the fiscal year ended December 31, 2010, a compensation consultant; and the services the compensation consultant or any affiliate of the
compensation consultant provided during this period;
(xiii) C&F Financial Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under Section 111 of EESA, to the SEOs
and the next twenty most highly compensated employees during the fiscal year ended December 31, 2010;
(xiv) C&F Financial Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between C&F
Financial Corporation and Treasury, including any amendments;
(xv) C&F Financial Corporation will submit to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal
year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee
identified; and
(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for
example, 18 USC 1001.)
Date
March 3, 2011
(Back To Top)
/s/ Thomas F. Cherry
Thomas F. Cherry, Executive Vice President and
Chief Financial Officer
NASDAQ
INVESTOR RELATIONS &
FINANCIAL STATEMENTS
C&F Financial Corporation's Annual Report on
Form 10-K and quarterly reports on Form 10-Q, as
filed with the Securities and Exchange Commission,
may be obtained without charge by visiting the
Corporation's website at www.cffc.com.
Copies of these documents can also be obtained
without charge upon written request. Requests
for this or other financial information about C&F
Financial Corporation should be directed to:
Thomas Cherry
Executive Vice President, CFO & Secretary
C&F Financial Corporation
P.O. Box 391
West Point, VA 23181
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
NewYork, NY 10038
telephone them toll-free at:
1-800-937-5449
or visit their website at:
www.amstock.com
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3600 LaGrange Parkway
Toano, Virginia 23168
757-741-2201
802 Main Street
PO Box 391
West Point, VA 23181
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