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C&F Financial Corporation is a one-bank holding
company providing a full range of banking services to
individuals and businesses through its subsidiaries.
C&F Bank (Citizens and Farmers Bank) offers quality
banking services to individuals and businesses through
18 retail branches located in Virginia from Hampton
to Richmond.
C&F Mortgage Corporation originates and sells
residential mortgages throughout Virginia, North
Carolina, Maryland, Delaware and New Jersey.
Through its subsidiaries, C&F Mortgage provides
ancillary mortgage loan production services for loan
settlement, residential appraisals and title insurance.
C&F Finance Company specializes in new and used
automobile lending in Alabama, Georgia, Illinois, Indiana,
Kentucky, Maryland, Missouri, North Carolina, Ohio,
Tennessee, Texas, Virginia and West Virginia.
C&F Investment Services, Inc. provides a full range
of securities brokerage, life and health insurance and
investment services to individuals and businesses
through the Bank’s 18 retail branch locations.
Featured on cover: T. Hurst Kelley, Midlothian Branch Manager
Meghan Codd Walker & Deanna Lorianni, Zuula Consulting
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
New York, NY 10038
telephone them toll-free at:
1-800-937-5449
or visit their website at:
www.amstock.com
2012 C&F ANNUAL REPORT
P1
Performance measures continue to show that C&F Financial Corporation is a top performer in both Virginia
and National Peer Group comparisons. Our Return on Average Assets and Return on Average Equity far surpass the
average of our peers.
2012 in Review
NET INCOME (In thousands)
$16,382
$12,976
$4,181
$5,526
$8,110
2008
2009
2010
2011
2012
EARNINGS PER SHARE (Assuming Dilution)
$1.37
2008
$1.44
2009
RETURN ON AVERAGE EQUITY
$4.86
$3.72
$2.24
2010
2011
2012
14.86%
17.05%
6.39%
6.60%
9.74%
2008
2009
2010
2011
RETURN ON AVERAGE ASSETS
1.30%
7.51%
2012
1.71%
.51%
2008
.50%
2009
.78%
.94%
2010
2011
2012
Peer Comparison Source: Federal Financial Institutions Examination Council (FFIEC) Bank Holding Company Performance Report –
2012 data is through 9/30
2012 C&F ANNUAL REPORT
P2
Larry G. Dillon
Chairman, President & Chief Executive Officer
It seems that this letter always starts with a statement similar to,
“It is my pleasure to present . . .” and, once again, with a record-breaking
earnings year in 2012, I am, on behalf of the Board of Directors, very
pleased to present C&F Financial Corporation’s 2012 Annual Report.
It is very gratifying to communicate the results of our company, but this
year may be just a little more special in that we have followed 2011, a year
in which we achieved record earnings, with a year in which we exceeded
the record earnings of 2011 by over 26%, despite the sluggish economy
and the continuing issue of problem loans. I am very proud of what our
people have been able to accomplish during 2012.
The corporation’s net income for 2012 was a record $16.4 million
vs. $13.0 million in 2011 (and more than double the $8.1 million earned
in 2010). This resulted in a return on average equity of 17.05% and a
return on average assets of 1.71% for 2012 compared to 14.85% and
1.30%, respectively, for the year 2011. Both returns compare favorably to
those of our peers, who experienced a return on average equity of 7.51%
and a return on average assets of 0.94% for 2012. Earnings per common
share, assuming dilution, also increased significantly from $3.72 in 2011
to $4.86 in 2012, a 30.6% increase.
Total assets increased from $928.1 million at year-end 2011 to
$977.0 million at year-end 2012 and deposits increased $39.8 million
from $646.4 million at year-end 2011 to $686.2 million at year-end 2012.
The positive financial results for 2012, along with being added to the
Russell 2000® Index in June 2012, resulted in a market price increase
from $26.60 per share at the end of 2011 to $38.94 per share as of
December 31, 2012, a 46.4% increase. When dividends, which increased
from $1.01 per share in 2011 to $1.08 per share in 2012, are considered,
total shareholder return for 2012 was 51%.
J. Marshall Lewis
named President
1927
Citizens Exchange Bank & Trust
Company merges with Farmers
and Mechanics Bank to become
Citizens and Farmers Bank
1933
C&F Bank organized
originally as The Farmers
and Mechanics Bank
W. T. Robinson
named President,
Citizens and
Farmers Bank
1961
2012 C&F ANNUAL REPORT
P3
The Corporation’s capital continues to remain strong as
loss of income resulting from the decline in loans to
it increased from $96.1 million at year-end 2011 to $102.2
non-affiliates due to decreased demand for new loans and
million at year-end 2012, even after repaying the remaining
increased competition for loans in the market place.
$10 million in Capital Purchase Program (“CPP”) funds to the
Non-performing assets continued to be elevated compared to
U. S. Treasury. We were able to achieve our goal of exiting
historical levels, with $17.7 million at December 31, 2012
the CPP in a timely and non-dilutive manner and all of our
compared to $16.1 million at the end of 2011. Non-performing
capital ratios continue to exceed the “well-capitalized” thresh-
assets include non-accrual loans and other real estate owned.
olds. With the CPP now behind us, we can focus our attention
In an effort to return non-accrual loans to performing status,
on growing our business and return to a dividend strategy
we make every effort to work with our borrowers who continue
that balances the desire to return capital to our shareholders
to experience financial difficulties. However, when necessary,
with the liquidity and capital needs of the Corporation.
The success of 2012 can be attributed to several primary
areas; however, maybe the most notable is that the net income
for all three of our major business segments contributed to
our record earnings. The retail banking segment’s income
increased $2.6 million and net income for the mortgage
banking segment increased $860,000. The consumer finance
segment continued to have very strong operating results,
reporting $12.6 million of net income for 2012, which was
comparable to net income for 2011.
we take possession of our collateral supporting these loans
and dispose of it as expeditiously as possible. Regardless, we
continually evaluate the level of our reserves for non-performing
assets and believe them to be adequate.
The Retail Bank made progress on numerous fronts
throughout this past year. Several e-commerce initiatives
experienced significant success. Most importantly, our new
mobile banking service, possibly the most significant new
service we’ve offered in years, allows customers with smart-
phones to handle just about all of their banking transactions
Our Retail Bank’s net income of $2.2 million was a
over that device, including account balance and transaction
significant improvement when compared to a loss of
lookup, transferring of funds, and payment of bills. We’ve
$432,000 in 2011. The Bank benefited from the effects of the
also spent a considerable amount of time developing and
low interest rate environment on the cost of deposits, as well
implementing a new Small Business Loan platform, which
as lower loan loss provision expenses. Offsetting this was the
provides our customers the ability to obtain small business
loans quicker and with less “red tape” and at competitive
rates. While it is probably a bit early to judge our success,
C&F Bank is committed to its communities and to providing
Citizens and Farmers Bank acquires The
Colonial Bank (our current Providence Forge
and Quinton branches)
1978
1979
First branch established
on 14th Street in West Point
1989
1991
Larry G. Dillon named
President, Citizens and
Farmers Bank
Bank purchases and
renovates Leggett’s
building in West Point
for Operations Center
2012 C&F ANNUAL REPORT
P4
loan products that contribute to their economic growth.
Company, even though used car prices are declining and
From an operations standpoint, we have put much effort into
delinquencies are up, we believe that earnings will remain
improving our efficiencies and processes by better utilizing
strong due to expansion into new markets. And, at our Retail
technology and upgrading many of our software programs,
Bank, we continue to focus on reducing our non-performing
and improving our disaster recovery capabilities.
assets and growing our earning assets.
The increase in the net income at our Mortgage
At all of our companies, we are making diligent efforts
Company was primarily attributable to the 36% increase in
to leverage all economies of scale by automating processes.
loan production in 2012 compared to 2011. This increase
We are experimenting with an innovative branch design with
was achieved despite the amount of time and money we have
the renovation of our Quinton office to be completed in the
spent on complying with numerous new laws and regulations
late Spring of 2013, and we expect our newest product,
confronting the mortgage industry. During 2012, our
consumer mobile capture, to be a popular new product
Mortgage Company expanded its service area by opening a
offering in the Spring of 2013. This service will allow our
new office in Virginia Beach.
Our Finance Company’s continued strong earnings
performance was primarily attributable to a 10.2% growth in
average loans during 2012 and the continued benefit of the
low cost of its variable rate borrowings. These benefits were
offset by a decline in average loan yield resulting from increased
competition as well as an increase in net charge-offs resulting
customers to deposit a check from any location by “capturing”
a picture of the front and back of the item and transmitting
it to us via their smartphones for deposit into their
accounts. These new investments in products and services,
along with the technology needed to support them, will pay
for themselves over the long term through lower operating
costs, a higher level account retention, and more compre-
from the current economic environment and lower resale
hensive customer relationships.
prices of repossessed vehicles, which necessitated an increase
in the loan loss provision. During 2012, our Finance
Company began offering its services in Missouri, Illinois, and
Texas for both growth and diversification purposes.
Our excitement for the future is tempered, however,
by the cloud hanging over the entire industry and even the
economy by the “overkill” of government regulation and over-
sight that continues to worsen by the day. The Dodd-Frank
We are cautiously optimistic about the future. At our
Bill, enacted several years ago, may have had good intentions
Mortgage Company, expansion within our existing markets
behind it, but the resulting impact to the banking industry,
appears feasible and we are exploring options to reduce our
especially the community banking industry, is not good.
dependency on large aggregators of loans, both of which have
In fact, there is little in this bill that will prevent a recession
the potential of improving our net income. At our Finance
like we have just gone through, especially the prevention of
C&F Mortgage
Corporation is
formed
1995
1994
C&F Financial Corporation,
a one-bank holding
company is formed
W.T. Robinson
retires and is
named “Chairman of
the Board Emeritus”
1998
Internet Banking
is introduced
2001
Banking From Your Pad
www.cffc.com
2012 C&F ANNUAL REPORT
P5
institutions being so big that the government cannot allow
As we have said many times over the years, we will take
them to fail. Further, there are so many portions of the bill,
short-term “hits” to income if those “hits” will provide long-
many for which the regulations still have to be written, that
term returns and we have not changed that philosophy.
will do little other than to add to the governmental “red tape”
While we will certainly take short-term improvements to
that prevents banking institutions from giving meaningful
income, our focus is more on the long-term and we don’t see
and efficient service to their customers. In addition, the capital
that changing. Our goal is to provide excellent service to our
framework of Basel III, at least as it stands today, could have
customers, service that they will tell others about, while at the
a negative impact on the company by requiring us to
same time providing a good return to our shareholders and
satisfy substantially more stringent capital requirements
taking good care of our staff members. That’s who we are.
and to implement more complex rules for calculating risk-
weighted assets.
We were saddened by the loss of one of our past directors
during this past year, Thomas B. Whitmore Jr. Tom served us
It is my belief that the best pricing and service is given to
for many years and could best be described as a “gentleman’s
the customer when there is fair and extensive competition
gentleman”. His is a loss to his family, friends and the entire
within an industry; and, most regulation cannot serve as a
community, which he so loved.
substitute. Trying to manipulate the markets through
regulation, even if well-intended, rarely takes into account
implementation issues and the unforeseen results are often
worse than the problem attempted to be solved. Such is the
case with Dodd-Frank and, unfortunately, I believe it will be
the demise of many good community banks who throw in the
towel because the cost of keeping up with the regulatory
burden is a cost too high to bear, both financially and spiritu-
ally to the staffs of these organizations.
Many thanks to our staff, who are “focused on you”, to
our directors for their continued guidance, and to you for
your continued confidence, support and patronage. We look
forward to serving you in 2013 and the years ahead.
Sincerely,
Larry G. Dillon
Chairman, President & Chief Executive Officer
Citizens and Farmers
Bank acquires Moore
Loans (renamed in 2004 as
C&F Finance Company)
2002
2004
C&F Bank
expands to the
Peninsula
2005
C&F Bank
headquarters moves to
Stonehouse Commerce
Park in Toano
2012
C&F Bank introduces
Mobile Banking
Listed left to right:
Joshua H. Lawson
Paul C. Robinson
James H. Hudson III
Barry R. Chernack
Larry G. Dillon
Audrey D. Holmes
J. P. Causey Jr.
Bryan E. McKernon
C. Elis Olsson
C&F DIRECTORS & OFFICERS
C&F FINANCIAL CORPORATION
C&F BANK BOARD OF DIRECTORS
SANDSTON
VARINA ADVISORY BOARD
C&F MORTGAGE CORPORATION
BOARD OF DIRECTORS
J. P. Causey Jr.
Attorney-at-Law
J.P. Causey, Attorney-at-Law
Larry G. Dillon, Chairman of the Board
James H. Hudson III
Attorney-at-Law
Hudson & Bondurant, P.C.
Bryan E. McKernon, President & CEO
C&F Mortgage Corporation
Barry R. Chermack
Retired Partner
Price Waterhouse Coopers, LLP
Paul C. Robinson
Owner & President
Francisco, Robinson & Associates,
Realtors
INDEPENDENT PUBLIC
ACCOUNTANTS
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
CORPORATE COUNSEL
Hudson & Bondurant, P.C.
West Point, Virginia
J. P. Causey Jr.*+
Attorney-at-Law
J.P. Causey, Attorney-at-Law
Barry R. Chernack*+
Retired Partner
PricewaterhouseCoopers LLP
Larry G. Dillon*+
Chairman, President & CEO
C&F Financial Corporation
Citizens and Farmers Bank
Audrey D. Holmes*+
Attorney-at-Law
Audrey D. Holmes, Attorney-at-Law
James H. Hudson III*+
Attorney-at-Law
Hudson & Bondurant, P.C.
Joshua H. Lawson*+
President
Thrift Insurance Corporation
Bryan E. McKernon+
President & CEO
C&F Mortgage Corporation
C. Elis Olsson*+
Director of Operations
Martinair, Inc.
Paul C. Robinson*+
Owner & President
Francisco, Robinson & Associates, Realtors
Katherine P. Buckner
Retired Branch Manager
C&F Bank
E. Ray Jernigan
Business Owner
Citizens Machine Shop
James M. Mehfoud
Pharmacist/Business Owner
Sandston Pharmacy
Robert F. Nelson Jr.
Professional Engineer
Engineering Design Associates
Reginald H. Nelson IV
Senior Partner
Colonial Acres Farm
John G. Ragsdale II
Business Owner
Sandston Cleaners
Sandra W. Seelmann
Real Estate Broker/Owner
Varina & Seelmann Realty
C&F BANK RICHMOND BOARD
Jeffery W. Jones
Chairman & CEO
WFofR, Incorporated
S. Craig Lane
President
Lane & Hamner, P.C.
Meade A. Spotts
President
Spotts, Fain, P.C.
* C&F Financial Corporation Board Member
+ C&F Bank Board Member
Scott E. Strickler
Treasurer
Robins Insurance Agency, Inc.
2012 C&F ANNUAL REPORT P6
C&F OFFICERS & LOCATIONS
C&F BANK
ADMINISTRATIVE OFFICES
802 Main Street
West Point, Virginia 23181
(804) 843-2360
3600 LaGrange Parkway
Toano, Virginia 23168
(757) 741-2201
Larry G. Dillon*
Chairman, President & CEO
Thomas F. Cherry*
Executive Vice President, CFO & Secretary
Rodney W. Overby
Senior Vice President, Chief Information Officer
John A. Seaman, III
Senior Vice President & Chief Credit 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, Review Appraiser
Deborah H. Hall
Vice President, Credit Administration
Donna M. Haviland
Vice President, Director of Internal Audit
Anita W. Hazelwood
Vice President, Treasury Solutions
Ellen M. Howard
Vice President, Director of Loan Operations
Dollie M. Kelly
Vice President, Quality Assurance Manager
Michael C. King
Vice President, Technology Manager
Maureen B. Medlin
Vice President, Marketing
Deborah R. Nichols
Vice President, Director of Compliance
Kevin E. Kelly
Vice President, Special Assests
Mary-Jo Rawson
Vice President & Controller
Helga H. Ridenhour
Vice President, Operations Manager
Teresa S. Weaver
Vice President, Retail Market Leader
Melanie C. Wynkoop
Vice President, Retail Market Leader
*Officers of C&F Financial Corporation
CHESTER, VIRGINIA
Mary Schoenfelder
Vice President & Branch Manager
HAMPTON, VIRGINIA
Eric D. Floyd
Branch Manager
MECHANICSVILLE, VIRGINIA
Ryan L. Melcher
Branch Manager
MIDLOTHIAN, VIRGINIA
T. Hurst Kelley
Branch Manager
NEWPORT NEWS, VIRGINIA
LeMay K. Woodland
Assistant Branch Manager
NORGE, VIRGINIA
PROVIDENCE FORGE, VIRGINIA
James D. W. King
Vice President & Branch Manager
QUINTON, VIRGINIA
Don V. Hillbish
Assistant Vice President & Branch Manager
RICHMOND, VIRGINIA
West Broad Street
Bina Y. Doshi
Branch Manager
Patterson Avenue
David M. Younce
Assistant Branch Manager
VARINA, VIRGINIA
Mary Long
Assistant Vice President & Branch Manager
SALUDA, VIRGINIA
Elizabeth B. Faudree
Vice President & Branch Manager
SANDSTON, VIRGINIA
Heather E. Luck
Branch Manager
WEST POINT, VIRGINIA
Main Street
Mary Ann Seward
Assistant Branch Manager
14th Street
Donna T. Callis
Assistant Vice President & Branch Manager
WILLIAMSBURG, VIRGINIA
Jamestown Road
Traci L. Carlson
Assistant Vice President & Branch Manager
Longhill Road
Brenda A. Rappold
Branch Manager
YORKTOWN, VIRGINIA
Michael E. McGraw
Assistant Vice President & Branch Manager
C&F BANK / RICHMOND
ADMINISTRATIVE OFFICE
Tracy E. Pendleton
Vice President, Commercial Banking
C&F BANK / PENINSULA
ADMINISTRATIVE OFFICE
One City Center
11815 Fountain Way, Suite 410
Newport News, Virginia 23606
(757) 952-1670
Vern E. Lockwood II
Senior Vice President, Regional President
Bonnie S. Smith
Vice President, Construction Lending
David S. Jolley
Vice President, Commercial Banking
Scott W. Stolldorf
Vice President, Commercial Banking
C&F INVESTMENT SERVICES, INC.
802 Main Street
West Point, Virginia 23181
(804)843-4584 or (800) 583-3863
Eric F. Nost, CFP
President
MIDLOTHIAN, VIRGINIA
Douglas L. Hartz
Vice President, Investment Consultant
Frank C. Maloney IV
Vice President, Insurance Specialist &
Investment Consultant
RICHMOND, VIRGINIA
Bruce D. French
Assistant Vice President, Investment Consultant
WILLIAMSBURG, VIRGINIA
Douglas L. Cash Jr.
Vice President, Investment Consultant
2012 C&F ANNUAL REPORT P7
C&F OFFICERS & LOCATIONS
C&F MORTGAGE CORPORATION
ADMINISTRATIVE OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8300
Bryan E. McKernon
President & CEO
Mark A. Fox
Executive Vice President & COO
Donna G. Jarratt
Senior Vice President & Chief of
Branch Administration
Kevin A. McCann
Senior Vice President & CFO
Tracy L. Bishop
Vice President & Human Resources Manager
Susan L. Driver
Vice President & Underwriting Manager
Madeline Witty
Vice President & Chief Compliance Officer
Michael J. Vogelbach
Manager of Information Systems
Katherine K. Watrous
Controller
CHARLOTTESVILLE, VIRGINIA
William E. Hamrick
Vice President & Branch Manager
FREDERICKSBURG, VIRGINIA
Brian F. Whetzel
Branch Manager
R.W. Edmondson III
Branch Manager
HANOVER, VIRGINIA
ROANOKE, VIRGINIA
John H. Reeves III
Vice President & Regional Manager
FISHERSVILLE, VIRGINIA
Vickie J. Painter
Branch Manager
GASTONIA, NORTH CAROLINA
Nancy W. Poteat
Branch Manager
HARRISONBURG, VIRGINIA
Gloria J. Wright
Branch Manager
LYNCHBURG, VIRGINIA
Shirley D. Falwell
Branch Manager
Andrew N. Shields
Branch Manager
2012 C&F ANNUAL REPORT P8
MIDLOTHIAN, VIRGINIA
Brandon W. Beswick
Branch Manager–Southside
Donald R. Jordan
Vice President &
Branch Manager–Richmond South
Daniel J. Murphy
Vice President & Branch Manager–Midlothian
GLEN ALLEN, VIRGINIA
Page C. Yonce
Vice President & Branch Manager
John S. Fulton
Branch Manager
Susan P. Burkett
Vice President & Operations Manager
NEWPORT NEWS, VIRGINIA
WILLIAMSBURG, VIRGINIA
Mary L. Rebholz
Branch Manager
VIRGINIA BEACH, VIRGINIA
James E. McNees
Branch Manager
ANNAPOLIS, MARYLAND
Michael J. Mazzola
Senior Vice President &
Maryland Area Manager
William J. Regan
Vice President & Branch Manager
CLARKSVILLE, MARYLAND
Scott B. Segrist
Branch Manager
Robert G. Menton
Branch Manager
NEWPORT, DELAWARE
Craig I. Snyder
Branch Manager
MOORESTOWN, NEW JERSEY
R. Scott Wallace
Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy
Branch Manager
C&F TITLE AGENCY, INC.
Midlothian, Virginia
Eileen A. Cherry
Vice President & Title Insurance Underwriter
HOMETOWN SETTLEMENT
SERVICES, LLC
Annapolis, Maryland
Midlothian, Virginia
CERTIFIED APPRAISALS, LLC
Midlothian, Virginia
H. Daniel Salomonsky
Vice President & Appraisal Manager
C&F FINANCE COMPANY
ADMINISTRATIVE OFFICE
1313 East Main Street
Suite 400
Richmond, Virginia 23219
(804) 236-9601
S. Dustin Crone
President
Michael K. Wilson
Executive Vice President & COO
C. Shawn Moore
Senior Vice President
Thomas W. Young
Vice President, Operations
Kevin F. Jones Jr.
R.V.P. of Originations
Pamela L. Austin
R.V.P. of Sales
Oneida Wood
Director of Human Resources
Serving the following states
ALABAMA
GEORGIA
ILLINOIS
INDIANA
KENTUCKY
MARYLAND
MISSOURI
NORTH CAROLINA
OHIO
TENNESSEE
TEXAS
VIRGINIA
WEST VIRGINIA
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
________________________________________________________________
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2012
or
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
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
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
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 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)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2012 was $121,048,425.
There were 3,267,737 shares of common stock outstanding as of February 27, 2013.
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April
DOCUMENTS INCORPORATED BY REFERENCE
16, 2013 are incorporated by reference in Part III of this report.
Accelerated Filer
Smaller reporting
company
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.
MINE SAFETY DISCLOSURES
PART II
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.
FINANIAL STATEMENTS AND SUPPLEMENTARY DATA
page 1
page 11
page 16
page 17
page 17
page 18
page 18
page 19
page 20
page 54
page 56
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
page 106
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
page 106
page 108
page 108
page 108
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
page 109
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
SIGNATURES
page 109
page 109
page 110
page 113
PART I
ITEM 1.
BUSINESS
General
C&F Financial Corporation (the Corporation) is a bank holding company that was incorporated in March 1994 under the
laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its sole operating subsidiary, Citizens and
Farmers Bank (C&F Bank or the Bank), which is an independent commercial bank chartered under the laws of the
Commonwealth of Virginia. The Bank originally opened for business under the name Farmers and Mechanics Bank on January
22, 1927. The Bank has the following five wholly-owned subsidiaries, all incorporated under the laws of the Commonwealth of
Virginia:
• C&F Mortgage Corporation and its wholly-owned subsidiaries Hometown Settlement Services LLC and Certified
Appraisals LLC
• C&F Finance Company and its wholly-owned subsidiary C&F Remarketing LLC
• 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, 2012, assets of the
Retail Banking segment totaled $813.8 million. For the year ended December 31, 2012, the net income for this segment totaled
$2.2 million.
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Mortgage Banking
We conduct mortgage banking activities through C&F Mortgage, which was organized in September 1995. C&F
Mortgage provides mortgage loan origination services through 13 locations in Virginia, three in Maryland, one each in
Wilmington, Delaware; Moorestown, New Jersey; and Gastonia, North Carolina. The Virginia offices are located one each in
Charlottesville, Fishersville, Fredericksburg, Glen Allen, Hanover, Harrisonburg, Lynchburg, Newport News, Roanoke,
Virginia Beach and Williamsburg, and two in Midlothian. The Maryland offices are located in Annapolis, Ellicott City and
Waldorf. C&F Mortgage offers a wide variety of residential mortgage loans, which are originated for sale generally to the
following investors: Wells Fargo Home Mortgage; Franklin American Mortgage Company; US Bank Home Mortgage; Penny
Mac Corporation; Ally Bank; Lake Michigan Financial Group, Inc.; Plaza Home Mortgage, Inc.; Maryland Department of
Housing and Community Development; and the Virginia Housing Development Authority. C&F Mortgage does not securitize
loans. The Bank also purchases 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 guaranteed by the United States
Department of Agriculture (the USDA) and 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 is non-conforming in
that they do not meet Fannie Mae or Freddie Mac guidelines, but are eligible for sale to various other investors. Through its
subsidiaries, C&F Mortgage also provides ancillary mortgage loan origination services for loan settlement and residential
appraisals. Revenues from mortgage banking operations consist principally of gains on sales of loans to investors in the
secondary mortgage market, loan origination fee income and interest earned on mortgage loans held for sale. At December 31,
2012, assets of the Mortgage Banking segment totaled $87.0 million. For the year ended December 31, 2012, net income for
this segment totaled $2.2 million.
Consumer Finance
We conduct consumer finance activities through C&F Finance, which the Bank acquired on September 1, 2002. C&F
Finance is a regional finance company providing automobile loans throughout Virginia and in portions of Alabama, Georgia,
Illinois, Indiana, Kentucky, Maryland, Missouri, North Carolina, Ohio, Tennessee, Texas and West Virginia through its offices
in Richmond and Hampton, Virginia, in Nashville, Tennessee and in Hunt Valley, 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, 2012, assets of the
Consumer Finance segment totaled $280.2 million. For the year ended December 31, 2012, net income for this segment totaled
$12.6 million.
Employees
At December 31, 2012, we employed 528 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
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advertising campaigns, efficiencies through economies of scale and, by virtue of their greater total capitalization, 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. Due to the increased regulatory and compliance burden, the industry has seen a consolidation in
the number of competitors in the marketplace. The downturn in the housing markets related to declines in real estate values,
increased payment defaults and foreclosures has 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.
The competitive factors faced by C&F Mortgage may change due to the “Dodd-Frank Wall Street Reform and
Consumer Protection Act” (the Dodd-Frank Act), which was signed into law on July 21, 2010. The Dodd-Frank Act affects
many aspects of mortgage finance regulation, which may result in changes to the competitive landscape in the future. The many
modifications introduced have required or will require extensive rulemaking, and the full effect of the Dodd-Frank Act and the
size of the related compliance burden will not be known for some time to come. The reforms to mortgage lending encompass
broad new restrictions on lending practices and loan terms, amend price thresholds for certain lending segments, add new
disclosure forms and procedures for all mortgages, and mandate stronger legal liabilities in connection with real estate finance.
In addition, the Dodd-Frank Act authorizes the Consumer Financial Protection Bureau (the CFPB) to establish certain
minimum standards for the origination of residential mortgages, including a determination of the borrower's ability to repay
(for which the CFPB finalized rules in January 2013), and allows borrowers to raise certain defenses to foreclosure if they
receive any loan other than a "qualified mortgage" as defined by the Dodd-Frank Act and the CFPB. While C&F Mortgage is
continuing to evaluate all aspects of the Dodd-Frank Act, such legislation and regulations promulgated pursuant to such
legislation could materially and adversely affect the manner in which it conducts its mortgage business, result in heightened
federal regulation and oversight of its business activities, and result in increased costs and potential litigation associated with its
business activities. Given the far-reaching effect of the Dodd-Frank Act on mortgage finance, compliance with the
requirements of the Dodd-Frank Act may require substantial changes to mortgage lending systems and processes and other
implementation efforts.
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.
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. However, given the current regulatory and
compliance environment in which C&F Mortgage operates, strategies are being implemented to mitigate any significant
disruption in C&F Mortgage's direct or indirect access to the secondary market for residential mortgage loans. C&F Mortgage,
like all residential mortgage lenders, would be affected by the inability of Fannie Mae, Freddie Mac, the FHA or the VA to
purchase or guarantee loans. Although C&F Mortgage sells loans to various intermediaries, the ability of these aggregators to
purchase or guarantee loans would be limited if these government-sponsored entities cease to exist or materially limit their
purchases or guarantees 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,
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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, resulting in intensified competition for loans and qualified personnel. 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 by providing a high level
of dealer service, building strong dealer relationships, offering flexible loan terms, and 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 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 and state regulation of
financial institutions may change in the future and affect the Corporation’s and the Bank’s operations.
Regulatory Reform
The financial crisis of 2008, including the downturn of global economic, financial and money markets and the threat of
collapse of numerous financial institutions, and other recent events have led to the adoption of numerous new laws and
regulations that apply to, and focus on, financial institutions. The most significant of these new laws is the Dodd-Frank Act,
which was adopted on July 21, 2010 and, in part, is intended to implement significant structural reforms to the financial
services industry. The Dodd-Frank Act is discussed in more detail below.
As a result of the Dodd-Frank Act and other regulatory reforms, the Corporation is experiencing a period of rapidly
changing regulations. These regulatory changes could have a significant effect on how the Corporation conducts its business.
The specific implications of the Dodd-Frank Act and other proposed regulatory reforms cannot yet be predicted and will
depend to a large extent on the specific regulations that are adopted in the coming months and years to implement regulatory
reform initiatives.
Regulation of the Corporation
As a bank holding company, the Corporation is subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the Federal Reserve Board). The Federal Reserve Board has the power to order any bank holding
company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal
Reserve Board has reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the
financial soundness, safety or stability of any bank subsidiary of the bank holding company.
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, and permits interstate banking acquisitions subject to certain
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conditions, including national and state concentration limits. As a result of the Dodd-Frank Act, a bank holding company must
be well capitalized and well managed to engage in an interstate bank acquisition or merger, and banks may branch across state
lines provided that the law of the state in which the branch is to be located would permit establishment of the branch if the bank
were a state bank chartered by such state.
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, pursuant to the Dodd-Frank Act and Federal Reserve policy, a bank
holding company must commit resources to support its subsidiary depository institutions, which is referred to as serving as a
"source of strength." 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. The
Corporation also must file annual, quarterly and other periodic reports with, and comply with other regulations of, the
Securities and Exchange Commission (the SEC).
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. As long as the Corporation has total consolidated assets of less than $15
billion, under current capital standards the Corporation may include in Tier 1 and total capital the Corporation’s trust preferred
securities that were issued before May 19, 2010. The capital 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.
In June 2012, the federal bank regulatory agencies proposed (i) rules to implement the Basel III capital framework as
outlined by the Basel Committee on Banking Supervision and (ii) rules for calculating risk-weighted assets. The federal bank
regulatory agencies have delayed the implementation of Basel III and the new-risk-weighted assets calculations to consider
comments received on the proposed rules. The timing for the agencies' publication of revised proposed rules regarding, or final
rules to implement, Basel III and the new risk-weighted assets calculations is uncertain.
Basel III, if implemented by the U.S. banking agencies and fully phased-in as proposed, will require bank holding
companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. 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.
If fully phased in as proposed, Basel III would require 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
5
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 designed to absorb losses during periods of
economic stress and to be imposed when national regulators determine that excess aggregate credit growth becomes associated
with a buildup of systemic risk. This buffer 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 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 are currently expected to be phased-in over a five-year period (20% per year). The implementation of the
capital conservation buffer is expected to begin at 0.625% and be phased in over a four-year period (increasing by that amount
each year until it reaches 2.5%).
In connection with proposing rules to adopt the Basel III capital framework, the federal banking regulators also proposed
revisions to the general rules for calculating a banking organization's total risk-weighted assets (the denominator for risk-based
capital ratios) (such revisions, the Standardized Approach). If adopted as proposed, the Standardized Approach would modify
the risk weightings that are applied to many classes of assets held by community banks, importantly including by applying
higher risk weightings to certain "higher risk" mortgage loans and commercial real estate loans that are frequently held in a
community bank's loan portfolio.
The regulations ultimately applicable to the Corporation may be substantially different from the Basel III or
Standardized Approach proposed rules that were issued in June 2012. Requirements to maintain higher levels of capital or to
maintain higher levels of liquid assets could adversely affect the Corporation's net income and return on equity.
Limits on Dividends
The Corporation is a legal entity that is 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 limits on the sources of dividends and 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 paying 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.
The Dodd-Frank Act
The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including changes that
will affect all bank holding companies and banks, including the Corporation and the Bank. Provisions that significantly affect
the business of the Corporation and the Bank include the following:
•
Insurance of Deposit Accounts. The Dodd-Frank Act changed the assessment base for federal deposit insurance from the
amount of insured deposits to consolidated assets less tangible capital. The Dodd-Frank Act also made permanent the
$250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor Protection Corporation
protection from $100,000 to $250,000.
• Payment of Interest on Demand Deposits. The Dodd-Frank Act repealed the federal prohibitions on the payment of
interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other
accounts.
• Creation of the Consumer Financial Protection Bureau. The Dodd-Frank Act centralized significant aspects of
consumer financial protection by creating a new agency, the CFPB, which is discussed in more detail below.
• Debit Card Interchange Fees. The Dodd-Frank Act amended the Electronic Fund Transfer Act (EFTA) to, among other
things, require that debit card interchange fees be reasonable and proportional to the actual cost incurred by the issuer
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with respect to the transaction. In June 2011, the Federal Reserve Board adopted regulations setting the maximum
permissible interchange fee as the sum of 21 cents per transaction and 5 basis points multiplied by the value of the
transaction, with an additional adjustment of up to one cent per transaction if the issuer implements additional fraud-
prevention standards. Although issuers that have assets of less than $10 billion are exempt from the Federal Reserve
Board’s regulations that set maximum interchange fees, these regulations could significantly affect the interchange fees
that financial institutions with less than $10 billion in assets are able to collect.
In addition, the Dodd-Frank Act implements other far-reaching changes to the financial regulatory landscape, including
provisions that:
• Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks from
•
availing themselves of such preemption.
Impose comprehensive regulation of the over-the-counter derivatives market, subject to significant rulemaking
processes, which would include certain provisions that would effectively prohibit insured depository institutions from
conducting certain derivatives businesses in the institution itself.
• Require depository institutions with total consolidated assets of more than $10 billion to conduct regular stress tests and
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,”
subject to certain exceptions.
Prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain
unregistered investment companies (the Volker Rule).
Implement corporate governance revisions that apply to all public companies not just financial institutions.
•
•
Many aspects of the Dodd-Frank Act remain 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. 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.
Insurance of Accounts, Assessments and Regulation by the FDIC
The Bank’s deposits are insured by the DIF of the FDIC up to the standard maximum insurance amount for each deposit
insurance ownership category. As of January 1, 2013, the basic limit on FDIC deposit insurance coverage is $250,000 per
depositor. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC, subject to administrative and potential judicial hearing and review
processes.
Deposit Insurance Assessments. The DIF is funded by assessments on banks and other depository institutions. As
required by the Dodd-Frank Act, in February 2011, the FDIC approved a final rule that changed the assessment base for DIF
assessments from domestic deposits to average consolidated total assets minus average tangible equity (defined as Tier 1
capital). In addition, as also required by the Dodd-Frank Act, the FDIC has adopted a new large-bank pricing assessment
scheme, set a target “designated reserve ratio” (described in more detail below) of 2 percent for the DIF and established a lower
assessment rate schedule when the reserve ratio reaches 1.15 percent and, in lieu of dividends, provides for a lower assessment
rate schedule, when the reserve ratio reaches 2 percent and 2.5 percent. An institution's assessment rate depends upon the
institution's assigned risk category, which is based on supervisory evaluations, regulatory capital levels and certain other
factors. Initial base assessment rates ranges from 2.5 to 45 basis points. The FDIC may make the following further adjustments
to an institution’s initial base assessment rates: decreases for long-term unsecured debt including most senior unsecured debt
and subordinated debt; increases for holding long-term unsecured debt or subordinated debt issued by other insured depository
institutions; and increases for broker deposits in excess of 10 percent of domestic deposits for institutions not well rated and
well capitalized.
The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of
reserves for the DIF, or the “designated reserve ratio.” Among other changes, the Dodd-Frank Act (i) raised the minimum
designated reserve ratio to 1.35 percent and removed the upper limit on the designated reserve ratio, (ii) requires that the
designated reserve ratio reach 1.35 percent by September 2020, and (iii) requires the FDIC to offset the effect on institutions
with total consolidated assets of less than $10 billion of raising the designated reserve ratio from 1.15 percent to 1.35 percent.
The FDIA requires that the FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis. On
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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.
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 issued and administered by the regulatory
agencies (including the CFPB) 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 and operations, such as the payment of
interest on deposits, the charging of interest on loans, the types of business conducted, the products and terms offered to
customers and the location of offices.
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 January 2011. Upon the conclusion of the
FDIC’s CRA examination in January 2012, the FDIC upgraded C&F Bank’s CRA Lending Test rating and the overall CRA
rating to “Satisfactory.”
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 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. At December 31, 2012, the Bank owned
$3.7 million of FHLB stock.
Consumer Protection. The Dodd-Frank Act created the CFPB, a federal regulatory agency that is 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. The Dodd-Frank Act gives the CFPB authority to supervise and
regulate providers of consumer financial products and services, and establishes the CFPB’s power to act against unfair,
deceptive or abusive practices, and gives the CFPB rulemaking authority in connection with numerous federal consumer
financial protection laws (for example, but not limited to, the Truth-in-Lending Act and the Real Estate Settlement Procedures
Act).
As a smaller institution (i.e., with assets of $10 billion or less), 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. However, the CFPB may
include its own examiners in regulatory examinations by a small institution’s prudential regulators and may require smaller
institutions to comply with certain CFPB reporting requirements. In addition, regulatory positions taken by the CFPB and
administrative and legal precedents established by CFPB enforcement activities, including in connection with supervision of
larger bank holding companies, could influence how the Federal Reserve and FDIC apply consumer protection laws and
regulations to financial institutions that are not directly supervised by the CFPB. The precise effect of the CFPB’s consumer
protection activities on the Corporation cannot be forecast.
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 USDA, the VA and state regulatory authorities with respect to originating, processing and selling
mortgage loans. Those rules and regulations, among other things, establish standards for loan origination, prohibit
discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some
cases, restrict certain loan features and fix maximum interest rates and fees. In addition to other federal laws, mortgage
origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act,
Real Estate Settlement Procedures Act, and Home Ownership Equity Protection Act, and the regulations promulgated under
these acts. These laws prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning
credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require
the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender,
8
geographical distribution and income level. The Dodd-Frank Act has transferred rulemaking authority under many of these
laws to the CFPB.
Consumer Financing Regulation. The Corporation’s Consumer Finance segment also is regulated by the VBFI and the
states and jurisdictions in which it operates, and the segment's lending operations are subject to federal regulations over which
the CFPB has rulemaking authority. 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.
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, 2012, the Bank was considered “well capitalized.”
Incentive Compensation. The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the FDIC have
issued regulatory guidance (the Incentive Compensation Guidance) 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 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." The
findings will be included in reports of examination, and deficiencies will be incorporated into the organization's supervisory
ratings. 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.
The Dodd-Frank Act requires the SEC and the federal bank regulatory agencies to establish joint regulations or
guidelines that require financial institutions with assets of at least $1 billion to disclose the structure of their incentive
compensation practices and prohibit such institutions from maintaining compensation arrangements that encourage
inappropriate risk-taking by providing excessive compensation or that could lead to material financial loss to the financial
institution. The SEC and the federal bank regulatory agencies proposed such regulations in March 2011, which may become
effective before the end of 2013. If the regulations are adopted in the form initially proposed, they will impose limitations on
the manner in which the Corporation may structure compensation for its executives only if the Corporation's total consolidated
assets exceed $1 billion. These proposed regulations incorporate the principles discussed in the Incentive Compensation
Guidance.
Financial Holding Company Status. As provided by the Gramm-Leach-Bliley Act of 1999 (GLBA), a bank holding
company may become eligible to engage in activities that are financial in nature or incident or complimentary to financial
activities by qualifying 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. To date, the Corporation has not filed a declaration to become a financial
holding company, and qualification as such by other bank holding companies has not had a material effect on the Corporation's
or the Bank's business.
Confidentiality and Required Disclosures of Customer Information. The Corporation is subject to various laws and
regulations that address the privacy of nonpublic personal financial information of consumers. The GLBA and certain
regulations issued thereunder protect 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.
9
The Corporation is also subject to various laws and regulations that attempt to combat money laundering and terrorist
financing. The Bank Secrecy Act requires all financial institutions to, among other things, create a system of controls designed
to prevent money laundering and the financing of terrorism, and imposes recordkeeping and reporting requirements. The USA
Patriot Act facilitates information sharing among governmental entities and financial institutions for the purpose of combating
terrorism and money laundering, and requires financial institutions to establish anti-money laundering programs. The Federal
Bureau of Investigation (FBI) sends banking regulatory agencies lists of the names of persons suspected of involvement in
terrorist activities, and requests banks to search their 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 U.S. Department of the
Treasury (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 ensure 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. If the Bank finds a name of an "enemy" of the
United States 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.
Although these laws and programs impose compliance costs and create privacy obligations and, in some cases, reporting
obligations, these laws and programs do not materially affect the Bank's products, services or other business activities.
Stress Testing. As required by the Dodd-Frank Act, the federal banking agencies have implemented stress testing
requirements for certain financial institutions, including bank holding companies and state chartered banks, with more than $10
billion in total consolidated assets. Although these requirements do not apply to institutions with less than $10 billion in total
consolidated assets, the federal banking agencies emphasize that all banking organizations, regardless of size, should have the
capacity to analyze the potential effect of adverse market conditions or outcomes on the organization's financial condition.
Based on existing regulatory guidance, the Corporation and the Bank will be expected to consider the institution's interest rate
risk management, commercial real estate loan concentrations and other credit-related information, and funding and liquidity
management during this analysis of adverse outcomes.
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 "Investor
Relations/SEC Filings" as of the day they are filed with the SEC. Copies of documents also can be obtained free of charge by
writing to the Corporation’s secretary at P.O. Box 391, West Point, VA 23181 or by calling 804-843-2360.
10
ITEM 1A.
RISK FACTORS
A continuation or deterioration of the current economic environment could adversely affect our financial condition and
results of operations.
A continuation or deterioration of the current economic environment could adversely affect 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. Overall, during 2012 the economic environment has been adverse for many
households and businesses in our markets, the Commonwealth of Virginia and the United States. 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 elevated loan loss provisions and write-downs and other expenses
associated with foreclosed properties beginning in 2008 as the level of nonperforming assets increased throughout the period.
The economic recovery has been less than robust and there can be no assurance that the measured economic recovery will
continue. The continued high levels of unemployment coupled with the continued downward pressure in the housing market
has and may continue to have an adverse effect on the Corporation’s results of operations.
Deterioration in the soundness of our counterparties or disruptions to credit markets 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. In addition, over the last several years developments in the global or national economies or financial
markets have caused temporary disruptions in the credit and liquidity markets, which at times has restricted the flow of capital
to credit markets and financial institutions, and future disruptions could restrict our ability to engage in routine funding
transactions and adversely affect our liquidity. There is no assurance that the failure of our counterparties would not materially
adversely affect the Corporation’s results of operations.
Our home lending profitability could be significantly reduced if we are not able to originate and resell a high volume of
mortgage loans.
One of the components of our strategic plan is to generate significant noninterest income from C&F Mortgage, which
originates a variety of single-family residential loan products for sale to investors in the secondary market. The existence of an
active secondary market is dependent upon the continuation of programs currently offered by government-sponsored
enterprises (GSEs), such as Fannie Mae and Freddie Mac, and the FHA, which account for a substantial portion of the
secondary market in residential mortgage loans. Because the largest participants in the secondary market are GSEs whose
activities are governed by federal law, any future changes in laws that significantly affect the activity of the GSEs could
adversely affect our mortgage company’s operations. Further, in September 2008, Fannie Mae and Freddie Mac were placed
into conservatorship by the U.S. government. Although to date, the conservatorship has not had a significant or adverse effect
on our operations, it is unclear whether further changes or reforms would adversely affect our operations. Although we sell
loans to various intermediaries, the ability of these aggregators to purchase loans would be limited if the GSEs cease to exist or
materially limit their purchases of mortgage loans.
Pursuant to the Dodd-Frank Act, the CFPB issued a final rule in January 2013 amending Regulation Z, as implemented
by the Truth in Lending Act, to require mortgage lenders to make a reasonable and good faith determination, based on verified
and documented information, that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according
to its terms. These CFPB rules require a mortgage lender to either (i) originate "qualified mortgages," defined as loans that do
not include negative amortization, interest-only payments, balloon payments, or terms longer than 30 years; or (ii) originate
loans that consider eight separate underwriting factors that are identified in the CFPB rules to evaluate each borrower's ability
to repay. These CFPB rules, in addition to other previously-issued and to-be-issued CFPB regulations, could materially affect
our ability to originate and resell a high volume of mortgage loans, which could adversely affect our financial condition and
results of operations.
11
Compliance with laws, regulations and supervisory guidance, both new and existing, may adversely affect 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 revenues, 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 divided by total
interest-earning assets. 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. Since the interest rate cuts made by the Federal Reserve Bank in
September 2007, our net interest margin has recovered gradually over the past several years because we have been able to
reprice fixed-rate deposits at lower rates, as well as implement policies that established floors on variable rate loans. The
Federal Reserve’s Federal Open Market Committee has stated it will keep the federal funds target rate at 0%-0.25% until
economic and labor conditions (as indicated by the unemployment rate) improve, which is currently expected to be until 2015.
While such a continuance of accommodative monetary policy could allow us to continue to reprice fixed-rate deposits at lower
rates, sustained low interest rates could put further pressure on the yields generated by our loan portfolio and on our net interest
margin. There is no guarantee we will continue to be able to reprice deposits at favorable rates as competition for deposits from
both local and national financial institutions is intense, and continued pressure on our asset yields and net interest margin could
adversely affect our results of operations.
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. 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 in
recent years resulting from reduced demand in both the new and resale housing markets and housing market value declines to
keep pressure on loan origination volume at C&F Mortgage. At the same time as market conditions have been negatively
affecting loan origination volume, efforts by the Federal Reserve Board to keep interest rates low and government initiatives
and programs to assist borrowers to refinance residential mortgage loans (e.g., the Home Affordable Refinance Program, or
HARP), have caused a substantial increase in loan originations and refinancing activity. There is no guarantee that efforts by
the Federal Reserve Board will have a positive effect on loan originations or that government loan modification programs will
have a positive effect on mortgage refinancing transactions. 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 then 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
12
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 affect our results of operations and
financial condition.
Deterioration in economic conditions, such as the recent recession, continuing high unemployment, and 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, 2012, 30 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, 2012, 41 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 for relevant periods of time, 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 effect of economic events, the outcome of which are uncertain. Because any
estimate of loan losses is necessarily subjective and the accuracy of any estimate depends on the outcome of future events, we
face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the
allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net
income. Although we believe our allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we
cannot predict such losses or that our allowance will be adequate in the future.
Competition from other financial institutions and financial intermediaries may adversely affect our profitability.
We face substantial competition in originating loans and in attracting deposits. Our competition in originating loans and
attracting deposits comes principally from other banks, mortgage banking companies, consumer finance companies, savings
associations, credit unions, brokerage firms, insurance companies and other institutional lenders and purchasers of loans.
Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank
13
regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger clients. These
institutions may be able to offer the same loan products and services that we offer at more competitive rates and prices.
Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans, which
could adversely affect our profitability.
We are subject to security and operational risks relating to our use of technology that could damage our reputation and our
business.
In the ordinary course of business, the Corporation collects and stores sensitive data, including proprietary business
information and personally identifiable information of our customers and employees, in systems and on networks. The secure
processing, maintenance and use of this information is critical to operations and the Corporation's business strategy. The
Corporation has invested in information security technologies and continually reviews processes and practices that are designed
to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the
Corporation's computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error,
malfeasance or other disruptions. Such security breaches could expose us to possible liability and damage our reputation. We
rely on standard security systems and procedures to provide the security and authentication necessary to effect secure
collection, transmission and storage of sensitive data. These systems and procedures include but are not limited to (i) regular
penetration testing of our network perimeter, (ii) regular employee training programs on sound security practices, (iii)
deployment of tools to monitor the Bank's network including intrusion prevention and detection systems, electronic mail spam
filters, anti-virus and anti-malware, resource logging and patch management, (iv) multifactor authentication for customers
using treasury management tools, and (v) enforcement of security policies and procedures for the additions and maintenance of
user access and rights to resources.
While most of our core data processing is conducted internally, certain key applications are outsourced to third party
providers. If our third party providers encounter difficulties or if we have difficulty in communicating with such third parties, it
will significantly affect our ability to adequately process and account for customer transactions, which would significantly
affect our business operations.
Our business is technology dependent and an inability to invest in technological improvements may adversely affect results
of operations and financial condition.
The financial services industry is undergoing rapid technological changes with frequent introductions of new
technology-driven products and services, which may require substantial capital expenditures to modify or adapt existing
products and services. In addition to better customer service, the effective use of technology increases efficiency and results in
reduced costs. Our future success will depend in part upon our ability to create synergies in our operations through the use of
technology. Many competitors have substantially greater resources to invest in technological improvements. We cannot assure
that technological improvements will increase operational efficiency or that we will be able to effectively implement new
technology-driven products and services or be successful in marketing these products and services to our customers.
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 years. 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 regulatory environment within the United States and mandates significant changes in
the financial regulatory landscape that will affect 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, have been given significant discretion in drafting the Dodd-Frank Act’s implementing rules and
regulations, many of which have not been finalized. Consequently, many of the details and much of the impact of the Dodd-
Frank Act will depend on the final implementing rules and regulations, and it remains too early to fully assess the complete
effect of the Dodd-Frank Act and related regulatory rulemaking processes on our business, financial condition or results of
operations.
The Dodd-Frank Act 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 when considered in connection with the proposed Basel III capital framework and related regulatory
proposals could significantly limit our future capital strategies. The Dodd-Frank Act also increases regulation of derivatives
14
and hedging transactions, which could limit our ability to enter into, or increase the costs associated with, interest rate hedging
transactions.
The Consumer Financial Protection Bureau may increase our regulatory compliance burden and could affect the consumer
financial products and services that we offer.
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 (CFPB), may
reshape the consumer financial laws through rulemaking and enforcement of the Dodd-Frank Act’s prohibitions against unfair,
deceptive and abusive consumer finance products or practices, which may directly affect 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 CFPB has jurisdiction over banks with $10 billion or
greater in assets, rules, regulations and policies issued by the CFPB 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 the FDIC. Further, the CFPB may include
its own examiners in regulatory examinations by the Corporation's primary regulators. 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 Basel III capital framework could require higher levels of capital and liquid assets, which could adversely affect the
Corporation's net income and return on equity.
The Basel III capital framework, if implemented by the U.S. banking agencies and fully phased-in as proposed, would
represent the most comprehensive overhaul of the U.S. banking capital framework in over two decades. The proposed Basel III
capital framework and related changes to the standardized calculations of risk-weighted assets are complex and would create
enormous compliance burdens, especially for community banks. These proposed regulations would require bank holding
companies and their subsidiaries, such as the Corporation and the Bank, to maintain substantially more capital as a result of
higher required capital levels and more demanding regulatory capital risk-weightings and calculations. For example, the Basel
III framework would require unrealized gains and losses to flow through to common equity tier 1 capital, which would create
significant, and to some extent unpredictable, volatility in regulatory capital levels and calculations and cause banks to adopt
significantly more conservative capital strategies. The proposals would require all banks to substantially change the manner in
which they collect and report information to calculate risk-weighted assets, and would likely dramatically increase risk-
weighted assets at many banking organizations as a result of applying higher risk weightings to many types of loans and
securities. As a result, banks may be forced to sell certain portions of their residential mortgage portfolios and limit originations
of certain types of commercial and mortgage loans, thereby reducing the amount of credit available to borrowers and limiting
opportunities to earn interest income from the loan portfolio.
If the proposed changes to bank capital levels (Basel III) and the calculation of risk-weighted assets are implemented
without change, many banks could be required to access the capital markets on short notice and in relatively weak economic
conditions, which could result in banks raising capital that significantly dilutes existing shareholders. Additionally, many
community banks could be forced to limit banking operations and activities, and growth of loan portfolios and interest income,
in order to focus on retention of earnings to improve capital levels. The regulations ultimately applicable to the Corporation
may be substantially different from the proposed rules to implement the Basel III capital framework and revised calculations of
risk-weighted assets. However, we cannot make assurances that final regulations will not have a detrimental effect on the
Corporation's net income and return on equity and limit the products and services we provide to our customers.
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.
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, which became effective April 1, 2011. A depository institution’s deposit insurance assessment is
now calculated based on the institution’s total assets less tangible equity, rather than the previous base of total deposits. While
15
the Corporation’s FDIC insurance assessments have declined as a result of this change, the Bank’s FDIC insurance premiums
could increase if the Bank’s asset size increases, if the FDIC raises base assessment rates, or if the FDIC takes other actions to
replenish the DIF.
Changes in accounting standards and management’s selection of accounting methods, including assumptions and
estimates, could materially affect 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 affect how the Corporation records and reports its financial condition and results of operations. In some
cases, the Corporation could be required to apply a new or revised standard retroactively, resulting in changes to previously
reported financial results, or a cumulative charge to retained earnings. In addition, management is required to use certain
assumptions and estimates in preparing our financial statements, including determining the fair value of certain assets and
liabilities, among other items. If the assumptions or estimates are incorrect, the Corporation may experience unexpected
material consequences.
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 affect our future success.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
The Corporation has no unresolved comments from the SEC staff.
16
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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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.
The Bank 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 $101,000 for the year ended December 31, 2012.
C&F Mortgage’s Newport News loan production office is located on the second floor of the Bank’s Newport News
branch building and its Williamsburg loan production office is located on the second floor of the Bank's Jamestown Road
branch location. In addition, C&F Mortgage has 16 loan production offices leased from nonaffiliates including 10 in Virginia,
three in Maryland, and one each in Delaware, North Carolina, and New Jersey. Rental expense for these leased locations
totaled $1.1 million for the year ended December 31, 2012.
The Hampton office of C&F Finance is located on the second floor of the Bank’s Hampton branch building. In January
2011, C&F Finance entered into a five-year lease agreement with an unrelated third party for approximately 17,000 square feet
of office space in Richmond, Virginia, which is being used for C&F Finance’s headquarters and its loan and administrative
functions and staff. C&F Finance has two leased offices, one each in Maryland and Tennessee. Rental expense for these leased
locations totaled 321,000 for the year ended December 31, 2012.
All of the Corporation’s properties are in good operating condition and are adequate for the Corporation’s present and
anticipated future needs.
ITEM 3.
LEGAL PROCEEDINGS
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.
17
ITEM 4.
MINE SAFETY DISCLOSURES
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name (Age)
Present Position
Business Experience
During Past Five Years
Larry G. Dillon (60)
Chairman, President and
Chief Executive Officer
Chairman, President and Chief Executive Officer of the Corporation and
the Bank since 1989
Thomas F. Cherry (44)
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
Bryan E. McKernon (56)
President and Chief Executive Officer,
C&F Mortgage
President and Chief Executive Officer of C&F Mortgage since 1995
PART II
ITEM 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
The Corporation’s Common Stock is traded on the over-the-counter market and is listed for trading on the NASDAQ
Global Select Market of the NASDAQ Stock Market under the symbol “CFFI.” As of February 27, 2013, there were
approximately 2,200 shareholders of record. As of that date, the closing price of our Common Stock on the NASDAQ Global
Select Stock Market was $39.83. Following are the high and low sales prices as reported by the NASDAQ Stock Market, along
with the dividends that were declared quarterly in 2012 and 2011.
Quarter
First
Second
Third
Fourth
$
$
High
31.53
41.95
43.42
40.00
2012
Low
26.40
28.25
38.51
33.06
$
Dividends
0.26
0.26
0.27
0.29
$
High
25.75
22.68
23.75
28.00
$
2011
Low
21.21
19.95
19.00
20.21
$
Dividends
0.25
0.25
0.25
0.26
Payment of dividends is at the discretion of the Corporation’s board of directors and is subject to various federal and
state regulatory limitations. For further information regarding payment of dividends refer to Item 1, “Business,” under the
heading “Limits on Dividends.”
During 2012, the Corporation did not purchase any of its Common Stock.
18
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:
$ 977,018
102,197
640,283
686,184
$ 76,964
10,111
66,853
12,405
54,448
33,502
63,922
24,028
7,646
16,382
311
$ 16,071
Earnings per common share—basic
Earnings per common share—assuming dilution
Dividends
$
5.00
4.86
1.08
2012
2011
2010
2009
2008
$ 928,124
96,090
616,984
646,416
$ 904,137
92,777
606,744
625,134
$ 888,430
88,876
613,004
606,630
$ 855,657
64,857
633,017
550,725
$
$
$
73,790
11,881
61,909
14,160
47,749
27,046
56,084
18,711
5,735
12,976
1,183
11,793
3.76
3.72
1.01
$
$
$
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
$
$
2.26
2.24
1.00
1.44
1.44
1.06
$
$
$
64,130
21,395
42,735
13,766
28,969
25,149
49,320
4,798
617
4,181
—
4,181
1.38
1.37
1.24
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
3,305,902
3,172,277
3,103,469
3,048,491
3,058,274
1.71%
17.05
21.60
10.03
1.30%
14.86
26.86
8.75
0.78%
9.74
44.25
8.01
0.50%
6.60
73.48
7.61
0.51%
6.39
89.79
7.98
19
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 including continuation of the current low interest rate environment, the deposit portfolio
including trends in deposit maturities and rates, interest rate sensitivity, market risk, regulatory developments, monetary policy
implemented by the Federal Reserve including quantitative easing programs, 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, the CFPB
and the regulatory and enforcement activities of the CFPB and rules promulgated under the Basel III framework
• monetary and fiscal policies of the U.S. Government, including policies of the Treasury and the Federal Reserve
Board
the value of securities held in the Corporation’s investment portfolios
the quality or composition of the loan portfolios and the value of the collateral securing those loans
the commercial and residential real estate markets
the inventory level and pricing of used automobiles
the level of net charge-offs on loans and the adequacy of our allowance for loan losses
demand in the secondary residential mortgage loan markets
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
the Corporation's expansion and technology initiatives
technology
reliance on third parties for key services
accounting principles, policies and guidelines
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
These risks are exacerbated by the turbulence over the past several years 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.
20
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.
There can be no assurance that the actions taken by the federal government and regulatory agencies will alleviate the
industry or economic factors that may adversely affect the Corporation’s business and financial performance. Further, many
aspects of the Dodd-Frank Act remain subject to rulemaking and will take effect over several years, making it difficult to
anticipate the overall effect on the Corporation’s business and financial performance.
These risks and uncertainties, and the risks discussed in more detail in Item 1A, "Risk Factors," 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, 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, historical experience, 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, even if the loan balance is less than $500,000. 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.
21
Impairment of Securities: Impairment of securities occurs when the fair value of a security is less than its amortized
cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i)
we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its
amortized cost basis. If, however, we do not intend to sell the security and it is not more-likely-than-not that we will be
required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss,
which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected
from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-
temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment
must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary
based on our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an
equity security results in a write-down that must be included in net income. We regularly review each investment security for
other-than-temporary impairment based on criteria that 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: All of the Corporation's goodwill was recognized in connection with the Bank's acquisition of C&F Finance
Company in September 2002. With the adoption of Accounting Standards Update 2011-08, Intangible-Goodwill and Other-
Testing Goodwill for Impairment, in 2012, the Corporation is no longer required to perform a test for impairment unless, based
on an assessment of qualitative factors related to goodwill, we determine that it is more likely than not that the fair value of
C&F Finance Company is less than its carrying amount. If the likelihood of impairment is more than 50 percent, the
Corporation must perform a test for impairment and we may be required to record impairment charges. In assessing the
recoverability of the Corporation’s goodwill, major assumptions used in determining impairment are 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 will perform a sensitivity analysis by increasing the discount rate, lowering sales multiples and reducing
increases in future income.
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 transactions affect 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.”
22
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 $16.4 million in 2012, compared with net income of $13.0 million in 2011. Net
income available to common shareholders for 2012 was $16.1 million, or $4.86 per common share assuming dilution,
compared with $11.8 million, or $3.72 per common share assuming dilution for 2011. 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 (CPP). The financial results for 2012
were attributable to (1) strong earnings in the Consumer Finance segment, which continued to benefit from substantial loan
growth, robust automobile demand and the current low interest rate environment, (2) increased profitability in the Mortgage
Banking segment, which benefited from higher gains on sales of loans and ancillary loan production fee income, both due to
increased mortgage loan originations and sales volumes during 2012 and (3) increased profitability in the Retail Banking
segment, which benefited from the effects of the low interest rate environment on the cost of deposits and lower loan loss
provision expense. See “Principal Business Activities” below for additional discussion.
The Corporation’s ROE and ROA were 17.05 percent and 1.71 percent, respectively, for the year ended December 31,
2012, compared to 14.86 percent and 1.30 percent for the year ended December 31, 2011. The increase in these ratios during
2012 was primarily due to earnings improvement of the Retail Banking and Mortgage Banking segments and the sustained
earnings strength of the Consumer Finance segment. In addition, the redemption of the Series A Preferred Stock was
accomplished without raising additional capital and has eliminated any future Series A Preferred Stock dividends and discount
accretion to reduce net income available to common shareholders. See “Principal Business Activities” below for additional
information.
2013 Outlook
While management believes that the Corporation is well positioned to see continued strong earnings in 2013, the
following factors could influence the Corporation’s financial performance in 2013:
• Retail Banking: Our ability to achieve loan growth will be a significant influence on the Bank's performance during
2013. General economic trends in the Bank's markets have contributed to decreased demand for new loans and
increased competition to satisfy the limited loan demand that exists. It will be challenging to maintain the Retail
Banking segment's net interest margin at its current level if funds obtained from loan repayments and from deposit
growth cannot be fully used to originate new loans and instead are reinvested in lower-yielding assets. Managing the
continuing risks inherent in our loan portfolio and expenses associated with nonperforming assets will also continue
to influence the Retail Banking segment's performance during 2013. General economic trends in the Bank’s markets
will continue to affect the quality of the loan portfolio and 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
already taken possession of and from future foreclosures. Further actions that may be taken by the federal
government to restrict or control pricing on products offered by banks may affect the Bank’s noninterest income
during 2013 and the costs to comply with such actions and other government regulations may increase noninterest
expense during 2013.
• Mortgage Banking: C&F Mortgage generates significant noninterest income from the sale of residential loan
products into the secondary market to investors, which in turn aggregate and sell loans predominantly to government-
sponsored enterprises, such as Fannie Mae and Freddie Mac, and the FHA. Any disruption in the Mortgage
Company's access to the aggregators directly or to the government-sponsored enterprises indirectly may affect the
Mortgage Company's noninterest income during 2013. C&F Mortgage will be affected during 2013 and beyond by
the reforms to mortgage lending encompassed by the Dodd-Frank Act’s broad new restrictions on lending practices
and loan terms, including recent regulations addressing mortgage loan ability-to-repay requirements and "qualified
mortgage" standards issued by the CFPB. Compliance with the regulations promulgated under the Dodd-Frank Act
23
and by the CFPB may require substantial changes to mortgage lending systems and processes due to the heightened
federal regulation.
• Consumer Finance: With the expectation that short-term interest rates will remain low, C&F Finance should generate
strong operating results in 2013 because a significant portion of its funding is indexed to short-term interest rates.
The ongoing effects of the current economic environment, including sustained unemployment levels, may result in
more loan delinquencies and collateral 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. 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 overall tightening of credit. As
economic and financial conditions have improved, institutions with access to capital began re-entering the
automobile financing market during 2012. We expect intensified competition for loans and qualified personnel to
continue in 2013, which may affect loan pricing strategies to grow market share and personnel costs at C&F Finance
during 2013.
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: C&F Bank reported net income of $2.2 million for the year ended December 31, 2012, compared to a
net loss of $432,000 for the year ended December 31, 2011. The improvement in financial results for 2012, as compared to
2011, resulted from the following: (1) the effect of the low interest rate environment on the cost of deposits, (2) the decrease in
loan loss provision expense, (3) an increase in activity-based interchange income, (4) lower FDIC insurance expense and (5)
lower expenses associated with write-downs and holding costs of foreclosed properties. Partially offsetting these positive
factors were the negative effects of the following: (1) a decline in average loans to non-affiliates to $403.2 million for 2012
from $406.1 million for 2011 resulting from weak loan demand in the current economic environment, coupled with intensified
competition for loans in our markets, (2) a decline in overdraft fee income, and (3) higher occupancy expenses associated with
depreciation and maintenance of technology investments related to expanding the banking products we offer to our customers
and to improving our operational efficiency and security.
The Bank’s nonperforming assets were $17.7 million at December 31, 2012, compared to $16.1 million at December 31,
2011. Nonperforming assets at December 31, 2012 included $11.5 million in nonaccrual loans, compared to $10.0 million at
December 31, 2011, and $6.2 million in foreclosed properties, compared to $6.1 million at December 31, 2011. TDRs were
$16.5 million at December 31, 2012, of which $9.8 million were included in nonaccrual loans, compared to $17.1 million at
December 31, 2011, of which $8.4 million were included in nonaccrual loans. The increase in nonaccrual loans primarily
resulted from the addition during 2012 of $5.2 million for one commercial customer secured by undeveloped residential and
commercial property. Specific reserves of $2.8 million have been established for nonaccrual loans as of December 31, 2012.
Management believes it has provided adequate loan loss reserves for the Retail Banking segment’s loans. Other real estate
owned at December 31, 2012 consists of both residential and non-residential properties. These properties have been written
down to their estimated fair values less selling costs.
Mortgage Banking: C&F Mortgage reported net income of $2.2 million for the year ended December 31, 2012,
compared to $1.3 million for the year ended December 31, 2011. The improvement in financial results for 2012, as compared
to 2011, was primarily attributable to: (1) higher gains on the sales of loans and ancillary loan production fees, (2) lower legal
and consulting fees and (3) an increase in interest income earned on the average warehouse of loans originated for resale. The
increases in both loan originations and gains on the sale of loans resulted in partially offsetting increases during 2012 in loan
production expenses, income-based compensation expenses and the provision for indemnifications. Additionally, during 2012
C&F Mortgage incurred higher non-production based personnel expenses in order to manage the increasingly complex
regulatory environment in which it operates.
Loan origination volume for the year ended December 31, 2012 increased to $840.1 million from $616.4 million for the
year ended December 31, 2011. During 2012, the amount of loan originations for refinancings and new and resale home
purchases were $344.4 million and $495.7 million, respectively, compared to $184.9 million and $431.5 million, respectively,
during 2011. The increase in origination volume is largely a result of the continued low interest rate environment throughout
2012, which spurred refinancing activity and stabilization in housing market values. The higher volume of loan originations in
24
2012 resulted in an increase in gains on sales of loans, which were $20.6 million for the year ended December 31, 2012,
compared to $16.1 million for the year ended December 31, 2011.
Consumer Finance: C&F Finance reported net income of $12.6 million for the year ended December 31, 2012, which
was a $300,000 increase over the year ended December 31, 2011. The financial results for 2012, as compared to 2011, included
the effects of the following: (1) the sustained low cost on its variable-rate borrowings and (2) an increase in average loans
outstanding of 10.2 percent from 2011 to 2012. Factors that negatively affected the financial results during 2012 were increases
of (1) $2.0 million in the loan loss provision expense due to higher net charge-offs as a result of economic conditions and lower
resale prices of repossessed automobiles, (2) $879,000 in personnel expenses as a result of expansion into new markets and
loan growth and (3) $150,000 in occupancy expense as a result of the relocation of C&F Finance's headquarters to a larger
leased office building in April 2011 and depreciation and maintenance of technology to support growth.
The allowance for loan losses as a percentage of loans increased to 7.96 percent at December 31, 2012, compared to 7.94
percent at December 31, 2011. Management believes that the current allowance for loan losses is adequate to absorb probable
losses in the loan portfolio.
Other and Eliminations: The net loss for this combined segment was $607,000 for the year ended December 31, 2012,
compared to a net loss of $533,000 for the year ended December 31, 2011. Revenue and expense of this combined segment
include the results of operations of our investment, insurance and title subsidiaries, 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 was $102.2 million at December 31, 2012, compared to $96.1 million at December 31,
2011. Capital growth resulted from earnings for the year ended December 31, 2012, offset in part by the redemption of the
Corporation's remaining Series A Preferred Stock and payment of dividends on common stock and the Series A Preferred
Stock. Capital also included a $1.3 million net increase in other comprehensive income. For the years ended December 31,
2012, 2011 and 2010, the Corporation's average common equity to average assets ratio was 10.03%, 8.75% and 8.01%,
respectively.
The capital and liquidity positions of the Corporation remain strong. Capital has continued to grow during 2012 and
exceeds current regulatory capital standards for being well-capitalized. In April 2012, the Corporation achieved its goal of
exiting the CPP by redeeming the remainder of its Series A Preferred Stock. The funds for this redemption were provided by
existing financial resources of the Corporation and no new capital was issued.
We also manage capital through dividends to the Corporation’s shareholders. The Corporation’s board of directors
continued its policy of paying dividends in 2012 and declared a quarterly cash dividend of 29 cents per common share for the
fourth quarter of 2012, which was a 7.4 percent increase over the prior quarter's cash dividend declared of 27 cents per common
share, and an 11.5 percent increase over the 26 cents per share declared for the fourth quarter of 2011. The dividend payout
ratio was 21.6 percent of net income available to common shareholders for the year ended December 31, 2012. 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.
25
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets for each of the years ended December 31, 2012, 2011 and 2010.
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 as 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
(35,126)
92,821
$ 940,350
$ 110,237
98,045
45,645
134,668
163,921
552,516
162,312
714,828
104,737
23,749
843,314
97,036
2012
2011
2010
Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
Average
Balance
Income/
Expense
Yield/
Rate
$ 20,376
$
336
1.65% $ 19,366
$
$ 20,531
$
383
1.87%
117,612
137,988
732,972
7,059
7,395
71,998
11,695
22
882,655
79,415
6.00
5.36
9.82
0.19
9.00
118,984
138,350
683,648
19,863
841,861
(30,652)
95,048
$ 906,257
314
7,362
7,676
68,630
46
76,352
1.62%
6.19
5.55
10.04
105,526
126,057
684,667
6,786
7,169
65,003
0.23
9.07
11,628
43
822,352
72,215
(25,893)
95,431
$ 891,890
410
369
45
2,047
2,454
5,325
4,786
10,111
0.37% $ 109,314
0.38
0.10
1.52
1.50
0.96
2.95
1.41
77,882
42,083
135,307
172,675
537,261
159,710
696,971
93,912
20,410
811,293
94,964
552
507
43
2,684
3,217
7,003
4,878
11,881
0.51%
0.65
0.10
1.98
1.86
1.30
3.05
1.70
$ 95,005
64,085
41,685
142,918
178,569
522,262
167,984
690,246
89,430
20,776
800,452
91,438
537
563
42
3,161
3,935
8,238
4,997
13,235
Total liabilities and shareholders’ equity
$ 940,350
$ 906,257
$ 891,890
Net interest income
Interest rate spread
Interest expense to average earning assets
Net interest margin
$ 69,304
$ 64,471
$ 58,980
7.37%
1.41%
7.66%
7.59%
1.15%
7.85%
26
6.43
5.69
9.49
0.37
8.78
0.57%
0.88
0.10
2.21
2.20
1.58
2.97
1.92
6.86%
1.61%
7.17%
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.
TABLE 2: Rate-Volume Recap
2012 from 2011
2011 from 2010
Increase (Decrease)
Due to
Rate
Volume
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Rate
Volume
Total
Increase
(Decrease)
$
(1,501)
$
4,869
$
3,368
$
3,724
$
(97)
$
3,627
5
(219)
(8)
(1,723)
(147)
(248)
(2)
(624)
(606)
(1,627)
(171)
(1,798)
17
(84)
(16)
4,786
5
110
4
(13)
(157)
(51)
79
28
22
(303)
(24)
3,063
(142)
(138)
2
(637)
(763)
(1,678)
(92)
(1,770)
$
75
$
4,758
$
4,833
$
(21 )
(282 )
(12 )
3,409
(62 )
(163 )
1
(315 )
(592 )
(1,131 )
129
(1,002 )
4,411
(48)
858
15
728
77
107
—
(162)
(126)
(104)
(248)
(352)
(69)
576
3
4,137
15
(56)
1
(477)
(718)
(1,235)
(119)
(1,354)
$
1,080
$
5,491
(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
2012 Compared to 2011
Net interest income, on a taxable-equivalent basis, was $69.3 million for the year ended December 31, 2012, compared
to $64.5 million for the year ended December 31, 2011. The higher net interest income during 2012, as compared to the same
period of 2011, resulted from a 19 basis point increase in net interest margin to 7.85 percent, coupled with a 4.8 percent
increase in average earning assets. The increase in net interest margin was principally a result of growth in the Consumer
Finance segment's loan portfolio (which generates higher yields than the Retail Banking segment's loan portfolio) and
decreases in the rates paid by the Retail Banking segment on savings and time deposits, partially offset by lower yields on the
aggregate loan portfolio and municipal securities. The decreases in rates paid on time and savings deposits were primarily a
result of the sustained low interest rate environment and the repricing of higher rate certificates of deposit as they matured to
lower rates. In addition, the mix in interest-bearing deposits has shifted to shorter-term deposit accounts, including demand
deposits and money market deposit accounts. The decreases in the yields on loans resulted primarily from higher average loans
held for sale at the Mortgage Banking segment, which typically are lower yielding than loans held for investment. The increase
in average loans held for sale offset the favorable effects of a change in the mix of loans held for investment, specifically an
increase in higher yielding average loans at the Consumer Finance segment and a decline in lower yielding average loans at the
Retail Banking segment, which resulted in higher yields on loans held for investment. The decline in the yield on securities
resulted from calls and maturities of higher-yielding securities and purchases of municipal securities with lower yields in the
current low interest rate environment.
Average loans, which includes both loans held for investment and loans held for sale, increased to $733.0 million for the
year ended December 31, 2012 from $683.6 million for the year ended December 31, 2011. A portion of the increase occurred
27
in the Mortgage Banking segment’s portfolio of loans held for sale, the average balance of which increased $28.2 million
during 2012 compared to 2011. This increase is indicative of higher mortgage loan production due to the continued low interest
rate environment that has led to increased mortgage borrowing and refinancing activity during 2012. In total, average loans to
non-affiliates held for investment increased $21.2 million during 2012. The Consumer Finance segment's average loan portfolio
increased $24.3 million during 2012 as a result of robust demand in existing and new markets. The increase in average loans at
the Consumer Finance segment was offset in part by a $3.1 million decrease in the Retail Banking and Mortgage Banking
segments' portfolios of average loans held for investment. Of this $3.1 million decrease, $2.9 million occurred in the Retail
Banking loan portfolio, where loan production has been negatively affected by weak demand for new loans in the current
economic environment and intensified competition for loans in our markets.
The overall yield on average loans decreased 22 basis points to 9.82 percent for the year ended December 31, 2012,
when compared to 2011, principally as a result of the higher level of lower-yielding Mortgage Banking segment loans held for
sale as a percentage of total loans, as well as a slight decrease in the yield on the Consumer Finance segment loans as a result of
increased competition for automobile financing loans in the segment's markets.
Average securities available for sale decreased $362,000 for the year ended December 31, 2012, when compared to
2011. The decrease resulted from the effect of the lower interest rate environment on call activity, coupled with limited
availability of reinvestment opportunities that satisfy the investment portfolio's role in managing interest rate sensitivity,
providing liquidity and serving as an additional source of interest income. The lower yield on the available-for-sale securities
portfolio during 2012 resulted from the calls and maturities of higher-yielding securities and purchases of lower yielding
securities in the current low interest rate environment, as well as purchases of shorter term securities with lower yields
throughout 2012 and 2011.
Average interest-bearing deposits in other banks and Federal funds sold decreased $8.2 million for the year ended
December 31, 2012, when compared to 2011, as a result of deploying excess liquidity to partially fund loan demand at the
Mortgage Banking and Consumer Finance segments. The average yield on these overnight funds declined four basis points
during 2012 as a result of the continuing low interest rate environment.
Average interest-bearing time and savings deposits increased $15.3 million for the year ended December 31, 2012,
compared to 2011, mainly due to a shift to shorter-term money market deposit accounts, which provide depositors greater
flexibility for funds management and investing decisions in this low interest rate environment. The average cost of deposits
declined 34 basis points during 2012 because time deposits that matured throughout 2012 and 2011 repriced at lower interest
rates or were not renewed, interest rates paid on interest-bearing demand and money market deposits accounts decreased as a
result of the sustained low interest rate environment and the balances of short-term savings and money market deposits, which
pay a lower interest rate, increased.
Average borrowings increased $2.6 million for the year ended December 31, 2012, compared to 2011. This increase
occurred in short-term fed funds purchased in order to fund the Mortgage Banking segment's portfolio of loans held for sale.
The average cost of borrowings declined 10 basis points during 2012 because of the higher average balance of fed funds
purchased in relation to total borrowings, as well as the maturity of $10.0 million of FHLB advances during the third quarter of
2012, which were replaced by advances carrying lower interest rates.
Based on actions and announcements by the Federal Reserve during the first quarter of 2013, the Corporation anticipates
that interest rates will remain low in the short-term, which will most likely preserve the low rate environment that has been
favorable during 2012 to the Mortgage Banking segment's operations and to C&F Finance's cost of funds. During 2012 the low
interest rate environment caused the declines in interest expense. The Corporation expects these declines in interest expense to
have less of an effect on net interest margin in 2013. It will be challenging to maintain the Retail Banking segment's net interest
margin at its current level if funds obtained from loan repayments and from deposit growth cannot be fully used to originate
new loans and instead are reinvested in lower-yielding earning assets, and if the reduction in earning asset yields exceeds
interest rate declines in interest-bearing liabilities. With the expectation that short-term interest rates will not change
significantly and the current low rate environment will continue, the net interest margin at the Consumer Finance segment will
be most affected by increasing competition and loan pricing strategies that these competitors may use to grow market share in
automobile financing.
28
2011 Compared to 2010
Net interest income, on a taxable-equivalent basis, was $64.5 million for the year ended December 31, 2011, compared
to $59.0 million for the year ended December 31, 2010. The higher net interest income during 2011, as compared to the same
period of 2010, resulted from a 49 basis point increase in net interest margin to 7.66 percent, coupled with a 2.4 percent
increase in average earning assets. 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 money market and time deposits, partially offset by a lower yield on securities. The
increase in the yield on loans was primarily a result of a change in the mix of loans whereby lower yielding average loans at the
Retail Banking and Mortgage Banking segments declined and higher yielding average loans at the Consumer Finance segment
increased. The decrease in rates paid on money market and time deposits was primarily a result of a reduction in interest rates
paid on money market deposit accounts resulting from the sustained low interest rate environment, and the repricing of higher
rate certificates of deposit as they matured to lower rates. In addition, the mix in interest-bearing deposits has shifted to shorter-
term interest-bearing and money market deposit accounts. The decline in the yield on securities resulted from purchases of
securities with lower yields in the low interest rate environment. The average interest rate paid on borrowings increased 8 basis
points during 2011, as compared to the same period in 2010, due to the effects of changes in the mix of borrowings to less
dependence on lower-cost short-term borrowings, which occurred as a result of deposit growth, and the effects of a 25 basis
point increase in July 2010 in the rate on our variable-rate revolving line of credit.
Average loans, which includes both loans held for investment and loans held for sale, decreased slightly to $683.6
million for the year ended December 31, 2011 from $684.7 million for the year ended December 31, 2010. A portion of the
decrease occurred in the Mortgage Banking segment’s portfolio of loans held for sale, the average balance of which declined
$9.8 million during 2011. This decline was indicative of the lower loan production due to continued overall weakness in the
housing market, housing market value declines, and the expiration of the homebuyer tax credits that boosted loan demand
during the first half of 2010. In total, average loans to non-affiliates held for investment increased $8.8 million during 2011.
However, the Retail Banking and Mortgage Banking segments’ portfolio of average loans held for investment decreased $23.9
million during 2011. Loan production at the Retail Banking segment was negatively affected by weak demand for new loans
and loan originations during 2011 did not keep pace with payments on existing loans, charge-offs and transfers to foreclosed
properties. The decline in average loans at the Retail Banking segment was offset by an increase in the Consumer Finance
segment’s average loan portfolio, which increased $32.7 during 2011. This increase resulted from robust demand in existing
and new markets.
The overall yield on average loans increased 55 basis points to 10.04 percent for the year ended December 31, 2011,
when compared to the same period in 2010, 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 $12.3 million for the year ended December 31, 2011, when compared to
the same period in 2010. The increase in securities available for sale occurred predominantly in the Retail Banking segment’s
municipal bond portfolio in conjunction with a strategic increase the investment portfolio as a percentage of total assets. The
lower yield on the available-for-sale securities portfolio during 2011, compared to the same period in 2010, resulted from the
calls and maturities of higher-yielding securities and purchases of lower-yielding securities in the current low interest rate
environment, as well as purchases of shorter-term securities with lower yields during 2011.
Average interest-bearing deposits in other banks and Federal funds sold increased $8.2 million for the year ended
December 31, 2011, when compared to the same period in 2010, as a result of excess liquidity provided by growth in the
Corporation’s deposit portfolio, coupled with reduced loan demand at the Retail Banking and Mortgage Banking segments. The
average yield on these overnight funds of 23 basis points during 2011 was a result of the continuing low interest rate
environment.
Average interest-bearing time and savings deposits increased $15.0 million for the year ended December 31, 2011,
compared to the same period in 2010, mainly due to higher deposit balances from municipal customers. In addition, the mix in
interest-bearing deposits shifted to shorter-term interest-bearing and money market deposit accounts from longer-term
certificates of deposits, which allowed depositors greater flexibility for funds management and investing decisions. The average
cost of deposits declined 28 basis points for the year ended December 31, 2011, compared to the same period in 2010, because
time deposits that matured throughout 2010 and into 2011 repriced at lower interest rates or were not renewed, interest rates
paid on money market deposit accounts were reduced as a result of the sustained low interest rate environment, and the
balances of shorter-term interest-bearing deposits, which pay a lower interest rate, increased.
Average borrowings decreased $8.3 million for the year ended December 31, 2011, compared to the same period in
2010. This decrease was attributable to reduced funding needs as the growth in average earning assets was primarily met
29
through the growth in average deposits. The average cost of borrowings increased 8 basis points for the year ended December
31, 2011, compared to the same period in 2010, as a result of a change in the composition of borrowings, which occurred as
lower-cost short-term variable-rate borrowings were repaid with excess liquidity provided by lower loan demand and deposit
growth. Further contributing to the increase in the average cost of borrowings during 2011 was a 25 basis point increase in July
2010 in the Consumer Finance segment’s variable-rate revolving line of credit.
NONINTEREST INCOME
TABLE 3: Noninterest Income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale
securities
Other income
Total noninterest income
$
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale
securities
Other income
Total noninterest income
$
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains (losses) on calls of available for sale
securities
Other income
Total noninterest income
$
2012 Compared to 2011
Retail
Banking
$
— $
Year Ended December 31, 2012
Consumer
Finance
Other and
Eliminations
Retail
Banking
$
— $
Year Ended December 31, 2011
Consumer
Finance
Other and
Eliminations
Mortgage
Banking
20,572
—
3,669
—
646
24,887
$
Mortgage
Banking
16,094
—
2,876
—
55
19,025
$
Mortgage
Banking
18,567
—
2,795
—
470
21,832
$
3,326
2,431
11
356
6,124
3,509
2,245
13
190
5,957
3,511
1,920
58
604
6,093
$
$
$
—
—
11
—
1,138
1,149
$
— $
—
199
—
1,143
1,342
$
$
$
—
—
10
—
845
855
$
$
— $
—
159
—
1,050
1,209
$
$
$
—
—
8
—
681
689
$
$
(3) $
—
190
12
887
1,086
$
Total
20,572
3,326
6,310
11
3,283
33,502
Total
16,094
3,509
5,290
13
2,140
27,046
Total
18,564
3,511
4,913
70
2,642
29,700
Retail
Banking
$
— $
Year Ended December 31, 2010
Consumer
Finance
Other and
Eliminations
Total noninterest income increased $6.5 million, or 23.9 percent, for the year ended December 31, 2012, compared to the
same period in 2011. This increase resulted from higher gains on sales of loans and ancillary loan production fees at the
Mortgage Banking segment due to the increase in loan originations and sales, coupled with increases in other income from
higher activity-based debit card interchange fees at the Retail Banking segment and higher loan servicing fees at the Consumer
Finance segment. In addition, there was $827,000 of unrealized appreciation in the Corporation's nonqualified defined
contribution plan, as described in Item 8, "Financial Statements and Supplementary Data," under the head "Note 11: Employee
30
Benefit Plans." Partially offsetting these increases was a decline in the Retail Banking segment's service charges on deposit
accounts, which resulted from lower overdraft fess during 2012.
2011 Compared to 2010
Total noninterest income decreased $2.7 million, or 8.9 percent, for the year ended December 31, 2011, compared to the
same period in 2010. This decrease primarily resulted from lower gains on sales of loans at the Mortgage Banking segment due
to the decline in loan production, which was partially offset by higher service charges and fees at the Retail Banking segment
due to an increase in activity-based debit card interchange income. Further contributing to the decline in noninterest income
during 2011 was a $285,000 gain recognized in 2010 by the Retail Banking segment for the sale of the facility previously
occupied by the Consumer Finance segment and $640,000 of unrealized depreciation in the Corporation’s nonqualified defined
contribution plan.
NONINTEREST EXPENSE
TABLE 4: Noninterest Expense
Year Ended December 31, 2012
Consumer
Finance
7,591
827
Other and
Eliminations
865
23
Mortgage
Banking
16,675
1,904
$
$
—
1,205
3,156
4,361
22,940
$
—
—
3,273
3,273
11,691
$
—
—
456
456
1,344
Year Ended December 31, 2011
Consumer
Finance
6,712
677
Other and
Eliminations
839
27
Mortgage
Banking
12,044
1,901
$
$
11
807
3,028
3,846
17,791
$
—
—
2,883
2,883
10,272
$
—
—
407
407
1,273
Total
40,693
6,795
1,634
1,205
13,595
16,434
63,922
Total
34,317
6,491
1,427
807
13,042
15,276
56,084
$
$
$
$
(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
Retail
Banking
15,562
4,041
$
1,634
—
6,710
8,344
27,947
Retail
Banking
14,722
3,886
1,416
—
6,724
8,140
26,748
$
$
$
$
$
$
$
31
(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
$
2012 Compared to 2011
Retail
Banking
14,661
3,397
$
3,088
—
6,627
9,715
27,773
Year Ended December 31, 2010
Consumer
Finance
6,062
409
Other and
Eliminations
718
30
Mortgage
Banking
13,448
1,932
$
$
23
3,745
3,192
6,960
22,340
$
—
—
2,484
2,484
8,955
$
—
—
479
479
1,227
$
$
Total
34,889
5,768
3,111
3,745
12,782
19,638
60,295
$
$
Total noninterest expenses increased $7.8 million, or 14.0 percent, for the year ended December 31, 2012, compared to
the same period in 2011. This increase occurred primarily from higher personnel costs at (1) the Mortgage Banking segment
due to higher production and income-based compensation, which resulted from the increase in loan production and sales during
2012, as well as higher non-production compensation in order to manage the increasingly complex regulatory environment in
which the Mortgage Banking segment operates, (2) the Retail Banking segment due to increased staffing in the branch network
to support customer service initiatives, and (3) the Consumer Finance segment due to an increase in the number of personnel to
support expansion into new markets and loan growth. In addition, there were increases in occupancy expense during 2012 at
the Retail Banking segment due to depreciation and maintenance of technology investments related to expanding the banking
products we offer to our customers and to improving our operational efficiency and security and at the Consumer Finance
segment due to the relocation in April 2011 to a larger leased headquarters building and depreciation and maintenance of
technology to support growth. The Mortgage Banking segment recognized a higher provision for indemnification losses during
2012 in connection with loans sold to investors.
2011 Compared to 2010
Total noninterest expenses decreased $4.2 million, or 7.0 percent, for the year ended December 31, 2011, compared to
the same period in 2010. This decrease occurred primarily at the Mortgage Banking segment due to a $2.9 million decline in
the provision for indemnification losses, as well as the $1.4 million decline in personnel expenses as a result of lower
production-based compensation. Further expense reductions during 2011, compared to 2010, occurred at the Retail Banking
segment as (1) OREO expenses declined $1.7 million and (2) FDIC deposit insurance premiums declined $204,000. These
expense reductions were offset in part by (1) higher non-production salary expense at the Mortgage Banking segment due to the
regulatory compliance environment, (2) higher personnel expenses at the Consumer Finance segment resulting from an
increase in the number of personnel to manage the growth in loans outstanding and higher variable compensation resulting
from increased profitability, loan growth and portfolio performance and (3) higher occupancy expenses at the Retail Banking
associated with depreciation and maintenance of technology investments related to expanding the banking products we offer to
our customers and to improving our operational efficiency and security and at the Consumer Finance segments associated with
the relocation of C&F Finance’s headquarters to a larger facility and depreciation and maintenance of technology investments
to support growth.
INCOME TAXES
Applicable income taxes on 2012 earnings amounted to $7.6 million, resulting in an effective tax rate of 31.8 percent,
compared with $5.7 million, or 30.7 percent, in 2011 and $2.9 million, or 26.7 percent, in 2010. The increase in the effective
rate in 2012 in relation to 2011 and the increase in the effective rate in 2011 compared to 2010 resulted from higher pre-tax
earnings at the non-bank business segments, which are not exempt from state income taxes and do not generate tax-exempt
income. In addition, during 2012 there was a decrease in tax-exempt income at the Retail Banking segment generated by tax-
exempt securities issued by states and political subdivisions, as compared to an increase in tax-exempt interest income at the
Retail Banking segment in 2011.
32
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 loans meeting the classification criteria for special mention,
substandard, doubtful and loss, as well as impaired loans from performing loans within the portfolio. The remaining non-
classified loans are grouped by loan type (e.g., commercial, consumer) and by risk rating. We assign each loan type an
allowance factor based on the associated risk, current economic conditions, past performance, 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-classified 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 for
relevant periods of time which can vary depending on economic conditions, 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.
• 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
33
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 because it is probable that the Corporation will not be able to collect all amounts due.
•
•
•
• 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.
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 for relevant
periods of time which can vary depending on economic conditions, 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.
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. A fee will be collected for extensions only in states that permit it. 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, as a
percentage of loans outstanding, was 0.73 percent in 2012, 0.69 percent in 2011 and 1.03 percent in 2010.
34
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—construction1
Commercial, financial and agricultural2
Equity lines
Consumer
Consumer finance
Total loans charged off
Recoveries of loans previously charged off:
Real estate—residential mortgage
Real estate—construction1
Commercial, financial and agricultural2
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
_______
1
2012
33,677
$
$
Year Ended December 31,
2010
24,027
2009
$ 19,806
$
2011
28,840
2008
15,963
$
2,400
165
9,840
12,405
793
—
2,074
159
337
10,134
13,497
35
—
121
79
207
2,880
3,322
10,175
35,907
$
6,000
360
7,800
14,160
1,096
—
2,566
52
319
8,144
12,177
98
—
173
12
122
2,449
2,854
9,323
33,677
$
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
$
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
0.72%
0.89%
0.97%
1.09%
0.14%
2.76%
2.39%
2.89%
5.18%
5.46%
2
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
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.
35
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 1
Commercial, financial and agricultural 2
Equity lines
Consumer
Consumer finance
Unallocated
Balance, December 31
Ratio of loans to total year-end loans:
Real estate—residential mortgage
Real estate—construction 1
Commercial, financial and agricultural 2
Equity lines
Consumer
Consumer finance
2012
2011
December 31,
2010
2009
2008
$
$
2,358
424
9,824
885
283
22,133
—
35,907
$
$
2,379
480
10,040
912
319
19,547
—
33,677
$
$
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
22%
1
30
5
1
41
100%
22%
1
33
5
1
38
100%
23%
2
34
5
1
35
100%
23%
2
39
5
1
30
100%
22%
4
42
4
1
27
100%
________
1
2
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
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, 2012 were as follows:
TABLE 7A: Credit Quality Indicators
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction 2
Commercial, financial and agricultural 3
Equity lines
Consumer
$
$
Pass
143,947
2,133
167,693
31,199
4,746
349,718
$
$
Special
Mention
1,374
—
6,678
1,327
3
9,382
Substandard
2,131
$
2,929
21,247
767
369
27,443
$
Substandard
Nonaccrual
1,805
—
9,434
31
191
11,461
$
$
(Dollars in thousands)
Consumer finance
Performing
277,531
$
Non-performing
$
655
$
Total1
149,257
5,062
205,052
33,324
5,309
398,004
$
$
Total
278,186
_________
1 At December 31, 2012, the Corporation did not have any loans classified as Doubtful or Loss.
2
3
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending
and commercial business lending.
36
Loans by credit quality indicators as of December 31, 2011 were as follows:
TABLE 7B: Credit Quality Indicators
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction 2
Commercial, financial and agricultural 3
Equity lines
Consumer
$
$
Pass
140,304
2,867
164,448
31,935
5,271
344,825
$
$
Special
Mention
1,261
—
18,787
298
10
20,356
Substandard
3,130
$
2,870
20,931
836
776
28,543
$
Substandard
Nonaccrual
2,440
—
8,069
123
—
10,632
$
$
(Dollars in thousands)
Consumer finance
Performing
245,924
$
Non-performing
$
381
$
Total1
147,135
5,737
212,235
33,192
6,057
404,356
$
$
Total
246,305
_________
1 At December 31, 2011, the Corporation did not have any loans classified as Doubtful or Loss.
2
3
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending
and commercial business lending.
The combined Retail Banking and Mortgage Banking segments’ allowance for loan losses decreased $356,000 since
December 31, 2011, and the provision for loan losses at these combined segments decreased $3.8 million, or 59.7 percent, for
the year ended December 31, 2012 compared to the same period in 2011. The allowance for loan losses to total loans for these
combined segments declined to 3.46 percent at December 31, 2012, compared to 3.49 at December 3, 2011. The decline in the
allowance ratio occurred as a result of charge-offs at the Retail Banking segment against previously established loan loss
reserves. Substandard nonaccrual loans increased to $11.5 million at December 31, 2012 from $10.6 million at December 31,
2011. The increase since December 31, 2011 was concentrated in the commercial sector of the Retail Banking segment's loan
portfolio to which we have allocated the largest portion of the Retail Banking segment's loan loss allowance, and was
attributable to one commercial relationship placed on substandard nonaccrual status during the first quarter of 2012, which was
classified as substandard at December 31, 2011. The increase in substandard nonaccrual loans attributable to this one
relationship was partly offset by charge-offs and the transfer of substandard nonaccrual loans to OREO. Substandard loans of
the Retail Banking segment at December 31, 2012 include $3.8 million of commercial loans to one borrower that are cross-
collateralized with a $5.2 million substandard nonaccrual loan to the same borrower. While debt service on the $3.8 million of
substandard loans is current and negotiations are ongoing with the borrower, it may become necessary to foreclose on all
properties collateralizing this relationship in a future period. Special mention loans declined $11.0 million, or 53.9 percent, for
the year ended December 31, 2012 compared to the same period in 2011 as a result of management's focus on pro-actively
identifying, evaluating and resolving emerging problem loans. We believe that the current level of the allowance for loan losses
at the combined Retail Banking and Mortgage Banking segments is adequate to absorb any losses on existing loans that may
become uncollectible. If 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 $22.1 million at December 31, 2012 from $19.5
million at December 31, 2011, and its provision for loan losses increased $2.0 million for the year ended December 31, 2012,
compared to the same period in 2011. The allowance for loan losses as a percentage of loans at December 31, 2012 was 7.96
percent, compared with 7.94 percent at December 31, 2011. The increase in the provision for loan losses during 2012 was
primarily attributable to higher net charge-offs, which increased over the historically lower levels we experienced during 2011
and 2010, due to economic conditions and lower resale prices of repossessed automobiles in 2012. 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 a further decline in values of automobiles securing outstanding loans, a higher provision for
loan losses may become necessary.
37
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.
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.
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.
38
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.
$
2012
$ 11,461
—
6,236
—
$ 17,697
$
$ 16,492
$ 398,004
$ 13,774
2011
10,011
621
6,059
—
16,691
$
68
— $
$
17,094
$ 404,356
14,130
$
4.38%
3.46
120.18
4.07%
3.49
132.90
$
2010
7,765
—
10,295
379
18,439
$
1,030
$
$
9,769
$ 414,831
11,398
$
$
2009
4,812
204
12,360
440
$ 17,816
451
$
$
3,111
$ 447,592
9,076
$
3.87%
$
2008
17,222
1,460
1,370
596
20,648
$
3,517
$
$
—
$ 480,438
7,198
$
4.28%
4.33%
2.75
146.79
2.03
180.94
1.50
38.53
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
2012
$
655
— $
$
$
$ 278,186
$ 22,133
2011
$
381
— $
2010
151
—
$ 220,753
17,442
$
2009
$
387
— $
$
$
$ 189,439
$ 14,951
2008
798
—
$ 172,385
12,608
$
$ 246,305
19,547
$
0.24%
0.15%
0.07%
0.20%
0.46%
7.96
7.94
7.90
7.89
7.31
39
Table 9 presents the changes in the OREO balance for 2012 and 2011:
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,
2012
2011
$
$
9,986
3,866
205
(1,240)
(2,683)
39
10,173
(3,937)
14,653
5,040
—
(963)
(8,801)
57
9,986
(3,927)
$
6,236
$
6,059
Nonperforming assets of the combined Retail Banking and Mortgage Banking segments totaled $17.7 million at
December 31, 2012, compared to $16.7 million at December 31, 2011. Nonperforming assets at December 31, 2012 included
$11.5 million of nonaccrual loans, compared to $10.6 million at December 31, 2011, and $6.2 million of foreclosed, or OREO,
properties, compared to $6.1 million at December 31, 2011. Nonaccrual loans primarily consist of loans for residential real
estate secured by residential properties and commercial loans secured by residential and non-residential properties. Specific
reserves of $2.8 million have been established for these nonaccrual loans. We believe we have provided adequate loan loss
reserves based on current appraisals or evaluations 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.
There were no accruing loans past due for 90 days or more at the combined Retail Banking and Mortgage Banking
segments at December 31, 2012, compared to $68,000 at December 31, 2011, which consisted of two loans that returned to
current status during 2012.
OREO properties at December 31, 2012 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. While sales of
OREO totaled $2.7 million in 2012 and the OREO loss provision was $1.3 million, loans totaling $3.9 million were transferred
to OREO. These transfers consisted primarily of two commercial relationships totaling $3.1 million.
Nonaccrual loans at the Consumer Finance segment increased to $655,000 at December 31, 2012 from $381,000 at
December 31, 2011. As noted above, the allowance for loan losses increased from $19.5 million at December 31, 2011 to $22.1
million at December 31, 2012, and the ratio of the allowance for loan losses to total consumer finance loans rose slightly from
7.94 percent at December 31, 2011 to 7.96 percent at December 31, 2012. Nonaccrual consumer finance loans remain relatively
low compared to the allowance for loan losses and total consumer finance loan portfolio 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 interest on nonaccrual loans had been recognized, we would have recorded additional gross interest income of
$654,000 for 2012, $651,000 for 2011 and $624,000 for 2010 . Interest received on nonaccrual loans was $171,000 in 2012,
$119,000 in 2011 and $24,000 in 2010.
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. 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. TDRs are considered impaired loans.
40
Impaired loans, which consisted solely of TDRs, and the related allowance at December 31, 2012, were as follows:
TABLE 10A: 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
Unpaid
Principal
Balance
$
2,230
$
2,283
$
Related
Allowance
433
Average
Balance Total
Loans
$
2,266
$
Interest
Income
Recognized
124
7,892
5,234
—
812
—
324
16,492
$
8,190
5,234
—
817
—
324
16,848
$
1,775
1,432
—
112
—
49
3,801
$
8,260
5,443
1,407
827
—
324
18,527
$
$
254
236
—
13
—
16
643
Impaired loans, which include TDRs of $17.1 million, and the related allowance at December 31, 2011, were as follows:
TABLE 10B: 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
Unpaid
Principal
Balance
$
3,482
$
3,698
$
Related
Allowance
657
Average
Balance Total
Loans
$
3,723
$
Interest
Income
Recognized
137
5,861
5,490
2,285
652
—
324
18,094
$
5,957
5,814
2,285
654
—
324
18,732
$
1,464
1,331
318
161
—
49
3,980
$
6,195
6,116
2,397
663
—
324
19,418
$
$
102
372
—
6
—
14
631
At December 31, 2012, the balance of impaired loans was $16.5 million, consisting solely of TDRs, for which there
were specific valuation allowances of $3.8 million. At December 31, 2011, the balance of impaired loans was $18.1 million,
including $17.1 million of TDRs, for which there were specific valuation allowances of $4.0 million. The decline in TDRs
during 2012 was attributable to charge-offs and transfers to OREO. The Corporation has no obligation to fund additional
advances on its impaired loans.
During the year ended December 31, 2012, the Corporation modified $4.9 million of loans that were classified as TDRs,
compared to $9.8 million modified as TDRs during the same period of 2011. TDR modifications during 2012 consisted
primarily of one $3.9 million relationship, which was classified as substandard at December 31, 2012. As the Retail Banking
segment's loan portfolio remains under credit quality pressure, the Corporation may use loan modifications as a responsible
approach to managing asset quality when working with borrowers who are experiencing financial difficulty, which may result
in additional TDRs in the future.
41
TDRs at December 31, 2012 and 2011 were as follows:
TABLE 11: Troubled Debt Restructurings
(Dollars in thousands)
Accruing TDRs
Nonaccrual TDRs1
Total TDRs2
_________
1
2
Included in nonaccrual loans in Table 8: Nonperforming Assets.
Included in impaired loans in Tables 10A and 10B: Impaired Loans.
December 31,
2012
6,692
9,800
16,492
$
$
2011
8,653
8,441
17,094
$
$
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 the modified 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
C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party counterparties. As is
customary in the industry, the agreements with these counterparties require C&F Mortgage to extend representations and
warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the
agreements, the counterparties are entitled to make loss claims and repurchase requests of C&F Mortgage for loans that contain
covered deficiencies. C&F Mortgage has obtained early payment default recourse waivers for a significant portion of its
business. Recourse periods for early payment default for the remaining counterparties vary from 90 days up to one year.
Recourse periods for borrower misrepresentation, 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. C&F Mortgage has adopted a
reserve methodology whereby provisions are made to an expense account to fund a reserve maintained as a liability account on
the balance sheet for potential losses. The loan performance data of sold loans is not made available to C&F Mortgage making
the evaluation of potential losses inherently subjective as it requires estimates that are susceptible to significant revision as
more information becomes available. A schedule of expected losses on loans with claims or indemnifications is maintained to
ensure the reserve is adequate to cover estimated losses. Often times, claims are not factually validated and they are rescinded.
Once claims are validated and the actual or potential loss is agreed upon with the counterparties, the reserve is charged and a
cash payment is made to settle the claim. The balance of the indemnification reserve has adequately provided for all claims in
each of the three years ended December 31, 2012. 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,
2011
2010
2012
$
1,702
1,205
(815)
2,092
$
1,291
807
(396)
1,702
$
$
2,538
3,745
(4,992)
1,291
The increases in the provision for indemnification losses and payments during 2012 were attributable to the 36.5 percent
increase in loan sales volume in 2012, compared to the sales volume in 2011, as well as the continued level of foreclosures and
defaults. The decreases in the provision for indemnification losses and payments during 2012 and 2011, when compared to
2010, were primarily due to an agreement reached during the second quarter of 2010 with C&F Mortgage’s then largest
investor that resolved all known and unknown indemnification obligations for loans sold to this investor prior to 2010. As
42
expected, with this agreement in place, there was a $2.9 million decline in indemnification expense and a $4.6 million decline
in payments from 2010 to 2011.
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, 2012, the Corporation had total assets of $977.0 million compared to $928.1 million at December 31,
2011. The increase was principally a result of growth in the portfolio of securities available for sale, loan growth at the
Consumer Finance segment, and increases in loans held for sale at the Mortgage Banking segment and in cash and cash
equivalents at the Retail Banking segment, which were offset in part by a decline in loans held for investment at the Retail
Banking segment.
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, 2012, the Corporation’s loans held for investment in all categories totaled $676.2 million and loans
held for sale totaled $72.7 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 1
Commercial, financial, and agricultural 2
Equity lines
Consumer
Consumer finance
Total loans
Less allowance for loan losses
Total loans, net
2012
$ 149,257
5,062
205,052
33,324
5,309
278,186
676,190
(35,907)
$ 640,283
2011
$ 147,135
5,737
212,235
33,192
6,057
246,305
650,661
(33,677)
$ 616,984
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
2008
$ 141,341
28,286
272,164
29,136
9,511
172,385
652,823
(19,806)
$ 633,017
________
1
2
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending
and commercial business lending.
43
TABLE 14: Maturity/Repricing Schedule of Loans
December 31, 2012
Commercial,
Financial,
and Agricultural
Real Estate
Construction
$
$
$
$
53,788
17,286
3,142
28,038
56,279
46,519
2,965
—
—
2,097
—
—
(Dollars in thousands)
Variable Rate:
Within 1 year
1 to 5 years
After 5 years
Fixed Rate:
Within 1 year
1 to 5 years
After 5 years
The increase in total loans held for investment primarily occurred in the consumer finance category as a result of robust
demand for automobiles, partially offset by decreases in builder line lending and commercial business lending due to (i)
reduced loan demand, coupled with increased competition among financial institutions for the limited lending opportunities
within our markets, and (ii) foreclosures as a result of the continuing challenging economic environment during 2012.
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, USDA-guaranteed and VA-guaranteed loans
comply with the criteria established by HUD, the USDA, 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 first and second liens on properties located
in its primary market area in southeastern and central Virginia. The Bank offers various types of residential first 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. Second mortgage loans are offered with fixed and adjustable rates. Second mortgage
loans are granted for a fixed period of time, usually between five and 20 years. 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.
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 real estate 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
44
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.
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.
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.
45
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.
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.
Builder Line Lending
The Bank offers builder lines of credit to residential home builders to support their land and lot inventory needs. A
construction loan facility for a builder will typically have an expiration of 12 months or less. Each loan that is made under the
master loan facility will have a stated maturity that allows time for the residential unit to be constructed and sold to a
homebuyer under prevailing market conditions. Specific terms vary based on the purpose of the loan (e.g., lot inventory, spec
or non pre-sold units, pre-sold units) and previous sales activity to new homebuyers in the particular development. Repayment
relies upon the successful performance of the underlying residential real estate project. This type of lending carries a higher
level of risk related to residential real estate market conditions, a functioning first and secondary market in which to sell
residential properties, and the borrower’s ability to manage inventory and run projects. The Bank manages this risk by lending
to experienced builders and by using specific underwriting policies and procedures for these types of loans.
46
Loans associated with builder line 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.
Equity Line Lending
The Bank offers its customers home equity lines of credit 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. Home equity lines of credit are made on an open-end, revolving basis. Home equity loans
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 equity line 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
contract purchase decisions comply with C&F Finance’s underwriting policies and procedures.
Finance contract application packages completed by prospective borrowers are submitted by the automobile dealers
electronically through a third-party online automotive sales and finance platform to C&F Finance’s automated origination and
application 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 purchase of the contract. The purchase 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 purchase decision. Exceptions to credit
policies and authorities must be approved by a designated credit officer. C&F Finance’s typical customers 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
47
automobile financing sources. However, C&F Finance generally purchases contracts with 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
$
$
Percent
Percent
December 31, 2012
Amount
24,649
2,189
125,875
152,713
104
152,817
December 31, 2011
Amount
15,283
2,216
127,079
144,578
68
100% $ 144,646
16% $
2
82
100
*
10%
2
88
100
*
100%
Growth in debt securities occurred in the Bank’s portfolio of U.S. government agencies and corporations as a result of
the Bank’s strategy to maintain the securities portfolio at a targeted percentage of total assets. The growth during 2012 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 2012, the municipal bond sector, which is a significant component of the Corporation’s
obligations of states and political subdivisions category of securities, experienced a decline in securities prices due to year-end
selling by investors seeking to capture capital gains, in part due to continued uncertainty about tax rates and the tax status of
municipal bond interest payments. At December 31, 2012, approximately 96 percent 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 89 percent were rated “A” or better, as measured by market
value, at December 31, 2012. 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, 2012 and no other-
than-temporary impairment has been recognized.
Table 16 presents additional information pertaining to the composition of the securities portfolio by the earlier of
contractual maturity or expected maturity, excluding preferred stock. Expected maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
48
TABLE 16: Maturity of Securities
2012
Year Ended December 31,
2011
2010
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
$
18,514
1.42% $
14,742
1.47% $
10,707
1.17%
2,922
2.64
—
2,991
3,123
24,628
28
2,099
—
—
2,127
13,030
34,474
46,168
23,207
116,879
31,572
36,573
49,159
26,330
—
2.20
2.39
1.64
4.68
2.35
—
—
2.38
4.63
5.86
5.97
6.60
5.91
2.75
5.66
5.74
6.10
506
—
—
15,248
73
2,062
—
—
2,135
15,106
30,415
47,545
27,099
120,165
29,921
32,983
47,545
27,099
3.94
—
—
1.55
4.67
2.94
—
—
2.99
4.72
5.46
6.02
6.33
5.78
3.12
5.28
—
—
13,629
9
2,220
—
—
2,229
14,148
27,706
45,244
26,522
113,620
24,864
32,848
6.02
6.33
5.27% $ 129,478
45,244
26,522
—
—
1.49
6.42
3.49
—
—
3.50
5.27
5.69
6.13
6.32
5.96
3.50
5.27
6.13
6.32
5.45%
(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
$ 143,634
5.13% $
137,548
________
1 Yields on tax-exempt securities have been computed on a taxable-equivalent basis.
2
Total securities exclude preferred stock at amortized cost of $27,000 at December 31, 2012, 2011 and 2010 (estimated fair
value of $104,000 at December 31, 2012, $68,000 at December 31, 2011 and $31,000 at December 31, 2010).
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 $686.2 million at December 31, 2012, compared to $646.4 million at December 31, 2011, with
increases of $10.2 million in noninterest-bearing demand deposits and $50.9 million in savings and interest-bearing demand
deposits, which were offset in part by a $21.3 million decline in time deposits. A portion of the increase in demand deposits
49
was attributable to cyclical increases in municipality accounts. However, there was a shift throughout 2012 in the mix of
deposits to shorter-term, lower rate interest-bearing demand deposits as depositors are positioning for flexibility regarding the
availability of their funds in the event of a favorable shift in interest rates.
The Corporation had $2.8 million in brokered money market deposits outstanding at December 31, 2012, compared to
no brokered deposits at December 31, 2011. The source of these brokered deposits is uninvested cash balances held in third-
party brokerage sweep accounts. The Corporation uses brokered deposits as a means of diversifying liquidity sources, as
opposed to a long-term deposit gathering strategy.
Table 17 presents the average deposit balances and average rates paid for the years 2012, 2011 and 2010.
TABLE 17: Average Deposits and Rates Paid
2012
Year Ended December 31,
2011
2010
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$ 104,737
$
93,912
$
89,430
110,237
98,045
45,645
134,668
163,921
552,516
$ 657,253
0.37%
0.38
0.10
1.52
1.50
0.96%
109,314
77,882
42,083
135,307
172,675
537,261
631,173
$
0.51%
0.65
0.10
95,005
64,085
41,685
1.98
1.86
1.30%
142,918
178,569
522,262
$ 611,692
0.57%
0.88
0.10
2.21
2.20
1.58%
(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
Table 18 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2012.
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
BORROWINGS
December 31, 2012
18,401
$
14,246
25,530
80,383
138,560
$
In addition to deposits, the Corporation utilizes short-term and long-term borrowings. Short-term borrowings from the
Federal Reserve Bank and the FHLB are used to fund the Corporation's 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,
50
Trust II issued $10.0 million of trust preferred capital securities in a private placement to an institutional investor and $310,000
in common equity to the Corporation. The principal asset of Trust II is $10.3 million of the Corporation’s trust preferred capital
notes. In July 2005, Trust I, a wholly-owned subsidiary of the Corporation, was formed for the purpose of issuing trust
preferred capital securities to partially fund the Corporation’s purchase of 427,186 shares of its common stock. On July 21,
2005, Trust I issued $10.0 million of trust preferred capital securities in a private placement to an institutional investor and
$310,000 in common equity to the Corporation. The principal asset of Trust I is $10.3 million of the Corporation’s trust
preferred capital notes. For further information concerning the Corporation’s borrowings, refer to Item 8, “Financial Statements
and Supplementary Data,” under the heading “Note 8: Borrowings.”
OFF-BALANCE-SHEET ARRANGEMENTS
To meet the financing needs of customers, the Corporation is a party, in the normal course of business, to financial
instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit, commitments to sell
loans and standby letters of credit. These instruments involve elements of credit and interest rate risk in addition to the amount
on the balance sheet. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual
amount of these instruments. We use the same credit policies in making these commitments and conditional obligations as we
do for on-balance-sheet instruments. We obtain collateral based on our credit assessment of the customer in each circumstance.
Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the
contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a
fee by the customer. Since many of the commitments may expire without being completely drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The total amount of unused loan commitments was $87.1
million at December 31, 2012 and $83.5 million at December 31, 2011.
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 was $8.1 million at December 31, 2012 and
$9.3 million at December 31, 2011.
At December 31, 2012, C&F Mortgage had rate lock commitments to originate mortgage loans aggregating $76.8
million and loans held for sale of $72.7 million. C&F Mortgage has entered into corresponding commitments with third party
investors to sell loans of approximately $149.5 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. Payments made under these recourse provisions were $815,000 in
2012, $396,000 in 2011and $5.0 million in 2010. Payments in 2010 included the satisfaction of all known and unknown
indemnification obligations for loans sold to one of C&F Mortgage’s then largest investors prior to 2010, which was part of a
settlement with this investor. 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 valid 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.
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,
2012, the cash flow hedges had a fair value of ($513,000), which is recorded in other liabilities. The cash flow hedges were
fully effective at December 31, 2012. Therefore, the loss on the cash flow hedges was recognized as a component of other
comprehensive income (loss), net of deferred income taxes.
51
LIQUIDITY
The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to satisfy the
credit needs of our customers and the demands of our depositors, creditors and investors. Stable core deposits and a strong
capital position are the components of a solid foundation for the Corporation’s liquidity position. Additional sources of
liquidity available to the Corporation include cash flows from operations, loan payments and payoffs, deposit growth, sales of
securities, the issuance of brokered certificates of deposit and the capacity to borrow additional funds.
Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks, federal funds sold and
nonpledged securities available for sale, totaled $63.3 million at December 31, 2012. The Corporation’s funding sources,
including capacity, amount outstanding and amount available at December 31, 2012 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
Total
Capacity
59,000
5,000
101,093
47,057
120,000
332,150
$
$
December 31, 2012
Outstanding
$
— $
5,000
52,500
—
75,487
132,987
$
$
Available
59,000
—
48,593
47,057
44,513
199,163
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. Our ability to maintain sufficient liquidity may be affected by numerous factors, including economic
conditions nationally and in our markets. Depending on our liquidity levels, our capital position, conditions in the capital
markets and other factors, we may from time to time consider the issuance of debt, equity or other securities or other possible
capital market transactions, the proceeds of which could provide additional liquidity for our operations.
Certificates of deposit of $100,000 or more, maturing in less than a year, totaled $58.2 million at December 31, 2012;
certificates of deposit of $100,000 or more, maturing in more than one year, totaled $80.4 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, 2012 are presented in Table 20.
Table 20: Contractual Obligations
(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
Payments Due by Period
Less than 1
Year
$
$
— $
—
—
—
—
4,644
1,186
5,830
$
1-3 Years
—
20,000
—
—
—
—
1,530
21,530
3-5 Years
75,487
$
25,000
—
—
—
—
530
$ 101,017
More than 5
Years
$
$
—
7,500
—
—
20,620
5,000
37
33,157
Total
75,487
52,500
—
—
20,620
9,644
3,283
161,534
$
$
________
1
FHLB advances include convertible advances of $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
52
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. FHLB advances also
include a fixed rate hybrid advances of $7.5 million, $7.5 million and $2.5 million maturing in 2015, 2016 and 2018,
respectively. These advances provide fixed-rate funding until the stated maturity date. The bank may add interest rate caps
or floors at a future date, at which time the cost of the caps or floors will be added to the advance rate. For further
information concerning the Corporation’s FHLB borrowings, refer to Item 8, “Financial Statements and Supplementary
Data,” under the heading “Note 8: Borrowings.”
2 At December 31, 2012 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.
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, 2012, compared with 15.1 percent at December 31, 2011. The total capital to
risk-weighted assets ratio was 16.6 percent at December 31, 2012, compared with 16.4 percent at December 31, 2011. The Tier
1 leverage ratio was 11.5 percent at December 31, 2012 and 2011. 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 $10.0
million of Series A Preferred Stock outstanding on December 31, 2011 in Tier 1 capital for regulatory capital adequacy
determination purposes. In April 2012, the Corporation redeemed the remaining 10,000 shares of its Series A Preferred Stock.
Therefore, Tier 1 capital at December 31, 2012 includes no Series A Preferred Stock.
Shareholders’ equity was $102.2 million at year-end 2012 compared with $96.1 million at year-end 2011. During 2012,
the Corporation declared common stock dividends of $1.08 per share, compared to $1.01 per share declared in 2011 and $1.00
per share declared in 2010 . The dividend payout ratio, based on net income available to common shareholders, was 21.60
percent in 2012, 26.9 percent in 2011 and 44.2 percent in 2010. In addition, on April 11, 2012, the Corporation redeemed the
remaining $10.0 million of the total $20.0 million of Series A Preferred Stock. The funds for this redemption were provided by
existing financial resources of the Corporation and no new capital was issued.
In June 2012, the federal bank regulatory agencies proposed (i) rules to implement the Basel III capital framework as
outlined by the Basel Committee on Banking Supervision and (ii) rules for calculating risk-weighted assets. As discussed in
Item 1. “Business” under the heading “Regulation and Supervision,” the federal bank regulatory agencies have delayed the
implementation of Basel III to consider comments received on the proposed rules. The timing for the agencies' publication of
revised proposed rules or final rules to implement Basel III and revised risk-weighted assets calculations is uncertain.
Requirements to maintain higher levels of capital could adversely affect the Corporation's net income and return on equity and
limit the products and services it provides to its customers.
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
53
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.
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, 2012. 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, 2012, indicate that the Corporation would expect net interest income to decrease over the next twelve
months 4.08 percent assuming an immediate downward shift in market interest rates of 200 basis points (BP) and to increase
0.15 percent if rates shifted upward in the same manner.
54
1-Year Net Interest Income Simulation (dollars in thousands)
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Hypothetical Change
in Net
Interest Income for the
Year Ended
December 31, 2012
Dollars
Percentage
$
$
(2,759)
101
(4.08)%
0.15%
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, 2012 indicate that the EVE
would decrease 1.89 percent assuming an immediate downward shift in market interest rates of 200 BP and would increase
1.45 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
$
$
(2,599)
1,988
Percentage
(1.89)%
1.45%
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 an increase 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
reprice quicker over time than what the Corporation pays on its borrowings and deposits due to the shorter 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.
55
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share and per share amounts)
Assets
Cash and due from banks
Interest-bearing deposits in other banks
Federal funds sold
Total cash and cash equivalents
Securities—available for sale at fair value, amortized cost of $143,661 and $137,575,
respectively
Loans held for sale, net
Loans, net of allowance for loan losses of $35,907 and $33,677, respectively
Federal Home Loan Bank stock, at cost
Corporate premises and equipment, net
Other real estate owned, net of valuation allowance of $3,937 and $3,927, 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, 0 and 10,000 shares issued and
outstanding, respectively)
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,259,823 and 3,178,510 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.
56
December 31,
2012
2011
$
$
8,079
17,541
—
25,620
$
$
152,817
72,727
640,283
3,744
27,083
6,236
5,673
10,724
32,111
$ 977,018
$ 105,721
293,854
286,609
686,184
9,139
132,987
20,620
837
25,054
874,821
—
—
5,787
4,723
997
11,507
144,646
70,062
616,984
3,767
28,462
6,059
5,242
10,724
30,671
928,124
95,556
242,917
307,943
646,416
7,544
132,987
20,620
1,111
23,356
832,034
—
10
3,162
5,624
88,695
4,716
102,197
$ 977,018
3,091
13,438
76,167
3,384
96,090
928,124
$
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 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
Investment services income
Net gains on calls and sales 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
Year Ended December 31,
2011
2010
2012
$
$
71,947
22
68,571
46
$
64,941
43
213
4,659
123
76,964
824
2,047
2,454
3,799
987
10,111
66,853
12,405
54,448
20,572
3,326
6,310
1,017
11
2,266
33,502
40,693
6,795
16,434
63,922
24,028
7,646
16,382
311
16,071
5.00
4.86
$
$
$
206
4,859
108
73,790
1,102
2,684
3,217
3,892
986
11,881
61,909
14,160
47,749
16,094
3,509
5,290
1,008
13
1,132
27,046
34,317
6,491
15,276
56,084
18,711
5,735
12,976
1,183
11,793
3.76
3.72
$
$
$
281
4,459
124
69,848
1,142
3,161
3,935
3,998
999
13,235
56,613
14,959
41,654
18,564
3,511
4,913
834
70
1,808
29,700
34,889
5,768
19,638
60,295
11,059
2,949
8,110
1,149
6,961
2.26
2.24
$
$
$
See notes to consolidated financial statements.
57
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except for share and per share amounts)
Net income
Other comprehensive income, net:
Changes in defined benefit plan assets and benefit obligations, net
Unrealized gain (loss) on cash flow hedging instruments, net
Unrealized holding gains (losses) on securities, net of
reclassification adjustment
Comprehensive income, net
2012
16,382
$
December 31,
2011
2010
$
12,976
$
8,110
(24)
1
(559)
(223)
1,355
17,714
$
4,095
16,289
$
$
(139)
(91)
(667)
7,213
See notes to consolidated financial statements.
58
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share
amounts)
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Shareholders’
Equity
$
20
$
3,009
$
21,210
$ 63,669
$
968
$
88,876
Balance December 31, 2009
Comprehensive income, net:
Net income
Other comprehensive loss, net
Comprehensive income, net
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
Comprehensive income, net:
Net income
Other comprehensive income, net
Comprehensive income, net
Stock options exercised
Share-based compensation
Restricted stock vested
Accretion of preferred stock discount
Preferred stock redemption
Common stock issued
Cash dividends paid – common stock ($1.01
per share)
Cash dividends paid – preferred stock (5%
per annum)
Balance December 31, 2011
Comprehensive income, net:
Net income
Other comprehensive income, net
Comprehensive income, net
Stock options exercised
Share-based compensation
Restricted stock vested
Accretion of preferred stock discount
Preferred stock redemption
Common stock issued
Cash dividends declared – common stock
($1.08 per share)
Cash dividends paid – preferred stock (5%
per annum)
—
—
—
—
—
—
—
—
20
—
—
—
—
—
—
—
(10)
—
—
—
10
—
—
—
—
—
—
—
(10)
—
—
—
—
—
—
23
—
—
—
—
—
—
—
386
367
149
—
—
3,032
22,112
—
—
—
34
—
23
—
—
2
—
—
—
—
—
660
395
(111)
333
(9,990)
39
—
—
3,091
13,438
—
—
—
49
—
16
—
—
6
—
—
—
—
—
1,260
537
13
172
(9,990)
194
—
—
8,110
—
—
—
—
(149)
(3,088)
(1,000)
67,542
12,976
—
—
—
—
—
(333)
—
—
(3,168)
(850)
76,167
16,382
—
—
—
—
—
(172)
—
—
(3,479)
(203)
$ 88,695
$
—
(897)
—
—
—
—
—
—
71
—
3,313
—
—
—
—
—
—
—
—
—
3,384
—
1,332
—
—
—
—
—
—
—
—
—
8,110
(897)
7,213
409
367
—
(3,088)
(1,000)
92,777
12,976
3,313
16,289
694
395
(88)
—
(10,000)
41
(3,168)
(850)
96,090
16,382
1,332
17,714
1,309
537
29
—
(10,000)
200
(3,479)
(203)
4,716
$
102,197
Balance December 31, 2012
$
— $
3,162
$
5,624
See notes to consolidated financial statements.
59
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation
Deferred income taxes
Provision for loan losses
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 on sale of other real estate owned
Origination of loans held for sale
Sale of loans
Change in other assets and liabilities:
Accrued interest receivable
Other assets
Accrued interest payable
Other liabilities
Net cash provided by (used in) operating activities
Investing activities:
Proceeds from maturities, calls and sales of securities available for sale
Purchase of securities available for sale
Net redemptions 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 in time deposits
Net increase (decrease) in borrowings
Redemption of preferred stock
Issuance of common stock
Proceeds from exercise of stock options
Cash dividends
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure
Interest paid
Income taxes paid
Supplemental disclosure of noncash investing and financing activities
Unrealized gains (losses) on securities available for sale
Loans transferred to other real estate owned
Pension adjustment
Unrealized gains (losses) on cash flow hedging instruments
Year Ended December 31,
2011
2010
2012
$
16,382
$
12,976
$
8,110
2,270
(848)
12,405
1,205
1,250
537
731
(11)
(39)
(840,140)
837,475
(431)
(1,280)
(274)
457
29,689
34,100
(40,906)
23
(39,570)
(205)
2,683
(891)
(44,766)
61,102
(21,334)
1,595
(10,000)
200
1,309
(3,682)
29,190
14,113
11,507
25,620
$
2,121
(1,341)
14,160
807
911
395
758
(13)
(57)
(616,438)
613,529
(169)
6
(49)
396
27,992
31,098
(39,914)
120
(29,440)
—
8,801
(1,840)
(31,175)
23,025
(1,743)
(2,989)
(10,000)
41
694
(4,018)
5,010
1,827
9,680
11,507
$
10,385
8,949
11,930
6,955
$
2,085
(3,866)
(37)
1
6,300
(5,040)
(860)
(368)
$
$
$
1,887
(2,253)
14,959
3,745
2,180
367
615
(70)
(45)
(748,263)
709,866
335
(1,238)
(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)
(148)
$
$
$
See notes to consolidated financial statements.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of C&F Financial
Corporation and its wholly owned subsidiary, Citizens and Farmers Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation. In addition, C&F Financial Corporation owns C&F Financial Statutory
Trust I and C&F Financial Statutory Trust II, which are unconsolidated subsidiaries. The subordinated debt owed to these trusts
is reported as a liability of the Corporation. The accounting and reporting policies of C&F Financial Corporation and
Subsidiary (the Corporation) conform to accounting principles generally accepted in the United States of America (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, fair value measurements 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: 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. Substantially all of the Corporation’s lending activities are with
customers located in Virginia, Maryland, Tennessee and North Carolina. At December 31, 2012, 30.3 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, 41.1 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.
Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, cash and cash equivalents include
cash, balances due from banks, interest-bearing deposits in banks and federal funds sold, all of which mature within 90 days.
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2012 and 2011,
these reserve balances amounted to zero and $360,000, respectively. The Corporation is required to maintain collateral against
all loss positions in its interest rate swaps which are described in Note 18. At December 31, 2012, the Corporation was required
to maintain collateral of $600,000 in connection with its interest rate swaps.
61
Securities: Investments in debt and equity securities with readily determinable fair values are classified as either held to
maturity, available for sale, or trading, based on management’s intent. Currently all of the Corporation’s investment securities
are classified as available for sale. Available for sale securities are carried at estimated fair value with the corresponding
unrealized gains and losses excluded from earnings and reported in other comprehensive income. Gains or losses are
recognized in earnings on the trade date using the amortized cost of the specific security sold. Purchase premiums and
discounts are recognized in interest income using the interest method over the terms of the securities.
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment
is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend to sell the security or (ii)
it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however,
the Corporation does not intend to sell the security and it is not more-likely-than-not that the Corporation will be required to
sell the security before recovery, the Corporation 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 the Corporation's 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. The Corporation regularly
reviews 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, the
Corporation's best estimate of the present value of cash flows expected to be collected from debt securities, the Corporation's
intention with regard to holding the security to maturity and the likelihood that the Corporation 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, except
potentially for TDRs as noted below.
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
62
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, 2012 and 2011, the Corporation had $16.49 million and $17.09 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.
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 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. Relative to non-classified loans, non-impaired classified loans are assigned a higher allowance factor which
increases with the severity of classification. The characteristics of the loan ratings are as follows:
63
•
•
•
•
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 specifically identified weakness in the borrower’s operations and in 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 because it is probable that the Corporation will not be able to collect all amounts due.
• 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: C&F Mortgage enters into commitments to originate residential mortgage loans for sale 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. C&F Mortgage 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, C&F Mortgage 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, 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.
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, early default or underwriting error.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses arising from valid
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
64
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: The Corporation’s goodwill was recognized in connection with the Bank’s acquisition of C&F Finance in
September 2002. With the adoption of Accounting Standards Update (ASU) 2011-08, Intangible-Goodwill and Other-Testing
Goodwill for Impairment, in 2012, the Corporation is no longer required to perform a test for impairment unless, based on an
assessment of qualitative factors related to goodwill, the Corporation determines that it is more likely than not that the fair
value of C&F Finance is less than its carrying amount. If the likelihood of impairment is more than 50 percent, the Corporation
must perform a test for impairment and may be required to record impairment charges. While not required to do so, the
Corporation completed an annual test for impairment during the fourth quarter of 2012 and determined there was no
impairment to be recognized in 2012.
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.
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 a change in the plan’s funded status in the year in which the change
occurs through other 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 2012 and 2011 determined that the Corporation’s
pension plan was underfunded. As a result, the Corporation recognized pension liabilities of $446,000 at December 31, 2012
and $473,000 at December 31, 2011, and recognized a net loss of $24,000 in 2012, a net loss of $559,000 in 2011 and a net loss
of $139,000 in 2010 as components of other comprehensive income (loss). 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 restricted shares is
charged to income ratably over the vesting period. Compensation expense for the years ended December 31, 2012, 2011 and
65
2010 included $488,000 ($303,000 after tax), $363,000 ($225,000 after tax) and $367,000 ($228,000 after tax), respectively,
for restricted stock granted during 2007 through 2012. As of December 31, 2012, there was $1.69 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 affect 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: The Financial Accounting Standards Board (FASB) guidance requires 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 has applied the two-class method of computing basic and diluted EPS for
each of the years ended December 31, 2012, 2011 and 2010 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
Comprehensive Income and are described more fully in Note 9.
Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other
asset or an other liability in the consolidated balance sheet. The Corporation’s derivative financial instruments have been
designated as and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the Corporation’s 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. The Corporation’s derivative
financial instruments are described more fully in Note 18.
Recent Significant Accounting Pronouncements:
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing – Reconsideration of Effective Control for Repurchase
Agreements. The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the
transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of
default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments
in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should
be applied prospectively to transactions or modification of existing transactions that occur on or after the effective date. The
adoption of the new guidance did not have a material effect on the Corporation’s consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement – Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU is the result of joint efforts by the FASB and
the International Accounting Standards Board to develop a single, converged fair value framework on how (not when) to
measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing
fair value measurement principles in U.S. GAAP, with many of the amendments made to eliminate unnecessary wording
differences between U.S. GAAP and International Financial Reporting Standards. The amendments are effective for interim
and annual periods beginning after December 15, 2011, with prospective application. Early application was not permitted. The
Corporation has included the required disclosures in its consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income – Presentation of Comprehensive Income. The objective
of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the
prominence of items reported in other comprehensive income by eliminating the option to present components of other
comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner
changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive
66
income, the option for an entity to present components of other comprehensive income either net of related tax effects or before
related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied
retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December
15, 2011. The amendments do not require transition disclosures. The Corporation has included the required disclosures in its
consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income - Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income. The amendments in this ASU require an entity to present (either on the face of the
statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts
reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other
disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the
same reporting period. An entity is required to apply these amendments for fiscal years, and interim periods within those years,
beginning on or after December 15, 2012. The Corporation is currently assessing the effect that ASU 2011-03 will have on its
financial statements.
In September 2011, the FASB issued ASU 2011-08, Intangible – Goodwill and Other – Testing Goodwill for Impairment. The
amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more
likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is
necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as
having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair
value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying
amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011. The adoption of the amendments did not have a material effect on the Corporation’s
consolidated financial statements.
In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible Assets for
Impairment. The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill,
reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative
assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a
quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived
asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset's
fair value when testing an indefinite-lived intangible asset for impairment. The amendments are effective for annual and
interim impairment tests performed for fiscal years beginning after September 15, 2012. The Corporation does not expect the
adoption of ASU 2012-02 to have a material effect on its financial statements.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet - Disclosures about Offsetting Assets and Liabilities. This
ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible
for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement.
An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim
periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for
all comparative periods presented. The Corporation does not expect the adoption of ASU 2011-11 to have a material effect on
its financial statements.
In January 2013, the FASB issued ASU 2013-01, Balance Sheet - Clarifying the Scope of Disclosures about Offsetting Assets
and Liabilities. The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815,
Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase
agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements.
An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after
January 1, 2013. The Corporation does not expect the adoption of ASU 2013-01 to have a material effect on its financial
statements.
67
NOTE 2: Securities
The Corporation’s debt and equity securities, all of which are classified as available for sale, at December 31, 2012 and 2011
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
December 31, 2012
Gross
Gross
Unrealized
Unrealized
Losses
Gains
$
$
24
62
9,069
77
9,232
$
$
(3) $
—
(73)
—
(76) $
December 31, 2011
Gross
Gross
Unrealized
Unrealized
Losses
Gains
$
$
39
81
6,998
41
7,159
$
$
(4) $
—
(84)
—
(88) $
Estimated
Fair Value
24,649
2,189
125,875
104
152,817
Estimated
Fair Value
15,283
2,216
127,079
68
144,646
Amortized
Cost
24,628
2,127
116,879
27
143,661
$
$
Amortized
Cost
15,248
2,135
120,165
27
137,575
$
$
The amortized cost and estimated fair value of securities, all of which are classified as available for sale, at December 31, 2012
and 2011, 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, 2012
December 31, 2011
Amortized
Cost
31,572
36,573
49,159
26,330
27
143,661
$
$
Estimated
Fair Value
31,859
$
38,474
53,402
28,978
104
152,817
$
$
Amortized
Cost
29,921
32,983
47,545
27,099
27
$ 137,575
Estimated
Fair Value
30,108
34,169
51,021
29,280
68
144,646
$
$
Proceeds from the maturities, calls and sales of securities available for sale in 2012 were $34.10 million, resulting in gross
realized gains of $11,000; in 2011 were $31.10 million, resulting in gross realized gains of $13,000; in 2010 were $28.69
million, resulting in gross realized gains of $88,000 and gross realized losses of $18,000.
The Corporation pledges securities to primarily secure public deposits and repurchase agreements. Securities with an aggregate
amortized cost of $107.87 million and an aggregate fair value of $115.14 million were pledged at December 31, 2012.
Securities with an aggregate amortized cost of $106.97 million and an aggregate fair value of $112.66 million were pledged at
December 31, 2011.
68
Securities in an unrealized loss position at December 31, 2012, 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
Total temporarily impaired
securities
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
$
5,479
$
3
$
— $
—
$
5,479
$
5,804
71
263
2
6,067
$
11,283
$
74
$
263
$
2
$
11,546
$
3
73
76
There are 32 debt securities totaling $11.55 million considered temporarily impaired at December 31, 2012. 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 2012, the municipal bond sector, which is included in the Corporation's obligations of states and political
subdivisions category of securities, experienced a decline in securities prices due to year-end selling by investors seeking to
capture capital gains, and in part due to uncertainty about tax rates and the tax status of municipal bond interest payments. At
December 31, 2012, approximately 96 percent 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 89 percent were rated “A” or better, as measured by market value, at December 31, 2012. 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, 2012 and no other-than-temporary impairment has been
recognized.
The Corporation’s investment in FHLB stock totaled $3.74 million at December 31, 2012. 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, 2012 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, 2011, 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
Total temporarily impaired
securities
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
$
2,064
$
4
$
— $
—
$
2,064
$
3,305
35
1,328
49
4,633
$
5,369
$
39
$
1,328
$
49
$
6,697
$
4
84
88
69
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,
2012
$ 149,257
5,062
205,052
33,324
5,309
278,186
676,190
(35,907)
$ 640,283
$
$
2011
147,135
5,737
212,235
33,192
6,057
246,305
650,661
(33,677)
616,984
________
1
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending
and commercial business lending.
Consumer loans included $293,000 and $299,000 of demand deposit overdrafts at December 31, 2012 and 2011, respectively.
Loans on nonaccrual status were as follows:
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction:
Construction lending1
Consumer lot lending1
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition & development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
December 31,
2012
2011
$
1,805
$
2,440
—
—
3,426
5,234
15
759
31
191
655
12,116
$
—
—
5,093
—
2,303
673
123
—
381
11,013
Total loans on nonaccrual status
$
________
1 At December 31, 2012 and 2011 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 2012, 2011 and 2010, interest
income would have increased by approximately $654,000, $651,000 and $624,000, respectively.
70
The past due status of loans as of December 31, 2012 was as follows:
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total Past
Due
Current
Total Loans
90+ Days
Past Due
and
Accruing
$
1,402
$
456
$
641
$
2,499
$
146,758
$ 149,257
$
—
(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
$
—
—
—
—
—
—
—
—
3,157
1,905
3,157
1,905
7,650
496
324
8,470
111,177
119,647
—
—
794
270
69
10,111
20,296
$
—
—
—
—
—
2,052
3,004
$
5,234
5,234
28,903
34,137
—
40
22
191
655
7,107
—
15,948
15,948
834
292
260
12,818
30,407
34,486
33,032
5,049
265,368
645,783
35,320
33,324
5,309
278,186
$ 676,190
$
$
$
—
—
—
—
—
—
—
—
—
—
For the purposes of the above table, “Current” includes loans that are 1-29 days past due. In addition, the above table includes
nonaccrual loans that are current of $1.2 million, 30-59 days past due of $3.4 million, 60-89 days past due of $421,000 and 90+
days past due of $7.1 million.
71
The past due status of loans as of December 31, 2011 was as follows:
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past
Due
Total Past
Due
Current
Total Loans
90+ Days
Past Due
and
Accruing
$
1,270
$
1,445
$
533
$
3,248
$
143,887
$ 147,135
$
(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
and development
lending
Builder line
lending
Commercial
business lending
Equity lines
Consumer
Consumer finance
Total
$
—
—
—
—
986
1,311
—
—
480
69
13
5,327
8,145
$
—
—
—
90
—
1,041
3,887
$
—
—
—
—
—
—
33
—
381
947
—
—
5,084
653
5,084
653
2,297
114,475
116,772
—
—
480
192
13
6,749
12,979
$
32,645
17,637
32,645
17,637
44,701
33,000
6,044
239,556
637,682
45,181
33,192
6,057
246,305
$ 650,661
$
$
65
—
—
—
—
—
—
—
3
—
68
For the purposes of the above table, “Current” includes loans that are 1-29 days past due. In addition, the above table includes
nonaccrual loans that are current of $8.6 million, 30-59 days past due of $86,000, 60-89 days past due of $1.5 million and 90+
days past due of $882,000.
Loan modifications that were classified as TDRs during the years ended December 31, 2012 and 2011 were as follows:
Year Ended December 31,
2012
2011
Number of
Loans
1
—
Post-
Modification
Recorded
Investment
122
—
$
Post-
Modification
Recorded
Investment
700
235
$
Number of
Loans
4
3
3
6
—
1
—
1
12
$
278
4,226
—
193
—
108
4,927
1
7
1
8
4
—
28
$
176
5,233
505
2,285
652
—
9,786
(Dollars in thousands)
Real estate – residential mortgage – interest reduction
Real estate – residential mortgage – interest rate concession
Commercial, financial and agricultural:
Commercial real estate lending – interest reduction
Commercial real estate lending – interest rate concession
Commercial real estate lending – principal reduction
Builder line lending – interest rate concession
Commercial business lending – interest rate concession
Consumer – interest reduction
Total
72
TDR additions during the year ended December 31, 2012 included one commercial relationship totaling $3.85 million for
which loan modifications were negotiated. This relationship was classified as substandard at December 31, 2012. TDR
additions during the year ended December 31, 2011 included two commercial relationships totaling $7.14 million for which
loan modifications were negotiated. While these relationships were also in nonaccrual status at December 31, 2012, the
borrowers were servicing the loans in accordance with the modified terms. The Corporation has no obligation to fund
additional advances on its impaired loans.
TDR payment defaults during the years ended December 31, 2012 and 2011 were as follows:
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Builder line lending
Consumer
Total
Year Ended December 31,
2012
2011
Number of
Loans
1
$
Recorded
Investment
84
Number of
Loans
2
Recorded
Investment
153
$
5
1
7
1,386
88
—
$
1,558
—
—
4
157
1
3
$
For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification,
either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.
Impaired loans, which consist solely of TDRs, and the related allowance at December 31, 2012 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
$
2,230
$
Unpaid
Principal
Balance
2,283
Average
Balance-
Impaired
Loans
$
2,266
Interest
Income
Recognized
124
$
Related
Allowance
433
$
7,892
5,234
—
812
—
324
16,492
$
8,190
5,234
—
817
—
324
16,848
$
$
1,775
1,432
—
112
—
49
3,801
$
8,260
5,443
1,407
827
—
324
18,527
$
254
236
—
13
—
16
643
73
Impaired loans, which include TDRs of $17.09 million, and the related allowance at December 31, 2011 were as follows:
Recorded
Investment
in
Loans
$
3,482
$
Unpaid
Principal
Balance
3,698
Average
Balance-
Impaired
Loans
$
3,723
Interest
Income
Recognized
137
$
Related
Allowance
657
$
(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
5,861
5,490
2,285
652
—
324
18,094
$
5,957
5,814
2,285
654
—
324
18,732
$
1,464
1,331
318
161
—
49
3,980
$
6,195
6,116
2,397
663
—
324
19,418
$
102
372
—
6
—
14
631
$
Year Ended December 31,
2011
28,840
14,160
(12,177)
2,854
33,677
2012
33,677
12,405
(13,497 )
3,322
35,907
$
$
$
2010
24,027
14,959
(12,330)
2,184
28,840
$
$
$
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
The following table presents, as of December 31, 2012, 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).
74
(Dollars in thousands)
Allowance for loan losses:
Real Estate
Residential
Mortgage
Real Estate
Construction
Commercial,
Financial &
Agricultural
Equity
Lines
Consumer
Consumer
Finance
Total
Balance at the beginning of year
$
2,379
$
480
$
10,040
$
912
$
319
$ 19,547
$ 33,677
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
$
$
$
737
(793)
35
2,358
433
1,925
Loans:
Ending balance
$ 149,257
Ending balance: individually evaluated
for impairment
$
2,230
Ending balance: collectively evaluated
for impairment
$ 147,027
$
$
$
$
$
$
(56)
—
—
424
$
1,737
(2,074)
121
9,824
— $
3,319
6,505
424
5,062
$
$
53
(159)
79
885
$
94
(337)
207
283
9,840
12,405
(10,134)
(13,497)
2,880
3,322
$ 22,133
$ 35,907
— $
49
$
— $
3,801
885
$
234
$ 22,133
$ 32,106
$
$
$
205,052
$ 33,324
$
5,309
$ 278,186
$ 676,190
— $
13,938
$
— $
324
$
— $ 16,492
5,062
$
191,114
$ 33,324
$
4,985
$ 278,186
$ 659,698
The following table presents, as of December 31, 2011, 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:
Real Estate
Residential
Mortgage
Real Estate
Construction
Commercial,
Financial &
Agricultural
Equity
Lines
Consumer
Consumer
Finance
Total
Balance at the beginning of year
$
1,442
$
581
$
8,688
$
380
$
307
$ 17,442
$ 28,840
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
$
$
$
1,935
(1,096)
98
2,379
657
1,722
Loans:
Ending balance
$
147,135
Ending balance: individually evaluated
for impairment
$
3,482
Ending balance: collectively evaluated
for impairment
$
143,653
$
$
$
$
$
$
(101)
—
—
3,745
(2,566)
173
480
$
10,040
— $
3,274
6,766
480
5,737
$
$
572
(52)
12
912
$
209
(319)
122
319
7,800
14,160
(8,144)
(12,177)
2,449
2,854
$ 19,547
$ 33,677
— $
49
$
— $
3,980
912
$
270
$ 19,547
$ 29,697
$
$
$
212,235
$ 33,192
$
6,057
$ 246,305
$ 650,661
— $
14,288
$
— $
324
$
— $ 18,094
5,737
$
197,947
$ 33,192
$
5,733
$ 246,305
$ 632,567
75
Loans by credit quality indicators as of December 31, 2012 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
Pass
143,947
$
Special
Mention
1,374
$
Substandard
$
2,131
$
Substandard
Nonaccrual
1,805
228
1,905
102,472
19,422
13,469
32,330
31,199
4,746
349,718
$
$
—
—
2,776
1,789
1,926
187
1,327
3
9,382
$
2,929
—
10,973
7,692
538
2,044
767
369
27,443
$
—
—
3,426
5,234
15
759
31
191
11,461
(Dollars in thousands)
Consumer finance
_____________
1 At December 31, 2012, the Corporation does not have any loans classified as Doubtful or Loss.
Performing
277,531
$
Non-Performing
$
655
$
Loans by credit quality indicators as of December 31, 2011 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
Pass
140,304
$
Special
Mention
1,261
$
Substandard
$
3,130
$
Substandard
Nonaccrual
2,440
2,214
653
96,773
13,605
12,480
41,590
31,935
5,271
344,825
$
$
—
—
5,413
9,939
1,434
2,001
298
10
20,356
$
2,870
—
9,493
9,101
1,420
917
836
776
28,543
$
—
—
5,093
—
2,303
673
123
—
10,632
(Dollars in thousands)
Consumer finance
Performing
245,924
$
Non-Performing
$
381
$
__________
1 At December 31, 2011, the Corporation did not have any loans classified as Doubtful or Loss.
76
Total1
149,257
$
3,157
1,905
119,647
34,137
15,948
35,320
33,324
5,309
398,004
$
Total
278,186
Total1
147,135
$
5,084
653
116,772
32,645
17,637
45,181
33,192
6,057
404,356
$
Total
246,305
NOTE 5: Other Real Estate Owned
At December 31, 2012 and 2011, OREO was $6.24 million and $6.06 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 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,
2012
2011
$
$
9,986
3,866
205
(1,240)
(2,683)
39
10,173
(3,937)
6,236
$
$
14,653
5,040
—
(963)
(8,801)
57
9,986
(3,927)
6,059
Year Ended December 31,
2011
2010
2012
$
3,927
1,250
(1,240 )
3,937
$
3,979
911
(963)
3,927
$
$
2,402
2,180
(603)
3,979
Net expenses applicable to OREO, other than the provision for losses, were $384,000, $516,000 and $931,000 for the years
ended December 31, 2012, 2011 and 2010, 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
December 31,
2012
6,506
25,604
24,096
56,206
(29,123)
27,083
$
$
$
$
2011
6,506
25,967
23,032
55,505
(27,043)
28,462
77
NOTE 7: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, $100 or more
Other time deposits
Remaining maturities on time deposits at December 31, 2012 are as follows:
(Dollars in thousands)
2013
2014
2015
2016
2017
Thereafter
NOTE 8: Borrowings
The table below presents selected information on short-term borrowings:
(Dollars in thousands)
Customer repurchase agreements1
Federal Reserve Bank discount window2
FHLB advances3
Federal funds purchased4
Balance outstanding at year end
Maximum balance at any month end during the year
Average balance for the year
Weighted average rate for the year
Weighted average rate on borrowings at year end
Estimated fair value at year end
December 31,
2012
$ 138,560
148,049
$ 286,609
$
$
2011
148,617
159,326
307,943
$ 136,234
59,092
47,656
17,053
7,530
19,044
$ 286,609
December 31,
$
2012
9,139
—
—
—
9,139
$
$ 22,383
8,704
$
0.46%
0.50%
9,139
$
2011
4,644
—
—
2,900
7,544
7,750
5,831
0.69%
0.56%
7,544
$
$
$
$
$
1 Secured transactions with customers, which generally mature the day following the day sold.
2 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. At December 31, 2012 and 2011 there were no short-term borrowings from the
Federal Reserve Bank.
3 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, 2012 and 2011 there were no short-term FHLB advances outstanding.
4 Advances against $59 million in federal funds lines with correspondent banks.
Long-term borrowings at December 31, 2012 consist of a repurchase agreement with a third-party correspondent bank, 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
78
December 31, 2012 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, 2012 was $75.49 million. C&F Finance’s revolving
bank line of credit agreement contains covenants regarding C&F Finance’s capital adequacy, collateral performance, adequacy
of the allowance for loan losses and interest expense coverage. C&F Finance satisfied all such covenants during 2012. Long-
term advances from the FHLB at December 31, 2012 consist of $35.00 million of convertible advances and $17.50 million of
fixed rate hybrid advances. 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 advances provide fixed-rate
funding until the stated maturity date. The Bank may add interest rate caps or floors at a future date, at which time the cost of
the caps or floors will be added to the advance rate. The table below presents selected information on the FHLB advances:
(Dollars in thousands)
Balance Outstanding at December 31, 2012
Fixed Rate Hybrid Advances
Convertible Advances
Interest Rate
Maturity Date
Next
Conversion
Option Date
$7,500
$7,500
$2,500
$5,000
$7,500
$7,500
$5,000
$5,000
$5,000
3.39%
0.80
1.28
3.95
3.69
3.70
4.06
2.93
3.59
08/10/15
08/30/16
08/30/18
11/17/14
11/28/14
10/19/17
10/25/17
11/27/17
06/06/18
02/19/13
02/28/13
01/22/13
01/25/13
02/27/13
The contractual maturities of long-term borrowings at December 31, 2012 are as follows:
(Dollars in thousands)
2013
2014
2015
2016
2017
Thereafter
Fixed Rate
$
—
12,500
7,500
7,500
17,500
7,500
52,500
$
$
$
Floating
Rate
— $
—
—
75,487
—
5,000
80,487
$
Total
—
12,500
7,500
82,987
17,500
12,500
132,987
The Corporation’s unused lines of credit for future borrowings total approximately $199.16 million at December 31, 2012,
which consists of $48.59 million available from the FHLB, $44.51 million on C&F Finance’s revolving bank line of credit,
$47.06 million available from the Federal Reserve Bank and $59.00 million under federal funds agreements with third party
financial institutions. 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 3.46% at December 31,
2012. The fixed rate portion of the securities converted 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
79
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.
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).
On July 27, 2011, the Corporation redeemed $10.00 million of the total $20.00 million liquidation preference of its Series A
Preferred Stock. The Corporation paid $10.10 million to redeem this portion of the Series A Preferred Stock, consisting of
$10.00 million in liquidation preference and $100,000 of accrued and unpaid dividends associated with the preferred stock
being redeemed. On April 11, 2012, the Corporation redeemed the remaining $10.00 million of the total $20.00 million
liquidation preference of its Series A Preferred Stock. The Corporation paid $10.08 million to redeem this portion of the Series
A preferred Stock, consisting of $10.00 million in liquidation preference and $78,000 of accrued and unpaid dividends
associated with the preferred stock redemption. The funds for both of these redemptions were provided by existing financial
resources of the Corporation; therefore, there was no dilution to the Corporation's common shareholders. Further, the
Corporation will pay no future dividends on the Series A Preferred Stock.
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 proceeds received from
the issuance of the Series A Preferred Stock, approximately $792,000 was attributable to the Warrant, based on the relative fair
value of the Warrant on the date of issuance. The Corporation has not repurchased the Warrant as of December 31, 2012. If the
Corporation repurchases the Warrant in a future period, the repurchase is not expected to have any effect on the Corporation's
earnings or earnings per share in the period of repurchase.
Common Shares. The Corporation did not repurchase any shares of its common stock during the years ended December 31,
2012, 2011 or 2010.
Other Comprehensive Income
The following table presents the cumulative balances of the components of other comprehensive income, net of deferred taxes
of $2.51 million, $1.79 million and $30,000 as of December 31, 2012, 2011 and 2010, respectively.
80
(Dollars in thousands)
Net unrealized gains on securities
Net unrecognized loss on cash flow hedges
Net unrecognized losses on defined benefit plan
Total cumulative other comprehensive income
$
$
2012
December 31,
2011
2010
$
5,951
(313 )
(922 )
4,716
$
4,596
(314)
(898)
3,384
$
$
501
(91)
(339)
71
The following tables present the changes in accumulated other comprehensive income, net of tax.
(Dollars in thousands)
Unrealized Loss
on Cash Flow
Hedging
Instruments
Unrealized
Holding Gains
on Securities
Defined
Benefit
Pension Plan
Assets and
Benefit
Obligations
Balance at December 31, 2011
Net change for the twelve months ended December 31, 2012
Balance at December 31, 2012
$
$
(314)
1
(313)
$
$
4,596
1,355
5,951
$
$
(898) $
(24)
(922) $
(Dollars in thousands)
Balance at December 31, 2010
Net change for the twelve months ended December 31, 2011
Balance at December 31, 2011
(Dollars in thousands)
Unrealized Loss
on Cash Flow
Hedging
Instruments
(91)
(223)
$
$
(314)
Unrealized Loss
on Cash Flow
Hedging
Instruments
Balance at December 31, 2009
Net change for the twelve months ended December 31, 2010
Balance at December 31, 2010
$
$
Defined
Benefit
Pension Plan
Assets and
Benefit
Obligations
$
(339) $
(559)
$
(898) $
$
Unrealized
Holding Gains
on Securities
501
4,095
4,596
$
Unrealized
Holding Gains
(Losses) on
Securities
1,168
(667)
501
$
$
— $
(91)
(91)
$
Defined
Benefit
Pension Plan
Assets and
Benefit
Obligations
(200) $
(139)
(339) $
Total
3,384
1,332
4,716
Total
71
3,313
3,384
Total
968
(897)
71
The following tables present the change in each component of other comprehensive income on a pre-tax and after-tax basis for
the twelve months ended December 31, 2012, 2011 and 2010.
(Dollars in thousands)
Defined benefit pension plan:
Net loss
Amortization of prior service costs
Defined benefit pension plan assets and benefit obligations, net
Unrealized loss on cash flow hedging instruments
Unrealized holding gains on securities
Total increase in other comprehensive income
Twelve Months Ended December 31, 2012
Pre-Tax
Tax Expense
(Benefit)
Net-of-Tax
$
$
31 $
(68)
(37)
1
2,085
2,049 $
11
(24)
(13)
—
730
717
$
$
20
(44)
(24)
1
1,355
1,332
81
(Dollars in thousands)
Defined benefit pension plan:
Net loss
Amortization of net obligation at transition
Amortization of prior service costs
Defined benefit pension plan assets and benefit obligations, net
Unrealized loss on cash flow hedging instruments
Unrealized holding gains on securities
Total increase in other comprehensive income
(Dollars in thousands)
Defined benefit pension plan:
Net loss
Amortization of net obligation at transition
Amortization of prior service costs
Defined benefit pension plan assets and benefit obligations, net
Unrealized loss on cash flow hedging instruments
Unrealized holding losses on securities
Total decrease in other comprehensive income
Twelve Months Ended December 31, 2011
Pre-Tax
Tax Expense
(Benefit)
Net-of-Tax
$
$
(788) $
(4)
(68)
(860)
(368)
6,300
5,072 $
(276)
(1)
(24)
(301)
(145)
2,205
1,759
$
$
(512)
(3)
(44)
(559)
(223)
4,095
3,313
Twelve Months Ended December 31, 2010
Pre-Tax
Tax Expense
(Benefit)
Net-of-Tax
$
$
(142) $
(5)
(68)
(215)
(148)
(1,026)
(1,389) $
(50)
(2)
(24)
(76)
(57)
(359)
(492)
$
$
(92)
(3)
(44)
(139)
(91)
(667)
(897)
The Corporation reclassified net gains from securities of $7,000, $8,000 and $46,000 from other comprehensive income to
earnings for the years ended December 31, 2012, 2011 and 2010, respectively.
Earnings Per Common Share
The components of the Corporation’s earnings per common share calculations are as follows:
(Dollars in thousands)
Net income
Accumulated dividends on Series A Preferred Stock
Amortization of Series A Preferred Stock discount
Net income available to common shareholders
Weighted average number of common shares used in earnings per common
share—basic
Effect of dilutive securities:
Stock option awards and warrant
Weighted average number of common shares used in earnings per common
share—assuming dilution
$
$
$
December 31,
2011
12,976
(850)
(333)
11,793
$
2012
16,382
(139 )
(172 )
16,071
2010
8,110
(1,000)
(149)
6,961
$
$
3,215,049
3,135,645
3,085,025
90,853
36,632
18,444
3,305,902
3,172,277
3,103,469
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 215,000, 316,000 and 361,000 shares issuable upon exercise of options for the years
ended December 31, 2012, 2011 and 2010, respectively, were not included in computing diluted earnings per common share
because they were anti-dilutive.
82
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,
2011
2010
2012
8,494
(848 )
7,646
$
$
7,076
(1,341)
5,735
$
$
5,202
(2,253)
2,949
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
Year Ended December 31,
2012
Percent of
Pre-tax
Income
2011
Percent of
Pre-tax
Income
2010
Percent of
Pre-tax
Income
$
8,410
35.0% $
6,362
34.0% $
3,760
34.0%
(1,631)
(6.8)
(1,652)
(8.8)
(1,516)
(13.7)
78
1,133
—
—
(225)
(119)
7,646
$
0.3
4.7
—
—
(0.9)
(0.5)
31.8% $
98
1,114
—
41
(180)
(48)
5,735
0.5
6.0
—
100
787
0.9
7.1
(5)
(0.1)
0.2
(1.0)
(0.3)
30.6% $
—
(135)
(42)
2,949
—
(1.2)
(0.3)
26.7%
83
The Corporation’s net deferred income taxes totaled $14.9 million and $14.8 million at December 31, 2012 and 2011,
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 and OREO losses
Reserve for indemnification losses
OREO expenses
Deferred compensation
Other-than-temporary impairment of Fannie Mae and Freddie Mac preferred stock
Share-based compensation
Interest on nonaccrual loans
Defined benefit plan
Cash flow hedges
Other
Deferred tax asset
Deferred tax liability
Goodwill and other intangible assets
Depreciation
Net unrealized gain on securities available for sale
Deferred tax liability
Net deferred tax asset
December 31,
2012
2011
$
$
15,036
795
226
2,049
614
340
244
156
200
1,284
20,944
(2,794)
(59)
(3,205)
(6,058)
14,886
$
$
14,128
647
381
1,916
614
331
119
165
201
1,240
19,742
(2,509)
(3)
(2,475)
(4,987)
14,755
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
2009.
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 full-time 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. All employee contributions are fully vested upon contribution. 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, or earlier in the event of retirement, death or attainment of age 65 while an
employee. The amounts charged to expense under this plan were $387,000, $405,000 and $372,000 in 2012, 2011 and 2010,
respectively.
C&F Mortgage maintains a Defined Contribution 401(k) Savings Plan that authorizes a voluntary salary deferral of from 1% to
100% of compensation (with a discretionary company match), subject to statutory limitations. Substantially all employees who
have attained the age of eighteen are eligible to participate on the first day of the next month following employment date. The
plan provides for an annual discretionary contribution to the account of each eligible employee based in part on C&F
Mortgage’s profitability for a given year, and on each participant’s contributions to the plan. Contributions may be invested in
various investment funds offered under the plan. All employee contributions are fully vested upon contribution. An employee is
vested 25% in the employer’s contributions after two years of service, 50% after three years, 75% after four years, and fully
vested after five years. The amounts charged to expense under this plan were $29,000, $12,000 and $0 in 2012, 2011 and
2010, 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 $147,000, $139,000 and $108,000 in
2012, 2011 and 2010, respectively.
84
Individual performance bonuses are awarded annually to certain members of management under the Corporation's Management
Incentive 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 $1.02 million, $844,000 and $816,000 in 2012, 2011 and 2010, respectively. In accordance with employment
agreements for certain senior officers of C&F Mortgage, performance bonuses of $1.05 million, $657,000 and $336,000 were
expensed in 2012, 2011 and 2010, respectively. Performance used in determining the awards is directly related to the
profitability of C&F Mortgage.
The Bank has a non-contributory, defined benefit pension plan (Cash Balance Plan) for all full-time employees over 21 years of
age. Under the Cash Balance Plan, the benefit account 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.
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 Cash Balance Plan and to enhance retirement
benefits by providing supplemental contributions from time to time. Expenses under this plan were $175,000, $153,000 and
$124,000 in 2012, 2011 and 2010, 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.
85
The following table summarizes the projected benefit obligations, plan assets, funded status and rate assumptions associated
with the Bank’s Cash Balance Plan based upon actuarial valuations.
(Dollars in thousands)
Change in benefit obligation
Projected benefit obligation, beginning
Service cost
Interest cost
Actuarial loss
Benefits paid
Projected benefit obligation, ending
Change in plan assets
Fair value of plan assets, beginning
Actual return on plan assets
Employer contributions
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
2012
8,768
636
395
505
(246)
10,058
8,295
1,063
500
(246)
9,612
(446 )
(446 )
2,495
—
(1,077)
(496)
922
$
$
$
$
$
$
$
$
December 31,
2011
2010
$
$
$
$
$
$
$
$
7,915
611
438
154
(350)
8,768
7,261
(116)
1,500
(350)
8,295
(473)
(473)
2,525
—
(1,144)
(483)
898
$
$
$
$
$
$
$
$
6,816
531
397
523
(352)
7,915
6,385
828
400
(352)
7,261
(654)
(654)
1,738
(4)
(1,212)
(183)
339
4.0%
8.0%
3.0%
4.5%
8.0%
4.0%
5.5%
8.0%
4.0%
The accumulated benefit obligation was $10.06 million and $8.77 million as of the actuarial valuation dates in 2012 and 2011,
respectively.
86
(Dollars in thousands)
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net obligation at transition
Recognized net actuarial loss
Net periodic benefit cost
$
Other changes in plan assets and benefit obligations recognized in other
comprehensive income
Net loss (gain)
Amortization of net obligation at transition
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,
2011
2010
2012
$
636
395
(633)
(68)
—
106
436
(31)
—
68
(13)
24
460
$
611
438
(581)
(68)
(4)
63
459
788
4
68
(301)
559
1,018
$
$
531
397
(495)
(68)
(5)
48
408
142
5
68
(76)
139
547
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 $79,000, zero 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
The benefits expected to be paid by the plan in the next ten years are as follows:
January 1,
2012
2011
2010
4.5%
8.0%
3.0%
5.5%
8.0%
4.0%
6.0%
8.0%
4.0%
(Dollars in thousands)
2013
2014
2015
2016
2017
2018 – 2022
$
$
167
760
234
717
509
3,656
6,043
The Bank selects the expected long-term rate of return on assets in consultation with its investment advisors and actuary, and
with concurrence from their auditors. 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.
87
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the
plan is assumed to continue in force and not terminate during the period during which assets are invested. However,
consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and
expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly
within periodic costs).
The Bank’s defined benefit pension plan’s weighted average asset allocations by asset category are as follows:
Mutual funds-fixed income
Mutual funds-equity
Cash and equivalents
* Less than one percent.
December 31,
2012
2011
39%
61
*
100%
40%
60
*
100%
As of December 31, 2012 and 2011, the fair value of the defined benefit plan assets is as follows:
December 31, 2012
(Dollars in thousands)
Mutual funds-fixed income 1
Mutual funds-equity 2
Cash and equivalents 3
Total pension assets
(Dollars in thousands)
Mutual funds-fixed income 1
Mutual funds-equity 2
Cash and equivalents 3
Total pension assets
$
$
$
$
Fair Value Measurements Using
Level 2
Level 1
Level 3
Assets at Fair
Value
3,735
5,867
10
9,612
$
$
—
—
—
—
$
$
— $
—
—
— $
3,735
5,867
10
9,612
December 31, 2011
Fair Value Measurements Using
Level 2
Level 1
Level 3
Assets at Fair
Value
3,306
4,983
6
8,295
$
$
—
—
—
—
$
$
— $
—
—
— $
3,306
4,983
6
8,295
_________
1
This category includes investments in mutual funds focused on fixed income securities with both short-term and long-term
investments. The funds are valued using the net asset value method in which an average of the market prices for the
underlying investments is used to value the funds.
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.
2
3
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a
targeted asset allocation of 39% fixed income and 61% 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.
88
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 $690,000 and $603,000 at December 31, 2012 and 2011,
respectively. New advances to directors and officers totaled $231,000 and repayments totaled $144,000 in the year ended
December 31, 2012. These loans were made in the ordinary course of business on substantially the same terms and conditions,
including interest rates, collateral and repayment terms, as those prevailing at the same time for comparable transactions with
unrelated persons, and, in the opinion of management and the Corporation’s Board of Directors, do not involve more than
normal risk or present other unfavorable features.
NOTE 13: Share-Based Plans
On April 15, 2008, the Corporation’s shareholders approved the Amended and Restated C&F Financial Corporation 2004
Incentive Stock Plan (the Amended 2004 Plan), which, among other things, expanded the group of eligible award recipients to
include certain key employees of the Corporation, as well as non-employee directors (including non-employee regional or
advisory directors). The Amended 2004 Plan authorizes an aggregate of 500,000 shares of Corporation common stock to be
issued as equity awards in the form of stock options, stock appreciation rights, restricted stock and/or restricted stock units to
key employees and non-employee directors. Since the Amended 2004 Plan’s approval in 2008, 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 plan that 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. All options outstanding under this plan are exercisable as of
December 31, 2012. All options expire ten years from the grant date.
Prior to the approval of the plan in 2004, 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, 2012. 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, 2012. 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, 2012. 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 expired in 2009, and regional directors of the Bank were added to the group of eligible award recipients
under the Amended 2004 Plan.
89
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
2012
Exercise
Price*
36.68
$
Intrinsic
Value
—
22.70
—
2011
2010
Shares
390,617
—
(34,800)
(30,750)
Exercise
Price*
$ 34.95
—
18.70
35.07
Shares
417,717
—
(23,100)
(4,000)
$
Exercise
Price*
33.71
—
15.90
15.75
Shares
325,067
—
(48,635)
—
276,432
$
39.14
$
176
325,067
$ 36.68
390,617
$
34.95
The total intrinsic value of in-the-money options exercised in 2012 was $608,000. Cash received from option exercises during
2012 was $1.10 million. The Corporation has a policy of issuing new shares to satisfy the exercise of stock options.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2012:
Range of Exercise Prices
$35.20 to $39.60
$40.50 to $46.20
Total
* Weighted average
Number Outstanding
at December 31, 2012
206,732
69,700
276,432
Options Outstanding and Exercisable
Remaining
Contractual Life
(Years)*
Exercise Price*
2.7
1.3
2.3
$
$
38.25
41.77
39.14
As permitted under the Amended 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:
2012
2011
2010
Nonvested at beginning of year
Granted
Vested
Cancelled
Nonvested at end of year
Weighted-
Average
Grant Date
Fair Value
22.59
$
33.16
28.85
22.60
24.69
$
Shares
87,125
29,025
(16,100)
(2,350)
97,700
Shares
86,025
31,100
(22,650)
(7,350)
87,125
Weighted-
Average
Grant Date
Fair Value
25.89
23.80
35.44
26.80
22.59
$
$
Shares
58,725
28,850
—
(1,550)
86,025
Weighted-
Average
Grant Date
Fair Value
28.59
20.70
—
31.40
25.89
$
$
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 2012, 2011 and 2010 was
$33.16, $23.80 and $20.70, respectively. Compensation expense is charged to income ratably over the vesting periods, and was
$488,000 in 2012, $363,000 in 2011 and $367,000 in 2010. As of December 31, 2012, there was $1.69 million of total
unrecognized compensation cost related to restricted stock granted under the Amended 2004 Plan. This amount is expected to
be recognized through 2017.
90
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 $715.20 million and $712.13 million, respectively, at December 31, 2012 and $690.07 million and $687.49
million, respectively, at December 31, 2011. Management believes that, as of December 31, 2012, the Corporation and the
Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2012, 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.
The Corporation’s and the Bank’s actual capital amounts and ratios are presented in the following table:
91
Actual
Minimum Capital
Requirements
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31, 2012:
Total Capital (to Risk-Weighted
Assets)
Corporation
Bank
$ 118,824
115,892
16.6% $
16.3
57,216
56,970
8.0%
8.0
$
N/A
71,213
N/A
10.0%
Tier 1 Capital (to Risk-Weighted
Assets)
Corporation
Bank
Tier 1 Capital (to Average Tangible
Assets)
Corporation
Bank
As of December 31, 2011:
Total Capital (to Risk-Weighted
Assets)
109,552
106,657
109,552
106,657
15.3
15.0
11.5
11.2
28,608
28,485
38,205
38,091
4.0
4.0
4.0
4.0
N/A
42,728
N/A
47,613
N/A
6.0
N/A
5.0
Corporation
Bank
$ 113,427
111,029
16.4% $
16.2
55,205
54,999
8.0%
8.0
N/A
$
68,749
N/A
%
10.0
Tier 1 Capital (to Risk-Weighted
Assets)
Corporation
Bank
Tier 1 Capital (to Average Tangible
Assets)
Corporation
Bank
104,492
102,126
104,492
102,126
15.1
14.9
11.5
11.3
27,603
27,500
36,362
36,252
4.0
4.0
4.0
4.0
N/A
41,249
N/A
45,315
N/A
6.0
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. On July 27, 2011, the Corporation
redeemed $10.00 million, or 50 percent, of the $20.00 million of Series A Preferred Stock. The Corporation paid $10.10
million to redeem the preferred stock, consisting of $10.00 million in liquidation value and $100,000 of accrued and unpaid
dividends associated with the preferred stock. On April 11, 2012, the Corporation redeemed the remaining 10,000 shares of its
Preferred Stock issued to Treasury in January 2009 under the CPP. The redemption consisted of $10.0 million in liquidation
value and $78,000 of accrued and unpaid dividends associated with the Preferred Stock. The funds for both redemptions were
provided by existing financial resources of the Corporation and no new capital was issued. As of December 31, 2012, the
Warrant remains outstanding. The outstanding Series A Preferred Stock (including the Warrant) was treated as Tier 1 capital at
December 31, 2011.
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 2012 and 2011.
92
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 $87.06 million and $83.50 million at December 31, 2012 and 2011,
respectively.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to
a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to
customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $8.12
million and $9.27 million at December 31, 2012 and 2011, respectively.
At December 31, 2012, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to approximately
$76.77 million and loans held for sale of $72.73 million. C&F Mortgage has entered into corresponding commitments with
third party investors to sell loans of approximately $149.50 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 counterparties. As is
customary in the industry, the agreements with these counterparties require C&F Mortgage to extend representations and
warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the
agreements, the counterparties are entitled to make loss claims and repurchase requests of C&F Mortgage for loans that contain
covered deficiencies. C&F Mortgage has obtained early payment default recourse waivers for a significant portion of its
business. Recourse periods for early payment default for the remaining counterparties 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. C&F Mortgage has
adopted a reserve methodology whereby provisions are made to an expense account to fund a reserve maintained as a liability
account on the balance sheet for potential losses. The loan performance data of sold loans is not made available to C&F
Mortgage by the counterparties making the evaluation of potential losses inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. A schedule of expected losses on loans with claims
or indemnifications is maintained to ensure the reserve is adequate to cover estimated losses. Often times, claims are not
factually validated and they are rescinded. Once claims are validated and the actual or potential loss is agreed upon with the
counterparties, the reserve is charged and a cash payment is made to settle the claim. The balance of the indemnification
reserve has adequately provided for all claims in each of the three years ended December 31, 2012. The following table
presents the changes in the allowance for indemnification losses for the periods presented:
93
(Dollars in thousands)
Allowance, beginning of period
Provision for indemnification losses
Payments
Allowance, end of period
$
$
Year Ended December 31,
2011
2010
2012
$
1,702
1,205
(815 )
2,092
$
1,291
807
(396)
1,702
$
$
2,538
3,745
(4,992)
1,291
Risks also arise from the possible inability of counterparties to meet the terms of their contracts. C&F Mortgage has procedures
in place to evaluate the credit risk of investors and does not expect any counterparty to fail to meet its obligations.
The Corporation is committed under noncancelable operating leases for certain office locations. Rent expense associated with
these operating leases was $1.47 million, $1.49 million and $1.26 million, for the years ended December 31, 2012, 2011 and
2010, respectively.
Future minimum lease payments due under these leases as of December 31, 2012 are as follows:
(Dollars in thousands)
2013
2014
2015
2016
2017
Thereafter
$
$
1,186
812
718
372
158
37
3,283
NOTE 16: Fair Value of Assets and Liabilities
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use
of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three
broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels.
These levels are:
• Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and
liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities.
• Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
• Level 3—Valuation is determined using model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect the Corporation's estimates of assumptions that
market participants would use in pricing the respective asset or liability. Valuation techniques may include the use of
pricing models, discounted cash flow models and similar techniques.
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, 2012.
94
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain
assets recorded at fair value on a recurring basis in the financial statements.
Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements,
but may also use Level 1 or Level 3 measurements if required by the future composition of the portfolio. At December 31,
2012 and 2011, the Corporation's entire investment securities portfolio was valued using Level 2 fair value measurements. The
Corporation has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The
vendor's sources for security valuation are Standard & Poor's Securities Evaluations Inc. ("SPSE") and Thomson Reuters
Pricing Service (“TRPS”). Both sources provide opinions, known as evaluated prices, as to the value of individual securities
based on model-based pricing techniques that are partially based on available market data, including prices for similar
instruments in active markets and prices for identical assets in markets that are not active. SPSE provides evaluated prices for
the Corporation's obligations of states and political subdivisions category of securities. SPSE uses proprietary pricing models
and pricing systems, mathematical tools and judgment to determine an evaluated price for a security based upon a hierarchy of
market information regarding that security or securities with similar characteristics. TRPS provides evaluated prices for the
Corporation's U.S. government agencies and corporations and mortgage-backed categories of securities. Securities in the U.S.
government agencies and corporations category are individually evaluated on an option adjusted spread basis for callable issues
or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark
curve for non-callable issues. Securities in the mortgage-backed category are grouped into aggregate categories defined by
issuer program, weighted average coupon, and weighted average maturity. Each aggregate is benchmarked to a relative
mortgage-backed to-be-announced (“TBA”) price. TBA prices are obtained from market makers and live trading systems.
Derivative payable. The Corporation’s derivative financial instruments have been designated as and qualify as cash flow
hedges. The fair value of derivatives is determined using the discounted cash flow method.
The following table presents the balances of financial assets measured at fair value on a recurring basis.
December 31, 2012
(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
Fair Value Measurements Using
Level 2
Level 1
Level 3
Assets at
Fair
Value
— $
—
—
—
— $
— $
— $
24,649
2,189
125,875
104
152,817
513
513
$
$
$
$
—
—
—
—
—
—
—
$
$
$
$
24,649
2,189
125,875
104
152,817
513
513
$
$
$
$
95
(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
December 31, 2011
Fair Value Measurements Using
Level 2
Level 1
Level 3
Assets at
Fair
Value
$
$
$
$
— $
—
—
—
— $
— $
— $
15,283
2,216
127,079
68
144,646
515
515
$
$
$
$
—
—
—
—
—
—
—
$
$
$
$
15,283
2,216
127,079
68
144,646
515
515
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Corporation may be required, from time to time, to measure and recognize certain other financial assets at fair value on a
nonrecurring basis in accordance with GAAP. The following describes the valuation techniques and inputs used by the
Corporation in determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the financial
statements.
Impaired loans. The Corporation does not record loans at fair value on a recurring basis. However, there are instances when a
loan is considered impaired and an allowance for loan losses is established. A loan is considered impaired when it is probable
that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. All TDRs
are considered impaired loans. The Corporation measures 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.
Additionally, management reviews current market conditions, borrower history, past experience with similar loans and
economic conditions. Based on management's review, additional write-downs to fair value may be incurred. The Corporation
maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. When
the fair value of an impaired loan is based solely on observable cash flows, market price or a current appraisal, the Corporation
records the impaired loan as nonrecurring Level 2. However, if based on management's review, additional write-downs to fair
value are required, the Corporation records the impaired loan as nonrecurring Level 3.
The measurement of impaired loans of less than $500,000 is based on each loan's future cash flows discounted at the loan's
effective interest rate rather than the market rate of interest, which is not a fair value measurement and is therefore excluded
from fair value disclosure requirements.
Other real estate owned. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at
the lower of the loan balance or the fair value less costs to sell at the date of foreclosure. Initial fair value is based upon
appraisals the Corporation obtains from independent licensed appraisers. 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. As such, we record OREO as nonrecurring Level 3.
96
The following table presents the balances of financial assets measured at fair value on a non-recurring basis.
December 31, 2012
(Dollars in thousands)
Impaired loans, net
Other real estate owned net
Total
(Dollars in thousands)
Impaired loans, net
Other real estate owned, net
Total
$
$
$
$
Fair Value Measurements Using
Level 2
Level 3
Level 1
Assets at Fair
Value
— $
—
— $
— $
—
— $
9,074
6,236
15,310
$
$
9,074
6,236
15,310
December 31, 2011
Fair Value Measurements Using
Level 2
Level 3
Level 1
Assets at Fair
Value
— $
—
— $
— $
—
— $
10,182
6,059
16,241
$
$
10,182
6,059
16,241
The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at
fair value on a non-recurring basis as of December 31, 2012:
(Dollars in thousands)
Fair Value
Valuation Technique(s)
Unobservable Inputs
Range of Inputs
Fair Value Measurements at December 31, 2012
Impaired loans, net
$
9,074
Appraisals
Discount to reflect current market
conditions and estimated selling costs
Other real estate owned, net
Total
6,236
15,310
$
Fair Value of Financial Instruments
Appraisals
Discount to reflect current market
conditions and estimated selling costs
5% - 40%
0% - 70%
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial
assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring
basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the
Corporation.
The following describes the valuation techniques used by the Corporation to measure its financial instruments at fair value as of
December 31, 2012 and 2011.
Cash and short-term investments. The nature of these instruments and their relatively short maturities provide for the
reporting of fair value equal to the historical cost.
Loans, net. The fair value of performing loans is estimated using a discounted expected future cash flows analysis based on
current rates being offered on similar products in the market. An overall valuation adjustment is made for specific credit risks
as well as general portfolio risks. Based on the valuation methodologies used in assessing the fair value of loans and the
associated valuation allowance, these loans are considered Level 3. See Note 1 for more information on the valuation
methodologies used in creating the valuation allowance for performing loans.
Loan totals, as listed in the table below, include impaired loans. For valuation techniques used in relation to impaired loans, see
the Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis section in this Note 16.
97
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 purchase prices agreed
to by third party investors, which are obtained simultaneously with the rate lock commitments made to individual borrowers.
Fair value is generally not materially different than cost (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, 2012.
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 in active markets (Level 2).
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 in active markets (Level 2).
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 following tables reflect the carrying amounts and estimated fair values of the Corporation's financial instruments whether
or not recognized on the balance sheet at fair value.
Fair Value Measurements at December 31, 2012 Using
Total Fair
Value
Level 3
Level 1
Level 2
$
25,620
$
—
—
5,673
$
$
399,575
—
—
837
—
152,817
—
74,964
—
—
290,483
158,027
513
—
$
— $
651,133
—
—
$
— $
—
—
—
25,620
152,817
651,133
74,964
5,673
399,575
290,483
158,027
513
837
(Dollars in thousands)
Financial assets:
Cash and short-term investments
Securities available for sale
Loans, net
Loans held for sale, net
Accrued interest receivable
Financial liabilities:
Demand deposits
Time deposits
Borrowings
Derivative payable
Accrued interest payable
Carrying
Value
$
$
25,620
152,817
640,283
72,727
5,673
399,575
286,609
162,746
513
837
98
(Dollars in thousands)
Financial assets:
Cash and short-term investments
Securities available for sale
Loans, net
Loans held for sale, net
Accrued interest receivable
Financial liabilities:
Demand deposits
Time deposits
Borrowings
Derivative payable
Accrued interest payable
Carrying
Value
$
$
11,507
144,646
616,984
70,062
5,242
338,473
307,943
161,151
515
1,111
Fair Value Measurements at December 31, 2011 Using
Total Fair
Value
Level 3
Level 1
Level 2
$
11,507
$
—
—
5,242
$
$
338,473
—
—
1,111
—
144,646
—
72,859
—
—
312,095
157,863
515
—
$
— $
624,219
—
—
$
— $
—
—
—
11,507
144,646
624,219
72,859
5,242
338,473
312,095
157,863
515
1,111
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.
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.
99
(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 (benefit) expense
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
Year Ended December 31, 2012
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$
32,301
—
6,124
38,425
2,400
7,404
15,562
12,385
37,751
674
(1,479)
$
2,153
$ 813,817
—
$
739
$
$
Retail
Banking
32,715
—
5,957
38,672
6,000
9,154
14,722
12,026
41,902
(3,230)
(2,798)
(432)
$
$ 772,552
—
$
957
$
$
$
$
$
$
$
$
$
$
$
$
2,358
20,572
4,315
27,245
165
483
16,675
6,265
23,588
47,403
—
1,149
48,552
9,840
6,334
7,591
4,100
27,865
3,657
1,466
2,191
86,978
$
$
— $
$
272
20,687
8,042
12,645
280,205
10,724
179
$
$
$
$
$
$
—
—
1,322
1,322
—
988
865
479
2,332
$
(5,098)
—
20
(5,078)
—
(5,098)
—
—
(5,098)
(1,010)
(383)
(627) $
$
3,570
$
—
$
—
20
—
20
(207,552)
$
$
— $
— $
76,964
20,572
12,930
110,466
12,405
10,111
40,693
23,229
86,438
24,028
7,646
16,382
977,018
10,724
1,190
Year Ended December 31, 2011
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$
1,673
16,094
2,931
20,698
360
256
12,044
5,747
18,407
43,776
—
855
44,631
7,800
5,833
6,712
3,560
23,905
2,291
960
1,331
82,312
$
$
— $
$
98
20,726
8,116
12,610
249,671
10,724
786
$
$
$
$
$
$
—
—
1,209
1,209
—
1,014
839
434
2,287
$
(4,374)
—
—
(4,374)
—
(4,376)
—
—
(4,376)
(1,078)
(544)
(534) $
$
3,262
$
—
$
3
2
1
1
(179,673)
$
$
— $
— $
73,790
16,094
10,952
100,836
14,160
11,881
34,317
21,767
82,125
18,711
5,735
12,976
928,124
10,724
1,844
100
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income (loss)
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income
taxes
Income tax expense (benefit)
Net income (loss)
Total assets
Goodwill
Capital expenditures
Year Ended December 31, 2010
Retail
Banking
Mortgage
Banking
Consumer
Finance
Other
Eliminations
Consolidated
$
33,922
—
6,093
40,015
6,500
10,452
14,661
13,112
44,725
(4,710)
(3,216)
$
(1,494)
$ 756,250
—
$
1,333
$
$
$
$
$
$
$
2,210
18,567
3,265
24,042
34
365
13,448
8,892
22,739
37,382
—
689
38,071
8,425
5,278
6,062
2,893
22,658
1,303
521
782
78,550
$
$
— $
$
411
15,413
6,011
9,402
224,233
10,724
131
$
$
$
$
$
$
184
—
1,089
1,273
—
1,031
717
509
2,257
$
(3,850)
(3)
—
(3,853)
—
(3,891)
1
—
(3,890)
(984)
(380)
(604) $
$
2,840
$
—
$
—
37
13
24
(157,736)
$
$
— $
— $
69,848
18,564
11,136
99,548
14,959
13,235
34,889
25,406
88,489
11,059
2,949
8,110
904,137
10,724
1,875
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 200 basis points and fixed rate loans that carry interest rates ranging from 3.8 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.
NOTE 18: Derivative Financial Instruments
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, 2012, the cash flow hedges had a fair value of
($513,000), which is recorded in other liabilities. The cash flow hedges were fully effective at December 31, 2012 and
therefore the loss on the cash flow hedges was recognized as a component of other comprehensive income (loss), net of
deferred income taxes.
101
December 31,
2012
2011
$
852
103
2,906
119,565
$ 123,426
$
20,620
609
102,197
$ 123,426
$
$
$
$
586
68
2,672
114,011
117,337
20,620
627
96,090
117,337
Year Ended December 31,
2011
2010
2012
$
$
—
(987)
13,232
4,246
737
(846)
$
16,382
$
— $
(986)
14,136
(137)
647
(684)
12,976
$
22
(999)
2,551
6,573
684
(721)
8,110
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 (loss) of subsidiary
Other income
Other expenses
Net income
102
(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 distributed (undistributed) earnings of subsidiary
Share-based compensation
Net gain on securities
(Increase) decrease 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
Net proceeds from issuance of common stock
Redemption of preferred stock
Cash dividends
Proceeds from exercise of stock options
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash at beginning of year
Cash at end of year
NOTE 20: Other Noninterest Expenses
Year Ended December 31,
2011
2010
2012
$
16,382
$
12,976
$
8,110
(4,246)
537
—
(217)
(17)
12,439
—
—
—
137
395
—
12
21
13,541
—
—
—
—
200
(10,000)
(3,682)
1,309
(12,173)
266
586
852
$
—
41
(10,000)
(4,018)
694
(13,283)
258
328
586
$
$
(6,573)
367
(12)
322
21
2,235
1,262
—
1,262
—
—
—
(4,088)
409
(3,679)
(182)
510
328
The following table presents the significant components in the statements of income line “Noninterest Expenses-Other
Expenses.”
(Dollars in thousands)
Data processing fees
Loan and OREO expenses
Professional fees
Telecommunication expenses
Provision for indemnification losses
All other noninterest expenses
Total Other Noninterest Expenses
Year Ended December 31,
2011
2010
2012
$
$
2,273
1,982
1,688
1,181
1,205
8,105
16,434
$
$
2,129
2,038
1,946
1,104
807
7,252
15,276
$
$
1,869
3,631
1,898
1,086
3,745
7,409
19,638
103
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 declared 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 declared per common share
$
$
2012 Quarter Ended
March 31
June 30
$
18,756
13,192
7,383
15,057
5,518
3,780
3,634
1.11
0.26
19,098
13,642
7,729
15,227
6,144
4,181
4,016
1.22
0.26
$
September 30
19,505
14,129
9,570
16,987
6,712
4,533
4,533
1.36
0.27
$
December 31
19,605
13,485
8,820
16,651
5,654
3,888
3,888
1.17
0.29
2011 Quarter Ended
March 31
June 30
$
17,632
11,748
6,457
13,949
4,256
2,969
2,680
0.85
0.25
18,369
12,011
6,358
13,969
4,400
3,083
2,793
0.88
0.25
$
September 30
18,918
11,912
7,140
13,923
5,129
3,513
3,055
0.96
0.25
$
December 31
18,871
12,078
7,091
14,243
4,926
3,411
3,265
1.02
0.26
104
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
C&F Financial Corporation
West Point, Virginia
We have audited the accompanying consolidated balance sheets of C&F Financial Corporation and Subsidiary as of December
31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31, 2012. 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, 2012 and 2011, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2012, 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, 2012, 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 5, 2013 expressed an unqualified opinion on the effectiveness of C&F
Financial Corporation and Subsidiary’s internal control over financial reporting.
Winchester, Virginia
March 5, 2013
105
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, including the Corporation’s Chief Executive
Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures
(as 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, 2012 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,
2012. 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, 2012, 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, 2012 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, 2012 that have materially affected, or are reasonably likely to materially
affect, the Corporation’s internal control over financial reporting.
106
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
C&F Financial Corporation
West Point, Virginia
We have audited C&F Financial Corporation and Subsidiary’s internal control over financial reporting as of December 31,
2012, 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, 2012, 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 as of December 31, 2012 and 2011, and the related consolidated statements of income,
comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2012 of C&F Financial Corporation and Subsidiary and our report dated March 5, 2013 expressed an unqualified
opinion.
Winchester, Virginia
March 5, 2013
107
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 in the 2013 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 in the 2013 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 “Investor
Relations.” 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 “Investor Relations”
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 three directors who
satisfy all of the following criteria: (i) meet the independence requirements of the NASDAQ Stock Market’s (NASDAQ) listing
standards, (ii) have not accepted directly or indirectly any consulting, advisory, or other compensatory fee from the Corporation
or any of its subsidiaries, (iii) are not an affiliated person of the Corporation or any of its subsidiaries, (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 and C. Elis
Olsson. 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. Mr. Chernack is independent of
management based on the independence requirements set forth in the NASDAQ’s listing standards’ definition of “independent
director” and an independence evaluation performed by the board of 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 in the 2013 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 compensation tables that follow the Compensation Committee Report in the
2013 Proxy Statement are incorporated herein by reference. The information regarding director compensation contained in the
2013 Proxy Statement under the caption, “Director Compensation,” is incorporated herein by reference.
108
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in the 2013 Proxy Statement under the caption, “Security Ownership of Certain Beneficial
Owners and Management,” is incorporated herein by reference.
The information contained in the 2013 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 in the 2013 Proxy Statement under the caption, “Interest of Management in Certain
Transactions,” is incorporated herein by reference. The information contained in the 2013 Proxy Statement under the caption,
“Director Independence,” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the 2013 Proxy Statement under the captions, “Principal Accountant Fees” and “Audit
Committee Pre-Approval Policy,” is incorporated herein by reference.
109
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
3.1
Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit 3.1 to Form 10-
KSB filed March 29, 1996)
3.1.1 Amendment to Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit
3.1.1 to Form 8-K filed January 14, 2009)
3.2
Amended and Restated Bylaws of C&F Financial Corporation, as adopted October 16, 2007 (incorporated by
reference to Exhibit 3.2 to Form 8-K filed October 22, 2007)
Certain instruments relating to trust preferred securities not being registered have been omitted in accordance with Item
601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange
Commission upon its request.
4.1
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)
4.2 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)
*10.1 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)
*10.3 Amended and Restated Change in Control Agreement dated December 30, 2008 between C&F Financial
Corporation and Thomas F. Cherry (incorporated by reference to Exhibit 10.3 to Form 10-K filed March 9, 2009)
*10.3.1 Amendment to Amended and Restated Change in Control Agreement dated March 1, 2012 between C&F
Financial Corporation and Thomas F. Cherry (incorporated by reference to Exhibit 10.3.1 to Form 10-K filed
March 5, 2012)
*10.4
Restated VBA Executives’ Non-Qualified Deferred Compensation Plan for C&F Financial Corporation
(incorporated by reference to Exhibit 10.4 to Form 10-K filed March 7, 2008)
*10.4.1 Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred Compensation Plan for C&F
Financial Corporation dated as of December 31, 2008 (incorporated by reference to Exhibit 10.4.1 to Form 10-K
filed March 9, 2009)
*10.4.2 Attachment to the Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation dated as of January 1, 2008 (incorporated by reference to
Exhibit 10.4.2 to Form 10-K filed March 7, 2008)
*10.4.3 Amendment to Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred Compensation
Plan for C&F Financial Corporation effectively dated as of December 31, 2008 (incorporated by reference to
Exhibit 10.4.3 to Form 10-K filed March 9, 2009)
110
*10.4.4 Amendment to Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred Compensation
Plan for C&F Financial Corporation effectively dated as of January 1, 2009 (incorporated by reference to Exhibit
10.4.4 to Form 10-K filed March 3, 2010)
*10.5
Restated VBA Directors’ Deferred Compensation Plan for C&F Financial Corporation (incorporated by reference
to Exhibit 10.5 to Form 10-K filed March 7, 2008)
*10.5.1 Adoption Agreement for the Restated VBA Director’s Deferred Compensation Plan for C&F Financial
Corporation dated as of December 31, 2008 (incorporated by reference to Exhibit 10.5.1 to Form 10-K filed
March 9, 2009)
*10.5.2 Amendment to Adoption Agreement for the Restated VBA Directors’ Deferred Compensation Plan for C&F
Financial Corporation effectively dated as of December 31, 2008 (incorporated by reference to Exhibit 10.5.2 to
Form 10-K filed March 9, 2009)
*10.6 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)
*10.7 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)
*10.8 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)
*10.9
C&F Financial Corporation Management Incentive Plan dated February 25, 2005, as amended January 18, 2011
(incorporated by reference to Exhibit 10.9 to Form 10-K filed March 3, 2011)
*10.10 Amended and Restated C&F Financial Corporation 2004 Incentive Stock Plan (incorporated by reference to
Exhibit 10.10 to Form 10-K filed March 7, 2008)
*10.10.1 Form of C&F Financial Corporation Restricted Stock Agreement (incorporated by reference to Exhibit 10.10.1 to
Form 10-Q filed August 8, 2008)
*10.10.2 Form of C&F Financial Corporation Restricted Stock Agreement (incorporated by reference to Exhibit 10.10.2 to
Form 8-K filed December 8, 2009)
*10.10.3 Form of C&F Financial Corporation TARP-Compliant Restricted Stock Agreement (incorporated by reference to
Exhibit 10.10.3 to Form 8-K filed December 8, 2009)
*10.10.4 Form of C&F Financial Corporation Restricted Stock Agreement (approved May 2012)
*10.11
Form of C&F Financial Corporation Incentive Stock Option Agreement (incorporated by reference to Exhibit
10.2 to Form 8-K filed December 29, 2004)
*10.11.1 Form of Notice of Amendment to C&F Financial Corporation Incentive Stock Option Agreement (incorporated
by reference to Exhibit 10.11.1 to Form 10-Q filed on November 8, 2011)
*10.12 Employment Agreement (Amended and Restated) between C&F Mortgage Corporation and Bryan McKernon,
dated January 1, 2013
*10.14
Amended and Restated Change in Control Agreement dated December 30, 2008 between C&F Financial
Corporation and Bryan McKernon (incorporated by reference to Exhibit 10.14 to Form 10-K filed March 9,
2009)
*10.14.1 Amendment to Amended and Restated Change in Control Agreement dated March 1, 2012 between C&F
Financial Corporation and Bryan McKernon (incorporated by reference to Exhibit 10.14.1 to Form 10-K filed
March 5, 2012)
111
*10.15
Schedule of C&F Financial Corporation Non-Employee Directors’ Annual Compensation
*10.16 Base Salaries for Named Executive Officers of C&F Financial Corporation
*10.17
Form of C&F Financial Corporation Restricted Stock Agreement (incorporated by reference to Exhibit 10.16 to
Form 8-K filed December 18, 2006)
10.19
Amended and Restated Loan and Security Agreement by and between Wells Fargo Preferred Capital, Inc.,
various financial institutions and C&F Finance Company dated as of August 25, 2008 (incorporated by reference
to Exhibit 10.19 to Form 8-K filed August 28, 2008)
10.19.1 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)
10.19.2 Second Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank,
N.A., various financial institutions and C&F Finance Company dated as of September 17, 2012 (incorporated by
reference to Exhibit 10.19.2 to Form 10-Q filed November 8, 2012)
10.24 Letter Agreement, dated January 9, 2009, including the Securities Purchase Agreement-Standard Terms
incorporated by reference therein, between C&F Financial Corporation and the United States Depart of the
Treasury (incorporated by reference to Exhibit 10.24 to Form 8-K filed January 14, 2009)
10.27 Letter Agreement, dated July 27, 2011, between C&F Financial Corporation and the United States Department of
the Treasury (incorporated by reference to Exhibit 10.27 to Form 8-K filed July 28, 2011)
10.28
Letter Agreement, dated April 11, 2012, between C&F Financial Corporation and the United States Department
of the Treasury (incorporated by reference to Exhibit 10.28 to Form 8-K filed April 12, 2012)
21
23
Subsidiaries of the Registrant
Consent of Yount, Hyde & Barbour, P.C.
31.1
Certification of CEO pursuant to Rule 13a-14(a)
31.2
Certification of CFO pursuant to Rule 13a-14(a)
32
Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350
99.1
Certification of CEO pursuant to 31 C.F.R. Section 30.15
99.2
Certification of CFO pursuant to 31 C.F.R. Section 30.15
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
________
* Indicates management contract
112
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.
SIGNATURES
Date: March 5, 2013
C&F FINANCIAL CORPORATION
(Registrant)
By:
/S/ LARRY G. DILLON
Larry G. Dillon
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/ LARRY G. DILLON
Larry G. Dillon, Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/S/ THOMAS F. CHERRY
Thomas F. Cherry, Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/S/ J. P. CAUSEY JR.
J. P. Causey Jr., Director
/S/ BARRY R. CHERNACK
Barry R. Chernack, Director
/S/ AUDREY D. HOLMES
Audrey D. Holmes, Director
/S/ JAMES H. HUDSON III
James H. Hudson III, Director
/S/ JOSHUA H. LAWSON
Joshua H. Lawson, Director
/S/ C. ELIS OLSSON
C. Elis Olsson, Director
/S/ PAUL C. ROBINSON
Paul C. Robinson, Director
Date: March 5, 2013
Date: March 5, 2013
Date: March 5, 2013
Date: March 5, 2013
Date: March 5, 2013
Date: March 5, 2013
Date: March 5, 2013
Date: March 5, 2013
Date: March 5, 2013
113
The following graph compares the yearly cumulative total shareholder return on the common stock of C&F
Financial Corporation (the Corporation) with the yearly cumulative total shareholder return on stock included in (1)
the NASDAQ Composite Index and (2) the CFFI Custom Peer Group (the Peer Group). The Peer Group consists of
entities that meet the following criteria: (i) publicly-traded financial institution headquartered in Virginia, Maryland,
North Carolina, South Carolina or Tennessee (ii) total assets as of December 31 of the prior year of between $667
million and $2.1 billion, and (iii) no denial of an application to participate in the Capital Purchase Program. For
2012, the Peer Group consisted of 24 publicly-traded commercial financial institutions in Virginia, Maryland, North
Carolina, South Carolina and Tennessee. The median asset size for the Peer Group was $1.06 billion based on total
assets as of December 31, 2012. The following financial institutions were included in the Peer Group: NewBridge
Bancorp (NC); First United Corporation (MD); Wilson Bank Holding Company (TN); First Security Group, Inc.
(TN); Community Bankers Trust Corporation (VA); Shore Bancshares, Inc. (MD); Eastern Virginia Bankshares,
Inc. (VA); Peoples Bancorp of North Carolina, Inc. (NC); Crescent Financial Bancshares, Inc. (NC); National
Bankshares, Inc. (VA); Middleburg Financial Corporation (VA); Old Point Financial Corporation (VA); ECB
Bancorp, Inc. (NC); Southern First Bancshares, Inc. (SC); First South Bancorp, Inc. (NC); Tri-County Financial
Corporation (MD); American National Bankshares Inc. (VA); 1st Financial Services Corporation (NC); Valley
Financial Corporation (VA); Monarch Financial Holdings, Inc. (VA); Access National Corporation (VA); Carolina
Bank Holdings, Inc. (NC); Palmetto Bancshares, Inc. (SC); and Security Federal Corporation (SC). While the
criteria for the Peer Group will remain the same in future years, the companies meeting these criteria, and thus
comprising the Peer Group, may change from year to year, as the Peer Group is updated annually to account for
changes in asset size due to mergers, acquisitions, or growth.
The graph below assumes $100 invested on December 31, 2007 in the Corporation, the NASDAQ Composite
Index and the Peer Group, and shows the total return on such an investment as of December 31, 2012, assuming
reinvestment of dividends. There can be no assurance that the Corporation’s stock performance in the future will
continue with the same or similar trends depicted in the graph below.
C&F Financial Corporation
Total Return Performance
C&F Financial Corporation
NASDAQ Composite
CFFI Custom Peer Group 2012
180
160
140
120
100
80
60
40
e
u
l
a
V
x
e
d
n
I
20
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
Index
C&F Financial Corporation
NASDAQ Composite
CFFI Custom Peer Group 2012
12/31/07
100.00
100.00
100.00
12/31/08
55.16
60.02
67.92
Period Ending
12/31/09
71.03
87.24
58.36
12/31/10
87.70
103.08
53.47
12/31/11
109.41
102.26
44.22
12/31/12
165.17
120.42
60.07
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
New York, NY 10038
telephone them toll-free at:
1-800-937-5449
or visit their website at:
www.amstock.com
#
#
3600 LaGrange Parkway
Toano, Virginia 23168
757-741-2201
802 Main Street
PO Box 391
West Point, VA 23181
www.cffc.com