3600 LaGrange Parkway
Toano, Virginia 23168
757-741-2201
802 Main Street
PO Box 391
West Point, VA 23181
www.cffc.com
I-DEPOSIT24 CONVENIENT SAVINGS
PERSONAL certificate of deposit RESPECTFUL
C&F RELATIONSHIP REVIEW knowledgeable TREASURY
CONSUMER LENDING PEOPLE-FOCUSED CHECKING
CARING
Focused on You
COMMUNITY SUPPORT COMPETITIVE business lending
cutting edge technology
MOBILE BANKING FRIENDLY
VALUE
UNDIVIDED ATTENTION
C&F COMPANY CONNECTION
trusted advisor LINE OF CREDIT MONEY MARKET
responsible
BIG BANK CAPABILITIES
personalized service
VALUE
putting people first ACTIVE
CHARACTER
DEDICATION HOME EQUITY LINE OF CREDIT TELEBANK
SMALL BANK SERVICE
ACCESSIBLE
MORTGAGE LOAN
2015 ANNUAL REPORT
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 Virginia.
C&F Mortgage Corporation originates
and sells residential mortgages throughout
Virginia, Maryland and North Carolina.
Through its subsidiary, C&F Mortgage also
provides residential appraisal services.
C&F Finance Company specializes in new
and used indirect automobile lending in
Alabama, Florida, Georgia, Illinois, Indiana,
Kentucky, Maryland, Missouri, New Jersey,
North Carolina, Ohio,
Pennsylvania,
Tennessee, Texas, Virginia and West Virginia.
C&F Wealth Management Corporation
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.
E
C
N
A
M
R
O
F
R
E
P
l
a
i
c
n
a
n
i
F
NET INCOME (in thousands)
$12,976
$16,382
$14,444 $12,344 $12,530
2011
2012
2013 2014 2015
EARNINGS PER SHARE (assuming dilution)
$3.72
$4.86
$4.19 $3.59 $3.68
2011
2012
2013 2014 2015
RETURN ON AVERAGE EQUITY
14.86%
17.05% 13.39% 10.32% 9.87%
2011
2012
2013 2014 2015
RETURN ON AVERAGE ASSETS
1.30%
1.71% 1.35% .93% .92%
2011
2012
2013 2014 2015
l 2015 C&F ANNUAL REPORT l 1
Letter to our SHAREHOLDERS
It is a pleasure to present to you C&F Financial
Corporation’s (“C&F”) 2015 annual report. 2015
was a year in which we achieved solid financial results
and undertook important strategic initiatives that
we believe will enhance shareholder value for years
to come.
$291.8 million from $283.3 million. This growth
was primarily funded by excess cash and customer
deposits, which grew to $1.07 billion at the end of
2015 from $1.03 billion at the end of 2014. Our
capital remains strong as C&F’s shareholders’ equity
grew to $131.1 million from $123.6 million.
Net income for the year ended December 31, 2015
was $12.5 million, or $3.68 per share assuming
dilution, compared with $12.3 million, or $3.59
per share assuming dilution, for the year ended
December 31, 2014. This resulted in a 9.87 percent
return on equity (ROE) and a 0.92 percent return on
assets (ROA) for 2015, compared to 10.32 percent
and 0.93 percent, respectively, for 2014. ROE and
ROA for 2015 declined as a result of both equity
and asset growth, primarily loans, which outpaced
earnings growth. As has been the case for many
years, our results continue to compare favorably to
financial institutions that we consider our peers. For
2015, ROE and ROA for our peers approximated
7.39 percent and 0.78 percent, respectively.
C&F continues to benefit from diversified lines
of business. In years past, this strategy has been
beneficial as a decline in earnings at one of our
subsidiaries was often offset by an increase in
earnings at another subsidiary. We’re pleased to
announce that in 2015, earnings increased at all
three of our major subsidiaries. Earnings at C&F Bank
increased slightly to $5.63 million in 2015, compared
to $5.58 million during 2014, primarily as a result
of an increase in loans to third parties. Earnings at
C&F Mortgage Corporation increased to $677,000
in 2015, compared to $411,000 in 2014, resulting
from a 15 percent increase in originations for the
year. Earnings at C&F Finance Company increased
to $7.18 million in 2015 compared to $6.94 million
in 2014, primarily as a result of incremental income
from a $19.6 million loan portfolio purchased for
$16.3 million in the second quarter of 2015.
Total assets for C&F grew to $1.4 billion by the end
of 2015. More importantly, total loans increased
to $901.5 million at the end of 2015 from $835.8
million at the end of 2014, which consisted of
an increase at C&F Bank to $606.2 million from
$549.2 million and an increase at C&F Finance to
For the first time in almost a decade, the U.S. Federal
Reserve raised short-term interest rates 25 basis
points in the fourth quarter of 2015. The question
now is when will they raise them again and by how
much? With worries about China, slower global
economic growth, instability in North Korea and
the Middle East, volatile oil prices and conflicting
U.S. economic indicators, the answer for us is that
we’re not sure. In fact, some analysts say we may
be facing another recession. The only thing we can
do is be prepared for any interest rate environment,
and we believe we are well-prepared. Our balance
sheet is strong; our credit quality is good; our
capital position is strong; we have plenty of excess
cash; and from an interest rate risk perspective, our
balance sheet is well positioned.
Our key goal in 2015 for C&F Bank was to increase
loans and, as mentioned above, loans grew in excess of
10 percent during 2015. This was accomplished by the
hiring of experienced commercial lending personnel in
the Richmond market over the last several years and
successfully recruiting a commercial lending team
in the Williamsburg market that came onboard at
the end of 2014. It was also helped by an increase in
lending throughout our retail branch network and our
continued commitment to small business lending. We
were — and still are — focused on lending!
However, lending was not our only focus at C&F
Bank in 2015. Our investments in e-commerce, risk
management, compliance and training continued
throughout the year. We rolled out C&F Business
Mobile Banking and Apple Pay, becoming one of
the first community banks in Virginia to do so with
each. We implemented a portfolio risk management
software for our commercial loan portfolio; we
implemented electronic funds transfer risk and fraud
software; and we began issuing the new EMV Visa
Debit Card to our customers. All of these initiatives
are designed to grow the business as well as to
2 l 2015 C&F ANNUAL REPORT l
Photo (l-r): Larry G. Dillon, Chairman & Chief Executive Officer
and Thomas F. Cherry, President & Chief Financial Officer
protect the bank and our customers. We continue to
invest in compliance management systems to ensure
we are adhering to all of the new regulations that
continue to evolve as a result of the Dodd-Frank Act
and other new rules being initiated by the Consumer
Financial Protection Board (CFPB). In addition
to these systems and regulatory enhancements,
we continued to make substantial investments in
our personnel. In 2015, we introduced C&F Bank
Academy, which will function almost like a “college”
within our company. While we have always invested
in training, this academy was formed to make sure
our training will be focused on the areas that will
most benefit the bank and our customers.
Growth in earning assets will continue to be our
primary focus at C&F Bank during 2016. Even with
the success in loan growth during 2015, we continue
to have a tremendous amount of cash on our
balance sheet, so the challenge remains to deploy
that cash into earning assets. With commercial
and small business lending teams already in place in
the Richmond and Williamsburg markets, a newly-
recruited experienced lending team in the Hampton
and Newport News market and the continued
in the real estate development and
resurgence
construction markets, we fully expect the expansion
of our loan portfolio during 2016. We will continue
to focus on our e-commerce strategy as this is quickly
becoming the primary means of banking for most
businesses and individuals. We are confident that
we offer all of the e-commerce products and services
that enable us to compete with the largest financial
institutions. This is evidenced by the number of
customers that have enrolled in and more importantly,
are utilizing these products and services with our bank.
2016 will be an exciting year for C&F Bank!
C&F Mortgage increased its loan originations by
14.8 percent to $549.3 million in 2015 from $478.6
million in 2014. This growth was accomplished
in spite of the costly and time-consuming new
regulations with which we must now comply. The
newest rule, created by the CFPB, is the Truth in
Lending Act RESPA Integrated Disclosure Rule
(TRID) for which we
implemented drastically
new processes during 2015. This has completely
changed the way we and the mortgage industry as a
whole do business. We have invested thousands of
personnel hours and purchased a new operating
system in order to assist in complying with TRID.
While this system has aided us with TRID
implementation, it has also helped us realize
efficiencies in our overall processes, which
l 2015 C&F ANNUAL REPORT l 3
will ultimately benefit our customers. Supposedly,
this rule was enacted to make things simpler and
more transparent for the consumer. From our
perspective, however, a rule that requires thousands
of pages to explain implementation and has resulted
in increased costs to the consumer doesn’t seem
simple or very consumer-friendly. As a result of TRID
and ongoing and prospective regulations, we are
continually updating and enhancing our compliance
management system.
We believe we have such a strong platform for future
growth that in 2015 we created a new subsidiary of
C&F Mortgage called Lender Solutions, which will give
us a new source of income. This company was created
to leverage the investments we have made in our
mortgage banking infrastructure. Lender Solutions
provides certain mortgage origination
functions
to smaller mortgage companies at a price that we
believe is more cost effective than if these companies
performed them for themselves. We’re pleased to say
that we have enrolled our first customer for this new
program and are excited about future prospects.
by some of our competitors. As a result, organic
growth was difficult during 2015. Therefore, we
supplemented the slower organic growth with the
purchase of a $19.6 million portfolio of automobile
loans. We purchased this portfolio for approximately
$16.3 million (a $3.3 million discount). As a result
of this purchase, C&F Finance’s loans grew to $291.8
million at the end of 2015 from $283.3 million at
the end of 2014.
As with our other subsidiaries, we continue to invest
in technology at C&F Finance in order to improve
efficiencies, help us manage rigorous regulatory
burdens and capture more business. For example, we
implemented a new loan system in 2015 that we have
confidence will help deal with many of these issues and
opportunities. We also continued to strengthen our
compliance management system in order to ensure
we are addressing the evolving compliance issues in
the auto lending industry. We continued to invest in
our collections efforts from both a personnel and a
technology perspective. As mentioned above, we are
observing that certain competitors in the industry
C&F Brand Attributes
PERSONAL COMPETITIVE responsible
C ARING
Competition for loan originators remains strong in
the mortgage industry and this is a major reason we
created the C&F Mortgage Loan Officer School in
2015. This program is designed to develop and train
loan officers in-house who are new to the industry
as opposed to always trying to recruit the same loan
officers every other mortgage company is recruiting.
While we will continue to recruit seasoned lenders,
our new school will supplement that strategy. The first
class graduated in 2015 and we have already started
a new class for 2016. Our focus at C&F Mortgage
is higher loan production! With the investments
in our infrastructure, our recruiting efforts and our
new loan officer training school, along with our new
subsidiary Lender Solutions, the prospects for 2016
are encouraging.
The competition for auto loans for C&F Finance
remains aggressive, resulting in lower rates and in
many cases less restrictive underwriting standards
have relaxed their credit standards resulting in higher
delinquencies and charge-offs for the
industry.
While we have maintained, if not strengthened, our
own credit standards, we are not immune from the
deterioration of credit quality in this industry. We
have also been working on a credit scorecard that
will be ready for rollout later in 2016. This scorecard
will allow us to make decisions in a more timely and
efficient manner, which is currently a competitive
advantage of larger financial institutions.
We believe 2016 will continue to be challenging
for C&F Finance from a competitive standpoint.
However, we have momentum going into 2016
as we achieved record loan volume in the fourth
quarter of 2015. This momentum, along with
our continued investments in technology and
compliance management systems, set the stage for
a promising year to come.
4 l 2015 C&F ANNUAL REPORT l
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.
Unsurprisingly, a common theme when discussing
our significant business segments is compliance and
regulatory burden. We’ve heard too many times from our
employees that it seems we are becoming a compliance
company that happens to take deposits and make
loans. While we will continue to voice our concerns to
our legislative representatives and regulators about over
regulation, this burden is clearly here to stay and we will
manage it in the most efficient and effective way possible.
It has been our strategy to automate compliance
functions as much as feasibly possible in order to give
the best service to our customers, provide our employees
more time to serve our customers and reduce the amount
of time spent on compliance paperwork and processes.
While we have made many improvements, we continue
to make new investments that will make us more efficient
and allow us to serve our customers better. 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, but also our
information technology ability, which again we feel is
advanced compared to financial institutions our size
and quite comparable with those much larger than C&F.
We believe we do a good job of serving our customers,
caring for our employees and being a good corporate
citizen to the communities we serve. We believe we
are fulfilling our brand promise of “Focused on You.”
However, believing in it and actually delivering on it are
different. We get it. It’s also very clear that competition
among banks and financial services firms has greatly
increased and will continue to intensify in the years
to come. That’s why it’s more important than ever
for C&F to have a total-team understanding and
engagement with what we know makes us uniquely
valuable in this growing competitive landscape.
For that reason, we engaged PadillaCRT, a
Richmond-based brand management
and
public relations firm, to conduct what’s known
as a “refresh” of our “Focused on You” brand
promise. We’re proud to report that extensive
interviews with many of our employees, customers,
and other members of the C&F community revealed
that we are viewed in a very favorable light as a caring,
personal, competitive, and responsible bank. The team
from PadillaCRT went so far as to call these results
“unprecedented.” PadillaCRT is now helping us build a
plan for leveraging these attributes into how we “tell our
story” through the actions and words of our employees.
This work will also help us target our marketing strategies
on the right markets with the right message, which we
view as extremely positive for C&F.
At the end of 2014, the Board of Directors promoted
Thomas F. Cherry to President of both C&F and C&F
Bank in order to ensure C&F’s future leadership. This
change was also intended to provide opportunities
for others within the organization by expanding their
experiences and responsibilities, which will be beneficial
to the long-term future of the company. This transition
has gone very well in 2015, and we look forward to
continuing to work 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 & CEO
Thomas F. Cherry
President & CFO
l 2015 C&F ANNUAL REPORT l 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 of Philanthropy
Virginia Home For Boys and Girls
CORPORATE
COUNSEL
Hudson Law, PLC
West Point, Virginia
INDEPENDENT PUBLIC
ACCOUNTANTS
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
C&F MORTGAGE CORPORATION
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
C&F FINANCIAL CORPORATION
C&F BANK BOARD OF DIRECTORS
J.P. Causey Jr.*+
Attorney-at-Law
J.P. Causey Jr., Attorney-at-Law
Thomas F. Cherry*+
President & Chief Financial Officer
C&F Financial Corporation
Citizens and Farmers Bank
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 l 2015 C&F ANNUAL REPORT l
Standing (l-r):
Joshua H. Lawson, Bryan E. McKernon,
Audrey D. Holmes, James H. Hudson III, James T.
Napier, Larry G. Dillon, J. P. Causey Jr., Paul C. Robinson
Seated (l-r): Barry R. Chernack, Thomas F. Cherry, C. Elis Olsson
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, Chief HR Officer
Christopher A. Spillare
Senior Vice President, Treasurer
Matthew H. Steilberg
Senior Vice President, Director 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
Maureen B. Medlin
First Vice President, Marketing
Deborah R. Nichols
First Vice President, Director of Compliance
Mary-Jo Rawson*
First Vice President, Controller &
Assistant Secretary
Helga H. Ridenhour
First Vice President, Operations Manager
Maria Sullivan
First Vice President,
Director of Human Resources
Leslie A. Campbell
Vice President, Credit Administration
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
Mary Landon
Vice President, Underwriting
Christopher J. Robb
Vice President, Credit Analyst Manager
Teresa S. Weaver
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
Jacob L. Smith
Assistant Vice President, Branch Manager
CUMBERLAND, VIRGINIA
David M. Younce
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
Jennifer L. Willner
Branch Manager
Brandermill
Maurice V. Dixon, Branch Manager
Midlothian
Vicki M. Alvarez
Assistant Vice President, Branch Manager
NEWPORT NEWS, VIRGINIA
City Center
Melanie C. Wynkoop
Vice President, Branch Manager & Team Leader
NORGE, VIRGINIA
Taryn R. Haden,
Vice President, Branch Manager & Team Leader
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
Vice President, Branch Manager & Team Leader
RICHMOND, VIRGINIA
Patterson Avenue
Varina
Shawn R. Finisecy, Branch Manager
Wellesley
West Broad
Bina Y. Doshi
Vice President, Branch Manager
SANDSTON, VIRGINIA
William P. Sossong
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
Kiln Creek
Susan L. Burns, Branch Manager
C&F BANK-PENINSULA
COMMERCIAL BANKING
ADMINISTRATIVE OFFICES
1167 Jamestown Road
Williamsburg, Virginia 23185
(757) 841-1732
Mark J. Eggleston
Regional President, Williamsburg/Peninsula
Bonnie S. Smith
First Vice President, Construction Lending
CITY CENTER COMMERCIAL
BANKING OFFICE
11815 Fountain Way, Suite 400
Newport News, Virginia 23606
(757)596-1047
Henry L. Singleton
Senior Peninsula Executive,
Senior Commercial Relationship Manager
Scott T. McNeill
Vice President,
Commercial Relationship Manager
l 2015 C&F ANNUAL REPORT l 7
C&F OFFICERS & LOCATIONS
C&F BANK-RICHMOND
COMMERCIAL BANKING
ADMINISTRATIVE OFFICES
4701 Cox Road, Suite 160
Glen Allen, Virginia 23060
(804) 955-4700
F. Arnold Blackmon III
Senior Commercial Relationship Manager
Walter M. Cart Jr.
Vice President, Relationship Manager
Michael D. Gasiorowski
Vice President, Relationship Manager
Matthew J. Ohlschlager
Vice President, Senior Relationship Manager
Tracy E. Pendleton
Vice President, Relationship Manager
C&F WEALTH MANAGEMENT
CORPORATION
802 Main Street
West Point, Virginia 23181
(804)843-4584 or (800) 583-3863
Eric F. Nost, CFP®
President
MIDLOTHIAN, VIRGINIA
Douglas L. Hartz
First 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
Vice President, Investment Officer &
Operations and Compliance Manager
WILLIAMSBURG, VIRGINIA
Douglas L. Cash Jr.
First 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
8 l 2015 C&F ANNUAL REPORT l
Kevin A. McCann
Senior Vice President, Chief Financial Officer
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.
Vice President of Originations
Tony Lamont
Regional Vice President of Sales
Barbara Stephens
Vice President of Loan Processing
Sabrina Carroll
Director of Collections
Oneida Wood
Director of Human Resources
Serving the following states
ALABAMA
FLORIDA
GEORGIA
ILLINOIS
INDIANA
KENTUCKY
MARYLAND
MISSOURI
NEW JERSEY
NORTH CAROLINA
OHIO
PENNSYLVANIA
TENNESSEE
TEXAS
VIRGINIA
WEST VIRGINIA
Michael J. Mazzola
Senior Vice President
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
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
ANNAPOLIS, MARYLAND
William J. Regan
Vice President, Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy, Branch Manager
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
For the fiscal year ended December 31, 2015
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 000-23423
C&F FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation or organization)
54-1680165
(I.R.S. Employer Identification No.)
802 Main Street
West Point, VA 23181
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (804) 843-2360
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value per share
Title of each class
The NASDAQ Stock Market LLC
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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, 2015 was $117,071,257.
There were 3,451,148 shares of common stock outstanding as of February 29, 2016.
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 19, 2016 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
Page
3
14
22
22
23
23
24
26
27
65
68
117
117
120
120
120
120
121
121
122
126
2
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 subsidiaries, all incorporated under the laws of the Commonwealth of
Virginia:
C&F Mortgage Corporation and its wholly-owned subsidiaries Certified Appraisals LLC and Lender
Solutions LLC
C&F Finance Company and its wholly-owned subsidiary C&F Remarketing LLC
C&F Wealth Management Corporation (formerly 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). For detailed information about the financial condition and results of operations
of these segments, see “Note 18. Business Segments” in Item 8. “Financial Statements and Supplementary Data” in this
report. The following general business discussion focuses on the activities within each of these segments.
In addition, the Corporation conducts brokerage activities through C&F Wealth Management Corporation,
insurance activities through C&F Insurance Services, Inc. and title insurance services 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, and assumed by the Corporation when CVBK was merged
into the Corporation on March 22, 2014, with all such issuances occurring 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.
3
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, West Point and
Yorktown, two in Williamsburg, four 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 and mobile banking and debit and credit cards, as well as safe deposit box rentals, notary public, electronic transfer
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, 2015, assets of the Retail
Banking segment totaled $1.23 billion. For the year ended December 31, 2015, 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 10 locations in Virginia, two in Maryland and one in North
Carolina. The Virginia offices are located one each in Charlottesville, Fishersville, Fredericksburg, Glen Allen,
Harrisonburg, Lynchburg, Newport News and Williamsburg, and two in Midlothian. The Maryland offices are located in
Annapolis and Waldorf. The North Carolina office is located in Gastonia. 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 mortgage loans from C&F Mortgage.
C&F Mortgage originates conventional mortgage loans, mortgage loans insured by the Federal Housing Administration
(the FHA), and 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, Certified Appraisals LLC, C&F
Mortgage provides ancillary mortgage loan origination services for residential appraisals and through its subsidiary, Lender
Solutions LLC, provides certain mortgage origination functions to third parties. 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, 2015, assets of the Mortgage Banking
segment totaled $58.2 million. For the year ended December 31, 2015, net income for this segment totaled $677,000.
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 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, 2015, assets of the Consumer
4
Finance segment totaled $295.4 million. For the year ended December 31, 2015, net income for this segment totaled $7.2
million.
Employees
At December 31, 2015, we employed 598 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, to maximize efficiencies through economies of scale and, by virtue of their greater
total capitalization, to have substantially higher lending limits than the Bank.
Factors such as interest rates offered, the number and location of branches and the types of products offered, as well
as the reputation of the institution, affect competition for deposits and loans. We compete by emphasizing customer service
and technology, establishing long-term customer relationships, building customer loyalty, and providing products and
services to address the specific needs of our customers. We target individual and small-to-medium size business customers.
No material part of the Bank’s business is dependent upon a single or a few customers, and the loss of any single
customer would not have a materially adverse effect upon the Bank’s business.
Mortgage Banking
C&F Mortgage competes with large national and regional banks, credit unions, smaller regional mortgage lenders
and small local broker operations. 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.
The competitive factors faced by C&F Mortgage have changed and will likely continue to change due to regulatory
reforms and initiatives, including but not limited 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 regulatory reforms and initiatives, 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,
require 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 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
5
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. As an example of one such change, during 2015, C&F Mortgage implemented drastically new
processes and systems in order to comply with the CFPB’s Integrated Mortgage Disclosure Rules Under the Real Estate
Settlement Procedures Act and the Truth in Lending Act (TRID), which became effective October 2015. TRID applies to
most closed-end mortgage loans, which is the emphasis of C&F Mortgage’s activities.
To operate profitably in this competitive and regulatory 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 2014 and 2015, 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 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 for 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, banks and their affiliates 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
6
statutory or regulatory provisions or proposals for more information. Because regulation of financial institutions changes
regularly 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.
The Corporation continues to experience a period of rapidly changing regulations and an environment of constant
regulatory reform. 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 potential regulatory reforms cannot yet be fully predicted and
will depend to a large extent on the specific regulations that are adopted in the future.
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 Federal Reserve Board and the Federal Deposit
Insurance Corporation (the FDIC) have adopted guidelines and released interpretative materials that establish operational
and managerial standards to promote the safe and sound operation of banks and bank holding companies. These standards
relate to the institution’s key operating functions, including but not limited to capital management, internal controls,
internal audit system, information systems, data and cybersecurity, loan documentation, credit underwriting, interest rate
exposure and risk management, vendor management, executive management and its compensation, asset growth, asset
quality, earnings, liquidity and risk management.
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. Bank holding companies and their subsidiaries are also subject to restrictions on transactions with insiders
and affiliates.
Each of the Bank’s depository accounts is insured by 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.
7
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 of that institution – including that
institution’s parent holding company. 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.
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 institutions 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 an
institution’s 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 include 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.
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
8
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, Federal Reserve Board
supervisory guidance indicates that the Federal Reserve Board may have safety and soundness concerns if a bank holding
company pays dividends that exceed earnings for the period in which the dividend is being paid. Further, 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 imposed limits for debit card interchange fees for issuers that
have over $10 billion in assets, which could affect the amount of interchange fees collected by financial institutions
with less than $10 billion in assets.
In addition, the Dodd-Frank Act implements other changes to financial regulations, including provisions that:
Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks from
availing themselves of such preemption.
Impose comprehensive regulation of the over-the-counter derivatives market, subject to significant rulemaking
processes, which would include certain provisions that would effectively prohibit insured depository institutions
from conducting certain derivatives businesses in the institution itself.
Require depository institutions with total consolidated assets of more than $10 billion to conduct regular stress tests
and require large, publicly traded bank holding companies to create a risk committee responsible for the oversight
of enterprise risk management.
Require loan originators to retain 5 percent of any loan sold or securitized, unless it is a “qualified residential
mortgage,” subject to certain exceptions.
Prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain
unregistered investment companies (the Volcker Rule).
9
Implement corporate governance revisions that apply to all public companies not just financial institutions.
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 as an insured institution, 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 range from 2.5 to 45 basis points. The FDIC may make the following further adjustments to an
institution’s initial base assessment rate: 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 proposed by the FDIC during 2015. 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
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 constituent organizations and 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, the data security and cybersecurity infrastructure of the constituent
organizations and the combined organization, 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.
10
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, 2015,
the Bank owned $3.2 million of FHLB stock.
Consumer Protection. The CFPB is the 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 CFPB supervises and regulates providers of consumer financial products and
services, and has 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)).
Because the Corporation and the Bank are smaller institutions (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 and banks, 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 and C&F Mortgage are 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.
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’s mortgage origination activities, C&F Mortgage 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.
11
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. C&F Finance also is regulated by the VBFI and the states and jurisdictions in
which it operates, and its 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, 2016, 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, 2015, 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, 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.
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 Gramm-Leach-Bliley
Act 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
12
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 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
13
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,
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, but 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.
14
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 implements significant changes in the financial regulatory landscape, including
through regulations issued pursuant to the Dodd-Frank Act, 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, some of which have not been
finalized. Consequently, the complete effect 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 created a new financial consumer
protection agency, the CFPB. The CFPB is reshaping 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
are directly affecting 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 total 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 in their entirety. However, these costs, limitations and restrictions are
producing, and may continue to produce, significant, material effects on our business, financial condition and results of
operations.
The Basel III Final Rules 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, 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
15
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 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.
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 believe that our current interest
rate exposure is manageable and does not indicate any significant exposure to interest rate changes. On December 16,
2015, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate, which is the interest
rate at which depository institutions lend reserve balances to other depository institutions overnight, to 0.25%-0.50%,
which was the first change since December 16, 2008 when the target range was decreased to 0%-0.25%. The FOMC
concluded that there had been considerable improvement in labor market conditions during 2015 and it was reasonably
confident that inflation will rise, over the medium term, toward its 2 percent objective. However, the FOMC’s monetary
policy remains accommodative after this increase. Despite the 25 basis point increase in the federal funds rate, we are
expecting continued pressure on our net interest margin due to continued low market rates and intense competition for
loans and deposits from both local and national financial institutions. 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. Continued pressure on our net interest margin could adversely affect our results of operations.
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 could adversely affect 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, 2015, 39 percent of our loan portfolio consisted of commercial, financial and agricultural loans,
which include loans secured by real estate for builder lines, acquisition and development and commercial development, as
well as commercial loans secured by personal property. These loans generally carry larger loan balances and involve a
greater degree of financial and credit risk than home equity and residential loans. The increased financial and credit risk
associated with these types of loans is a result of several factors, including the concentration of principal in a limited
16
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, 2015, 32 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 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. Interest rates, low housing
inventory, cash buyers, new mortgage lending regulations and other market conditions have a direct effect on loan
originations across the industry.
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.
The existence of an active secondary market is a critical component of C&F Mortgage’s ability to generate income
from the sale of loans to investors. Active secondary markets for residential mortgages depend 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
17
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.
Compliance with the CFPB regulations aimed at the mortgage banking industry may require substantial changes to
mortgage lending systems and processes that may adversely affect income from our mortgage company.
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 separate
underwriting factors that are identified in the CFPB rules to evaluate each borrower’s ability to repay. In June 2015, the
CFPB issued rules that combined disclosures previously established by TILA and RESPA into a single disclosure referred
to as the TILA-RESPA Integrated Disclosure, or TRID. During 2015, C&F Mortgage implemented drastically new
processes and systems in order to comply with TRID. TRID applies to most closed-end mortgage loans and overhauls the
manner in which mortgage loan origination disclosures are made pursuant to TILA (Regulation Z) and RESPA. 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 effect 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. 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 (including for personnel and systems infrastructure) associated with mortgage banking
activities. 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 at our Retail Banking segment 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 at this segment are considerations with respect to the
effect of economic events, the outcome of which are uncertain.
Our allowance for loan losses at our Consumer Finance segment is determined by analyzing delinquency rates and
trends in deferrals, defaults, repossessions and loans charged off. 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.
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.
18
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.
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 increased the rate
of 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.
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 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.
19
We rely substantially on deposits made by customers in our target markets to provide liquidity and support growth.
Our business strategies are based on access to funding from local customer deposits. Deposit levels may be
affected by a number of factors, including interest rates paid by competitors, general interest rate levels, returns available
to customers on alternative investments and general economic conditions. If our deposit levels fall, we could lose a
relatively low cost source of funding and our interest expense would likely increase as we obtain alternative funding to
replace lost deposits. If local customer deposits are not sufficient to fund our normal operations and growth, we will look
to outside sources, such as borrowings from the FHLB, which is a secured funding source. Our ability to access borrowings
from the FHLB will be dependent upon whether and the extent to which we can provide collateral to secure FHLB
borrowings. We may also look to federal funds purchased and brokered deposits, although, the use of brokered deposits
may be limited or discouraged by our banking regulators. We may also seek to raise funds through the issuance of shares
of our common stock or other equity or equity-related securities as additional sources of liquidity. If we are unable to
access funding sufficient to support our business operations and growth strategies or are only able to access such funding
on unattractive terms, we may not be able to implement our business strategies which may negatively affect our financial
performance.
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 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
20
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.
Future issuances of our common stock could adversely affect the market price of the common stock and could be
dilutive.
We may issue additional shares of common stock or securities that are convertible into or exchangeable for, or
that represent the right to receive, shares of our common stock. Issuances of a substantial number of shares of our common
stock, or the expectation that such issuances might occur, including in connection with acquisitions, could materially
adversely affect the market price of the shares of our common stock and could be dilutive to shareholders. Any decision
we make to issue common stock in the future will depend on market conditions and other factors, and we cannot predict
or estimate the amount, timing, or nature of possible future issuances of our common stock. Accordingly, our common
shareholders bear the risk that future issuances of our securities will reduce the market price of the common stock and
dilute their stock holdings in the Corporation.
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 Wealth Management Corporation.
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 been marketing this property for sale and anticipates
completing a sale during the first quarter of 2016.
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 $165,000 for the year ended
December 31, 2015.
22
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. This property was listed for sale during the fourth quarter
of 2015.
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 13 loan production offices leased from nonaffiliates including 10
in Virginia, two in Maryland, and one in North Carolina. Rental expense for leased locations totaled $810,000 for the year
ended December 31, 2015.
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
staff. C&F Finance has two leased offices, one each in Maryland and Tennessee. Rental expense for leased locations totaled
$390,000 for the year ended December 31, 2015.
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.
23
Table of Contents
EXECUTIVE OFFICERS OF THE REGISTRANT
Name (Age)
Present Position
Business Experience
During Past Five Years
Larry G. Dillon (63)
Chairman and
Chief Executive Officer
Thomas F. Cherry (47)
President, Chief Financial Officer and Secretary
Bryan E. McKernon (59)
President and Chief Executive Officer,
C&F Mortgage
John A. Seaman, III (58)
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; Director
of the Corporation and C&F Bank since April 2015; 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; Director of C&F Bank since 1998
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 (47)
President, C&F Finance
President of C&F Finance since 2010; Executive Vice President of
C&F Finance from 2007 through 2009
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 February 29, 2016, 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 $40.13. Following are
24
the high and low sales prices as reported by the NASDAQ Stock Market, along with the dividends that were declared
quarterly in 2015 and 2014.
Quarter
First
Second
Third
Fourth
2015
Low
2014
Dividends High Low
Dividends
High
$ 39.75 $ 34.05 $
37.92
38.00
39.77
33.76
33.20
35.02
0.30 $ 45.88 $ 32.13 $
0.30
0.30
0.32
30.33
32.61
32.40
37.04
36.99
39.97
0.29
0.30
0.30
0.30
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 authorized a share repurchase program for the Corporation’s outstanding
common stock (the Repurchase Program) in May 2014, which initially expired in May 2015. In May 2015, the
Corporation’s Board of Directors reauthorized the Repurchase Program to authorize repurchases of up to $5.0 million of
the Corporation’s common stock through May 2016. 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 Securities Exchange Act of 1934 (the Exchange Act) and/or Rule 10b-18 of the Exchange Act. As of
December 31, 2015, $5.0 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, 2015.
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, 2015 - October 31, 2015 1
November 1, 2015 - November 30, 2015
December 1, 2015 - December 31, 20151
Total
Total Number of
Shares Purchased
Part of Publicly
Average Price Paid Announced Plans or Under the Plans or
Programs
Be Purchased
Programs
per Share
1,050 $
—
4,414
5,464 $
35.04
—
37.80
37.27
— $
—
—
— $
5,000
5,000
5,000
5,000
1 These shares were withheld from employees to satisfy tax withholding obligations arising upon the vesting of
restricted shares. Accordingly, these shares are not included in the calculation of approximate dollar value of shares
that may yet be purchased under the Repurchase Program.
25
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
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 per common share
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
2015
2014
2013
2012
2011
$ 1,405,076
131,059
865,892
1,073,633
$ 1,338,187
123,610
800,198
1,026,101
$ 1,312,536
113,180
785,532
1,008,292
$
$
$
$
$
$
87,049
8,694
78,355
15,512
62,843
20,714
66,174
17,383
4,853
12,530
—
12,530
3.68
3.68
1.22
$
$
$
86,495
8,525
77,970
16,330
61,640
19,405
63,557
17,488
5,144
12,344
—
12,344
3.63
3.59
1.19
80,212
8,623
71,589
15,085
56,504
21,668
56,599
21,573
7,129
14,444
—
14,444
4.37
4.19
1.16
$
$
$
$
977,215 $
102,394
640,283
686,184
928,124
96,090
616,984
646,416
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
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
3,401,834
3,436,278
3,443,982
3,305,902
3,172,277
0.92 %
9.87
33.20
9.29
0.93 %
10.32
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
26
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, the Corporation’s and each business segment’s loan portfolio
and business prospects related to each 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, the amount and timing of accretion associated with the
fair value accounting adjustments recorded in connection with the 2013 acquisition of CVBK, provision for
indemnification losses, levels of noninterest income and expense, interest rates and yields including possible future changes
in 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 changes to
the federal funds target rate, 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 application of the Basel III capital
standards to the Corporation and the Bank
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 results expected from the CVBK acquisition, including continued relationships with
major customers, deposit retention and expansion of C&F Bank’s brand recognition
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
27
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, including competition in the non-prime automobile finance
markets
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 made 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,
certain 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 probable losses inherent
in the loan portfolio. 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
28
it requires estimates that are susceptible to significant revision as more information becomes available. For more
information see the section titled “Asset Quality” within Item 7.
Allowance for Indemnifications: The allowance for indemnifications is established through charges to earnings
in the form of a provision for indemnifications, which is included in other noninterest expenses. A loss is charged against
the allowance for indemnifications under certain conditions when a purchaser of a loan (investor) sold by C&F Mortgage
incurs a loss due to borrower misrepresentation, fraud, early default, or underwriting error. The allowance represents an
amount that, in management’s judgment, will be adequate to absorb any losses arising from indemnification requests.
Management’s judgment in determining the level of the allowance is based on the volume of loans sold, historical
experience, current economic conditions and information provided by investors. This evaluation is inherently subjective,
as it requires estimates that are susceptible to significant revision as more information becomes available.
Impairment of Loans: We consider a loan impaired when it is probable that the Corporation will be unable to
collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during
a period of delay in payment if we expect the ultimate collection of all amounts due. We measure impairment on a loan-
by-loan basis for commercial, construction and residential loans in excess of $500,000 by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair
value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. We maintain a valuation allowance to the extent that the measure of the impaired
loan is less than the recorded investment. Troubled debt restructurings (TDRs) are also considered impaired loans, even if
the loan balance is less than $500,000. A TDR occurs when we agree to significantly modify the original terms of a loan
by granting a concession 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,” is
not recorded and is available to absorb future credit loss on those loans. 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 to acquisition, we evaluate on a quarterly basis our estimate of cash flows expected to be collected.
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 loan losses. Subsequent
significant 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 that increases 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.
Purchased performing loans are recorded at fair value as of the acquisition using the contractual cash flows method
29
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 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 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 similar 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.
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.
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) 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
30
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
results of operations for the year ended December 31, 2013 includes CVBK’s results subsequent to the acquisition date.
Financial Performance Measures
Net income for the Corporation was $12.5 million in 2015, or $3.68 per common share assuming dilution, compared
with net income of $12.3 million in 2014, or $3.59 per common share assuming dilution. The change in financial results
for 2015, as compared to 2014, was attributable to increases in earnings at each of the Corporation’s principal business
segments.
See “Principal Business Activities” below for additional discussion.
The Corporation’s ROE and ROA were 9.87 percent and 0.92 percent, respectively, for the year ended
December 31, 2015, compared to 10.32 percent and 0.93 percent, respectively, for the year ended December 31, 2014. The
decrease in these ratios during 2015 resulted primarily from growth in average equity and average assets, which outpaced
earnings growth. Average equity increased due to internal capital growth of 6.1 percent and average assets increased
primarily due to the 7.0 percent increase in average loans.
2016 Outlook
Management believes the Corporation’s financial performance in 2016 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) an uncertain interest rate environment and potential fluctuations in
interest rates that may depress loan production levels in the Mortgage Banking segment, 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 2016:
Retail Banking: Growth in higher-yielding earning assets, specifically loans, will be our primary focus at the
Bank during 2016. With commercial and small business lending teams already in place in Richmond and
31
Williamsburg, Virginia, a newly-recruited experienced lending team in Hampton and Newport News, Virginia,
and the continued resurgence in the real estate development and construction sectors in our markets, we expect
to continue to grow our loan portfolio during 2016. However, the general economic trends in the Bank’s
markets and the current low interest rate environment have contributed to increased competition and lower
yields on both the loan and investment portfolios. In addition, the effect of the recent increase in the federal
funds rate on the Bank’s cost of funds and the competition for deposits remains to be seen. It will be challenging
to maintain the Retail Banking segment’s net interest margin at its current level as the net accretion of the fair
value accounting adjustments recorded in connection with the CVB acquisition decline and if funds obtained
from loan repayments and possibly higher-costing deposit growth are reinvested in loans during this low
interest rate environment. Also in 2016, we will continue to focus on our e-commerce strategy as this is quickly
becoming the primary means of banking for most businesses and individuals, and we believe we must
successfully implement our e-commerce strategy to remain competitive within the financial services industry.
Mortgage Banking: C&F Mortgage generates significant noninterest income from the sale of residential loan
products into the secondary market. Although earnings increased at the Mortgage Banking segment in 2015,
compared to 2014, increasing future profitability at the current origination levels will be challenging due to the
fixed costs of maintaining the personnel, compliance and technology infrastructure required to support
mortgage banking activities. While our goal is to increase origination volume through internal growth in
existing markets and through strategic initiatives, our ability to maintain a level of loan production in 2016
sufficient to sustain profitability will be dependent on market factors beyond our control, such as the interest
rate environment and changes in interest rates, housing starts and loan demand. If mortgage interest rates
continue to rise during 2016, C&F Mortgage may experience a lower loan demand, particularly for mortgage
refinancings, which could negatively affect earnings of the Mortgage Banking segment in 2016. In addition,
during 2016 C&F Mortgage will continue to (i) compete to retain and attract qualified loan officers, (ii) incur
higher costs related to compliance with new residential mortgage regulations and disclosures, especially given
the heightened federal regulation of lending practices and loan terms and disclosures and (iii) implement new
systems in order to realize efficiencies overall in our mortgage banking processes and to create opportunities
for revenue generation.
Consumer Finance: C&F Finance provides automobile financing through lending programs that are designed
to serve customers in the non-prime market. The competition for these customers remains aggressive, as
evidenced by lower loan rates and less restrictive underwriting standards by some of our competitors. As a
result, organic growth was difficult during 2015, and we expect organic growth of our consumer finance loan
portfolio to continue to be difficult in 2016. However, some market data is encouraging and C&F Finance
purchased a record volume of loans from dealers in the fourth quarter of 2015. We believe that some
competitors in the industry have relaxed credit standards resulting in higher delinquencies and charge-offs
for certain participants in the industry. While we intend to maintain our own credit standards, we are not
immune from the effects of deteriorating credit quality within the industry, which may result in higher
delinquency levels and charge-offs for the Consumer Finance segment in 2016 and negatively affect C&F
Finance’s earnings in 2016. For example, non-prime borrowers may default at higher rates in 2016 if these
borrowers perceive a high level of credit available in the market on accommodative terms. During 2016, we
expect to continue investing in technology at C&F Finance in order to capture more business, improve
efficiencies, and manage the rigorous regulatory burdens and evolving compliance issues in the indirect auto
lending industry.
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 both the years ended
December 31, 2015 and 2014. Net income for 2015 was positively influenced by (1) the effects of loan growth on interest
income, (2) a shift in deposit composition from time deposits to non-interest bearing demand deposits and non-term
savings, money market and interest bearing deposits accounts, which pay lower interest rates, (3) a lower cost of
32
borrowings resulting from the maturity of a portion of the Bank’s higher-rate FHLB advances and (4) cost savings related
to the integration of CVB into the Bank’s infrastructure. Offsetting these positive factors were (1) a decline in the yield
on the Bank’s investment and loan portfolios due to the effects of the low interest rate environment, coupled with a decline
in the net accretion attributable to fair value accounting adjustments, as discussed below, and (2) higher personnel costs
associated with generating commercial and small business loan growth.
The results for both 2015 and 2014 for the Retail Banking segment have been affected by the fair value accounting
adjustments recorded in connection with the 2013 acquisition of CVB. These adjustments resulted from marking assets
and liabilities acquired from CVB to their fair values as of the acquisition date. As a result, 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 (1) amortization of the core deposit intangible and (2) higher depreciation expense associated with the buildings
acquired in the CVB merger. The net accretion attributable to these adjustments was $1.3 million, net of taxes ($2.0 million
before taxes) for the year ended December 31, 2015, compared to $1.9 million, net of taxes ($3.0 million before taxes) for
the year ended December 31, 2014.
The Retail Banking segment’s nonperforming assets were $7.1 million at December 31, 2015, compared to $5.5
million at December 31, 2014. Nonperforming assets at December 31, 2015 included $6.2 million in nonaccrual loans,
compared to $4.7 million at December 31, 2014, and $942,000 in foreclosed properties, compared to $786,000 at December
31, 2014. The increase in nonaccrual loans since December 31, 2014 was primarily due to one customer relationship of
$956,000 moving to nonaccrual status during 2015. The remaining increase in nonaccrual loans was generally attributable
to the credit deterioration of certain smaller balance loans, partially offset by principal payments on existing nonaccrual
loans. Troubled debt restructured (TDR) loans were $5.3 million at December 31, 2015, of which $2.5 million were
included in nonaccrual loans, as compared to $5.8 million of TDR loans at December 31, 2014, of which $2.0 million were
included in nonaccrual loans. Management believes the current level of the allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio, based on the relevant history of charge-offs and recoveries, current economic
conditions, overall portfolio quality and review of specific criticized loans. If loan concentrations within the Bank’s loan
portfolio result in higher credit risk or if economic conditions worsen, a higher loan loss allowance may be warranted in
future periods, which may require a provision for loan losses.
Mortgage Banking: C&F Mortgage reported net income of $677,000 for the year ended December 31, 2015,
compared to $411,000 for the year ended December 31, 2014. Loan origination volume for the year ended December 31,
2015 increased to $549.3 million from $478.6 million for the year ended December 31, 2014. During 2015, the amount of
loan originations for refinancings and new and resale home purchases were $104.4 million and $444.9 million,
respectively, compared to $71.8 million and $406.8 million, respectively, during 2014. The increase in origination volume
is due to the effect of the favorable interest rate environment during 2015 on home sales. The increase in loan originations
in 2015 resulted in an increase in gains on sales of loans, which were $6.3 million for the year ended December 31, 2015,
compared to $5.1 million for the year ended December 31, 2014.
Consumer Finance: C&F Finance reported net income of $7.2 million for the year ended December 31, 2015,
compared to $6.9 million for the year ended December 31, 2014. At the end of the second quarter of 2015, the consumer
finance segment purchased a $19.6 million loan portfolio for $16.3 million, and recorded a purchase discount of $3.3
million, which will be accreted into income over the remaining life of the portfolio. The improvement in net income for
the year ended December 31, 2015 was primarily due to the incremental income from the acquired loan portfolio, and an
$803,000 decline in the provision for loan losses, offset by an increase in salary and other noninterest expense.
Average loans for the year ended December 31, 2015 increased $705,000, compared to average loans for the year
ended December 31, 2014. The increase was due to the purchased portfolio described above, somewhat offset by lower
originations due to increased competition and loan pricing strategies that competitors used to grow market share.
The results of the consumer finance segment include a $15.5 million provision for loan losses for the year ended
December 31, 2015, compared to $16.3 million for the year ended December 31 2014. The net charge-off ratio for the year
ended December 31, 2015 was 5.50 percent, compared to 5.39 percent for the year ended December 31, 2014. The increase
in this ratio for the year ended December 31, 2015 was due to net charge-offs related to the consumer finance loans
purchased during the second quarter of 2015, which had the effect of increasing this ratio 56 basis points. The allowance
33
for loan losses to total loans was 8.21 percent at December 31, 2015, compared to 8.50 percent at December 31, 2014. The
decrease in this ratio at December 31, 2015 was primarily due to the inclusion of the consumer finance loans purchased
during the second quarter of 2015, which were recorded at a discount and had the effect of reducing this ratio 32 basis
points. While the Corporation expects the purchase discount accretion on this portfolio to mitigate the effect of losses on
the purchased portfolio, this portfolio is routinely re-evaluated as part of the segment’s overall analysis of the adequacy of
the allowance for loan losses. Management believes that the current allowance for loan losses is adequate to absorb
probable losses in the loan portfolio. If factors influencing the consumer finance segment result in a higher net charge-off
ratio in the future, C&F Finance Company may need to increase the level of its allowance for loan losses, which could
negatively affect future earnings.
Other and Eliminations: The other segment, which principally includes the Corporation’s holding company
operations and wealth management subsidiary, reported an aggregate net loss of $955,000 for the year ended December 31,
2015, compared to a net loss of $587,000 for the year ended December 31, 2014. The higher loss during 2015 was due to
an increase at the holding company in (1) general corporate expenses and (2) interest expense, which resulted from the
utilization of interest rate swaps to manage the interest rate risk exposure of the Corporation’s trust preferred capital notes.
Partially offsetting these negative factors was higher earnings during 2015 from our wealth management subsidiary.
Capital Management
Total shareholders’ equity was $131.1 million at December 31, 2015, compared to $123.6 million at December 31,
2014. Capital growth resulted from earnings for the year ended December 31, 2015 and stock option exercises, offset in
part by dividends and share repurchases during the year.
The Corporation’s Board of Directors continued its policy of paying dividends in 2015 and declared a quarterly
cash dividend of 32 cents per share for the fourth quarter of 2015, which was a 6.7 percent increase over the prior quarter’s
dividend amount of 30 cents per share. For the year ended December 31, 2015, the Corporation declared dividends of
$1.22 per share, which was a two percent increase over dividends of $1.19 per share declared in 2014. The dividend payout
ratio was 33.2 percent of basic earnings per share for the year ended December 31, 2015, compared to 32.8 percent in
2014. The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the
resulting dividend payout ratio in light of changes in economic conditions, capital levels, expected future earnings, and
certain changes to the regulatory capital framework that began to apply to the Corporation and the Bank on January 1,
2015.
Pursuant to the Repurchase Program the Corporation is authorized to purchase up to $5.0 million of the
Corporation’s common stock through May 2016. As of December 31, 2015, the Corporation had not used any of this
authority and remained authorized to purchase up to $5.0 million of the Corporation’s common stock under the Repurchase
Program.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets for each of the years ended December 31, 2015, 2014 and
2013 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).
34
TABLE 1: Average Balances, Income and Expense, Yields and Rates
2015
2014
2013
Average
Balance
Income/ Yield/
Expense Rate
Average
Balance
Income/ Yield/
Expense Rate
Average
Balance
Income/ Yield/
Expense Rate
$
99,611 $ 2,422
6,305
8,727
80,177
116,414
216,025
905,616
2.43 % $
5.42
4.04
8.85
96,286 $ 2,493
6,693
9,186
79,246
118,221
214,507
854,948
2.59 % $
5.66
4.28
9.27
47,886 $ 1,065
6,928
7,993
74,456
116,846
164,732
761,751
2.22 %
5.93
4.85
9.77
364
89,268
0.25
7.04
146,622
1,268,263
(35,349)
133,030
$ 1,365,944
378
88,810
0.24
7.24
157,205
1,226,660
(35,090)
132,785
$ 1,324,355
68,093
994,576
(34,880)
108,088
$ 1,067,784
159
82,608
0.23
8.31
(Dollars in thousands)
Assets
Securities:
Taxable
Tax-exempt
Total securities
Total loans
Interest-bearing deposits in other
banks and federal funds sold
Total earning assets
Allowance for loan losses
Total non-earning assets
Total assets
Liabilities and Shareholders’
Equity
Time and savings deposits:
Interest-bearing demand deposits $
Money market deposit accounts
Savings accounts
Certificates of deposit, $100 or
203,614 $
204,597
99,585
448
563
79
0.22 % $ 186,548 $
0.28
0.08
181,530
97,643
439
493
83
0.24 % $
0.27
0.09
137,615 $
132,449
61,237
412
382
73
0.30 %
0.29
0.12
more
Other certificates of deposit
Total time and savings deposits
Borrowings
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
139,878
209,909
857,583
173,187
1,030,770
185,774
22,491
1,239,035
126,909
Total liabilities and shareholders’
equity
$ 1,365,944
1,282
1,822
4,194
4,500
8,694
0.92
0.87
0.49
2.60
0.84
139,502
241,231
846,454
170,101
1,016,555
166,928
21,261
1,204,744
119,611
$ 1,324,355
1,299
1,766
4,080
4,445
8,525
0.93
0.73
0.48
2.61
0.84
133,363
179,387
644,051
167,003
811,054
123,859
25,348
960,261
107,523
$ 1,067,784
1,464
1,920
4,251
4,372
8,623
1.10
1.07
0.66
2.62
1.06
Net interest income
Interest rate spread
Interest expense to average earning
assets
Net interest margin
$ 80,574
$ 80,285
$ 73,985
6.20 %
0.69 %
6.35 %
6.40 %
0.69 %
6.55 %
7.25 %
0.87 %
7.44 %
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.
35
TABLE 2: Rate-Volume Recap
2015 from 2014
2014 from 2013
Increase (Decrease)
Due to
Total
Increase
Volume (Decrease) Rate
Increase (Decrease)
Due to
Total
Increase
Volume (Decrease)
Rate
$
(3,646)
$
4,577
$
931 $ (3,988)
$
8,778
$
4,790
(155)
(287)
12
(4,076)
(30)
7
(6)
(20)
303
254
(25)
229
84
(101)
(26)
4,534
39
63
2
3
(247)
(140)
80
(60)
$
(4,305)
$
4,594
$
(71)
(388)
(14)
458
199
(316)
1,229
81
5
214
(4,100)
10,302
(100)
(23)
(25)
(230)
(707)
9
70
(4)
(17)
56
114
55
169
(1,093)
289 $ (3,007)
(1,085)
(8)
127
134
35
65
553
914
81
995
1,428
(235)
219
6,202
27
111
10
(165)
(154)
(171)
73
(98)
$
9,307
$
6,300
(Dollars in thousands)
Interest income:
Loans
Securities:
Taxable
Tax-exempt
Interest-bearing deposits in other banks and
federal funds sold
Total interest income
Interest expense:
Time and savings deposits:
Interest-bearing demand deposits
Money market deposit accounts
Savings accounts
Certificates of deposit, $100 or more
Other certificates of deposit
Total time and savings deposits
Borrowings
Total interest expense
Change in net interest income
2015 Compared to 2014
Net interest income, on a taxable-equivalent basis, for the year ended December 31, 2015 was $80.6 million,
compared to $80.3 million for the year ended December 31, 2014. The increase in net interest income for 2015, compared
to 2014, was a result of an increase in average earning assets, offset in part by a decrease in net interest margin. Net interest
margin decreased 20 basis points to 6.35 percent for 2015 as compared to 2014. The decrease resulted from a decline in
the yield on interest-earning assets of 20 basis points, which was primarily attributable to decreases in the yields on the
loan and investment securities portfolios, as described below. While the cost of interest-bearing liabilities in 2015 remained
level with 2014, deposits continued to shift from higher-cost term deposits to lower-cost deposits, including interest-
bearing demand deposits and money market accounts and noninterest-bearing demand deposits.
Average loans, which includes both loans held for investment and loans held for sale, increased $50.7 million to
$905.6 million for the year ended December 31, 2015, compared to 2014. Average loans held for sale increased $12.2
million, or 42.1 percent, during 2015, compared to 2014, due to a 14.8 percent increase in loan originations from 2014 to
2015 and fluctuations in the period of time between mortgage loan origination and sales to third-party investors. Average
loans held for investment for the Retail Banking segment increased $37.1 million, or 7.0 percent, for 2015 due to growth
in commercial real estate lending, commercial business lending and real estate mortgage segments of the loan portfolio,
which was driven by investing in experienced commercial lending personnel and the resurgence in the real estate
development and construction sectors in our markets. Average loans held for investment at the Consumer Finance segment
increased $705,000, or 0.25 percent, for 2015 due to the purchase of a loan portfolio in the second quarter of 2015, which
was acquired to improve interest income in light of the lack of internally generated loan growth.
The overall yield on average loans decreased 42 basis points to 8.85 percent for year ended December 31, 2015,
compared to 2014. The decrease in the average loan yield is due to the decline in the average yield at both the Retail
Banking and Consumer Finance segments. At the Retail Banking segment the decrease in yield is the result of the effects
of the low interest rate environment, coupled with a decline in the net accretion attributable to fair value accounting
adjustments recorded in connection with the 2013 acquisition of CVB. The accretion contributed approximately 25 basis
36
points to the yield on loans and 18 basis points to the yield on interest earning assets and net interest margin for 2015
compared to approximately 32 basis points to the yield on loans, 22 basis points to the yield on interest earning assets and
23 basis points to the net interest margin for 2014. At the Consumer Finance segment, the decrease in yield is the result
of increased competition and loan pricing strategies that competitors have used to grow market share. Partially offsetting
the decrease in the yield is the incremental interest income from the Consumer Finance segment’s higher-yielding acquired
loan portfolio that was purchased in the second quarter of 2015.
Average securities available for sale increased $1.5 million for the year ended December 31, 2015, compared to
2014. The average yield on the securities portfolio decreased due to the (1) purchase of lower-yielding shorter-term
securities to replace maturities and calls of longer-term, higher yielding securities and (2) the current interest rate
environment. The Corporation has utilized the strategy of investing in lower-yielding, shorter-term securities, including
mortgage-backed securities, to limit exposure to a potential future rising interest rate environment by limiting the security
portfolio’s duration.
Average interest-bearing deposits in other banks, consisting primarily of excess reserves maintained at the Federal
Reserve Bank, and federal funds sold decreased $10.6 million for the year ended December 31, 2015, compared to the
same period of 2014. These decreases occurred as the Corporation used these funds to partially fund loan growth during
2015. The average yield on these overnight funds increased one basis point during 2015. Effective December 17, 2015,
the Federal Reserve Bank increased the interest rate on excess reserve balances from 0.25 percent to 0.50 percent, which
had a minimal effect on yield for the year ended December 31, 2015.
Average interest-bearing time and savings deposits increased $11.1 million for the year ended December 31, 2015,
compared to the same period in 2014. The average cost of interest-bearing deposits increased 1 basis point during 2015.
The average cost of interest-bearing deposits benefited from the shift in deposit composition from time deposits to non-
interest bearing demand deposits and non-term savings, money market and interest-bearing demand deposits, which pay
lower interest rates. However, the rate on other certificates of deposit increased 14 basis points in 2015 over 2014 primarily
due to only a partial year of CVB purchase accretion during 2015. The fair value adjustment on the CVB certificates of
deposit was fully accreted during the second quarter of 2015. Time deposit accretion related to the accounting adjustment
to the CVB time deposits reduced cost by 4 basis points 2015, compared to 13 basis points in 2014.
Average borrowings increased $3.1 million for the year ended December 31, 2015, compared to the same period of
2014. This increase resulted from borrowings related to the purchase of a consumer finance loan portfolio in the second
quarter of 2015. The average cost of borrowings declined one basis point during 2015, as a result of the maturity of higher
interest rate FHLB advances, which were replaced with lower rate FHLB advances.
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. 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.
2014 Compared to 2013
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 was a result of
the sustained low interest rate environment, the repricing of higher-rate certificates of deposit as they mature to lower rates,
37
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.
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.
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.
38
NONINTEREST INCOME
TABLE 3: Noninterest Income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Net gains on calls and sales of available for sale securities
Investment services income
Other income
Total noninterest income
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Net gains on calls and sales of available for sale securities
Investment services income
Other income
Retail
Banking
$
Year Ended December 31, 2015
Mortgage Consumer Other and
Eliminations
Banking
— $ 6,336 $
Finance
4,322
4,176
29
—
556
—
2,597
—
—
24
— $
—
14
—
—
1,081
$ 9,083 $ 8,957 $ 1,095 $
Total
— $ 6,336
4,322
—
6,787
—
29
—
1,481
1,481
1,759
98
1,579 $ 20,714
Retail
Banking
$
Year Ended December 31, 2014
Mortgage Consumer Other and
Banking
Eliminations
— $ 5,086 $
Finance
4,468
3,901
29
—
772
—
2,314
—
—
250
— $
—
14
—
—
1,213
Total
— $ 5,086
4,468
—
6,246
17
29
—
1,229
1,229
2,347
112
1,358 $ 19,405
Total noninterest income
$ 9,170 $ 7,650 $ 1,227 $
(Dollars in thousands)
Gains on sales of loans
Service charges on deposit accounts
Other service charges and fees
Net gains on calls of available for sale securities
Investment services income
Other income
Total noninterest income
2015 Compared to 2014
Retail
Banking
$
Year Ended December 31, 2013
Mortgage Consumer Other and
Banking
Eliminations
— $ 7,532 $
Finance
4,197
2,917
6
—
552
—
3,131
—
—
603
— $
—
9
—
—
1,181
$ 7,672 $ 11,266 $ 1,190 $
Total
— $ 7,532
4,197
—
6,220
163
276
270
1,060
1,060
2,383
47
1,540 $ 21,668
Total noninterest income increased $1.3 million, or 6.7 percent, for the year ended December 31, 2015, compared
to the same period in 2014. The increase in total noninterest income for 2015 was attributable to (1) higher loan production
at the Mortgage Banking segment resulting in higher gains on sales of loans and ancillary loan origination fees and (2)
higher investment services income at the Corporation’s wealth management subsidiary. These increases were partially
offset by lower noninterest income at (1) the Retail Banking segment due to a decline in overdraft and maintenance fees,
which was offset in part by higher debit card interchange income and other branch fee income and (2) lower loan servicing
fees at the Consumer Finance segment. Other income for both the Retail Banking and Mortgage Banking segments
decreased due to the inclusion of net unrealized depreciation in noninterest expense related to the non-qualified deferred
compensation plan during 2015, compared to net appreciation during 2014.
2014 Compared to 2013
Total noninterest income decreased $2.3 million, or 10.4 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 market conditions caused a decline of 33.6 percent in loan origination volume during 2014 and
39
corresponding decreases of $2.4 million in gains on sales of loans and $1.6 million in ancillary loan origination fees
constituting a 32.1 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.
NONINTEREST EXPENSE
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses:
OREO expenses
Provision for indemnification losses
Other expenses
Total other expenses
Total noninterest expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses:
OREO expenses
Provision for indemnification losses
Other expenses
Total other expenses
Total noninterest expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Other expenses:
OREO expenses
Provision for indemnification losses
Other expenses
Total other expenses
Total noninterest expense
2015 Compared to 2014
TABLE 4: Noninterest Expense
Retail
Banking
Year Ended December 31, 2015
Mortgage Consumer Other and
Eliminations
Finance
Banking
Total
$
23,185 $
6,255
4,594 $
1,850
9,758 $
713
1,389 $
10
38,926
8,828
71
—
10,829
10,900
40,340 $
—
274
2,439
2,713
9,157 $
—
—
4,257
4,257
14,728 $
—
—
550
550
1,949 $
71
274
18,075
18,420
66,174
$
Year Ended December 31, 2014
Retail
Mortgage Consumer
Banking
Banking Finance
Other and
Eliminations
Total
$
22,944 $
6,250
3,568 $
1,832
8,962 $
717
836 $
7
36,310
8,806
6
—
11,302
11,308
40,502 $
—
240
2,370
2,610
8,010 $
—
—
4,022
4,022
13,701 $
—
—
501
501
1,344 $
6
240
18,195
18,441
63,557
$
Year Ended December 31, 2013
Retail
Banking
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
—
8,693
9,374
32,400 $
—
558
2,877
3,435
9,447 $
—
—
3,477
3,477
12,177 $
—
—
1,749
1,749
2,575 $
681
558
16,796
18,035
56,599
$
Total noninterest expenses increased $2.6 million, or 4.1 percent, for the year ended December 31, 2015, compared
to the same period in 2014. The increase in total noninterest expenses for 2015 resulted primarily from higher personnel
costs during 2015 (1) at C&F Bank due to increased staff levels and support positions associated with personnel dedicated
to growing C&F Bank's commercial and small business loan portfolios, (2) at C&F Mortgage due to higher production-
based compensation associated with the higher loan volume and (3) at C&F Finance due to entry into new markets over
40
the past several years, competition for qualified personnel and staffing increases for compliance and asset quality processes.
Other expenses at C&F Finance increased due to higher (1) collection expenses, (2) loan application volume and (3)
conversion costs related to data processing and front-end lending systems to enhance our ability to capture a larger share
of the market and support future growth. Other expenses for both the Retail Banking and Mortgage Banking segments
included net unrealized depreciation related to the non-qualified deferred compensation plan during 2015, compared to net
appreciation included in noninterest income during 2014. The other segment, which principally includes the Corporation’s
holding company operations and wealth management subsidiary, experienced increases in general corporate expenses.
Cost savings related to the integration of CVB into the Bank’s infrastructure contributed to the decline in total noninterest
expense at the Retail Banking segment.
2014 Compared to 2013
Total noninterest expenses increased $7.0 million, or 12.3 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 lower OREO expenses 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.
INCOME TAXES
Income tax expense on 2015 earnings was $4.9 million, resulting in an effective tax rate of 27.9 percent, compared
with $5.1 million, or 29.4 percent, in 2014 and $7.1 million, or 33.0 percent, in 2013. As described in Item 8. “Financial
Statement and Supplementary Data,” under the heading “Note 2: Adoption of New Accounting Standards,” effective
January 1, 2015, the Corporation began recognizing amortization of its investments in qualified affordable housing projects
as a component of income taxes. As required by ASU 2014-01, noninterest expense and income tax expense for 2014 and
2013 have been restated for the retrospective application of this standard. Accordingly, income tax expense included
$406,000, $415,000, and $396,000 of amortization of its investments in qualified affordable housing projects during the
years ended December 31, 2015, 2014 and 2013, respectively. The Corporation’s effective tax rate has progressively
declined over the past three years as a result of earnings growth at the Retail Banking segment, which is exempt from state
income taxes and has included tax-exempt income on securities issued by states and political subdivisions. Further, the
Corporation’s effective tax rate in 2013 was somewhat inflated due to the effect of $707,000 of non-deductible expenses
associated with the acquisition of CVBK on October 1, 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
41
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 similar 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 (i.e., special mention, substandard, doubtful, loss) a higher allowance factor than non-
classified loans within a particular loan type based on our concerns regarding collectibility or our knowledge of particular
elements surrounding the borrower. Our allowance factors increase with the severity of classification. Allowance factors
used for unclassified loans are based on our analysis of charge-off history for relevant periods of time which can vary
depending on economic conditions, and our judgment based on the overall analysis of the lending environment including
the general economic conditions. Our analysis of charge-off history also considers economic cycles and the trends during
those cycles. Those cycles that more closely match the current environment are considered more relevant during our
review. The allowance for loan losses is the aggregate of specific allowances, the calculated allowance required for
classified loans by category and the general allowance for each portfolio type.
In conjunction with the methodology described above, we consider the following risk elements that are inherent in
the loan portfolio:
Real estate residential mortgage loans carry risks associated with the continued credit-worthiness of the borrower
and changes in the value of the collateral.
Real estate construction loans carry risks that the project will not be finished according to schedule, the project will
not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal
amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan
customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the
project.
Commercial, financial and agricultural loans carry risks associated with the successful operation of a business or a
real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of
these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is
risk associated with the value of collateral other than real estate which may depreciate over time and cannot be
appraised with as much precision.
Equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the
value of the collateral.
Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value of the
collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are more likely
than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.
As discussed above we segregate loans meeting the criteria for special mention, substandard, doubtful and loss from
non-classified, or pass rated, loans. We review the characteristics of each rating at least annually, generally during the first
quarter. The characteristics of these ratings are as follows:
Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral
margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid
all obligations as agreed and it is expected that this type of payment history will continue. When necessary,
acceptable personal guarantors support the loan.
42
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 may be 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 the Corporation’s definition of
impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide
evidence that it is probable that the Corporation will be unable to collect all amounts due.
Substandard nonaccrual loans have the same characteristics as substandard loans; however they have a non-accrual
classification because it is probable that the Corporation will not be able to collect all amounts due.
Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.
Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for
any future payment on the loan. Loss rated loans are fully charged off.
Allowance for Loan Losses Methodology - 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, estimated and experienced prepayment speeds and other relevant factors. Subsequent decreases
to the expected cash flows to be collected on a PCI loan will generally result in a provision for loan losses resulting in an
increase to the allowance for loan 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.
43
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 2.13 percent in 2015, 2.10 percent in 2014
and 1.32 percent in 2013.
The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses
inherent in the loan portfolio. 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 (recoveries) charge-offs to average total loans
2015
$ 35,606
Year Ended December 31,
2013
2014
$ 34,852 $ 35,907 $
2012
33,677 $ 28,840
2011
—
45
15,467
15,512
—
60
16,270
16,330
1,030
90
13,965
15,085
2,400
165
9,840
12,405
6,000
360
7,800
14,160
(144)
—
(21)
(19)
(317)
(19,816)
(20,317)
257
—
31
1
268
4,211
4,768
(15,549)
$ 35,569
(161)
—
(271)
(80)
(312)
(19,022)
(19,846)
(849)
—
(2,298)
(126)
(399)
(16,398)
(20,070)
(793)
—
(2,074)
(159)
(337)
(10,134)
(13,497)
(1,096)
—
(2,566)
(52)
(319)
(8,144)
(12,177)
59
—
210
—
250
3,751
4,270
(15,576)
98
—
173
12
122
2,449
2,854
(9,323)
$ 35,606 $ 34,852 $ 35,907 $ 33,677
106
3
227
28
173
3,393
3,930
(16,140)
35
—
121
79
207
2,880
3,322
(10,175)
outstanding during period for Retail Banking and Mortgage
Banking
Ratio of net charge-offs to average total loans outstanding during
period for Consumer Finance
(0.01)%
0.06 %
0.73 %
0.72 %
0.89 %
5.50 %
5.39 %
4.59 %
2.76 %
2.39 %
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 corresponding 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:
Real estate—residential mortgage
Real estate—construction 1
Commercial, financial and agricultural 2
Equity lines
Consumer
Consumer finance
Unallocated
Total allowance for loan losses
Ratio of loans to total period-end loans:
Real estate—residential mortgage
Real estate—construction 1
Commercial, financial and agricultural 2
Equity lines
Consumer
Consumer finance
2015
2014
December 31,
2013
2012
2011
$
2,471
94
7,755
1,052
243
23,954
—
$ 35,569
$ 2,313 $ 2,355 $
2,358 $ 2,379
480
10,040
912
319
19,547
—
$ 35,606 $ 34,852 $ 35,907 $ 33,677
434
7,744
812
211
24,092
—
434
7,805
892
273
23,093
—
424
9,824
885
283
22,133
—
21 %
1
39
6
1
32
100 %
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 %
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, 2015 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
Substandard
Special
Mention
Pass
$ 181,107 $ 1,276 $
7,687
317,720
48,392
8,760
72
9,080
617
116
$ 563,666 $ 11,161 $
$
Total1
$ 186,763
Substandard Nonaccrual
2,297
—
2,960
881
19
2,083
—
26,302
221
116
28,722 $
7,759
356,062
50,111
9,011
6,157 $ 609,706
*
Included in the table above are loans purchased in connection with the acquisition of CVB of $71.1 million pass
rated, $4.1 million special mention, $5.2 million substandard and $542,000 substandard nonaccrual.
(Dollars in thousands)
Consumer finance
Non‐
Performing
$ 290,925 $
Performing Total
830 $ 291,755
1 At December 31, 2015, 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, 2014 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
$ 171,414 $ 2,978 $
4,677
269,631
48,443
7,984
—
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
Performing Non-Performing Total
$ 282,293 $
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.
The Retail Banking segment’s allowance for loan losses increased $56,000 since December 31, 2014 as a result of
net recoveries during 2015. While there was an increase in nonaccrual loans and loans 90 days or more past due and still
accruing since December 31, 2014, there was no provision for loan losses at the Retail Banking segment during 2015
because of the overall improvement in the quality of the loan portfolio as indicated by the $5.2 million decline in
substandard loans, partially offset by a $1.3 million increase in substandard nonaccrual loan. The increase in nonaccrual
loans was primarily due to one customer relationship of $956,000 moving to nonaccrual status during 2015. The allowance
for loan losses to total loans, excluding purchased credit impaired loans, declined to 1.86 percent at December 31, 2015,
compared to 2.08 percent at December 31, 2014. We believe that the current level of the allowance for loan losses at C&F
Bank is adequate to absorb probable losses inherent in the loan portfolio, based on the relevant history of charge-offs and
reocveries, current economic conditions, overall portfolio quality and review of specific criticized loans. If loan
concentrations within the Bank’s loan portfolio result in higher credit risk or if economic conditions worsen, a higher loan
loss allowance may be warranted in future periods, which may require a provision for loan losses.
The Consumer Finance segment’s allowance for loan losses decreased by $138,000 to $24.0 million at December
31, 2015 from $24.1 million at December 31, 2014, and its provision for loan losses decreased $803,000 for the year ended
December 31, 2015, as compared to 2014. The net charge-off ratio for the year ended December 31, 2015 was 5.50 percent,
compared to 5.39 percent for the year ended December 31, 2014. The increase in this ratio for the year ended December
31, 2015 was due to net charge-offs related to the consumer finance loans purchased during the second quarter of 2015,
which had the effect of increasing this ratio 56 basis points. The allowance for loan losses as a percentage of loans
decreased to 8.21 percent at December 31, 2015, compared to 8.50 percent at December 31, 2014. The decrease in this
rate at December 31, 2015 was primarily due to the inclusion of the purchased consumer finance loans, which were
recorded at a discount and had the effect of reducing this ratio 32 basis points at December 31, 2015. While we expect the
purchase discount accretion on this portfolio to mitigate the effect of losses on the purchased portfolio, this portfolio is
routinely re-evaluated as part of the segment’s overall analysis of the adequacy of the allowance for loan losses. As
previously described, the Consumer Finance segment, at times, offers payment deferrals to borrowers. The average
amounts deferred, as a percentage of average loans outstanding during 2015 was 2.13%, compared to 2.10% during 2014.
Increased use of deferrals may result in a lengthening of the loss confirmation period. We believe that the current level of
the allowance for loan losses at the Consumer Finance segment is adequate to absorb probable losses inherent in the loan
46
portfolio. 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.
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 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 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, as allowed by state law, 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)
Loans, excluding purchased loans
Purchased performing loans1
Purchased credit impaired loans1
Total loans
2015
$ 525,283
67,022
13,908
$ 606,213
2014
$ 447,614
80,146
21,424
$ 549,184
2013
$ 402,755
104,471
32,520
$ 539,746
2012
$ 395,664
—
—
$ 395,664
2011
$ 401,745
—
—
$ 401,745
Nonaccrual loans2
Purchased performing-nonaccrual loans3 9
Total nonaccrual loans
OREO4
Total nonperforming assets5
$
$
5,615
542
6,157
942
7,099
$
$
4,114
603
4,717
786
5,503
$
$
3,740
651
4,391
2,768
7,159
$ 11,461
—
11,461
6,236
$ 17,697
$ 10,011
—
10,011
6,059
$ 16,070
Accruing loans past due for 90 days or more6 9
Troubled debt-restructurings (TDRs)2
Purchased performing TDRs7 9
Allowance for Loan Losses (ALL)
Nonperforming assets to total loans and OREO
ALL to total loans, excluding purchased credit impaired
loans8
ALL to total nonaccrual loans
Net (recoveries) charge-offs to average total loans
761
$
5,080
$
$
264
$ 11,017
14
$
5,549
$
$
278
$ 10,961
75
$
5,217
$
$
403
$ 11,266
$
—
$ 16,492
$
—
$ 13,380
$
68
$ 17,094
$
—
$ 13,650
1.17 %
1.00 %
1.34 %
4.40 %
3.94 %
1.86
178.93
(0.01)
2.08
232.37
0.06
2.22
256.57
0.73
3.38
116.75
0.72
3.40
136.35
0.89
1
The loans acquired from CVB are tracked in two separate categories - "purchased performing" and "purchased credit
impaired." The fair value adjustments for the purchased performing loans are (1) $932,000 at December 31, 2015,
$1.1 million at December 31, 2014, and $1.3 million at December 31, 2013 for interest and (2) $3.0 million at
December 31, 2015, $3.8 million at December 31, 2014, and $5.2 million at December 31, 2013 for credit. The fair
value adjustments for the purchased credit impaired loans are (1) $4.0 million at December 31, 2015, $5.1 million at
December 31, 2014 and $5.0 million at December 31, 2013 for interest and (2) $7.8 million at December 31, 2015,
$10.0 million at December 31, 2014 and $11.5 million at December 31, 2013 for credit.
2 Nonaccrual loans include nonaccrual TDRs of $2.5 million at December 31, 2015, $2.0 million at December 31, 2014,
$2.6 million at December 31, 2013, $9.8 million at December 31, 2012 and $8.4 million million at December 31,
2011.
Purchased performing-nonaccrual loans are presented net of fair value interest and credit marks totaling $247,000 at
December 31, 2015, $249,000 at December 31, 2014 and $488,000 December 31, 2013.
3
4 OREO is recorded at its estimated fair market value less cost to sell.
5 As required by acquisition accounting, purchased credit impaired loans that were considered nonaccrual and TDRs
prior to the acquisition lose these designations and are not included in post-acquisition nonperforming assets as
presented in the Asset Quality section of this table.
6 Accruing loans past due for 90 days or more include purchased credit impaired loans of $172,000 as of December 31,
7
8
2015.
Purchased performing TDRs are accruing and are presented net of fair value interest and credit marks totaling $8,300
at December 31, 2015, $9,200 at December 31, 2014 and $11,000 at December 31, 2013.
For the purpose of calculating this ratio, purchased performing loans are included in total loans. Purchased performing
loans were marked to fair value on acquisition date; therefore, no allowance for loan losses was recorded for these
loans.
9 Because the Corporation acquired CVB on 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
48
were considered nonaccrual and TDRs prior to acquisition lose these designations and are not included in post-
acquisition nonperforming assets in Table 8.
Mortgage Banking Segment
(Dollars in thousands)
Nonaccrual loans
Total loans
Allowance for loan losses
Nonaccrual loans to total loans
Allowance for loan losses to total loans
Allowance for loan losses to nonaccrual loans
Consumer Finance Segment
(Dollars in thousands)
Nonaccrual loans
Accruing loans past due for 90 days or more
Total loans
Allowance for loan losses
Nonaccrual loans to total loans
Allowance for loan losses to total loans
Net charge-offs to average total loans
$
$
$
2015
2014
2013
2012
2011
$
—
$
3,493
598
$
— %
17.12
—
$
187
$
3,288
553
$
5.69 %
16.82
295.72
$
—
$
2,914
493
$
— %
16.92
—
$
—
$
2,340
393
$
— %
16.79
—
621
2,611
480
23.78 %
18.38
77.29
2015
830
$
—
$
$ 291,755
$ 23,954
2014
1,040
$
—
$
$ 283,333
$ 24,092
0.28 %
8.21
5.50
0.37 %
8.50
5.39
2012
2013
1,187
$
—
$
$ 277,724
$ 23,093
655
$
—
$
$ 278,186
$
22,133
0.43 %
8.32
4.59
0.24 %
7.96
2.76
2011
381
$
—
$
$ 246,305
$ 19,547
0.15 %
7.94
2.39
Table 9 presents the changes in the OREO balance for 2015 and 2014
TABLE 9: OREO Changes
(Dollars in thousands)
Balance at the beginning of year, gross
Transfers between loans and other real estate owned
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,
2015
2014
$
$
815
824
(63)
(706)
242
(114)
998
(56)
942
$
$
6,904
1,960
(4,135)
(4,382)
354
114
815
(29)
786
Nonperforming assets of the Retail Banking segment totaled $7.1 million at December 31, 2015, compared to $5.5
million at December 31, 2014, a 29.0 percent increase during 2015. Nonperforming assets at December 31, 2015 included
$6.2 million of nonaccrual loans, compared to $4.7 million at December 31, 2014, and $942,000 of OREO compared to
$786,000 at December 31, 2014. The ratio of the allowance for loan losses to nonaccrual loans decreased to 178.93 percent
at December 31, 2015 from 232.37 percent at December 31, 2014. The increase in nonaccrual loans since December 31,
2014 was primarily due to one customer relationship of $956,000, consisting of a commercial real estate mortgage loan
and an equity line, moving to nonaccrual status during 2015. The remaining increase in nonaccrual loans was generally
attributable to the credit deterioration of certain smaller balance loans, partially offset by principal payments on existing
nonaccrual 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 economic
49
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 $942,000 at December 31, 2015, compared to $786,000 at
December 31, 2014, and primarily consisted of residential lots. These properties have been written down to their estimated
fair values less cost to sell. The growth in OREO during 2015 resulted from foreclosures, partially offset by sales in 2015.
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 $830,000 at December 31, 2015 from $1.0 million
at December 31, 2014. As noted above, the allowance for loan losses at the Consumer Finance segment decreased from
$24.1 million at December 31, 2014 to $24.0 million at December 31, 2015, and the ratio of the allowance for loan losses
to total consumer finance loans was 8.21 percent as of December 31, 2015, compared to 8.50 percent at December 31,
2014. The decrease in this ratio is primarily due to the inclusion of the consumer finance loans purchased during the second
quarter of 2015, which had the effect of reducing this ratio 32 basis points at December 31, 2015. 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
$531,000 for 2015, $413,000 for 2014, and $479,000 for 2013. Interest received on nonaccrual loans was $246,000 for
2015, $233,000 in 2014, $241,000 in 2013.
As discussed above, we measure impaired loans based on the present value of expected future cash flows discounted
at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value
of the collateral if the loan is collateral dependent. We maintain a valuation allowance to the extent that the measure of the
impaired loan is less than the recorded investment. TDRs occur when we agree to significantly modify the original terms
of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions
typically are made for loss mitigation purposes and could include reductions in the interest rate, payment extensions,
forgiveness of principal, forbearance or other actions. TDRs are considered impaired loans.
Impaired loans, which consisted solely of TDRs, and the related allowance at December 31, 2015, were as follows:
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Commercial business lending
Equity lines
Consumer
Total
TABLE 10A: Impaired Loans
Recorded
Investment Unpaid
Average
Balance-
Impaired
Interest
Income
Recognized
in
Loans
Principal Related
Balance Allowance Loans
$
2,689 $ 2,828 $
360 $ 2,782 $
97
2,319
99
30
207
2,522
99
32
207
438
28
—
23
2,362
108
32
208
$
5,344 $ 5,688 $
849 $ 5,492 $
35
1
1
7
141
50
Impaired loans, which included $5.8 million of TDR loans, and the related allowance at December 31, 2014, were
as follows:
TABLE 10B: Impaired Loans
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Commercial business lending
Equity lines
Consumer
Total
Recorded
Investment Unpaid
Average
Balance Interest
Principal Related
Income
Total
Recognized
Balance Allowance Loans
in
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
TDRs at December 31, 2015 and 2014 were as follows:
TABLE 11: Troubled Debt Restructurings
(Dollars in thousands)
Accruing TDRs
Nonaccrual TDRs1
Total TDRs2
2015
$
December 31,
2014
2,810 $ 3,801
2,534
2,026
5,344 $ 5,827
$
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 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
51
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, 2015.
The following table presents the changes in the allowance for indemnification losses for the periods presented:
TABLE 12: Allowance for Indemnification Losses
(Dollars in thousands)
Allowance, beginning of period
Provision for indemnification losses
Payments
Allowance, end of period
Year Ended December 31,
2013
2015
2014
$ 2,089 $ 2,415 $ 2,092
558
(235)
$ 2,363 $ 2,089 $ 2,415
240
(566)
274
—
The higher levels of the provision for indemnification losses and payments during 2013 relative to 2015 and 2014
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, 2015, the Corporation had total assets of $1.41 billion compared to $1.34 billion at
December 31, 2014. 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
originated through the Mortgage Banking segment sold to third-party investors. At December 31, 2015, the Corporation’s
loans held for investment in all categories, net of the allowance for loan losses, totaled $865.9 million and loans held for
sale had a fair value of $44.0 million.
52
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
2011
2012
2014
2015
December 31,
2013
$ 186,763 $ 179,817 $ 188,455 $ 149,257 $ 147,135
5,737
212,235
33,192
6,057
246,305
650,661
(33,677)
$ 865,892 $ 800,198 $ 785,532 $ 640,283 $ 616,984
7,325
306,845
50,321
8,163
283,333
835,804
(35,606)
5,062
205,052
33,324
5,309
278,186
676,190
(35,907)
5,810
288,593
50,795
9,007
277,724
820,384
(34,852)
7,759
356,062
50,111
9,011
291,755
901,461
(35,569)
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.
TABLE 14: Maturity/Repricing Schedule of Loans
(Dollars in thousands)
Variable Rate:
Within 1 year
1 to 5 years
After 5 years
Fixed Rate:
Within 1 year
1 to 5 years
After 5 years
December 31, 2015
Commercial,
Financial,
Real Estate
and Agricultural Construction
$
$
63,069 $
30,357
32,993
14,255 $
64,798
150,590
392
500
—
4,155
2,712
—
The increase in total loans from December 31, 2014 to December 31, 2015 was primarily due to a $49.2 million, or
16.0%, increase in commercial, financial and agricultural loans that was driven by successful investments in our
commercial lending personnel and strength in commercial lending in our local markets.
Total loans at December 31, 2015 and 2014 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, 2015 and 2014:
53
TABLE 15: PCI and Purchased Performing Loans
December 31, 2015
(Dollars in thousands)
Outstanding principal balance
Carrying amount
Real estate – residential mortgage
Commercial, financial and agricultural
Equity lines
Consumer
Total acquired loans
(Dollars in thousands)
Outstanding principal balance
Carrying amount
Real estate – residential mortgage
Commercial, financial and agricultural
Equity lines
Consumer
Total acquired loans
Purchased
Credit
Purchased
Impaired Performing Total
$ 25,701
$ 96,694
70,993
$
$
1,305 $
12,317
286
—
$ 13,908 $
15,478 $ 16,783
49,604
37,287
14,255
13,969
288
288
67,022 $ 80,930
December 31, 2014
Purchased
Credit
Purchased
Impaired Performing Total
$ 121,556
$ 36,541
85,015
$
$
1,723 $
19,367
318
16
$ 21,424 $
18,688 $ 20,411
64,382
45,015
15,782
15,464
995
979
80,146 $ 101,570
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 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
54
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
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 Bank offers fixed and variable
interest rates on construction loans. 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
The Retail Banking segment’s consumer lot loans are 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.
55
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 authorizes commercial real
estate loans to borrowers who will occupy or use the financed property in connection with their normal business operations.
We also will consider making commercial real estate loans secured by non-owner-occupied properties 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.
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
The Retail Banking segment makes land acquisition and development loans 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
56
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 larger in 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.
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
The Retail Banking segment’s 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.
57
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. These loans must satisfy our underwriting criteria, including loan-to-value, debt ratio and credit score guidelines.
Loans associated with consumer lending are included in the consumer category in Table 13: Summary of Loans
Held for Investment.
Consumer Finance
The Consumer Finance segment 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 displays the
requested contract structure. C&F Finance personnel with credit authority review the transaction 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.
The Consumer Finance segment’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.
58
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. At December 31, 2015 and 2014, all securities in the Corporation’s investment portfolio were
classified as available for sale.
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. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
Total available for sale securities at fair value
December 31, 2015
Amount
$ 18,501
77,027
123,948
$ 219,476
Percent Amount
22,934
9 % $
67,619
35
131,344
56
100 % $ 221,897
December 31, 2014
Percent
10 %
31
59
100 %
The Corporation seeks to diversify its portfolio to minimize risk, including by purchasing shorter-duration mortgage-
backed securities to reduce interest rate risk and for cash flow and reinvestment opportunities and securities issued by states
and political subdivisions due to the tax benefits and the higher tax-adjusted 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, 2015, 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.
Table 17 presents additional information pertaining to the composition of the securities portfolio by the earlier of
contractual maturity or expected maturity. Expected maturities will differ from contractual maturities because borrowers
may have the right to prepay obligations with or without call or prepayment penalties.
59
(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:
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
TABLE 17: Maturity of Securities
2015
Year Ended December 31,
2014
2013
Amortized Average
Yield
Cost
Weighted
Weighted
Amortized Average
Weighted
Amortized Average
Cost
Yield
Cost
Yield
$
—
—
—
—
—
— % $
—
—
—
—
—
—
—
—
—
— % $
—
—
—
—
10,000
—
—
—
10,000
8,600
—
10,159
—
2.35
—
2.23
—
15,252
998
6,160
999
2.35
0.74
2.21
2.51
16,482
1,502
5,534
8,985
0.01 %
—
—
—
0.01
2.21
0.68
2.20
3.27
18,759
2.29
23,409
2.43
32,503
1.64
1
64,549
10,947
1,460
76,957
18,023
71,710
16,208
12,448
118,389
—
—
—
—
—
6.23
2.13
3.02
2.71
2.27
4.67
5.02
5.50
6.35
5.17
—
—
—
—
—
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
2.76
5.36
4.95
5.36
6.45
5.70
—
—
—
—
—
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
2.38
5.94
5.66
5.26
6.42
5.91
—
—
—
9.44
9.44
26,624
136,259
37,314
13,908
$ 214,105
31,201
3.92
111,084
3.65
48,519
3.88
5.97
23,633
3.87 % $ 214,437
37,672
3.89
53,907
4.06
46,473
3.78
5.79
79,656
4.16 % $ 217,708
2.73
5.45
4.76
3.89
4.26 %
1 Yields on tax-exempt securities have been computed on a taxable-equivalent basis using the federal corporate income tax rate of
34 percent.
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 $1.07 billion at December 31, 2015, compared to $1.03 billion at December 31, 2014. The $47.5
million increase in deposits from December 31, 2014 to December 31, 2015 occurred primarily in non-term accounts, as
60
depositors shifted from time deposits in order to position themselves for flexibility regarding the availability of their funds
in the event of an increase in interest rates.
The Corporation had $2.9 million in brokered money market deposits outstanding at December 31, 2015, compared
to $3.1 million in brokered money market deposits at December 31, 2014. 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 2015, 2014 and 2013.
TABLE 18: Average Deposits and Rates Paid
2015
Year Ended December 31,
2014
2013
(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
$ 185,774
203,614
204,597
99,585
139,878
209,909
857,583
Average
Rate
Average
Balance
$ 166,928
186,548
181,530
97,643
139,502
241,231
846,454
Average Average
Balance
Rate
$ 123,859
0.24 % 137,615
132,449
0.27
61,237
0.09
133,363
0.93
0.73
179,387
0.48 % 644,051
0.22 %
0.28
0.08
0.92
0.87
0.49 %
Average
Rate
0.30 %
0.29
0.12
1.10
1.07
0.66 %
Total deposits
$
1,043,357
$
1,013,382
$ 767,910
Table 19 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2015.
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
BORROWINGS
$
December 31, 2015
13,576
15,252
36,138
90,169
155,135
$
In addition to deposits, the Corporation utilizes short-term and long-term borrowings. Short-term borrowings from
the Federal Reserve Bank and the FHLB may be 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 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
61
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 $159.2 million at December 31, 2015, and $136.0 million at December 31, 2014.
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 $11.0 million at
December 31, 2015, and $13.4 million at December 31, 2014.
At December 31, 2015, C&F Mortgage had interest rate lock commitments (or IRLCs) to originate mortgage loans
aggregating $43.9 million and loans held for sale of $43.2 million. At December 31, 2015, each loan held for sale by C&F
Mortgage was subject to a forward sales agreement on a best efforts basis. 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 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, 2015, C&F Mortgage
had best efforts forward sales contracts with a notional value of $87.1 million. The fair value of these derivative instruments
at December 31, 2015 was $744,000, which was included in other assets. There were no loans to be delivered on a
mandatory basis at December 31, 2015.
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
62
to absorb any losses arising from valid indemnification requests. Payments made under these recourse provisions were
$566,000 in 2014 and $235,000 in 2013. There were no payments made in 2015.
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 2020 and December 2019,
respectively. The cash flow hedges’ total notional amount is $25.0 million. At December 31, 2015, the cash flow hedges
had a fair value of $(175,000), which is recorded in other liabilities. The cash flow hedges were fully effective at December
31, 2015. 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 $277.3 million at December 31, 2015, compared to $279.1 million at
December 31, 2014. The Corporation’s funding sources, including capacity, amount outstanding and amount available at
December 31, 2015 are presented in Table 20.
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, 2015
Capacity Outstanding Available
$ 65,000 $
5,000
50,000
149,977
15,032
120,000
$ 405,009 $
— $ 65,000
—
50,000
102,977
15,032
31,971
140,029 $ 264,980
5,000
—
47,000
—
88,029
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 $65.0 million at December 31, 2015; time
deposits of $100,000 or more, maturing in more than one year, totaled $90.2 million.
63
The Corporation’s contractual obligations and scheduled payment amounts due at various intervals over the next
five years and beyond as of December 31, 2015 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
3‑5 Years
Total
$ 88,029 $
1 Year
1‑3 Years
— $ 88,029 $
—
—
25,139
—
94
$ 169,796 $ 8,911 $ 120,220 $ 15,432 $ 25,233
14,500
—
—
932
25,000
—
5,000
2,191
47,000
25,139
5,000
4,628
7,500
—
—
1,411
— $
More than
5 Years
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 (1) prior to their
respective conversion dates, (2) if the FHLB does not convert the advance on the conversion date, or, (3) 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, $2.5 million, $7.0 million, and $7.5 million maturing
in 2016, 2018, 2019, and 2020, 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, 2015 there were no outstanding federal funds purchased or borrowings from the Federal Reserve
Bank.
As a result of the Corporation’s management of liquid assets and the ability to generate liquidity through liability
funding, we believe that we maintain overall liquidity sufficient to satisfy the Corporation’s operational requirements and
contractual obligations.
CAPITAL RESOURCES
The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and
changing competitive conditions and economic forces. We regularly review the adequacy of the Corporation’s capital. We
maintain a structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential
losses. While we will continue to look for opportunities to invest capital in profitable growth, share purchases are another
tool that facilitates improving shareholder return, as measured by ROE and earnings per share.
Changes to the regulatory capital framework that were approved in July 2013 by the federal banking agencies (the
Basel III Final Rule) began applying to the Corporation and the Bank on January 1, 2015, subject to limited phase-in
periods. In addition to the primary indicators relied on by bank regulators in measuring capital position prior to 2015 (i.e.,
Tier 1 capital, total risk-based capital and leverage ratios), banking regulators now measure the common equity tier 1
capital (CET1) ratio when evaluating an institution’s capital position. Refer to Item 1. “Business” under the heading
“Regulation and Supervision” for an overview of the Basel III Final Rules. The Corporation’s CET1 to total risk-weighted
assets ratio was 11.2 percent at December 31, 2015. The Corporation’s Tier 1 capital to risk-weighted assets ratio was 13.7
percent at December 31, 2015, compared with 13.3 percent at December 31, 2014. The total capital to risk-weighted assets
ratio was 15.0 percent at December 31, 2015, compared with 14.5 percent at December 31, 2014. The Tier 1 leverage ratio
was 10.0 percent at December 31, 2015, compared with 9.2 percent at December 31, 2014. These ratios are in excess of
64
the mandated minimum requirements. These ratios include the trust preferred securities issued by the Corporation in
December 2007 and July 2005, as well as issued by CVBK in 2003 and assumed by the Corporation in March 2014.
Shareholders’ equity was $131.1 million at year-end 2015 compared with $123.6 million at year-end 2014. During
2015, the Corporation declared common stock dividends of $1.22 per share, compared to $1.19 per share declared in 2014
and $1.16 per share declared in 2013. The dividend payout ratio was 33.2 percent of basic earnings per share for the year
ended December 31, 2015, compared to 32.8 percent in 2014 and 26.6 percent in 2013. On May 14, 2014, the Corporation
repurchased from the United States Treasury a 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 (Warrant). The Warrant was
originally issued 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 Warrant, which has been
cancelled. The funds for this redemption were provided by existing financial resources of the Corporation and no new
capital was issued.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Corporation are described in Item 8, “Financial Statements and
Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies-Recent Significant
Accounting Pronouncements.”
EFFECTS OF INFLATION AND CHANGING PRICES
The Corporation’s financial statements included herein have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). GAAP presently requires the Corporation to measure financial position
and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or
recession are generally not considered. The primary effect of inflation on the operations of the Corporation is reflected in
increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial
institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes
in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest
rates are highly sensitive to many factors that are beyond the control of the Corporation, including changes in the expected
rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United
States government, its agencies and various other governmental regulatory authorities.
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
affect 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 three outstanding interest rate swaps used as
hedging transactions at December 31, 2015. 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 $15.0 million mature in 2019 and one interest rate swap with a notional value of $10.0 million matures in 2020.
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 in the normal course of 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
65
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.
The simulation analysis results are presented in the table below. These results, based on a measurement date balance
sheet as of December 31, 2015, indicate that the Corporation would expect net interest income to decrease over the next
twelve months 3.51 percent assuming an immediate downward shift in market interest rates of 200 basis points (BP) and
to increase 1.89 percent if rates shifted upward to the same degree.
1-Year Net Interest Income Simulation (dollars in thousands)
Hypothetical Change in Net
Interest Income
Over the Next Twelve
Months as of
December 31, 2015
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Dollars
$
$
(2,769)
1,490
Percentage
(3.51)%
1.89 %
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, 2015 indicate that the
EVE would decrease 12.36 percent assuming an immediate downward shift in market interest rates of 200 BP and would
increase 3.91 percent if rates shifted upward to the same degree.
66
Static EVE Change (dollars in thousands)
Assumed Market Interest Rate Shift
-200 BP shock
+200 BP shock
Hypothetical Change in EVE
Percentage
Dollars
(12.36)%
$
3.91 %
$
(27,360)
8,662
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 2015,
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.
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, 2015, the Corporation had best efforts
forward sales contracts with a notional value of $87.1 million. The fair value of these derivative instruments at
December 31, 2015 was $744,000, which was included in other assets. There were no loans to be delivered on a mandatory
basis at December 31, 2015.
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
Total cash and cash equivalents
Securities—available for sale at fair value, amortized cost of $214,105 and $214,437,
respectively
Loans held for sale, at fair value
Loans, net of allowance for loan losses of $35,569 and $35,606, respectively
Restricted stocks, at cost
Corporate premises and equipment, net
Other real estate owned, net of valuation allowance of $56 and $29, 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
December 31,
2015
2014
$
9,679 $
143,264
152,943
10,749
156,867
167,616
219,476
44,000
865,892
3,345
36,533
942
6,829
14,425
1,618
14,988
44,085
221,897
28,279
800,198
3,442
37,295
786
6,421
14,425
2,583
14,484
40,761
$ 1,405,076 $ 1,338,187
$
197,909 $
535,992
339,732
1,073,633
12,093
140,029
25,139
698
22,425
1,274,017
161,839
497,755
366,507
1,026,101
14,436
127,488
25,103
740
20,709
1,214,577
Shareholders’ Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,437,787 and
3,418,750 shares issued and outstanding, respectively, includes, 137,200 and
135,600 of unvested shares, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
3,301
10,420
116,167
1,171
131,059
3,283
9,456
107,785
3,086
123,610
$ 1,405,076 $ 1,338,187
See notes to consolidated financial statements.
68
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
Mortgage-backed securities
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
Net gains on calls and sales of available for sale securities
Investment services income
Other
Total noninterest income
Noninterest expenses
Salaries and employee benefits
Occupancy
Other
Total noninterest expenses
Income before income taxes
Income tax expense
Net income
Net income per share - basic
Net income per share - assuming dilution
Year Ended December 31,
2015
2014
2013
$
80,102 $
364
79,207 $ 74,415
159
378
466
1,233
4,162
184
538
87,049
1,090
3,104
3,338
1,162
8,694
78,355
15,512
62,843
6,336
4,322
6,787
29
1,481
1,759
20,714
690
1,228
4,417
184
391
86,495
1,015
3,065
3,485
960
8,525
77,970
16,330
61,640
5,086
4,468
6,246
29
1,229
2,347
19,405
506
408
4,573
47
104
80,212
867
3,384
3,561
811
8,623
71,589
15,085
56,504
7,532
4,197
6,220
276
1,060
2,383
21,668
38,926
8,828
18,420
66,174
17,383
4,853
12,530 $
3.68 $
3.68 $
31,167
36,310
7,397
8,806
18,035
18,441
56,599
63,557
21,573
17,488
5,144
7,129
12,344 $ 14,444
4.37
4.19
3.63 $
3.59 $
$
$
$
See notes to consolidated financial statements.
69
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income
Other comprehensive income (loss):
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 (loss) on cash flow hedging instruments
Unrealized holding gain (loss) 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):
Comprehensive income
Year Ended December 31,
2015
2013
2014
$ 12,530 $ 12,344 $ 14,444
(728)
255
(2,048)
717
(61)
21
(513)
(68)
24
(1,375)
(72)
28
(44)
227
(89)
138
985
(344)
(68)
24
597
182
(71)
111
(2,061)
722
(29)
10
(1,358)
(1,915)
(8,478)
2,967
(276)
97
(5,690)
(4,982)
$ 10,615 $ 15,696 $ 9,462
7,088
(2,480)
(29)
10
4,589
3,352
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
Table of Contents
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Common
Stock
Additional
Paid - In
Capital
Retained
Earnings1
$
3,162 $
5,624 $
88,892 $
4,716 $
Accumulated
Other
Total
Comprehensive Shareholders’
Income (Loss)
Equity
102,394
(Dollars in thousands, except per share amounts)
Balance December 31, 2012
Comprehensive income:
Net income
Other comprehensive loss
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
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
Comprehensive income:
Net income
Other comprehensive loss
Stock options exercised
Share-based compensation
Restricted stock vested
Common stock issued
Common stock purchased
Cash dividends declared – common stock ($1.22 per share)
Balance December 31, 2015
$
—
—
94
—
11
3
(1)
—
3,269
—
—
—
—
—
15
3
(4)
—
3,283
—
—
34
—
27
4
(47)
—
3,301 $
—
—
4,207
687
101
122
(55)
—
10,686
—
—
(2,303)
11
1,024
65
130
(157)
—
9,456
—
—
1,269
1,060
144
131
(1,640)
—
14,444
—
—
—
—
—
—
(3,845)
99,491
12,344
—
—
—
—
—
—
—
(4,050)
107,785
12,530
—
—
—
—
—
—
(4,148)
10,420 $ 116,167 $
—
(4,982)
—
—
—
—
—
—
(266)
—
3,352
—
—
—
—
—
—
—
3,086
—
(1,915)
—
—
—
—
—
—
1,171 $
14,444
(4,982)
4,301
687
112
125
(56)
(3,845)
113,180
12,344
3,352
(2,303)
11
1,024
80
133
(161)
(4,050)
123,610
12,530
(1,915)
1,303
1,060
171
135
(1,687)
(4,148)
131,059
1 Retained earnings as of December 31, 2012, 2013 and 2014 includes the cumulative effect of $197,000, $239,000,
and $237,000, respectively, resulting from the adoption of ASU 2014-01 “Accounting For Investments in Qualified
Affordable Housing Projects.” See “Note 1 – Summary of Significant Accounting Policies” and “Note 2 – Adoption
of New Accounting Standard” for additional information.
See notes to consolidated financial statements.
71
Table of Contents
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 gains on sale of corporate 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 restricted stocks
Purchase of loan portfolio
Net increase in loans
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 increase (decrease) in borrowings
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 (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period
Supplemental disclosure
Interest paid
Income taxes paid
Supplemental disclosure of noncash investing and financing activities
Unrealized (losses) gains on securities available for sale
Transfers between loans and other real estate owned
Pension adjustment
Unrealized (losses) gain on cash flow hedging instruments
Assets acquired, excluding cash and cash equivalents of $59,775
Liabilities assumed
Year Ended December 31,
2015
2014
2013
$
12,530
$
12,344
$
14,444
2,511
1,378
15,512
274
90
1,231
(1,918)
1,551
(29)
(242)
(26)
(351)
(549,287)
539,902
(6,336)
2,739
2,247
16,330
240
29
1,104
(2,969)
1,406
(29)
(354)
(96)
(497)
(478,641)
491,327
(5,086)
(408)
(2,532)
(42)
1,524
15,332
36,450
(37,211)
97
(16,258)
(65,639)
706
(1,808)
—
(83,663)
74,307
(26,450)
10,198
—
135
(1,687)
1,303
(4,148)
53,658
(14,673)
167,616
152,943
9,026
560
(2,090)
(824)
(789)
(72)
—
—
$
$
$
(61)
(1,283)
(103)
(4,470)
34,177
38,660
(36,246)
894
—
(30,288)
4,382
(1,815)
—
(24,413)
51,185
(32,258)
(2,844)
(2,303)
133
(161)
11
(4,050)
9,713
19,477
148,139
167,616
9,710
3,577
7,059
(1,960)
(2,116)
227
—
—
$
$
$
2,349
2,286
15,085
558
459
743
(844)
812
(276)
(218)
165
(188)
(721,340)
765,676
(7,532)
333
442
(905)
(8,455)
63,594
79,441
(33,823)
2,090
—
(13,030)
4,209
(3,654)
55,579
90,812
20,955
(14,002)
(39,465)
—
125
—
4,301
(3,845)
(31,931)
122,519
25,620
148,139
9,528
5,986
(8,754)
(588)
917
182
311,173
366,752
$
$
$
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, the Corporation
owns C&F Financial Statutory Trust I, 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 Subsidiary 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: The 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 the Corporation and CVB was merged with and into C&F Bank.
C&F Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation and Subsidiaries (C&F Mortgage), C&F
Finance Company (C&F Finance), C&F Wealth Management Corporation (formerly 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, and
through its subsidiary, Lender Solutions LLC, provides certain mortgage origination functions to third parties. C&F
Finance, acquired on September 1, 2002, is a finance company providing automobile loans through indirect lending
programs. C&F Wealth Management Corporation, organized in April 1995 and renamed in May 2015, is a full-service
brokerage firm offering a comprehensive range of investment services and insurance products through an alliance with an
independent broker/dealer. 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.
Reclassification: Certain reclassifications have been made to prior period amounts to conform to the current year
presentation. None of these reclassifications are considered material. See Note 2 for additional information about
reclassifications related to the adoption of a new accounting standard.
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, 2015,
securities issued by the Commonwealth of Virginia and its political subdivisions comprised 10.3 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
73
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, 2015, 39.5 percent of the Corporation’s loan portfolio consisted of commercial, financial and agricultural
loans, which include loans secured by real estate for builder lines, acquisition and development and commercial
development, as well as commercial loans secured by personal property. In addition, 32.4 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, the 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 as information relative to closing date fair values became available. The Corporation's
results of operations for the year ended December 31, 2013 include CVBK's results of operations from October 1, 2013.
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, 2015 and 2014, the minimum requirement was $739,000 and $713,000, respectively. 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, 2015 and 2014, the Corporation was required to maintain collateral of $721,000 and $620,000, respectively,
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 the 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 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 and is available to absorb future credit losses on those
loans. 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. 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 by CVB are no longer classified as nonperforming so long as, at quarterly re-
estimation periods, we believe we will fully collect the new carrying value of the pools of loans.
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
may be required in future periods 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 is reported at the 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)
75
as noted below. Consistent with the Corporation’s method for nonaccrual loans, payments on impaired loans are first
applied to principal outstanding, except potentially for TDRs as noted below.
TDRs occur when the Corporation agrees to significantly modify the original terms of a loan due to the deterioration in
the financial condition of the borrower. TDRs are considered impaired loans. Upon designation as a TDR, the Corporation
evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the
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, 2015 and 2014, the Corporation had $5.34 million and $5.83 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 probable losses inherent
in the loan portfolio. 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 similar properties or general market
conditions when appropriate. The general component covers non-classified loans and those loans classified as 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 may be
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 the
Corporation’s 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.
On a quarterly basis the Corporation evaluates its estimate of cash flows 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 as of the
acquisition date, such as the effect of collateral value changes, changing loss severities, estimated and experienced
prepayment speeds and other relevant factors. Subsequent decreases to the expected cash flows to be collected on a PCI
loan will generally result in a provision for loan losses.
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.
77
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 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, 2015 and 2014. 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. Physical possession of residential real estate
securing consumer mortgage loans occurs when legal title is obtained upon completion of foreclosure or when the borrower
conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or similar legal
agreement. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on
updated appraisals, general market conditions, recent sales of similar 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, 2015, 2014 and 2013
was $2.51 million, $2.74 million and $2.35 million, respectively.
Goodwill: The Corporation’s goodwill was recognized in connection with its 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, 2015 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 2015. In assessing the
recoverability of C&F Finance’s goodwill, major assumptions used in determining impairment were future income, sales
multiples in determining terminal value and the discount rate applied to future cash flows for five years.
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
78
Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred loans and (3) the Corporation does not maintain effective control over the transferred
loans through an agreement to repurchase them before their maturity.
Income Taxes: The Corporation determines deferred income tax assets and liabilities using the liability (or balance sheet)
method. Under this method, the net deferred tax asset or liability is determined annually for differences between the
financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
When tax returns are filed, it is highly certain that some positions taken will be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that
will be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as
the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the taxing authorities upon examination. The Corporation did
not have any liabilities resulting from unrecognized tax benefits as of December 31, 2015 and December 31, 2014. 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, 2015 and
2014 determined that the Corporation’s pension plan was overfunded. As a result, the Corporation recognized a pension
asset of $179,000 and $502,000 at December 31, 2015 and 2014 and recognized a net loss of $513,000 and $1.4 million
in 2015 and 2014 and a net gain of $597,000 in 2013 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 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, 2015,
2014 and 2013 included $1.06 million ($658,000 after tax), $967,000 ($600,000 after tax) and $659,000 ($409,000 after
tax), respectively. As of December 31, 2015, there was $2.81 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.
79
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, 2015, 2014 and 2013 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.
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 presented 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 in the secondary market whereby the interest rate on the loan is determined prior to funding. The
period of time between issuance of a rate lock commitment and closing and sale of the loan generally ranges from 15 to
75 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, 2015 consisted of (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will
be sold in the secondary market on a best efforts basis and the related forward commitments to sell mortgage loans 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 reported 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(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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 became effective for
public business entities for annual periods and interim reporting periods within those annual periods, beginning after
December 15, 2014. The adoption of ASU 2014-01 did not have a material effect on the Corporation’s financial statements.
The adoption of ASU 2014-01 is described further in Note 2.
80
Table of Contents
In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting –
Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08
amend various paragraphs in the ASC regarding positions of the staff of the SEC pursuant to the issuance of Staff
Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did
not have a material effect on the Corporation’s financial statements.
In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined
Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) – 1. Fully Benefit-Responsive
Investment Contracts, 2. Plan Investment Disclosures, and 3. Measurement Date Practical Expedient.” The amendments
within this ASU are in three parts. Among other things, Part I amendments designate contract value as the only required
measure for fully benefit-responsive investment contracts; Part II amendments eliminate the requirement that plans
disclose: (a) individual investments that represent five percent or more of net assets available for benefits; and (b) the net
appreciation or depreciation for investments by general type requirements for both participant-directed investments and
nonparticipant-directed investments; and Part III amendments provide a practical expedient to permit plans to measure
investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that
is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end. The amendments in Parts
I and II of this ASU are effective on a retrospective basis and Part III is effective on a prospective basis, for fiscal years
beginning after December 15, 2015. Early adoption is permitted. The Corporation does not expect the adoption of ASU
2015-12 to have any effect on its financial statements.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to
estimated amounts that are identified during the measurement period in the reporting period in which the adjustment
amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the
effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the
estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require
an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount
recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the
adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are
effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within
those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after
the effective date with earlier application permitted for financial statements that have not been issued. The Corporation
does not expect the adoption of ASU 2015-16 to have a material effect on its financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01 require, among other
things, equity investments (except those accounted for under the equity method of accounting, or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; public
business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset
(i.e., securities or loans and receivables). It also eliminates the requirement for public business entities to disclose the
method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial
instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years. The Corporation is currently
assessing the effect that ASU 2016-01 will have on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in
ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at
the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or
control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged.
Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model
and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years
81
Table of Contents
beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon
issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must
apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. The modified retrospective approach would not require any
transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not
apply a full retrospective transition approach. The Corporation is currently assessing the effect that ASU 2016-02 will have
on its financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have
a material effect on the Corporation’s financial position, results of operations or cash flows.
NOTE 2: Adoption of New Accounting Standard
The Corporation adopted ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, as of
January 1, 2015. As permitted by the guidance, the Corporation has elected to amortize the initial cost of investments in
affordable housing projects over the period in which the Corporation will receive related tax credits, which approximates
the proportional amortization method, and the resulting amortization is recognized as a component of income taxes
attributable to continuing operations. Historically, the amortization related to these investments was recognized within
noninterest expense. The Corporation adopted this guidance in the first quarter of 2015 with retrospective application as
required by ASU 2014-01. Prior period results have been restated to conform to this presentation.
As of December 31, 2015, the carrying value of the Corporation’s aggregate investment in qualified affordable housing
projects was $2.48 million and the aggregate commitment to provide additional capital to these investments was $896,000.
Amortization recognized as a component of income tax expense for the years ended December 31, 2015, 2014 and 2013
was $406,000, $415,000 and $396,000, respectively.
NOTE 3: Securities
The Corporation’s debt and equity securities, all of which are classified as available for sale, at December 31, 2015 and
2014 are summarized as follows:
December 31, 2015
Gross
Gross
Amortized Unrealized Unrealized
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
82
Gains
Losses
Cost
$ 18,759 $
76,957
118,389
$ 214,105 $
— $
513
5,640
6,153 $
Fair Value
18,501
77,027
123,948
(782) $ 219,476
(258) $
(443)
(81)
December 31, 2014
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
$ 23,409 $
66,716
124,312
$ 214,437 $
1 $
935
7,158
8,094 $
(476) $
Fair Value
22,934
67,619
(32)
131,344
(126)
(634) $ 221,897
The amortized cost and estimated fair value of securities at December 31, 2015 and 2014, by the earlier of contractual
maturity or expected maturity, are shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Fair Value
$ 26,624 $ 26,789 $
December 31, 2015
Amortized
Cost
December 31, 2014
Amortized
Cost
31,201 $ 31,243
115,304
49,968
25,382
$ 214,105 $ 219,476 $ 214,437 $ 221,897
139,640
38,196
14,851
136,259
37,314
13,908
111,084
48,519
23,633
Fair Value
Proceeds from the maturities, calls and sales of securities available for sale in 2015 were $36.45 million, resulting in gross
realized gains of $29,000; 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.
The Corporation pledges securities to primarily secure public deposits and repurchase agreements. Securities with an
aggregate amortized cost of $91.93 million and an aggregate fair value of $95.13 million were pledged at
December 31, 2015. 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 in an unrealized loss position at December 31, 2015, 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
Less Than 12 Months
Fair
Value
Unrealized Fair
Value
Loss
12 Months or More
Unrealized
Loss
Fair
Value
Total
Unrealized
Loss
$
9,530 $
69 $ 8,971 $
189 $ 18,501 $
27,085
397
2,252
46
29,337
5,157
$ 41,772 $
32
4,666
49
9,823
498 $ 15,889 $
284 $ 57,661 $
258
443
81
782
There were 79 debt securities totaling $57.66 million considered temporarily impaired at December 31, 2015. The primary
cause of the temporary impairments in the Corporation’s investments in debt securities was fluctuations in interest rates.
Interest rates generally increased during 2015, most significantly in the short and middle term portions of the United States
Treasury security yield curve, thereby increasing unrealized losses on the Corporation’s debt securities. Yields across the
curve rose, but overall, the yield curve flattened. The Federal Reserve’s Federal Open Market Committee increased the
target range for the federal funds rate for the first time since 2006. This action drove shorter-maturity yields up, while a
lower inflation outlook due to global growth concerns and oil prices approaching a six-year low capped longer-term yields.
The municipal bond sector, which includes the Corporation’s obligations of states and political subdivisions, had an
increasing supply of newly issued bonds compared to historical averages, although the majority of these new issues were
used to refund existing bonds. At December 31, 2015, 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 88 percent were rated “A” or better, as
measured by market value, at December 31, 2015. For the approximately 12 percent not rated “A” or better, as measured
by market value at December 31, 2015, 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
83
a recovery of unrealized losses, the Corporation does not consider these investments to be other-than-temporarily impaired
at December 31, 2015 and no other-than-temporary impairment has been recognized.
Securities in an unrealized loss position at December 31, 2014, by duration of the period of the unrealized loss, are shown
below.
Less Than 12 Months
12 Months or More
Total
(Dollars in thousands)
U.S. government agencies and corporations
Mortgage-backed securities
Obligations of states and political subdivisions
$
Total temporarily impaired securities
$
Fair
Value
Loss
Unrealized Fair
Value
2 $ 21,234 $
—
51
53 $ 31,801 $
4,518
6,049
1,966 $
—
6,279
8,245 $
Unrealized Fair
Loss
Value
Unrealized
Loss
474 $ 23,200 $
4,518
32
75 12,328
581 $ 40,046 $
476
32
126
634
The Corporation’s investment in restricted stocks totaled $3.35 million and $3.44 million at December 31, 2015 and 2014,
respectively. Restricted stock is generally viewed as a long-term investment, which are carried at cost because there is no
market for the stock other than the FHLBs with respect to FHLB stock, or member institutions with respect to CBB stock.
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, 2015 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.
NOTE 4: Loans
Major classifications of loans are summarized as follows:
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction 1
Commercial, financial and agricultural 2
Equity lines
Consumer
Consumer finance
Less allowance for loan losses
Loans, net
December 31,
2014
2015
186,763 $ 179,817
7,325
7,759
306,845
356,062
50,321
50,111
8,163
9,011
283,333
291,755
835,804
901,461
(35,569)
(35,606)
865,892 $ 800,198
$
$
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.
Consumer loans included $266,000 and $355,000 of demand deposit overdrafts at December 31, 2015 and 2014,
respectively.
84
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, 2015 and 2014 were as follows:
(Dollars in thousands)
Outstanding principal balance
Carrying amount
Real estate – residential mortgage
Commercial, financial and agricultural1
Equity lines
Consumer
Total acquired loans
Acquired Loans -
Acquired Loans -
December 31, 2015
Purchased
Credit Impaired
$
$
$
25,701
1,305
12,317
286
—
13,908
$
$
$
Purchased
Performing
70,993
15,478
37,287
13,969
288
67,022
Acquired Loans -
Total
96,694
16,783
49,604
14,255
288
80,930
$
$
$
1
Includes acquired loans classified by the Corporation as commercial real estate lending, land acquisition and
development lending, builder line lending and commercial business lending.
(Dollars in thousands)
Outstanding principal balance
Carrying amount
Real estate – residential mortgage
Commercial, financial and agricultural1
Equity lines
Consumer
Total acquired loans
Acquired Loans -
Acquired Loans -
December 31, 2014
Purchased
Credit Impaired
$
$
$
36,541
1,723
19,367
318
16
21,424
$
$
$
Purchased
Performing
85,015
18,688
45,015
15,464
979
80,146
Acquired Loans -
Total
$
$
$
121,556
20,411
64,382
15,782
995
101,570
1
Includes acquired loans classified by the Corporation as commercial real estate lending, land acquisition and
development lending, builder line lending and commercial business lending.
The following table presents a summary of the change in the accretable yield of the PCI loan portfolio for the years
ended December 31, 2015 and 2014:
(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,
2015
2014
$
13,488 $
(2,603)
7,776
(3,234)
355
(821)
10,419 $
10,593
(1,647)
13,488
$
85
Loans on nonaccrual status at December 31, 2015 and 2014 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 and development lending1
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
Total loans on nonaccrual status
$
2015
2014
$
2,297 $
2,472
—
—
2,515
—
359
86
881
19
830
6,987 $
—
—
2,033
—
—
—
356
43
1,040
5,944
1
At December 31, 2015 and 2014 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 2015, 2014 and 2013, interest
income would have increased by approximately $531,000, $413,000 and $479,000, respectively.
The past due status of loans as of December 31, 2015 was as follows:
90+ Days
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction:
Construction lending
Consumer lot lending
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition and development
lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
Total
30 - 59 Days 60 - 89 Days 90+ Days Total
Past Due
Past Due Past Due Past Due
$
737 $
146 $
PCI
574 $ 1,457 $ 1,305 $ 184,001 $
Past Due and
Current1 Total Loans Accruing 2
186,763 $
268
—
—
—
—
—
—
—
—
—
—
5,996
1,763
5,996
1,763
1,475
1,280
423
3,178
10,359
204,079
217,616
—
—
20
378
84
15,046
17,740 $
$
—
—
86
—
2
2,264
3,778 $ 3,138 $ 24,656 $ 13,908 $ 862,897 $
—
—
359
359
427
321
990
612
19
105
830 18,140
46,311
20,612
68,779
48,835
8,906
273,615
—
—
1,958
286
—
—
46,311
20,971
71,164
50,111
9,011
291,755
901,461 $
—
—
493
—
—
—
—
—
—
761
1
2
For the purposes of the table above, “Current” includes loans that are 1-29 days past due.
Includes PCI loans of $172,000.
86
The table above includes the following:
nonaccrual loans that are current of $3.17 million, 30-59 days past due of $377,000, 60-89 days past due of
$887,000 and 90+ days past due of $2.55 million.
performing loans purchased in the acquisition of CVB that are current of $66.37 million, 30-59 days past due of
$270,000, 60-89 days past due of $0 and 90+ days past due of $378,000.
The past due status of loans as of December 31, 2014 was as follows:
90+ Days
(Dollars in thousands)
Real estate – residential mortgage
Real estate – construction:
Construction lending
Consumer lot lending
Commercial, financial and agricultural:
Commercial real estate lending
Land acquisition and development
lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Consumer finance
Total
30 - 59 Days 60 - 89 Days 90+ Days Total
Past Due Past Due Past Due
Past Due
$
1,481 $
256 $
PCI
679 $ 2,416 $ 1,723 $ 175,678 $
Current1 Total Loans
179,817 $
Past Due and
Accruing
—
—
—
88
—
—
21
319
15
12,421
14,345 $
$
—
—
—
—
—
—
3,839
3,486
3,839
3,486
—
115
203
13,011
171,566
184,780
—
—
—
122
6
—
—
53
205
37
2,599
3,150 $ 1,962 $ 19,457 $ 21,424 $ 794,923 $
—
—
74
646
58
1,040 16,060
44,094
20,207
51,334
49,357
8,089
267,273
3,379
48
2,929
318
16
—
47,473
20,255
54,337
50,321
8,163
283,333
835,804 $
—
—
—
—
—
—
14
—
—
14
1
For the purposes of the table above, “Current” includes loans that are 1-29 days past due.
The table above includes the following:
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.
performing loans purchased in the acquisition of CVB that are current of $79.01 million, 30-59 days past due of
$634,000, 60-89 days past due of $88,000 and 90+ days past due of $413,000.
Loan modifications that were classified as TDRs during the years ended December 31, 2015 and 2014 were as follows:
Year Ended December 31,
2015
Pre-
Post-
Modification Modification
Number of Recorded
Investment
Loans
Recorded
Investment
2014
Pre-
Post-
Number of Recorded
Investment
Loans
Modification Modification
Recorded
Investment
124
124 $
2 $
(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
3
1
1
—
674
103
96
—
674
103
96
—
—
—
—
1
8 $
—
—
—
3
1,000 $
—
—
—
3
1,000
2 $
336 $
336
1
—
1
—
1
239
239
—
15
—
17
—
15
—
17
2
7 $
261
868 $
261
868
87
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. There were no TDR payment defaults during the years ended
December 31, 2015 and 2014.
Impaired loans, which consisted solely of TDRs, and the related allowance at December 31, 2015 were as follows:
(Dollars in thousands)
Real estate – residential mortgage
Commercial, financial and agricultural:
Commercial real estate lending
Commercial business lending
Equity lines
Consumer
Total
Average
Balance-
Impaired
Interest
Income
Recognized
Recorded Unpaid
Investment Principal Related
in Loans
Balance Allowance Loans
$
2,689 $ 2,828 $
360 $ 2,782 $
97
2,319
99
30
207
2,522
99
32
207
438
28
—
23
2,362
108
32
208
$
5,344 $ 5,688 $
849 $ 5,492 $
35
1
1
7
141
Impaired loans, which included TDR loans 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
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
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
88
Year Ended December 31,
2014
2015
2013
$ 35,606 $ 34,852 $ 35,907
15,085
(20,070)
3,930
$ 35,569 $ 35,606 $ 34,852
15,512
(20,317)
4,768
16,330
(19,846)
4,270
The following table presents, as of December 31, 2015, 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:
Balance at the beginning of year
Provision charged to operations
Loans charged off
Recoveries of loans previously charged off
Ending balance
Ending balance: individually evaluated for
impairment
Ending balance: collectively evaluated for
impairment
Ending balance: acquired loans - purchase credit
Real Estate
Commercial,
Financial &
Residential Real Estate
Mortgage Construction Agricultural
Equity
Lines
Consumer
Consumer Finance
Total
$
$
$
2,313 $
45
(144)
257
2,471 $
434 $
(340)
—
—
94 $
7,744 $
1
(21)
31
7,755 $
812 $
258
(19)
1
1,052 $
211 $
81
(317)
268
243 $
24,092 $
15,467
(19,816)
4,211
23,954 $
35,606
15,512
(20,317)
4,768
35,569
360 $
— $
466 $
— $
23 $
— $
849
$
2,111 $
94 $
7,254 $
1,052 $
220 $
23,954 $
34,685
impaired
$
— $
— $
35 $
— $
— $
— $
35
Loans:
Ending balance
Ending balance: individually evaluated for
$ 186,763 $
7,759 $
356,062 $ 50,111 $
9,011 $
291,755 $ 901,461
impairment
$
2,689 $
— $
2,418 $
30 $
207 $
— $
5,344
Ending balance: collectively evaluated for
impairment
Ending balance: acquired loans - purchase credit
$ 182,769 $
7,759 $
341,327 $ 49,795 $
8,804 $
291,755 $ 882,209
impaired
$
1,305 $
— $
12,317 $
286 $
— $
— $
13,908
The following table presents, as of December 31, 2014, 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
Commercial,
Real Estate
Residential Real Estate
Financial &
Mortgage Construction Agricultural
Equity
Lines
Consumer
Consumer Finance
Total
$
$
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
impairment
$
417 $
— $
455 $
1 $
6 $
— $
879
Ending balance: collectively evaluated for
impairment
$
1,896 $
434 $
7,289 $
811 $
205 $
24,092 $
34,727
Ending balance: acquired loans - purchase credit
impaired
$
— $
— $
— $
— $
— $
— $
—
Loans:
Ending balance
Ending balance: individually evaluated for
$ 179,817 $
7,325 $
306,845 $ 50,321 $
8,163 $
283,333 $ 835,804
impairment
$
3,000 $
— $
2,889 $
30 $
95 $
— $
6,014
Ending balance: collectively evaluated for
impairment
$ 175,094 $
7,325 $
284,589 $ 49,973 $
8,052 $
283,333 $ 808,366
Ending balance: acquired loans - purchase credit
impaired
$
1,723 $
— $
19,367 $
318 $
16 $
— $
21,424
89
Loans by credit quality indicators as of December 31, 2015 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 and development lending
Builder line lending
Commercial business lending
Equity lines
Consumer
Special
Substandard
Pass
Mention Substandard Nonaccrual
Total1
$ 181,107 $ 1,276 $
2,083 $
2,297 $ 186,763
5,924
1,763
72
—
195,479
45,061
19,252
57,928
48,392
8,760
6,089
856
829
1,306
617
116
—
—
13,533
394
531
11,844
221
116
—
—
5,996
1,763
2,515
—
359
86
881
19
217,616
46,311
20,971
71,164
50,111
9,011
$ 563,666 $
11,161 $
28,722 $
6,157 $ 609,706
Included in the table above are loans purchased in connection with the acquisition of CVB of $71.14 million pass rated,
$4.09 million special mention, $5.15 million substandard and $542,000 substandard nonaccrual.
(Dollars in thousands)
Consumer finance
Performing Non‐Performing Total
$ 290,925 $
830 $ 291,755
1 At December 31, 2015, the Corporation does not have any loans classified as Doubtful or Loss.
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 and 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
—
—
165,804
43,693
18,321
41,813
48,443
7,984
4,136
1,136
1,389
930
772
103
2,648
—
12,807
2,644
545
11,594
750
33
—
—
3,839
3,486
2,033
—
—
—
356
43
184,780
47,473
20,255
54,337
50,321
8,163
$ 502,149 $
11,444 $
33,974 $
4,904 $ 552,471
Included in the table above are loans purchased in connection with the acquisition of CVB of $87.27 million pass rated,
$2.99 million special mention, $10.71 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.
90
NOTE 6: Other Real Estate Owned
At December 31, 2015 and 2014, OREO was $942,000 and $786,000, 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
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
Changes in the allowance for OREO losses are as follows:
(Dollars in thousands)
Balance at the beginning of year
Provision for losses
Charge-offs, net
Balance at the end of year
$
$
Year Ended December 31,
2015
2014
$
$
815
824
(63)
(706)
242
(114)
998
(56)
942
$
$
6,904
1,960
(4,135)
(4,382)
354
114
815
(29)
786
2015
Year Ended December 31,
2014
4,135 $
29
(4,135)
29 $
90
(63)
56 $
2013
3,937
459
(261)
4,135
29 $
Other noninterest income (expense), net applicable to OREO, other than the provision for losses, were $19,000, $(6,000)
and $(253,000) for the years ended December 31, 2015, 2014 and 2013, respectively.
NOTE 7: Corporate Premises and Equipment
Major classifications of corporate premises and equipment are summarized as follows:
(Dollars in thousands)
Land
Buildings
Equipment, furniture and fixtures
Less accumulated depreciation
NOTE 8: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, over $250
Other time deposits
91
December 31,
2015
8,431 $
32,989
32,158
73,578
(37,045)
36,533 $
2014
8,431
33,917
36,956
79,304
(42,009)
37,295
$
$
December 31,
2014
2015
60,565
64,270 $
275,462
305,942
339,732 $ 366,507
$
$
Remaining maturities on time deposits are as follows:
(Dollars in thousands)
2016
2017
2018
2019
2020
Thereafter
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, 2015
$
158,494
81,741
34,731
40,431
13,414
10,921
339,732
$
December 31,
2015
12,093
14,423
12,952
$
$
$
0.41 %
0.43 %
$
12,093
2014
14,436
15,488
12,745
0.39 %
0.38 %
14,436
1 Consists entirely of secured transactions with customers, which generally mature the day following the day sold.
Long-term borrowings at December 31, 2015 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, 2015 was $5.00 million. The interest rate on the revolving bank line of credit, which matures
in 2018, 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, 2015 was $88.03 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 2015. Long-term advances from the FHLB at December 31, 2015 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 for the FHLB advances:
92
Balance Outstanding at December 31, 2015
(Dollars in thousands)
Fixed Rate Hybrid Advances
Convertible Advances
Next
Conversion
Interest Rate Maturity Date Option Date
$7,500
$2,500
$7,000
$7,500
$7,500
$5,000
$5,000
$5,000
0.80 %
1.28
1.95
1.78
3.70
4.06
2.93
3.59
08/30/16
08/30/18
12/04/19
08/21/20
10/19/17
10/25/17
11/27/17
06/06/18
04/19/16
04/25/16
02/29/16
*
Convertible advance had a one-time advance option and the date has passed.
The contractual maturities of long-term borrowings at December 31, 2015 are as follows:
(Dollars in thousands)
2016
2017
2018
2019
2020
Thereafter
Fixed Rate Floating Rate Total
$
— $
7,500 $
17,500
7,500
7,000
7,500
—
$ 47,000 $
7,500
105,529
12,500
7,000
7,500
—
93,029 $ 140,029
88,029
5,000
—
—
—
The Corporation’s unused lines of credit for future borrowings total approximately $264.98 million at December 31, 2015,
which consists of $102.98 million available from the FHLB, $31.97 million on C&F Finance’s revolving bank line of
credit, $15.03 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, 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 potential effects of rising interest rates, 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, and require quarterly distributions by
93
Trust I to the holder of the securities at a rate equal to the three-month LIBOR rate plus 1.57%. During 2015, in order to
mitigate the potential effects of rising interest rates, the Corporation entered into an interest rate swap agreement whereby
the effective fixed interest rate on all $10.00 million of the securities became 3.44%. The interest rate swap matures in
September 2020. 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-consolidated 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, and require quarterly
distributions by CVBK Trust I to the holder of the securities at a rate equal to the three-month LIBOR plus 2.85%. During
2014, in order to mitigate the potential effects of rising interest rates, 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 $636,000 as of December 31, 2015.
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
Shareholders’ Equity
Preferred Shares. On January 9, 2009, as part of the Capital Purchase Program (Capital Purchase Program) established
by the U.S. Department of the Treasury (Treasury) under the Emergency Economic Stabilization Act of 2008 (EESA), the
Corporation issued and sold to Treasury for an aggregate purchase price of $20.00 million in cash (1) 20,000 shares of the
Corporation’s fixed rate cumulative perpetual preferred stock, Series A, par value $1.00 per share, having a liquidation
preference of $1,000 per share (Series A Preferred Stock) and (2) a ten-year warrant to purchase up to 167,504 shares of
the Corporation’s common stock at an initial exercise price of $17.91 per share (Warrant).
On July 27, 2011, the Corporation redeemed $10.00 million of the total $20.00 million liquidation preference of its Series
A Preferred Stock and on April 11, 2012, the Corporation redeemed the remaining $10.00 million. 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.
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 provided
by existing financial resources of the Corporation; therefore, there was no dilution to the Corporation’s common
shareholders.
Common Shares. The Corporation repurchased 38,759 and 2,800 shares of its common stock during the years ended
December 31, 2015 and 2014, respectively under a share repurchase program authorized by the Corporation’s Board of
Directors. During the years ended December 31, 2015, 2014 and 2013, the Corporation withheld 8,745, 1,808 and 1,215
94
shares of its common stock, respectively, from employees to satisfy tax withholding obligations arising upon the vesting
of restricted shares.
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 $620,000, $1.66 million and $163,000 as of December 31, 2015, 2014 and 2013,
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
Earnings Per Common Share
2013
December 31,
2014
2015
$ 3,491 $ 4,850 $ 261
(202)
(325)
$ 1,171 $ 3,086 $ (266)
(107)
(2,213)
(64)
(1,700)
The components of the Corporation’s earnings per common share calculations are as follows:
(Dollars in thousands)
Net income
2015
12,530 $
December 31,
2014
12,344 $
$
2013
14,444
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
3,401,426
3,404,112
3,305,132
408
32,166
138,850
3,401,834
3,436,278
3,443,982
Potential common shares that may be issued by the Corporation for its stock option awards, and when it was outstanding
in 2013 and 2014, the Warrant, were determined using the treasury stock method. Approximately 70,000, 150,000 and
18,000 shares issuable upon exercise of options for the years ended December 31, 2015, 2014 and 2013, respectively, were
not included in computing diluted earnings per common share because they were anti-dilutive.
The Corporation has applied the two-class method of computing basic and diluted EPS for each period presented 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.
NOTE 11: Income Taxes
Principal components of income tax expense as reflected in the consolidated statements of income are as follows:
(Dollars in thousands)
Current taxes
Deferred taxes
95
Year Ended December 31,
2015
2013
2014
$ 3,475 $ 2,897 $ 4,843
2,286
$ 4,853 $ 5,144 $ 7,129
2,247
1,378
Table of Contents
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
Percent of
Year Ended December 31,
Percent of
Pre-tax
Income
2015
Pre-tax
Income
2014
Percent of
Pre-tax
Income
2013
rates
$ 6,084
35.0 % $ 6,120
35.0 % $ 7,551
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
Increase in bank-owned life insurance
State income taxes, net of federal tax
(1,456)
(8.4)
(1,546)
(8.8)
(1,600)
(7.4)
38
(159)
0.2
(0.9)
42
(38)
0.2
(0.2)
59
(38)
0.3
(0.2)
benefit
563
3.3
532
3.0
938
4.3
Amortization of investments in qualified
affordable housing projects, net of
federal tax benefit
Tax credit on investments in qualified
264
1.5
270
1.5
257
1.2
affordable housing projects
(400)
(2.3)
(180)
(1.0)
(225)
(1.0)
Nondeductible expenses primarily related
to the acquisition of CVBK
Other
—
(81)
$ 4,853
—
—
(0.5)
(56)
27.9 % $ 5,144
251
—
(0.3)
(64)
29.4 % $ 7,129
1.1
(0.3)
33.0 %
The Corporation’s net deferred income taxes totaled $20.4 million and $20.7 million at December 31, 2015 and 2014,
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 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
96
December 31,
2014
2015
$ 13,445 $ 13,590
6,603
794
1,821
791
1,222
149
40
2,677
27,687
4,888
898
1,940
918
997
—
68
3,411
26,565
(3,569)
(566)
(63)
(125)
(1,880)
(6,203)
(3,291)
(904)
(176)
—
(2,611)
(6,982)
$ 20,362 $ 20,705
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 2012.
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
$633,000, $557,000 and $417,000 in 2015, 2014 and 2013, 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
$59,000, $16,000 and $104,000 in 2015, 2014 and 2013, 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 $211,000, $199,000 and
$155,000 in 2015, 2014 and 2013, 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 or 2013. 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/Chief Financial Officer of the
Corporation, and recommends to the Corporation’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 C&F Bank and C&F Finance. In determining the awards, performance, including the Corporation’s growth rate, returns
on average assets and equity, asset quality measures and absolute levels of income are considered. In addition, the 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 $1.50 million, $1.20 million
and $1.32 million in 2015, 2014 and 2013, respectively. In accordance with employment agreements for certain senior
officers of C&F Mortgage, performance bonuses of $338,000, $173,000 and $932,000 were expensed in 2015, 2014 and
2013, 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
97
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.
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 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 $226,000,
$215,000 and $185,000 in 2015, 2014 and 2013, 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.
On December 16, 2014, the Corporation approved an additional compensation benefit for the Corporation’s Chief
Executive Officer to provide post-retirement medical and dental insurance premiums for him and his spouse for life.
Expense under this arrangement was $69,000 in 2015 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 (gain) loss
Benefits paid
Prior service cost attributed to CVB participation
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
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
2015
December 31,
2014
2013
$ 13,582
1,040
468
(347)
(351)
126
14,518
14,084
(36)
1,000
(351)
14,697
179
179
$
$
$ 10,659
763
451
1,882
(173)
—
13,582
11,624
633
2,000
(173)
14,084
502
$
502
$
$ 10,058
776
425
91
(691)
—
10,659
9,612
1,703
1,000
(691)
11,624
965
$
965
$
$ 4,160
(755)
(1,192)
$ 2,213
$ 3,558
(942)
(916)
$ 1,700
$ 1,510
(1,010)
(175)
325
$
3.8 %
7.5
3.0
3.6 %
7.5
3.0
4.4 %
8.0
3.0
98
The accumulated benefit obligation was $14.52 million and $13.58 million as of the actuarial valuation dates December 31,
2015 and 2014, respectively.
(Dollars in thousands)
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized net actuarial loss
Net periodic benefit cost
Other changes in plan assets and benefit obligations recognized in other comprehensive
loss
Net loss (gain)
Prior service cost
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)
2016
2017
2018
2019
2020
2021 – 2025
Year Ended December 31,
2014 2013
2015
$ 1,040 $
468
(1,043)
(61)
130
534 $
$
763 $ 776
425
451
(748)
(832)
(68)
(68)
121
33
506
347
602
126
61
(276)
513
(985)
—
68
320
(597)
$ 1,047 $ 1,722 $ (91)
2,048
—
68
(741)
1,375
January 1,
2015 2014 2013
3.6 %
7.5
3.0
4.4 %
7.5
3.0
4.0 %
8.0
3.0
$
$
1,633
797
2,145
752
718
6,981
13,026
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).
99
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.
2015
2014
39 %
61
*
100 %
41 %
59
*
100 %
The following table summarizes the fair value of the defined benefit plan assets as of December 31, 2015 and 2014. 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, 2015
Fair Value Measurements Using Assets at Fair
Level 2 Level 3
Level 1
— $
$
—
—
— $
5,944 $
8,741
12
14,697 $
— $
—
—
— $
5,944
8,741
12
14,697
Value
$
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
$
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.
100
NOTE 13: Related Party Transactions
Loans outstanding to directors and executive officers totaled $4.10 million and $2.45 million at December 31, 2015 and
2014, respectively. Advances to directors and officers totaled $1.8 million and repayments totaled $150,000 in the year
ended December 31, 2015. Total deposits for directors and executive officers were $3.8 million and $3.4 million at
December 31, 2015 and 2014, 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. Stock
options issued under the Amended 2004 Plan prior to 2006 were issued to employees at a price equal to the fair market
value of the Corporation’s common stock on the date granted. All options outstanding under the Amended 2004 Plan are
exercisable as of December 31, 2015. All options expire ten years from the grant date.
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
2015
Exercise Intrinsic
Value
Price*
Shares
100,762 $ 37.75
—
37.99
37.21
—
(34,000)
(42,762)
24,000 $ 38.39 $
2014
2013
Exercise
Price*
Shares
164,150 $ 38.21
—
—
39.29
(271)
(63,117)
38.95
100,762 $ 37.75
Exercise
Shares
Price*
276,432 $ 39.14
—
—
40.41
(94,382)
(17,900)
40.87
164,150 $ 38.21
22
The total intrinsic value of in-the-money options exercised in 2015 was $31,000. Cash received from option exercises
during 2015 was $1.29 million, and a $12,000 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.
101
The following table summarizes information about stock options outstanding and exercisable at December 31, 2015:
Options Outstanding and Exercisable
Remaining
Range of Exercise Prices
$37.17 to $39.60
* Weighted average
Number Outstanding Contractual Life
at December 31, 2015
24,000
(Years)*
0.8 $
Exercise Price*
38.39
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
2015
Weighted-
Average
Grant Date
Shares
Fair Value
135,600 $ 34.34
38.33
33,925
26.57
(27,250)
44.44
(5,075)
137,200 $ 36.50
2014
Weighted-
Average
Grant Date
Fair Value
31.18
39.84
20.13
42.14
34.34
Shares
120,183 $
32,625
(15,208)
(2,000)
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 $
Compensation is accounted for using the fair value of the Corporation’s common stock on the date the restricted shares
are awarded. The weighted-average grant date fair value per share of restricted stock granted for the years 2015, 2014 and
2013 was $38.33, $39.84 and $45.24, respectively. Compensation expense is charged to income ratably over the vesting
periods, and was $1.06 million in 2015, $967,000 in 2014 and $659,000 in 2013. As of December 31, 2015, there was
$2.81 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 2020.
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.
In December 2013, the Federal Reserve Board issued a final rule that made 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 required the Corporation and the Bank to comply with the following new minimum capital ratios, effective
January 1, 2015: (1) a new common equity Tier 1 capital ratio (CET1) of 4.5% of risk-weighted assets; (2) a Tier 1 capital
ratio of 6% of risk-weighted assets (increased from the 2014 requirement of 4%); (3) a total capital ratio of 8% of risk-
weighted assets (unchanged from the 2014 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% CET1 to risk-weighted assets to increase
the ratio to 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
102
Table of Contents
Basel III Final Rules became effective January 1, 2015 and the Basel III Final Rules capital conservation buffer will be
phased in from 2015 to 2019. For additional information about the Basel III Final Rules, see “Item 1. Business” under the
heading “Regulation and Supervision” in this Annual Report on Form 10-K.
As of December 31, 2015, the most recent notification from the 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, 2015, the Bank was required to maintain minimum total risk-based, Tier 1 risk-
based, CET1 risk-based and Tier 1 leverage ratios as set forth in the table below.
The Corporation’s and the Bank’s actual capital amounts and ratios as of December 31, 2015 and 2014 are presented in
the following table. Risk-weighted assets for the Corporation and C&F Bank were $1.00 billion and $1.00 billion,
respectively at December 31, 2015 and $896.60 million and $894.08 million, respectively at December 31, 2014.
Management believes that, as of December 31, 2015, the Corporation and C&F Bank met all capital adequacy requirements
to which they are subject.
(Dollars in thousands)
As of December 31, 2015:
Total Capital (to Risk-Weighted Assets)
Corporation
C&F Bank
Tier 1 Capital (to Risk-Weighted Assets)
Corporation
C&F Bank
Common Equity Tier 1 Capital (to Risk-Weighted
Assets)
Corporation
C&F Bank
Tier 1 Capital (to Average Assets)
Corporation
C&F Bank
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
Minimum To Be
Well Capitalized
Under Prompt
Actual
Minimum Capital Corrective Action
Requirements
Provisions
Amount Ratio Amount Ratio Amount
Ratio
$ 150,102 15.0 % $ 80,216
80,560
150,711 15.0
8.0 %
8.0 $ 100,700
N/A N/A
10.0 %
137,210 13.7
137,815 13.7
60,162
60,420
6.0
6.0
N/A N/A
8.0
80,560
112,633 11.2
137,815 13.7
45,121
45,315
4.5
4.5
N/A N/A
6.5
65,455
137,210 10.0
137,815 10.1
54,756
54,792
4.0
4.0
N/A N/A
5.0
68,491
$ 130,401 14.5 % $ 71,731
71,527
129,228 14.5
8.0 %
8.0 $
N/A N/A
89,408
10.0 %
118,892 13.3
117,753 13.2
35,866
35,763
4.0
4.0
N/A N/A
6.0
53,645
118,892
117,753
9.2
9.1
51,974
51,959
4.0
4.0
N/A N/A
5.0
64,949
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 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.
103
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, which was assumed
by the Corporation when CVBK was merged into the Corporation on March 22, 2014. 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, 2015 and 2014.
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by C&F
Bank 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 $159.21 million at December 31, 2015
and $136.00 million at December 31, 2014.
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 $10.99 million at December 31, 2015 and $13.40 million at December 31, 2014.
C&F Mortgage had rate lock commitments (or IRLCs) to originate mortgage loans amounting to approximately $43.94
million and loans held for sale of $43.21 million. At December 31, 2015, each loan held for sale by C&F Mortgage was
subject to a forward sales agreement on a best efforts basis. 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 mortgage backed securities 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, 2015, the Corporation had best efforts forward sales contracts with a
notional value of $87.15 million. The fair value of these derivative instruments at December 31, 2015 was $744,000, which
was included in other assets. There were no loans to be delivered on a mandatory basis at December 31, 2015.
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
104
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, 2015. 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,
2014
2015
2013
$
$
2,089 $
274
—
2,363 $
2,415 $
240
(566)
2,089 $
2,092
558
(235)
2,415
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 $1.37 million, $1.25 million and $1.39 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
Future minimum lease payments due under the Corporation's operating leases as of December 31, 2015 are as follows:
(Dollars in thousands)
2016
2017
2018
2019
2020
Thereafter
$ 1,411
1,224
967
546
386
94
$ 4,628
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.
105
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 elected to use
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, 2015 and 2014, 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 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.
106
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. All of the Corporation’s cash flow hedges are classified as Level 2.
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
Total assets
Liabilities:
December 31, 2015
Fair Value Measurements Using Assets at
Level 3 Fair Value
Level 1 Level 2
$ —
—
—
—
—
—
—
$
$
18,501
77,027
123,948
219,476
44,000
744
$ 264,220
$
$
18,501
— $
77,027
—
123,948
—
219,476
—
44,000
—
—
744
— $ 264,220
Derivative liability - cash flow hedges
$
—
$
175
$
— $
175
(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
Level 3 Fair Value
Level 1 Level 2
$ —
—
—
—
—
—
—
—
$
$
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
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 held for investment 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
107
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 or if the impaired loan
otherwise does not meet the standards for Level 2 classification, the Corporation records the impaired loan as nonrecurring
Level 3.
The measurement of impaired loans of less than $500,000, with the exception of Commercial loan TDRs, 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 similar properties, length of
time the properties have been held, and our ability and intent 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. As such, we record OREO as nonrecurring Level 3.
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, 2015
Fair Value Measurements Using Assets at Fair
Level 1 Level 2 Level 3
$
1,953 $
—
942
—
2,895 $
—
1,953
942
2,895
—
—
—
Value
$
$
$
$
$
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
$
$
$
$
$
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, 2015:
Fair Value Measurements at December 31, 2015
(Dollars in thousands)
Impaired loans, net
Fair Value Valuation Technique(s)
$ 1,953
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% - 60%
0% - 65%
Other real estate owned, net
942
Appraisals
Total
$ 2,895
108
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, 2015 and 2014.
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.
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 has elected to carry its portfolio of loans held for sale (or LHFS) at fair value, measured on
a recurring basis.
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.
109
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
Bank-owned life insurance
Accrued interest receivable
Financial liabilities:
Demand deposits
Time deposits
Borrowings
Derivative liability - cash flow hedges
Accrued interest payable
(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
Bank-owned life insurance
Accrued interest receivable
Financial liabilities:
Demand deposits
Time deposits
Borrowings
Derivative liability - cash flow hedges
Accrued interest payable
Carrying
Value
Fair Value Measurements at December 31, 2015 Using Total Fair
Value
Level 1
Level 2
Level 3
$ 152,943 $
219,476
865,892
44,000
744
14,988
6,829
$ 733,901 $
339,732
177,261
175
698
$
$
152,943
—
—
—
—
—
6,829
733,901
—
—
—
698
$
$
—
219,476
—
44,000
744
14,988
—
—
342,275
174,032
175
—
— $ 152,943
219,476
—
875,341
875,341
44,000
—
744
—
14,988
—
6,829
—
— $ 733,901
342,275
—
174,032
—
175
—
698
—
Carrying Fair Value Measurements at December 31, 2014 Using Total Fair
Value
Level 2
Value
Level 1
Level 3
$ 167,616 $
221,897
800,198
28,279
448
40
14,484
6,421
$ 659,594 $
366,507
167,027
143
740
$
$
167,616
—
—
—
—
—
—
6,421
659,594
—
—
—
740
$
$
—
221,897
—
28,279
448
40
14,484
—
—
369,538
160,052
143
—
— $ 167,616
221,897
—
813,010
813,010
28,279
—
448
—
40
—
14,484
—
6,421
—
— $ 659,594
369,538
—
160,052
—
143
—
740
—
The Corporation assumes interest rate risk (the risk that general interest rate levels will change) in the course of 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.
110
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 a full-service brokerage firm that derives revenues from offering investment
services and insurance products through an alliance with an independent broker/dealer and an insurance company that
derives revenues from 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.
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Total assets
Goodwill
Capital expenditures
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Total assets
Goodwill
Capital expenditures
Retail
Banking
Mortgage Consumer
Banking Finance
Other
Eliminations Consolidated
Year Ended December 31, 2015
$
42,960 $ 1,698 $ 47,053 $
—
9,083
52,043
6,336
2,621
10,655
—
1,095
48,148
— $
—
1,579
1,579
(4,662) $
—
—
(4,662)
87,049
6,336
14,378
107,763
45
310
4,594
4,563
9,512
1,143
466
677 $
—
5,682
23,185
17,155
46,022
6,021
392
5,629 $
15,467
6,201
9,758
4,970
36,396
11,752
4,573
$
7,179 $ (955) $
$ 1,233,976 $ 58,206 $ 295,430 $ 4,973 $
— $
$
1 $
$
—
1,163
1,389
560
3,112
(1,533)
(578)
— $ 10,723 $
211 $
100 $
3,702 $
1,597 $
—
(4,662)
—
—
(4,662)
—
—
— $
15,512
8,694
38,926
27,248
90,380
17,383
4,853
12,530
(187,509) $ 1,405,076
14,425
1,909
— $
— $
Retail
Banking
Mortgage Consumer
Banking Finance
Other
Eliminations Consolidated
Year Ended December 31, 2014
$
43,616 $ 1,304 $ 46,569 $
—
9,170
52,786
5,086
2,564
8,954
—
1,227
47,796
— $
—
1,358
1,358
(4,994) $
—
—
(4,994)
86,495
5,086
14,319
105,900
60
199
3,568
4,442
8,269
685
274
411 $
—
5,915
22,944
17,558
46,417
6,369
791
5,578 $
16,270
6,445
8,962
4,739
36,416
11,380
4,438
$
6,942 $ (587) $
$ 1,183,134 $ 42,143 $ 283,984 $ 4,208 $
— $
$
1 $
$
—
960
836
508
2,304
(946)
(359)
— $ 10,723 $
177 $
92 $
3,702 $
1,657 $
—
(4,994)
—
—
(4,994)
—
—
— $
16,330
8,525
36,310
27,247
88,412
17,488
5,144
12,344
(175,282) $ 1,338,187
14,425
1,927
— $
— $
111
(Dollars in thousands)
Revenues:
Interest income
Gains on sales of loans
Other noninterest income
Total operating income
Expenses:
Provision for loan losses
Interest expense
Salaries and employee benefits
Other noninterest expenses
Total operating expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Total assets
Goodwill
Capital expenditures
Retail
Banking
Mortgage Consumer
Banking Finance
Other
Eliminations Consolidated
Year Ended December 31, 2013
$
34,777 $ 1,865 $ 48,735 $
—
7,672
42,449
7,532
3,734
13,131
—
1,190
49,925
2 $
—
1,540
1,542
(5,167) $
—
—
(5,167)
80,212
7,532
14,136
101,880
90
343
4,118
5,329
9,880
3,251
1,300
13,965
6,501
7,877
4,300
32,643
17,282
6,740
1,030
6,135
18,361
14,039
39,565
2,884
(465)
$
3,349 $ 1,951 $ 10,542 $ (1,398) $
$ 1,157,467 $ 50,803 $ 278,855 $ 4,017 $
— $
$
2 $
$
—
811
811
1,764
3,386
(1,844)
(446)
— $ 10,723 $
53 $
535 $
3,702 $
3,294 $
—
(5,167)
—
—
(5,167)
—
—
— $
15,085
8,623
31,167
25,432
80,307
21,573
7,129
14,444
(178,606) $ 1,312,536
14,425
3,884
— $
— $
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 purchase loan contracts 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 $15.00 million and $10.00 million of the Corporation’s trust
preferred capital notes to fixed rates of interest until December 2019 and September 2020, respectively.
The cash flow hedges’ total notional amount is $25.00 million. At December 31, 2015, the cash flow hedges had a fair
value of $(175,000), which is recorded in other liabilities. The cash flow hedges were fully effective at December 31, 2015;
therefore, the net loss on the cash flow hedges was recognized as a component of other comprehensive income (loss), net
of deferred income taxes.
112
December 31,
2015
2014
$
768 $
662
2,506
146,027
$ 156,647 $ 149,195
3,155
152,724
$
25,139 $ 25,103
482
123,610
$ 156,647 $ 149,195
449
131,059
Year Ended December 31,
2014
2015
2013
$ (1,162) $
(757)
31,150
(14,726)
270
53
(1,546)
$ 12,530 $ 12,344 $ 14,444
(916) $
5,596
8,180
—
20
(536)
5,255
8,568
—
22
(153)
NOTE 20: Parent Company Condensed Financial Information
Financial information for the parent company is as follows:
(Dollars in thousands)
Balance Sheets
Assets
Cash
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
113
(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 common 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
NOTE 21: Other Noninterest Expenses
Year Ended December 31,
2014
2015
2013
$ 12,530 $ 12,344 $ 14,444
(8,568)
1,231
36
—
(661)
(65)
4,503
—
—
—
—
—
(8,180)
1,104
27
—
4,882
(4,263)
5,914
14,726
743
—
(270)
(4,710)
4,550
29,483
—
—
—
160
160
296
(4,196)
(26,058)
—
(29,958)
135
—
(1,687)
(4,148)
1,303
(4,397)
106
662
768 $
133
(2,303)
(161)
(4,050)
11
(6,370)
(296)
958
662 $
125
—
—
(3,845)
4,301
581
106
852
958
$
The following table presents the significant components in the statements of income line “Noninterest Expenses-Other
Expenses.”
(Dollars in thousands)
Data processing fees
Professional fees
Telecommunication expenses
Amortization of core deposit intangible
Travel and educational expenses
Marketing and advertising expenses
Acquisition transactions cost
All other noninterest expenses
Total other noninterest expenses
Year Ended December 31,
2013
2014
2015
$ 3,616
$ 2,700
$ 3,704
2,222
2,101
1,507
1,437
1,190
966
1,109
1,064
1,333
1,407
315
—
7,270
7,620
2,326
1,231
333
1,032
964
1,351
8,098
$ 18,420 $ 18,441 $ 18,035
114
NOTE 22: Quarterly Condensed Statements of Income—Unaudited
Dollars in thousands (except per share amounts)
Total interest income
Net interest income after provision for loan losses
Other income
Other expenses
Income before income taxes
Net income
Net income per 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 per share—assuming dilution
Dividends declared per common share
2015 Quarter Ended
March 31 June 30 September 30 December 31
$ 20,803 $ 21,350 $
15,257
5,101
16,750
3,608
2,645
0.77
0.30
17,019
5,515
16,654
5,880
4,101
1.21
0.30
2014 Quarter Ended
March 31 June 30 September 30 December 31
$ 21,294 $ 21,712 $
22,778 $
16,377
4,805
16,261
4,921
3,477
1.02
0.30
21,838 $
15,582
4,712
15,571
4,723
3,293
0.97
0.30
22,118
14,190
5,293
16,508
2,974
2,307
0.68
0.32
21,651
14,188
4,697
15,663
3,222
2,417
0.71
0.30
15,564
4,651
16,091
4,124
2,892
0.83
0.29
16,306
5,345
16,232
5,419
3,742
1.09
0.30
115
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
C&F Financial Corporation
West Point, Virginia
We have audited the accompanying consolidated balance sheets of C&F Financial Corporation and Subsidiary (the
Corporation) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive
income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. These
financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of C&F Financial Corporation and Subsidiary as of December 31, 2015 and 2014, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S.
generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), C&F Financial Corporation and Subsidiary’s internal control over financial reporting as of December 31, 2015,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013, and our report dated March 4, 2016 expressed an unqualified opinion
on the effectiveness of C&F Financial Corporation and Subsidiary’s internal control over financial reporting.
Richmond, Virginia
March 4, 2016
116
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 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, 2015 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, 2015. 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, 2015, 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, 2015 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, 2015 that have materially affected, or are reasonably likely to
materially affect, the Corporation’s internal control over financial reporting.
117
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, 2015, 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, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013.
118
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of income,
comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015
of C&F Financial Corporation and Subsidiary, and our report dated March 4, 2016 expressed an unqualified opinion.
Richmond, Virginia
March 4, 2016
119
ITEM 9B.
OTHER INFORMATION
None
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect to the directors of the Corporation is contained in the 2016 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 2016 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 2016 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.” The Corporation 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. The Corporation intends
to provide any required disclosure of any amendment to or waiver of the Code that applies to its 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. The Corporation 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 the Corporation’s 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 2016 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 2016 Proxy Statement are incorporated herein by reference. The information regarding director
compensation contained in the 2016 Proxy Statement under the caption, “Director Compensation,” is incorporated herein
by reference.
ITEM 12.
AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the 2016 Proxy Statement under the caption, “Security Ownership of Certain
Beneficial Owners and Management,” is incorporated herein by reference.
The information contained in the 2016 Proxy Statement under the caption, “Equity Compensation Plan
Information,” is incorporated herein by reference.
120
ITEM 13.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
The information contained in the 2016 Proxy Statement under the caption, “Interest of Management in Certain
Transactions,” is incorporated herein by reference. The information contained in the 2016 Proxy Statement under the
caption, “Director Independence,” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the 2016 Proxy Statement under the captions, “Principal Accountant Fees” and “Audit
Committee Pre-Approval Policy,” is incorporated herein by reference.
121
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 February 23, 2016 (incorporated
by reference to Exhibit 3.1 to Form 8-K filed February 29, 2016)
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 Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred Compensation Plan for
C&F Financial Corporation dated as of December 31, 2008 (incorporated by reference to Exhibit 10.4.1 to
Form 10-K filed March 9, 2009)
*10.4.2 Attachment to the Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation dated as of January 1, 2008 (incorporated by reference
to Exhibit 10.4.2 to Form 10-K filed March 7, 2008)
*10.4.3 Amendment to Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation effectively dated as of December 31, 2008
(incorporated by reference to Exhibit 10.4.3 to Form 10-K filed March 9, 2009)
*10.4.4 Amendment to Adoption Agreement for the Restated VBA Executives’ Non-Qualified Deferred
Compensation Plan for C&F Financial Corporation effectively dated as of January 1, 2009 (incorporated
by reference to Exhibit 10.4.4 to Form 10-K filed March 3, 2010)
122
Table of Contents
*10.5
Restated VBA Directors’ Deferred Compensation Plan for C&F Financial Corporation (incorporated by
reference to Exhibit 10.5 to Form 10-K filed March 7, 2008)
*10.5.1 Adoption Agreement for the Restated VBA Director’s Deferred Compensation Plan for C&F Financial
Corporation dated as of December 31, 2008 (incorporated by reference to Exhibit 10.5.1 to Form 10-K
filed March 9, 2009)
*10.5.2 Amendment to Adoption Agreement for the Restated VBA Directors’ Deferred Compensation Plan for
C&F Financial Corporation effectively dated as of December 31, 2008 (incorporated by reference to
Exhibit 10.5.2 to Form 10-K filed March 9, 2009)
*10.7
Amended and Restated C&F Financial Corporation 1998 Non-Employee Director Stock Compensation
Plan (incorporated by reference to Exhibit 10.7 to Form 10-K filed March 7, 2008)
*10.9
C&F Financial Corporation Management Incentive Plan dated December 15, 2015
*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
123
Table of Contents
*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
10.19.4
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)
Fourth 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 2, 2015
(incorporated by reference to Exhibit 10.19.4 to Form 10-Q filed November 6, 2015)
*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)
*10.29.1
Form of C&F Financial Corporation Restricted Stock Agreement for Chief Executive Officer (approved
December 15, 2015)
*10.29.2
Form of C&F Financial Corporation Restricted Stock Agreement for Key Employees (approved December
15, 2015)
*10.29.3
Form of C&F Financial Corporation Restricted Stock Agreement for Non-Employee Directors (approved
December 15, 2015)
*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)
*10.34
Change in Control Agreement dated August 5, 2015 between C&F Financial Corporation and S. Dustin
Crone (incorporated by reference to Exhibit 10.34 to Form 10-Q filed August 7, 2015)
21
Subsidiaries of the Registrant
124
23
Consent of Yount, Hyde & Barbour, P.C.
31.1
Certification of CEO pursuant to Rule 13a-14(a)
31.2
Certification of CFO pursuant to Rule 13a-14(a)
32
Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
*
Indicates management contract
125
Table of Contents
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 4, 2016
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/ JAMES T. NAPIER
James T. Napier, Director
/S/ PAUL C. ROBINSON
Paul C. Robinson, Director
Date: March 4, 2016
Date: March 4, 2016
Date: March 4, 2016
Date: March 4, 2016
Date: March 4, 2016
Date: March 4, 2016
Date: March 4, 2016
Date: March 4, 2016
Date: March 4, 2016
Date: March 4, 2016
126
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 commercial 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 $780 million and $2.0 billion. For 2015, the Peer Group consisted of 24 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, 2014. The following financial
institutions were included in the Peer Group: Access National Corporation (VA); American National Bankshares,
Inc. (VA);Avenue Financial Holdings, Inc. (TN); Community Bankers Trust Corporation (VA): Eastern Virginia
Bankshares, Inc. (VA); Farmers Capital Bank Corporation (KY); First South Bancorp, Inc. (NC); First United
Corporation (MD); Franklin Financial Network, Inc. (TN); HopFed Bancorp Inc. (KY); Middleburg Financial
Corporation (VA); Monarch Financial Holdings (VA); National Bankshares, Inc. (VA); Old Line Bancshares, Inc.
(MD); Old Point Financial Corporation (VA); Peoples Bancorp of North Carolina, Inc. (NC); Premier Financial
Bancorp, Inc. (WV); Select Bancorp, Inc. (NC); Shore Bancshares, Inc. (MD); Southern National Bancorp of Virginia,
Inc. (VA); Summit Financial Group Inc. (MD); The Community Financial Corporation (MD); WashingtonFirst
Bankshares, Inc. (VA); and Xenith 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, 2010 in the Corporation, the NASDAQ Composite
Index and the Peer Group, and shows the total return on such an investment as of December 31, 2015, 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 2015
250
220
190
160
130
100
e
u
l
a
V
x
e
d
n
I
70
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Index
C&F Financial Corporation
NASDAQ Composite
CFFI Custom Peer Group 2015
Period Ending
12/31/10
100.00
100.00
100.00
12/31/11
124.76
99.21
85.27
12/31/12
188.34
116.82
121.17
12/31/13
226.43
163.75
162.74
12/31/14
203.53
188.03
176.42
12/31/15
206.53
201.40
213.41
Source : SNL Financial LC, Charlottesville, VA
© 2016
www.snl.com
This page intentionally left blank.
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 F. 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
PERSONAL certificate of deposit RESPECTFUL
C&F RELATIONSHIP REVIEW knowledgeable TREASURY
CONSUMER LENDING PEOPLE-FOCUSED CHECKING
I-DEPOSIT24 CONVENIENT SAVINGS
Focused on You
COMMUNITY SUPPORT COMPETITIVE business lending
CARING
MOBILE BANKING FRIENDLY
UNDIVIDED ATTENTION
VALUE
cutting edge technology
C&F COMPANY CONNECTION
trusted advisor LINE OF CREDIT MONEY MARKET
BIG BANK CAPABILITIES
MORTGAGE LOAN
responsible
VALUE
SMALL BANK SERVICE
personalized service
CHARACTER
ACCESSIBLE
putting people first ACTIVE
DEDICATION HOME EQUITY LINE OF CREDIT TELEBANK
2015 ANNUAL REPORT