2 0 1 4 A N N U A L R E P O R T
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 25 retail branches located in the eastern
region of Virginia.
C&F Mortgage Corporation originates and sells residential mortgages
throughout Virginia, Maryland and North Carolina. Through its subsidiary,
C&F Mortgage also provides ancillary mortgage loan origination services for
residential appraisals.
C&F Finance Company specializes in new and used indirect automobile
lending in Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland,
Missouri, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania,
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 25 retail branch locations.
COVER PHOTOS:
Far Left: (l-r) Mark J. Eggleston, C&F Bank Regional President, Williamsburg/Peninsula;
Taryn R. Haden, C&F Bank AVP & Branch Manager; Karen S. Roberts, VP, Concrete Jack
Center: (l-r) Rodney W. Overby, C&F Bank Senior Vice President & Chief Information Officer
Far Right: (l-r) J. Stokeley Fulton, Jr., C&F Mortgage Branch Manager & Loan Officer;
Phillip T. Coon, C&F Mortgage Branch Sales Manager & Loan Officer
NET INCOME (in thousands)
$8,110
$12,976
$16,382
$14,402
$12,346
2010
2011
2012
2013
2014
EARNINGS PER SHARE (assuming dilution)
$2.24
$3.72
$4.86
$4.18
$3.59
2010
2011
2012
2013
2014
RETURN ON AVERAGE EQUITY
9.74%
14.86%
17.05%
13.39%
10.34%
2010
2011
2012
2013
2014
RETURN ON AVERAGE ASSETS
.78%
1.30%
1.71%
1.35%
.93%
2010
2011
2012
2013
2014
2014 C&F Annual Report
-1-
(l-r) Anne Morris-Anderson,
Post Audit Review Specialist:
Michael D. Gasiorowski,
VP Commercial Relationship Manager;
Anita M. Hazelwood,
VP Treasury Solutions Consultant
To Our Shareholders:
It is a pleasure to present to you C&F Financial
Corporation’s (“C&F”) annual report, and for the
first time, we are greeting you jointly as a result of
Tom Cherry’s promotion to President of both C&F and
C&F Bank. 2014 was a very eventful yet challenging
year from an earnings standpoint, an operational
standpoint, a regulatory standpoint and even a corporate
governance standpoint. As we have stated in the past, we
are willing to forgo short term earnings if the end result
ultimately enhances long term shareholder value. We
believe the decisions and initiatives that were made and
implemented during 2014 continue to make progress
toward that goal.
Net income for the year ended December 31, 2014
was $12.3 million, or $3.59 per share, as compared
with $14.4 million, or $4.18 per share, for the year
ended December 31, 2013. This resulted in a 10.34
percent return on equity and a 0.93 percent return on
average assets for 2014, compared to 13.39 percent and
1.35 percent, respectively, for 2013. These ratios were
affected not only by a reduction in earnings for 2014,
but also because our average capital grew, as well as our
average assets, which increased significantly due to the
acquisition of Central Virginia Bankshares (“CVB”) in the
later part of 2013. Our results continue to compare
favorably to financial institutions that we consider our
peers. Return on equity for our peers was 6.15 percent
and return on assets for our peers was 0.70 percent.
Even though earnings were lower in 2014, C&F
continued to benefit from its diversified business structure.
Earnings at C&F Bank continued to improve primarily
as a result of our CVB acquisition and the decline in
nonperforming assets during 2014. This earnings
improvement partially offset the effects of lower earnings
at C&F Mortgage and C&F Finance, which continued to
be negatively affected by industry-wide factors.
Earnings at C&F Bank increased $2.3 million during
2014. The improvement in the Bank’s earnings resulted
from the net accretion of fair market value accounting
adjustments resulting from the CVB acquisition, the
effects of the continued low interest rate environment on
the cost of deposits throughout 2014, the improvement
in our loan credit quality resulting in a $1 million decline
in the 2014 loan loss provision and a significant decline in
“other real estate owned” resulting in lower related holding
costs and associated loss provisions. Partially offsetting
these positive factors were the effects of higher personnel
costs associated with the CVB acquisition, the addition
of commercial loan personnel focused on growing the
-2-
2014 C&F Annual Report
Bank’s small business and commercial loan portfolios, as well as expenses
associated with combining CVB’s operations into the Bank’s and the
added depreciation of equipment purchased to upgrade CVB’s systems and
equipment to conform to the Bank’s technology and security infrastructure.
Earnings at C&F Mortgage declined $1.5 million for 2014. The
entire mortgage industry, including C&F Mortgage, has experienced
significantly reduced refinancing and purchase activity, which translated
into weaker mortgage loan volume and correspondingly lower income for
2014. Additionally, while all of C&F’s business segments continue to face
unprecedented regulations, the mortgage industry seems to be bearing the
brunt of the Dodd-Frank Act, which has greatly complicated the residential
mortgage lending process. Complying with the new regulations is very labor
intensive and very expensive for both the consumer and C&F Mortgage.
Earnings at C&F Finance declined $3.6 million during 2014. The
entire consumer finance industry has experienced increased competition
over the last several years as new companies have entered this business
and as others have sought to increase their market share. The results of
this growth in competition have been loan pricing strategies throughout
the industry that have lowered loan yields as well as an easing in credit
standards that has significantly increased the potential for charge-offs. As
companies have eased credit standards, it makes it easier for borrowers
to default, as they know they will be able to get a new loan from another
lender. These developments in the industry have had a negative effect
on the earnings of C&F Finance. Our average loans outstanding were
relatively flat for 2014 and the average loan yield declined 76 basis points
because we intentionally did not purchase the lower-priced and riskier
automobile sales contracts. Additionally, the provision for loan losses
increased $2.3 million as a result of the difficult economic environment
for non-prime consumers, reduced values of repossessed vehicles and the
easing of underwriting standards by our competitors leading to higher
default rates.
Total assets for C&F remained relatively flat during 2014. Total
loans increased from $820 million to $836 million. The limited growth
reflects intense competition for loans in C&F Bank’s market area and our
deliberate decision to limit loan growth at C&F Finance due to the issues
mentioned above. Even though it is our intention to grow loans at C&F
Bank, and we are making every effort to do so, the economy in our trade
area is still relatively weak and the competition for loans is very intense.
As a result, loan yields continued to decline during 2014. Aggressively
growing loan balances at these lower yields will increase interest rate risk
in the future when rates start to rise and that’s another reason we are
cautious. Total deposits increased from $1.01 billion to $1.03 billion.
While this is a modest increase, it reflects our decision to discontinue
paying the above-market rates on deposits that CVB had paid prior to the
acquisition. The abundance of cash held by C&F Bank also reduces our
need to pay for higher-priced time deposits.
With the completion
of the merger of
CVB into C&F Bank,
the integration of their
staff into our culture
and the excellent
progress we have
made with our internal
operations, namely
training, compliance
and systems, we have
had a very productive
year and have achieved
many of the cost savings
that we projected when
the decision to purchase
CVB was made.
2014 C&F Annual Report
-3-
From an operational standpoint, we’ve expended significant resources
throughout C&F in two areas over the last several years: training and
compliance. Ongoing training is essential throughout the company in
order to keep our personnel current on all the new regulations continually
affecting C&F, especially those related to the Dodd-Frank Act; give our
customers knowledgeable and helpful service; and, contribute to the overall
personal development of our personnel. In addition, we put tremendous
effort into training CVB personnel on all of our processes and systems.
Training is an investment that comes with a substantial cost, albeit a
worthwhile one, that has affected earnings at all of C&F’s subsidiaries.
As we have mentioned in the past, with the passage of the Dodd-
Frank Act, which more than doubled the regulations with which financial
companies must comply, and the regulatory emphasis on consumer
protection, we have had to put significant effort into building complex
compliance systems throughout our entire company. While it has been
painful at times, we are confident that we are as well prepared as any bank
our size to meet the challenges of this hyper-regulatory environment.
While other organizations, especially in the mortgage banking and
consumer finance realms, have taken the road of not complying with the
new regulations until they have to, we believe that the day of reckoning
may shortly come and our proactive efforts will be rewarded.
We are very confident that we have a sound infrastructure in place
throughout the entire company that includes not only our training
and compliance functions mentioned above, but also our information
technology, which we, again, feel is comparable to not only any financial
institutions our size but also many others much larger than C&F. With
the explosion of new regulations over the past several years, it has been
our strategy to automate compliance as much as feasibly possible in order
to give the best service to our customers, to give our people more time
to serve our customers, and to reduce the amount of time that is spent
on consumer compliance. While we have made many improvements, we
continue to make new investments and are currently implementing new
software programs at both our mortgage and finance subsidiaries that
will make us more efficient and allow us to serve our customers better.
This, in conjunction with our ability to offer the latest electronic product
offerings, such as mobile banking and, soon, small business mobile
banking, evidences our commitment to using innovations in technology
in ways that are beneficial to our customers.
Growth in earning assets will be our main focus at C&F Bank during
2015. As we mentioned above, we currently have a tremendous amount
of cash on our balance sheet, so our challenge is to deploy that cash into
earning assets. With a commercial and small business lending team already
in place in Richmond, a newly attracted and seasoned lending team in the
Larry G. Dillon,
Chairman & Chief Executive Officer
Thomas F. Cherry,
President & Chief Financial Officer
-4-
2014 C&F Annual Report
Williamsburg market and resurgence in the real estate
development and construction markets, we are looking
forward to increased lending and the expansion of our
loan portfolio in the coming year.
With the completion of the merger of CVB into
C&F Bank, the integration of CVB’s staff into our
culture and the excellent progress we have made with
our internal operations, namely training, compliance
and systems, we have had a very productive year
and have achieved many of the cost savings that we
projected when the decision to purchase CVB was
made. As a result, we believe we are well positioned
to leverage the systems and capabilities that we have
put in place to increase the revenue opportunities
throughout the new markets that the CVB acquisition
has afforded us.
Our focus at our mortgage company is higher loan
production. We recently added a new production office
in Raleigh, NC which will contribute to increasing
our production and we will continue to look for new
expansion opportunities. We also believe that our
legislators are starting to understand that the increase
in regulations has slowed the real estate market by
decreasing the number of eligible buyers, and we are
hopeful they will make it easier for new homebuyers in
the near future.
At our finance company, we will continue to
diligently work to keep our loan quality and yields up
while at the same time maintaining and growing our
portfolio. New technology being put in place at this
time will help us streamline our processes and make
us more efficient thereby increasing time available to
spend on competing for new quality loans.
We often speak of our goal to remain an
independent company, which requires that we give
good returns to our shareholders. But there are other
factors that contribute to our independent existence for
the long term, and one of those is having an effective
management team that has longevity and continuity.
It was with that thought in mind that the Board of
Directors promoted Tom Cherry to President of both
C&F and C&F Bank in order to ensure C&F’s future
leadership. This change will provide opportunities
for others within the organization to expand their
experiences and responsibilities, which will be beneficial
to the long-term future of the company. As we have
done over the past several years, we anticipate working
together as your CEO and President in managing this
company as we move forward.
Many thanks to our officers and staff for their
commitment to and hard work for our company, to our
directors for their confidence and guidance, and to you
for your investment and faith in our company. We’re
excited about our future.
Larry G. Dillon
Chairman &
Chief Executive Officer
Thomas F. Cherry
President &
Chief Financial Officer
2014 C&F Annual Report
-5-
C&F DIRECTORS
C&F BANK RICHMOND BOARD
David H. Downs
Director of the Kornblau Institute
Virginia Commonwealth University
Jeffery W. Jones
Chairman & Chief Executive Officer
WFofR, Media
S. Craig Lane
President
Lane & Hamner, P.C.
Meade A. Spotts
President
Spotts Fain, P.C.
Scott E. Strickler
Treasurer
Robins Insurance Agency, Inc.
Adrienne P. Whitaker
Vice President, Institutional Advancement
Virginia State University
Photo: Seated (l-r): Barry R. Chernack,
Audrey D. Holmes, James H. Hudson III
Standing (l-r): Paul C. Robinson,
Joshua H. Lawson, Bryan E. McKernon,
James T. Napier, Larry G. Dillon,
J. P. Causey Jr., C. Elis Olsson
C&F MORTGAGE CORPORATION
BOARD OF DIRECTORS
C&F FINANCIAL CORPORATION
C&F BANK BOARD OF DIRECTORS
J.P. Causey Jr.
Attorney-at-Law
J.P. Causey Jr., Attorney-at-Law
Larry G. Dillon
Chairman of the Board
C&F Financial Corporation
Citizens and Farmers Bank
James H. Hudson III
Attorney-at-Law
Hudson Law, PLC
Bryan E. McKernon
President & Chief Executive Officer
C&F Mortgage Corporation
Barry R. Chernack
Retired Partner
PricewaterhouseCoopers LLP
Paul C. Robinson
Owner & President
Francisco, Robinson & Associates,
Realtors
INDEPENDENT PUBLIC
ACCOUNTANTS
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
CORPORATE COUNSEL
Hudson Law, PLC
West Point, Virginia
J.P. Causey Jr.*+
Attorney-at-Law
J.P. Causey Jr., Attorney-at-Law
Barry R. Chernack*+
Retired Partner
PricewaterhouseCoopers LLP
Larry G. Dillon*+
Chairman & Chief Executive Officer
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 Law, PLC
Joshua H. Lawson*+
President
Thrift Insurance Corporation
Bryan E. McKernon+
President & Chief Executive Officer
C&F Mortgage Corporation
James T. Napier+
President
Napier Realtors, ERA
C. Elis Olsson*+
Director of Operations
Martinair, Inc.
Paul C. Robinson*+
Owner & President
Francisco, Robinson
& Associates, Realtors
* C&F Financial Corporation Board Member
+ C&F Bank Board Member
-6-
2014 C&F Annual Report
C&F OFFICERS & LOCATIONS
C&F BANK
ADMINISTRATIVE OFFICES
3600 LaGrange Parkway
Toano, Virginia 23168
(757) 741-2201
802 Main Street,
West Point, Virginia 23181
(804) 843-2360
Larry G. Dillon*
Chairman & Chief Executive Officer
Thomas F. Cherry*
President & Chief Financial Officer
Herbert E. Marth, Jr.
Senior Banking Executive
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
Christopher A. Spillare
Senior Vice President, Treasurer
Matthew H. Steilberg
Senior Vice President, Head of Retail Banking
Sandra S. Fryer
First Vice President, Application
Support Manager
Deborah H. Hall
First Vice President, Credit Administration
Ellen M. Kurek
First Vice President, Director of Loan Operations
Jason E. Long
First Vice President, Finance
Deborah R. Nichols
First Vice President, Director of Compliance
Mary-Jo Rawson
First Vice President, Controller &
Assistant Secretary
Shirley G. Boelt
Vice President, Senior Human Resources
Generalist
E. Turner Coggin
Vice President, Senior Loan Underwriter
Terrence C. Gates
Vice President, Appraisal Review
Donna M. Haviland
Vice President, Director of Internal Audit
Anita W. Hazelwood
Vice President, Treasury Solutions
Bobbi J. Jones
Vice President, Finance
Dollie M. Kelly
Vice President, Quality Assurance Manager
& Security Officer
Kevin E. Kelly
Vice President, Special Assets
Thomas P. Kelley
Vice President, Loan Underwriter
Maureen B. Medlin
Vice President, Marketing
Matthew J. Ohlschlager
Vice President, Senior Relationship Manager
Helga H. Ridenhour
Vice President, Operations Manager
Christopher J. Robb
Vice President, Credit Analyst Manager
Teresa S. Weaver
Vice President, Retail Market Leader
Melanie C. Wynkoop
Vice President, Retail Market Leader
*Officers of C&F Financial Corporation
C&F BANK BRANCHES
CARTERSVILLE, VIRGINIA
Betty J. Davis
Assistant Vice President, Branch Manager
CHESTER, VIRGINIA
Mary Schoenfelder
Vice President, Branch Manager
CUMBERLAND, VIRGINIA
Karyn G. DiPietro
Assistant Vice President, Branch Manager
HAMPTON, VIRGINIA
Eric D. Floyd, Branch Manager
MECHANICSVILLE, VIRGINIA
Mary S. Long
Assistant Vice President, Branch Manager
MIDDLESEX, VIRGINIA
Elizabeth B. Faudree
Vice President, Branch Manager
MIDLOTHIAN, VIRGINIA
Alverser
Jane H. Wagner,
Assistant Vice President, Branch Manager
Bellgrade
Jane H. Wagner,
Assistant Vice President, Branch Manager
Brandermill
Maurice V. Dixon, Branch Manager
Midlothian
Vicki M. Alvarez
Assistant Vice President, Branch Manager
NEWPORT NEWS, VIRGINIA
City Center
NORGE, VIRGINIA
Taryn R. Haden,
Assistant Vice President, Branch Manager
POWHATAN, VIRGINIA
David M. Younce
Assistant Vice President, Branch Manager
PROVIDENCE FORGE, VIRGINIA
James D. W. King
Vice President, Branch Manager
QUINTON, VIRGINIA
Donald V. Hillbish
Assistant Vice President, Branch Manager
RICHMOND, VIRGINIA
Patterson
Jarvis R. Hill, Branch Manager
Varina
Shawn R. Finisecy, Branch Manager
Wellesley
Ryan Melcher
Assistant Vice President, Branch Manager
West Broad
Bina Y. Doshi
Assistant Vice President, Branch Manager
SANDSTON, VIRGINIA
Heather E. Snow
Assistant Vice President, Branch Manager
WEST POINT, VIRGINIA
14th Street
Donna T. Callis
Assistant Vice President, Branch Manager
Main Street
Mary Ann Seward, Assistant Branch Manager
WILLIAMSBURG, VIRGINIA
Jamestown Road
Traci L. Carlson
Assistant Vice President, Branch Manager
Longhill Road
Brenda A. Rappold, Branch Manager
YORKTOWN, VIRGINIA
Susan L. Burns, Branch Manager
C&F BANK-PENINSULA
COMMERCIAL BANKING
ADMINISTRATIVE OFFICE
1167 Jamestown Road
Williamsburg, Virginia 23185
(757) 841-1732
Mark J. Eggleston
Regional President—Williamsburg/Peninsula
Bonnie S. Smith
First Vice President, Construction Lending
Vern E. Lockwood, II
Senior Vice President, Senior Relationship
Manager—Peninsula/Williamsburg
2014 C&F Annual Report
-7-
C&F OFFICERS & LOCATIONS
C&F BANK-RICHMOND
COMMERCIAL BANKING
ADMINISTRATIVE OFFICE
4701 Cox Road, Suite 160
Glen Allen, Virginia 23060
(804) 955-4700
Gail L. Letts
Regional President—Richmond,
Chief Lending Officer
Walter M. Cart, Jr.
Vice President, Relationship Manager
Michael Gasiorowski
Vice President, Relationship Manager
David C. Guzman
Vice President, Relationship Manager
Kelly E. Patterson
Vice President, Relationship Manager
Tracy E. Pendleton
Vice President, Relationship Manager
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 Officer
POWHATAN, VIRGINIA
Mary Ellen Twigg
Assistant Vice President, Investment Officer
RICHMOND, VIRGINIA
Bruce D. French
Assistant Vice President, Investment Officer
WEST POINT, VIRGINIA
Robert M. Dick III
Operations and Compliance Manager,
Investment Officer
WILLIAMSBURG, VIRGINIA
Douglas L. Cash Jr.
Vice President, Investment Officer
C&F MORTGAGE CORPORATION
ADMINISTRATIVE OFFICE
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8300
Bryan E. McKernon
President & Chief Executive Officer
Mark A. Fox
Executive Vice President &
Chief Operating Officer
Donna G. Jarratt
Senior Vice President,
Chief of Branch Administration
Kevin A. McCann
Senior Vice President, Chief Financial Officer
Tracy L. Bishop
Vice President, Human Resources Manager
Madeline Witty
Vice President, Chief Compliance Officer
Michael J. Vogelbach
Manager of Information Systems
Katherine K. Watrous
Controller
C&F MORTGAGE BRANCHES
CHARLOTTESVILLE, VIRGINIA
William E. Hamrick
Vice President, Branch Manager
FREDERICKSBURG, VIRGINIA
Brian F. Whetzel, Branch Manager
R.W. Edmondson III, Branch Manager
ROANOKE, VIRGINIA
Joyce A. Stewart
Branch Manager
FISHERSVILLE, VIRGINIA
HARRISONBURG, VIRGINIA
Vickie J. Painter, Branch Manager
GASTONIA, NORTH CAROLINA
Nancy W. Poteat, Branch Manager
LYNCHBURG, VIRGINIA
Shirley D. Falwell, Branch Manager
Andrew N. Shields, Branch Manager
MIDLOTHIAN, VIRGINIA
Brandon W. Beswick
Branch Manager
Donald R. Jordan
Vice President, Branch Manager
Daniel J. Murphy
Vice President, Branch Manager
John H. Reeves III
Vice President, Regional Manager
GLEN ALLEN, VIRGINIA
Page C. Yonce
Vice President, Branch Manager
J. Stokeley Fulton, Jr., Branch Manager
NEWPORT NEWS, VIRGINIA
WILLIAMSBURG, VIRGINIA
Mary L. Rebholz, Branch Manager
VIRGINIA BEACH, VIRGINIA
Edward (Ted) O. Yoder
Regional Manager
ANNAPOLIS, MARYLAND
Michael J. Mazzola
Senior Vice President
William J. Regan
Vice President, Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy, Branch Manager
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 &
Chief Operating Officer
C. Shawn Moore
Senior Vice President
Thomas W. Young
First Vice President, Operations
Kevin F. Jones Jr.
Regional Vice President of Originations
Tony Lamont
Regional Vice President of Sales
Oneida Wood
Director of Human Resources
Serving the following states
ALABAMA
FLORIDA
GEORGIA
ILLINOIS
INDIANA
KENTUCKY
MARYLAND
MISSOURI
NEW HAMPSHIRE
NEW JERSEY
NORTH CAROLINA
OHIO
PENNSYLVANIA
TENNESSEE
TEXAS
VIRGINIA
WEST VIRGINIA
-8-
2014 C&F Annual Report
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, 2014
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 organization)
54-1680165
(I.R.S. Employer Identification No.)
802 Main Street
West Point, VA 23181
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (804) 843-2360
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value per share
Title of each class
The NASDAQ Stock Market LLC
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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.:
Large accelerated filer
Non-accelerated filer
☐
☐ (Do not check if a smaller reporting company)
Accelerated Filer
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 common stock held by non-affiliates of the registrant as of June 30, 2014 was $114,598,638.
There were 3,393,935 shares of common stock outstanding as of March 6, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 21,
2015 are incorporated by reference in Part III of this report.
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.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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ITEM 1.
BUSINESS
General
PART I
C&F Financial Corporation (the Corporation) is a bank holding company that was incorporated in March 1994
under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of Citizens and Farmers Bank
(the Bank or C&F Bank), which is an independent commercial bank chartered under the laws of the Commonwealth of
Virginia. C&F Bank originally opened for business under the name Farmers and Mechanics Bank on January 22, 1927.
C&F Bank has the following five wholly-owned active subsidiaries, all incorporated under the laws of the
Commonwealth of Virginia:
C&F Mortgage Corporation and its wholly-owned subsidiary 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.
CVB Title Services, Inc.
On October 1, 2013, the Corporation acquired all of the outstanding common stock of Central Virginia
Bankshares, Inc. (CVBK) in an all-cash transaction in which CVBK shareholders received $0.32 for each share of
CVBK common stock they owned, or approximately $846,000 in the aggregate. In addition, the Corporation purchased
from the U.S. Treasury for $3.4 million all of CVBK's preferred stock and warrants issued to the U.S. Treasury under the
Capital Purchase Program (CPP). CVBK was a one-bank holding company incorporated under the laws of the
Commonwealth of Virginia. CVBK owned all of the stock of Central Virginia Bank (CVB), which was an independent
commercial bank chartered under the laws of the Commonwealth of Virginia. On March 22, 2014, CVBK was merged
with and into C&F Financial Corporation and CVB was merged with and into C&F Bank.
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 service through CVB Title Services, 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 three non-operating subsidiaries, C&F Financial Statutory Trust II (Trust II) formed in
December 2007, C&F Financial Statutory Trust I (Trust I) formed in July 2005, and Central Virginia Bankshares
Statutory Trust I (CVBK Trust I) formed in December 2003. These trusts were formed for the purpose of issuing $10.0
million each for Trust II and Trust I of the Corporation’s junior subordinated debt securities and $5.0 million for CVBK
Trust I of junior subordinated debt securities originally issued by CVBK, but assumed by the Corporation when CVBK
was merged into the Corporation on March 22, 2014, with all such issuances occuring in private placements to
institutional investors. All three trusts are unconsolidated subsidiaries of the Corporation. The principal assets of these
trusts are $10.3 million each for Trust II and Trust I and $5.2 million for CVBK Trust I of the Corporation's junior
subordinated debt securities (such securities of the Corporation referred to herein as “trust preferred capital notes”) that
are reported as liabilities of the consolidated Corporation.
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Retail Banking
We provide retail banking services through C&F Bank. C&F Bank provides retail banking services at its main
office in West Point, Virginia, and 24 Virginia branches located one each in Cartersville, Chester, Cumberland,
Hampton, Mechanicsville, Newport News, Norge, Powhatan, Providence Forge, Quinton, Saluda, Sandston, Varina,
West Point and Yorktown, two in Williamsburg, three in Richmond and four in Midlothian. 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 debit 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, 2014, assets of the Retail Banking segment totaled $1.18 billion. For the year ended
December 31, 2014, the net income for this segment totaled $5.6 million.
Mortgage Banking
We conduct mortgage banking activities through C&F Mortgage, which was organized in September 1995. C&F
Mortgage provides mortgage loan origination services through 12 locations in Virginia, two in Maryland and two in
North Carolina. The Virginia offices are located one each in Charlottesville, Fishersville, Fredericksburg, Glen Allen,
Harrisonburg, Lynchburg, Newport News, Roanoke, Virginia Beach and Williamsburg, and two in Midlothian. The
Maryland offices are located in Annapolis and Waldorf. The North Carolina offices are located in Gastonia and Raleigh.
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; Penny Mac Corporation; and
the Virginia Housing Development Authority (VHDA). C&F Mortgage does not securitize loans. C&F Bank may also
purchase 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). A majority of the conventional loans are
conforming loans that qualify for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal
Home Loan Mortgage Corporation (Freddie Mac). The remainder of the conventional loans are non-conforming in that
they do not meet Fannie Mae or Freddie Mac guidelines, but are eligible for sale to various other investors. Through its
subsidiary, C&F Mortgage also provides ancillary mortgage loan origination services for 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,
2014, assets of the Mortgage Banking segment totaled $42.4 million. For the year ended December 31, 2014, net income
for this segment totaled $411,000.
Consumer Finance
We conduct consumer finance activities through C&F Finance. C&F Finance is a regional finance company
providing automobile loans throughout Virginia and in portions of Alabama, Florida, Georgia, Illinois, Indiana,
Kentucky, Maryland, Missouri, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, 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. The typical borrowers on the retail installment sales contracts
purchased 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,
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2014, assets of the Consumer Finance segment totaled $283.9 million. For the year ended December 31, 2014, net
income for this segment totaled $6.9 million.
Employees
At December 31, 2014, we employed 616 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 interstate branching, and expansion of community and regional banks into our service areas.
The banking business in Virginia, and in the Bank’s primary service area in the Hampton to Richmond corridor, is
highly competitive for both loans and deposits, and is dominated by a relatively small number of large banks with many
offices operating over a wide geographic area. Among the advantages such large banks have are their ability to finance
wide-ranging advertising campaigns, efficiencies through economies of scale and, by virtue of their greater total
capitalization, 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 agency guidelines for sales of mortgages in the
secondary market business continue to be stringent. Interest rates, low housing inventory, cash buyers, new mortgage
lending regulations and other market conditions have resulted in reduced originations across the industry during 2014.
C&F Mortgage was not immune to these factors, as its production declined as well.
The competitive factors faced by C&F Mortgage have changed and may continue to change due to the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Dodd-Frank Act affects many
aspects of mortgage finance regulation, which has changed and may continue to 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 full effect 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 finalized rules became effective in
January 2014), 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 CFPB regulations. While C&F Mortgage is continuing to
evaluate all aspects of the Dodd-Frank Act and regulations issued pursuant thereto and by the CFPB, such legislation and
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regulations 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 and CFPB regulations on
mortgage finance, compliance with the requirements of the Dodd-Frank Act and CFPB regulations 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
people in sales and operations in the industry, providing an infrastructure that manages regulatory 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. Further, C&F Mortgage has
implemented strategies to mitigate potential 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 or suffer
deteriorations in their financial condition.
Consumer Finance
The non-prime automobile finance business is highly competitive. The automobile finance market is highly
fragmented and is served by a variety of financial entities, including the captive finance affiliates of major automotive
manufacturers, banks, savings associations, credit unions and independent finance companies. Many of these competitors
have substantially greater financial resources and lower costs of funds than our finance subsidiary. In addition,
competitors often provide financing on terms that are more favorable to automobile purchasers or dealers than the terms
C&F Finance offers. Many of these competitors also have long-standing relationships with automobile dealerships and
may offer dealerships or their customers other forms of financing, including dealer floor plan financing and leasing,
which we do not.
During 2013 and 2014, a number of financial institutions and other lenders have increased focus on operations in
the non-prime automobile finance markets resulting in intensified competition for loans and qualified personnel and, to a
lesser extent thus far, credit easing. 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. This summary is not complete, and we refer you to the particular statutory or
regulatory provisions or proposals for more information. Because regulation of financial institutions changes regularly
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and is the subject of constant legislative and regulatory debate, we cannot forecast how federal and state regulation and
supervision 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 events led to the adoption of numerous laws and regulations that
apply to, and focus on, financial institutions. The most significant of these 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 continues to experience 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 fully
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 the Bank Holding Company Act of 1956 (the BHCA)
and regulation and supervision by the Board of Governors of the Federal Reserve System (the Federal Reserve Board).
Pursuant to the BHCA 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 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 conditions, including national and state
concentration limits. The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or non-bank
acquisition, merger or consolidation proposed by a bank holding company. 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.
Each of the Bank’s depository accounts is insured by the Federal Deposit Insurance Corporation (the FDIC)
against loss to the depositor to the maximum extent permitted by applicable law, and federal law and regulatory policy
impose a number of obligations and restrictions on the Corporation and the Bank to reduce potential loss exposure to
depositors and to the FDIC Deposit Insurance Fund (DIF). For example, pursuant to the Dodd-Frank Act and Federal
Reserve Board 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 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 damages 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 a bank.
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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 adopted rules to implement the Basel III capital framework as
outlined by the Basel Committee on Banking Supervision and standards for calculating risk-weighted assets and risk-
based capital measurements (collectively, the Basel III Final Rules) that apply to banking organizations they supervise.
For the purposes of these capital rules, (i) common equity tier 1 capital (CET1) consists principally of common stock
(including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred
stock and related surplus, and certain grandfathered cumulative preferred stocks and trust preferred securities; and (iii)
Tier 2 capital consists principally of Tier 1 capital plus qualifying subordinated debt and preferred stock, and limited
amounts of the allowance for loan losses. Each regulatory capital classification is subject to certain adjustments and
limitations, as implemented by the Basel III Final Rules. The Basel III Final Rules also establish risk weightings that are
applied to many classes of assets held by community banks, importantly including applying higher risk weightings to
certain commercial real estate loans.
The Basel III Final Rules were effective January 1, 2015, and the Basel III Final Rules capital conservation buffer
will be phased in from 2015 to 2019.
When fully phased in, the Basel III Final Rules require banks to maintain (i) a minimum ratio of CET1 to risk-
weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as
that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a
minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is
added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of
8.5% upon full implementation), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets
of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is
phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum
leverage ratio of 4%, 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).
The Basel III Final Rules provide deductions from and adjustments to regulatory capital measures, primarily
to CET1, including deductions and adjustments that were not applied to reduce CET1 under historical regulatory
capital rules. F or example, mortgage servicing rights, deferred tax assets, dependent upon future taxable income,
and significant investments in non-consolidated financial entities must 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. These
deductions from and adjustments to regulatory capital will generally be phased in beginning in 2015 through 2018.
The Basel III Final Rules permanently includes in Tier 1 capital trust preferred securities issued prior to May
19, 2010 by bank holding companies with less than $15 billion in total assets, subject to a limit of 25% of Tier 1
capital. The Corporation expects that its trust preferred securities will be included in the Corporation’s Tier 1 capital
until their maturity.
The Basel III Final Rules also implement 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 is 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%).
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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 C&F 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 C&F 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 C&F
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 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.
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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 Volcker 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 future rulemaking, 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. 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
calculated based on average consolidated total assets minus average tangible equity (defined as Tier 1 capital). As
required by the Dodd-Frank Act, the FDIC has adopted a 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 – which requirement will be met by rules that will be proposed by the FDIC when the
reserve ratio approaches 1.15 percent. The FDIA requires that the FDIC consider the appropriate level for the designated
reserve ratio on at least an annual basis. The FDIC has adopted a 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 its primary federal regulator, the FDIC. The various laws and regulations
issued and administered by the regulatory agencies (including the CFPB) affect corporate practices, such as the payment
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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. Prior approval of the
applicable primary federal regulator and the VBFI is required for a Virginia chartered bank or bank holding company to
merge with another bank or bank holding company, or purchase the assets or assume the deposits of another bank or
bank holding company, or acquire control of another bank or bank holding company. In reviewing applications seeking
approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the
competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to
the stability of the U.S. banking or financial system, the applicant's performance record under the Community
Reinvestment Act (CRA) and fair housing initiatives, and the applicant's compliance with and the effectiveness of the
subject organizations in combating money laundering activities and complying with Bank Secrecy Act requirements.
Community Reinvestment Act. The 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 2014, the Bank received a "Satisfactory" CRA rating.
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, 2014, the Bank owned $3.3 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 (TILA) and the
Real Estate Settlement Procedures Act (RESPA)).
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 Board and to the Bank by the FDIC.
However, the CFPB may include its own examiners in regulatory examinations by a small institution’s principal
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 Board 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 and the
Bank cannot be determined with certainty.
Mortgage Banking Regulation. In connection with making mortgage loans, the Bank is subject to rules and
regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide for
inspections and appraisals of property, require credit reports on prospective borrowers, in some cases, restrict certain
loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors
concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services
rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications
based on race, gender, geographical distribution and income level. The Bank’s mortgage origination activities are subject
to the Equal Credit Opportunity Act (ECOA), TILA, Home Mortgage Disclosure Act, RESPA, and Home Ownership
Equity Protection Act, and the regulations promulgated under these acts, among other additional state and federal laws,
regulations and rules.
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The Bank’s mortgage origination activities are also subject to Regulation Z, which implements TILA. Certain
provisions of Regulation Z 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. Alternatively, a mortgage lender can originate “qualified mortgages”, which are generally
defined as mortgage loans without negative amortization, interest-only payments, balloon payments, terms exceeding 30
years, and points and fees paid by a consumer equal to or less than 3% of the total loan amount. Higher-priced qualified
mortgages (e.g., subprime loans) receive a rebuttable presumption of compliance with ability-to-repay rules, and other
qualified mortgages (e.g., prime loans) are deemed to comply with the ability-to-repay rules. The Corporation’s
Mortgage Banking segment predominately originates mortgage loans that comply with Regulation Z’s “qualified
mortgage” rules.
In addition to certain regulations applicable to the Bank, 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.
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 numerous federal
regulations over which the CFPB has rulemaking authority and regarding which enforcement authority is shared by the
Federal Reserve Board, the FDIC, the Department of Justice and the Federal Trade Commission. 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.
Certain federal regulatory agencies, and in particular, the CFPB, the Federal Trade Commission, and the
Federal Reserve Board, have recently become more active in investigating the products, services and operations of banks
and other finance companies engaged in auto finance activities. These investigations have extended to banks that engage
in indirect automobile lending, and the CFPB has released regulatory guidance that deems automobile lenders within the
CFPB’s jurisdiction responsible for ECOA noncompliance even if such noncompliance is a result of dealer lending
practices. As of January 1, 2015, the Corporation and C&F Finance are not subject to supervision by the CFPB.
Other 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, 2014, the Bank was considered “well
capitalized.”
Incentive Compensation. The Federal Reserve Board, 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,
12
pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to
correct the deficiencies.
As required by the Dodd-Frank Act, in March 2011 the SEC and the federal bank regulatory agencies proposed
regulations that would prohibit financial institutions with assets of at least $1 billion from maintaining executive
compensation arrangements that encourage inappropriate risk taking by providing excessive compensation or that could
lead to material financial loss. 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 and will require the Corporation
to submit annual reports to the Federal Reserve Board regarding the Corporation’s incentive compensation. These
proposed regulations incorporate the principles discussed in the Incentive Compensation Guidance. The comment period
for these proposed regulations has closed and a final rule has not yet been published.
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.
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 or place transferred funds into a blocked 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, and compliance with all of the laws, programs, and privacy and reporting obligations may require
significant resources of the Corporation and the Bank, 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
13
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 market conditions or
outcomes.
Volcker Rule. The Dodd-Frank Act prohibits bank holding companies and their subsidiary banks from engaging in
proprietary trading except in limited circumstances, and places limits on ownership of equity investments in private
equity and hedge funds (the Volcker Rule). On December 10, 2013, the U.S. financial regulatory agencies (including the
Federal Reserve Board, the FDIC and the SEC) adopted final rules to implement the Volcker Rule. Among other things,
these final rules would have prohibited banking entities from owning collateralized debt obligations (CDOs) backed by
trust preferred securities (TruPS), effective July 21, 2015. However, subsequent to these final rules the U.S. financial
regulatory agencies issued an interim rule effective April 1, 2014 to exempt CDOs backed by TruPS from the final rule
implementing the Volcker Rule, provided that (a) the CDO was established prior to May 19, 2010, (b) the banking entity
reasonably believes that the CDO’s offering proceeds were used to invest primarily in TruPS issued by banks with less
than $15 billion in assets, and (c) the banking entity acquired the CDO investment on or before December 10, 2013.
Neither the Corporation nor the Bank currently has any CDO investments, and the Corporation believes that its financial
condition will not be significantly affected by the Volcker Rule, the final rule or the interim rule. Several portions of the
Volcker Rule remain subject to regulatory rulemaking and legislative activity, including to further delay effectiveness of
some provisions of the Volcker Rule. The Corporation and the Bank do not expect that any delays in the effectiveness of
a portion of the Volcker Rule will significantly affect the Corporation’s or the Bank’s financial condition.
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 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.
ITEM 1A.
RISK FACTORS
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,
14
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.
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.
The Dodd-Frank Act could continue to 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, 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 has increased and will likely
continue to 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 Basel III Final Rules and
related regulatory capital rules and proposals could significantly limit our future capital strategies. The Dodd-Frank Act
also increases regulation of derivatives and hedging transactions, which could limit our ability to enter into, or increase
the costs associated with, interest rate hedging transactions.
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
15
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 Final Rules will require higher levels of capital and liquid assets, which could adversely affect the
Corporation's net income and return on equity.
The Basel III Final Rules represent the most comprehensive overhaul of the U.S. banking capital framework in
over two decades. This new capital framework and related changes to the standardized calculations of risk-weighted
assets are complex and create additional compliance burdens, especially for community banks. The Basel III Final Rules
require bank holding companies and their subsidiaries, such as the Corporation and C&F Bank, to maintain significantly
more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and
calculations. As a result of the Basel III Final Rules, many community banks could be forced to limit banking operations
and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The
Corporation believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the
Basel III Final Rules. However, the Corporation can offer no assurances with regard to the ultimate effect of the Basel III
Final Rules, and satisfying increased capital requirements imposed by the Basel III Final Rules may require the
Corporation to limit its banking operations, retain net income or reduce dividends to improve regulatory capital levels,
which could negatively affect our business, financial condition and results of operations.
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 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.
Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.
The policies of the Federal Reserve affect us significantly. The Federal Reserve regulates the supply of money and
credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on
borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies
determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our
control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk
that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could
reduce the demand for a borrower's products and services. This could adversely affect the borrower's earnings and ability
to repay a loan, which could have a material adverse effect on our financial condition and results of operations.
16
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. The Federal Reserve’s Federal Open
Market Committee has stated it will keep the federal funds target rate at 0%-0.25% until economic, inflation and labor
conditions improve. While such a continuance of accommodative monetary policy could allow us to continue to reprice a
portion of our 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.
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 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 higher due to the concentration of our loan portfolio in commercial loans and in consumer
finance loans.
At December 31, 2014, 37 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, 2014, 34 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 for installment sales
17
contracts we purchase and collection methods, we cannot guarantee that these criteria or methods will ultimately provide
adequate protection against these risks.
Competition from other financial institutions and financial intermediaries may adversely affect our profitability.
We face substantial competition in originating loans and in attracting deposits. Our competition in originating
loans and attracting deposits comes principally from other banks, mortgage banking companies, consumer finance
companies, savings associations, credit unions, brokerage firms, insurance companies and other institutional lenders and
purchasers of loans. Additionally, banks and other financial institutions with larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the
credit needs of larger clients. These institutions may be able to offer the same loan products and services that we offer at
more competitive rates and prices. Increased competition could require us to increase the rates we pay on deposits or
lower the rates we offer on loans, which could adversely affect our profitability.
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. Interest rates, low
housing inventory, cash buyers, new mortgage lending regulations and other market conditions have resulted in reduced
originations across the industry during 2014. C&F Mortgage was not immune to these factors, as its production declined
as well.
In addition, credit markets have continued to experience difficult conditions and volatility. While payment
defaults by borrowers and mortgage loan foreclosures may have abated, the agencies and investors continue to submit
claims in an attempt to minimize their losses. This 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. We cannot be assured that a prolonged period of payment defaults and foreclosures will not result in an increase
in requests for repurchases or indemnifications, or that established reserves will be adequate, which could adversely
affect the Corporation’s net income.
Our home lending profitability could be significantly reduced if we are not able to originate and sell 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), the FHA, the VA, the USDA, and
state bond programs, 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 and the subsequent final rules issued by the CFPB in January 2013 amending
Regulation Z, as implemented by the Truth in Lending Act, effective January 2014 mortgage lenders are responsible for
making 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
18
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 sell a high volume of mortgage loans, which could adversely affect our financial condition and results of
operations.
An increase in interest rates may reduce our mortgage revenues, which would negatively impact our noninterest
income.
Our Mortgage Banking segment provides a significant portion of our noninterest income. We generate gains on
sales of mortgage loans primarily from sales of mortgage loans that we originate to investors. In a rising or higher
interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to
be sold to investors. This would result in a decrease in noninterest income. In addition, our results of operations are
affected by the amount of noninterest expenses associated with mortgage banking activities, such as salaries and
employee benefits. During periods of reduced loan demand, our results of operations may be adversely affected to the
extent that we are unable to reduce expenses commensurate with the decline in mortgage loan origination activity.
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 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.
Our real estate lending business can result in increased costs associated with foreclosed properties.
Because we originate loans secured by real estate, we may have to foreclose on the collateral property to protect
our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in
the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors
outside of our control, included, but not limited to general or local economic conditions, environmental cleanup liability,
neighborhood values, interest rates, real estate tax rates, operating expenses of the mortgaged properties, and supply of
and demand for properties. Certain expenditures associated with the ownership of income-producing real estate,
principally real estate taxes and maintenance costs, may adversely affect the net cash flows generated by the real estate.
Therefore, the cost of operating income-producing real property may exceed the rental income earned from such
property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the
real property at a loss.
We may incur losses on purchased loans that are materially greater than reflected in our fair value adjustments.
We accounted for the CVBK acquisition under the acquisition method of accounting, recording the acquired
assets and liabilities of CVBK at fair value based on acquisition accounting adjustments. We recorded at fair value all
purchased credit-impaired loans acquired based on the present value of their expected cash flows. We estimated cash
flows using specific credit reviews of certain loans, quantitative credit risk, interest rate risk and prepayment risk models,
and qualitative economic and environmental assessments, each of which uses assumptions about matters that are
19
inherently uncertain, and involves the exercise of our best judgment in making those assumptions. We may not realize
the estimated cash flows or fair value of these loans. In addition, although the difference between the pre-acquisition
carrying value of purchased credit-impaired loans and their expected cash flows - the nonaccretable difference - is
available to absorb future charge-offs, we may be required to increase our allowance for loan losses and related provision
expense due to subsequent additional credit deterioration in these loans.
For more information see, "Critical Accounting Policies - Purchased Credit-Impaired Loans" in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report.
Acquisition of CVBK's assets and assumption of CVBK's liabilities may expose us to intangible asset risk, which
could affect our result of operations and financial condition.
In connection with accounting for the acquisition of CVBK, we recorded assets acquired and liabilities assumed at
their fair value, which resulted in us recording certain intangible assets, including goodwill. Adverse conditions in our
business climate, including a significant decline in future operating cash flows, a significant change in our stock price or
market capitalization, or a deviation from our expected growth rate and performance, may significantly affect the fair
value of any goodwill (including goodwill related to the CVBK acquisition) and may trigger impairment losses, which
could be materially adverse to our results of operations, financial condition and stock price.
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. Security breaches, including cyber incidents and
hacking events, have been experienced by several of the world’s largest financial institutions that utilize sophisticated
security tools to prevent such breaches, incidents and events. Any security breach that we experience 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 our 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. Additionally, in recent years banking regulators have focused on the
responsibilities of financial institutions to supervise vendors and other third-party service providers. We may have to
dedicate significant resources to manage risks and regulatory burdens presented by our relationship with vendors and
third-party service providers, including our data processing and cybersecurity service providers.
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
20
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.
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.
Our common stock price may be volatile, which could result in losses to our investors.
Our common stock price has been volatile in the past and several factors could cause the price to fluctuate in the
future. These factors include, but are not limited to, actual or anticipated variations in earnings, changes in analysts'
recommendations or projections with regard to our common stock or the markets and businesses in which we operate,
operations and stock performance of other companies deemed to be peers, and reports of trends and concerns and other
issues related to the financial services industry. Fluctuations in our common stock price may be unrelated to our
performance. General market declines or market volatility in the future, especially in the financial institutions sector,
could adversely affect the price of our common stock, and the current market price may not be indicative of future
market prices.
21
Future sales of our common stock by shareholders or the perception that those sales could occur may cause our
common stock price to decline.
Although our common stock is listed for trading on NASDAQ Global Select Market, the trading volume in our
common stock may be lower than that of other larger financial institutions. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and
sellers of the common stock at any given time. This presence depends on the individual decisions of investors and
general economic and market conditions over which we have no control. Given the potential for lower relative trading
volume in our common stock, significant sales of the common stock in the public market, or the perception that those
sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be
in the absence of these sales or perceptions.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
The Corporation has no unresolved comments from the SEC staff.
ITEM 2.
PROPERTIES
The following describes the location and general character of the principal offices and other materially important
physical properties of the Corporation.
C&F 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 C&F Bank’s
Main Office and the main office of C&F Investment Services.
C&F Bank owns a building located at 3600 LaGrange Parkway in Toano, Virginia. The building was acquired in
2004 and has 85,000 square feet. Portions of the building were renovated in 2005 and 2014 in order to house the C&F
Bank's operations center, which consists of C&F Bank’s loan, deposit and administrative functions and staff.
The building owned by C&F Bank and previously used for the its 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 this property.
C&F Bank owns a building located at 1400 Alverser Drive in Midlothian, Virginia. The building provides space
for a branch office of C&F 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.
C&F Bank owns 23 other retail banking branch locations and leases one retail banking branch location and one
regional commercial lending office in Virginia. Rental expense for leased locations totaled $141,000 for the year ended
December 31, 2014.
C&F Bank owns a building located at 2036 New Dorset Road in Powhatan, Virginia. The building was built in
1996 and has three floors totaling 14,000 square feet that had previously housed CVB's operations center. The building is
currently utilized as an additional training and backup facility.
C&F Mortgage’s Newport News loan production office is located on the second floor of C&F Bank’s Newport
News branch building. In addition, C&F Mortgage has 14 loan production offices leased from nonaffiliates including 10
in Virginia, two in Maryland, and two in North Carolina. Rental expense for leased locations totaled $774,000 for the
year ended December 31, 2014.
The Hampton office of C&F Finance is located on the second floor of C&F Bank’s Hampton branch building.
C&F Finance has a 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
22
staff. C&F Finance has two leased offices, one each in Maryland and Tennessee. Rental expense for leased locations
totaled $325,000 for the year ended December 31, 2014.
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.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name (Age)
Present Position
Business Experience
During Past Five Years
Larry G. Dillon (62)
Chairman and
Chief Executive Officer
Thomas F. Cherry (46)
President, Chief Financial Officer and Secretary
Bryan E. McKernon (58)
President and Chief Executive Officer,
C&F Mortgage
John A. Seaman, III (57)
Senior Vice President and Chief Credit Officer,
C&F Bank
Chairman and Chief Executive Officer of the Corporation and
C&F Bank since December 2014; Chairman, President and Chief
Executive Officer of the Corporation and C&F Bank from 1989
to December 2014; Chairman, President and Chief Executive
Officer of CVBK and CVB from September 2013 through March
2014
Secretary of the Corporation and C&F Bank since 2002;
President and Chief Financial Officer of the Corporation and
C&F Bank since December 2014; Executive Vice President and
Chief Financial Officer of the Corporation and C&F Bank from
December 2004 to December 2014; Executive Vice President and
Chief Financial Officer of CVBK and CVB from September 2013
through March 2014
President and Chief Executive Officer of C&F Mortgage since
1995
Senior Vice President and Chief Credit Officer of C&F Bank
since October 2011 and of CVB from September 2013 through
March 2014; Director of Homebuilder Banking-Special
Situations Group, Mid-Atlantic Region, Wells Fargo Bank, N.A.,
with particular responsibility for residential loan resolution and
workouts from 2008 through September 2011
S. Dustin Crone (46)
President, C&F Finance
President of C&F Finance since 2010; Executive Vice President
of C&F Finance from 2006 through 2009
23
PART II
ITEM 5.
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
The Corporation’s common stock is listed for trading on the NASDAQ Global Select Market of the NASDAQ
Stock Market under the symbol “CFFI.” As of March 6, 2015, 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 $35.80.
Following are the high and low sales prices as reported by the NASDAQ Stock Market, along with the dividends that
were declared quarterly in 2014 and 2013.
Quarter
First
Second
Third
Fourth
2014
Low
2013
Dividends High Low
Dividends
High
$ 45.88 $ 32.13 $
37.04
36.99
39.97
30.33
32.61
32.40
0.29 $ 42.00 $ 36.80 $
0.30
0.30
0.30
38.35
48.06
43.17
55.99
59.59
56.68
0.29
0.29
0.29
0.29
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.”
Issuer Purchases of Equity Securities
The Corporation’s Board of Directors has authorized a share repurchase program for the Corporation’s
outstanding common stock through May 2015 (the Repurchase Program). Repurchases under the Repurchase Program
may be made through privately-negotiated transactions, or open-market transactions, including pursuant to a trading plan
in accordance with Rule 10b5-1 of the Exhange Act and/or Rule 10b-18 of the Exchange Act. As of December 31, 2014,
an additional $4.9 million of the Corporation’s common stock may be purchased under the Repurchase Program.
The following table summarizes repurchases of the Corporation's common stock that occurred during the three
months ended December 31, 2014.
Maximum Number
(or Approximate
Dollar Value) of
Total Number of
Shares Purchased as Shares that May Yet
(Dollars in thousands, except for per share amounts)
October 1, 2014 - October 31, 2014
November 1, 2014 - November 30, 2014
December 1, 2014 - December 31, 2014
Total
Total Number of
Shares Purchased 1
Part of Publicly
Average Price Paid Announced Plans or Under the Plans or
Programs
Be Purchased
Programs
per Share
234 $
—
1,349
1,583 $
33.01
—
38.74
37.89
— $
—
—
— $
—
—
—
—
1 These shares were withheld from employees to satisfy tax withholding obligations arising upon the vesting of
restricted shares.
24
ITEM 6. SELECTED FINANCIAL DATA
Five Year Financial Summary
(Dollars in thousands, except share and per share
amounts)
Selected Year-End Balances:
Total assets
Total shareholders’ equity
Total loans (net)
Total deposits
Summary of Operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income before taxes
Income tax expense
Net income
Effective dividends on preferred stock
Net income available to common shareholders
Per share:
Earnings per common share—basic
Earnings per common share—assuming dilution
Dividends
Weighted average number of shares—assuming
dilution
Significant Ratios:
Return on average assets
Return on average common equity
Dividend payout ratio – common shares
Average common equity to average assets
2014
2013
2012
2011
2010
$ 1,333,323
123,373
800,198
1,026,101
$ 1,312,297
112,941
785,532
1,008,292
$
$
$
$
$
$
86,495
8,525
77,970
16,330
61,640
19,571
64,135
17,076
4,730
12,346
—
12,346
3.63
3.59
1.19
80,212
8,623
71,589
15,085
56,504
22,220
57,612
21,112
6,710
14,402
—
14,402
4.36
4.18
1.16
$
$
$
$
$
$
$
$
977,018
102,197
640,283
686,184
76,964
10,111
66,853
12,405
54,448
20,622
51,042
24,028
7,646
16,382
311
16,071
5.00
4.86
1.08
928,124 $
96,090
616,984
646,416
904,137
92,777
606,744
625,134
73,790 $
11,881
61,909
14,160
47,749
17,171
46,209
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
17,935
48,530
11,059
2,949
8,110
1,149
6,961
2.26
2.24
1.00
3,436,278
3,443,982
3,305,902
3,172,277
3,103,469
0.93 %
10.34
32.80
9.02
1.35 %
13.39
26.61
10.07
1.71 %
17.05
21.60
10.03
1.30 %
14.86
26.86
8.75
0.78 %
9.74
44.25
8.01
25
ITEM 7.
RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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 future
financial performance, liquidity, strategic business initiatives, operating initiatives related to the acquisition of CVBK
and continued integration of CVB into C&F Bank, 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
possible future rising interest rate environments, the deposit portfolio including trends in deposit maturities and rates,
interest rate sensitivity, market risk, regulatory developments, monetary policy implemented by the Federal Reserve
Board including quantitative easing programs, capital requirements, growth strategy, hedging 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, such as volatility in yields on U.S. Treasury bonds and increases or volatility in mortgage 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 the Basel III Final Rules
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, and the effect of these policies on interest rates and business in our markets
the ability to achieve the operations and results expected after the CVBK acquisition, including anticipated
cost savings, continued relationships with major customers and deposit retention, and the ability to effectively
integrate CVB into C&F Bank
the value of securities held in the Corporation’s investment portfolios
demand for loan products
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, including sales prices of repossessed vehicles
the level of net charge-offs on loans and the adequacy of our allowance for loan losses
deposit flows
demand in the secondary residential mortgage loan markets
26
the level of indemnification losses related to mortgage loans sold
the strength of the Corporation’s counterparties and the economy in general
competition from both banks and non-banks
demand for financial services in the Corporation’s market area
the Corporation's expansion and technology initiatives
reliance on third parties for key services
accounting principles, policies and guideline and elections by the Corporation thereunder
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.
27
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.
Loans Acquired in a Business Combination: The Corporation has accounted for the loans acquired in the
acquisition of CVBK and its subsidiary CVB in accordance with FASB Accounting Standards Codification (ASC) Topic
805, Business Combinations. Accordingly, as of the acquisition, CVB's loans were segregated between (i) purchased
credit-impaired (PCI) loans and (ii) purchased performing loans and were recorded at estimated fair value without the
carryover of the related allowance for loan losses.
PCI loans are those for which there is evidence of credit deterioration since origination and for which it is
probable at the date of acquisition that the Corporation will not collect all contractually required principal and interest
payments. When determining fair market value, PCI loans were aggregated into pools of loans based on common risk
characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality
deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually
required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the
"nonaccretable difference," and is not recorded. Any excess of cash flows expected at acquisition over the estimated fair
value is referred to as the "accretable" yield and is recognized as interest income over the remaining life of the loan when
there is a reasonable expectation about the amount and timing of such cash flows. Subsequent decreases to the expected
cash flows will generally result in a provision for loan losses, while subsequent increases in cash flows may result in a
reversal of post-acquisition provision for loan losses, or a transfer from nonaccretable difference to accretable yield.
Subsequent to acquisition, we evaluate on a quarterly basis our estimate of cash flows expected to be collected. In
the current economic environment, estimates of cash flows for PCI loans require significant judgment. Subsequent
decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the
allowance for loans losses. Subsequent significant increases in cash flows will generally result in an increase in interest
income over the remaining life of the loan, or pool(s) of loans. Disposals of loans, which may include sale of loans to
third parties, receipt of payments in full or part from the borrower or foreclosure of the collateral, result in removal of the
loan from the PCI loan portfolio at its carrying amount.
The Corporation's PCI loans currently consist of loans acquired in connection with the acquisition of CVB. PCI
loans that were classified as nonperforming loans by CVB are no longer classified as nonperforming so long as, at
acquisition and quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of
loans.
28
Purchased performing loans are recorded at fair value as of the acquisition using the contractual cash flows
method of recognizing discount accretion based on the acquired loans' contractual cash flows. The fair value discount,
including a credit discount, is accreted as an adjustment to yield over the estimated lives of the loans. There is no
allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses
may be required in future periods for any deterioration in these loans subsequent to the acquisition.
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: The Corporation's goodwill was recognized in connection with the Corporation's acquisition of CVBK
in October 2013 and C&F Bank's acquisition of C&F Finance Company 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 may first assess qualitative factors to determine if it is more likely than not that the fair value of
goodwill is less than the carrying amount, which determines if the two-step goodwill impairment test is necessary. 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. If an impairment test is performed, we will prepare a sensitivity analysis by
increasing the discount rate, lowering sales multiples and reducing increases in future income.
Retirement Plan: C&F 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. C&F 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.
29
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 Corporation's derivative financial
instruments consist of (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will be held
for sale and related forward sales commitments and (2) interest rate swaps that qualify as cash flow hedges of the
Corporation's trust preferred capital notes. Because the IRLCs and forward sale commitments are not designated as
hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of the
Corporation's IRLCs and forward sales commitments and realized gains and losses upon ultimate sale of the loans are
reported as noninterest income. 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 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.”
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, dividends and share repurchases, while considering the
need to maintain a strong regulatory capital position.
On October 1, 2013, the Corporation acquired all of the outstanding common stock of CVBK. On March 22,
2014, CVBK was merged with and into the Corporation and CVB was merged with and into C&F Bank. The
Corporation's financial position and results of operations as of and for the year ended December 31, 2014 include the
acquired assets and assumed liabilities of CVBK that remain on the Corporation’s balance sheet and the results of
operating such assets and liabilities subsequent to the acquisition of CVBK.
Financial Performance Measures
Net income for the Corporation was $12.3 million in 2014, or $3.59 per common share assuming dilution
compared with net income of $14.4 million in 2013 or $4.18 per common share assuming dilution. The change in
financial results for 2014, as compared to 2013, was principally attributable to lower earnings at the Mortgage Banking
and Consumer Finance segments, offset in part by an increase in earnings at the Retail Banking segment. At the
Mortgage Banking segment, interest rates, low housing inventory, cash buyers, new mortgage lending regulations and
other market conditions have led to weaker mortgage loan origination volume and correspondingly lower income from
gains on sales of loans and ancillary mortgage lending fees during 2014. Partially offsetting the negative effects of the
production decline was a decline in production-based compensation. At the Consumer Finance segment, higher net
charge-offs attributable to (1) the continued difficult economic environment for non-prime consumers, (2) reduced sale
prices on repossessed vehicles, (3) the effect of easing of underwriting standards by our competitors and (4) our
borrowers willingness to default on their loans has resulted in a higher provision for loan losses during 2014, compared
to 2013. The Retail Banking segment, which reported an increase in earnings during 2014, compared to 2013, benefited
from (1) fair value accounting adjustments associated with the acquisition of CVBK, (2) the effect of the continued low
interest rate environment on the costs of deposits, (3) a decline in the provision for loan losses as a result of improvement
in asset quality, and (4) a decline in expenses associated with other real estate owned as a result of the sale of a majority
of these properties since December 31, 2013.
30
See “Principal Business Activities” below for additional discussion.
The Corporation’s ROE and ROA were 10.34 percent and 0.93 percent, respectively, for the year ended
December 31, 2014, compared to 13.39 percent and 1.35 percent, respectively, for the year ended December 31,
2013. The decrease in these ratios during 2014 resulted primarily from lower net income during 2014. The decline in
ROE was also affected by internal capital growth of 9.2 percent since December 31, 2013 resulting from earnings and an
increase in unrealized appreciation of the corporation’s investment securities portfolio, offset by dividends and warrant
and share repurchases. The decline in ROA was also affected by average asset growth of 24.0 percent resulting from the
corporation’s acquisition of CVBK in 2013.
2015 Outlook
Management believes the Corporation's financial performance in 2015 will be affected by (i) lower accretion
income related to the fair value accounting adjustments for the CVBK acquisition, partially offset by an increase in
interest income from growth in average loans outstanding, (ii) continued sluggish mortgage loan demand that may
continue to depress loan production levels in the Mortgage Banking segment, which could be further affected by
increases in interest rates, and (iii) continued elevated charge-off levels and competition in the Consumer Finance
segment. The following additional factors could influence the Corporation’s financial performance in 2015:
• Retail Banking: Our ability to achieve loan growth will be a significant influence on the Bank’s performance
during 2015. General economic trends in the Bank’s markets have contributed to lackluster demand for new
loans and increased competition. 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, or held as interest-bearing
deposits in other banks. As part of our strategy to increase lending and build our brand, C&F Bank has
continued to strengthen its commercial lending presence in Hampton Roads and Richmond, Virginia,
improved its small business loan platform, and has fully integrated the former CVB branches expanding the
branch network to 25. While we incurred initial costs to fully integrate CVB's operations into the Bank, we
expect to realize cost savings going forward and will be able to leverage our technology investments over the
past several years in systems and products that enhance fraud prevention and deliver state-of-the-art banking
products to our customers.
• Mortgage Banking: C&F Mortgage generates significant noninterest income from the sale of residential loan
products into the secondary market to investors. Our ability to maintain a level of loan production in 2015
sufficient to sustain profitability will be dependent on market factors beyond our control, such as changes in
interest rates, housing starts and loan demand. If mortgage interest rates rise during 2015, C&F Mortgage
may experience a continuation of lower loan demand, particularly for mortgage refinancings, which could
negatively affect earnings of the Mortgage Banking segment in 2015. In addition, during 2015 C&F
Mortgage will continue to (i) incur fixed costs associated with its expansion into new markets (ii) compete to
retain and attract qualified loan officers, especially given the heightened federal regulation of lending
practices and loan terms (iii) incur higher costs related to compliance with new residential mortgage
regulations and (iv) implementation of new technology.
• Consumer Finance: C&F Finance provides automobile financing through lending programs that are designed
to serve customers in the non-prime market. Increased competition and loan pricing strategies that
competitors have used to grow market share have had a significant adverse effect on the growth of the
Consumer Finance segment’s loan portfolio. In addition, loan performance within this market segment is
particularly vulnerable to economic conditions, including a protracted period of unemployment because
unemployment benefits expire for those who have not been able to find employment and households may be
underemployed. C&F Finance began experiencing higher delinquency levels and charge-offs during the
second half of 2013, and if economic conditions for customers in the non-prime finance segment do not
improve and if resale values on repossessed vehicles continue to decline, the elevated levels of charge-offs
may continue in 2015, which will negatively affect the Consumer Finance segment's earnings in 2015. The
combination of these factors may result in slower loan growth and lower earnings in the Consumer Finance
31
segment during 2015. We also expect continued strong competition among automobile finance lenders for
qualified personnel in 2015, which may affect personnel costs at C&F Finance during 2015.
Principal Business Activities
An overview of the financial results for each of the Corporation’s principal segments is presented below. A more
detailed discussion is included in the section “Results of Operations.”
Retail Banking: The Retail Banking segment reported net income of $5.6 million for the year ended
December 31, 2014, compared to $3.3 million for the year ended December 31, 2013. The improvement in financial
results for 2014, as compared to 2013, was significantly driven by the fair value accounting adjustments resulting from
the acquisition of CVB. These adjustments resulted from marking assets and liabilities acquired from CVB to fair market
values as of the acquisition date. Accordingly, yields on loans and investments acquired from CVB increased and the
cost of certificates of deposit decreased, the benefits of which were partially offset by the amortization of the core
deposit intangible and higher depreciation associated with the write-up of certain buildings recognized in the acquisition
of CVB. The net accretion attributable to these adjustments was $1.9 million, net of taxes ($3.0 million before taxes),
during the year ended December 31, 2014, compared to $549,000, net of taxes ($844,000 before taxes) during 2013 after
the acquisition of CVB. The improvement in net income of the Retail Banking segment for the year ended December 31,
2014, compared to the year ended December 31, 2013 also resulted from, (1) the effects of the continued low interest
rate environment on C&F Bank's cost of deposits throughout 2014, (2) stability in loan credit quality resulting in a $1.0
million decrease in the loan loss provision for 2014 compared to 2013, and (3) a significant decline in C&F Bank's
foreclosed properties resulting in lower holding costs and loss provisions. Partially offsetting these positive factors for
Retail Banking were the effects of the following: (1) higher personnel costs associated with increased staff levels and
support positions associated with the addition of seven branches through the acquisition of CVB and the addition of
commercial loan personnel focused on growing the segment’s commercial and small business loan portfolios, (2) one-
time costs and ongoing operating expenses associated with the effects of combining CVB’s operations into the Bank’s,
and (3) depreciation of equipment purchased to upgrade CVB’s systems and equipment to conform to the Bank’s
technology infrastructure.
C&F Bank's nonperforming assets were $5.5 million at December 31, 2014, compared to $7.2 million at
December 31, 2013. Nonperforming assets at December 31, 2014 included $4.7 million in nonaccrual loans, compared to
$4.4 million at December 31, 2013, and $786,000 in foreclosed properties, compared to $2.8 million at December 31,
2013. The increase in nonaccrual loans since December 31, 2013 was generally attributable to smaller balance residential
real estate and commercial loans. The decline in OREO during the year ended December 31, 2014 resulted from sales of
properties that had a total carrying value of $2.5 million at December 31, 2013, partially offset by foreclosures in 2014.
Troubled debt restructured (TDR) loans were $5.8 million at December 31, 2014, of which $2.0 million were included in
nonaccrual loans, as compared to $5.6 million of TDR loans at December 31, 2013, of which $2.6 million were included
in nonaccrual loans.
Mortgage Banking: C&F Mortgage reported net income of $411,000 for the year ended December 31, 2014,
compared to $2.0 million for the year ended December 31, 2013. The entire mortgage industry, including the
Corporation’s Mortgage Banking segment, is experiencing significantly reduced refinancing and historically low
purchase activity, which has translated into weaker mortgage loan volume and correspondingly lower income from gains
on sales of loans and ancillary mortgage lending fees.
Loan origination volume for the year ended December 31, 2014 declined to $478.6 million from $721.3 million
for the year ended December 31, 2013. During 2014, the amount of loan originations for refinancings and new and resale
home purchases were $71.8 million and $406.8 million, respectively, compared to $223.6 million and $497.7 million,
respectively, during 2013. The decrease in origination volume is largely a result of interest rates, low housing inventory,
cash buyers, new mortgage lending regulations and other market conditions. The lower volume of loan originations in
2014 resulted in a decrease in gains on sales of loans, which were $5.1 million for the year ended December 31, 2014,
compared to $7.5 million for the year ended December 31, 2013.
32
If conditions influencing the mortgage banking environment, such as interest rates and housing inventories, do not
improve, C&F Mortgage may experience a continuation of lower loan demand, particularly for mortgage refinancings,
which would negatively affect earnings of the mortgage banking segment in future periods.
Consumer Finance: C&F Finance reported net income of $6.9 million for the year ended December 31, 2014,
compared to $10.5 million for the year ended December 31, 2013. Average loans for the year ended December 31, 2014
were essentially level with average loans for the year ended December 31, 2013. The lack of portfolio growth year over
year, along with a decline of 74 basis points in the average yield on the portfolio for the year ended December 31, 2014
have resulted in a $2.1 million decline in net interest income during the year. Increased competition and loan pricing
strategies that competitors have used to grow market share have had a significant adverse effect on the growth and
average yield of the Consumer Finance segment’s loan portfolio.
The provision for loan losses increased $2.3 million as a result of an increase in charge offs and growth in the loan
portfolio. The increase in loan charge-offs during 2014 is a result of the current economic environment for non-prime
consumers, reduced sales prices of repossessed vehicles and easing of underwriting standards and pricing by
competitors. Because of the increase in charge-offs and management’s expectation that the factors driving the increased
charge-offs will persist, we have increased C&F Finance's allowance for loan losses as a percentage of loans at
December 31, 2014 to 8.50 percent, as compared with 8.32 percent at December 31, 2013. Management believes that the
current allowance for loan losses is adequate to absorb probable losses in the loan portfolio. However, if the current
economic environment continues and credit easing by new entrants and competitors in the automobile financing sector
intensifies, the Consumer Finance segment could continue to experience an elevated level of charge-offs during 2015,
which may result in higher provisions for loan losses and limit loan portfolio growth.
Other and Eliminations: The net loss for this combined segment was $587,000 for the year ended December 31,
2014, compared to a net loss of $1.4 million for the year ended December 31, 2013. The "other segment" includes the
Corporation's holding company, which recognized $1.0 million in transaction costs, net of taxes ($1.2 million before
taxes) during the year ended December 31, 2013 associated with the Corporation's acquisition of CVBK.
Capital Management
Total shareholders’ equity was $123.4 million at December 31, 2014, compared to $112.9 million at December
31, 2013. Capital growth resulted from earnings for the year ended December 31, 2014 and an increase in unrealized
holding gains on securities available for sale, which are a component of accumulated other comprehensive income,
partially offset by dividends and warrant and share repurchases.
The Corporation’s board of directors continued its policy of paying dividends in 2014 and declared a quarterly
cash dividend of 30 cents per common share for the fourth quarter of 2014. The dividend payout ratio was 32.8 percent
of basic earnings per share for the year ended December 31, 2014. The board of directors continues to evaluate the
dividend payout in light of changes in economic conditions, capital levels and expected future levels of earnings, and the
changes to the regulatory capital framework implemented by the Basel III Final Rules that were approved during 2013
by the federal banking agencies and are effective (subject to certain limited phase-in schedules) as of January 1, 2015.
Further affecting capital during 2014 was the Corporation’s repurchase from the United States Department of the
Treasury (Treasury) of a warrant to purchase 167,504 shares of the Corporation’s common stock at an exercise price of
$17.91 per share (Warrant). The Warrant was issued to Treasury in January 2009 in connection with the Corporation’s
participation in the Troubled Asset Relief Program (TARP) Capital Purchase Program. The Corporation paid an
aggregate purchase price of $2.3 million for the repurchase of the Warrant, which has been cancelled. The repurchase
price was based on the fair market value of the Warrant as agreed upon by the Corporation and Treasury. With the
repurchase of the Warrant, the Corporation has completely exited the TARP Capital Purchase Program.
During the second quarter of 2014, the Board of Directors of the Corporation authorized a share repurchase
program to purchase up to $5.0 million of the Corporation’s common stock. The Corporation purchased 2,800 shares
under this repurchase program during 2014 through open market transactions at an average price of $33.05 per share.
33
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets for each of the years ended December 31, 2014, 2013 and
2012 and includes the average balances of CVBK since October 1, 2013. 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. Net
interest income also includes the net interest income of CVBK since October 1, 2013, which includes accretion and
amortization associated with the fair value adjustments recognized in connection with the Corporation's purchase of
CVBK. 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
2014
Average Income/ Yield/
Expense Rate
Balance
2013
Average Income/ Yield/
Expense Rate
Balance
2012
Average Income/ Yield/
Expense Rate
Balance
$
96,286 $ 2,493
6,693
9,186
118,221
214,507
2.59% $
5.66
4.28
47,886 $ 1,065
6,928
7,993
116,846
164,732
2.22 % $
5.93
4.85
117,612
137,988
20,376 $
336
7,059
7,395
1.65 %
6.00
5.36
Loans, net
Interest-bearing deposits in other banks
and Fed funds sold
854,948
79,246
9.27
761,751
74,456
9.77
732,972
71,998
9.82
157,205
378
0.24
68,093
159
0.23
11,695
22
0.19
Total earning assets
Allowance for loan losses
Total non-earning assets
88,810
7.24
1,226,660
(35,090)
132,546
82,608
8.31
994,576
(34,880)
108,088
Total assets
$ 1,324,116
$1,067,784
79,415
9.00
882,655
(35,126)
92,821
$ 940,350
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
$
186,548 $
181,530
97,643
439
493
83
0.24% $ 137,615 $
0.27
0.09
132,449
61,237
412
382
73
0.30 % $ 110,237 $
0.29
0.12
98,045
45,645
410
369
45
0.37 %
0.38
0.10
1,299
1,766
4,080
4,445
0.93
0.73
0.48
2.61
8,525
0.84
139,502
241,231
846,454
170,101
1,016,555
166,928
21,260
1,204,743
119,373
133,363
179,387
644,051
167,003
1,464
1,920
4,251
4,372
1.10
1.07
0.66
2.62
134,668
163,921
552,516
162,312
2,047
2,454
5,325
4,786
1.52
1.50
0.96
2.95
8,623
1.06
811,054
123,859
25,348
960,261
107,523
10,111
1.41
714,828
104,737
23,749
843,314
97,036
$ 940,350
Total liabilities and shareholders’ equity $ 1,324,116
$1,067,784
Net interest income
Interest rate spread
Interest expense to average earning assets
Net interest margin
$ 80,285
$ 73,985
$ 69,304
7.25 %
0.87 %
7.44 %
7.59 %
1.15 %
7.85 %
6.40%
0.69%
6.55%
34
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, and
includes the changes in CVBK's net interest income since October 1, 2013. 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
2014 from 2013
2013 from 2012
(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
2014 Compared to 2013
Increase (Decrease)
Due to
Rate
Volume
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Total
Increase
Volume (Decrease)
Rate
$
(3,988)
$
8,778
$
4,790
$
(357)
$
2,815
$
2,458
199
(316)
5
(4,100)
(100)
(23)
(25)
(230)
(707)
(1,085)
(8)
(1,093)
(3,007)
1,229
81
214
10,302
127
134
35
65
553
914
81
995
9,307
$
$
1,428
(235)
219
6,202
27
111
10
(165)
(154)
(171)
73
(98)
6,300
$
150
(85)
7
(285)
(89)
(98)
11
(563)
(749)
(1,488)
(549)
(2,037)
1,752
$
$
579
(46)
130
3,478
91
111
17
(20)
215
414
135
549
2,929
729
(131)
137
3,193
2
13
28
(583)
(534)
(1,074)
(414)
(1,488)
4,681
$
Net interest income, on a taxable-equivalent basis, for the year ended December 31, 2014 was $80.3 million,
compared to $74.0 million for the year ended December 31, 2013. The increase in net interest income for 2014,
compared to 2013, was a result of an increase in average earning assets resulting from the acquisition of CVBK, offset in
part by a decrease in the net interest margin. Net interest margin decreased 89 basis points to 6.55 percent for 2014
relative to 2013. The decrease in net interest margin during 2014 was attributable to a decrease in the yield on interest-
earning assets of 107 basis points, offset in part by decreases in the cost of interest-bearing liabilities and an increase in
demand deposits that pay no interest. The decrease in the yield on interest-earning assets was primarily attributable to a
large increase in interest-bearing deposits in other banks and federal funds sold, which provides the lowest yield of all
earning assets, and decreases in the yields on the investment and loan portfolios. The decrease in the cost of interest-
bearing liabilities is a result of the sustained low interest rate environment, the repricing of higher-rate certificates of
deposit as they mature to lower rates, and a shift in the mix of deposits from higher cost interest-bearing deposits to
lower cost deposits, including non-interest-bearing demand deposits and low-cost interest-bearing demand deposits,
money market deposits and savings accounts.
Average loans, which includes both loans held for investment and loans held for sale, increased $93.2 million to
$854.9 million for the year ended December 31, 2014, compared to 2013. In total, average loans held for investment
increased $112.4 million for the year ended December 31, 2014 compared to 2013, which included increases attributable
to the acquisition of CVBK on October 1, 2013. These increases were offset in part by a $19.2 million decline in the
Mortgage Banking segment's average portfolio of loans held for sale during 2014, compared to 2013. The decline in
demand for mortgage loans and refinancing activity during 2014 resulted in a $242.7 million decrease in loan
originations during 2014, representing a 33.6 percent decline compared to 2013.
35
The overall yield on average loans decreased 50 basis points to 9.27 percent for year ended December 31, 2014,
compared to 2013. The majority of the decrease was the result of a 74 basis point decline in the average yield on the
Consumer Finance loan portfolio for the year ended December 31, 2014 which was due to increased competition and
loan pricing strategies that competitors have used to grow market share. Partially offsetting these factors in 2014 was
$2.7 million of accretion related to the fair value interest adjustments to CVB's loan portfolio, which contributed
approximately 32 basis points to the yield on loans and 22 basis points to the yield on interest earning assets and 23 basis
points to the net interest margin for 2014.
Average securities available for sale increased $49.8 million for the year ended December 31, 2014, compared to
2013, which was primarily attributable to the acquisition of CVB's securities portfolio. The average yield on the
securities portfolio decreased due to the (1) lower-yielding securities within CVB’s portfolio that were included for the
full year, (2) purchase of lower-yielding shorter-term securities and (3) reinvestment of the proceeds from calls and
maturities of longer-term, higher yielding securities to shorter-term, lower-yielding taxable securities. The Corporation
has utilized the strategy of investing in lower-yielding, shorter-term securities to limit exposure to potential future rising
interest rate environments.
Average interest-bearing deposits in other banks and federal funds sold increased $89.1 million for the year ended
December 31, 2014, compared to the same period of 2013, which was primarily attributable to the acquisition of CVBK.
The remainder of the increase in 2014 resulted from deposit growth and lower loan funding needs of C&F Mortgage due
to the decline in demand for mortgage loans during 2014. The average yield on these overnight funds increased one basis
point during 2014.
Average interest-bearing time and savings deposits increased $202.4 million for the year ended December 31,
2014, compared to the same period in 2013, which was primarily attributable to the acquisition of CVB. The average
cost of interest-bearing deposits declined 18 basis points during 2014, which resulted from (1) the repricing of time
deposits that matured throughout 2013 and into 2014 to lower interest rates, (2) a decline in interest rates paid on NOW
and money market deposit accounts in the sustained low interest rate environment, (3) a shift in deposit composition to
non-term savings and money market deposits, which pay lower interest rates, and (4) time deposit accretion related to the
fair value accounting adjustment to CVB’s time deposit, which reduced the cost of interest-bearing deposits by 13 basis
points.
Average borrowings increased $3.1 million for the year ended December 31, 2014, compared to the same period
of 2013. This increase was primarily due to the Corporation’s assumption of $5.2 million of trust preferred capital notes
in connection with the acquisition of CVBK. The average cost of borrowings declined one basis point during 2014.
The continuing challenge at the Retail Banking segment will be the deployment of excess cash into earning assets
as we expect significant competition for loans and the low interest rate environment to continue to suppress yields on
investment securities. If market conditions, such as interest rates and housing inventories, do not improve, the Mortgage
Banking segment may continue to experience lower loan demand, particularly for refinancings, which could reduce
interest income on loans originated for sale, further contributing to a deterioration in net interest margin. The net interest
margin at the Consumer Finance segment will be most affected by increasing competition and loan pricing strategies that
competitors may use to grow market share in automobile financing. This increased competition may result in lower
yields and lower loan growth as the Consumer Finance segment responds to competitive pricing pressures and fewer
purchases of automobile retail installment sales contracts.
2013 Compared to 2012
Net interest income, on a taxable-equivalent basis, for the year ended December 31, 2013 was $74.0 million,
compared to $69.3 million for the year ended December 31, 2012. The increase in net interest income for 2013,
compared to 2012, was a result of an increase in average earning assets resulting from the acquisition of CVBK, offset in
part by a decrease in the net interest margin. Net interest margin decreased 41 basis points to 7.44 percent for the 2013
relative to 2012. The decrease in net interest margin during 2013 can be attributed to a decrease in the yield on interest-
earning assets offset in part by decreases in the cost of interest-bearing liabilities and an increase in demand deposits that
36
pay no interest. The decrease in the yield on interest-earning assets was primarily attributable to a large increase in
interest-bearing deposits in other banks and federal funds sold, which segment of earning assets provides the lowest yield
of all segments of earning assets, and decreases in the yields on the investment and loan portfolios. The decrease in the
cost of interest-bearing liabilities is a result of the sustained low interest rate environment, the repricing of higher-rate
certificates of deposit and borrowings as they mature to lower rates, and a shift in the mix of deposits from higher cost
interest-bearing deposits to lower cost deposits, including non-interest-bearing demand deposits and low-cost interest-
bearing demand deposits, money market deposits and savings accounts.
Average loans, which includes both loans held for investment and loans held for sale, increased $28.8 million to
$761.8 million for the year ended December 31, 2013, compared to the same period of 2012. In total, average loans held
for investment increased $45.2 million from the year ended December 31, 2012 to the same period in 2013, which
included increases of $36.1 million attributable to the acquisition of CVB on October 1, 2013 and $20.7 million
attributable to growth in the Consumer Finance segment's average loan portfolio. These increases were offset in part by a
$12.0 million decline in C&F Bank's portfolio of average loans held for investment, where loan production has been
negatively affected by weak demand for new loans in the current economic environment and intense competition for
loans in our markets. The Mortgage Banking segment's average portfolio of loans held for sale decreased $16.4 million
during 2013, compared to 2012. The decline in demand for mortgage loans and refinancing activity during 2013 resulted
in a $118.8 million decrease in loan originations during 2013 compared to 2012.
The overall yield on average loans decreased 5 basis points to 9.77 percent for year ended December 31, 2013,
when compared to the same period of 2012. While the average loan yield benefited from growth in the higher-yielding
Consumer Finance loan portfolio, yields on new loans in this segment have declined in response to aggressive pricing
strategies by competitive lenders, and the yield on the Consumer Finance segment's portfolio declined 84 basis points to
17.20 percent. Further contributing to the decline in the loan yield was a 15 basis point decline in the yield on C&F
Bank's loan portfolio resulting from the sustained low interest rate environment, coupled with competitive pricing for
limited loan demand. Partially offsetting these factors in 2013 were (i) the collection of $307,000 of nonaccrual interest
in connection with the pay-off of $2.0 million of TDRs related to one commercial relationship, which contributed
approximately four basis points to the yield on loans and three basis points to the total yield on interest earning assets
and the net interest margin for 2013 and (ii) $797,000 of accretion related to the fair value interest adjustments to CVB's
loan portfolio, which contributed approximately ten basis points to the yield on loans and eight basis points to the yield
on interest earning assets and the net interest margin for 2013.
Average securities available for sale increased $26.7 million for the year ended December 31, 2013, compared to
the same period of 2012, of which $16.3 million was attributable to the acquisition of CVB's securities portfolio since
October 1, 2013. Securities also increased at C&F Bank where the average balance of shorter-term securities of U.S.
government agencies and corporations increased $10.1 million. Shifts in the mix of investments from higher-yielding
securities to lower-yielding securities were attributable to (1) collateral requirements to support public deposits and (2)
reinvesting the proceeds from calls and maturities of longer-term investments to shorter-term taxable securities to limit
the Corporation's exposure to potential future rising interest rate environments. The lower yield on the securities
portfolio during 2013 resulted from the calls and maturities of higher-yielding securities and purchases of lower-yielding
shorter-term securities, as described above, and the inclusion of lower-yielding securities within CVB’s portfolio.
Average interest-bearing deposits in other banks and federal funds sold increased $56.4 million for the year ended
December 31, 2013, compared to the same period of 2012, of which $15.7 million was attributable to the acquisition of
CVBK. The remainder of the increase in 2013 resulted from deposit growth and lower loan funding needs of (i) C&F
Bank due to weak loan demand and heightened competition for loans and (ii) C&F Mortgage due to the decline in
demand for mortgage loans during 2013. The average yield on these overnight funds increased four basis points during
2013.
Average interest-bearing time and savings deposits increased $91.5 million for the year ended December 31,
2013, compared to the same period in 2012, of which $68.9 million was attributable to the acquisition of CVB. The
remainder of the increase occurred at C&F Bank from higher average interest-bearing demand, money market and
savings deposits at C&F Bank, which was offset in part by lower average certificates of deposit. The average cost of
interest-bearing deposits declined 30 basis points during 2013, which resulted from (1) the repricing of time deposits that
37
matured throughout 2012 and into 2013 to lower interest rates, (2) a decline in interest rates paid on NOW and money
market deposit accounts in the sustained low interest rate environment (3) a shift in deposit composition to non-term
savings and money market deposits, which pay lower interest rates, and (4) time deposit accretion related to the fair
value accounting adjustment to CVB’s time deposit, which reduced the cost of interest-bearing deposits by four basis
points.
Average borrowings increased $4.7 million for the year ended December 31, 2013, compared to the same period
of 2012. This increase was primarily due to increases in retail overnight repurchase agreements with commercial
depositors during 2013. The average cost of borrowings declined 33 basis points during 2013 because of the maturity of
$10.0 million of FHLB advances during the third quarter of 2012, which were replaced by advances carrying lower
interest rates. In addition, $5.0 million of trust preferred capital notes issued in 2007 converted to a lower variable rate
from a higher fixed rate near the end of 2012.
NONINTEREST INCOME
TABLE 3: Noninterest Income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other income
Total noninterest income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other income
Total noninterest income
(Dollars in thousands)
Gains on sales of loans *
Service charges on deposit accounts
Other service charges and fees
Gains on calls of available for sale securities
Other income
Total noninterest income
Retail
Banking
$
— $
Year Ended December 31, 2014
Mortgage Consumer Other and
Banking
Eliminations
5,108
—
2,314
—
—
—
14
—
—
—
17
—
Finance
$
$
$
Total
5,108
4,468
6,246
29
4,468
3,901
29
772
394
1,213
1,341
3,720
$
9,170 $
7,816
$
1,227
$
1,358 $
19,571
Retail
Banking
$
— $
4,197
2,917
6
552
7,672 $
$
Retail
Banking
$
— $
3,326
2,431
11
356
6,124 $
$
Year Ended December 31, 2013
Mortgage Consumer Other and
Eliminations
Banking
Finance
7,510
—
3,131
—
1,177
11,818
$
$
—
—
9
—
1,181
1,190
$
$
— $
—
163
270
1,107
1,540 $
Year Ended December 31, 2012
Mortgage Consumer Other and
Eliminations
Banking
Finance
7,692
—
3,669
—
646
12,007
$
$
—
—
11
—
1,138
1,149
$
$
— $
—
199
—
1,143
1,342 $
Total
7,510
4,197
6,220
276
4,017
22,220
Total
7,692
3,326
6,310
11
3,283
20,622
* Gains on sales of loans at the Mortgage Banking segment have been reclassified to conform to current year
presentation.
38
2014 Compared to 2013
Total noninterest income decreased $2.6 million, or 11.9 percent, for the year ended December 31, 2014,
compared to the same period in 2013. The decrease in total noninterest income for 2014 was attributable to the Mortgage
Banking segment where current market conditions caused a decline of 33.6 percent in loan origination volume during
2014 and corresponding decreases of $2.4 million in gains on sales of loans and $1.6 million in ancillary loan origination
fees constituting a 33.9 percent decline in noninterest income generated by that segment. Noninterest income also
declined because of a nonrecurring $270,000 gain recognized in 2013 from the sale of securities by the Corporation.
These decreases were partially offset by higher noninterest income at the Retail Banking segment, which included a full
year of CVB noninterest income. In addition, C&F Bank recognized higher activity-based debit card interchange and
service charges on its deposit accounts resulting from increased customer activity during 2014.
2013 Compared to 2012
Total noninterest income increased $1.6 million, or 7.7 percent, for the year ended December 31, 2013, compared
to the same period in 2012. The increase in total noninterest income for 2013 included $668,000 of noninterest income of
CVBK since October 1, 2013 consisting of $285,000 of service charges on deposit accounts, $237,000 of other service
charges and fees and $146,000 of other income. In addition, noninterest income was affected by the Mortgage Banking
segment's election in the second quarter of 2013 to use fair value accounting for its portfolio of loans held for sale and
IRLCs, which resulted in a $333,000 favorable fair value adjustment for the year ended December 31, 2013. Noninterest
income for the Mortgage Banking segment was further affected by volatility in mortgage interest rates, which caused a
decline of 14.1 percent in loan origination volume during 2013 and a corresponding $182,000 decrease in gains on sales
of loans and $538,000 decrease in ancillary loan origination fees. C&F Bank recognized higher activity-based debit card
interchange and service charges on its deposit accounts resulting from increased customer activity during 2013. The
Corporation's holding company, which is included in "Other and Eliminations" above, recognized a $270,000 gain in the
third quarter of 2013 from the sale of its holdings of Fannie Mae and Freddie Mac preferred stock.
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
TABLE 4: Noninterest Expense
Retail
Banking
Year Ended December 31, 2014
Mortgage Consumer Other and
Eliminations
Finance
Banking
Total
$
22,944 $
6,250
3,568 $
1,832
8,962 $
717
836 $
7
36,310
8,806
6
—
11,714
11,720
40,914 $
—
240
2,536
2,776
8,176 $
—
—
4,022
4,022
13,701 $
—
—
501
501
1,344 $
6
240
18,773
19,019
64,135
$
39
(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
Banking
$
Year Ended December 31, 2013
Retail
Mortgage Consumer
Banking Finance
Other and
Eliminations
Total
18,361 $
4,665
4,118 $
1,894
7,877 $
823
811 $
15
31,167
7,397
681
—
9,154
9,835
32,861 $
—
558
3,429
3,987
9,999 $
—
—
3,477
3,477
12,177 $
—
—
1,749
1,749
2,575 $
681
558
17,809
19,048
57,612
$
Year Ended December 31, 2012
Retail
Banking
Mortgage Consumer
Banking
Finance
Other and
Eliminations
Total
$
15,562 $
4,041
3,795 $
1,904
7,591 $
827
865 $
23
27,813
6,795
1,634
—
6,710
8,344
—
1,205
3,156
4,361
—
—
3,273
3,273
$
27,947 $ 10,060 $
11,691 $
—
—
456
456
1,344 $
1,634
1,205
13,595
16,434
51,042
* Salaries and employee benefits for prior periods at the Mortgage Banking segment have been reclassified to conform
to current year presentation.
2014 Compared to 2013
Total noninterest expenses increased $6.5 million, or 11.3 percent, for the year ended December 31, 2014,
compared to the same period in 2013. The increase in total noninterest expenses for 2014, which includes a full year of
CVBK noninterest expenses, resulted primarily from higher personnel costs during 2014 (1) at C&F Bank due to
increased staff levels and support positions associated with the addition of seven branches through the acquisition of
CVB and the addition of new personnel dedicated to growing C&F Bank's commercial and small business loan portfolio,
(2) due to one-time costs and ongoing operating expenses associated with the effects of combining CVB’s operations
into C&F Bank’s and (3) due to depreciation of equipment purchased to upgrade CVB’s systems and equipment to
conform to C&F Bank’s technology infrastructure. In addition, personnel costs increased at the Consumer Finance
segment due to an increase in the number of personnel related to the segment’s expansion efforts throughout 2013.
These increases were partially offset by a lower OREO expense at the Retail Banking segment, lower variable loan
production costs at the Mortgage Banking segment and nonrecurring transaction costs recognized in 2013 associated
with the Corporation’s acquisition of CVBK.
2013 Compared to 2012
Total noninterest expenses increased $6.6 million, or 12.9 percent, for the year ended December 31, 2013,
compared to the same period in 2012. The increase in total noninterest expenses for 2013 included $2.8 million of
noninterest expenses of CVBK since October 1, 2013 consisting of $1.0 million of salaries and employee benefits,
$282,000 of occupancy expense and $1.5 million of other expenses. Further increases resulted primarily from higher
personnel costs during 2013 at (1) C&F Bank due to increased staffing in the branch network to support customer service
initiatives and the addition of new personnel dedicated to growing C&F Bank's commercial and small business loan
portfolio, (2) the Mortgage Banking segment due to higher non-production based compensation associated with the
expansion into Virginia Beach, Virginia and with regulatory compliance and (3) the Consumer Finance segment due to
an increase in the number of personnel to support expansion into new markets. In addition, C&F Bank recognized a
40
$165,000 loss on the sale of a facility in West Point, Virginia previously used for its deposit operations, and the
Corporation's holding company, which is included in "Other and Eliminations" above, recognized $1.2 million in
transaction costs associated with the Corporation's acquisition of CVBK. These increases were partially offset by a lower
provision for indemnification losses in connection with loans sold to investors at the Mortgage Banking segment and
lower foreclosed properties expenses at C&F Bank.
INCOME TAXES
Income taxes on 2014 earnings amounted to $4.7 million, resulting in an effective tax rate of 27.7 percent,
compared with $6.7 million, or 31.8 percent, in 2013 and $7.6 million, or 31.8 percent, in 2012. Earnings of the Retail
Banking segment, which are exempt from state income taxes and include tax-exempt income on securities issued by
states and political subdivisions, increased in 2014 and became a larger portion of the Corporation’s earnings. Therefore,
the Corporation’s effective tax rate declined in 2014 as compared to 2013. Further, the Corporation’s effective tax rate
in 2013 reflected the effect of $707,000 of non-deductible expenses associated with the acquisition of CVBK on
October 1, 2013. For 2013 compared to 2012, the effective tax rate remained the same even through earnings of the
Retail Banking segment increased because of the effect of $707,000 of non-deductible expenses associated with the
acquisition of CVB in 2013.
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. This analysis includes purchased performing loans acquired in connection with the
Corporation's acquisition of CVBK on October 1, 2013. 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.
41
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 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.
42
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 - PCI Loans - As previously described, on a quarterly basis we evaluate
our estimate of cash flows expected to be collected on PCI loans. These evaluations require the continued assessment of
key assumptions and estimates similar to the initial estimate of fair value, such as the effect of collateral value changes,
changing loss severities, prepayment speeds and other relevant factors. Subsequent decreases to the expected cash flows
will generally result in a provision for loan losses resulting in an increase to the allowance for loans losses. For a more
detailed description, see "Critical Accounting Policies" in this Item 7.
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, deferrals, 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 2.10
percent in 2014, 1.32 percent in 2013 and 0.73 percent in 2012.
43
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
2014
34,852
$
—
60
16,270
16,330
161
—
271
80
312
19,022
19,846
59
—
210
—
250
3,751
4,270
15,576
35,606
$
Year Ended December 31,
2012
2013
2011
2010
$ 35,907 $ 33,677 $ 28,840 $ 24,027
1,030
90
13,965
15,085
849
—
2,298
126
399
16,398
20,070
2,400
165
9,840
12,405
793
—
2,074
159
337
10,134
13,497
6,000
360
7,800
14,160
1,096
—
2,566
52
319
8,144
12,177
6,500
34
8,425
14,959
334
—
3,787
44
189
7,976
12,330
106
3
227
28
173
3,393
3,930
16,140
6
—
21
32
83
2,042
2,184
10,146
$ 34,852 $ 35,907 $ 33,677 $ 28,840
35
—
121
79
207
2,880
3,322
10,175
98
—
173
12
122
2,449
2,854
9,323
0.06%
0.73 %
0.72 %
0.89 %
0.97 %
5.39%
4.59 %
2.76 %
2.39 %
2.89 %
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.
For further information regarding the adequacy of our allowance for loan losses, refer to “Nonperforming Assets”
within this Item 7.
44
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
2014
2013
December 31,
2012
2011
2010
$
$
2,313
434
7,744
812
211
24,092
—
35,606
$
2,355 $
434
7,805
892
273
23,093
—
1,442
581
8,688
380
307
17,442
—
$ 34,852 $ 35,907 $ 33,677 $ 28,840
2,358 $
424
9,824
885
283
22,133
—
2,379 $
480
10,040
912
319
19,547
—
21%
1
37
6
1
34
100 %
23 %
1
35
6
1
34
100 %
22 %
1
30
5
1
41
100 %
22 %
1
33
5
1
38
100 %
23 %
2
34
5
1
35
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, 2014 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
Special
Mention
Substandard
Substandard Nonaccrual
Total1
Pass
$ 171,414 $
4,677
269,631
48,443
7,984
2,978 $
—
7,591
772
103
$ 502,149 $ 11,444 $
2,953 $
2,648
27,590
750
33
33,974 $
2,472 $ 179,817
7,325
306,845
50,321
8,163
4,904 $ 552,471
—
2,033
356
43
*
Included in the table above are loans purchased in connection with the acquisition of CVB of $87.3 million pass
rated, $3.0 million special mention, $10.7 million substandard and $603,000 substandard nonaccrual.
(Dollars in thousands)
Consumer finance
Non‐
Performing
$ 282,293 $
Performing Total
1,040 $ 283,333
1 At December 31, 2014, 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.
45
Loans by credit quality indicators as of December 31, 2013 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
Special
Mention
Substandard
Substandard Nonaccrual
Total1
$ 180,670 $ 2,209 $
2,899
243,576
48,603
8,616
116
8,571
1,003
2
$ 484,364 $ 11,901 $
3,580 $
2,795
34,573
898
158
42,004 $
1,996 $ 188,455
5,810
288,593
50,795
9,007
4,391 $ 542,660
—
1,873
291
231
*
Included in the table above are loans purchased in connection with the acquisition of CVB of $119.8 million pass
rated, $3.3 million special mention, $17.8 million substandard and $652,000 substandard nonaccrual.
(Dollars in thousands)
Consumer finance
Non-
Performing
$ 276,537 $
Performing Total
1,187 $ 277,724
1 At December 31, 2013, 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 Retail Banking segment's allowance for loan losses decreased $305,000 since December 31, 2013 as a result
of net charge-offs during 2014 that were largely provided for through provisions in loan losses recognized in prior
periods. While there was a slight increase in substandard nonaccrual loans since December 31, 2013, there was no
provision for loan losses at the Retail Banking segment during 2014 because of the overall improvement in the quality of
the loan portfolio as indicated by the $8.0 million decline in substandard loans. The allowance for loan losses to total
loans, excluding purchased credit impaired loans, declined to 2.08 percent at December 31, 2014, compared to 2.22
percent at December 31, 2013. We believe that the current level of the allowance for loan losses at C&F Bank 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 by $999,000 to $24.1 million at December
31, 2014 from $23.1 million at December 31, 2013, and its provision for loan losses increased $2.3 million for the year
ended December 31, 2014, as compared to 2013. The increase in provision for loan losses during 2014 and the lack of
significant loan portfolio growth since December 31, 2013 resulted in an increase in the ratio of the allowance for loan
losses as a percentage of loans at December 31, 2014 to 8.50 percent from 8.32 percent at December 31, 2013. The
increase in the provision for loan losses during 2014 was primarily attributable to higher net charge-offs, which resulted
from the uncertain economic conditions, lower resale prices of repossessed vehicles and easing of underwriting standards
and pricing by our competitors leading to higher default rates. 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 factors influencing the Consumer Finance segment result in higher net charge-off ratio in
future periods, the Consumer Finance segment may need to increase the level of its allowance for loan losses, which
could negatively affect future earnings of the Consumer Finance segment.
46
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, including purchased loans.
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
used 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 and related fees. 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.
47
Table 8 summarizes nonperforming assets at December 31 of each of the past five years.
TABLE 8: Nonperforming Assets
Retail Banking Segment
(Dollars in thousands)
Nonaccrual loans
OREO*
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 loans
Allowance for loan losses to nonaccrual loans
$
2014
4,717
786
5,503
$
14
$
$
5,827
$ 549,183
$ 10,961
2013
$
4,391
2,768
7,159
$
75
$
$
5,620
$ 539,746
$ 11,266
$
$
2010
2012
7,765
$ 11,461
10,295
6,236
$ 18,060
$ 17,697
1,030
$
—
$
$ 16,492
9,769
$
$ 395,664 $ 401,745 $ 412,092
$ 11,228
$ 13,381
2011
10,011
6,059
16,070
68
17,094
13,650
$
$
$
1.00 %
2.00
232.37
1.34 %
2.09
256.57
$
4.40 %
3.38
116.75
3.94 %
3.40
136.35
4.28 %
2.72
144.60
* OREO is recorded at its fair market value less cost to sell.
** Because the Corporation acquired CVBK on October 1, 2013, and the Corporation did not own CVBK's assets
(including CVB's nonperforming assets) prior to October 1, 2013, information regarding CVB's nonperforming
assets for periods prior to the acquisition is not included in Table 8. Further, as required by purchase accounting,
PCI loans that were considered nonaccrual and TDRs prior to the acquisition lose these designations and are not
included in post-acquisition nonperforming assets in Table 8.
Mortgage Banking Segment
(Dollars in thousands)
Nonaccrual loans
OREO*
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 loans
Allowance for loan losses to nonaccrual loans
2014
2013
2012
2011
2010
$
$
$
$
$
$
$
187
—
187
$
—
$
—
$
3,288
$
553
$
5.69%
16.82
295.72
$
—
—
—
—
—
2,914
493
$
$
$
$
$
—%
$
—
—
—
—
—
2,340
393
$
$
$
$
$
—%
16.92
—
16.79
—
$
621
—
621
—
—
2,611
480
$
$
$
$
$
23.78 %
18.38
77.29
—
379
379
—
—
2,739
170
12.16 %
6.21
—
* OREO is recorded at its fair market value less cost to sell.
Consumer Finance Segment
(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
2014
1,040
$
$
—
$ 283,333
24,092
$
2013
1,187
$
$
—
$ 277,724
$ 23,093
2012
655
$
$
—
$ 278,186
$ 22,133
2011
381
$
$
—
$ 246,305
19,547
$
2010
151
$
$
—
$ 220,753
$ 17,442
0.37%
8.50
0.43 %
8.32
0.24 %
7.96
0.15 %
7.94
0.07%
7.90
48
Table 9 presents the changes in the OREO balance for 2014 and 2013:
TABLE 9: OREO Changes
(Dollars in thousands)
Balance at the beginning of year, gross
Transfers between loans and other real estate owned
Acquired from CVB
Charge-offs
Sales proceeds
Gain on disposition
Deferred gain on disposition
Balance at the end of year, gross
Less valuation allowance
Balance at the end of year, net
Year Ended December 31,
2014
6,904
1,960
—
(4,135)
(4,382)
324
144
815
(29)
786
2013
10,173
588
395
(261)
(4,209)
218
—
6,904
(4,135)
2,769
$
$
$
$
Nonperforming assets of C&F Bank totaled $5.5 million at December 31, 2014, compared to $7.2 million at
December 31, 2013, a 23 percent decrease during 2014. C&F Bank's nonperforming assets at December, 2014 included
$4.7 million of nonaccrual loans, compared to $4.4 million at December 31, 2013, and $786,000 of OREO compared to
$2.8 million at December 31, 2013. The ratio of the allowance for loan losses to nonaccrual loans decreased to 232.37
percent at December 31, 2014 from 256.57 percent at December 31, 2013. The increase in nonaccrual loans since
December 31, 2013 was generally attributable to smaller balance residential real estate and commercial loans.
We believe we have provided adequate loan loss reserves based on our evaluations of collectability of loans,
which considers trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current
econcomic conditions that may affect borrowers’ ability to repay and collateral values, overall portfolio quality and
review of specific potential losses.
The Corporation's aggregate OREO properties were $786,000 at December 31, 2014, compared to $2.8 million at
December 31, 2013, and primarily consisted of residential lots. These properties have been written down to their
estimated fair values less cost to sell. The decline in OREO during 2014 resulted from sales of properties that had a net
carrying value of $2.5 million at December 31, 2013, partially offset by foreclosures in 2014. In connection with the
OREO sales in 2014, the Corporation recognized $4.1 million of OREO charge-offs which were largely provided for
through OREO loss provisions recognized in prior periods.
Nonaccrual loans at the Consumer Finance segment decreased to $1.0 million at December 31, 2014 from $1.2
million at December 31, 2013. As noted above, the allowance for loan losses at the Consumer Finance segment increased
from $23.1 million at December 31, 2013 to $24.1 million at December 31, 2014, and the ratio of the allowance for loan
losses to total consumer finance loans was 8.50 percent as of December 31, 2014, compared to 8.32 percent at December
31, 2013. Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer
finance loan portfolio because the Consumer Finance segment generally 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
$413,000 for 2014, $479,000 for 2013 and $654,000 for 2012. Interest received on nonaccrual loans was $233,000 in
2014, $241,000 in 2013 and $171,000 in 2012.
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
49
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.
Impaired loans, which included $5.8 million of TDRs, and the related allowance at December 31, 2014, were as
follows:
TABLE 10A: Impaired Loans
Recorded
Investment Unpaid
Average
Balance-
Impaired
Interest
Income
Recognized
in
Loans
Principal Related
Balance Allowance Loans
$
3,000 $ 3,094 $
417 $ 2,931 $
139
2,786
—
103
30
95
2,908
—
103
32
95
440
—
15
1
6
2,735
—
115
25
95
$
6,014 $ 6,232 $
879 $ 5,901 $
150
—
7
2
4
302
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Total
Impaired loans, which included $5.6 million of TDR loans, and the related allowance at December 31, 2013, were
as follows:
TABLE 10B: Impaired Loans
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Total
Recorded
Investment in Principal Related
Unpaid
Average
Balance Interest
Income
Total
Loans
Balance Allowance Loans Recognized
$
2,601 $ 2,694 $
390 $ 2,090 $
99
2,729
13
695
131
93
2,780
16
756
132
93
504
4
131
—
14
2,748
14
562
33
95
$
6,262 $ 6,471 $
1,043 $ 5,542 $
99
1
11
—
9
219
50
TDRs at December 31, 2014 and 2013 were as follows:
TABLE 11: Troubled Debt Restructurings
December 31,
(Dollars in thousands)
Accruing TDRs
Nonaccrual TDRs1
Total TDRs2
2013
2014
$
3,801 $ 3,026
2,026
2,594
5,827 $ 5,620
$
1
2
Included in nonaccrual loans in Table 8: Nonperforming Assets.
Included in impaired loans in Tables 10A and 10B: Impaired Loans.
While TDRs are considered impaired loans, not all TDRs are on nonaccrual status. If a loan was on nonaccrual
status at the time of the TDR modification, the loan will remain on nonaccrual status following the modification and may
be returned to accrual status based on the Corporation’s policy for returning loans to accrual status. 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
modified payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the TDR
will remain on an accruing status.
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, 2014. 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
51
Year Ended December 31,
2012
2014
2013
$ 2,415 $ 2,092 $ 1,702
1,205
(815)
$ 2,089 $ 2,415 $ 2,092
240
(566)
558
(235)
The higher levels of the provision for indemnification losses and payments during 2012 relative to 2014 and 2013
were attributable to more claims arising throughout the mortgage banking industry from more stringent agency (i.e.,
Fannie Mae, Freddie Mac) loan reviews.
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, 2014, the Corporation had total assets of $1.33 billion compared to $1.31 billion at December
31, 2013. The significant components of the Corporation’s balance sheet are discussed below.
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, 2014, the Corporation’s loans held for investment in all categories
totaled $800.2 million and loans held for sale had a fair value of $28.3 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
2013
2011
2014
2010
December 31,
2012
$ 179,817 $ 188,455 $ 149,257 $ 147,135 $ 146,073
12,095
219,226
32,187
5,250
220,753
635,584
(28,840)
$ 800,198 $ 785,532 $ 640,283 $ 616,984 $ 606,744
5,810
288,593
50,795
9,007
277,724
820,384
(34,852)
7,325
306,845
50,321
8,163
283,333
835,804
(35,606)
5,737
212,235
33,192
6,057
246,305
650,661
(33,677)
5,062
205,052
33,324
5,309
278,186
676,190
(35,907)
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.
52
TABLE 14: Maturity/Repricing Schedule of Loans
December 31, 2014
Commercial,
Financial,
Real Estate
and Agricultural Construction
$
$
67,736 $
26,045
37,873
14,873 $
85,646
74,672
4,953
—
—
2,372
—
—
(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 primarily occurred in the Bank’s real estate loans for commercial, land acquisition and
development and builder line purposes, which was offset in part by a decline in residential mortgage and commercial
business loans.
Total loans at December 31, 2014 and 2013 include loans purchased in connection with the Corporation’s
acquisition of CVB on October 1, 2013. These loans were recorded at estimated fair value on the date of acquisition
without the carryover of the related allowance for loan losses. The acquired loans fall into two categories, purchased
performing loans and purchased credit-impaired (PCI) loans. On the date of acquisition, the Corporation acquired PCI
loans with a fair value of $35.3 million and acquired purchased performing loans with a fair value of $111.8 million. The
following tables present the outstanding principal balance and the carrying amount of purchased loans that are included
in the Corporation's balance sheet at December 31, 2014 and 2013:
TABLE 15: PCI and Purchased Performing Loans
December 31, 2014
(Dollars in thousands)
Outstanding principal balance
Carrying amount
Real estate – residential mortgage
Real estate – construction
Commercial, financial and agricultural
Equity lines
Consumer
Total acquired loans
Purchased
Credit
Purchased
Impaired Performing Total
85,015
$ 36,541
$ 121,556
$
$
1,723 $
—
19,367
318
16
$ 21,424 $
18,688 $ 20,411
—
64,382
15,782
995
80,146 $ 101,570
—
45,015
15,464
979
53
(Dollars in thousands)
Outstanding principal balance
Carrying amount
Real estate – residential mortgage
Real estate – construction
Commercial, financial and agricultural
Equity lines
Consumer
Total acquired loans
December 31, 2013
Purchased
Credit
Impaired
$ 49,041
Purchased
Performing
$ 110,977
Total
$ 160,018
$
2,694 $
771
28,602
332
121
29,285 $ 31,979
1,688
83,806
17,241
2,277
$ 32,520 $ 104,471 $ 136,991
917
55,204
16,909
2,156
See "Critical Accounting Policies" in this Item 7 for a description of the Corporation's accounting for purchased
performing and PCI loans.
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.
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 Bank’s option. 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. We make loans primarily for the
construction of one-to-four family residences and, to a lesser extent, multi-family dwellings. The Bank also makes
54
construction loans for office and warehouse facilities and other nonresidential projects, generally limited to borrowers
that present other business opportunities for the Retail Banking segment.
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 a
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. We do not typically amortize
construction loans, and the borrower pays interest monthly on the outstanding principal balance of the loan. The interest
rates on construction loans are fixed and variable. We do not generally finance the construction of commercial real estate
projects built on a speculative basis. For residential builder loans, we limit 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, we 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. We attempt to minimize such risks (1) by making
construction loans in accordance with our underwriting standards and to established customers in our primary market
area and (2) by monitoring the quality, progress and cost of construction. Generally, our maximum loan-to-value ratio 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 Retail Banking segment'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. 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, we also will consider making commercial real estate loans
under the following two conditions: (1) the borrower is in strong financial condition and presents a substantial business
opportunity for the Corporation and (2) the borrower has substantially pre-leased the improvements to high-caliber
tenants.
55
Our 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 maximum loan-to-value ratio for a commercial real
estate loan is 80 percent; however, this maximum can be waived for particularly strong borrowers on an exception basis.
Most commercial real estate loans are further secured by one or more unconditional personal guarantees.
In recent years, we have structured a portion of our commercial real estate loans as mini-permanent loans. The
amortization period, term and interest rates for these loans vary based on borrower preferences and our assessment of the
loan and the degree of risk involved. If the borrower prefers a fixed rate of interest, we usually offer a loan with a fixed
rate of interest for a term of three to ten 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 provide
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 an opportunity to adjust the interest
rate on this type of interest-earning asset in accordance with our 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 our control,
such as a downturn in the local economy, could adversely affect the performance of the commercial real estate loan
portfolio. We seek to minimize these risks by lending to established customers and generally restricting our commercial
real estate loans to our 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. Our policy is to make land acquisition loans to borrowers for the purpose of acquiring
developed lots for single-family, townhouse or condominium construction. We 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.
We underwrite and process 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, we use 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 appraisal policies for
developed lots for single-family or townhouse construction. We 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, we carefully evaluate 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.
56
Builder Line Lending
The Retail Banking segment 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. We manage this risk by lending to experienced builders and by using specific underwriting
policies and procedures for these types of loans.
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 Retail Banking segment 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 our 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 Retail Banking segment 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, we believe 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.
57
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 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 16 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 16: Securities Available for Sale
(Dollars in thousands)
U.S. Treasury securities
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Corporate and other debt securities
Total available for sale securities at fair value
*
Less than one percent
December 31, 2014
Amount Percent Amount
*% $ 10,000
$
29,950
50,863
127,139
158
100 % $ 218,110
December 31, 2013
Percent
5 %
14
23
58
*
100 %
—
22,934
67,619
131,344
—
$ 221,897
10
31
59
*
The Corporation seeks to diversify its portfolio to minimize risk, including by purchasing mortgage-backed
securities for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to
58
the tax benefits and the higher yield obtained from these securities. All of the Corporation's mortgage-backed securities
are direct issues of United States government agencies or government-sponsored enterprises. The municipal bond sector,
which is included in the Corporation's obligations of states and political subdivisions category of securities, is the largest
component within the securities portfolio. At December 31, 2014, approximately 97 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. The securities portfolio composition has changed considerably during 2014 with
the purchase of mortgage-backed securities that, while lower yielding, are of shorter duration which minimizes exposure
to interest rate risk.
Table 17 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.
TABLE 17: Maturity of Securities
2014
Year Ended December 31,
2013
2012
(Dollars in thousands)
U.S. Treasury 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 U.S.Treasury securities
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
Corporate and other debt 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 corporate and other debt securities
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
Amortized Average
Yield
Cost
Weighted
Weighted
Amortized Average
Weighted
Amortized Average
Cost
Yield
Cost
Yield
$
—
—
—
—
—
—% $ 10,000
—
—
—
—
—
—
10,000
—
0.01 % $
—
—
—
0.01
—
—
—
—
—
—%
—
—
—
—
15,252
998
6,160
999
2.35
0.74
2.21
2.51
16,482
1,502
5,534
8,985
2.21
0.68
2.20
3.27
18,514
—
2,991
3,123
1.42
—
2.20
2.39
23,409
2.25
32,503
2.43
24,628
1.64
3
41,535
21,954
3,224
66,716
15,946
68,551
20,405
19,410
124,312
—
—
—
—
—
6.24
2.34
2.76
2.86
2.50
5.36
4.95
5.36
6.45
5.30
—
—
—
—
—
2
1,403
2,392
47,521
51,318
11,188
51,002
38,547
22,992
123,729
—
—
—
158
158
4.50
3.00
2.68
2.76
2.76
5.94
5.66
5.26
6.42
5.70
—
—
—
9.44
9.44
28
2,099
—
—
2,127
13,030
34,474
46,168
23,207
116,879
—
—
—
—
—
4.68
2.35
—
—
2.38
4.63
5.86
5.97
6.60
5.91
—
—
—
—
—
31,201
111,084
48,519
23,633
$ 214,437
37,672
3.89
53,907
4.06
46,473
3.78
5.79
79,656
4.16% $ 217,708
31,572
2.73
36,573
5.45
49,159
4.76
3.89
26,330
4.26 % $ 143,634
2.75
5.66
5.74
6.10
5.13 %
59
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 (estimated fair value of
$104,000 at December 31, 2012). The Corporation did not hold any preferred stock at December 31, 2014 and 2013.
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 $1.03 billion at December 31, 2014, compared to $1.01 billion at December 31, 2013. The $17.8
million increase in deposits from December 31, 2013 to December 31, 2014 occurred primarily in non-term accounts, as
depositors shifted from time deposits in order to position themselves for flexibility regarding the availability of their
funds in the event of a favorable shift in interest rates.
The Corporation had $3.1 million in brokered money market deposits outstanding at December 31, 2014,
compared to $2.4 million in brokered money market deposits at December 31, 2013. 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 18 presents the average deposit balances and average rates paid for the years 2014, 2013 and 2012.
TABLE 18: Average Deposits and Rates Paid
2014
Year Ended December 31,
2013
2012
(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
Average
Balance
$ 166,928
186,548
181,530
97,643
139,502
241,231
846,454
Average
Rate
Rate
Average
Balance
$ 123,859
0.24 % 137,615
0.27
132,449
0.09
61,237
0.93
133,363
0.73
179,387
0.48 % 644,051
Average Average
Balance
$ 104,737
0.30 % 110,237
98,045
0.29
45,645
0.12
134,668
1.10
1.07
163,921
0.66 % 552,516
Average
Rate
0.37 %
0.38
0.10
1.52
1.50
0.96 %
Total deposits
$
1,013,382
$ 767,910
$ 657,253
Table 19 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2014.
TABLE 19: 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
60
$
December 31, 2014
16,807
19,130
43,137
80,998
160,072
$
BORROWINGS
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 agreement to repurchase with a third-party correspondent bank. All FHLB advances are secured
by a blanket floating lien on all of C&F 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 C&F Bank’s securities portfolio.
In December, 2007, Trust II, a wholly-owned subsidiary of the Corporation, was formed for the purpose of issuing
trust preferred capital securities for general corporate purposes including the refinancing of existing debt. On
December 14, 2007, Trust II issued $10.0 million of trust preferred capital securities in a private placement to an
institutional investor and $310,000 in common equity to the Corporation. The principal asset of Trust II is $10.3 million
of the Corporation’s trust preferred capital notes. In July 2005, Trust I, a wholly-owned subsidiary of the Corporation,
was formed for the purpose of issuing trust preferred capital securities to partially fund the Corporation’s purchase of
427,186 shares of its common stock. On July 21, 2005, Trust I issued $10.0 million of trust preferred capital securities in
a private placement to an institutional investor and $310,000 in common equity to the Corporation. The principal asset of
Trust I is $10.3 million of the Corporation’s trust preferred capital notes. In December 2003, CVBK Trust I was formed
for the purpose of issuing $5.0 million of trust preferred capital securities in private placements to institutional investors.
The principal asset of CVBK Trust I is $5.2 million of trust preferred capital notes originally issued by CVBK and then
assumed by the Corporation.
For further information concerning the Corporation’s borrowings, refer to Item 8, “Financial Statements and
Supplementary Data,” under the heading “Note 9: 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 $136.0 million at December 31, 2014, and $129.2 million at December 31, 2013.
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 $13.4 million at December 31,
2014, and $13.7 million at December 31, 2013.
At December 31, 2014, C&F Mortgage had rate lock commitments to originate mortgage loans aggregating $38.4
million and loans held for sale of $28.3 million. At December 31, 2014, each loan held for sale by C&F Mortgage was
subject to a forward sales agreement. C&F Mortgage enters into IRLCs with customers and will sell the underlying
61
loans to investors on either a best efforts or a mandatory delivery basis. C&F Mortgage mitigates interest rate risk on
IRLCs and loans held for sale by (a) entering into forward loan sales contracts with investors for loans to be delivered on
a best efforts basis or (b) entering into forward sales contracts of mortgage-backed to-be-announced securities (TBAs)
for loans to be delivered on a mandatory basis. Both the IRLCs with customers and the forward sales contracts are
considered derivative financial instruments. At December 31, 2014, C&F Mortgage had forward sales contracts with a
notional value of $66.7 million. The fair value of these derivative instruments at December 31, 2014 was $448,000,
which was included in other assets.
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 lending 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 that, in
management's judgment, will be adequate to absorb any losses arising from valid indemnification requests. Payments
made under these recourse provisions were $566,000 in 2014, $235,000 in 2013 and $815,000 in 2012.
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
the Corporation’s exposure to interest rate risk by converting variable rates of interest on $10.0 million and $15.0 million
of the Corporation’s trust preferred capital notes to fixed rates of interest until September 2015 and December 2019,
respectively. The cash flow hedges’ total notional amount is $25.0 million. At December 31, 2014, the $15.0 million
cash flow hedges had a fair value of $40,000, which is recorded in other assets, and the $10.0 million cash flow hedges
had a fair value of ($143,000), which is recorded in other liabilities. The cash flow hedges were fully effective at
December 31, 2014. Therefore, the net loss on the cash flow hedges was recognized as a component of other
comprehensive income (loss), net of deferred income taxes.
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 $279.1 million at December 31, 2014. The increase in liquid assets
during 2014 resulted primarily from the increase in interest-bearing deposits at other banks, as the Corporation increased
deposits at other banks as it could not deploy funds into newly-originated loans or into securities at attractive risk-
adjusted returns. The Corporation’s funding sources, including capacity, amount outstanding and amount available at
December 31, 2014 are presented in Table 20.
62
TABLE 20: Funding Sources
(Dollars in thousands)
Unsecured federal funds agreements
Repurchase agreements
Repurchase lines of credit
Borrowings from FHLB
Borrowings from Federal Reserve Bank
Revolving line of credit
Total
December 31, 2014
Capacity Outstanding Available
$ 65,000 $
5,000
50,000
142,881
26,013
120,000
$ 408,894 $
— $ 65,000
—
50,000
95,881
26,013
44,512
127,488 $ 281,406
5,000
—
47,000
—
75,488
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.
Time deposits of $100,000 or more, maturing in less than a year, totaled $79.1 million at December 31, 2014; time
deposits of $100,000 or more, maturing in more than one year, totaled $81.0 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, 2014 are presented in Table 21.
Table 21: Contractual Obligations
Payments Due by Period
Less than
(Dollars in thousands)
Bank lines of credit
FHLB advances 1
Trust preferred capital notes
Securities sold under agreements to repurchase
Operating leases
Total2
Total
$ 75,488 $
47,000
25,103
19,436
4,885
More than
5 Years
1 Year
7,500
—
1‑3 Years
— $ 75,488
25,000
—
14,436 —
1,992
3‑5 Years
$ — $ —
—
14,500
25,103
—
—
5,000
436
1,191
$ 102,480 $ 20,691 $ 25,539
1,266
$ 171,912 $ 23,202
1. FHLB advances include convertible advances of $17.5 million maturing in 2017 and $5.0 million maturing in 2018.
These advances have fixed rates of interest unless the FHLB exercises its option to convert the interest on these
advances from fixed-rate to variable-rate (i.e., the conversion date). We can elect to repay the advances in whole or
in part on their respective conversion dates and on any interest payment dates thereafter without the payment of a fee
if the FHLB elects to convert the advances. However, we would incur a fee if we repay the advances prior to their
respective conversion dates, if the FHLB does not convert the advance on the conversion date, or, after notification
of conversion, on any date other than the conversion date or any interest payment date thereafter. FHLB advances
also include fixed rate hybrid advances of $7.5 million, $7.5 million $2.5 million, and $7.0 million maturing in
2015, 2016, 2018, and 2019, respectively. These advances provide fixed-rate funding until the stated maturity date.
We 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 9: Borrowings.”
2. At December 31, 2014 there were no outstanding federal funds purchased or borrowings from the Federal Reserve
Bank.
63
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 capital positions of the Corporation and C&F Bank continue to exceed regulatory minimum requirements.
The primary indicators relied on by bank regulators in measuring the capital position at December 31, 2014 and
December 31, 2013, are the Tier 1 capital, total risk-based capital, and leverage ratios, as further described in Item 8.
“Financial Statements and Supplementary Data” under the heading “Note 15: Regulatory Requirements and
Restrictions.” The Corporation’s Tier 1 capital to risk-weighted assets ratio was 13.3 percent at December 31, 2014,
compared with 13.4 percent at December 31, 2013. The total capital to risk-weighted assets ratio was 14.5 percent at
December 31, 2014, compared with 14.7 percent at December 31, 2013. The Tier 1 leverage ratio was 9.2 percent at
December 31, 2014, compared with 8.9 percent at December 31, 2013. These ratios are in excess of the mandated
minimum requirements. These ratios include the trust preferred securities issued by the Corporation in December 2003,
December 2007 and July 2005, as well as issued by CVBK in 2003 and assumed by the Corporation in March 2014.
Shareholders’ equity was $123.4 million at year-end 2014 compared with $112.9 million at year-end 2013. During
2014, the Corporation declared common stock dividends of $1.19 per share, compared to $1.16 per share declared in
2013 and $1.08 per share declared in 2012. The dividend payout ratio was 32.8 percent of basic earnings per share for
the year ended December 31, 2014, compared to 26.6 percent in 2013 and 21.6 percent in 2012. 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
addition, on May 14, 2014, the Corporation repurchased the ten-year warrant to purchase up to 167,504 shares of the
Corporation’s common stock, par value $1.00 per share at an initial exercise price of $17.91 per share for $2.3 million.
The funds for this redemption were provided by existing financial resources of the Corporation and no new capital was
issued.
In June 2013, the federal bank regulatory agencies adopted the Basel III Final Rules (i) to implement the Basel III
capital framework and (ii) for calculating risk-weighted assets. These rules are effective beginning January 1, 2015,
subject to limited phase-in periods. Refer to Item 1. "Business" under the heading "Regulation and Supervision" for an
overview of the Basel III Final Rules.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Corporation are described in Item 8, “Financial Statements and
Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies-Recent Significant
Accounting Pronouncements.”
EFFECTS OF INFLATION AND CHANGING PRICES
The Corporation's financial statements included herein have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). GAAP presently requires the Corporation to measure
financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due
to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Corporation
is reflected in increased operating costs. In management's opinion, changes in interest rates affect the financial condition
of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly
influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as
64
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 four outstanding interest rate swaps
used as hedging transactions at December 31, 2014. The interest rate swaps were entered into to fix the rate of interest
paid on $25.0 million of the Corporation’s variable rate trust preferred capital notes. Two interest rate swaps with a total
notional value of $10.0 million mature in 2015 and two interest rate swaps with a total notional value of $15.0 million
mature in 2019.
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 assumptions include loan prepayments, time
deposit early withdrawals, the sensitivity of deposit repricing to changes in market rates, withdrawal behavior of non-
maturing deposits, and other factors that management deems significant.
65
The simulation analysis results are presented in the table below. These results, based on a measurement date
balance sheet as of December 31, 2014, indicate that the Corporation would expect net interest income to decrease over
the next twelve months 2.82 percent assuming an immediate downward shift in market interest rates of 200 basis points
(BP) and to increase 1.79 percent if rates shifted upward in the same manner.
1-Year Net Interest Income Simulation (dollars in thousands)
Hypothetical Change in Net
Interest Income
for the Year Ended
December 31, 2014
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Dollars
$
$
(2,152)
1,366
Percentage
(2.82)%
1.79 %
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, 2014 indicate that the
EVE would decrease 9.59 percent assuming an immediate downward shift in market interest rates of 200 BP and would
increase 1.52 percent if rates shifted upward in the same manner.
Static EVE Change (dollars in thousands)
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Hypothetical Change in EVE
Percentage
(9.59) %
1.52 %
Dollars
(19,844)
$
$ 3,150
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 interest-bearing deposits in other
banks and loan portfolios. However, in a falling rate environment the simulation assumes that adjustable-rate assets will
continue to reprice downward, subject to floors on certain loans, and fixed-rate assets with prepayment or callable
options will reprice at lower rates while certain deposits cannot reprice any lower.
The EVE analysis above indicates 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. 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 interest-bearing deposits in other banks and investment and loan portfolios as compared to time deposits and
borrowings and the longer average life of non-maturing deposits, such as interest checking and money market accounts.
During 2014, balances in interest-bearning deposits in other banks increased, the maturity or repricing dates in the
Corporation’s investment portfolio were shortened, and the maturity or repricing dates in the Corporation’s borrowings
were lengthened.
66
We believe that our current interest rate exposure is manageable and does not indicate any significant exposure to
interest rate changes.
C&F Mortgage enters into IRLCs with customers and will sell the underlying loans to investors on either a best
efforts or a mandatory basis. C&F Mortgage mitigates interest rate risk on IRLCs and loans held for sale by (a) entering
into forward loan sales contracts with investors for loans to be delivered on a best efforts basis or (b) entering into
forward sales contracts of TBAs for loans to be delivered on a mandatory basis. Both the IRLCs with customers and the
forward sales contracts are considered derivative financial instruments. At December 31, 2014, the Corporation had
forward sales contracts with a notional value of $66.7 million. The fair value of these derivative instruments at
December 31, 2014 was $448,000, which was included in other assets.
67
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 $214,437 and $217,708,
respectively
Loans held for sale, at fair value
Loans, net of allowance for loan losses of $35,606 and $34,852, respectively
Restricted stocks, at cost
Corporate premises and equipment, net
Other real estate owned, net of valuation allowance of $29 and $4,135, respectively
Accrued interest receivable
Goodwill
Core deposit intangible, net
Bank-owned life insurance
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
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,418,750 and 3,388,793
shares issued and outstanding, respectively, includes 135,600 and, 120,183 of
nonvested shares, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
68
December 31,
2014
2013
$
10,749 $
156,867
—
167,616
14,666
41,750
91,723
148,139
221,897
28,279
800,198
3,442
37,295
786
6,421
14,425
2,583
14,484
35,897
218,110
35,879
785,532
4,336
38,232
2,769
6,360
14,425
3,774
13,988
40,753
$ 1,333,323 $ 1,312,297
$ 161,839 $ 147,520
460,889
399,883
1,008,292
11,780
132,987
25,068
843
20,386
1,199,356
497,755
366,507
1,026,101
14,436
127,488
25,103
740
16,082
1,209,950
—
—
3,283
9,456
107,548
3,086
123,373
3,269
10,686
99,252
(266)
112,941
$ 1,333,323 $ 1,312,297
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Interest income
Interest and fees on loans
Interest on interest-bearing deposits and federal funds sold
Interest and dividends on securities
U.S. government agencies and corporations
Tax-exempt obligations of states and political subdivisions
Taxable obligations of states and political subdivisions
Corporate bonds and other
Total interest income
Interest expense
Savings and interest-bearing deposits
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
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,
2013
2014
2012
$
79,207 $
378
74,415 $
159
71,947
22
1,918
4,417
184
391
86,495
1,015
3,065
3,485
960
8,525
77,970
16,330
61,640
5,108
4,468
6,246
1,229
29
2,491
19,571
914
4,573
47
104
80,212
867
3,384
3,561
811
8,623
71,589
15,085
56,504
7,510
4,197
6,220
1,060
276
2,957
22,220
36,310
8,806
19,019
64,135
17,076
4,730
12,346
—
12,346 $
3.63 $
3.59 $
31,167
7,397
19,048
57,612
21,112
6,710
14,402
—
14,402 $
4.36 $
4.18 $
$
$
$
273
4,659
—
63
76,964
824
4,501
3,799
987
10,111
66,853
12,405
54,448
7,692
3,326
6,310
1,017
11
2,266
20,622
27,813
6,795
16,434
51,042
24,028
7,646
16,382
311
16,071
5.00
4.86
See notes to consolidated financial statements.
69
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income
Other comprehensive income (loss), net:
Changes in defined benefit plan assets and benefit obligations
Changes in net (loss) gain arising during the period1
Tax effect
Amortization of prior service cost arising during the period1
Tax effect
Net of tax amount
Unrealized gain on cash flow hedging instruments
Unrealized holding gain arising during the period
Tax effect
Net of tax amount
Unrealized holding gains (losses) on securities
Unrealized holding gains (losses) arising during the period
Tax effect
Reclassification adjustment for gains included in net income2
Tax effect
Net of tax amount
Other comprehensive income (loss), net:
Comprehensive income, net
Year Ended December 31,
2014
2012
2013
$ 12,346 $ 14,402 $ 16,382
(2,048)
717
(68)
24
(1,375)
227
(89)
138
985
(344)
(68)
24
597
182
(71)
111
31
(11)
(68)
24
(24)
1
—
1
7,088
(2,480)
(29)
10
4,589
3,352
2,096
(734)
(11)
4
1,355
1,332
$ 15,698 $ 9,420 $ 17,714
(8,478)
2,967
(276)
97
(5,690)
(4,982)
1 These items are included in the computation of net periodic benefit cost, which is a component of salaries and
employee benefits expense on the consolidated statements of income. See Note 12, Employee Benefit Plans, for
additional information.
2 Gains are included in “Net gains on calls and sales of available for sale securities" on the consolidated statements
of income.
See notes to consolidated financial statements.
70
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Balance December 31, 2011
Comprehensive income:
Net income
Other 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)
Balance December 31, 2012
Comprehensive income:
Net income
Other comprehensive income (loss), net
Stock options exercised
Share-based compensation
Restricted stock vested
Common stock issued
Common stock purchased
Cash dividends declared – common stock ($1.16 per
share)
Balance December 31, 2013
Comprehensive income:
Net income
Other comprehensive income, net
Common stock warrant repurchased
Stock options exercised
Share-based compensation
Restricted stock vested
Common stock issued
Common stock purchased
Cash dividends declared – common stock ($1.19 per
share)
Balance December 31, 2014
Preferred
Stock
$ 10 $
Common
Stock
3,091 $ 13,438 $ 76,167 $
Retained
Earnings
Additional
Paid - In
Capital
Accumulated
Other
Total
Comprehensive Shareholders’
Income (Loss)
3,384 $
—
1,332
—
—
—
—
—
—
Equity
96,090
16,382
1,332
1,309
537
29
—
(10,000)
200
—
—
1,260
537
13
172
(9,990)
194
16,382
—
—
—
—
(172)
—
—
—
—
49
—
16
—
—
6
—
—
(3,479)
—
(3,479)
—
3,162
—
5,624
(203)
88,695
—
4,716
(203)
102,197
—
—
94
—
11
3
(1)
—
—
4,207
687
101
122
(55)
14,402
—
—
—
—
—
—
—
(4,982)
—
—
—
—
—
14,402
(4,982)
4,301
687
112
125
(56)
—
—
—
—
—
—
(10)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,269
—
10,686
(3,845)
99,252
—
(266)
(3,845)
112,941
—
—
—
—
—
—
—
—
—
—
—
—
—
15
3
(4)
—
—
(2,303)
11
1,024
65
130
(157)
12,346
—
—
—
—
—
—
—
—
3,352
—
—
—
—
—
—
12,346
3,352
(2,303)
11
1,024
80
133
(161)
—
— $
—
3,283 $
—
(4,050)
9,456 $ 107,548 $
$
—
(4,050)
3,086 $ 123,373
See notes to consolidated financial statements.
71
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Deferred income taxes
Provision for loan losses
Provision for indemnifications
Provision for other real estate owned losses
Share-based compensation
Net accretion of certain acquisition-related fair value adjustments
Accretion of discounts and amortization of premiums on securities, net
Realized gains on sales and calls of securities
Net realized gains on sales of other real estate owned
Net realized (gain) loss on sale of premises and equipment
Increase in bank-owned life insurance cash surrender value
Origination of loans held for sale
Proceeds from sales of loans held for sale
Gains on sales of loans held for sale
Change in other assets and liabilities:
Accrued interest receivable
Other assets
Accrued interest payable
Other liabilities
Net cash provided by operating activities
Investing activities:
Proceeds from maturities, calls and sales of securities available for sale
Purchases 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
Acquisition of Central Virginia Bankshares, Inc., net of cash paid
Net cash (used in) provided by investing activities
Financing activities:
Net increase in demand, interest-bearing demand and savings deposits
Net decrease in time deposits
Net (decrease) increase in borrowings
Redemption of preferred stock
Repurchase of common stock warrant
Issuance of common stock
Repurchase of common stock
Proceeds from exercise of stock options
Cash dividends
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure
Interest paid
Income taxes paid
Supplemental disclosure of noncash investing and financing activities
Unrealized gains (losses) on securities available for sale
Transfers between loans and other real estate owned
Pension adjustment
Unrealized gains on cash flow hedging instruments
Assets acquired, excluding cash and cash equivalents of $59,775
Liabilities assumed
Year Ended December 31,
2012
2013
2014
$
12,346
$
14,402
$
16,382
2,739
2,247
16,330
240
29
1,104
(2,969)
1,406
(29)
(324)
(96)
(497)
(478,641)
491,349
(5,108)
(61)
(1,285)
(103)
(4,500)
34,177
38,660
(36,246)
894
(30,288)
—
4,382
(1,815)
—
(24,413)
2,349
2,286
15,085
558
459
743
(844)
812
(276)
(218)
165
(188)
(721,340)
765,698
(7,510)
333
484
(905)
(8,455)
63,638
79,441
(33,823)
2,090
(13,030)
—
4,209
(3,654)
55,579
90,812
51,185
(32,258)
(2,844)
—
(2,303)
133
(161)
11
(4,050)
9,713
19,477
148,139
$ 167,616
20,955
(14,002)
(39,465)
—
—
125
—
4,301
(3,845)
(31,931)
122,519
25,620
$ 148,139
$
$
9,710
3,577
$
9,528
5,986
7,059
(1,960)
(2,116)
227
—
—
$
(8,754)
(588)
917
182
311,173
366,752
2,270
(848)
12,405
1,205
1,250
566
—
731
(11)
(39)
—
(108)
(840,140)
845,167
(7,692)
(431)
(1,172)
(274)
18
29,279
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
10,385
8,949
2,085
(3,866)
(37)
1
—
—
$
$
$
See notes to consolidated financial statements.
72
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 (the Corporation) and its wholly owned subsidiary, Citizens and Farmers Bank (the Bank or C&F
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, and Central Virginia
Bankshares Statutory Trust I, all of 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
Subsidiaries 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, C&F Bank, which is an independent
commercial bank chartered under the laws of the Commonwealth of Virginia. On October 1, 2013, the Corporation
acquired Central Virginia Bankshares, Inc. (CVBK) and its wholly-owned subsidiary, Central Virginia Bank (CVB),
which was an independent commercial bank chartered under the laws of the Commonwealth of Virginia. On March 22,
2014, CVBK was merged with and into C&F Financial Corporation and CVB was merged with and into C&F Bank.
C&F Bank has five wholly-owned active subsidiaries: C&F Mortgage Corporation and Subsidiary (C&F Mortgage),
C&F Finance Company (C&F Finance), C&F Investment Services, Inc., C&F Insurance Services, Inc., and CVB Title
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 subsidiary, Certified Appraisals LLC,
provides ancillary mortgage loan production services for residential appraisals. C&F Finance, acquired on September 1,
2002, is a finance company providing automobile loans through indirect lending programs. 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 C&F Bank, C&F Mortgage and other financial institutions that have an equity interest in the
agency. CVB Title Services, Inc., was organized for the primary purpose of owning membership interests in two
insurance-related limited liability companies. Business segment data is presented in Note 18.
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. At December 31, 2014,
securities issued by the Commonwealth of Virginia and its political subdivisions comprised 10.5 percent of its state and
political subdivision portfolio and securities issued by the Virginia State Housing Authority comprised 2.8 percent of its
state and political subdivision portfolio. There are no other concentrations in any one state greater than 10.0 percent and
no other individual issuers 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 3 discusses the Corporation’s
securities portfolio and investment activities.
Substantially all of the Corporation’s lending activities are with customers located in Virginia, Georgia and Tennessee.
At December 31, 2014, 36.7 percent of the Corporation’s loan portfolio consisted of commercial, financial and
73
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, 33.9 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 4 discusses the Corporation’s
lending activities.
Business Combination: On October 1, 2013, C&F Financial Corporation acquired CVBK. This acquisition was
accounted for using the acquisition method of accounting, meaning the assets and liabilities of CVBK were recorded at
their respective fair values as of October 1, 2013. These fair values were preliminary and subject to refinement for up to
one year after the closing date of the transaction (the Measurement Period) as information relative to closing date fair
values became available. The Corporation's financial position and results of operations as of and for the year ended
December 31, 2013 include CVBK's financial position as of December 31, 2013 and CVBK's results of operations from
October 1, 2013. Note 2 presents the Measurement Period adjustments to the preliminary fair values.
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 (FRB). At
December 31, 2014, the minimum requirement was $713,000 for C&F Bank. At December 31, 2013, the minimum
requirement was $373,000 for C&F Bank and $90,000 for CVB. The Corporation is required to maintain collateral
against all loss positions in its interest rate swaps which are described in Note 19. At December 31, 2014, the
Corporation was required to maintain collateral of $620,000 in connection with its interest rate swaps.
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: During the second quarter of 2013, the Corporation elected to begin using fair value accounting
for its entire portfolio of loans held for sale (LHFS) in accordance with ASC 820 - Fair Value Measurement and
Disclosures. Fair value of the Corporation's LHFS is based on observable market prices for similar instruments traded in
the secondary mortgage loan markets in which the Corporation conducts business. Substantially all loans originated by
C&F Mortgage are held for sale to outside investors.
74
Loans Acquired in a Business Combination: Loans acquired in a business combination, such as C&F Financial
Corporation's acquisition of CVB, are recorded at estimated fair value on the date of acquisition without the carryover
of the related allowance for loan losses. Purchased credit-impaired (PCI) loans are those for which there is evidence of
credit deterioration since origination and for which it is probable at the date of acquisition that the Corporation will not
collect all contractually required principal and interest payments. When determining fair market value, PCI loans were
aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date
of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual
status. The difference between contractually required payments at acquisition and the cash flows expected to be
collected at acquisition is referred to as the "nonaccretable difference," and is not recorded. Any excess of cash flows
expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest
income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such
cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses, while
subsequent increases in cash flows may result in a reversal of post-acquisition provision for loan losses, or a transfer
from nonaccretable difference to accretable yield.
Loans not designated PCI loans as of the acquisition date are designated Purchased Performing Loans. The Corporation
accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion
based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a
credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There
is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan
losses is recorded for any deterioration in these loans subsequent to the acquisition.
Originated 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
75
Corporation evaluates the borrower’s payment history, past due status and ability to make payments based on the revised
terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Corporation concludes that the
borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude
otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan
will remain on nonaccrual status following the modification and may be returned to accrual status based on the policy for
returning loans to accrual status as noted above. As of December 31, 2014 and 2013, the Corporation had $5.83 million
and $5.62 million, respectively, 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.
76
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:
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.
Allowance for Indemnifications: The allowance for indemnifications is established through charges to earnings in the
form of a provision for indemnifications, which is included in other noninterest expenses. A loss is charged against the
allowance for indemnifications when a purchaser of a loan (investor) sold by C&F Mortgage incurs a validated
indemnified loss due to borrower misrepresentation, fraud, early payment 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
77
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.
Restricted Stocks: Restricted stocks include Federal Home Loan Bank (FHLB) stock and Community Bankers Bank
(CBB) stock owned by C&F Bank at December 31, 2014. At December 31, 2013 restricted stocks included FHLB stock
owned by C&F Bank and FHLB stock, FRB stock and CBB stock owned by CVB. All of CVB’s FRB stock was
redeemed and C&F Bank assumed ownership of the CBB stock when CVB merged with and into C&F Bank on March
22, 2014. FHLB stock and CBB stock are 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 and CBB 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 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 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. Depreciation expense for the years ended December 31, 2014, 2013 and
2012 was $2.74 million, $2.35 million and $2.27 million, respectively.
Goodwill: The Corporation’s goodwill was recognized in connection with the Corporation's acquisition of CVBK in
October 2013 and its 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 may
first assess qualitative factors to determine if it is more likely than not that the fair value of goodwill is less than the
carrying amount, which determines if the two-step goodwill impairment test is necessary. 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, as of December 31, 2014 the Corporation completed an annual test for
impairment of goodwill related to the acquisition of C&F Finance and determined there was no impairment to be
recognized in 2014.
Core Deposit Intangible: The Corporation's core deposit intangible (CDI) was recognized in connection with the
Corporation's acquisition of CVB in October 2013, and represents the value of long-term deposit relationships acquired
in this transaction. The Corporation is amortizing the CDI over an estimated weighted average life of six years using the
sum-of-the-years digits method.
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
78
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. The
Corporation did not have any liabilities resulting from unrecognized tax benefits as of December 31, 2014 and
December 31, 2013. Interest and penalties associated with unrecognized tax benefits are classified as additional income
taxes in the statements 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 at December 31,
2014 and 2013 determined that the Corporation's pension plan was overfunded. As a result, the Corporation recognized a
pension asset of $502,000 and $965,000 at December 31, 2014 and 2013, respectively, and recognized a net loss of $1.4
million in 2014, a net gain of $597,000 in 2013 and a net loss of $24,000 in 2012 as components of other comprehensive
income (loss). The Corporation’s pension plan is described more fully in Note 12.
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, 2014, 2013 and 2012 included $967,000 ($600,000 after tax), $659,000 ($409,000 after tax) and $488,000
($303,000 after tax), respectively, for restricted stock granted during 2009 through 2014. As of December 31, 2014, there
was $2.79 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 14.
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, 2014, 2013 and 2012 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 10.
79
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 10.
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 interest rate lock commitments (IRLCs) to originate residential
mortgage loans for sale whereby the interest rate on the loan is determined prior to funding. 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 (a) entering into forward loan sales contracts with investors for loans to
be delivered on a best efforts basis or (b) entering into forward sales contracts of mortgage-backed to-be-announced
securities (TBAs) for loans to be delivered on a mandatory basis. Both the IRLCs with customers and the forward sales
contracts are considered derivative financial instruments, which are discussed below.
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 Corporation’s derivative financial instruments as of
December 31, 2014 consisted of (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will
be sold in the secondary market and the related forward commitments to sell mortgage loans and mortgage-backed
securities (MBS) and (2) interest rate swaps that qualified as cash flow hedges on the Corporation's trust preferred capital
notes. Because the IRLCs and forward sales commitments are not designated as hedging instruments, adjustments to
reflect unrealized gains and losses resulting from changes in fair value of the Corporation's IRLCs and forward sales
commitments and realized gains and losses upon ultimate sale of the loans are classified as noninterest income. The
Corporation's IRLCs and forward loan sales commitments are described more fully in Note 16 and Note 17. 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 period(s)
during which the hedged transactions affect earnings. The cash flow hedges are described more fully in Note 19.
Recent Significant Accounting Pronouncements:
In January 2014, the FASB issued ASU 2014-01, Investments-Equity Method and Joint Ventures - Accounting for
Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force). The
amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments
in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under
the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits
and other tax benefits received and recognizes the net investment performance in the income statement as a component
of income tax expense (benefit). The amendments in this ASU should be applied retrospectively to all periods presented.
A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing
projects before the date of adoption may continue to apply the effective yield method for those preexisting investments.
The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods
within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Corporation does not
expect the adoption of ASU 2014-01 to have a material effect on its financial statements.
In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors -
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of
the FASB Emerging Issues Task Force). The amendments in this ASU clarify that if or when an in substance
repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real
estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the
residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the
residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or
80
through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the
amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer
mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local
requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for
annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Corporation
does not expect the adoption of ASU 2014-04 to have a material effect on its financial statements.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant,
and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity. The amendments in this ASU change the criteria for reporting discontinued operations while enhancing
disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be
presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations
and financial results and include disposals of a major geographic area, a major line of business, or a major equity method
investment. The new guidance requires expanded disclosures about discontinued operations that will provide financial
statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.
Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant part of
an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for
public business entities for annual periods, and interim periods within those annual periods, beginning after December
15, 2014. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2014-08 to have a material
effect on its financial statements.
In June 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU
applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or
enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.
The guidance supersedes the revenue recognition requirements in Revenue Recognition-Topic 605, most industry-
specific guidance, and some cost guidance included in Revenue Recognition-Construction-Type and Production-Type
Contracts-Subtopic 605-35. The core principle of the guidance is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. To be in alignment with the core principle, an entity must
apply a five step process including: identification of the contract(s) with a customer, identification of performance
obligations in the contract(s), determination of the transaction price, allocation of the transaction price to the
performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation.
Additionally, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are
not in a contract with a customer have also been amended to be consistent with the guidance on recognition and
measurement. The amendments in this ASU are effective for annual reporting periods beginning after December 15,
2016, including interim periods within that reporting period. Early adoption is not permitted. The Corporation is
currently assessing the effect that ASU 2014-09 will have on its financial statements.
In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity
Transactions, Repurchase Financings, and Disclosures. This ASU aligns the accounting for repurchase-to-maturity
transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical
repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and
supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be
accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure
for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the
exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional
disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions
accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period
beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is
required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after
March 15, 2015. Early adoption is not permitted. The Corporation is currently assessing the effect that ASU 2014-11
will have on its financial statements.
81
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for
Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the
Requisite Service Period. The new guidance applies to reporting entities that grant employees share-based payments in
which the terms of the award allow a performance target to be achieved after the requisite service period. The
amendments in the ASU require that a performance target that affects vesting and that could be achieved after the
requisite service period be treated as a performance condition. Existing guidance in Compensation - Stock
Compensation (Topic 718), should be applied to account for these types of awards. The amendments in this ASU are
effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early
adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or
retrospective basis. The Corporation is currently assessing the effect that ASU 2014-12 will have on its financial
statements.
In August 2014, the FASB issued ASU No. 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic
310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The amendments in this
ASU apply to creditors that hold government-guaranteed mortgage loans and is intended to eliminate the diversity in
practice related to the classification of these guaranteed loans upon foreclosure. The new guidance stipulates that a
mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if (1) the loan has a
government guarantee that is not separable from the loan prior to foreclosure, (2) at the time of foreclosure, the creditor
has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has
the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on
the basis of the fair value of the real estate is fixed. Upon foreclosure, the other receivable should be measured on the
amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this
ASU are effective for annual periods and interim periods within those annual periods beginning after December 15,
2014. Entities may adopt the amendments on a prospective basis or modified retrospective basis as of the beginning of
the annual period of adoption; however, the entity must apply the same method of transition as elected under ASU 2014-
04. Early adoption is permitted provided the entity has already adopted ASU 2014-04. The Corporation is currently
assessing the effect that ASU 2014-14 will have on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic
205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update is intended
to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s
ability to continue as a going concern and to provide related footnote disclosures. Management is required under the
new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt
about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued
when preparing financial statements for each interim and annual reporting period. If conditions or events are identified,
the ASU specifies the process that must be followed by management and also clarifies the timing and content of going
concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for
annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is
permitted. The Corporation does not expect the adoption of ASU 2014-15 to have a material effect on its financial
statements.
In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether
the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.
The amendments in ASU do not change the current criteria in U.S. GAAP for determining when separation of certain
embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S.
GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial
instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all
relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the
nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily
determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends
upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also
clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and
features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances)
when considering how to weight those terms and features. The amendments in this ASU are effective for public business
82
entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption, including adoption in an interim period, is permitted. The Corporation does not expect the adoption of ASU
2014-16 to have a material effect on its financial statements.
In November 2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting.
The amendments in ASU provide an acquired entity with an option to apply pushdown accounting in its separate
financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An
acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-
control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each
individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is
not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to
elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-
control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the
change-in-control event occurred should be considered a change in accounting principle in accordance with Topic 250,
Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control event,
that election is irrevocable. The amendments in this ASU are effective on November 18, 2014. After the effective date,
an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent
change-in-control event. However, if the financial statements for the period in which the most recent change-in-control
event occurred already have been issued or made available to be issued, the application of this guidance would be a
change in accounting principle. The Corporation does not expect the adoption of ASU 2014-17 to have a material effect
on its financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic
225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The
amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income
Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose
extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity
of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or
transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item
from the results of ordinary operations and show the item separately in the income statement, net of tax, after income
from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose
earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided
that the guidance is applied from the beginning of the fiscal year of adoption. The Corporation does not expect the
adoption of ASU 2015-01 to have a material effect on its financial statements.
NOTE 2: Business Combinations
On October 1, 2013, the Corporation completed its acquisition of CVBK, the one-bank holding company for CVB.
Pursuant to the Agreement and Plan of Merger dated June 10, 2013, CVBK's shareholders received $0.32 for each share
of CVBK common stock they owned, or approximately $846,000 in the aggregate. In addition, the Corporation
purchased from the U.S. Treasury for $3.35 million all of CVBK's preferred stock and warrants issued to the U.S
Treasury under the Capital Purchase Program, including accrued and unpaid dividends on the preferred stock. CVB had
seven retail bank branches located in the Virginia counties of Powhatan, Cumberland, Chesterfield and Henrico.
The Corporation accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805,
Business Combinations. Under the acquisition method of accounting, the assets and liabilities of CVBK were recorded at
their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the
loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to
calculate the estimated fair values. The fair values determined on the acquisition date were preliminary and subject to
refinement during the Measurement Period as additional information relative to the acquisition date fair values became
available. Goodwill of $5.91 million was initially recorded at the time of the CVBK acquisition. As a result of
retrospective fair value mark refinements during the Measurement Period in accordance with ASC 805 and related
83
guidance, the Corporation reduced goodwill related to the CVBK acquisition from $5.91 million, as estimated in the
Corporation’s 2013 audited financial statements, to $3.70 million.
(Dollars in thousands)
Cash consideration paid for:
CVBK common stock
CVBK preferred stock and warrants
Total cash consideration paid
Identifiable assets acquired:
Cash and cash equivalents
Securities available for sale
Loans
Corporate premises and equipment (2)
Other real estate owned
Core deposit intangibles
Deferred tax asset (3)
Other assets (4)
Total identifiable assets acquired
Identifiable liabilities assumed:
Deposits
Borrowings
Trust preferred capital notes
Other liabilities
Total identifiable liabilities assumed
Net identifiable assets (liabilities) assumed
Goodwill resulting from acquisition
Amounts
Previously
Recognized as of
October 1, 2013 (1)
Measurement
Period
Adjustments
Adjusted
Amounts
Recognized as of
October 1, 2013
$
$
846
3,350
4,196
$
846
3,350
4,196
59,775 $
120,097
147,066
10,948
395
4,107
6,029
16,624
365,041
315,421
42,124
4,439
4,768
366,752
—
—
—
(910)
—
—
3,235
(120)
2,205
—
—
—
—
—
59,775
120,097
147,066
10,038
395
4,107
9,264
16,504
367,246
315,421
42,124
4,439
4,768
366,752
$
$
(1,711) $
2,205 $
494
5,907
$
3,702
__________________
1 As previously reported in the Corporation’s 2013 Form 10-K.
2 The fair value of CVBK’s premises, including land, buildings and improvements, was determined based upon
appraisal by licensed appraisers. Based on information as of the acquisition date that became available during
the Measurement Period, the fair value of CVBK’s premises was reduced by $910,000.
3 The $3.24 million adjustment to the acquired deferred tax asset primarily resulted from management’s
determination during 2014 that the amount of future deductible losses on the purchased credit impaired loan
portfolio was greater than the amount originally estimated and recorded.
4
During 2014, management determined that the amount of accrued interest receivable recorded at the time of the
acquisition was overstated by $120,000.
84
NOTE 3: Securities
The Corporation’s debt and equity securities, all of which are classified as available for sale, at December 31, 2014 and
2013 are summarized as follows:
December 31, 2014
Gross
Gross
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
(Dollars in thousands)
U.S. Treasury securities
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Corporate and other debt securities
Amortized Unrealized Unrealized Estimated
Fair Value
Losses
Gains
Cost
$ 23,409 $
66,716
124,312
$ 214,437 $
1 $
935
7,158
8,094 $
(476) $ 22,934
67,619
(32)
(126)
131,344
(634) $ 221,897
December 31, 2013
Gross
Gross
Amortized Unrealized Unrealized Estimated
Fair Value
Losses
Gains
Cost
$ 10,000 $
32,503
51,318
123,729
158
$ 217,708 $
— $
4
100
4,223
—
4,327 $
(2,557)
(555)
(813)
—
— $ 10,000
29,950
50,863
127,139
158
(3,925) $ 218,110
The amortized cost and estimated fair value of securities at December 31, 2014 and 2013, 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.
December 31, 2014
December 31, 2013
(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
Cost
Fair Value
$ 31,201 $ 31,243 $
Amortized Estimated Amortized Estimated
Fair Value
Cost
37,672 $ 36,580
55,608
46,338
79,584
$ 214,437 $ 221,897 $ 217,708 $ 218,110
115,304
49,968
25,382
111,084
48,519
23,633
53,907
46,473
79,656
Proceeds from the maturities, calls and sales of securities available for sale in 2014 were $38.66 million, resulting in
gross realized gains of $50,000 and gross realized losses of $21,000; in 2013 were $79.44 million, resulting in gross
realized gains of $276,000; in 2012 were $34.10 million, resulting in gross realized gains of $11,000.
The Corporation pledges securities to primarily secure public deposits and repurchase agreements. Securities with an
aggregate amortized cost of $106.31 million and an aggregate fair value of $110.37 million were pledged at
December 31, 2014. Securities with an aggregate amortized cost of $149.22 million and an aggregate fair value of
$149.83 million were pledged at December 31, 2013.
85
Securities in an unrealized loss position at December 31, 2014, by duration of the period of the unrealized loss, are
shown below.
(Dollars in thousands)
U.S. government agencies and
corporations
Mortgage-backed securities
Obligations of states and political
subdivisions
Less Than 12 Months
Fair
Value
Unrealized Fair
Value
Loss
12 Months or More
Unrealized
Loss
Fair
Value
Total
Unrealized
Loss
$
1,966 $
—
2 $ 21,234 $
—
4,518
474 $ 23,200 $
32
4,518
476
32
126
634
Total temporarily impaired securities
$
8,245 $
6,279
51
53 $ 31,801 $
6,049
75
12,328
581 $ 40,046 $
There are 64 debt securities totaling $40.05 million considered temporarily impaired at December 31, 2014. The primary
cause of the temporary impairments in the Corporation's investments in debt securities was fluctuations in interest rates.
Interest rates declined throughout 2014, primarily in the middle and long-end of the United States Treasury yield curve,
thereby reducing unrealized losses on the Corporation's debt securities. Weaker global economic conditions increased
demand for United States debt securities, as the domestic economy improved even as the Federal Reserve wound down
its “quantitative easing” program of buying long-term bonds aimed at stimulating the economy. The municipal bond
sector, which includes the Corporation's obligations of states and political subdivisions, benefited from strong investor
demand as general credit quality improved throughout 2014 while the supply of new municipal bonds fell as compared to
last year. At December 31, 2014, approximately 97 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 91 percent were rated “A” or better, as measured by
market value, at December 31, 2014. For the approximately nine percent not rated "A" or better, as measured by market
value at December 31, 2014, the Corporation considers these to meet regulatory credit quality standards, such that the
securities have low risk of default by the obligor, and the full and timely repayment of principal and interest is expected
over the expected life of the investment. 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, 2014 and no other-than-temporary impairment has been recognized.
Securities in an unrealized loss position at December 31, 2013, by duration of the period of the unrealized loss, are
shown below.
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Total temporarily impaired securities
$ 29,430 $
40,090
21,260
$ 90,780 $
Less Than 12 Months
Unrealized
Loss
1,385 $ 8,948 $
Fair
Value
Fair
Value
12 Months or More
Total
Unrealized Fair
Value
Loss
Unrealized
Loss
555
656
—
3,078
2,596 $ 12,026 $
1,172 $ 38,378 $
40,090
—
157 24,338
1,329 $ 102,806 $
2,557
555
813
3,925
The Corporation’s investment in restricted stocks totaled $3.44 million at December 31, 2014, and was comprised of
$3.30 million of FHLB stock and $145,000 of CBB Stock. Restricted stock is generally viewed as a long-term
investment and as restricted investment securities, which are carried at cost, because there is no market for the stock,
other than the FHLBs or member institutions. Therefore, when evaluating restricted stock for impairment, their
respective values are based on the ultimate recoverability of the par value rather than by recognizing temporary declines
in value. The Corporation does not consider its investment in restricted stocks to be other-than-temporarily impaired at
December 31, 2014 and no impairment has been recognized. Total restricted stocks is shown as a separate line item on
the balance sheet and is not a part of the available for sale securities portfolio. At December 31, 2013, the Corporation’s
86
restricted stocks included $347,000 of stock in the FRB, of which CVB was a member, and $145,000 of CBB stock
owned by CVB.
NOTE 4: 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,
2013
2014
179,817 $ 188,455
5,810
7,325
288,593
306,845
50,795
50,321
9,007
8,163
277,724
283,333
820,384
835,804
(35,606)
(34,852)
800,198 $ 785,532
$
$
1
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line
lending and commercial business lending.
Consumer loans included $355,000 and $354,000 of demand deposit overdrafts at December 31, 2014 and 2013,
respectively.
The outstanding principal balance and the carrying amount of loans acquired pursuant to the Corporation's acquisition of
CVB (or acquired loans) that were recorded at fair value at the acquisition date and are included in the consolidated
balance sheet at December 31, 2014 and 2013 were as follows:
(Dollars in thousands)
Outstanding principal balance
Carrying amount
Real estate – residential mortgage
Real estate – construction
Commercial, financial and agricultural
Equity lines
Consumer
Total acquired loans
December 31, 2014
Acquired Loans - Acquired Loans -
Purchased
Credit Impaired
$
36,541 $
Purchased
Performing
Acquired Loans -
Total
85,015 $
121,556
$
$
1,723 $
—
19,367
318
16
21,424 $
18,688 $
—
45,015
15,464
979
80,146 $
20,411
—
64,382
15,782
995
101,570
87
(Dollars in thousands)
Outstanding principal balance
Carrying amount
Real estate – residential mortgage
Real estate – construction
Commercial, financial and agricultural
Equity lines
Consumer
Total acquired loans
December 31, 2013
Acquired Loans - Acquired Loans -
Purchased
Credit Impaired
Purchased
Performing
Acquired Loans -
Total
$
$
$
49,041 $
110,977 $
160,018
2,694 $
771
28,602
332
121
32,520 $
29,285 $
917
55,204
16,909
2,156
104,471 $
31,979
1,688
83,806
17,241
2,277
136,991
Loans on nonaccrual status at December 31, 2014 and 2013 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 lending1
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
Total loans on nonaccrual status
December 31,
2013
2014
$ 2,472 $ 1,996
—
—
—
—
2,033
—
—
—
356
43
1,040
1,486
—
13
374
291
231
1,187
$ 5,944 $ 5,578
1
At December 31, 2014 and 2013 there were no real estate construction lending loans, real estate consumer lot
lending loans or land acquisition and development lending loans on nonaccrual status.
If interest income had been recognized on nonaccrual loans at their stated rates during years 2014, 2013 and 2012,
interest income would have increased by approximately $413,000, $479,000 and $654,000, respectively.
88
The past due status of loans as of December 31, 2014 was as follows:
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction:
Construction lending
Consumer lot lending
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition & development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
Total
30‑59 Days 60‑89 Days 90+ Days
Past Due2,3
Past Due2,3
$
1,717 $
256 $
Past Due2,3
892 $
Total Past
Due
2,865 $ 176,952 $
Current1,2,3 Total Loans Accruing
179,817 $
90+ Days
Past Due and
—
—
—
—
—
—
—
—
3,839
3,486
3,839
3,486
264
—
—
21
319
15
12,421
14,757 $
53
—
—
53
205
37
2,599
3,203 $
$
115
218
—
—
122
6
1,040
2,393 $ 20,353 $ 815,451 $
184,348
47,255
20,255
54,263
49,675
8,105
267,273
432
218
—
74
646
58
16,060
184,780
47,473
20,255
54,337
50,321
8,163
283,333
835,804 $
For the purposes of the table above, “Current” includes loans that are 1-29 days past due
1
2 The table above includes nonaccrual loans that are current of $3.06 million, 30-59 days past due of $697,000,
60-89 days past due of $417,000 and 90+ days past due of $1.77 million.
3 The table above includes loans purchased in the acquisition of CVB that are current of $99.54 million, 30-59 days
past due of $1.05 million, 60-89 days past due of $141,000 and 90+ days past due of $846,000.
The past due status of loans as of December 31, 2013 was as follows:
30 - 59 Days 60 - 89 Days 90+ Days
Past Due2,3
Past Due2,3
$
1,547 $
952 $
Past Due2,3
1,547 $
Total Past
Due
4,046 $ 184,409 $
188,455 $
Current1,2,3 Total Loans Accruing
90+ Days
Past Due and
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction:
Construction lending
Consumer lot lending
—
—
—
—
—
—
—
—
3,728
2,082
3,728
2,082
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition & development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
Total
$
5,567
—
—
306
264
54
14,174
21,912 $
228
—
—
368
45
46
2,998
4,637 $
72
272
—
2,033
173
195
1,187
5,479 $ 32,028 $ 788,356 $
162,255
25,368
13,426
78,698
50,313
8,712
259,365
5,867
272
—
2,707
482
295
18,359
168,122
25,640
13,426
81,405
50,795
9,007
277,724
820,384 $
—
—
—
—
—
—
—
14
—
—
14
—
—
—
72
—
—
—
—
3
—
75
For the purposes of the table above, “Current” includes loans that are 1-29 days past due
1
2 The table above includes nonaccrual loans that are current of $2.15 million, 30-59 days past due of $7,000,
60-89 days past due of $306,000 and 90+ days past due of $3.11 million.
3 The table above includes loans purchased in the acquisition of CVB that are current of $136.30 million, 30-59
days past due of $1.35 million, 60-89 days past due of $841,000 and 90+ days past due of $2.98 million of which
$3,000 are 90+ days past due and accruing.
89
Loan modifications that were classified as TDRs during the years ended December 31, 2014 and 2013 were as follows:
Year Ended December 31,
2014
2013
(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
Builder line lending – interest rate concession
Commercial business lending – interest rate concession
Commercial business lending – term concession
Equity lines – term concession
Consumer – interest rate concession
Total
Number of Recorded
Investment
Loans
Post-
Modification
Post-
Modification
Number of Recorded
Investment
Loans
—
268
— $
2
124
674
2 $
3
1
1
—
—
—
—
1
8 $
103
96
—
—
—
—
3
1,000
—
4
1
1
1
1
—
10 $
—
1,829
17
117
77
30
—
2,338
For the purposes of the above table, the pre-modification recorded investment for TDRs were the same as the post-
modification recorded investment for TDRs for December 31, 2014 and 2013.
TDR payment defaults during the years ended December 31, 2014 and 2013 were as follows:
Year Ended December 31,
2014
2013
(Dollars in thousands)
Commercial real estate lending
Number of Recorded Number of Recorded
Investment Loans
Investment
Loans
—
— $
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 included TDRs of $5.83 million, and the related allowance at December 31, 2014 were as follows:
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Total
Average
Balance-
Impaired
Interest
Income
Recognized
Recorded Unpaid
Investment Principal Related
in Loans
Balance Allowance Loans
$
3,000 $ 3,094 $
417 $ 2,931 $
139
2,786
—
103
30
95
2,908
—
103
32
95
440
—
15
1
6
2,735
—
115
25
95
$
6,014 $ 6,232 $
879 $ 5,901 $
150
—
7
2
4
302
90
Impaired loans, which included TDR loans of $5.62 million, and the related allowance at December 31, 2013 were as
follows:
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Total
Average
Balance-
Impaired
Interest
Income
Recognized
Recorded Unpaid
Investment Principal Related
in Loans
Balance Allowance Loans
$
2,601 $ 2,694 $
390 $ 2,090 $
99
2,729
13
695
131
93
2,780
16
756
132
93
504
4
131
—
14
2,748
14
562
33
95
$
6,262 $ 6,471 $
1,043 $ 5,542 $
99
1
11
—
9
219
PCI loans had an unpaid principal balance of $36.54 million and a carrying value of $21.42 million at
December 31, 2014. Determining the fair value of purchased credit impaired loans required the Corporation to estimate
cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such
loans, the excess of the cash flows expected at acquisition over the estimated fair value is recognized as interest income
over the remaining lives of the loans and is called the accretable yield. The difference between contractually required
payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit
losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously
established allowance for loan losses from acquired loans.
The PCI loan portfolio related to the CVB acquisition was accounted for at fair value on the date of acquisition as
follows:
(Dollars in thousands)
Contractual principal and interest due
Nonaccretable difference
Expected cash flows
Accretable yield
Purchase credit impaired loans - estimated fair value
October 1, 2013
$
70,390
(26,621)
43,769
(8,454)
35,315
$
The following table presents a summary of the change in the accretable yield of the PCI loan portfolio for the years
ended December 31, 2014 and 2013:
(Dollars in thousands)
Accretable yield, balance at beginning of period
Accretion
Reclassification of nonaccretable difference due to improvement in expected cash
flows
Other changes, net
Accretable yield, balance at end of period
Year Ended December 31,
2014
2013
$
$
7,776 $
(3,234)
10,593
(1,647)
13,488 $
8,454
(678)
—
—
7,776
91
NOTE 5: Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
(Dollars in thousands)
Balance at the beginning of year
Provision charged to operations
Loans charged off
Recoveries of loans previously charged off
Balance at the end of year
Year Ended December 31,
2012
2013
2014
$ 34,852 $ 35,907 $ 33,677
12,405
(13,497)
3,322
$ 35,606 $ 34,852 $ 35,907
16,330
(19,846)
4,270
15,085
(20,070)
3,930
The following table presents, as of December 31, 2014, the total allowance for loan losses, the allowance by impairment
methodology (individually evaluated for impairment, collectively evaluated for impairment or PCI loans), the total loans
and loans by impairment methodology (individually evaluated for impairment, collectively evaluated for impairment or
PCI loans).
(Dollars in thousands)
Allowance for loan losses:
Commercial,
Real Estate
Financial &
Residential Real Estate
Mortgage Construction Agricultural
Equity
Lines
Consumer
Consumer Finance
Total
Balance at the beginning of year
Provision charged to operations
Loans charged off
Recoveries of loans previously charged off
Ending balance
Ending balance: individually evaluated for
impairment
$
$
$
2,355 $
60
(161)
59
2,313 $
434 $
—
—
—
434 $
7,805 $
—
(271)
210
7,744 $
892 $
—
(80)
—
812 $
273 $
—
(312)
250
211 $
23,093 $
16,270
(19,022)
3,751
24,092 $
34,852
16,330
(19,846)
4,270
35,606
417 $
— $
455 $
1 $
6 $
— $
879
Ending balance: collectively evaluated for
impairment
Ending balance: acquired loans - purchase credit
$
1,896 $
434 $
7,289 $
811 $
205 $
24,092 $
34,727
impaired
$
— $
— $
— $
— $
— $
— $
—
Loans:
Ending balance
Ending balance: individually evaluated for
impairment
Ending balance: collectively evaluated for
impairment
Ending balance: acquired loans - purchase credit
$ 179,817 $
7,325 $
306,845 $
50,321 $
8,163 $
283,333 $ 835,804
$
3,000 $
— $
2,889 $
30 $
95 $
— $
6,014
$ 175,094 $
7,325 $
284,589 $
49,973 $
8,052 $
283,333 $ 808,366
impaired
$
1,723 $
— $
19,367 $
318 $
16 $
— $
21,424
92
The following table presents, as of December 31, 2013, the total allowance for loan losses, the allowance by impairment
methodology (individually evaluated for impairment or collectively evaluated for impairment), the total loans and loans
by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).
(Dollars in thousands)
Allowance for loan losses:
Balance at the beginning of year
Provision charged to operations
Loans charged off
Recoveries of loans previously charged off
Ending balance
Ending balance: individually evaluated for
impairment
Ending balance: collectively evaluated for
Commercial,
Real Estate
Residential Real Estate
Financial &
Mortgage Construction Agricultural
Equity
Lines
Consumer
Consumer Finance
Total
$
$
$
2,358 $
740
(849)
106
2,355 $
424 $
7
—
3
434 $
9,824 $
52
(2,298)
227
7,805 $
885 $
105
(126)
28
892 $
283 $
216
(399)
173
273 $
22,133 $
13,965
(16,398)
3,393
23,093 $
35,907
15,085
(20,070)
3,930
34,852
390 $
— $
639 $
— $
14 $
— $
1,043
impairment
$
1,965 $
434 $
7,166 $
892 $
259 $
23,093 $
33,809
Ending balance: acquired loans - purchase credit
impaired
$
— $
— $
— $
— $
— $
— $
—
Loans:
Ending balance
Ending balance: individually evaluated for
$ 188,455 $
5,810 $
288,593 $
50,795 $
9,007 $
277,724 $ 820,384
impairment
$
2,601 $
— $
3,437 $
131 $
93 $
— $
6,262
Ending balance: collectively evaluated for
impairment
$ 183,160 $
5,039 $
256,554 $
50,332 $
8,793 $
277,724 $ 781,602
Ending balance: acquired loans - purchase credit
impaired
$
2,694 $
771 $
28,602 $
332 $
121 $
— $
32,520
Loans by credit quality indicators as of December 31, 2014 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
Special
Substandard
Pass
Mention Substandard Nonaccrual
Total1
$ 171,414 $ 2,978 $
2,953 $
2,472 $ 179,817
1,191
3,486
—
—
2,648
—
—
—
3,839
3,486
165,804
43,693
18,321
41,813
48,443
7,984
4,136
1,136
1,389
930
772
103
$ 502,149 $ 11,444 $
12,807
2,644
545
11,594
750
33
33,974 $
2,033
—
—
—
356
43
184,780
47,473
20,255
54,337
50,321
8,163
4,904 $ 552,471
Included in the table above are loans purchased in connection with the acquisition of CVB of $87.26 million pass rated,
$2.99 million special mention, $10.71 million substandard and $603,000 substandard nonaccrual.
(Dollars in thousands)
Consumer finance
Performing Non‐Performing Total
$ 282,293 $
1,040 $ 283,333
1 At December 31, 2014, the Corporation does not have any loans classified as Doubtful or Loss.
93
Loans by credit quality indicators as of December 31, 2013 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
Special
Substandard
Pass
Mention Substandard Nonaccrual
Total1
$ 180,670 $ 2,209 $
3,580 $
1,996 $ 188,455
1,068
1,831
11
105
2,649
146
—
—
3,728
2,082
152,017
18,236
11,608
61,715
48,603
8,616
2,934
1,601
1,278
2,758
1,003
2
$ 484,364 $ 11,901 $
11,685
5,803
527
16,558
898
158
42,004 $
1,486
—
13
374
291
231
168,122
25,640
13,426
81,405
50,795
9,007
4,391 $ 542,660
Included in the table above are loans purchased in connection with the acquisition of CVB of $119.75 million pass rated,
$3.30 million special mention, $17.77 million substandard and $652,000 substandard nonaccrual.
(Dollars in thousands)
Consumer finance
Non-
Performing
$ 276,537 $
Performing Total
1,187 $ 277,724
1 At December 31, 2013, the Corporation did not have any loans classified as Doubtful or Loss.
NOTE 6: Other Real Estate Owned
At December 31, 2014 and 2013, OREO was $786,000 and $2.77 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 between loans and other real estate owned
Acquisition of CVB
Charge-offs
Sales proceeds
Gain on disposition
Deferred gain on disposition
Balance at the end of year, gross
Less valuation allowance
Balance at the end of year, net
Year Ended December 31,
2014
6,904
1,960
—
(4,135)
(4,382)
324
144
815
(29)
786
$
$
2013
10,173
588
395
(261)
(4,209)
218
—
6,904
(4,135)
2,769
$
$
94
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
$
$
2014
4,135 $
29
(4,135)
Year Ended December 31,
2013
3,937 $
459
(261)
4,135 $
2012
3,927
1,250
(1,240)
3,937
29 $
Net expenses applicable to OREO, other than the provision for losses, were $6,000, $253,000 and $384,000 for the years
ended December 31, 2014, 2013 and 2012, respectively.
NOTE 7: Corporate Premises and Equipment
Major classifications of corporate premises and equipment are summarized as follows:
December 31,
2014
8,431 $
33,917
36,956
79,304
(42,009)
37,295 $
2013
8,431
32,493
40,100
81,024
(42,792)
38,232
$
$
December 31,
2013
2014
60,565 $
63,159
305,942
336,724
366,507 $ 399,883
$
$
$
$
199,395
73,019
44,127
28,013
13,849
8,104
366,507
(Dollars in thousands)
Land
Buildings
Equipment, furniture and fixtures
Less accumulated depreciation
NOTE 8: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, over $250
Other time deposits
Remaining maturities on time deposits at December 31, 2014 are as follows:
(Dollars in thousands)
2015
2016
2017
2018
2019
Thereafter
95
NOTE 9: Borrowings
The table below presents selected information on short-term borrowings:
(Dollars in thousands)
Balance outstanding at year end1
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,
2014
14,436
15,488
12,745
$
$
$
0.39 %
0.38 %
$
14,436
2013
11,780
15,812
12,276
0.40 %
0.40 %
11,780
1 Consists entirely of secured transactions with customers, which generally mature the day following the day sold.
Long-term borrowings at December 31, 2014 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 December 31, 2014 was $5.00 million. The interest rate on the revolving bank line of credit,
which matures in 2017, floats at the one-month LIBOR rate plus a range of 200 to 225 basis points, depending upon the
average balance outstanding on the line, and the outstanding balance as of December 31, 2014 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 2014. Long-term advances from the FHLB at December 31, 2014 consist of $22.50 million of
convertible advances and $24.50 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. C&F 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, 2014
Fixed Rate Hybrid Advances
Convertible Advances
Next
Conversion
Interest Rate Maturity Date Option Date
$7,500
$7,500
$2,500
$7,000
$7,500
$5,000
$5,000
$5,000
3.39 %
0.80
1.28
1.95
3.70
4.06
2.93
3.59
08/10/15
08/30/16
08/30/18
12/04/19
10/19/17
10/25/17
11/27/17
06/06/18
01/20/15
01/26/15
02/27/15
96
The contractual maturities of long-term borrowings at December 31, 2014 are as follows:
(Dollars in thousands)
2015
2016
2017
2018
2019
Thereafter
Fixed Rate Floating Rate Total
$
7,500 $
7,500
17,500
7,500
7,000
—
$ 47,000 $
— $
—
75,488
5,000
—
—
7,500
7,500
92,988
12,500
7,000
—
80,488 $ 127,488
lines of credit for future borrowings
The Corporation’s unused
total approximately $281.40 million at
December 31, 2014, which consists of $95.88 million available from the FHLB, $44.51 million on C&F Finance’s
revolving bank line of credit, $26.01 million available from the FRB, $65.00 million under unsecured federal funds
agreements with third party financial institutions, $50.00 million in repurchase lines of credit with third party financial
institutions. Additional loans and securities are available that can be pledged as collateral for future borrowings from the
FRB 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 rate equal to the three-month
LIBOR rate plus 3.15%. During 2014, in order to mitigate the effect of rising interest rates in the future, the Corporation
entered into an interest rate swap agreement whereby the effective fixed interest rate on all $10.00 million of the
securities became 4.82%. The interest rate swap matures in December 2019. The principal asset of Trust II is $10.31
million of the Corporation’s trust preferred capital notes with like maturities and like interest rates to the trust preferred
capital securities. The interest payments by the Corporation on the debt securities will be used by Trust II to pay the
quarterly distributions payable by Trust II to the holders of the trust preferred capital securities.
In July 2005, C&F Financial Statutory Trust I (Trust I), a wholly-owned non-operating subsidiary of the Corporation,
was formed for the purpose of issuing trust preferred capital securities to partially fund the Corporation’s purchase of
427,186 shares of its common stock. On July 21, 2005, Trust I issued $10.00 million of trust preferred capital securities
in a private placement to an institutional investor and $310,000 in common equity to the Corporation in exchange for
cash. The securities mature in September 2035, are redeemable at the Corporation’s option beginning after five years,
and require quarterly distributions by Trust I to the holder of the securities at a rate equal to the three-month LIBOR rate
plus 1.57%. During 2010, in order to mitigate the effect of rising interest rates in the future, the Corporation entered into
two interest rate swap agreements whereby the effective fixed interest rate on $5.00 million of the securities became
3.48% and the effective fixed interest rate on the remaining $5.00 million of the securities became 4.31%. The interest
rate swaps mature in September 2015. The principal asset of Trust I is $10.31 million of the Corporation’s trust
preferred capital notes with like maturities and like interest rates to the trust preferred capital securities. The interest
payments by the Corporation on the debt securities will be used by Trust I to pay the quarterly distributions payable by
Trust I to the holders of the trust preferred capital securities.
In December 2003, Central Virginia Bankshares Statutory Trust I (CVBK Trust I) was formed as a wholly-owned non-
operating subsidiary of CVBK for the purpose of issuing trust preferred capital securities for general corporate purposes.
On December 17, 2003, CVBK Trust I issued $5.00 million of trust preferred capital securities in a private placement to
an institutional investor and $155,000 in common equity to CVBK in exchange for cash. CVBK Trust I became a
wholly-owned non-operating subsidiary of the Corporation pursuant to the merger of CVBK with and into the
Corporation in March 2014, and the Corporation assumed CVBK’s obligations on the underlying trust preferred capital
notes. The securities mature in December 2033, are redeemable at the Corporation's option beginning after five years,
and require quarterly distributions by CVBK Trust I to the holder of the securities at a rate equal to the three-month
97
LIBOR plus 2.85%. During 2014, in order to mitigate the effect of rising interest rates in the future, the Corporation
entered into an interest rate swap agreement whereby the effective fixed interest rate on all $5.00 million of the securities
became 4.54%. The interest rate swap matures in December 2019. The principal asset of CVBK Trust I is $5.16 million
of trust preferred capital notes originally issued by CVBK and assumed by the Corporation 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 CVBK Trust I to pay the quarterly distributions payable by CVBK Trust I to the holders of the trust preferred
capital securities. The trust preferred capital securities issued by CVBK Trust I were adjusted to fair market value on the
date of acquisition of CVBK. The resulting fair value adjustment was a discount of $716,000, which is being accreted
over 20 years on a straight-line basis, and the balance of which was $672,000 as of December 31, 2014.
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 10: Shareholders’ Equity, Other Comprehensive Income and Earnings Per Common Share
Accumulated Other Comprehensive Income (Loss)
The following table presents the cumulative balances of the components of accumulated other comprehensive income
(loss), net of deferred taxes of $1.66 million, $163,000 and $2.51 million as of December 31, 2014, 2013 and 2012,
respectively.
(Dollars in thousands)
Net unrealized gains on securities
Net unrecognized loss on cash flow hedges
Net unrecognized losses on defined benefit plan
Total accumulated other comprehensive income (loss)
Shareholders’ Equity
December 31,
2013
2012
2014
$ 4,850 $
261 $ 5,951
(313)
(922)
$ 3,086 $ (266) $ 4,716
(64)
(1,700)
(202)
(325)
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). 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.
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.
On May 14, 2014, the Corporation repurchased the warrant for $2.30 million. The repurchase price was based on the fair
market value of the warrant as agreed upon by the Corporation and Treasury. The funds for this redemption were
98
provided by existing financial resources of the Corporation; therefore, there was no dilution to the Corporation's common
shareholders.
Common Shares. The Corporation repurchased 4,608 and 1,215 shares of its common stock during the years ended
December 31, 2014 and 2013, respectively. During the year ended December 31, 2014, 2,800 shares were purchased
under a share repurchase program authorized by the Corporation’s Board of Directors for the purchase of up to $5.0
million of the Corporation’s common stock through May 2015. During the years ended December 31, 2014 and 2013,
1,808 and 1,215 shares were withheld from employees to satisfy tax withholding obligations arising upon the vesting of
restricted shares. The Corporation did not repurchase any shares of its common stock during the year ended
December 31, 2012.
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
2014
12,346 $
—
—
12,346 $
December 31,
2013
14,402 $
—
—
14,402 $
$
$
2012
16,382
(139)
(172)
16,071
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
3,404,112
3,305,132
3,215,049
32,166
138,850
90,853
3,436,278
3,443,982
3,305,902
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 150,000, 18,000 and 215,000 shares issuable upon exercise of options
for the years ended December 31, 2014, 2013 and 2012, respectively, were not included in computing diluted earnings
per common share because they were anti-dilutive.
NOTE 11: Income Taxes
Principal components of income tax expense as reflected in the consolidated statements of income are as follows:
Year Ended December 31,
2014
2012
2013
$ 2,483 $ 4,424 $ 8,494
(848)
$ 4,730 $ 6,710 $ 7,646
2,247
2,286
(Dollars in thousands)
Current taxes
Deferred taxes
99
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
2014
Percent of
Pre-tax
Income
Year Ended December 31,
Percent of
Pre-tax
Income
2013
Percent of
Pre-tax
Income
2012
rates
$ 5,977
35.0 % $ 7,389
35.0 % $ 8,410
35.0 %
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
Nondeductible expenses primarily related
to the acquisition of CVBK
Tax credits
Other
(1,546)
(9.0)
(1,600)
(7.6)
(1,631)
(6.8)
42
532
0.3
3.1
59
0.3
78
938
4.4
1,133
—
(180)
(95)
$ 4,730
—
251
(1.1)
(225)
(0.6)
(102)
27.7 % $ 6,710
—
1.2
(225)
(1.1)
(0.4)
(119)
31.8 % $ 7,646
0.3
4.7
—
(0.9)
(0.5)
31.8 %
The Corporation’s net deferred income taxes totaled $20.7 million and $25.2 million at December 31, 2014 and 2013,
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
Fair market value adjustments related to acquisition
Reserve for indemnification losses
Deferred compensation
Share-based compensation
Interest on nonaccrual loans
Depreciation
Cash flow hedges
Other
Deferred tax asset
Deferred tax liability
Goodwill and other intangible assets
Core deposit intangible
Defined benefit plan
Depreciation
Net unrealized gain on securities available for sale
Deferred tax liability
Net deferred tax asset
December 31,
2013
2014
$ 13,590 $ 14,787
9,192
917
2,617
517
645
—
129
1,556
30,360
6,603
794
1,821
791
1,222
149
40
2,677
27,687
(3,291)
(904)
(176)
—
(2,611)
(6,982)
(3,079)
(1,321)
(513)
(132)
(141)
(5,186)
$ 20,705 $ 25,174
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 2011.
100
NOTE 12: Employee Benefit Plans
C&F 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 90% 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 C&F 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 C&F 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
$557,000, $417,000 and $387,000 in 2014, 2013 and 2012, 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 $16,000, $104,000 and $29,000 in 2014, 2013 and 2012, 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 C&F Bank. The amounts charged to expense under this plan were $199,000, $155,000 and
$147,000 in 2014, 2013 and 2012, respectively.
Central Virginia Bank maintained a qualified defined contribution plan for all eligible full-time and part-time employees
prior to March 22, 2014. The plan was sponsored by the VBA. CVB did not make any profit sharing contributions to the
plan during 2014, 2013 and 2012. On March 22, 2014 the CVB plan was terminated and the CVB plan assets totaling
$6.6 million were transferred into the Profit-Sharing Plan and the CVB plan participants became participants of the
Profit-Sharing Plan subject to its provisions.
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 President and Chief Financial Officer of the
Corporation, and recommends to the C&F Bank’s Board of Directors bonuses to be paid to certain other senior C&F
Bank and C&F Finance officers. In addition, the Chief Executive Officer recommends bonuses to be paid to other
officers of the C&F 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, C&F 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 $1.20 million,
$1.32 million and $1.02 million in 2014, 2013 and 2012, respectively. In accordance with employment agreements for
certain senior officers of C&F Mortgage, performance bonuses of $173,000, $932,000 and $1.05 million were expensed
in 2014, 2013 and 2012, respectively. Performance used in determining the awards is directly related to the profitability
of C&F Mortgage.
C&F 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. C&F Bank funds pension costs in accordance with the funding provisions of
the Employee Retirement Income Security Act.
101
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 $215,000, $185,000 and $175,000 in 2014, 2013 and 2012, respectively. Investments for this plan are held in a
Rabbi trust. These investments are included in other assets and the related liability is included in other liabilities.
The following table summarizes the projected benefit obligations, plan assets, funded status and rate assumptions
associated with the C&F 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 asset (liability)
Amounts recognized in accumulated other comprehensive loss
Net loss
Prior service cost
Deferred taxes
Total recognized in accumulated other comprehensive loss
Weighted-average assumptions for benefit obligation at valuation date
Discount rate
Expected return on plan assets
Rate of compensation increase
2014
December 31,
2013
2012
$ 10,659
763
451
1,882
(173)
$ 13,582
$ 11,624
633
2,000
(173)
$ 14,084
502
$
502
$
$ 3,558
(942)
(916)
$ 1,700
$ 10,058
776
425
91
(691)
$ 10,659
$ 9,612
1,703
1,000
(691)
$ 11,624
965
$
965
$
$ 8,768
636
395
505
(246)
$ 10,058
$ 8,295
1,063
500
(246)
$ 9,612
$ (446)
$ (446)
$ 1,510
(1,010)
(175)
325
$
$ 2,495
(1,077)
(496)
922
$
3.6 %
7.5
3.0
4.4 %
8.0
3.0
4.0 %
8.0
3.0
102
The accumulated benefit obligation was $13.58 million and $10.66 million as of the actuarial valuation dates December
31, 2014 and 2013, respectively.
(Dollars in thousands)
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net obligation at transition
Recognized net actuarial loss
Net periodic benefit cost
Year Ended December 31,
2013 2012
2014
$
763 $ 776 $ 636
451
395
425
(832)
(633)
(748)
(68)
(68)
(68)
—
—
—
33
106
121
347
436
506
Other changes in plan assets and benefit obligations recognized in other comprehensive
loss
Net loss (gain)
Amortization of net obligation at transition
Amortization of prior service costs
Deferred taxes
Total recognized in accumulated other comprehensive loss (income)
Total recognized in net periodic benefit cost and other comprehensive loss (income)
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:
(Dollars in thousands)
2015
2016
2017
2018
2019
2020 – 2024
2,048
—
68
(741)
1,375
(31)
—
68
(13)
24
$ 1,722 $ (91) $ 460
(985)
—
68
320
(597)
January 1,
2014 2013 2012
4.4 %
7.5
3.0
4.0 %
8.0
3.0
4.5 %
8.0
3.0
$
1,249
633
734
2,155
771
4,822
$ 10,364
C&F Bank selects the expected long-term rate of return on assets in consultation with its investment advisors and
actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be
invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net
of inflation), for the major asset classes held or anticipated to be held by the trust and for the trust itself. Undue weight is
not given to recent experience, which may not continue over the measurement period. Higher significance is placed on
current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose,
the plan is assumed to continue in force and not terminate during the period during which assets are invested. However,
consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust,
and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not
explicitly within periodic costs).
103
C&F Bank’s defined benefit pension plan’s weighted average asset allocations by asset category are as follows:
December 31,
Mutual funds-fixed income
Mutual funds-equity
Cash and equivalents
* Less than one percent.
2014
2013
38 %
62
*
100 %
39 %
61
*
100 %
The following table summarizes the fair value of the defined benefit plan assets as of December 31, 2014 and 2013. For
more information about fair value measurements, see “Note 17: Fair Value of Assets and Liabilities.”
(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
December 31, 2014
Fair Value Measurements Using Assets at Fair
Level 2 Level 3
Level 1
— $
$
—
—
— $
5,540 $
8,533
11
14,084 $
— $
—
—
— $
5,540
8,533
11
14,084
Value
$
December 31, 2013
Fair Value Measurements Using Assets at Fair
Level 2 Level 3
Level 1
$
— $
—
—
— $
4,431 $
7,181
12
11,624 $
— $
—
—
— $
4,431
7,181
12
11,624
Value
$
1 This category includes investments in mutual funds focused on fixed income securities with both short-term and
long-term investments. The funds are valued using the net asset value method in which an average of the market
prices for the underlying investments is used to value the funds.
2 This category includes investments in mutual funds focused on equity securities with a diversified portfolio and
includes investments in large cap and small cap funds, growth funds, international focused funds and value funds.
The funds are valued using the net asset value method in which an average of the market prices for the underlying
investments is used to value the funds.
3 This category comprises cash and short-term cash equivalent funds. The funds are valued at cost which
approximates fair value.
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return,
with a targeted asset allocation of 40% fixed income and 60% equities. The investment advisor selects investment fund
managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the
implementation of the plan’s investment strategy. The investment manager will consider both actively and passively
managed investment strategies and will allocate funds across the asset classes to develop an efficient investment
structure.
It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful to
avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees,
transaction costs and other administrative costs chargeable to the trust.
104
NOTE 13: Related Party Transactions
Loans outstanding to directors and executive officers totaled $2.45 million and $2.72 million at December 31, 2014 and
2013, respectively. There were no new advances to directors and officers and repayments totaled $262,000 in the year
ended December 31, 2014. Total deposits for directors and executive officers were $3.4 million and $3.6 million at
December 31, 2014 and 2013, respectively. In the opinion of management, these transactions 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 14: Share-Based Plans
On April 16, 2013, the Corporation’s shareholders approved the C&F Financial Corporation 2013 Stock and Incentive
Compensation Plan (the 2013 Plan) for the grant of equity awards to certain key employees of the Corporation, as well as
non-employee directors (including non-employee regional or advisory directors). The 2013 Plan authorizes an aggregate
of 500,000 shares of the Corporation's common stock to be issued as equity awards in the form of stock options, tandem
stock appreciation rights, restricted stock, restricted stock units and/or other stock-based awards. Since the 2013 Plan’s
approval, equity awards have only been issued in the form of restricted stock, which are accounted for using the fair
market value of the Corporation’s common stock on the date the restricted shares are awarded.
Prior to the approval of the 2013 Plan, the Corporation granted equity awards under the Amended and Restated C&F
Financial Corporation 2004 Incentive Stock Plan (the Amended 2004 Plan). The Amended 2004 Plan authorized 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 2006, all equity awards that were issued under the Amended 2004 Plan were in the form of restricted stock, which
were accounted for using the fair market value of the Corporation’s common stock on the date the restricted shares are
awarded.
Prior to the amendment of the Amended 2004 Plan in 2008, 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, 2014. 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, 2014. 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.
105
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
2014
Exercise Intrinsic
Value
Price*
Shares
164,150 $ 38.21
—
39.29
38.95
—
(271)
(63,117)
100,762 $ 37.75 $
200
2013
2012
Exercise
Price*
Shares
276,432 $ 39.14
—
—
40.41
(94,382)
(17,900)
40.87
164,150 $ 38.21
Exercise
Shares
Price*
325,067 $ 36.68
—
22.70
—
276,432 $ 39.14
—
(48,635)
—
The total intrinsic value of in-the-money options exercised in 2014 was less than $1,000. Cash received from option
exercises during 2014 was $11,000, and less than a $1,000 tax benefit was recognized in additional paid-in capital in
connection with nonqualified option exercises. 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, 2014:
Options Outstanding and Exercisable
Remaining
Range of Exercise Prices
$35.20 to $39.60
* Weighted average
Number Outstanding Contractual Life
at December 31, 2014
100,762
(Years)*
1.2 $
Exercise Price*
37.75
As permitted under the 2013 Plan and Amended 2004 Plan, the Corporation awards shares of restricted stock to certain
key employees and non-employee directors. Restricted shares awarded to employees generally vest on the fifth
anniversary of the grant date and restricted shares awarded to non-employee directors generally vest on the third
anniversary of the grant date. A summary of the activity for restricted stock awards for the periods indicated is presented
below:
Nonvested at beginning of year
Granted
Vested
Cancelled
Nonvested at end of year
2014
Shares
Weighted-
Average
Grant Date
Fair Value
120,183 $ 31.18
39.84
32,625
20.13
(15,208)
42.14
(2,000)
34.34
135,600 $
2013
Weighted-
Average
Grant Date
Fair Value
24.69
45.24
18.16
36.42
31.18
Shares
97,700 $
35,594
(10,700)
(2,411)
120,183 $
2012
Weighted-
Average
Grant Date
Shares
Fair Value
87,125 $ 22.59
33.16
29,025
28.85
(16,100)
22.60
(2,350)
24.69
97,700 $
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 2014, 2013 and
2012 was $39.84, $45.24 and $33.16, respectively. Compensation expense is charged to income ratably over the vesting
periods, and was $967,000 in 2014, $659,000 in 2013 and $488,000 in 2012. As of December 31, 2014, there was $2.79
million of total unrecognized compensation cost related to restricted stock granted under the 2013 Plan and the Amended
2004 Plan. This amount is expected to be recognized through 2019.
106
NOTE 15: 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 regulations effective as of December 31, 2014 and December 31, 2013 to ensure
capital adequacy have required the Corporation, C&F Bank and CVB 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). Per the regulatory capital standards effective as of December 31, 2014 and December 31, 2013, for
the Corporation, C&F Bank and CVB 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. As of these dates and 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 C&F Bank were $896.6 million and $894.08 million, respectively at December 31, 2014. Risk-weighted assets for
the Corporation, C&F Bank and CVB were $850.67 million, $692.50 million and $157.85 million, respectively, at
December 31, 2013 . Management believes that, as of December 31, 2014, the Corporation and C&F Bank met all
capital adequacy requirements to which they are subject.
As of December 31, 2014, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) for C&F
Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, under regulations applicable at December 31, 2014 the Bank was required to maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.
107
The Corporation’s and the Bank’s actual capital amounts and ratios are presented in the following table as of December
31, 2014 and 2013:
Minimum Capital
Requirements
Amount Ratio Amount Ratio Amount Ratio
Actual
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
$ 130,401
129,228
14.5 % $ 71,731
71,527
14.5
8.0 %
8.0
N/A
$ 89,408
N/A
10.0 %
118,892
117,753
13.3
13.2
35,866
35,763
118,892
117,753
9.2
9.1
51,974
51,959
4.0
4.0
4.0
4.0
N/A
53,645
N/A
77,939
N/A
6.0
N/A
6.0
(Dollars in thousands)
As of December 31, 2014:
Total Capital (to Risk-Weighted Assets)
Corporation
C&F Bank
Tier 1 Capital (to Risk-Weighted Assets)
Corporation
C&F Bank
Tier 1 Capital (to Average Tangible Assets)
Corporation
C&F Bank
As of December 31, 2013:
Total Capital (to Risk-Weighted Assets)
Corporation
C&F Bank
CVB
$ 125,159
100,538
19,602
14.7 % $ 68,054
55,400
14.5
12,628
12.4
8.0 %
8.0
8.0
N/A
$ 69,250
$ 15,785
N/A
10.0 %
10.0 %
Tier 1 Capital (to Risk-Weighted Assets)
Corporation
C&F Bank
CVB
Tier 1 Capital (to Average Tangible Assets)
Corporation
C&F Bank
CVB
114,227
91,559
19,567
13.4
13.2
12.4
34,027
27,700
6,314
4.0
4.0
4.0
N/A
41,550
9,471
N/A
6.0
6.0
114,227
91,559
19,567
8.9
9.4
5.9 13,290
51,623
38,964
N/A
N/A
4.0
6.0
58,447
4.0
4.0 19,935 6.0
In December 2013, The Federal Reserve Board issued a final rule that makes technical changes to its market risk capital
rule to align it with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The
Basel III final rules require the Company to comply with the following new minimum capital ratios, effective January 1,
2015: (1) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6% of
risk-weighted assets (increased from the current requirement of 4%); (3) a total capital ratio of 8% of risk-weighted
assets (unchanged from the current requirement); and, (4) a leverage ratio of 4% of total assets. The Basel III Final
Rules establish a capital conservation buffer of 2.5%, which is added to the 4.5% common equity Tier 1 capital ratio as
the buffer is phased in, effectively resulting in a miminum ratio of common equity Tier 1 capital to risk-weighted assets
of at least 7%. The Basel III Final Rules also establish risk weightings that applied to many classes of assets held by
community banks, importantly including applying higher risk weightings to certain commercial real estate loans. The
Basel III Final Rules were effective January 1, 2015, and the Basel III Final Rules capital conservation buffer will be
phased in from 2015 to 2019.
Based on management's interpretation and understanding of the new rules, the Company has evaluated the effect of the
Basel III final rules and expects the Company will continue to exceed the well capitalized minimum capital requirements
based on the December 31, 2014 balance sheet composition. For additional information about the Basel III Final Rules,
see “Item1. Business” under the heading “Regulation and Supervision” in this Annual Report on Form 10-K.
108
On January 9, 2009, as part of the Capital Purchase Program, the Corporation issued and sold to the U.S. Treasury
20,000 shares of the Corporation’s Series A Preferred Stock having a liquidation preference of $1,000 per share and a
Warrant for the purchase of up to 167,504 shares of the Corporation’s Common Stock, for a total price of $20.0 million.
The Corporation has redeemed 100 percent of the Series A Preferred Stock, $10.00 million in April 2012 and $10.00
million in July 2011 and the warrant was repurchased in May 2014 for $2.30 million.
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. On December 17, 2003, CVBK issued
$5.00 million of trust preferred securities through a statutory business trust for general corporate purposes. Based on the
Corporation’s Tier 1 capital levels, the entire $25.00 million of trust preferred securities was eligible for inclusion in the
Corporation's Tier 1 capital as of December 31, 2014 and 2013.
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by C&F
Bank (and prior to being merged into C&F Bank, CVB) to the Corporation. The total amount of dividends that may be
paid at any date by C&F Bank is generally limited to the retained earnings of C&F Bank, and loans or advances are
limited to 10 percent of C&F Bank’s capital stock and surplus on a secured basis.
NOTE 16: 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 $136.00 million at
December 31, 2014 and $129.24 million (including loan commitments at CVB) at December 31, 2013.
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 $13.40 million at December 31, 2014 and $13.72 million (including loan commitments at CVB) at
December 31, 2013.
C&F Mortgage had rate lock commitments (or IRLCs) to originate mortgage loans amounting to approximately $38.40
million and loans held for sale of $28.28 million. At December 31, 2014, each loan held for sale by C&F Mortgage was
subject to a forward sales agreement. C&F Mortgage enters into IRLCs with customers and will sell the underlying
loans to investors on either a best efforts or a mandatory delivery basis. C&F Mortgage mitigates interest rate risk on
IRLCs and loans held for sale by (a) entering into forward loan sales contracts with investors for loans to be delivered on
a best efforts basis or (b) entering into forward sales contracts of MBS for loans to be delivered on a mandatory basis.
Both the IRLCs with customers and the forward sales contracts are considered derivative financial instruments. At
December 31, 2014, the Corporation had forward sales contracts with a notional value of $66.68 million. The fair value
of these derivative instruments at December 31, 2014 was $448,000, which was included in other assets.
109
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, 2014. The following table presents the changes in the allowance for
indemnification losses for the periods presented:
(Dollars in thousands)
Allowance, beginning of period
Provision for indemnification losses
Payments
Allowance, end of period
Year Ended December 31,
2013
2012
2014
$ 2,415 $
2,092 $ 1,702
1,205
558
(235)
(815)
2,415 $ 2,092
$ 2,089 $
240
(566)
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 the Corporation's operating leases was $1.25 million, $1.39 million and $1.47 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
Future minimum lease payments due under the Corporation's operating leases as of December 31, 2014 are as follows:
(Dollars in thousands)
2015
2016
2017
2018
2019
Thereafter
$ 1,266
1,073
919
682
509
436
$ 4,885
110
NOTE 17: 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 options elections as of December 31, 2014, except that during the second quarter of 2013, the Corporation
elected to begin using fair value accounting for its entire portfolio of LHFS.
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 composition of the portfolio. At
December 31, 2014 and 2013, the Corporation's entire investment securities portfolio was comprised of securities
available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third
party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security
valuation are Standard & Poor's Securities Evaluations Inc. (SPSE), Thomson Reuters Pricing Service (TRPS), and
Interactive Data Pricing and Reference Data LLC (IDC). Each source provides 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 and IDC provide evaluated prices for the Corporation's obligations of states and political subdivisions
category of securities. Both sources use 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 and IDC provide evaluated prices for the Corporation's U.S.
government agencies and corporations and mortgage-backed categories of securities. Fixed-rate callable securities of 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. Fixed-rate securities issued by the Small Business
Association in the U.S. government agencies and corporations category are individually evaluated based upon a
hierarchy of security specific information and market data regarding that security or securities with similar
characteristics. Pass-through mortgage-backed 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
111
benchmarked to a relative mortgage-backed to-be-announced (TBA) or other benchmark price. TBA prices are obtained
from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are
individually evaluated based upon a hierarchy of security specific information and market data regarding that security or
securities with similar characteristics. Each evaluation is determined using an option adjusted spread and prepayment
model based on volatility-driven, multi-dimensional spread tables.
Loans held for sale. Fair value of the Corporation's LHFS is based on observable market prices for similar instruments
traded in the secondary mortgage loan markets in which the Corporation conducts business. The Corporation's portfolio
of LHFS is classified as Level 2.
Derivative asset (liability) - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on
either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts
basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a
mandatory basis. All of the Corporation's IRLCs are classified as Level 2.
Derivative asset (liability) - forward sales commitments. Forward commitments to sell mortgage loans and TBAs are
used to mitigate interest rate risk for residential mortgage LHFS and IRLCs. Forward commitments to sell mortgage
loans and TBAs are considered derivatives and are recorded at fair value, based on (i) committed sales prices from
investors for commitments to sell mortgage loans or (ii) observable market data inputs for commitments to sell TBAs.
The Corporation's forward sales commitments are classified as Level 2.
Derivative asset (liability) - cash flow hedges. The Corporation’s derivative financial instruments have been designated
as and qualify as cash flow hedges. The fair value of the Corporation's cash flow hedges 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.
(Dollars in thousands)
Assets:
Securities available for sale
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Total securities available for sale
Loans held for sale
Derivative asset - IRLC
Derivative asset - cash flow hedges
Total assets
Liabilities:
December 31, 2014
Fair Value Measurements Using Assets at Fair
Level 1 Level 2
Level 3
Value
$
$
—
—
—
—
—
—
—
—
$ 22,934
67,619
131,344
221,897
28,279
448
40
$ 250,664
$
$ —
—
—
—
—
—
—
— $
$
22,934
67,619
131,344
221,897
28,279
448
40
250,664
Derivative liability - cash flow hedges
$
—
$
143
$
— $
143
112
(Dollars in thousands)
Assets:
Securities available for sale
U.S. Treasury securities
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Corporate and other debt securities
Total securities available for sale
Loans held for sale
Derivative asset - IRLC
Derivative asset - forward sales commitments
Total assets
Liabilities:
December 31, 2013
Fair Value Measurements Using Assets at Fair
Level 1 Level 2
Level 3
Value
$
$
—
—
—
—
—
—
—
—
—
—
$
10,000
29,950
50,863
127,139
158
218,110
35,879
511
22
$ 254,522
$
$
— $
—
—
—
—
—
—
—
—
— $
10,000
29,950
50,863
127,139
158
218,110
35,879
511
22
254,522
Derivative liability - cash flow hedges
$
—
$
331
$
— $
331
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 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 (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less costs to sell at the date of foreclosure. 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.
113
The following table presents the balances of financial assets measured at fair value on a non-recurring basis.
(Dollars in thousands)
Impaired loans, net
Other real estate owned net
Total
(Dollars in thousands)
Impaired loans, net
Other real estate owned, net
Total
December 31, 2014
Fair Value Measurements Using Assets at Fair
Level 1 Level 2 Level 3
1,224 $
—
$
—
786
2,010 $
—
1,224
786
2,010
—
—
—
Value
$
$
$
$
$
December 31, 2013
Fair Value Measurements Using Assets at Fair
Level 1 Level 2 Level 3
3,646 $
—
$
2,769
—
6,415 $
—
3,646
2,769
6,415
—
—
—
Value
$
$
$
$
$
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, 2014:
Fair Value Measurements at December 31, 2014
(Dollars in thousands)
Impaired loans, net
Fair Value Valuation Technique(s)
$ 1,224
Appraisals
Unobservable Inputs
Discount to reflect current
market conditions and
estimated selling costs
Discount to reflect current
market conditions and
estimated selling costs
Range of Inputs
10% - 50%
0% - 56%
Other real estate owned, net
786
Appraisals
Total
$ 2,010
Fair Value of Financial Instruments
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, 2014 and 2013.
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 17.
114
Loans held for sale, net. As described in Assets and Liabilities Measured at Fair Value on a Recurring Basis section in
this Note 17, the Corporation elected to carry its portfolio of loans held for sale (or LHFS) at fair value, measured on a
recurring basis, during the second quarter of 2013.
Accrued interest receivable. The carrying amount of accrued interest receivable approximates fair value.
Bank-owned life insurance (BOLI). The fair value of BOLI is estimated using information provided by insurance
carriers. These policies are carried at their cash surrender value, which approximates the 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.
(Dollars in thousands)
Financial assets:
Cash and short-term investments
Securities available for sale
Loans, net
Loans held for sale
Derivative asset - IRLC
Derivative asset - cash flow hedges
Accrued interest receivable
Financial liabilities:
Demand deposits
Time deposits
Borrowings
Derivative liability - cash flow hedges
Accrued interest payable
Carrying Fair Value Measurements at December 31, 2014 Using Total Fair
Value
Level 1
Level 2
Level 3
Value
$167,616 $
221,897
800,198
28,279
448
40
6,421
$659,594 $
366,507
167,027
143
740
167,616 $
—
—
—
—
—
6,421
659,594 $
—
—
—
740
— $
221,897
—
28,279
448
40
—
— $
369,538
160,052
143
—
— $167,616
221,897
—
813,010
813,010
28,279
—
448
—
40
—
6,421
—
— $659,594
369,538
—
160,052
—
143
—
740
—
115
(Dollars in thousands)
Financial assets:
Cash and short-term investments
Securities available for sale
Loans, net
Loans held for sale
Derivative asset - IRLC
Derivative asset - forward sales
commitments
Accrued interest receivable
Carrying Fair Value Measurements at December 31, 2013 Using Total Fair
Value
Level 1
Level 2
Level 3
Value
$148,139 $
218,110
785,532
35,879
511
148,139 $
—
—
—
—
— $
218,110
—
35,879
511
— $148,139
218,110
—
800,488
800,488
35,879
—
511
—
22
6,360
—
6,360
Financial liabilities:
Demand deposits
Time deposits
Borrowings
Derivative liability - cash flow hedges
Accrued interest payable
$608,409 $
399,883
169,835
331
843
608,409 $
—
—
—
843
22
—
— $
403,291
162,194
331
—
—
—
22
6,360
— $608,409
403,291
—
162,194
—
331
—
843
—
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 18: 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 purchased
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
interest expense associated with the Corporation’s trust preferred capital notes and other general corporate expenses.
116
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Income tax (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
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
Retail
Banking
Mortgage Consumer
Banking Finance
Other
Eliminations Consolidated
Year Ended December 31, 2014
$
43,616 $ 1,304 $ 46,569 $
—
9,170
52,786
5,108
2,708
9,120
—
1,227
47,796
— $
—
1,358
1,358
(4,994) $
—
—
(4,994)
86,495
5,108
14,463
106,066
60
199
3,568
4,608
8,435
685
274
411 $
—
5,915
22,944
17,970
46,829
5,957
377
5,580 $
16,270
6,445
8,962
4,739
36,416
11,380
4,438
6,942 $ (587) $
$
$ 1,178,270 $ 42,143 $ 283,984 $ 4,208 $
— $
— $
$
1 $
92 $
$
—
960
836
508
2,304
(946)
(359)
10,723 $
177 $
3,702 $
1,657 $
—
(4,994)
—
—
(4,994)
—
—
— $
16,330
8,525
36,310
27,825
88,990
17,076
4,730
12,346
(175,282) $ 1,333,323
14,425
1,927
— $
— $
Retail
Banking
Mortgage Consumer
Banking Finance
Other
Eliminations Consolidated
Year Ended December 31, 2013
$
34,777 $
—
7,672
42,449
1,865 $
7,510
4,308
13,683
48,735 $
—
1,190
49,925
2 $
—
1,540
1,542
(5,167) $
—
—
(5,167)
80,212
7,510
14,710
102,432
1,030
6,135
18,361
14,500
40,026
2,423
(884)
3,307 $
90
343
4,118
5,881
10,432
3,251
1,300
1,951 $
13,965
6,501
7,877
4,300
32,643
17,282
6,740
—
811
811
1,764
3,386
(1,844)
(446)
$
10,542 $ (1,398) $
$ 1,157,228 $ 50,803 $ 278,855 $ 4,017 $
$
— $
— $
$
2 $
535 $
10,723 $
53 $
3,702 $
3,294 $
—
(5,167)
—
—
(5,167)
—
—
— $
15,085
8,623
31,167
26,445
81,320
21,112
6,710
14,402
(178,606) $ 1,312,297
14,425
3,884
— $
— $
117
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Income tax (benefit) expense
Net income (loss)
Total assets
Goodwill
Capital expenditures
Retail
Banking
Mortgage Consumer
Banking Finance
Other
Eliminations Consolidated
Year Ended December 31, 2012
$
32,301 $
—
6,124
38,425
2,358 $
7,692
4,315
14,365
47,403 $
—
1,149
48,552
— $
—
1,322
1,322
(5,098) $
—
20
(5,078)
2,400
7,404
15,562
12,385
37,751
674
(1,479)
165
483
3,795
6,265
10,708
3,657
1,466
2,191 $
9,840
6,334
7,591
4,100
27,865
20,687
8,042
—
988
865
479
2,332
(1,010)
(383)
$
$
$
$
2,153 $
12,645 $ (627) $
813,817 $ 86,978 $ 280,205 $ 3,570 $
— $
— $
10,723 $
179 $
— $
739 $
— $
272 $
—
(5,098)
—
—
(5,098)
20
—
20 $
(207,552) $
— $
— $
76,964
7,692
12,930
97,586
12,405
10,111
27,813
23,229
73,558
24,028
7,646
16,382
977,018
10,723
1,190
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 variable rate notes that carry interest
at one-month LIBOR plus 200 basis points and fixed rate notes 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 19: Interest Rate Swaps
The Corporation uses interest rate swaps to manage exposure of its trust preferred capital notes to interest rate risk.
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
the Corporation’s exposure to interest rate risk by converting variable rates of interest on $10.00 million and $15.00
million of the Corporation’s trust preferred capital notes to fixed rates of interest until September 2015 and December
2019, respectively.
The cash flow hedges total notional amount is $25.00 million. At December 31, 2014, the $15.0 million of cash flow
hedges entered into during 2014 had a fair value of $40,000, which is recorded in other asssets, and the other $10.0
million of cash flow hedges had a fair value of ($143,000), which is recorded in other liabilities. The cash flow hedges
were fully effective at December 31, 2014 and therefore the net loss on the cash flow hedges was recognized as a
component of other comprehensive income (loss), net of deferred income taxes.
118
NOTE 20: 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 subsidiaries
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 expense on borrowings
Dividends received from C&F Bank
Equity in undistributed net income (loss) of subsidiaries
Gain on sale of securities
Other income
Other expenses
Net income
(Dollars in thousands)
Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries
Share-based compensation
Amortization of acquisition-related fair value adjustment
Gain on sale of securities
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
Investing activities:
Proceeds from sale of securities
Acquisition of Central Virginia Bankshares, Inc.
Investment in Central Virginia Bank
Merger of Central Virginia Bankshares, Inc. into C&F Financial Corporation
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
Repurchase of common stock warrant
Common stock repurchases
Cash dividends
Proceeds from exercise of stock options
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash at beginning of year
Cash at end of year
119
December 31,
2014
2013
$
662 $
—
2,506
145,790
$
148,958 $
$
25,103 $
482
123,373
$
148,958 $
958
—
7,549
130,009
138,516
20,620
4,955
112,941
138,516
Year Ended December 31,
2013
2014
2012
$
$
(916) $
5,596
8,182
—
20
(536)
12,346 $
(757)
31,150
(14,768)
270
53
(1,546)
14,402
$
(987)
13,232
4,246
—
737
(846)
$ 16,382
Year Ended December 31,
2013
2014
2012
$
12,346 $
14,402
$ 16,382
(8,182)
1,104
27
—
4,882
(4,263)
5,914
—
—
—
160
160
—
133
—
(2,303)
(161)
(4,050)
11
(6,370)
(296)
958
662 $
$
14,768
743
—
(270)
(4,710)
4,550
29,483
296
(4,196)
(26,058)
—
(29,958)
—
125
—
—
—
(3,845)
4,301
581
106
852
958
(4,246)
566
—
—
(217)
(46)
12,439
—
—
—
—
—
—
200
(10,000)
—
—
(3,682)
1,309
(12,173)
266
586
852
$
NOTE 21: Other Noninterest Expenses
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
Amortization of core deposit intangible
Professional fees
Telecommunication expenses
Travel and educational expenses
Marketing and advertising expenses
Provision for indemnification losses
Acquisition transactions cost
All other noninterest expenses
Total Other Noninterest Expenses
NOTE 22: Quarterly Condensed Statements of Income—Unaudited
Year Ended December 31,
2013
2012
2014
$ 3,616 $ 2,700 $ 2,273
1,982
—
1,688
1,181
957
813
1,205
—
6,335
$ 19,019 $ 19,048 $ 16,434
364
1,190
2,101
1,507
1,109
1,333
240
315
7,244
1,001
333
2,326
1,231
1,032
964
558
1,351
7,552
2014 Quarter Ended
March 31 June 30 September 30 December 31
21,651
$ 21,294 $ 21,712 $
14,188
4,704
15,774
3,118
2,417
2,417
0.71
0.30
21,838 $
15,582
4,706
15,668
4,620
3,294
3,294
0.97
0.30
16,306
5,349
16,339
5,316
3,742
3,742
1.09
0.30
15,564
4,812
16,354
4,022
2,893
2,893
0.83
0.29
2013 Quarter Ended
March 31 June 30 September 30 December 31
$ 19,123 $ 19,230 $
22,205
14,936
4,520
15,511
3,945
2,852
2,852
0.81
0.29
19,654 $
13,745
5,639
14,524
4,860
3,366
3,366
0.97
0.29
14,028
6,963
14,548
6,443
4,178
4,178
1.22
0.29
13,795
5,098
13,029
5,864
4,006
4,006
1.19
0.29
Dollars in thousands (except per share amounts)
Total interest income
Net interest income after provision for loan losses
Other income
Other expenses
Income before income taxes
Net income
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
120
REPORT
T OF INDEPE
ENDENT REG
GISTERED P
PUBLIC ACC
OUNTING FI
IRM
To the Board
C&F Financi
West Point, V
d of Directors a
and Shareholde
n
ial Corporation
Virginia
ers
We have aud
December 31
shareholders
statements ar
financial stat
dited the acco
1, 2014 and 20
’ equity, and c
re the responsi
tements based o
mpanying con
013, and the r
ash flows for e
ibility of the C
on our audits.
nsolidated bala
related consoli
each of the thre
orporation’s m
ance sheets of
idated statemen
ee years in the
management. O
C&F Financia
nts of income,
period ended
Our responsibi
al Corporation
, comprehensiv
December 31,
lity is to expre
n and Subsidia
ve income, ch
2014. These f
ess an opinion
ary as of
hanges in
financial
on these
We conducte
States). Tho
financial stat
the amounts
and significa
believe that o
ed our audits in
ose standards r
tements are fre
and disclosure
ant estimates m
our audits prov
n accordance w
require that we
e of material m
es in the financ
made by manag
vide a reasonab
with the standa
e plan and perf
misstatement. A
cial statements.
gement, as wel
ble basis for ou
ards of the Pub
form the audit
An audit inclu
. An audit also
ll as evaluating
ur opinion.
blic Company A
t to obtain reas
udes examining
o includes asse
g the overall f
Accounting Ov
sonable assura
g, on a test basi
essing the acco
financial statem
versight Board
ance about whe
is, evidence su
ounting princip
ment presentati
d (United
ether the
upporting
ples used
ion. We
In our opinio
position of C
operations an
U.S. generall
on, the consolid
C&F Financial
nd their cash f
ly accepted acc
dated financial
l Corporation
flows for each
counting princi
statements ref
and Subsidiar
of the three ye
iples.
ferred to above
ry as of Decem
ears in the per
e present fairly,
mber 31, 2014
riod ended Dec
, in all material
4 and 2013, an
cember 31, 20
l respects, the f
nd the results
14, in conform
financial
of their
mity with
We have als
States), C&F
based on cri
Organization
opinion on th
o audited, in a
F Financial Cor
iteria establish
ns of the Tread
he effectivenes
accordance wit
rporation and S
hed in Internal
dway Commis
s of C&F Fina
th the standard
Subsidiary’s in
l Control — I
sion in 2013,
ancial Corporat
ds of the Publ
nternal control
Integrated Fra
and our repor
tion and Subsid
lic Company A
over financial
amework issue
rt dated March
diary’s internal
Accounting Ov
l reporting as o
ed by the Com
h 11, 2015 exp
l control over f
versight Board
of December 3
mmittee of Spo
pressed an unq
financial report
d (United
31, 2014,
onsoring
qualified
ting.
Winchester, V
March 11, 20
Virginia
015
121
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Corporation’s management, including the Corporation’s Chief
Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure
controls and procedures (as 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, 2014 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 subsidiaries 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, 2014. 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 (2013). Based on our
assessment, we believe that, as of December 31, 2014, 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, 2014 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, 2014 that have materially affected, or are reasonably likely to
materially affect, the Corporation’s internal control over financial reporting.
122
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 (the Corporation) internal control over financial reporting
as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. The Corporation’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 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 company'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 company'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 company; (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 company are being made only in accordance with authorizations of
management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company'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, the Corporation maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.
123
We have als
States), the c
income, com
ended Decem
an unqualifie
o audited, in a
consolidated ba
mprehensive inc
mber 31, 2014 o
ed opinion.
accordance wit
alance sheets a
come, changes
of C&F Financ
th the standard
as of Decembe
in shareholder
cial Corporatio
ds of the Publ
er 31, 2014 an
rs’ equity, and
on and Subsidia
lic Company A
nd 2013, and th
cash flows for
ary, and our re
Accounting Ov
he related cons
r each of the th
port dated Mar
versight Board
solidated statem
hree years in th
rch 11, 2015 ex
d (United
ments of
he period
xpressed
Winchester, V
March 11, 20
Virginia
015
124
ITEM 9B.
OTHER INFORMATION
On December 16, 2014, the Corporation’s Compensation Committee approved an additional compensation benefit
for Chairman and Chief Executive Officer Larry G. Dillon to provide post-retirement medical and dental insurance
premiums for Mr. Dillon and his spouse for life. The new benefit is effective as of January 1, 2015, although Mr. Dillon
is not eligible to begin receiving this benefit until he retires at or after age 65.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect to the directors of the Corporation is contained in the 2015 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 2015 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 information regarding the Corporation's Audit Committee is
contained in the 2015 Proxy Statement under the caption "Report of the Audit Committee" and is incorporated herein by
reference.
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 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 2015 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 2015 Proxy Statement are incorporated herein by reference. The information regarding director
compensation contained in the 2015 Proxy Statement under the caption, “Director Compensation,” is incorporated herein
by reference.
125
ITEM 12.
AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the 2015 Proxy Statement under the caption, “Security Ownership of Certain
Beneficial Owners and Management,” is incorporated herein by reference.
The information contained in the 2015 Proxy Statement under the caption, “Equity Compensation Plan
Information,” is incorporated herein by reference.
ITEM 13.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
The information contained in the 2015 Proxy Statement under the caption, “Interest of Management in Certain
Transactions,” is incorporated herein by reference. The information contained in the 2015 Proxy Statement under the
caption, “Director Independence,” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the 2015 Proxy Statement under the captions, “Principal Accountant Fees” and
“Audit Committee Pre-Approval Policy,” is incorporated herein by reference.
126
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
PART IV
2.1
3.1
3.1.1
3.2
Agreement and Plan of Merger dated as of June 10, 2013 by and among C&F Financial Corporation,
Special Purpose Sub, Inc. and Central Virginia Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to
Form 8-K filed June 14, 2013)
Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit 3.1 to Form
10-KSB filed March 29, 1996)
Amendment to Articles of Incorporation of C&F Financial Corporation (incorporated by reference to
Exhibit 3.1.1 to Form 8-K filed January 14, 2009)
Amended and Restated Bylaws of C&F Financial Corporation, as adopted December 16, 2014
(incorporated by reference to Exhibit 3.1 to Form 8-K filed December 22, 2014)
Certain instruments relating to trust preferred securities not being registered have been omitted in accordance with
Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and
Exchange Commission upon its request.
*10.1
*10.3
Amended and Restated Change in Control Agreement dated December 30, 2008 between C&F Financial
Corporation and Larry G. Dillon (incorporated by reference to Exhibit 10.1 to Form 10-K filed March 9,
2009)
Amended and Restated Change in Control Agreement dated December 30, 2008 between C&F Financial
Corporation and Thomas F. Cherry (incorporated by reference to Exhibit 10.3 to Form 10-K filed March 9,
2009)
*10.3.1
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
*10.4.2
*10.4.3
*10.4.4
Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred Compensation Plan for
C&F Financial Corporation dated as of December 31, 2008 (incorporated by reference to Exhibit 10.4.1 to
Form 10-K filed March 9, 2009)
Attachment to the Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation dated as of January 1, 2008 (incorporated by reference
to Exhibit 10.4.2 to Form 10-K filed March 7, 2008)
Amendment to Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation effectively dated as of December 31, 2008
(incorporated by reference to Exhibit 10.4.3 to Form 10-K filed March 9, 2009)
Amendment to Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation effectively dated as of January 1, 2009 (incorporated by
reference to Exhibit 10.4.4 to Form 10-K filed March 3, 2010)
127
*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
*10.5.2
*10.7
*10.9
Adoption Agreement for the Restated VBA Director’s Deferred Compensation Plan for C&F Financial
Corporation dated as of December 31, 2008 (incorporated by reference to Exhibit 10.5.1 to Form 10-K filed
March 9, 2009)
Amendment to Adoption Agreement for the Restated VBA Directors’ Deferred Compensation Plan for
C&F Financial Corporation effectively dated as of December 31, 2008 (incorporated by reference to
Exhibit 10.5.2 to Form 10-K filed March 9, 2009)
Amended and Restated C&F Financial Corporation 1998 Non-Employee Director Stock Compensation
Plan (incorporated by reference to Exhibit 10.7 to Form 10-K filed March 7, 2008)
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) (incorporated by
reference to Exhibit 10.10.4 to Form 10-K filed March 5, 2013)
*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
*10.14
Employment Agreement (Amended and Restated) between C&F Mortgage Corporation and Bryan
McKernon, dated January 1, 2013 (incorporated by reference to Exhibit 10.12 to Form 10-K filed March 5,
2013)
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)
*10.15
Schedule of C&F Financial Corporation Non-Employee Directors’ Annual Compensation
*10.16
Base Salaries for Executive Officers of C&F Financial Corporation
128
*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
10.19.2
10.19.3
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)
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)
Third 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 November 12, 2013
(incorporated by reference to Exhibit 10.19.3 to Form 10-K filed March 7, 2014)
*10.29
C&F Financial Corporation 2013 Stock and Incentive Compensation Plan (incorporated by reference to
Appendix A to the Corporation's Proxy Statement filed March 15, 2013)
*10.30
Form of C&F Financial Corporation Restricted Stock Agreement under 2013 Stock and Incentive
Compensation Plan (approved May 21, 2013) (incorporated by reference to Exhibit 10.30 to Form 8-K filed
May 24, 2013)
10.31
10.32
Securities Purchase Agreement dated as of July 17, 2013 by and among the United States Department of
the Treasury, Central Virginia Bankshares, Inc. and C&F Financial Corporation (incorporated by reference
to Exhibit 10.31 to Form 8-K filed July 22, 2013)
Amendment No. 1 to Securities Purchase Agreement dated as of September 13, 2013 by and among the
United States Department of the Treasury, Central Virginia Bankshares, Inc. and C&F Financial
Corporation (incorporated by reference to Exhibit 10.32 to Form 8K filed October 2, 2013)
*10.33
Change in Control Agreement dated October 9, 2012 between C&F Financial Corporation and John
Anthony Seaman (incorporated by reference to Exhibit 10.33 to Form 10-K filed March 7, 2014)
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
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
129
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
130
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
C&F FINANCIAL CORPORATION
(Registrant)
Date: March 11, 2015
By:
/S/ LARRY G. DILLON
Larry G. Dillon
Chairman 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 and
Chief Executive Officer
(Principal Executive Officer)
/S/ THOMAS F. CHERRY
Thomas F. Cherry, President,
Chief Financial Officer, Secretary and Director
(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 11, 2015
Date: March 11, 2015
Date: March 11, 2015
Date: March 11, 2015
Date: March 11, 2015
Date: March 11, 2015
Date: March 11, 2015
Date: March 11, 2015
Date: March 11, 2015
131
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, Kentucky,
Maryland, North Carolina, Tennessee and West Virginia and (ii) total assets as of December 31 of the prior year of
between $825 million and $2.0 billion, and (iii) no denial of an application to participate in the Capital Purchase
Program. For 2014, the Peer Group consisted of 23 publicly-traded commercial financial institutions in Virginia,
Kentucky, Maryland, North Carolina, Tennessee and West Virginia. The median asset size for the Peer Group was
$1.1 billion based on total assets as of December 31, 2013. The following financial institutions were included in the
Peer Group: Access National Corporation (VA); American National Bankshares, Inc. (VA); Bank of Kentucky
Financial Corporation (KY); Community Bankers Trust Corporation (VA: The Community Financial Corporation
(MD); Eastern Virginia Bankshares, Inc. (VA); Farmers Capital Bank Corporation (KY); First Security Group, Inc.
(TN); First United Corporation (MD); HopFed Bancorp Inc. (KY); Middleburg Financial Corporation (VA);
Monarch Financial Holdings (VA); National Bankshares, Inc. (VA); NewBridge Bancorp (MD); Old Line
Bancshares, Inc. (MD); Old Point Financial Corporation (VA); Peoples Bancorp of North Carolina, Inc. (NC);
Porter Bancorp, Inc. (KY): Premier Financial Bancorp, Inc. (WV); Shore Bancshares, Inc. (MD); Summit Financial
Group Inc. (WV); Valley Financial Corporation (VA); and WashingtonFirst Bankshares, Inc. (VA). 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, 2009 in the Corporation, the NASDAQ Composite
Index and the Peer Group, and shows the total return on such an investment as of December 31, 2014, 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 2014
350
300
250
200
150
100
50
e
u
l
a
V
x
e
d
n
I
0
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
Index
C&F Financial Corporation
NASDAQ Composite
CFFI Custom Peer Group 2014
12/31/09
100.00
100.00
100.00
12/31/10
123.47
118.15
95.16
Period Ending
12/31/11
154.04
117.22
81.72
12/31/12
232.54
138.02
111.03
12/31/13
279.57
193.47
150.13
12/31/14
251.29
222.16
166.71
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
President, Chief Financial Officer & 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:
6201 15th Avenue, Brooklyn NY 11219
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