C&F Financial Corporation
Annual Report 2018
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 26 retail branches located
in Virginia.
C&F Mortgage Corporation originates and sells residential mortgages
throughout Virginia, West Virginia, Maryland, North Carolina and
South Carolina. Through its subsidiary, C&F Mortgage also provides
residential appraisal services.
C&F Finance Company specializes in new and used indirect auto,
marine, and recreational vehicle lending in select areas of the following
states: Alabama, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky,
Maryland, Minnesota, 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 C&F Bank’s 26 retail
branch locations.
Larry Dillon was named C&F Bank
President in 1989.
Larry G. Dillon: A Legacy
of Integrity and Commitment
Mr. Robinson and Larry in 1997.
Larry, with his wife, Renaye, and
Vernon Dennis, serving his “world
famous hot dogs” to C&F employees.
Larry G. Dillon, C&F Bank’s CEO and Chairman for 29 years, announced his transition
to the role of Executive Chairman in December of 2018. Over his career, Larry has
deeply shaped our company with three business philosophy themes: serving others, a
family culture in the workplace and focusing on the long-term success of the company.
Larry’s commitment to serving others is the foundation of his character, with numerous
examples found throughout his career and life in the community. His commitment to the
West Point School Board, where he served as a member and/or chairman for nearly 20
years, was involved in the improvements that resulted in the district being ranked #1 in
Virginia. Similarly, Larry served as both President and a member of the Board of Directors
of the Virginia Bankers Association, where he continually advanced the critical role of
independent community banks throughout the Commonwealth. His volunteerism efforts
have greatly benefitted the overall social and economic strength of the communities C&F
serves and the citizens who live and work in them.
Larry’s devotion to exceptional customer service was instilled in him by his treasured
mentor and predecessor, William T. “Bill” Robinson, who always encouraged Larry to find
a way to accommodate a customer’s needs. This ideal, coupled with Larry’s community-
first outlook, has led generations of C&F employees to look for ways to help enrich the
lives of others with both our products and devoted service.
Importantly, in a world that often places priority on pursuing short-term wins, Larry
has always been a prudent visionary who kept his focus on the long-term performance
and profitability of our company. He is well known for his emphasis on being “the best
of the best,” rather than simply growing for the sake of becoming bigger. This wise
philosophy led to the addition of C&F Mortgage Corporation in 1995 and C&F Finance
Company in 2002. Larry’s approach also led to the expansion of the Bank from its
historic West Point and New Kent markets to the Peninsula and the cities of Richmond,
Williamsburg and Charlottesville. This growth continued with the addition of Central
Virginia Bank employees and customers, which strengthened our company for the
future and gave all of our customers more options for service.
Larry arranged for Babe Heffron,
WWII veteran and member of the
HBO-depicted “Band of Brothers,” to
speak to the students of several local
high schools on numerous occasions.
Larry will continue to be an active part of our company’s future in his role of Executive
Chairman. As he has done throughout his storied career, he will continue his mission to
ensure that C&F serves the community well into the future. Furthermore, he will always
remind our team to find ways to say yes to our customers while keeping a keen eye on
the future.
We are forever indebted to Larry for his integrity and commitment to our
company and its key stakeholders: our customers, employees, shareholders, and the
communities we serve.
Thank you Larry.
Larry served as Chairman of the fundraising committee that was able to fund the
02
construction of the Robinson-Olsson Auditorium & Fine Arts Center with zero debt.
01234560369121505000100001500020000012345605000100001500020000Earnings Per Share (assuming dilution)Net Income (in thousands) Return on Average AssetsReturn on Average EquityC&F Financial Corporation Financial Performance2014 2015 2016 2017 2018 $12,344$6,572 $3.59 $3.68 $1.88$13,459 $12,530 $3.89012345603691215050001000015000200002014 2015 2016 2017 201810.32%4.58%9.90% 9.87%01234560.00.20.40.60.81.01.20369121505000100001500020000 .93% .45% .96%.92% $13,215* $3.79*9.20%* .90%**Represents a non-U.S. GAAP financial measure. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Use of Certain Non-U.S. GAAP Financial Measures” included in the accompanying Form 10-K for the fiscal year ended December 31, 2018 for additional information regarding the derivation of these measures.03$18,020 $5.1512.40%1.19% Letter to Our ShareholdersIt is my pleasure to present C&F Financial Corporation’s (“C&F”) 2018 annual report. I would like to start by addressing the leadership change that took place on January 1, 2019. Larry Dillon, C&F’s CEO for 29 years, transitioned to the role of Executive Chairman, as part of a long-planned succession process, which he initiated several years ago. Since becoming CEO in 1989, at only the age of 36, Larry has led our company through extraordinary growth and innovation. At the time, C&F consisted of only C&F Bank with six branches, fewer than 95 employees and $141.5 million in total assets. Today, the Bank has 26 branches, and C&F employs more than 600 associates with over $1.5 billion in total assets. Still, it’s important to note that Larry’s leadership has always emphasized profitable growth versus growth just to become larger. This philosophy led to business opportunities that added C&F Mortgage, C&F Finance and C&F Wealth Management to the company, creating a diversified business structure that has significantly contributed to earnings growth over the years. Beyond these accomplishments, Larry has given so much to this company, and to me personally, through his mentorship and guidance. I am forever grateful for what he has done and will continue to do for C&F and I am looking forward to the future that lies ahead of us. We have much to celebrate, as we produced record earnings in 2018 and made significant progress towards attaining our longer-term strategic objectives. Net income for the year ended December 31, 2018 was $18.0 million, or $5.15 per share assuming dilution. This compares favorably to last year’s net income of $13.2 million, or $3.79 per share assuming dilution, as adjusted for the one-time revaluation of C&F’s net deferred tax assets as a result of the Tax Cuts and Jobs Act, which permanently reduced the federal income tax rate to 21 percent from the maximum rate of 35 percent prior to its passage. The Corporation’s returns on average equity (ROE) and average assets (ROA) for the year ended December 31, 2018, were 12.40 percent and 1.19 percent, respectively. Again, this compares favorably to last year’s adjusted ROE of 9.20 percent and adjusted ROA of 0.90 percent. Furthermore, our results compare favorably to financial institutions we consider our peers, as has been the case for many years. For 2018, average ROE and ROA for our peers was 8.37 percent and .95 percent, respectively.04Thomas F. CherryPresident & Chief Executive Officer While the increase in net income at each of our primary business segments includes the effect of the lower federal corporate income tax rate in 2018, it also reflects our focus on growing higher-yielding earning assets at the Bank and pursuing better asset quality at C&F Finance. In addition to these achievements, C&F Wealth Management reported another increase in net income year-over-year and is well-positioned for 2019 and beyond. Finally, although C&F Mortgage Corporation’s loan production volume was down in 2018, it outperformed loan production and profitability trends in the broader mortgage industry, as rising interest rates led to lower production volumes and decreased profitability.C&F’s assets exceeded $1.5 billion at the end of 2018. Total loans grew to $1.06 billion at the end of 2018 from $1.03 billion at the end of 2017, consisting primarily of an increase at the Bank to $762.5 million from $732.5 million. This growth was largely funded by excess liquidity resulting, in part, from growth in lower-cost customer deposits, which rose by $10.2 million during 2018. Our capital remains strong, which is critical to our safety, soundness and ability to invest in our future. Even after increasing dividends by 8.8 percent and repurchasing $1.1 million of C&F common stock during 2018, our shareholders’ equity increased to $152.0 million at the end of 2018 from $141.7 million at the end of 2017. C&F Bank saw record loan originations over the last two years and this will continue to be a primary goal in 2019 and beyond. Our investment in the commercial lending teams over the past several years continues to pay dividends for us. In addition to the increase in the volume of loans being originated, we are now able to originate larger and more complex loans because of the higher-caliber talent of our commercial lending teams, in conjunction with the company’s capital growth mentioned above. We will continue to recruit experienced commercial lending officers in our current and contiguous markets and expect another good year of loan production in 2019.C&F Finance continues to face strong competition in the non-prime automobile business, and we continue to implement new strategies to address this environment. The increase in loans in 2018 was a result of the expansion of programs to include marine and recreational vehicles. These contracts are for prime applicants, meaning individuals with higher credit scores, and are therefore priced at rates lower than our non-prime automobile loans. However, due to the higher credit quality of these loans, losses are anticipated to be substantially lower than our traditional non-prime automobile portfolio. We plan to continue to grow this part of our business in 2019. Additionally, changes to our underwriting standards and the implementation of scorecard technology several years ago resulted in a decline in charge-offs in our non-prime automobile business in 2018, and we expect that these charge-off levels will continue in 2019. We are also adding more sales associates throughout the country in an effort to expand our dealer base and increase our portfolio of non-prime automobile loans.As mentioned previously, production was down at C&F Mortgage as the changing economic environment impacted consumer demand. Rates have risen over the last two years and the refinance business slowed substantially, decreasing overall production in the industry. We believe we achieved better financial results than the industry because we have pursued a strategy based on providing loans to help customers buy properties, rather than overly relying on the refinance business as is the case with many of our competitors. Success in the mortgage business is highly driven by long-term retention of quality loan officers and we have consistently placed a high degree of focus on this objective. We will continue to actively recruit quality, experienced loan officers and develop new loan officers through our loan officer school. We have much to celebrate, as we produced record earnings in 2018 and made significant progress towards attaining our longer-term strategic objectives. 05 C&F Wealth Management continues its transition from a transaction-based fee business model to one more focused on total assets under management and associated advisory fees. We believe this approach is better for both our customers and the long-term profitability of C&F Wealth Management, as we have seen increases in net income over the past two years. We are also seeing much greater teamwork between C&F Wealth Management and our other lines of business, which creates significant cross-sell opportunities and deeper customer relationships. We anticipate this trend to continue.The financial services industry is experiencing an incredible shift towards a mobile-centric customer experience, which is driven by customers’ rapidly evolving expectations and behaviors. Keeping pace in this dynamic environment is critical to the long-term success of our company. To address this transformation, we will continue to execute our comprehensive digital strategy, which includes proactively educating our customers on digital banking options available to them, so that they can make the best decisions for their banking needs. Last year, the number of customers using our mobile banking services grew 16 percent at the Bank and continues to accelerate each month. Mobile deposit functionality for both individuals and businesses is one of the most popular features of our service, now numbering over 4,000 transactions per month. We also added ”real-time,” or instant, transaction alerts to our mobile service in 2018, which enables customers to monitor their account balances and quickly identify potential unauthorized transactions on their accounts. We are planning for many developments in the digital banking space in 2019, including the Bank’s rollout of Zelle in the first quarter. Zelle is a nationally recognized peer-to-peer payment service that provides a simple, safe and secure way to pay individuals you know. For example, splitting a check at a restaurant or paying a babysitter will now be much more convenient for our customers when they use Zelle. Although digital experiences and conveniences are critical, our ability to blend both the digital and in-person experience for our customers at our branches is at the forefront. With this in mind, we plan to renovate many of our Bank branches in the coming years. Our goal is to enhance our branches’ functionality in order to serve as a meeting place for customers to seek and receive sound advice on strategies for borrowing and saving money. Our strategy will rely on a balanced approach of financial expertise and new technology combined with the traditional personal and caring service we have delivered for many years. We have partnered with an architectural firm specializing in community banking design to help us in this effort. As we discussed in previous years’ letters, Charlottesville is a major focal point in our strategic expansion. Since we opened our first location in 2017, the team has successfully expanded the Bank’s presence in the market. With this success and key talent on board, we plan to open a second location in Charlottesville in the next year. In addition to our new location in Charlottesville, we will soon open a C&F Financial Center in the heart of the New Town business district in Williamsburg. The center will include a commercial banking team, wealth management advisors and mortgage services. We will open a similar facility in downtown Richmond that will include all the services of the center in Williamsburg as well as a new full-service retail branch. These financial centers will provide customers with a convenient and innovative one-stop-shop experience, while the company achieves better collaboration, synergies and teamwork. Attracting and retaining strong talent is an industry-wide challenge that we will continue to address in 2019 at all our companies. This challenge is a result of many factors including the growing competitive market for top talent, the changing landscape of skills businesses require in their workforce, expectations of workplace flexibility and overall low unemployment. Therefore, we will continue to evolve our strategy for employee retention and recruitment by investing in professional development programs and industry training; providing employees with flexible options on location of workplace and hours of work; and supporting employees and their families with innovative benefits like our on-site health center at our Stonehouse headquarters. 06Although digital experiences and conveniences are critical, our ability to blend both the digital and in-person experience for our customers at our branches is at the forefront. This center offers on-site healthcare for employees and their families and is part of a comprehensive company-
wide initiative designed to increase employee focus on wellness and prevention. These programs are offered
in addition to our already competitive compensation package, education assistance and matching retirement
contributions, to name a few.
We have consistently maintained that a strong community benefits everyone — our customers, employees
and shareholders. Our company’s diversification across four subsidiaries has always been one of our greatest
strengths, and we leveraged this teamwork to give back to the community in 2018. Through the “C&F Gives
Back” initiatives, over 75 company employees participated in the annual Anthem Corporate Run in Richmond
to benefit Fit4Kids, a non-profit agency dedicated to improving the diet and physical fitness of children in the
communities we serve. We also worked together as a team to collect over 1,000 jars of peanut butter for
Powhatan Backpacks of Love, an agency providing weekend meals for children in low-to-moderate income
households. Perhaps the greatest example of our C&F community service efforts is our annual Santa Tree
program, which provides holiday gifts for over 300 local children in need. I am very proud of our employees
who work together throughout the company to make our communities a better place to live and work.
Like any year, 2019 will not be without its challenges. We anticipate certain negative external factors
will play a major role in the banking industry’s performance, and we are focused on staying on top of these
challenges. These factors include:
• A changing rate environment. As dissension continues amongst members of the Federal Open Market
Committee (FOMC) on the direction of future interest rate policy, we have positioned ourselves to balance risk
and reward from the Fed’s policy decisions and market factors. Under the current rate environment, the Bank
continues to battle margin compression as costs of and competition for customer deposits have increased,
while yields on loans have remained relatively flat. We believe this will continue throughout 2019.
• Potential for economic contraction and asset deterioration. Asset quality has improved to record
levels at C&F. Frankly, it can’t get much better. Meanwhile, the economy continues to extend its record
period of recovery while the FOMC undertakes contractionary measures and equity markets continue to
experience volatility. We are mindful of these factors and are preparing for asset deterioration and other
factors that come along with eventual economic contraction.
• Regulatory relief. The regulatory bodies that govern the banking sector have been tasked by the
current administration with reducing regulations that hinder growth and inject unnecessary costs into the
banking system. Some of the regulations they intend to address became clearer in 2018 but, thus far, we
have realized very little tangible relief from regulatory burden. We stay apprised of these issues and will
remain an active participant in regulatory reform discussions through our participation with the Virginia
Bankers Association’s Government Relations Committee and membership in the American Bankers
Association and the American Financial Services Association.
Despite these possible headwinds, our outlook for 2019 and beyond is very bright. Our optimism is
driven by the strategic initiatives discussed throughout this letter and by our customers, shareholders and
employees, who make C&F a great organization to do business with, invest in and work for. We are confident
that we will remain a strong, stable and growing financial institution well into the future.
In closing, I want to acknowledge what an honor and privilege it is to serve as C&F’s CEO. I am humbled and
inspired by the support I have received from Larry, the Board and the C&F team. You should feel confident that the
priorities of C&F will not change. Larry and I have worked together for a long time and share the same vision for
C&F. I cherish and celebrate our legacy and values. We will continue to focus on creating value for our shareholders,
providing great service to our customers, serving our communities and making C&F a great place to work.
Thank you once again for your loyal support of our company.
Thomas F. Cherry, President & CEO
07
C&F Financial CorporationC&F Bank Board of DirectorsJulie R. Agnew, Ph.D.*+Associate Professor of Finance & EconomicsMason School of Business The College of William & MaryJ.P. Causey Jr.*+Attorney-at-LawJ.P. Causey Jr., Attorney-at-LawThomas F. Cherry*+ President & Chief Executive OfficerC&F Financial CorporationC&F BankBarry R. Chernack*+Retired PartnerPricewaterhouseCoopers LLPLarry G. Dillon*+Executive Chairman C&F Financial CorporationC&F BankAudrey D. Holmes*+Attorney-at-LawAudrey D. Holmes, Attorney-at-LawJames H. Hudson III*+Attorney-at-LawHudson Law, PLCBryan E. McKernon+President & Chief Executive OfficerC&F Mortgage CorporationJames T. Napier*+PresidentNapier Realtors, ERAC. Elis Olsson*+Director of OperationsMartinair, Inc.Elizabeth R. Kelley*+Managing Director Blue Heron Management, LLCPaul C. Robinson*+Owner & PresidentFrancisco, Robinson & Associates, Realtors* C&F Financial Corporation Board Member+ C&F Bank Board MemberCorporate CounselHudson Law, PLCWest Point, VirginiaIndependent Public AccountantsYount, Hyde & Barbour, PCWinchester, VirginiaC&F Bank Richmond Advisory BoardDavid H. DownsDirector of The Kornblau InstituteVirginia Commonwealth UniversityS. Craig LanePresidentLane & Hamner, PCMeade A. SpottsPresidentSpotts Fain, PCScott E. StricklerTreasurerRobins Insurance Agency, Inc.Adrienne P. WhitakerBusiness Development ExecutiveGreater Richmond ARCC&F Board of Directors: (seated l-r): Larry G. Dillon, Thomas F. Cherry(standing l-r): Audrey D. Holmes, Bryan E. McKernon, James T. Napier, Barry R. Chernack, Elizabeth R. Kelley, C. Elis Olsson, Paul C. Robinson, J. P. Causey Jr., James H. Hudson III, Julie R. Agnew 08C&F Directors C&F Officers & Locations
C&F Bank
Administrative Offices
3600 La Grange Parkway
Toano, Virginia 23168
(757) 741-2201
802 Main Street
West Point, Virginia 23181
(804) 843-2360
Thomas F. Cherry*
President & Chief Executive Officer
Larry G. Dillon*
Executive Chairman
Rodney W. Overby*
Executive Vice President &
Chief Information Officer
John A. Seaman III
Executive Vice President,
Chief Credit Officer
Deborah H. Hall
Senior Vice President,
Director of Credit Administration
Ellen M. Kurek
Senior Vice President,
Director of Credit Services
Jason E. Long*
Senior Vice President,
Chief Financial Officer
Herbert E. Marth Jr.
Senior Banking Executive
Mary-Jo Rawson*
Senior Vice President,
Controller & Secretary
Christopher A. Spillare
Senior Vice President, Treasurer
Matthew H. Steilberg
Senior Vice President,
Director of Retail Banking
Maria R. Sullivan
Senior Vice President,
Chief Human Resources Officer
E. Turner Coggin
First Vice President,
Senior Commercial Underwriter
Sandra S. Fryer
First Vice President,
Application Support Manager
Donna M. Haviland
First Vice President,
Director of Internal Audit
Maureen B. Medlin
First Vice President, Director of Marketing
Deborah R. Nichols
First Vice President, Director of Compliance
Mary B. Randolph
First Vice President, Director of Loan
Documentation & Administration
Helga H. Ridenhour
First Vice President, Director of Operations
Teresa S. Weaver
First Vice President, Retail Market Leader
Leslie A. Campbell
Vice President, Credit Administration
Vernon A. Dennis
Vice President, Facilities Manager
Matthew P. Dolci
Vice President, Controller
Terrence C. Gates
Vice President, Appraisal Review
Tayrn R. Haden
Vice President, Retail Market Leader
Anita W. Hazelwood
Vice President, Treasury Solutions
Taylor E. Johnson
Vice President, Commercial Underwriter
Dollie M. Kelly
Vice President, Quality Assurance
Manager & Security Officer
Kevin E. Kelly
Vice President, Special Assets
Donna A. Mathews
Vice President, Construction Lending
Mary L. Moniz
Vice President, Treasury Consultant
Lori H. Nein
Vice President, Branch Operations Support
Kelly T. Parsons
Vice President, Business Lending
Willis R. Parsons III
Vice President, Credit Administration
Kevin P. Quinn
Vice President, Information Technology
Christopher J. Robb
Vice President, Commercial Underwriter
Steve N. Schuman
Vice President, Loan Servicing Manager
Bobbie T. Washington
Vice President, Treasury Solutions
*Officers of C&F Financial Corporation
C&F Bank Branches
CARTERSVILLE, VIRGINIA
Bryony T. Gills
Assistant Vice President,
Branch Manager
CHARLOTTESVILLE, VIRGINIA
Patrick B. Lowry
Assistant Vice President,
Branch Manager
CHESTER, VIRGINIA
Jacob L. Smith
Assistant Vice President,
Branch Manager
CUMBERLAND, VIRGINIA
Deborah B. Henshaw
Assistant Vice President,
Branch Manager
HAMPTON, VIRGINIA
Jordan K. McCrum
Assistant Vice President,
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 & Brandermill
Maurice V. Dixon
Branch Manager
Midlothian
Jennifer L. Willner
Assistant Vice President,
Branch Manager
NEWPORT NEWS, VIRGINIA
City Center
Eric D. Floyd
Assistant Vice President,
Branch Manager
NORGE, VIRGINIA
Rebecca L. Hardin
Assistant Vice President,
Branch Manager
09
C&F Officers & Locations
POWHATAN, VIRGINIA
Sherelle M. Anderson
Vice President, Branch Manager
PROVIDENCE FORGE, VIRGINIA
Penelope L. Wynn
Vice President, Branch Manager
QUINTON, VIRGINIA
Jessica L. Hoskins
Branch Manager
RICHMOND, VIRGINIA
Patterson Avenue
Mary A. Schoenfelder
Vice President, Branch Manager
Varina
Jamal I. Hasan
Assistant Vice President,
Branch Manager
Wellesley
Terrance L Rogers
Assistant Vice President,
Branch Manager
West Broad
Bina Y. Doshi
Vice President, Branch Manager
SANDSTON, VIRGINIA
Natalee H. Bolton
Assistant Vice President,
Branch Manager
WEST POINT, VIRGINIA
14th Street & Main Street
Bethany K. Bajsert
Assistant Vice President,
Branch Manager
WILLIAMSBURG, VIRGINIA
Jamestown Road
Traci L. Carlson
Vice President, Branch Manager
Longhill Road
Beth M. Hodges
Branch Manager
YORKTOWN, VIRGINIA
Kiln Creek
Dorsey R. Jackson
Assistant Vice President,
Branch Manager
C&F Commercial Banking
Administrative Offices
5208 Monticello Avenue, Suite 150
Williamsburg, Virginia 23188
(757) 841-1732
Mark J. Eggleston
Regional President,
Williamsburg/Peninsula
Henry L. Singleton
Peninsula Senior Executive
Bradford T. Bonney
Vice President,
Relationship Manager
Scott T. McNeill
Vice President,
Relationship Manager
4701 Cox Road, Suite 160
Glen Allen, Virginia 23060
(804) 955-4700
Philip B. Hager
Richmond Senior Executive
Mary F. Landon
First Vice President,
Senior Underwriter
Tracy E. Pendleton
First Vice President,
Relationship Manager
Walter M. Cart Jr.
Vice President, Relationship Manager
Michael D. Gasiorowski
Vice President, Relationship Manager
Matthew J. Ohlschlager
Vice President,
Relationship Manager
304 E. Main Street
Charlottesville, Virginia 22902
(434) 529-3300
William V. Krebs Jr.
Regional President, Central Virginia
C&F Wealth Management
802 Main Street
West Point, Virginia 23181
(804) 843-4584 or (800) 583-3863
William C. Morrison, ChFC
President, Investment Officer
MIDLOTHIAN, VIRGINIA
Douglas L. Hartz
First Vice President, Investment Officer
POWHATAN, VIRGINIA
Mary Ellen Twigg
Assistant Vice President,
Investment Officer
WEST POINT, VIRGINIA
Douglas L. Cash Jr.
First Vice President, Investment Officer
WILLIAMSBURG, VIRGINIA
Jacqueline D. Howard
Assistant Vice President,
Investment Officer
C&F Mortgage Corporation
Administrative Office
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
(804) 858-8300
Bryan E. McKernon
President & Chief Executive Officer
Mark A. Fox
Executive Vice President,
Chief Operating Officer
Donna G. Jarratt
Senior Vice President,
Chief of Branch Administration
Kevin A. McCann
Senior Vice President,
Chief Financial Officer
Michael J. Mazzola
Senior Vice President, Branch &
Loan Officer Training Manager
Timothy A. Back
Vice President,
Secondary Marketing Manager
10
C&F Officers & Locations
Tracy L. Bishop
Vice President, Human Resources Manager
J. Stokeley Fulton Jr.
Vice President, Branch Manager
YORKTOWN, VIRGINIA
Mary. L. Rebholz
Branch Manager
WILLIAMSBURG, VIRGINIA
Matthew D. Sydnor
Branch Manager
CHESAPEAKE, VIRGINIA
MOYOCK, NORTH CAROLINA
Raymond A. Gunter
Branch Manager
O. Chaytor Midgett
Branch Manager
GASTONIA, NORTH CAROLINA
Nancy W. Poteat
Branch Manager
ANNAPOLIS, MARYLAND
William J. Regan
Vice President, Branch Manager
WALDORF, MARYLAND
Timothy J. Murphy
Vice President, Branch Manager
FORT MILL, SOUTH CAROLINA
R.W. Edmondson III
Vice President, Branch Manager
KEYSER, WEST VIRGINIA
Karen R. Pfeil
Branch Manager
CERTIFIED APPRAISALS, LLC
MIDLOTHIAN, VIRGINIA
H. Daniel Salomonsky
Vice President, Appraisal Manager
Madeline M. Witty
Vice President, Chief Compliance Officer
Georgia G. Parise
Vice President, Underwriting
& Risk Management
Julia A. Reynolds
Vice President, Project Manager
Michael J. Vogelbach
Vice President, Manager of
Information Systems
C&F Mortgage Corporation Offices
CHARLOTTESVILLE, VIRGINIA
William E. Hamrick
Vice President, Branch Manager
FREDERICKSBURG, VIRGINIA
Timothy J. Murphy
Vice President, Branch Manager
FISHERSVILLE, VIRGINIA
HARRISONBURG, VIRGINIA
Vickie J. Painter
Branch Manager
LYNCHBURG, VIRGINIA
Shirley D. Falwell
Branch Manager
MIDLOTHIAN, VIRGINIA
Brandon W. Beswick
Vice President, Branch Manager
Donald R. Jordan
Vice President, Branch Manager
Phillip T. Coon
Vice President, Branch Manager
Daniel J. Murphy
Vice President, Branch Manager
Jeffrey B. Baldwin
Branch Manager
GLEN ALLEN, VIRGINIA
Page C. Yonce
Vice President, Branch 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
Executive Vice President,
Chief Credit Officer
Thomas W. Young
Senior Vice President, Operations
Kevin F. Jones Jr.
Vice President of Originations
Charles A. Lamont Jr.
Vice President of Sales
Daniel H. Mullins
Assistant Vice President, Operations
Oneida C. Wood
Assistant Vice President,
Director of Human Resources
Sabrina K. Carroll
Director of Loan Servicing
FLORIDA
ILLINOIS
IOWA
MARYLAND
MISSOURI
Serving the following states:
ALABAMA
GEORGIA
INDIANA
KENTUCKY
MINNESOTA
NEW JERSEY NORTH CAROLINA
OHIO
TENNESSEE
VIRGINIA
PENNSYLVANIA
TEXAS
WEST VIRGINIA
11
12C&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:Jason E. Long Chief Financial OfficerC&F Financial CorporationP.O. Box 391, West Point, VA 23181Stock ListingCurrent market quotations for the common stock of C&F Financial Corporation are available under the symbol CFFI.Stock Transfer AgentAmerican Stock Transfer & Trust Company, LLC serves as transfer agent for the Corporation.You may write them at:6201 15th Avenue, Brooklyn, NY 11219telephone them toll-free at: (800) 937-5449or visit their website at: www.astfinancial.comInvestor Relations & Financial Statements UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
or
For the transition period from _________ to _________
Commission file number 000-23423
C&F FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation or organization)
54-1680165
(I.R.S. Employer Identification No.)
802 Main Street
West Point, VA 23181
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (804) 843-2360
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 par value per share
Title of each class
The NASDAQ Stock Market LLC
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated Filer
Smaller reporting company
Emerging growth company
☒
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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, 2018 was $205,720,132.
There were 3,486,861 shares of common stock, $1.00 par value per share, outstanding as of February 22, 2019.
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 16, 2019 are
incorporated by reference in Part III of this report.
TABLE OF CONTENTS
PART I
Page
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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16
24
24
24
24
25
27
28
67
70
118
118
121
121
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16. FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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ITEM 1.
BUSINESS
General
PART I
C&F Financial Corporation (the Corporation) is a bank holding company that was incorporated in March 1994
under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of Citizens and Farmers Bank
(the Bank or C&F Bank), which is an independent commercial bank chartered under the laws of the Commonwealth of
Virginia. C&F Bank originally opened for business under the name Farmers and Mechanics Bank on January 22, 1927.
C&F Bank has the following five wholly-owned subsidiaries, all incorporated under the laws of the Commonwealth of
Virginia:
• C&F Mortgage Corporation
• C&F Finance Company
• C&F Wealth Management Corporation
• C&F Insurance Services, Inc.
• CVB Title Services, Inc.
The Corporation operates in a decentralized manner in three principal business segments: (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. C&F Wealth Management Corporation, organized in April 1995, is a full-service brokerage firm offering a
comprehensive range of wealth management services and insurance products through third-party service providers. C&F
Insurance Services, Inc. was organized in July 1999 for the primary purpose of owning an equity interest in an independent
insurance agency that operates in Virginia and North Carolina. CVB Title Services, Inc. was organized for the primary
purpose of owning an equity interest in a full service title and settlement agency. The financial position and operating
results of C&F Wealth Management Corporation, C&F Insurance Services, Inc. and CVB Title Services, Inc. are not
significant to the Corporation as a whole.
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 Central Virginia Bankshares, Inc. (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.
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 25 Virginia branches located one each in Cartersville, Charlottesville, 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,
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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. Retail banking revenues
and operations are not materially affected by seasonal factors; however, public deposits tend to increase with tax
collections primarily in the fourth quarter of each year and decline with spending thereafter. At December 31, 2018, assets
of the retail banking segment totaled $1.4 billion. For the year ended December 31, 2018, net income for this segment
totaled $10.6 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 11 locations in Virginia, two in Maryland, two in North
Carolina, one in South Carolina, and one in West Virginia. The Virginia offices are located one each in Charlottesville,
Chesapeake, 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 offices are located in
Gastonia and Moyock. The South Carolina office is located in Fort Mill. The West Virginia office is located in Keyser.
C&F Mortgage offers a wide variety of residential mortgage loans, which are originated for sale generally to the following
investors: Penny Mac Corporation; Wells Fargo Home Mortgage; AmeriHome Mortgage Company, LLC; the Virginia
Housing Development Authority (VHDA); and Freedom Mortgage Corporation. 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. C&F Mortgage also has a division, Lender Solutions, that provides certain mortgage loan origination functions
to third parties and a subsidiary, Certified Appraisals LLC, which provides ancillary mortgage loan origination services to
third parties for residential appraisals. Revenues from mortgage banking operations consist principally of gains on sales
of loans to investors in the secondary mortgage market, loan origination fee income and interest earned on mortgage loans
held for sale. Revenues and income from mortgage banking, which are driven primarily by the origination and sale of
mortage loans, are subject to seasonal factors, including the volume of home sales in the residential real estate market,
which typically rises during spring and summer months and declines during fall and winter months. However, seasonal
trends may be disrupted by cyclical and other economic factors that affect the residential real estate market. At
December 31, 2018, assets of the mortgage banking segment totaled $56.1 million. For the year ended December 31, 2018,
net income for this segment totaled $1.9 million.
Consumer Finance
We conduct consumer finance activities through C&F Finance. C&F Finance is a regional finance company
purchasing automobile, marine and recreational vehicle (RV) loans throughout Virginia and in portions of Alabama,
Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Maryland, Minnesota, Missouri, New Jersey, North Carolina, Ohio,
Pennsylvania, Tennessee, Texas and West Virginia through its offices in Richmond and Hampton, Virginia, and in
Nashville, Tennessee. C&F Finance is an indirect lender that primarily 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 automobile 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. In addition, because 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. Beginning in 2016 with C&F Finance’s implementation of a scorecard model
for purchasing loan contracts, the credit worthiness of borrowers at origination has improved for automobile loans
purchased by C&F Finance and both the interest rates charged and level of credit losses experienced have decreased. In
addition to non-prime automobile financing, beginning in the first quarter of 2018, C&F Finance expanded its lending
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portfolio to include marine and RV loan contracts in the prime sector. These contracts are also purchased on an indirect
basis through a referral program administered by a third party. Because these contracts are for prime loans made to
individuals with higher credit scores, they are priced at rates substantially lower than the non-prime automobile portfolio.
Revenues from consumer finance operations consist principally of interest earned on automobile, marine and RV loans.
While the consumer finance segment’s loans outstanding and interest income are not materially affected by seasonal
factors, delinquencies on automobile loans are generally highest in the period from November through January, related in
part to seasonal trends affecting borrowers, including consumer spending. At December 31, 2018, assets of the consumer
finance segment totaled $297.6 million. For the year ended December 31, 2018, net income for this segment totaled $6.7
million.
Employees
At December 31, 2018, we employed 634 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, insurance companies
and other lending and deposit platforms offered by non-bank financial technology firms. 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 specifically in the Bank’s primary service area in the Hampton to
Charlottesville 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, establishing long-term customer relationships, building customer loyalty and providing traditional and digital
products and services to address the specific needs of our customers. We target individual customers, small-to-medium
size business customers and acquisition, development and construction loan customers in our markets.
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,
small local broker operations and internet lending platforms. 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 continue to evolve because of regulatory reforms and initiatives,
including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
While C&F Mortgage has kept pace with all aspects of the regulations issued pursuant to the Dodd-Frank Act and by the
Consumer Financial Protection Bureau (CFPB), other such legislative and regulatory initiatives in the future have the
potential to affect the operations of C&F Mortgage. Given the far-reaching effect of the Dodd-Frank Act and CFPB
regulations on mortgage finance, compliance with the requirements of the Dodd-Frank Act and CFPB regulations has
required and may continue to require substantial changes to mortgage lending systems and processes and other
implementation efforts.
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To operate profitably in this competitive and regulatory environment, mortgage companies 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, expanding into new markets that offer strategic
growth opportunities, providing an infrastructure that manages regulatory changes efficiently and effectively, utilizing
technology to improve efficiency and consistency in its operations and to mitigate compliance risk, offering products that
are competitive in both loan parameters and pricing, 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. 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 third-party counterparties (i.e., investors), 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.
Over the past several years, 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. In
addition, certain competitors in the industry have (i) relaxed underwriting standards resulting in higher delinquencies and
charge-offs for the industry and (ii) used loan pricing strategies resulting in lower loan yields. 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
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.
6
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 enacted
on July 21, 2010 and, in part, was intended to implement significant structural reforms to the financial services industry.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the EGRRCPA) was enacted
to reduce the regulatory burden on certain banking organizations, including community banks, by modifying or eliminating
certain federal regulatory requirements. While the EGRRCPA maintains most of the regulatory structure established by
the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of
less than $10 billion as well as for larger banks with assets above $50 billion. In addition, the EGRRCPA included
regulatory relief for community banks regarding regulatory examination cycles, call reports, application of the Volcker
Rule (proprietary trading prohibitions), mortgage disclosures, qualified mortgages, and risk weights for certain high-risk
commercial real estate loans. However, federal banking regulators retain broad discretion to impose additional regulatory
requirements on banking organizations based on safety and soundness and U.S. financial system stability considerations.
The Corporation continues to experience ongoing 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, the
EGRRCPA, and other potential regulatory reforms cannot yet be fully predicted and will depend to a large extent on the
specific regulations that are to be adopted in the future. Certain aspects of the Dodd-Frank Act and the EGRRCPA are
discussed in more detail below.
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 systems, information systems, data and cybersecurity, loan documentation,
credit underwriting, interest rate exposure and risk management, vendor management, executive management and its
compensation, corporate governance, 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, as further discussed below.
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
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FDIC may decline to enforce the provisions if it determines that a waiver is in the best interest of the DIF. An FDIC claim
for damages is superior to claims of stockholders of an insured depository institution or its holding company but is
subordinate to claims of depositors, secured creditors and holders of subordinated debt, other than affiliates, of the
commonly controlled insured depository institution.
The Federal Deposit Insurance Act (the FDIA) provides that amounts received from the liquidation or other
resolution of any insured depository institution must be distributed, after payment of secured claims, to pay the deposit
liabilities of the institution before payment of any other general creditor or stockholder 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
Basel III Capital Framework. 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 of other capital instruments, principally 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 and minimum capital ratios required to be maintained by banks were effective January 1,
2015. The Basel III Final Rules also include a requirement that banks maintain additional capital (the “capital conservation
buffer”), which was phased in beginning January 1, 2016 and was fully phased in effective January 1, 2019. The Basel III
Final Rules and fully phased in capital conservation buffer require banks to maintain (i) a minimum ratio of CET1 to risk-
weighted assets of at least 4.5 percent, plus a 2.5 percent capital conservation buffer (which is added to the minimum
CET1 ratio, effectively resulting in a required ratio of CET1 to risk-weighted assets of at least 7 percent), (ii) a minimum
ratio of Tier 1 capital to risk-weighted assets of at least 6.0 percent, plus the capital conservation buffer (effectively
resulting in a required Tier 1 capital ratio of 8.5 percent), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital
to risk-weighted assets of at least 8.0 percent, plus the capital conservation buffer (effectively resulting in a required total
capital ratio of 10.5 percent) and (iv) a minimum leverage ratio of 4 percent, calculated as the ratio of Tier 1 capital to
average total assets, subject to certain adjustments and limitations.
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. For 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 percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1.
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 percent 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.
Community Bank Leverage Ratio. As a result of the EGRRCPA, the federal banking agencies were required to
develop a Community Bank Leverage Ratio (the ratio of a bank’s tangible equity capital to average total consolidated
assets) for banking organizations with assets of less than $10 billion, such as the Bank. On November 21, 2018, the federal
8
banking agencies invited public comment on their proposal to establish the Community Bank Leverage Ratio framework.
Under the proposal, a community banking organization would be eligible to elect the Community Bank Leverage Ratio
framework if it has less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet
exposures, and a Community Bank Leverage Ratio greater than 9 percent. A qualifying community banking organization
that has chosen the proposed framework would be automatically considered in compliance with the Basel III capital
requirements and would be exempt from the complex Basel III risk-based capital calculations. Such a community banking
organization would be considered to have met the capital ratio requirements to be “well capitalized” for the federal banking
agencies’ Prompt Corrective Action rules provided it has a Community Bank Leverage Ratio greater than 9 percent.
Because the proposal has not been finalized and a final rule has not been issued, it is difficult at this time to predict when
or how this new capital ratio will ultimately be applied to community banking organizations or to predict the specific
effects of the final rule.
Small Bank Holding Company. The EGRRCPA also expanded the category of bank holding companies that may
rely on the Federal Reserve Board’s Small Bank Holding Company Policy Statement by raising the maximum amount of
assets a qualifying bank holding company may have from $1 billion to $3 billion. In addition to meeting the asset threshold,
a bank holding company must not engage in significant nonbanking activities, not conduct significant off-balance sheet
activities, and not have a material amount of debt or equity securities outstanding and registered with the SEC (subject to
certain exceptions). The Federal Reserve Board may, in its discretion, exclude any bank holding company from the
application of the Small Bank Holding Company Policy Statement if such action is warranted for supervisory purposes.
In August 2018, the Federal Reserve Board issued an interim final rule to apply the Small Bank Holding Company
Policy Statement to bank holding companies with consolidated total assets of less than $3 billion. The policy statement,
which, among other things, exempts certain bank holding companies from minimum consolidated regulatory capital ratios
that apply to other bank holding companies. As a result of the interim final rule, which was effective August 30, 2018, the
Corporation expects that it will be treated as a small bank holding company and will no longer be subject to regulatory
capital requirements. The comment period on the interim final rule closed on October 29, 2018. The Bank remains subject
to the regulatory capital requirements described above.
Limits on Dividends
The Corporation is a legal entity that is separate and distinct from the Bank. A significant portion of the revenues
of the Corporation result from dividends paid to it by the Bank. Both the Corporation and C&F Bank are subject to laws
and regulations that limit the payment of dividends, including limits on the sources of dividends and requirements to
maintain capital at or above regulatory minimums. Banking regulators have indicated that Virginia banking organizations
should generally pay dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses,
interest and taxes accrued or due by the bank and (2) if the prospective rate of earnings retention appears consistent with
the organization’s capital needs, asset quality and overall financial condition. In addition, 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 implemented far-reaching changes across the financial regulatory landscape, including
changes that have affected 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.
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• 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 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), as subsequently amended by the EGRRCPA which provides
an exemption from the Volcker Rule for many community banking organizations.
•
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, 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 is based on a
statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the
institution’s weighted average CAMELS component rating, and is subject to further adjustments including those related
to levels of unsecured debt and brokered deposits (not applicable to banks with less than $10 billion in assets). At
December 31, 2018, total base assessment rates for institutions that have been insured for at least five years range from
1.5 to 30 basis points applying to banks with less than $10 billion in assets.
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
10
designated reserve ratio to 1.35 percent and removed the upper limit on the designated reserve ratio, (ii) requires that the
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 reserve ratio from 1.15 percent to 1.35 percent – which
requirement was met by rules adopted by the FDIC during 2016. The FDIC adopted a DIF restoration plan, which resulted
in the fund reserve ratio exceeding 1.35 percent by September 30, 2018, as discussed below. The FDIA requires that the
FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis.
On June 30, 2016, the reserve ratio rose to 1.17 percent, which triggered three major changes to deposit insurance
assessments beginning for the third quarter of 2016: (i) the range of initial assessment rates for all institutions declined
from 5 to 35 basis points to 3 to 30 basis points (which are included in the total base assessment rates in the above
paragraph); (ii) surcharges equal to an annual rate of 4.5 basis points began for insured depository institutions with total
consolidated assets of $10 billion or more; and (iii) the revised assessment method described above was implemented.
At September 30, 2018, the reserve ratio was 1.36 percent. Banks with less than $10 billion in total consolidated
assets will receive credits to offset the portion of their assessments that help to raise the reserve ratio to 1.35 percent.
Beginning when the reserve ratio is at or above 1.38 percent, the FDIC will automatically apply such a bank’s credits to
reduce its regular DIF assessment up to the entire amount of the assessment.
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 financial condition, managerial resources, capital position and any asset
concentrations (including commercial real estate loan concentrations) 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, the applicant’s risk management programs and processes,
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.
Certain Transactions by Insured Banks with their Affiliates. There are statutory restrictions related to the extent
bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in “covered
transactions” with their insured depository institution (i.e., banking) subsidiaries. In general, an “affiliate” of a bank
includes the bank’s parent holding company and any subsidiary thereof. However, an “affiliate” does not generally include
the bank’s operating subsidiaries. The Dodd-Frank Act amended the definition of affiliate to include any investment fund
for which the bank or one of its affiliates is an investment adviser. A bank (and its subsidiaries) may not lend money to,
or engage in other covered transactions with, its non-bank affiliates if the aggregate amount of covered transactions
outstanding involving the bank, plus the proposed transaction, exceeds the following limits: (a) in the case of any one such
affiliate, the aggregate amount of covered transactions of the bank and its subsidiaries cannot exceed 10 percent of the
bank’s capital stock and surplus; and (b) in the case of all affiliates, the aggregate amount of covered transactions of the
bank and its subsidiaries cannot exceed 20 percent of the bank’s capital stock and surplus. “Covered transactions” are
defined to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate,
a purchase of assets from an affiliate, the acceptance of securities issued by an affiliate as collateral for a loan or extension
of credit to any person or company, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate,
securities borrowing or lending transactions with an affiliate that creates a credit exposure to such affiliate, or a derivatives
11
transaction with an affiliate that creates a credit exposure to such affiliate. Certain covered transactions are also subject to
collateral security requirements.
Covered transactions as well as other types of transactions between a bank and a bank holding company must be on
market terms, which means that the transaction must be conducted on terms and under circumstances that are substantially
the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with or involving
nonaffiliates or, in the absence of comparable transactions, that in good faith would be offered to or would apply to
nonaffiliates. Moreover, certain amendments to the BHCA provide that, to further competition, a bank holding company
and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit,
lease or sale of property of any kind, or furnishing of any service.
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 2017, 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, 2018, 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 smaller
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
12
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 percent of the total loan amount. Under the EGRRCPA,
most residential mortgage loans originated and held in portfolio by a bank with less than $10 billion in assets will be
designated as “qualified mortgages.” Higher-priced qualified mortgages (e.g., sub-prime 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.
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, 2019, the Corporation and C&F Finance were not subject to supervision by the CFPB.
Brokered Deposits. Section 29 of the FDIA and FDIC regulations generally limit the ability of any bank to accept,
renew or roll over any brokered deposit unless it is “well capitalized” or, with the FDIC’s approval, “adequately
capitalized.” However, as a result of the EGRRCPA, the FDIC is undertaking a comprehensive review of its regulatory
approach to brokered deposits, including reciprocal deposits, and interest rate caps applicable to banks that are less than
“well capitalized.” At this time, it is difficult to predict the impact, if any, of the FDIC’s review of brokered deposit
regulations.
Other Regulations
Prompt Corrective 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, 2018, 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
13
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.
In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions
(including bank holding companies and banks) from establishing or maintaining incentive-based compensation
arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive
officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead
to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing
whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate
risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that
incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to
appropriately balance risk and reward. The proposed rules also impose additional corporate governance requirements on
the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment
period for these proposed rules 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
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.
In August 2018, the CFPB published a final rule that provides an exception to the requirement to deliver an annual privacy
notice if a financial institution only provides nonpublic personal information to unaffiliated third parties under limited
exceptions under the Gramm-Leach-Bliley Act and related regulations, and has not changed its policies and practices
regarding disclosure of nonpublic personal financial information from those disclosed in the most recent privacy notice
provided to the customer. The final rule was effective September 17, 2018.
In August 2018, the CFPB published its final rule to update Regulation P pursuant to the amended Gramm-Leach-
Bliley Act. Under this rule, certain qualifying financial institutions are not required to provide annual privacy notices to
customers. To qualify, a financial institution must not share nonpublic personal information about customers except as
described in certain statutory exceptions which do not trigger a customer’s statutory opt-out right. In addition, the financial
institution must not have changed its disclosure policies and practices from those disclosed in its most recent privacy
notice. The rule sets forth timing requirements for delivery of annual privacy notices in the event that a financial institution
that qualified for the annual notice exemption later changes its policies or practices in such a way that it no longer qualifies
for the exemption.
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 added regulations to facilitate 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 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, and report it to OFAC.
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.
14
Cybersecurity. The federal banking agencies have adopted guidelines for establishing information security
standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board
of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and
processes related to information technology and the use of third parties in the provision of financial products and services.
The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk
management processes also address the risk posed by compromised customer credentials, and also expect financial
institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and
maintenance of the institution’s operations after a cyber-attack. If the Corporation or the Bank fails to meet the expectations
set forth in this regulatory guidance, the Corporation or the Bank could be subject to various regulatory actions and any
remediation efforts may require significant resources of the Corporation or the Bank.
In October 2016, the federal banking agencies issued proposed rules on enhanced cybersecurity risk-management
and resilience standards that would apply to very large financial institutions and to services provided by third parties to
these institutions. The comment period for these proposed rules has closed and a final rule has not been published.
Although the proposed rules would apply only to bank holding companies and banks with $50 billion or more in total
consolidated assets, these rules could influence the federal banking agencies’ expectations and supervisory requirements
for information security standards and cybersecurity programs of smaller financial institutions, such as the Corporation
and the Bank.
Stress Testing. As required by the Dodd-Frank Act, the federal banking agencies 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. The EGRRCPA subsequently raised the asset thresholds for company-run
stress testing and mandatory stress testing conducted by the Federal Reserve Board to $50 billion and $100 billion,
respectively. Although these requirements do not apply to the Company and the Bank, 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). The EGRRCPA exempted all banks with less than $10 billion in assets (including
their holding companies and affiliates) from the Volcker Rule, provided that the institution has total trading assets and
liabilities of five percent or less of total assets, subject to certain limited exceptions. In December 2018, the federal banking
agencies invited public comment on a proposal to exclude community banks from the application of the Volcker Rule.
The Corporation believes that its financial condition and its operations are not and will not be significantly affected by the
Volcker Rule, amendments thereto, or its implementing regulations.
Call Reports and Examination Cycle. All institutions, regardless of size, submit a quarterly call report that includes
data used by federal banking agencies to monitor the condition, performance, and risk profile of individual institutions and
the industry as a whole. The EGRRCPA contained provisions expanding the number of regulated institutions eligible to
use streamline call report forms. In November 2018, the federal banking agencies issued a proposal to permit insured
depository institutions with total assets of less than $5 billion that do not engage in certain complex or international
activities to file the most streamlined version of the quarterly call report, and to reduce data reportable on certain
streamlined call report submissions.
In December 2018, consistent with the provisions of the EGRRCPA, the federal banking agencies jointly adopted
final rules that permit banks with up to $3 billion in total assets, that received a composite CAMELS rating of “1” or “2,”
and that meet certain other criteria (including not having undergone any change in control during the previous 12-month
period, and not being subject to a formal enforcement proceeding or order), to qualify for an 18-month on-site examination
cycle.
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Future Regulation
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures,
as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding
companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such
legislation could change banking statutes and the operating environment of the Corporation in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other
financial institutions. The Corporation cannot predict whether any such legislation will be enacted, and, if enacted, the
effect that it, or any implementing regulations, would have on the financial condition or results of operations of the
Corporation. A change in statutes, regulations or regulatory policies applicable to the Corporation or any of its subsidiaries
could have a material effect on the business of the Corporation.
Available Information
The Corporation’s SEC filings are filed electronically and are available to the public over the Internet at the SEC’s
web site at http://www.sec.gov. 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
Risks Related to the Corporation’s 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 19,
2018, the Federal Open Market Committee (FOMC) announced its fourth increase during 2018 for the federal funds rate,
which is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight,
to 2.25 to 2.50 percent. The FOMC’s monetary policy remains accommodative after this increase, thereby supporting
strong labor market conditions and a sustained return to two percent inflation. Financial markets expect two more quarter-
point rate increases to the federal funds rate during 2019. As short-term market interest rates have risen, however, longer-
term market interest rates, including yields on U.S. treasury bonds, remain low. Therefore, we are expecting continued
pressure on our net interest margin due to 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
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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.
Adverse changes in economic conditions in our market areas or adverse conditions in an industry on which a local
market in which we do business is dependent could adversely affect our results of operations and financial condition.
We provide full service banking and other financial services in the Hampton to Charlottesville corridor in Virginia.
Our loan and deposit activities are directly affected by, and our financial success depends on, economic conditions within
these markets, as well as conditions in the industries on which those markets are economically dependent. A deterioration
in local economic conditions or in the condition of an industry on which a local market depends, such as the U.S. military
and related defense contractors and industries, could adversely affect such factors as unemployment rates, business
formations and expansions and housing market conditions. Adverse developments in any of these factors could result in
among other things, a decline in loan demand, a reduction in the number of creditworthy borrowers seeking loans, an
increase in delinquencies, defaults and foreclosures, an increase in classified and nonaccrual loans, a decrease in the value
of loan collateral, and a decline in the financial condition of borrowers and guarantors, any of which could adversely affect
our financial condition or business.
Our risk management framework may not be effective in mitigating risk and loss.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report and
control the risks we face. These risks include, but are not limited to, interest rate, credit, liquidity, operational, reputation,
legal, compliance, economic and litigation risk. Although we assess our risk management program on an ongoing basis
and make identified improvements to it, we can give no assurance that this approach and risk management framework
(including related controls) will effectively mitigate the risks listed above or limit losses that we may incur. If our risk
management program has flaws or gaps, or if our risk management controls do not function effectively, our results of
operations, financial condition or business may be adversely affected.
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, 2018, 43 percent of our loan portfolio consisted of commercial, financial and agricultural loans,
which include loans secured by real estate for builder lines, acquisition and development and commercial development, as
well as commercial loans secured by personal property. These loans generally carry larger loan balances and involve a
greater degree of financial and credit risk than home equity and residential loans. The increased financial and credit risk
associated with these types of loans is a result of several factors, including the concentration of principal in a limited
number of loans and to borrowers in similar lines of business, the size of loan balances, the effects of general economic
conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.
At December 31, 2018, 27 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 vehicles 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
17
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, deterioration in economic conditions may also cause borrowers to default on their mortgages. This may
result in potential repurchase or indemnification liability for 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. We
attempt to maintain an appropriate allowance for indemnification losses. Although we believe our allowance for
indemnification losses is adequate, this estimate is inherently subjective and indemnification losses depend on future
events that are often not within our control. Therefore, we can give no assurance that established reserves will be adequate
in the future. Additional provision for indemnification losses would have an adverse effect on 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 third-
party counterparties (i.e., investors), 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.
An increase in interest rates may reduce our mortgage revenues, which would negatively affect 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
18
may not be repaid. We attempt to maintain an appropriate allowance for loan losses to provide for losses in our loan
portfolio. Because any estimate of loan losses is necessarily subjective and the accuracy of any estimate depends on the
outcome of future events that are not within our control, we face the risk that charge-offs in future periods will exceed our
allowance for loan losses and that additional provision for loan losses will be required, which would have an adverse effect
on the Corporation’s net income. Although we believe our allowance for loan losses is adequate to absorb losses that are
inherent in our loan portfolio, we cannot predict the timing or severity of such losses nor give any assurance that our
allowance will be adequate in the future.
The Financial Accounting Standards Board (FASB) has issued a new accounting standard that will be effective for
the Corporation for the fiscal year beginning January 1, 2020. This standard, Accounting Standards Codification (ASC)
Topic 326, “Financial Instruments—Credit Losses” (ASC 326) will require the Corporation to record an allowance for
credit losses that represents expected credit losses over the lifetime of all loans in its portfolio. This represents a change
from the current method of providing for an allowance for loan losses that have been incurred. We have not yet determined
the impact that ASC 326 will have on our consolidated financial statements and regulatory capital. While the adoption of
ASC 326 will not affect ultimate loan performance or cash flows of the Corporation from making loans, the period in
which expected credit losses affect net income of the Corporation may not be similar to the recognition of loan losses
under current accounting guidance. If recognition of the allowance for credit losses results in a reduction of the regulatory
capital of C&F Bank, the initial reduction in regulatory capital will be phased in over three years under regulatory guidance.
If the reduction in regulatory capital of C&F Bank is significant, it may adversely impact the future ability of the
Corporation to pay dividends to shareholders.
Our real estate lending business can result in increased costs associated with Other Real Estate Owned (OREO).
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 may realize after a default is dependent upon factors outside of our
control, including, 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.
Acquisition of assets and assumption of liabilities may expose us to intangible asset risk, which could affect our result
of operations and financial condition.
In connection with accounting for the acquisitions of C&F Finance Company in 2002 and CVBK in 2013, we
recorded assets acquired and liabilities assumed at their fair value, which resulted in the recognition of 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 and may trigger impairment losses, which could
be materially adverse to our results of operations and financial condition.
We rely substantially on deposits obtained from 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, or debt securities including subordinated notes as additional sources of
19
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, including cybersecurity risks and cyber attacks, 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 may be
breached due to employee error, malfeasance or other disruptions. Security breaches, including cyber incidents, identity
theft 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
result in legal claims, regulatory penalties, disruption in operation, remediation expenses, costs associated with customer
notification and credit monitoring services, increased insurance premiums, loss of customers and business partners and
damage to the Corporation’s reputation. We rely on customary 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, (ii) regular employee training
programs on sound security practices and awareness of security threats, (iii) deployment of tools to monitor our network
including intrusion prevention and detection systems, electronic mail spam filters, anti-virus, anti-malware, anti-
ransomware, resource logging and patch management, (iv) multifactor authentication for customers using treasury
management tools and employees who access our network from outside of our premises, and (v) enforcement of security
policies and procedures for the additions and maintenance of user access and rights to resources. However, because the
techniques used to obtain unauthorized access, or to disable or degrade systems change frequently and are often not
recognized until launched against a target, the Corporation may be unable to anticipate these techniques or to implement
adequate protective measures.
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 and reputation. 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.
Business counterparties, over which the Corporation may have limited or no control, may experience disruptions that
could adversely affect the Corporation.
Multiple major U.S. retailers and a major consumer credit reporting agency have experienced data systems
incursions in recent years reportedly resulting in the thefts of credit and debit card information, online account information,
and other personal and financial data of hundreds of millions of individuals. Retailer incursions may affect debit cards
issued and deposit accounts maintained by many banks, including C&F Bank. Although the Corporation is not aware of
any instance in which the Corporation’s or the Bank’s systems have been breached in a retailer incursion, these events can
cause the Bank to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the
Bank and its customers. In some cases, the Bank may be required to reimburse customers for the losses they incur. Credit
reporting agency intrusions affect the Bank’s customers and can require these customers and the Bank to increase account
monitoring and take remedial action to prevent unauthorized account activity or access. Other possible points of intrusion
or disruption outside the Corporation’s and the Bank’s control include internet service providers, electronic mail portal
providers, social media portals, distant-server (or “cloud”) service providers, electronic data security providers,
telecommunications companies and smart phone manufacturers.
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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 enhancing customer service, the effective use of technology increases efficiency and
results in reduced costs, although a financial institution’s initial investment in a technology product or service may
represent a significant incremental cost. Our future success will depend in part upon our ability to create synergies in our
operations through the use of technology and to facilitate the ability of customers to engage in financial transactions in a
manner that enhances the customer experience. We cannot assure that technological improvements will increase
operational efficiency or that we will be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers, which may cause the Corporation to lose market
share or incur additional expense.
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 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, which has contributed to salary and employee benefit costs that have
risen and are expected to continue to rise, which may have an adverse effect on the Corporation’s net income. 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, and we may not be able to effectively integrate these individuals into our operations. 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.
21
Risks Related to the Regulation of the Corporation
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. 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.
Future legislation, regulation and government policy could affect the banking industry as a whole, including the
Corporation’s business and results of operations, in ways that are difficult to predict. In addition, the Corporation’s results
of operations could be adversely affected by changes in the way in which existing statutes and regulations are interpreted
or applied by courts and government agencies.
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 and regulations adopted pursuant and related thereto have 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 CFPB 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, it 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, 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.
22
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.
Risks Related to the Corporation’s Common Stock
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 our 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.
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 our 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 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.
The Corporation relies on dividends from its subsidiary for substantially all of its revenue.
The Corporation is a bank holding company that conducts substantially all of its operations through the Bank and
the Bank’s subsidiaries. As a result, the Corporation relies on dividends from the Bank for substantially all of its revenues.
There are various regulatory restrictions on the ability of the Bank to pay dividends or make other payments to the
Corporation, and the Corporation’s right to participate in a distribution of assets upon the Bank’s liquidation or
reorganization is subject to the prior claims of the Bank’s creditors. If the Bank is unable to pay dividends to the
Corporation, the Corporation may not be able to service its outstanding borrowings and other debt, pay its other obligations
23
or pay a cash dividend to the holders of the Corporation’s common stock, and the Corporation’s business, financial
condition and results of operations may be materially adversely affected. Further, although the Corporation has historically
paid cash dividends to holders of its common stock, holders of common stock are not entitled to receive dividends and
regulatory or economic factors may cause the Corporation’s Board of Directors to consider, among other actions, the
reduction of dividends paid on the Corporation’s common stock even if the Bank continues to pay dividends to 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 and houses C&F Bank’s Main Office.
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 have since been renovated in order to house C&F Bank’s
operations center, which consists of C&F Bank’s loan, deposit and administrative functions and staff.
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 22 other retail banking branch locations and leases two retail banking branch locations and three
regional commercial lending offices in Virginia.
C&F Mortgage’s Newport News and Williamsburg loan production offices are located on the second floor of C&F
Bank’s Newport News and Williamsburg branch buildings, respectively. In addition, C&F Mortgage has 14 loan
production offices leased from nonaffiliates including 8 in Virginia, two in Maryland, two in North Carolina, one in South
Carolina and one in West Virginia.
The Hampton office of C&F Finance is located on the second floor of C&F Bank’s Hampton branch building. C&F
Finance leases approximately 17,000 square feet of office space from an unrelated third party in Richmond, Virginia,
which provides space for C&F Finance’s headquarters and its loan and administrative functions and staff. C&F Finance
has one leased office in Tennessee.
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.
24
EXECUTIVE OFFICERS OF THE REGISTRANT
Name (Age)
Present Position
Business Experience
During Past Five Years
Larry G. Dillon (66) ................................................
Executive Chairman
Chairman of the Board of Directors of the Corporation and C&F
Bank since 1989; Chief Executive Officer of the Corporation and
C&F Bank from 1989 to December 2018; President of the
Corporation and C&F Bank from 1989 to 2014; Chairman,
President and Chief Executive Officer of CVBK and Central
Virginia Bank from September 2013 through March 2014
Thomas F. Cherry (50) ............................................
President and Chief Executive Officer
Chief Executive Officer of the Corporation and C&F Bank since
January 2019; President of the Corporation and C&F Bank since
2014; Director of the Corporation and C&F Bank since 2015;
Secretary of the Corporation and C&F Bank from 2002 to 2018;
Chief Financial Officer of the Corporation and C&F Bank from
2004 to 2016; Executive Vice President and Chief Financial
Officer of CVBK and Central Virginia Bank from September 2013
through March 2014
Jason E. Long (39) ..................................................
Senior Vice President and
Chief Financial Officer
Senior Vice President and Chief Financial Officer of the
Corporation and C&F Bank since 2016; First Vice President of
C&F Bank from 2014 to 2016; Various positions, most recently
Principal from April 2013 through September 2014, at the
accounting firm of Yount, Hyde & Barbour, P.C. since 2002
focusing on the financial services industry
Bryan E. McKernon (62) ........................................
President and Chief Executive Officer,
C&F Mortgage
President and Chief Executive Officer of C&F Mortgage since
1995; Director of C&F Bank since 1998
S. Dustin Crone (50) ...............................................
President, C&F Finance
President of C&F Finance since 2010
John A. Seaman, III (61) .........................................
Executive Vice President and
Chief Credit Officer,
C&F Bank
Executive Vice President and Chief Credit Officer of C&F Bank
since 2011 and of Central Virginia Bank from September 2013
through March 2014
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 22, 2019, there were approximately 2,000 shareholders of record.
As of that date, the closing price of our common stock on the NASDAQ Global Select Stock Market was $51.73.
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.”
25
Issuer Purchases of Equity Securities
The Corporation’s Board of Directors authorized a share repurchase program for the Corporation’s common stock
(the Repurchase Program) in May 2014 and subsequently reauthorized the Repurchase Program annually, most recently
in April 2018 for up to $5.0 million of the Corporation’s common stock and expiring on May 31, 2019. 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, as amended (the
Exchange Act) and/or Rule 10b-18 of the Exchange Act. As of December 31, 2018, $3.9 million of the Corporation’s
common stock may be purchased under the Repurchase Program.
The following table summarizes repurchases of the Corporation’s common stock that occurred during the three
months ended December 31, 2018.
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, 2018 - October 31, 2018 . . . . . . .
November 1, 2018 - November 30, 2018 . .
December 1, 2018 - December 31, 2018 . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Number of
Shares Purchased1
Part of Publicly
Average Price Paid Announced Plans or Under the Plans or
Programs
Be Purchased
Programs
per Share
— $
14,283
10,984
25,267
—
52.22
50.87
51.63
— $
14,283
6,949
21,232
5,000
4,254
3,895
1 During the three months ended December 31, 2018, 4,035 shares were withheld upon the vesting of restricted shares
granted to employees of the Corporation and its subsidiaries in order to satisfy tax withholding obligations.
26
ITEM 6.
SELECTED FINANCIAL DATA
Five Year Financial Summary
(Dollars in thousands, except per share amounts)
Financial Condition:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities, available for sale . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . .
Loans (net of allowance for loan losses) . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . .
Results 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 expense1 . . . . . . . . . . . . . . . . . . . . . . .
Net income1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share Data:
Earnings per share—basic1 . . . . . . . . . . . . . . . . .
Earnings per share—assuming dilution1 . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares—basic . . . . . .
Weighted average number of shares—assuming
2018
2017
2016
2015
2014
$
$
$
$
1,521,411
214,910
41,895
1,028,097
1,181,661
151,958
92,548
11,027
81,521
11,006
70,515
25,758
73,732
22,541
4,521
18,020
5.15
5.15
1.41
3,501,221
$
$
$
$
$
$
$
$
1,509,056
218,976
55,384
992,062
1,171,429
141,702
89,593
9,601
79,992
16,435
63,557
27,232
72,823
17,966
11,394
6,572
1.89
1.88
1.33
3,486,510
1,451,992
210,026
52,027
962,674
1,119,921
139,214
$
1,405,076 $
219,476
44,000
865,892
1,073,633
131,059
1,338,187
221,897
28,279
800,198
1,026,101
123,610
89,439
8,968
80,471
18,040
62,431
26,047
70,560
17,918
4,459
13,459
3.90
3.89
1.29
3,454,282
$
$
$
87,049 $
8,694
78,355
15,512
62,843
21,220
66,680
17,383
4,853
12,530 $
86,495
8,525
77,970
16,330
61,640
19,821
63,973
17,488
5,144
12,344
3.68 $
3.68
1.22
3,401,426
3.63
3.59
1.19
3,404,112
dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,501,221
3,486,589
3,455,883
3,401,834
3,436,278
Significant Ratios:
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets1 . . . . . . . . . . . . . . . . . . .
Return on average equity1 . . . . . . . . . . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . . . . . . . .
Asset Quality:
Allowance for loan losses (ALL)
5.80 %
1.19
12.40
27.38
9.63
5.99 %
0.45
4.58
70.37
9.82
6.30 %
0.96
9.90
33.08
9.65
6.35 %
0.92
9.87
33.20
9.29
6.55 %
0.93
10.32
32.80
9.02
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance. . . . . . . . . . . . . . . . . . . . . . . .
$
$
10,426
598
22,999
$
10,775
598
24,353
$
11,115
598
25,353
$
11,017
598
23,954
10,961
553
24,092
Ratio of ALL to total loans
Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance. . . . . . . . . . . . . . . . . . . . . . . .
1.37 %
17.19
7.77
1.48 %
1.63 %
18.22
8.34
18.26
8.33
1.86 %
17.12
8.21
2.08 %
16.82
8.50
1
In connection with the reduction in the federal corporate income tax rate as a result of the enactment of the Tax Cuts
and Jobs Act of 2017, the Corporation recognized a one-time remeasurement of its federal net deferred tax asset in
2017, which resulted in additional income tax expense and a decrease in net income of $6.6 million.
27
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 expected
future financial performance; strategic business initiatives and the anticipated effects thereof, including personnel additions
and the expansion of the indirect lending program to include marine and recreational vehicles; development of our digital
platform; liquidity and capital levels; net interest margin compression; the effect of future market and industry trends,
including competitive trends in the non-prime consumer finance markets, the Corporation’s and each business segment’s
loan portfolio, and business prospects related to each segment’s loan portfolio, including future lending and growth in
loans outstanding; asset quality and adequacy of the allowance for loan losses and the level of future charge-offs; trends
regarding the provision for loan losses, net loan charge-offs, levels of nonperforming assets and troubled debt
restructurings (TDRs); expenses associated with nonperforming assets; the utilization of scorecard models and the
performance of loans purchased using those models; the effects of future interest rate levels and fluctuations; the amount
and timing of accretion associated with the fair value accounting adjustments recorded in connection with the 2013
acquisition of CVBK; adequacy of the allowance for indemnification losses; levels of noninterest income and expense;
interest rates and yields including possible future interest rate increases; 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 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, management’s current beliefs, and risks and uncertainties. These statements are inherently uncertain and
there can be no assurance that the underlying estimates, assumptions or beliefs will be proven to be accurate. Actual
results could differ materially from historical results or those anticipated or implied 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 increases or volatility in the Federal Funds rate, yields on U.S. Treasury securities or
mortgage rates
• general business conditions, as well as conditions within the financial markets
• general economic conditions, including unemployment levels and slowdowns in economic growth
•
•
the legislative/regulatory climate with respect to financial institutions, including the Dodd-Frank Act and
regulations promulgated thereunder, the CFPB and the regulatory and enforcement activities of the CFPB, the
application of the Basel III capital standards to the Corporation and C&F Bank and the Economic Growth,
Regulatory Relief and Consumer Protection of 2018 and regulations promulgated thereunder
the effect of the Tax Cuts and Jobs Act of 2017 (the Tax Act) and changes in the effect of the Tax Act due to
issuance of interpretive regulatory guidance or enactment of corrective or supplemental legislation
• monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury
and the Federal Reserve Board, and the effect of these policies on interest rates and business in our markets
•
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
28
•
•
the inventory level and pricing of new and 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
•
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 branch and market expansions and technology initiatives
• cyber threats, attacks or events
• reliance on third parties for key services
• C&F Bank’s product offerings
• accounting principles, policies and guidelines and elections made by the Corporation thereunder
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. We undertake no obligation to update or revise any forward-
looking statement to reflect events or circumstances arising after the date on which the statement was made, except as
otherwise required by law.
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 management’s 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 for relevant periods of
time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s
ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation
is inherently subjective because it requires estimates that are susceptible to significant revision as more information
becomes available. For more information see the section titled “Asset Quality” within Item 7.
29
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 (investor) of a loan sold by C&F Mortgage incurs a validated
indemnified 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 that are probable of arising from valid
indemnification requests for loans that have been sold by C&F Mortgage. 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. For more information see the section titled “Off-Balance-
Sheet Arrangements” within Item 7.
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 based on 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 in the loan. All TDRs are also
considered impaired loans and are evaluated individually. 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: Acquired loans are classified as either (i) purchased credit-impaired
(PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.
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 are 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.” 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.
On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans. 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 in 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 quarterly
re-estimation periods, we believe we will fully collect the new carrying value of the pools of 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 for any deterioration in these loans in future periods.
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
30
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.
We regularly review unrealized losses in our investments in securities based on criteria including the extent to
which market value is below amortized cost, 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, foreclosure are held for sale and are
initially recorded at the fair value less estimated 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 estimated 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. The Corporation reviews the
carrying value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill
for impairment, the Corporation may first consider qualitative factors to determine whether the existence of events or
circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill
of the reporting unit is not impaired. If the Corporation elects to bypass the qualitative assessment or if we conclude that
it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the
reporting unit is compared with its carrying value to determine whether an impairment exists. In the fourth quarter of 2018
and 2017, the Corporation evaluated goodwill for impairment at the retail banking segment and the consumer finance
segment and concluded that no impairment existed based on an assessment of qualitative factors.
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 measured at fair value. The projected benefit
obligation and net periodic pension cost or income are actuarially determined using a number of key assumptions, which
may include discount rates, rates of return on plan assets, employee compensation and mortality and interest crediting
rates. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may affect
the projected benefit obligation in the year of the change, and may affect net periodic pension cost or income in the year
of the change or in future periods.
Derivative Financial Instruments: The Corporation uses derivatives primarily to manage risk associated with
changing interest rates and to assist customers with their risk management objectives. The Corporation’s derivative
financial instruments may include (1) interest rate lock commitments (IRLCs) on mortgage loans that will be held for sale
and the related forward sales commitments, (2) interest rate swaps with certain qualifying commercial loan customers and
dealer counterparties and (3) interest rate swaps that qualify and are designated as cash flow hedges of the Corporation’s
trust preferred capital notes. The Corporation recognizes derivative financial instruments at fair value as either an other
asset or other liability in the Consolidated Balance Sheets. Because the IRLCs, forward sales commitments and interest
rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect
unrealized gains and losses resulting from changes in fair value of these instruments are reported in the Consolidated
Statements of Income. The gains or losses on the Corporation’s cash flow hedges are reported as a component of other
comprehensive income, net of deferred income taxes, and are reclassified into earnings in the same period or periods
31
during which the hedged transactions affect earnings. For more information see the section titled “Off-Balance-Sheet
Arrangements” within Item 7.
Income Taxes: Determining the Corporation’s effective tax rate requires judgment. The Corporation’s net deferred
tax asset is determined annually based on temporary 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. In addition, there may be transactions and
calculations for which the ultimate tax outcomes are uncertain and the Corporation’s tax returns are subject to audit by
various tax authorities. Although we believe that estimates related to income taxes are reasonable, no assurance can be
given that the final tax outcome will not be materially different than that which is reflected in the consolidated financial
statements.
For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary
Data” under the heading “Note 1: Summary of Significant Accounting Policies.”
OVERVIEW
Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth
initiatives that will enhance long-term shareholder value. We track three primary financial performance measures in order
to assess the level of success in achieving these goals: (1) return on average assets (ROA), (2) return on average equity
(ROE), and (3) growth in earnings. In addition to these financial performance measures, we track the performance of the
Corporation’s three principal business segments: 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 capital position.
Financial Performance Measures
Net income for the Corporation was $18.0 million in 2018, or $5.15 per share assuming dilution, compared to net
income of $6.6 million in 2017, or $1.88 per share assuming dilution, and net income of $13.5 million in 2016, or $3.89
per share assuming dilution. The results for 2017 included the effect of the Tax Act, which was signed into law on
December 22, 2017. As a result of the permanent reduction in the federal corporate income tax rate, the Corporation
recorded a one-time remeasurement adjustment to its net federal deferred tax asset of $6.6 million, which was recognized
in income tax expense. Excluding the one-time effects of the Tax Act, adjusted net income for 2017 was $13.2 million, or
$3.79 per share assuming dilution.
The Corporation’s ROE and ROA were 12.40 percent and 1.19 percent, respectively, for the year ended
December 31, 2018, compared to 4.58 percent and 0.45 percent, respectively, for the year ended December 31, 2017 and
9.90 percent and 0.96 percent, respectively, for the year ended December 31, 2016. Excluding the effect of the
remeasurement of the Corporation’s net deferred tax asset, the Corporation’s adjusted ROE and adjusted ROA were 9.20
percent and 0.90 percent, respectively, for the year ended December 31, 2017.
Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net income,
adjusted earnings per share, adjusted ROE and adjusted ROA, which are non-GAAP financial measures, to the most
directly comparable financial measures calculated in accordance with U.S. GAAP.
2019 Outlook
Management believes the Corporation’s financial performance in 2019 will be affected by (1) lower accretion
income related to the fair value accounting adjustments for the CVBK acquisition, (2) an increase in interest income from
growth in average loans outstanding, (3) an uncertain interest rate environment and potential fluctuations in interest rates
that may depress loan production levels in the mortgage banking segment, and (4) continued competition for automobile
loan contracts and higher borrowing costs in the consumer finance segment. The following additional factors could
influence the Corporation’s financial performance in 2019:
32
• Retail Banking: Growth in higher-yielding earning assets, specifically loans, will continue to be our primary
focus at the Bank during 2019. We expanded our lending capabilities in January 2019 by adding a new
commercial lending team in the Richmond market. Our growing lending team and continued economic strength
in our markets, particularly in real estate development and construction, has led us to expect continued growth
in our loan portfolio during 2019. However, it will be challenging to maintain the retail banking segment’s net
interest margin at its current level, as interest income from PCI loans that resulted from improvements in certain
credits that were repaid in 2018 is unlikely to be realized at the same level in 2019. Additionally, increasing
competition for deposits as rates have risen may result in a higher cost of funds. We also expect an increase in
occupancy expense in 2019 related to new facilities, which will replace existing premises near the end of their
lease. Also in 2019, we expect to continue to focus on our digital strategy, because online and mobile access
are quickly becoming the primary means of banking for many businesses and individuals, and we believe our
digital strategy commitment is critical to remaining 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. Increasing future profitability at the current origination levels will be
challenging due to (1) recent margin compression resulting from lower mortgage industry loan production
volume and increased competition and (2) 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 2019 sufficient to sustain and increase profitability will be dependent on
market factors beyond our control, such as the interest rate environment and changes in interest rates, housing
inventory and loan demand. If mortgage interest rates continue to rise during 2019, C&F Mortgage may
experience a lower loan demand, particularly for mortgage refinancings, which could negatively affect earnings
of the mortgage banking segment in 2019. In addition, during 2019, C&F Mortgage anticipates it will continue
to (1) compete to retain and attract qualified loan officers, (2) incur costs associated with updating and
enhancing our compliance management system and processes for originating residential loans to mitigate
compliance and regulatory risks, as well as improving the quality of our loan origination process and (3) utilize
technology to its fullest capability 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 programs that are designed to serve
customers in the non-prime sector and marine and RV financing for borrowers in the prime sector. As has been
the case for the last several years, competition in the non-prime automobile loan business remains aggressive,
resulting in lower interest rates and in many cases, less restrictive underwriting standards by several of our
competitors. As a result, the expansion of our consumer finance loan portfolio into marine and RV loans in
2018 was partially offset by a slight decline in the automobile portfolio, and we expect organic loan growth to
continue to be challenging in 2019. However, C&F Finance’s scorecard model for purchasing automobile loan
contracts, which was implemented in 2016 and results in the purchase of loans with higher credit metrics, as
well as our expansion into marine and RV loans, are expected to result in charge-offs at C&F Finance remaining
at a level lower than that experienced prior to 2018. We believe it will be challenging to maintain the consumer
finance segment’s net interest margin at its current level as: (1) the expansion of our loan portfolio into marine
and RV loans will reduce average yields on loans compared to 2018, (2) competition in the market for non-
prime automobile loans may cause yields to continue to decline and (3) further increases in the federal funds
rate may trigger higher-cost variable-rate borrowings. We also 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 lending industry.
Principal Business Segments
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 $10.6 million for the year ended December 31,
2018, compared to net income of $5.0 million for the year ended December 31, 2017. The retail banking segment’s results
for the year ended December 31, 2017 included income tax expense of $3.5 million associated with the
33
remeasurement of C&F Bank’s net deferred tax asset. The retail banking segment’s income before income taxes for the
year ended December 31, 2018 was $12.6 million, compared to $10.7 million for the year ended December 31, 2017.
In addition to favorable income tax factors as discussed below under “Results of Operations,” positive factors
affecting net income of C&F Bank for the year ended December 31, 2018 compared to the year ended December 31, 2017
included: (1) higher interest income from loans, primarily due to (a) improvement in the performance of certain PCI loans,
as discussed below, (b) higher yields on variable rate loans resulting from rising interest rates and (c) loan growth and
(2) higher yields on excess cash balances. Partially offsetting these factors were (1) higher operating expenses associated
with C&F Bank continuing to (a) expand its retail and lending presence, (b) strengthen its technology infrastructure,
(c) expand its capabilities in administrative and compliance functions, (d) expand its product offerings and (e) promote
brand awareness, and (2) an increase in average rates on interest-bearing customer deposits.
The recognition of interest income on PCI loans is based on management’s expectation of future payments of
principal and interest. Expectations of the timing and amount of future payments on certain acquired loans that are PCI
loans improved during 2018, resulting in an acceleration of the recognition of interest income in 2018 compared to 2017.
Interest income recognized on PCI loans was $3.7 million for the year ended December 31, 2018, compared to $2.7 million
for the year ended December 31, 2017.
Average loans, excluding loans to affiliates, increased $27.4 million or 3.9 percent during the year ended
December 31, 2018, compared to the year ended December 31, 2017. C&F Bank’s total nonperforming assets were $1.7
million at December 31, 2018, compared to $5.4 million at December 31, 2017. Nonperforming assets at December 31,
2018 consisted primarily of $1.5 million in nonaccrual loans, compared to $5.3 million at December 31, 2017. The decline
in nonaccrual loans since December 31, 2017 resulted primarily from the resolution of one commercial relationship.
Mortgage Banking: The mortgage banking segment reported net income of $1.9 million for the year ended
December 31, 2018, compared to net income of $985,000 for the year ended December 31, 2017. The mortgage banking
segment’s results for the year ended December 31, 2017 included income tax expense of $589,000 associated with the
remeasurement of the mortgage banking segment’s net deferred tax asset. The mortgage banking segment’s income before
income taxes was $2.6 million for each of the years ended December 31, 2018 and 2017.
The increase in net income of the mortgage banking segment for the year ended December 31, 2018 was due
primarily to the favorable income tax factors discussed below under “Results of Operations.” For the year ended
December 31, 2018, income before income taxes of the mortgage banking segment was essentially unchanged, as lower
gains on sales of loans, which resulted from lower loan production, were offset by a decrease in operating expenses, which
resulted from operational efficiencies and management of personnel costs. While loan production decreased by 6.1 percent
for the year ended December 31, 2018 compared to the year ended December 31, 2017, C&F Mortgage Corporation’s loan
production volume outperformed loan production trends in the broader mortgage industry. Mortgage loan originations
during the the year ended December 31, 2018 for refinancings and home purchases were $76.9 million and $566.2 million,
respectively, compared to $99.6 million and $611.9 million, respectively, during the year ended December 31, 2017.
Consumer Finance: The consumer finance segment reported net income of $6.7 million for the year ended
December 31, 2018, compared to net income of $2.3 million for the year ended December 31, 2017. The consumer finance
segment’s results for the year ended December 31, 2017 included income tax expense of $1.7 million associated with the
remeasurement of the consumer finance segment’s net deferred tax asset. The consumer finance segment’s income before
income taxes for the year ended December 31, 2018 was $9.2 million, compared to $6.5 million for the year ended
December 31, 2017.
In addition to favorable income tax factors as discussed below under “Results of Operations,” positive factors
affecting net income of C&F Finance Company for the year ended December 31, 2018 included (1) a decline in the
provision for loan losses of $5.3 million compared to the year ended December 31, 2017, as a result of lower charge-offs
and improving credit quality of the portfolio, as discussed below, and (2) lower personnel and operating expenses resulting
from underwriting efficiencies and the purchase of loan contracts with higher credit metrics. Partially offsetting these
factors were (1) lower loan yields resulting from competition in the non-prime automobile loan business and the acquisition
of loan contracts with higher credit metrics, as well as relatively lower yields on marine and RV loans, as discussed below
34
and (2) higher-cost variable-rate borrowings resulting from increases in short-term interest rates since the first quarter of
2017.
The net charge-off ratio for 2018 decreased to 4.14 percent from 5.82 percent for 2017. The decline reflects a lower
number of charge-offs during 2018 as a result of C&F Finance Company’s purchasing loan contracts with higher credit
metrics beginning in 2016 based on the utilization of C&F Finance’s scorecard model for purchasing automobile loan
contracts. At December 31, 2018, total delinquent loans as a percentage of total loans was 4.76 percent, compared to 5.17
percent at December 31, 2017. The allowance for loan losses was $23.0 million, or 7.77 percent of total loans at
December 31, 2018, compared to $24.4 million, or 8.34 percent of total loans at December 31, 2017. The decrease in the
level of the allowance for loan losses as a percentage of total loans was primarily due to lower net charge-offs on non-
prime automobile loans and the purchase of marine and RV loans beginning in 2018, as discussed below, which require a
lower allowance for loan losses. At December 31, 2018, compared to December 31, 2017, the higher composition within
the consumer finance segment’s loan portfolio of marine and RV loans accounted for 28 basis points of the 57 basis points
decrease in this ratio. If factors influencing the consumer finance segment result in a higher net charge-off ratio in the
future, or if the consumer finance segment’s loan portfolio should grow, the segment may need to increase the level of its
allowance for loan losses, which would negatively affect future earnings.
During the first quarter of 2018, C&F Finance Company began the expansion of its indirect lending programs to
include marine and RV loans. These contracts are for prime loans made to individuals with higher credit scores and are
priced at rates substantially lower than its non-prime automobile portfolio. While these loans may contribute to net interest
margin compression, management expects they will require both a lower provision for loan losses and allowance for loan
losses than the consumer finance segment’s non-prime automobile loans.
Other and Eliminations: The other segment, which principally includes the Corporation’s holding company
operations and wealth management subsidiary, reported aggregate net losses of $1.2 million and $1.7 million for the years
ended December 31, 2018 and 2017, respectively. The other segments’ loss before income taxes was $1.8 million and
$1.9 million for the years ended December 31, 2018 and 2017, respectively. The lower net loss during 2018, compared to
2017, was primarily due to increased earnings at the Corporation’s wealth management subsidiary.
Capital Management
Total shareholders’ equity was $152.0 million at December 31, 2018, compared to $141.7 million at December 31,
2017. Capital growth resulted primarily from earnings for the year ended December 31, 2018, offset in part by dividends
and share repurchases during the year.
The Corporation’s Board of Directors continued its policy of paying dividends in 2018. For the year ended
December 31, 2018, the Corporation declared dividends of $1.41 per share. Annual dividends per share increased 6.0
percent over dividends of $1.33 per share declared in 2017, resulting from two increases in the quarterly dividend during
2018. At December 31, 2018, the Corporation’s annualized dividend was $1.48 per share, compared to $1.36 per share at
December 31, 2017, or an increase of 8.8 percent. 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,
current and future capital levels and requirements and expected future earnings.
In April 2018, the Corporation’s Board of Directors reauthorized a share repurchase program for the Corporation’s
outstanding common stock (the Repurchase Program) to purchase up to $5.0 million of the Corporation’s common stock
through May 2019. As of December 31, 2018, the Corporation had repurchased 21,232 shares of its common stock at an
aggregate cost of $1.1 million, and remained authorized to purchase up to $3.9 million of its common stock under the
Repurchase Program.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related
yields, and interest expense on interest-bearing liabilities, with related rates, for each of the years ended December 31,
35
2018, 2017 and 2016. 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. Accretion and amortization of fair value purchase
adjustments are included in the computation of yields on loans and investments and on the cost of borrowings acquired in
connection with the purchase of CVB. The CVB accretion contributed approximately 28 basis points to the yield on loans
and 21 basis points to both the yield on interest earning assets and net interest margin for the year ended December 31,
2018, compared to approximately 14 basis points to the yield on loans and 11 basis points to both the yield on interest
earning assets and the net interest margin for the year ended December 31, 2017 and approximately 24 basis points to the
yield on loans and 17 basis points to both the yield on interest earning assets and the net interest margin for the year ended
December 31, 2016. 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 21 percent for the year ended December 31, 2018 and 34 percent for
the years ended December 31, 2017 and 2016).
TABLE 1: Average Balances, Income and Expense, Yields and Rates
2018
2017
2016
Average
Balance
Income/ Yield/
Expense Rate
Average
Balance
Income/ Yield/
Expense Rate
Average
Balance
Income/ Yield/
Expense Rate
(Dollars in thousands)
Assets
Securities:
Taxable . . . . . . . . . . . . . . . . . . . . . $
Tax-exempt . . . . . . . . . . . . . . . . . .
Total securities . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits in other
138,053 $ 3,197
3,451
6,648
84,554
86,436
224,489
1,074,834
2.32 % $
3.99
2.96
7.87
115,392 $ 2,517
4,868
7,385
82,789
98,526
213,918
1,043,418
2.18 % $
4.94
3.45
7.93
99,564 $ 2,237
5,670
7,907
83,036
109,979
209,543
994,808
2.25 %
5.16
3.77
8.35
118,176
banks . . . . . . . . . . . . . . . . . . . . . . .
1,417,499
Total earning assets . . . . . . . . . . . .
(35,409)
Allowance for loan losses . . . . . . . . .
Total non-earning assets . . . . . . . . . .
126,814
Total assets . . . . . . . . . . . . . . . . . . . . $ 1,508,904
2,097
93,299
1.77
6.58
1,128
91,302
1.05
6.69
107,629
1,364,965
(36,101)
134,275
$ 1,463,139
105,293
1,309,644
(36,192)
135,615
$ 1,409,067
509
91,452
0.48
6.98
Liabilities and Shareholders’
Equity
Time and savings deposits:
Interest-bearing demand deposits . . $
Money market deposit accounts . . .
Savings accounts . . . . . . . . . . . . . .
Certificates of deposit, $100 or
221,750
215,662
116,896
more . . . . . . . . . . . . . . . . . . . . . .
Other certificates of deposit . . . . . .
Total time and savings deposits . . . .
Borrowings . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . . .
Demand deposits . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . .
172,616
177,279
904,203
165,290
1,069,493
266,415
27,678
1,363,586
145,318
Total liabilities and shareholders’
equity . . . . . . . . . . . . . . . . . . . . . $ 1,508,904
799
699
103
0.36
0.32
0.09
$
215,627
221,279
109,789
482
606
87
0.22
0.27
0.08
$
211,441
213,793
102,899
2,206
1,879
5,686
5,341
11,027
1.28
1.06
0.63
3.23
1.03
163,100
181,746
891,541
165,662
1,057,203
236,937
25,353
1,319,493
143,646
$ 1,463,139
1,839
1,734
4,748
4,853
9,601
1.13
0.95
0.53
2.93
0.91
142,115
198,061
868,309
170,490
1,038,799
210,520
23,842
1,273,161
135,906
$ 1,409,067
425
571
82
0.20
0.27
0.08
1,496
1,818
4,392
4,576
8,968
1.04
0.91
0.50
2.68
0.86
Net interest income . . . . . . . . . . . . . .
Interest rate spread . . . . . . . . . . . . . .
Interest expense to average earning
assets . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . .
$ 82,272
$ 81,701
$ 82,484
5.78 %
0.70 %
5.99 %
6.12 %
0.68 %
6.30 %
5.55 %
0.78 %
5.80 %
36
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. The Corporation
calculates 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 absolute dollar amounts of each.
TABLE 2: Rate-Volume Recap
2018 from 2017
2017 from 2016
(Dollars in thousands)
Interest income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities:
Increase (Decrease)
Due to
Total
Increase
Increase (Decrease)
Due to
Rate
Volume
(Decrease) Rate
Volume
Total
Increase
(Decrease)
$
(646)
$
2,411
$
1,765
$
(4,205)
$
3,958
$
(247)
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits in other banks . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . .
$
168
(865)
848
(495)
304
108
10
255
189
866
499
1,365
(1,860)
512
(552)
121
2,492
13
(15)
6
112
(44)
72
(11)
61
2,431
680
(1,417)
969
1,997
317
93
16
367
145
938
488
1,426
571
(67)
(229)
607
(3,894)
49
10
(1)
125
79
262
411
673
(4,567)
$
$
347
(573)
12
3,744
8
25
6
218
(163)
94
(134)
(40)
3,784
$
$
$
280
(802)
619
(150)
57
35
5
343
(84)
356
277
633
(783)
2018 Compared to 2017
Net interest income, on a taxable-equivalent basis, for 2018 increased to $82.3 million, compared to $81.7 million
for 2017. The net interest margin decreased 19 basis points to 5.80 percent, compared to 5.99 percent for 2017. The net
interest margin decline resulted from an 11 basis point decline in the yield on interest-earning assets coupled with a 12
basis point increase in the cost of interest-bearing liabilities for the year ended December 31, 2018, compared to the year
ended December 31, 2017. The decline in yield on interest-earning assets was primarily attributable to a decrease in the
yields on the loan and investment securities portfolios for 2018 compared to 2017, partially offset by an increase in the
yield on interest-earning deposits in other banks. The decrease in the net interest margin was offset in part by average
earning asset growth of $52.5 million for 2018, compared to 2017.
Average loans, which includes both loans held for investment and loans held for sale, increased $31.4 million to
$1.07 billion for the year ended December 31, 2018, compared to 2017. Average loans held for investment of the retail
banking segment increased $27.4 million, or 3.9 percent, for the year ended December 31, 2018, compared to 2017.
Average loans at the retail banking segment increased for 2018 because of growth in the real estate construction and
commercial real estate segments of the loan portfolio, which was driven by the continued strong loan demand in the real
estate development and construction sectors of our markets and by C&F Bank strengthening its commercial lending team.
Average loans held for investment at the consumer finance segment increased $2.0 million, or 0.7 percent, for 2018
compared to 2017 due to the consumer finance segment’s expansion into purchases of marine and RV loan contracts
beginning in the first quarter of 2018, partially offset by a decrease in average automobile loans. Average loans held for
sale increased $2.0 million, or 5.2 percent for 2018, compared to 2017.
The overall yield on average loans decreased 6 basis points to 7.87 percent for 2018, compared to 2017. Negative
factors affecting average loan yield for 2018, compared to 2017, were (1) the increased composition within the loan
portfolio of lower-yielding loans at the retail banking segment relative to the higher-yielding non-prime loans at the
consumer finance segment and (2) the decline in the average yield on loans at the consumer finance segment due primarily
to continued competition in the non-prime automobile loan business and growth in lower-yielding, higher quality loans
37
including marine and RV loans. Partially offsetting these factors were (1) improvements during 2018 in expectations of
the timing and amount of future payments on certain PCI loans, which resulted in an acceleration of the recognition of
interest income in 2018 compared to 2017 and (2) higher yields on variable rate and fixed rate loans resulting from
increases in interest rates.
Average securities available for sale increased $10.6 million for 2018, compared to 2017. However, the average
yield on the securities portfolio decreased 49 basis points for 2018, compared to 2017, primarily due to (1) the decrease in
the federal corporate income tax rate as a result of the Tax Act, which reduced the tax equivalent yield on tax-exempt
bonds, and (2) the reinvestment of proceeds from called or matured securities at lower yields.
Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the
Federal Reserve Bank, increased $10.5 million during 2018, compared to 2017. The increase during 2018 resulted from
customer deposit growth and net operating cash flow exceeding net growth in loan and securities. The average yield on
these overnight funds increased 72 basis points for 2018, compared to 2017, because of the Federal Reserve Bank’s
increases in the interest rate on excess cash reserve balances from 0.75 percent in December 2016 to 2.40 percent by the
end of 2018.
Average interest-bearing time deposits increased $5.0 million for 2018, compared to 2017, and average savings and
interest-bearing demand deposits increased $7.6 million for 2018, compared to 2017. Although interest rates have risen
since the beginning of 2017, the increase in the average cost of interest-bearing deposits was only 10 basis points during
2018, as the repricing of deposit accounts lagged market interest rate increases.
Average borrowings decreased $372,000 for 2018, compared to 2017. The decrease resulted from maturities during
2018 of a $5.0 million repurchase agreement with a third-party correspondent bank and a $2.5 million advance from the
FHLB, partially offset by fluctuations in repurchase agreements with commercial deposit customers. The average cost of
borrowings increased 30 basis points during 2018, compared to 2017, because of increases in short-term interest rates, to
which variable-rate borrowing at the consumer finance segment is indexed.
The Corporation believes that it may be challenging to maintain net interest margin at its current level, even with
the projected loan growth at the Bank during 2019, because of (1) the potential for further increases in short-term interest
rates, which will trigger a higher cost of variable-rate borrowing at the consumer finance segment and may drive higher
costs of customer deposits, (2) repricing of time deposits at current market rates, (3) lower yields on consumer finance
segment loans resulting from continued market competition and growth in lower-yielding higher-quality loans (including
marine and RV loans) and (4) lower accretion of purchase discounts on PCI loans, which is included in yields on loans.
2017 Compared to 2016
Net interest income, on a taxable-equivalent basis, for 2017 decreased to $81.7 million, compared to $82.5 million
for 2016. The net interest margin for 2017 decreased 31 basis points to 5.99 percent, compared to 6.30 percent for 2016.
The net interest margin decline resulted from a decline in the yield on interest-earning assets of 29 basis points and an
increase in the cost of funds of 5 basis points for the year ended December 31, 2017, compared to the year ended
December 31, 2016. The decline in yield on interest-earning assets for the year ended December 31, 2017 was primarily
attributable to decreases in the yields on the loan and investment securities portfolios. These decreases were offset in part
by earning asset growth of $55.3 million for the year ended December 31, 2017.
Average loans, which includes both loans held for investment and loans held for sale, increased $48.6 million to
$1.04 billion for the year ended December 31, 2017, compared to 2016. Average loans held for investment of the retail
banking segment increased $57.3 million, or 8.8 percent, for the year ended December 31, 2017, compared to 2016.
Average loans at the retail banking segment increased for 2017 because of growth in the commercial real estate and real
estate mortgage segments of the loan portfolio, which was driven by successfully recruiting experienced commercial
lending personnel over the past several years and the continued strong loan demand in the real estate development and
construction sectors of our markets. Average loans held for investment at the consumer finance segment decreased $3.4
million, or 1.1 percent, during 2017, compared to 2016, which was the result of competition within the non-prime
automobile finance industry. Average loans held for sale decreased $5.2 million, or 11.9 percent for 2017, compared to
2016, because of the shorter duration between loan closings and fundings during 2017.
38
The overall yield on average loans decreased 42 basis points to 7.93 percent during 2017, compared to 2016. The
decrease in the average loan yield was due to (1) the increased concentration of lower-yielding loans at the retail banking
segment relative to the higher-yielding loans at the consumer finance segment, (2) the lower accretion of fair value
purchase adjustments in connection with the purchase of CVB and (3) the decline in the average yield on loans at the
consumer finance segment due to the continued competitive pressure on loan pricing strategies and a strategic decision to
purchase loans with higher credit quality metrics, but lower yields.
Average securities available for sale increased $4.4 million during 2017, compared to 2016, while the overall yield
declined 32 basis points, due to the purchase of lower-yielding shorter-term securities to replace maturities and calls of
longer-term, higher yielding securities. The Corporation has shortened the security portfolio’s duration by investing in
lower-yielding, short-term securities in order to mitigate interest-rate risk of an anticipated rising interest rate environment.
Average interest-bearing deposits in other banks, consisting primarily of excess reserves maintained at the Federal
Reserve Bank, increased $2.3 million during 2017, compared to 2016, because of the lower loan funding requirements at
the mortgage banking and consumer finance segments, coupled with customer deposit growth, the effects of which were
offset in part by loan growth at the retail banking segment. The average yield on these overnight funds increased 57 basis
points during 2017 because of the Federal Reserve Bank’s increases in the interest rate on excess reserve balances from
0.75 percent in December 2016 to 1.50 percent by the end of 2017.
Average interest-bearing time deposits increased $4.7 million during 2017, compared to 2016, and average savings
and interest-bearing demand deposits increased $18.6 million during 2017, compared to 2016. Although interest rates have
risen since December 31, 2016, the increase in the average cost of interest-bearing time and savings deposits was only
three basis points during the year ended December 31, 2017 because growth in lower-cost non-term interest-bearing
deposits exceeded growth in higher-cost time deposits and the repricing of our deposit accounts lagged market interest rate
increases.
Average borrowings decreased $4.8 million for the ended December 31, 2017, compared to 2016. The decrease
resulted from the repayment during 2016 of the borrowings used to purchase a consumer finance loan portfolio at the end
of the second quarter of 2015. The average cost of borrowings increased 25 basis points during the year ended
December 31, 2017, compared to 2016, because of increases in one-month LIBOR, to which variable-rate borrowing at
the consumer finance segment is indexed, resulting from the rising interest rate environment, the effect of which was offset
in part by the retail banking segment’s restructuring of borrowings from the FHLB.
NONINTEREST INCOME
TABLE 3: Noninterest Income
Retail
Banking
Year Ended December 31, 2018
Mortgage Consumer Other and
Banking
Eliminations
Finance
(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 . . . . . .
Wealth management services income, net . . . . . . . . . . . .
BOLI income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swap fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
4,213
1,379
10
—
320
83
3,882
1,142
7,841 $
—
3,686
—
—
—
—
—
329
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . $ 11,029 $ 11,856 $
39
— $
—
7
—
—
104
—
—
627
738 $
— $
—
—
—
1,860
—
—
—
275
Total
7,841
4,213
5,072
10
1,860
424
83
3,882
2,373
2,135 $ 25,758
Retail
Banking
Year Ended December 31, 2017
Mortgage Consumer Other and
Banking
Eliminations
Finance
(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 . . . . . .
Wealth management services income, net . . . . . . . . . . . .
BOLI income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swap fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
4,458
1,336
10
—
328
193
3,476
1,325
8,553 $
—
3,885
—
—
—
—
—
768
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . $ 11,126 $ 13,206 $
— $
—
7
—
—
105
—
—
883
995 $
— $
—
—
—
1,619
—
—
—
286
Total
8,553
4,458
5,228
10
1,619
433
193
3,476
3,262
1,905 $ 27,232
Retail
Banking
Year Ended December 31, 2016
Mortgage Consumer Other and
Banking
Eliminations
Finance
(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 . . . . . .
Wealth management services income, net . . . . . . . . . . . .
BOLI income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swap fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
4,262
1,577
52
—
828
418
3,562
1,121
8,120 $
—
3,404
—
—
—
—
—
509
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . $ 11,820 $ 12,033 $
2018 Compared to 2017
— $
—
10
—
—
99
—
—
812
921 $
— $
—
—
—
1,165
—
—
—
108
Total
8,120
4,262
4,991
52
1,165
927
418
3,562
2,550
1,273 $ 26,047
Total noninterest income decreased $1.5 million, or 5.4 percent, for the year ended December 31, 2018, compared
to the year ended December 31, 2017. The decrease in noninterest income was primarily due to (1) a gain of $1.3 million
in 2017, included primarily in other income of the retail banking segment and mortgage banking segment, on assets held
in a rabbi trust related to the Corporation’s nonqualified defined contribution plan, compared to no such gain in 2018, (2) a
decrease in gains on sales of loans at the mortgage banking segment as a result of lower mortgage loan volume and pricing
pressure, as rising interest rates have led to declines in mortgage industry loan production volume and increased
competition, (3) decreased service charges on deposit accounts, which consists of overdraft and account maintenance fees,
at the retail banking segment and (4) decreased ancillary income at the mortgage banking segment as a result of lower
mortgage loan volume, partially offset by (1) increased debit card interchange income at the retail banking segment,
(2) higher income from other components of net periodic pension benefit income at the retail banking segment, included
in other income, resulting primarily from the Bank’s $3.0 million contribution to its cash balance pension plan in 2018,
(3) increased wealth management services income and (4) a gain of $168,000, included in other income at the retail banking
segment, resulting from the disposition of land in 2018. Changes in the fair value of assets held in the rabbi trust that are
recorded as items of income or loss are offset by adjustments to the Corporation’s deferred compensation liability to
participants in the nonqualified plan, which are recorded in salaries and employee benefits expense.
2017 Compared to 2016
Total noninterest income increased $1.2 million, or 4.5 percent, for the year ended December 31, 2017, compared
to the year ended December 31, 2016. Total noninterest income for 2017 increased primarily due to higher (1) gains on
sales of loans and ancillary loan origination fees at the mortgage banking segment because of higher loan production,
(2) debit card interchange income and overdraft charges at the retail banking segment, and (3) wealth management income
at C&F Wealth Management because of the addition of a new wealth management group in Williamsburg and Newport
News, Virginia in the fourth quarter of 2016, which were offset in part at the retail banking segment by lower swap fee
income. In addition, noninterest income of the retail banking segment for 2016 included one-time revenue items of
40
$359,000 in other service charges and fees associated with one of the Bank’s debit card programs, $493,000 associated
with bank-owned life insurance, and a $139,000 gain on sale of a Bank-owned property included in other income.
NONINTEREST EXPENSE
TABLE 4: Noninterest Expense
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . $ 26,355 $ 5,007 $
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses:
Banking
5,483
1,980
8,500 $
782
2,141 $ 42,003
8,308
63
Retail
Year Ended December 31, 2018
Mortgage Consumer Other and
Banking
Eliminations
Finance
Total
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,097
8,580
54
3,329
1,263
3,511
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . $ 46,515 $ 10,370 $ 14,056 $
38
549
7,452
15,969
2,791 $ 73,732
Year Ended December 31, 2017
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . $ 25,757 $ 6,503 $ 9,389 $
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses:
Banking
Finance
1,957
1,035
4,671
Eliminations Total
1,948 $ 43,597
7,730
67
Retail
Mortgage
Banking
Consumer
Other and
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,343
7,937
53
3,175
1,256
3,130
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . $ 43,708 $ 11,688 $ 14,810 $
35
567
6,687
14,809
2,617 $ 72,823
Year Ended December 31, 2016
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . $ 25,033 $ 5,664 $ 10,102 $
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses:
Banking
1,820
4,484
907
1,546 $ 42,345
7,228
17
Retail
Mortgage
Banking
Consumer
Finance
Other and
Eliminations
Total
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,844
8,105
47
2,948
1,412
3,118
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . $ 42,466 $ 10,479 $ 15,539 $
20
493
6,323
14,664
2,076 $ 70,560
2018 Compared to 2017
Total noninterest expenses increased $909,000, or 1.2 percent, for the year ended December 31, 2018, compared to
2017. The increase in noninterest expenses resulted primarily from higher operating costs at the retail banking segment
attributable to (1) increased personnel costs associated with expanding the Bank’s capabilities in administrative and
compliance functions, (2) higher data processing and occupancy expenses associated with enhancing our technology
infrastructure, expanding our digital product offerings and increased debit and credit card interchange activity and
(3) increased marketing expenses associated with promoting brand awareness. Partially offsetting these factors were (1) a
decrease in salaries and employee benefits expense associated with the Corporation’s nonqualified defined contribution
plan, primarily at the retail banking segment and mortgage banking segment, (2) decreased personnel costs at the mortgage
banking segment resulting from lower loan origination volume, operating efficiencies and managing personnel costs and
(3) decreased personnel costs at the consumer finance segment resulting from underwriting efficiencies and the purchase
of loans that have higher credit metrics, resulting in lower servicing cost. The Corporation records compensation expense
for participants in its nonqualified deferred compensation plan based on amounts contributed to the plan and changes in
the fair value of assets held in the rabbi trust associated with the plan, which are allocated to plan participants. In 2017,
salaries and employee benefits expense included $1.3 million related to changes in fair value of the assets in the rabbi
trust. In 2018, the assets held in the rabbi trust gave rise to losses of $610,000 recognized in other expense and a
corresponding reduction of salaries and employee benefits expense.
41
2017 Compared to 2016
Total noninterest expenses increased $2.3 million, or 3.2 percent, for the year ended December 31, 2017, compared
to 2016. The increase in noninterest expenses resulted primarily from higher personnel costs at (1) the Bank principally
because of increased staff levels and support positions associated with the Bank's retail banking and commercial lending
growth and expansion into Charlottesville, Virginia, (2) C&F Mortgage because of higher loan production and the
mortgage banking segment’s expansion in Chesapeake, Virginia, which began in the fourth quarter of 2016, and (3) the
Corporation’s wealth management subsidiary because of the addition of a new wealth management group in Williamsburg
and Newport News, Virginia in the fourth quarter of 2016. Occupancy expense increased (1) at the Bank, C&F Mortgage,
and at C&F Finance due to expenses associated with strengthening the technology infrastructure and (2) at the Bank, C&F
Mortgage, and C&F Wealth Management due to higher rent expense for the addition of locations in Charlottesville,
Chesapeake, and Williamsburg, respectively. These increases in noninterest expenses were offset in part at C&F Finance
by lower (1) personnel costs due to fewer sales contracts purchased during 2017, (2) repossession expenses due to normal
fluctuations in the timing of repossessed asset sales, (3) data processing fees due to a lower volume of loan activity and
(4) collection expenses due to costs associated with the transition to new systems that were incurred during the first quarter
of 2016.
INCOME TAXES
Income tax expense on 2018 earnings was $4.5 million, resulting in an effective tax rate of 20.1 percent, compared
with $11.4 million, or 63.4 percent, in 2017 and $4.5 million, or 24.9 percent, in 2016. The lower effective tax rate in
2018 compared to 2017, and the higher effective tax rate in 2017 compared to 2016, were primarily a result of the Tax
Act, which was signed into law on December 22, 2017 and permanently lowered the federal corporate income tax rate to
21 percent, effective January 1, 2018. In connection with the reduction in the federal corporate income tax rate, the
Corporation recognized a one-time remeasurement of its federal net deferred tax asset in 2017, which resulted in additional
income tax expense and a decrease in net income of $6.6 million. The lower federal corporate income tax rate also had a
favorable effect on the net income of each of the Corporation’s principal business segments in 2018 compared to 2017,
the benefit of which was offset in part by lower tax savings on tax-exempt investment securities income during 2018,
resulting from the lower income tax rate coupled with a decline in the average balance of tax-exempt securities.
ASSET QUALITY
Allowance and Provision for Loan Losses
Allowance for Loan Losses Methodology – Retail Banking and Mortgage Banking. We conduct an analysis of the
collectibility of the loan portfolio on a regular basis. This analysis does not apply to PCI loans, loans carried at fair value,
loans held for sale or off-balance sheet credit exposure (e.g., unfunded loan commitments and standby letters of credit).
We use this analysis to assess the sufficiency of the allowance for loan losses and to determine the necessary provision for
loan losses.
The analysis, at a minimum, considers the following factors:
• Changes in lending policies and procedures, including underwriting, collection, charge-off and recovery;
• Changes in international, national, regional and local economic and business conditions and developments that
affect the collectability of the portfolio, including the condition of various market segments;
• Changes in the nature and volume of the portfolio and in the terms of loans;
• Changes in the experience, ability and depth of lending management and other relevant staff;
• Changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and
severity of adversely classified or graded loans;
• Changes in the quality of our loan review system;
• Changes in the value of the underlying collateral for collateral-dependent loans;
• The existence and effect of any concentrations of credit and changes in the level of such concentrations;
• The effect of other external factors, such as competition;
• Historical trends of actual loan losses based on volume and types of loans; and
• Significant one-time transactions affecting the allowance for loan losses.
42
In conjunction with the factors described above, we consider the following risk elements that are inherent in the
loan portfolio as part of the analysis:
• 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.
The review process generally begins with loan officers or management identifying problem loans to be reviewed
on an individual basis for impairment. This review of individual loans is limited to those loans that have indications of
probable loss or that may result in significant losses to the Corporation, while all other loans, which may include delinquent
loans and loans classified as special mention or substandard, are evaluated as a group, as discussed below. In addition, all
TDRs are considered impaired loans and are individually evaluated. 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. A valuation allowance is established for an impaired loan to the extent that this measure of the impaired loan
is less than the recorded investment in the loan. When a loan is determined to be impaired, we follow a consistent process
to measure that impairment in our loan portfolio. 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 also estimate costs to sell collateral in the measurement of impairment if those costs are
expected to reduce the cash flows available to repay or otherwise satisfy the loan.
The remaining non-impaired loans are grouped by loan type (e.g., commercial real estate, commercial, residential
mortgage, consumer). We assign each loan type an allowance factor based on the historical loss rate for that type of loan
and an evaluation of the qualitative factors mentioned above to determine a general allowance. 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. 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. The allowance for loan losses is the aggregate of specific allowances and the
general allowance for each portfolio type.
43
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 loan ratings are as follows:
• Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral
margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower
has paid all obligations as agreed and it is expected that this type of payment history will continue. When
necessary, acceptable personal guarantors support the loan.
• Special mention loans have a specific, identified weakness in the borrower’s operations and in the borrower’s
ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history is
characterized by late payments. The Corporation’s risk exposure is mitigated by collateral supporting the loan.
The collateral is considered to be well-margined, well maintained, accessible and readily marketable.
• Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of
the Corporation’s credit extension. The payment history for the loan has been inconsistent and the expected or
projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value
of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect
the Corporation. There is a distinct possibility that the Corporation will sustain some loss if the deficiencies
associated with the loan are not corrected in the near term. A substandard loan would not automatically meet
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
nonaccrual 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 and prime marine and RV loans. These loans carry risks associated with (1) the continued
credit-worthiness of borrowers 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 default, repossession and charge-off. Therefore, the
loan loss allowance review process generally focuses on an analysis of charge-off history for relevant periods of time,
which can vary depending on economic conditions. Further consideration is given to the following factors:
• An overall analysis of the lending environment;
• Changes in the volume and severity of past due loans;
• Changes in the value of the underlying collateral;
• Changes in lending policies and procedures, including underwriting, collection and recovery;
• Changes in the composition of the portfolio; and
• The effect of external factors, such as competition.
44
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 that 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 non-prime automobile borrowers, whereby the borrower is allowed to move up to two payments
within a twelve-month rolling period to the end of the loan. A fee will be collected for extensions only in states that permit
it. An account for which all delinquent payments are deferred is classified as current at the time the deferment is granted
and therefore is not included as a delinquent account. Thereafter, such an account is aged based on the timely payment of
future installments in the same manner as any other account. We evaluate the results of this deferment strategy based upon
the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the
collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, we
believe that payment deferrals granted according to our policies and guidelines are an effective portfolio management
technique and result in higher ultimate cash collections. Payment deferrals may affect the ultimate timing of when an
account is charged off. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would
increase expectations of credit losses inherent in the portfolio and therefore increase the allowance for loan losses and
related provision for loan losses. The average amounts deferred on a monthly basis, as a percentage of average non-prime
automobile loans outstanding, was 2.30 percent in 2018, 2.57 percent in 2017 and 2.21 percent in 2016.
45
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)
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . $ 35,726 $ 37,066 $ 35,569 $ 35,606 $ 34,852
Provision for loan losses:
2018
2017
2014
2015
Year Ended December 31,
2016
Retail Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100
Mortgage Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Consumer Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,906
Total provision for loan losses . . . . . . . . . . . . . . . . . . 11,006
200
—
16,235
16,435
—
—
18,040
18,040
—
45
15,467
15,512
—
60
16,270
16,330
Loans charged off:
Real estate—residential mortgage . . . . . . . . . . . . . . . .
(42)
Commercial, financial and agricultural1 . . . . . . . . . . .
(409)
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(344)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,477)
Total loans charged off . . . . . . . . . . . . . . . . . . . . . . . . (17,272)
(179)
(349)
(42)
(301)
(21,525)
(22,396)
(82)
(87)
(57)
(281)
(20,663)
(21,170)
(144)
(21)
(19)
(317)
(19,816)
(20,317)
(161)
(271)
(80)
(312)
(19,022)
(19,846)
Recoveries of loans previously charged off:
Real estate—residential mortgage . . . . . . . . . . . . . . . .
Commercial, financial and agricultural1 . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
59
59
210
—
—
230
250
4,217
3,751
4,563
4,270
(15,576)
Net loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,709)
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,023 $ 35,726 $ 37,066 $ 35,569 $ 35,606
Ratio of net charge-offs (recoveries) to average total
257
31
1
268
4,211
4,768
(15,549)
118
21
2
189
4,291
4,621
(17,775)
163
206
—
236
4,022
4,627
(16,543)
loans outstanding during period for Retail Banking . .
0.06 %
0.08 %
(0.02)%
(0.01)%
0.06 %
Ratio of net charge-offs to average total loans
outstanding during period for Consumer Finance . . . .
4.14 %
5.82 %
5.55 %
5.50 %
5.39 %
1
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line
lending and commercial business lending.
For further information regarding the adequacy of our allowance for loan losses, refer to “Nonperforming Assets”
within this Item 7.
46
The allocation of the allowance for loan losses 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:
2018
2017
December 31,
2016
2015
2014
Real estate—residential mortgage . . . . . . . . . . . . . . . . $ 2,246 $ 2,371 $ 2,559 $ 2,471 $ 2,313
Real estate—construction 1 . . . . . . . . . . . . . . . . . . . . .
434
Commercial, financial and agricultural 2 . . . . . . . . . .
7,744
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
812
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,092
Total allowance for loan losses . . . . . . . . . . . . . . . . . . $ 34,023 $ 35,726 $ 37,066 $ 35,569 $ 35,606
94
7,755
1,052
243
23,954
605
7,478
688
231
24,353
727
6,688
1,106
257
22,999
816
7,393
685
261
25,352
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17 %
5
43
5
2
28
100 %
19 %
4
43
5
1
28
100 %
19 %
6
39
5
1
30
100 %
21 %
1
39
6
1
32
100 %
21 %
1
37
6
1
34
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, 2018 were as follows:
TABLE 7A: Credit Quality Indicators
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . .
Real estate – construction 2 . . . . . . . . . . . . . . . . .
Commercial, financial and agricultural 3 . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pass
$ 180,232
54,461
440,832
54,289
14,998
Special
Mention
$ 2,832
—
14,625
389
5
$ 744,812 $ 17,851 $
Substandard
$
Substandard Nonaccrual
594
$
—
24
883
—
1,243
—
454
99
6
1,802 $
Total1
$ 184,901
54,461
455,935
55,660
15,009
1,501 $ 765,966
(Dollars in thousands)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 295,442 $
Performing Performing
712 $ 296,154
Total
Non-
1 At December 31, 2018, 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.
47
Loans by credit quality indicators as of December 31, 2017 were as follows:
TABLE 7B: Credit Quality Indicators
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . $ 179,963 $
Real estate – construction 2 . . . . . . . . . . . . . . . . .
Commercial, financial and agricultural 3 . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,782
410,890
53,870
12,693
$ 702,198 $
Pass
Special
Mention
Substandard
Nonaccrual
Total1
Substandard
1,235 $
—
2,908
465
3
4,611 $
2,835 $
—
20,256
251
322
23,664 $
830 $ 184,863
44,782
—
437,884
3,830
55,237
651
13,018
—
5,311 $ 735,784
Non-
(Dollars in thousands)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 291,240 $
Performing
Performing
Total
764 $ 292,004
1 At December 31, 2017, 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 allowance for loan losses as a percentage of total loans, excluding PCI loans, declined
to 1.37 percent at December 31, 2018, compared to 1.48 percent at December 31, 2017, because of a decrease in the
allowance related to impaired loans, loan growth during 2018 and overall better credit quality. We believe that the current
level of the allowance for loan losses at the retail banking segment 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 retail banking segment’s loan portfolio
result in higher credit risk or if economic conditions deteriorate in future periods, a higher level of nonperforming loans
may be experienced, which may then require a higher provision for loan losses.
The consumer finance segment’s allowance for loan losses decreased by $1.4 million to $23.0 million at
December 31, 2018 from $24.4 million at December 31, 2017, and its provision for loan losses decreased $5.3 million for
the year ended December 31, 2018, as compared to 2017. The decrease in the allowance and the lower provision resulted
primarily from C&F Finance purchasing loan contracts with higher credit metrics beginning in 2016, which has led to an
overall improvement in the credit quality of the portfolio and lower charge-offs. Delinquent loans as a percentage of total
loans decreased to 4.76 percent at December 31, 2018 from 5.17 percent at December 31, 2017 and the net charge-off ratio
for 2018 decreased to 4.14 percent from 5.82 percent for 2017. The allowance for loan losses as a percentage of loans
decreased to 7.77 percent at December 31, 2018, compared to 8.34 percent at December 31, 2017, primarily as a result of
lower net charge-offs on non-prime automobile loans and the purchase of prime marine and RV loans beginning in 2018,
which require a lower allowance for loan losses. Management expects the marine and RV loan contracts purchased by the
consumer finance segment beginning in the first quarter of 2018, which are contracts for prime loans made to borrowers
with higher credit scores, to require both a lower provision for loan losses and allowance for loan losses than the consumer
finance segment’s non-prime automobile loans, contributing to a decrease in the overall level of the consumer finance
segment’s allowance for loan losses as a percentage of total loans. At December 31, 2018, compared to December 31,
2017, the higher composition within the consumer finance segment’s loan portfolio of marine and RV loans accounted for
28 basis points of the 57 basis points decrease in this ratio.
As previously described, the consumer finance segment, at times, offers payment deferrals to non-prime automobile
borrowers as a management technique to achieve higher ultimate cash collections on select loan accounts. Payment
deferrals may affect the ultimate timing of when an account is charged off. A significant reliance on deferrals as a means
of managing collections may result in a lengthening of the loss confirmation period, which would increase expectations of
credit losses inherent in the portfolio. The average amounts deferred on a monthly basis, as a percentage of average non-
prime automobile loans outstanding was 2.30 percent in 2018, 2.57 percent in 2017 and 2.21 percent in 2016.
48
Because C&F Finance primarily focuses on non-prime borrowers, the anticipated rates of delinquencies, defaults,
repossessions and losses on the consumer finance loans are higher than those experienced in the general automobile finance
industry and could be more dramatically affected by a general economic downturn. 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. While we manage the higher risk inherent in loans
made to non-prime borrowers through the underwriting criteria, portfolio management 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 adequate to absorb probable losses on existing consumer
finance segment loans that may become uncollectible. If factors influencing the consumer finance segment result in higher
net charge-off ratios in future periods, the consumer finance segment may need to increase the level of its allowance for
loan losses through additional provisions 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.
Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less
estimated 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 estimated 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.
At the consumer finance segment, the repossession process is generally initiated after a loan becomes more than 60
days delinquent. Borrowers have an opportunity to redeem their repossessed vehicles by paying all outstanding balances,
including finance charges and fees. Vehicles that are not redeemed within the prescribed waiting period before C&F
Finance has the legal right to sell the repossessed vehicle then become available-for-sale at the end of that period and are
reclassified from loans to other assets and are recorded initially at fair value less estimated costs to sell. The difference
between the carrying amount of each loan and the fair value of the vehicle (i.e. the deficiency) is charged against the
allowance for loan losses. Accounts still in process of collection or for which the Corporation does not have the legal right
to sell continue to be classified as loans until such legal authority is obtained. After the vehicles have been sold in third-
party auctions, we credit the proceeds from the sale of the vehicles, and any other recoveries, to the carrying value of the
repossessed vehicles. C&F Finance pursues collection of deficiencies, as allowed by state law, when it deems such action
to be appropriate.
49
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 . . . . . . . . . . . . . . . . . . . $ 723,778
Purchased performing loans1 . . . . . . . . . . . . . . . . . . . . . . .
36,874
Purchased credit impaired loans1 . . . . . . . . . . . . . . . . . . . .
1,835
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 762,487
2018
2017
$ 686,605
42,793
3,103
$ 732,501
2016
$ 629,523
53,329
9,256
$ 692,108
2015
$ 525,283
67,022
13,908
$ 606,213
2014
$ 447,614
80,146
21,424
$ 549,184
Nonaccrual loans2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . $
1,464
246
1,710
$
$
5,272
168
5,440
$
$
4,235
195
4,430
$
$
6,157
942
7,099
$
$
4,717
786
5,503
324
Accruing loans past due for 90 days or more . . . . . . . . . . . $
Troubled debt-restructurings (TDRs)2 . . . . . . . . . . . . . . . . $
5,451
Allowance for loan losses (ALL) . . . . . . . . . . . . . . . . . . . . $ 10,426
Nonperforming assets to total loans and OREO . . . . . . . .
ALL to total loans, excluding purchased credit impaired
306
$
$ 10,896
$ 10,775
6
$
$
5,825
$ 11,115
761
$
$
5,344
$ 11,017
14
$
$
5,827
$ 10,961
0.22 %
0.74 %
0.64 %
1.17 %
1.00 %
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ALL to total nonaccrual loans . . . . . . . . . . . . . . . . . . . . . .
Net (recoveries) charge-offs to average total loans . . . . . .
1.37
712.16
0.06
1.48
204.38
0.08
1.63
262.46
(0.02)
1.86
178.93
(0.01)
2.08
232.37
0.06
1 Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The
remaining discount for the purchased performing loans was $1.9 million at December 31, 2018, $2.3 million at
December 31, 2017, $2.9 million at December 31, 2016, $4.0 million at December 31, 2015 and $4.9 million at
December 31, 2014. The remaining discount for the purchased credit impaired loans was $7.9 million at December 31,
2018, $9.8 million at December 31, 2017, $10.5 million at December 31, 2016, $11.8 million at December 31, 2015
and $15.1 million at December 31, 2014.
2 Nonaccrual loans include nonaccrual TDRs of $166,000 at December 31, 2018, $3.9 million at December 31, 2017,
$2.0 million at December 31, 2016, $2.5 million at December 31, 2015 and $2.0 million at December 31, 2014.
Mortgage Banking Segment
(Dollars in thousands)
$
$
41
$
39
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
37
$
$ 3,275
$ 3,283
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,479
598
598
598
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . $
$
$
$
Nonaccrual loans to total loans. . . . . . . . . . . . . . . . . .
1.25 %
1.19 %
1.06 %
Allowance for loan losses to total loans . . . . . . . . . .
18.26
17.19
18.22
2017
2018
2016
2015
—
3,493
598
$
$
$
— %
17.12
2014
187
3,288
553
5.69 %
16.82
Consumer Finance Segment
2018
(Dollars in thousands)
712
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . $
—
Accruing loans past due for 90 days or more . . $
Repossessed assets . . . . . . . . . . . . . . . . . . . . . . . $
371
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 296,154
Allowance for loan losses . . . . . . . . . . . . . . . . . . $ 22,999
Nonaccrual loans to total loans. . . . . . . . . . . . . .
Allowance for loan losses to total loans . . . . . .
Net charge-offs to average total loans . . . . . . . .
0.24 %
7.77
4.14
2017
764
$
—
$
$
250
$ 292,004
$ 24,353
2016
1,215
$
—
$
$
580
$ 304,357
$ 25,353
2015
1,321
$
—
$
$
392
$ 293,480
$ 23,954
2014
1,040
$
—
$
$
312
$ 283,333
$ 24,092
0.26 %
8.34
5.82
0.40 %
8.33
5.55
0.28 %
8.21
5.50
0.37 %
8.50
5.39
50
Table 9 presents the changes in the OREO balance for 2018 and 2017.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) gain on disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
225 $
98
—
(18)
(2)
303
(57)
246 $
281
208
(29)
(245)
10
225
(57)
168
Year Ended December 31,
Nonperforming assets of the retail banking segment totaled $1.7 million at December 31, 2018, compared to $5.4
million at December 31, 2017. Nonperforming assets at December 31, 2018 consisted primarily of $1.5 million in
nonaccrual loans, compared to $5.3 million at December 31, 2017. The decline in nonaccrual loans during 2018 resulted
primarily from the resolution of one commercial relationship that had a total carrying amount at December 31, 2017 of
$3.80 million.
Nonaccrual loans at the consumer finance segment decreased to $712,000 at December 31, 2018 from $764,000 at
December 31, 2017. As noted above, the allowance for loan losses at the consumer finance segment decreased from $24.4
million at December 31, 2017 to $23.0 million at December 31, 2018, and the ratio of the allowance for loan losses to total
consumer finance loans was 7.77 percent as of December 31, 2018, compared to 8.34 percent at December 31, 2017.
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
becomes more than 60 days delinquent. Repossessed vehicles of the consumer finance segment are classified as other
assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to
repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the
deficiency) is charged against the allowance for loan losses. At December 31, 2018, repossessed vehicles at fair value less
estimated costs to sell included in other assets totaled $371,000, compared to $250,000 at December 31, 2017.
If interest on nonaccrual loans had been recognized, we would have recorded additional gross interest income of
$325,000 for 2018, $462,000 for 2017, and $304,000 for 2016. Interest received on nonaccrual loans was $384,000 for
2018, $89,000 in 2017, $247,000 in 2016.
As discussed above, we measure impaired loans either based on fair value of the loan using the loan’s obtainable
market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected
future cash flows discounted at the loan’s effective interest rate. 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.
51
Impaired loans, which included TDRs of $5.45 million, and the related allowance at December 31, 2018, were as
follows:
TABLE 10A: Impaired Loans
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . $ 3,057 $
Commercial, financial and agricultural:
Recorded
Investment
in Loans
without
Recorded
Investment
in Loans
with
Unpaid
Principal
Balance Specific Reserve Specific Reserve Allowance Loans
Related
Average
Balance-
Impaired
1,288 $
1,677 $
92 $ 3,056 $
Interest
Income
Recognized
142
Commercial real estate lending . . . . . . . . . . 2,468
Commercial business lending . . . . . . . . . . .
33
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . .
365
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,928 $
1,498
25
31
—
2,842 $
927
—
326
5
2,935 $
10 2,653
26
—
359
326
5
—
428 $ 6,099 $
132
—
2
—
276
Impaired loans, which consisted solely of TDRs, and the related allowance at December 31, 2017, were as follows:
TABLE 10B: Impaired Loans
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . $ 3,745 $
Commercial, financial and agricultural:
Recorded
Investment
in Loans
without
Recorded
Investment
in Loans
with
Average
Balance-
Impaired
Related
Specific Reserve Specific Reserve Allowance Loans
Unpaid
Principal
Balance
1,603 $
2,033 $
214 $ 3,743 $
Interest
Income
Recognized
184
Commercial real estate lending . . . . . . . . . .
Commercial business lending . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,120 $
6,981
41
32
321
2,841
35
31
322
4,832 $
4,031
—
—
—
6,064 $
615
—
—
—
7,818
45
32
321
829 $ 11,959 $
168
—
2
13
367
TDRs at December 31, 2018 and 2017 were as follows:
TABLE 11: Troubled Debt Restructurings
(Dollars in thousands)
Accruing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonaccrual TDRs1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total TDRs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
5,285 $
166
5,451 $
7,015
3,881
10,896
December 31, December 31,
1
2
Included in nonaccrual loans in Table 8: Nonperforming Assets.
Included in impaired loans in Tables 10A and 10B: Impaired Loans.
The decrease in impaired loans during 2018 consisted primarily of the resolution of one commercial relationship
that had a total carrying amount at December 31, 2017 of $3.80 million. 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 management
concludes that the borrower is able to make such modified payments, and there are no other factors or circumstances that
would cause management to conclude otherwise, the TDR will remain on an accruing status.
52
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, 2018, the Corporation had total assets of $1.52 billion compared to $1.51 billion at
December 31, 2017. The significant components of the Corporation’s Consolidated Balance Sheets 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, and marine and RV lending through the
consumer finance segment and in residential mortgage lending through the mortgage banking segment with substantially
all of the loans originated through the mortgage banking segment sold to third-party investors. At December 31, 2018, the
Corporation’s loans held for investment in all categories, net of the allowance for loan losses, totaled $1.0 billion and loans
held for sale had a fair value of $41.9 million.
Tables 12 and 13 present information pertaining to the composition of loans held for investment and the
maturity/repricing of certain loans held for investment.
TABLE 12: Summary of Loans Held for Investment
December 31,
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,028,097 $
2017
184,863 $ 188,264 $ 186,763 $ 179,817
7,325
44,782
306,845
437,884
50,321
55,237
8,163
13,018
283,333
292,004
835,804
1,062,120 1,027,788
(35,726)
(35,606)
992,062 $ 962,674 $ 865,892 $ 800,198
2018
184,901 $
54,461
455,935
55,660
15,009
296,154
55,732
390,388
52,600
8,399
304,357
999,740
(37,066)
7,759
356,062
50,111
9,011
291,755
901,461
(35,569)
(34,023)
2015
2014
2016
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.
53
TABLE 13: Maturity/Repricing Schedule of Loans Held for Investment
December 31, 2018
Commercial,
Financial,
Real Estate
and Agricultural Construction
(Dollars in thousands)
Variable Rate:
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135,775 $
90,440
27,730
—
242
28,905
Fixed Rate:
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,830 $
63,420
94,740
2,703
—
22,611
The increase in total loans from December 31, 2017 to December 31, 2018 was primarily due to commercial and
construction loan growth at the retail banking segment resulting from additions of experienced lenders to our commercial
lending team over the past several years and demand for commercial lending in our established markets, as well as
expansion into new markets.
Total loans at December 31, 2018 and 2017 included 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. On the date of acquisition, the Corporation acquired PCI
loans with a fair value of $35.3 million and 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 Consolidated Balance Sheets at December 31, 2018 and 2017.
TABLE 14: PCI and Purchased Performing Loans
December 31, 2018
Total
48,502
9,107
20,443
9,153
6
38,709
Purchased
Credit
Impaired
$ 9,734 $ 38,768 $
Purchased
Performing
(Dollars in thousands)
Outstanding principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying amount
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,461
90
—
18,982
9,063
6
284 $
8,823 $
Total acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,835 $ 36,874 $
54
(Dollars in thousands)
Outstanding principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying amount
December 31, 2017
Purchased
Credit
Impaired
Purchased
Performing
$ 12,856 $ 45,083 $
Total
57,939
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
492 $ 10,855 $
2,472
139
—
22,305
9,621
12
Total acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,103 $ 42,793 $
11,347
24,777
9,760
12
45,896
For a description of the Corporation’s accounting for purchased performing and PCI loans, see “Critical Accounting
Policies” in this Item 7.
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 the Hampton to Charlottesville corridor in Virginia. The Bank offers various types of
residential first mortgage loans in addition to traditional long-term, fixed-rate loans. The majority of such loans include
10, 15 and 30 year amortizing mortgage loans with fixed rates of interest and fixed-rate mortgage loans with terms of 20,
25 and 30 years but subject to call after five years at the Bank’s option. Second mortgage loans are offered with fixed and
adjustable rates. Second mortgage loans are granted for a fixed period of time, usually between 5 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 12: 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.
55
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 9 months to 15 months for the construction of an individual residence and from 15 months
to a maximum of 3 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
approved by 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 12:
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.
Loans associated with consumer lot lending are included in the real estate—construction category in Table 12:
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, apartment complexes, 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 property 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 5 years to 15 years. These loans normally have provisions for interest rate
56
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 3 to 10 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. Certain commercial
customers qualify for participation in an interest rate swap program. This program provides flexible pricing structures for
our larger borrowers who wish to pay a fixed rate of interest, while preserving a floating rate for the Bank, which protects
C&F Bank from exposure to rising interest rates.
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 12: 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
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 12: Summary of Loans Held for Investment.
57
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 12: 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 12: 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 12: Summary of Loans
Held for Investment.
Consumer Lending
The retail banking segment offers a variety of consumer loans, including automobile, personal secured and
unsecured, and loans secured by savings accounts or certificates of deposit. The shorter terms and generally higher interest
rates on consumer loans help the Bank maintain a profitable spread between its average loan yield and its cost of funds.
Consumer loans secured by collateral other than a personal residence generally involve more credit risk than residential
mortgage loans because of the type and nature of the collateral or, in certain cases, the absence of collateral. However, we
believe the higher yields generally earned on such loans compensate for the increased credit risk associated with such
loans. 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 12: Summary of Loans
Held for Investment.
58
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. In 2016, C&F Finance implemented a scorecard model that improved underwriting and pricing efficiencies.
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
automobile 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 in the automobile portfolio than traditional financing sources. However, C&F Finance
generally purchases these 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.
In addition to purchasing automobile contracts through a dealer network, C&F Finance began purchasing marine
and RV contracts, also on an indirect basis, through a third party provider in 2018. While the approval process is generally
the same as the automobile approval process described above, borrowers on marine and RV contracts purchased by C&F
Finance have not had prior credit issues and these contracts are considered prime. The rates charged on these loans are
significantly less than the automobile portfolio with a much lower expected level of credit losses.
Loans associated with automobile sales finance are included in the consumer finance category in Table 12:
Summary of Loans Held for Investment.
SECURITIES
The investment portfolio plays a primary role in the management of the Corporation’s interest rate sensitivity. In
addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The investment
portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes
in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried
at estimated fair value. At December 31, 2018 and 2017, all securities in the Corporation’s investment portfolio were
classified as available for sale.
59
Table 15 sets forth the composition of the Corporation’s securities available for sale in dollar amounts at fair value
and as a percentage of the Corporation’s total securities available for sale at the dates indicated.
TABLE 15: Securities Available for Sale
(Dollars in thousands)
U.S. government agencies and corporations . . . . . . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . .
17,473
104,983
92,454
Total available for sale securities at fair value . . . . . . . . . . . . . . . $ 214,910
December 31, 2018
December 31, 2017
Amount Percent Amount Percent
8 %
8 % $
44
49
48
43
100 %
16,173
97,058
105,745
100 % $ 218,976
The Corporation seeks to diversify its portfolio to minimize risk, including by purchasing (1) shorter-duration
mortgage-backed securities to reduce interest rate risk and for cash flow and reinvestment opportunities and (2) 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. At December 31, 2018, approximately 96 percent of the Corporation’s obligations of
states and political subdivisions, as measured by market value, were rated “A” or better by Standard & Poor’s or Moody’s
Investors Service.
Table 16 presents additional information pertaining to the composition of the securities portfolio at December 31,
at amortized cost, by the earlier of contractual maturity or expected maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment
penalties.
TABLE 16: Maturity of Securities
2018
Year Ended December 31,
2017
2016
Weighted
Weighted
Amortized Average
Amortized Average
Weighted
Amortized Average
(Dollars in thousands)
U.S. government agencies and corporations:
Maturing within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . $
Maturing after 1 year, but within 5 years . . . . . . . . . . . .
Maturing after 5 years, but within 10 years . . . . . . . . . .
Total U.S. government agencies and corporations . .
Cost
Yield
Cost
Yield
Cost
Yield
7,266
6,596
4,146
18,008
2.47 % $
2.08
2.17
2.26
6,770
3,099
6,645
16,514
2.23 % $
1.88
2.10
2.11
7,032
1,849
7,645
16,526
1.61 %
1.65
2.04
1.81
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 . . . . . . . . . . . . . . . . . . .
126
102,127
2,791
1,743
106,787
41,510
41,258
7,401
1,686
91,855
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 . . . . . . . . . . . . . . . . . . . . . . . . .
48,902
149,981
14,338
3,429
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 216,650
4.95
2.35
2.36
3.02
2.36
3.89
3.17
5.45
4.52
3.71
77
97,061
537
2
97,677
33,398
59,285
8,072
3,222
103,977
4.36
2.10
3.19
3.25
2.11
5.09
4.04
6.32
5.52
4.60
304
71,740
3,890
1,276
77,210
20,703
75,898
10,587
6,969
114,157
1.96
2.03
2.87
2.72
2.08
5.03
4.54
5.77
6.11
4.84
40,245
3.68
159,445
2.56
15,254
3.90
3.76
3,224
2.92 % $ 218,168
28,039
4.61
149,487
2.82
22,122
4.37
5.52
8,245
3.30 % $ 207,893
4.14
3.30
3.97
5.59
3.58 %
1. Yields on tax-exempt securities have been computed on a taxable-equivalent basis using the federal corporate income
tax rate of 21 percent for the year ended December 31, 2018 and 34 percent for the years ended December 31, 2017
and 2016.
60
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 $1.18 billion at December 31, 2018, compared to $1.17 billion at December 31, 2017. This increase
primarily consisted of a $23.7 million increase in non-interest bearing demand deposits offset by a decrease of $12.1
million in savings, money market and interest-bearing demand deposits, which reflects our continued focus on attracting
non-interest bearing deposits as a core funding source and continued competition for interest-bearing deposits as rates have
continued to rise.
The Corporation had $2.4 million in brokered money market deposits outstanding at December 31, 2018, compared
to $3.3 million in brokered money market deposits at December 31, 2017. The source of these brokered deposits is
uninvested cash balances held in third-party brokerage sweep accounts. The Corporation uses brokered deposits as a means
of diversifying liquidity sources, as opposed to a long-term deposit gathering strategy.
Table 17 presents the average deposit balances and average rates paid for the years 2018, 2017 and 2016.
TABLE 17: Average Deposits and Rates Paid
2018
Year Ended December 31,
2017
2016
(Dollars in thousands)
Noninterest-bearing demand deposits . . $
Interest-bearing transaction accounts . . .
Money market deposit accounts . . . . . . .
Savings accounts . . . . . . . . . . . . . . . . . . .
Certificates of deposit, $100 thousand
Average
Balance
266,415
221,750
215,662
116,896
Average
Rate
Average
Rate
Average
Rate
Average
Balance
236,937
215,627
221,279
109,789
Average
Balance
210,520
211,441
213,793
102,899
$
0.22 %
0.27
0.08
$
0.36 %
0.32
0.09
or more . . . . . . . . . . . . . . . . . . . . . . . . .
172,616
Other certificates of deposit . . . . . . . . . .
177,279
Total interest-bearing deposits . . . . .
904,203
Total deposits . . . . . . . . . . . . . . . . . . . $ 1,170,618
1.28
1.06
0.63 %
163,100
181,746
891,541
$ 1,128,478
1.13
0.95
0.53 %
142,115
198,061
868,309
$ 1,078,829
0.22 %
0.27
0.08
1.04
0.91
0.50 %
Table 18 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2018.
TABLE 18: Maturities of Certificates of Deposit with Balances of $100,000 or More
(Dollars in thousands)
3 months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3-6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2018
33,427
33,539
46,697
58,110
171,773
$
BORROWINGS
In addition to deposits, the Corporation utilizes short-term and long-term borrowings as sources of funds. 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, as well as overnight unsecured fed funds
lines with correspondent banks. Long-term borrowings consist of advances from the FHLB and advances under a non-
recourse revolving bank line of credit. 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.
61
In December, 2007, Trust II, a wholly-owned subsidiary of the Corporation, was formed for the purpose of issuing
trust preferred capital securities for general corporate purposes including the refinancing of existing debt. On December 14,
2007, Trust II issued $10.0 million of trust preferred capital securities in a private placement to an institutional investor
and $310,000 in common equity to the Corporation. The principal asset of Trust II is $10.3 million of the Corporation’s
trust preferred capital notes. In July 2005, Trust I, a wholly-owned subsidiary of the Corporation, was formed for the
purpose of issuing trust preferred capital securities to partially fund the Corporation’s purchase of 427,186 shares of its
common stock. On July 21, 2005, Trust I issued $10.0 million of trust preferred capital securities in a private placement
to an institutional investor and $310,000 in common equity to the Corporation. The principal asset of Trust I is $10.3
million of the Corporation’s trust preferred capital notes. In December 2003, CVBK Trust I was formed for the purpose
of issuing $5.0 million of trust preferred capital securities in private placements to institutional investors. The principal
asset of CVBK Trust I is $5.2 million of trust preferred capital notes originally issued by CVBK and then assumed by the
Corporation.
For further information concerning the Corporation’s borrowings, refer to Item 8. “Financial Statements and
Supplementary Data” under the heading “Note 9: Borrowings.”
OFF-BALANCE-SHEET ARRANGEMENTS
To meet the financing needs of customers, the Corporation is a party, in the normal course of business, to financial
instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit, commitments
to sell loans and standby letters of credit. These instruments involve elements of credit and interest rate risk in addition to
the amount on the balance sheet. The Corporation’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by
the contractual amount of these instruments. We use the same credit policies in making these commitments and conditional
obligations as we do for on-balance-sheet instruments. We obtain collateral based on our credit assessment of the customer
in each circumstance.
Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms
of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require
payment of a fee by the customer. Since many of the commitments may expire without being completely drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. The total amount of unused loan
commitments was $244.2 million at December 31, 2018, and $224.5 million at December 31, 2017.
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 $19.3 million at
December 31, 2018 and $15.5 million at December 31, 2017.
At December 31, 2018, C&F Mortgage had interest rate lock commitments (or IRLCs) to originate mortgage loans
aggregating $44.3 million and loans held for sale of $40.6 million. At December 31, 2018, each IRLC and 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, 2018, C&F Mortgage
had best efforts forward sales contracts with a notional value of $84.9 million. The fair value of these derivative instruments
at December 31, 2018 was $636,000, which was included in other assets. There were no loans to be delivered on a
mandatory basis at December 31, 2018.
C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party counterparties
(i.e., investors). 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
62
of C&F Mortgage for loans that contain covered deficiencies. C&F Mortgage has obtained early payment default recourse
waivers for a significant portion of its business. Recourse periods for early payment default for the remaining
counterparties vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting
error do not have a stated time limit. C&F Mortgage maintains an indemnification reserve for potential claims that, in
management’s judgment, will be adequate to absorb any losses arising from valid indemnification requests. Payments
made under these recourse provisions were $350,000 in 2016. There were no payments made in 2018 and 2017. Payments
made during 2016 primarily resulted from an agreement with a third-party counterparty that resolved all known and
unknown indemnification obligations for loans sold to this counterparty prior to August 2016.
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 has interest rate swaps that qualify and are designated 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, 2018, the cash flow hedges had a fair value of $289,000, which is recorded in other assets. The net gain on
the cash flow hedges is recognized as a component of other comprehensive income.
Pursuant to a program the Corporation initiated during 2016, the Corporation also enters into interest rate swaps
with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation
simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The
net effect of these interest rate swaps and the related loans is that the customer pays a fixed rate of interest and the
Corporation receives a floating rate. At December 31, 2018, the total notional amount of the interest rate swaps related to
these loans was $91.9 million, and the interest rate swaps had a net fair value of zero, with $1.6 million recognized in other
assets and $1.6 million recognized in other liabilities. These swaps are not designated as hedging instruments; therefore,
changes in fair value are recorded in other noninterest expense.
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 $220.1 million at December 31, 2018. The Corporation’s funding
sources, including capacity, amount outstanding and amount available at December 31, 2018 are presented in Table 19.
TABLE 19: Funding Sources
(Dollars in thousands)
Unsecured federal funds agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,000 $
Repurchase lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from Federal Reserve Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 412,251 $
50,000
152,346
19,905
120,000
Capacity
— $ 70,000
50,000
—
107,846
44,500
19,905
—
75,029
44,971
119,529 $ 292,722
December 31, 2018
Outstanding
Available
63
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, our business operations and initiatives, 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 $113.7 million at December 31, 2018; time
deposits of $100,000 or more, maturing in more than one year, totaled $58.1 million.
The Corporation’s contractual obligations and scheduled payment amounts due at various intervals over the next
five years and beyond as of December 31, 2018 are presented in Table 20.
Table 20: Contractual Obligations
Payments Due by Period
Less than
More than
(Dollars in thousands)
Bank line of credit . . . . . . . . . . . . . . . . . . . . . . . $
FHLB advances 1 . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred capital notes . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . .
Total2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 151,311 $
Total
75,029 $
44,500
25,245
6,537
1 Year
1-3 Years
3-5 Years
5 Years
— $
7,000
—
1,503
8,503 $
75,029 $
7,500
—
2,264
84,793 $
— $
15,000
—
554
15,554 $
—
15,000
25,245
2,216
42,461
1
FHLB advances include convertible advances of $7.0 million, $7.5 million, $7.5 million, $7.5 million, $5.0 million, $5.0 million
and $5.0 million maturing in 2019, 2020, 2022, 2023, 2024, 2025 and 2026, respectively. 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 $7.0 million and $7.5 million maturing in 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, 2018, 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, management believes that the Corporation maintains overall liquidity sufficient to satisfy its operational
requirements and contractual obligations.
CAPITAL RESOURCES
Shareholders’ equity was $152.0 million at year-end 2018, compared with $141.7 million at year-end 2017. During
2018, the Corporation declared common stock dividends of $1.41 per share, compared to $1.33 per share declared in 2017
and $1.29 per share declared in 2016.
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.
In August 2018, the Federal Reserve Board issued an interim final rule provisionally expanding the applicability of
its small bank holding company policy statement to bank holding companies with consolidated total assets of less than $3
64
billion. The statement previously applied only to bank holding companies with consolidated total assets of less than $1
billion. As a result of the interim final rule, which was effective August 30, 2018, the Corporation expects that it will be
treated as a small bank holding company and will no longer be subject to regulatory capital requirements. At December 31,
2018, the Corporation’s capital ratios exceeded all minimum capital requirements that would apply to the Corporation if
it were not a small bank holding company.
The Corporation’s CET1 to total risk-weighted assets ratio was 11.9 percent and 11.1 percent at December 31, 2018
and 2017, respectively. The Corporation’s Tier 1 capital to risk-weighted assets ratio was 14.0 percent and 13.2 percent at
December 31, 2018 and 2017, respectively. The total capital to risk-weighted assets ratio was 15.3 percent at December 31,
2018, compared with 14.4 percent at December 31, 2017. The Tier 1 leverage ratio was 11.3 percent at December 31,
2018, compared with 10.5 percent at December 31, 2017. 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. Additionally, all applicable regulatory capital ratios of C&F Bank were in excess of mandated minimum
requirements at December 31, 2018 and 2017.
Under the Basel III Final Rule, the Bank must maintain a capital conservation buffer of additional total capital and
CET1. The capital conservation buffer requirement was in effect on January 1, 2016, and is subject to phase-in from 2016
to 2019 in equal annual installments of 0.625 percent. Accordingly, at December 31, 2018 and 2017, the applicable capital
conservation buffer was 1.875 percent and 1.250 percent, respectively. At December 31, 2018, the Bank exceeded the
total capital conservation buffer and the CET1 capital conservation buffer by 525 and 748 basis points, respectively. At
December 31, 2017, the Bank exceeded the total capital conservation buffer and the CET1 capital conservation buffer by
499 and 722 basis points, respectively.
The Corporation's capital resources may be affected by the Corporation's Repurchase Program, which was
reauthorized by the Corporation's Board of Directors during the second quarter of 2018. Under the Repurchase Program
the Corporation is authorized to purchase up to $5.0 million of its common stock. Repurchases under the program may be
made through privately-negotiated transactions or open-market transactions, and shares repurchased will be returned to
the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares
repurchased under the program will be determined by management and the Board of Directors in their discretion and will
depend on a number of factors, including the market price of the shares, general market and economic conditions,
applicable legal requirements and other conditions. The Repurchase Program is authorized through May 31, 2019. As of
December 31, 2018, the Corporation had repurchased 21,232 shares of its common stock at an aggregate cost of $1.1
million, and remained authorized to purchase up to $3.9 million of its common stock under the Repurchase Program.
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 generally accepted
accounting principles in the United States (U.S. GAAP). U.S. 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.
65
USE OF CERTAIN NON-U.S. GAAP FINANCIAL MEASURES
The accounting and reporting policies of the Corporation conform to U.S. GAAP and prevailing practices in the
banking industry. However, certain non-U.S. GAAP measures are used by management to supplement the evaluation of
the Corporation’s performance. These include adjusted net income, adjusted earnings per share, adjusted ROE and adjusted
ROA excluding the one-time effect of the remeasurement of deferred tax assets and liabilities in connection with the
enactment of the Tax Act on December 22, 2017.
Management believes that the exclusion of the significant one-time effect of the Tax Act provides users of the
Corporation’s financial information a presentation of the Corporation’s financial results that is representative of its ongoing
operations. Management uses these non-U.S. GAAP measures to evaluate the Corporation’s operating performance on a
basis comparable to other financial periods. In this non-U.S. GAAP presentation, the income tax expense related to the
remeasurement of the Corporation’s net deferred tax asset is added to the Corporation’s net income. The resulting adjusted
net income is used in the calculations of adjusted earnings per share, adjusted ROE and adjusted ROA.
These non-U.S. GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial
statements, and other bank holding companies may define or calculate these or similar measures differently. A
reconciliation of the non-U.S. GAAP financial measures used by the Corporation to evaluate and measure the
Corporation’s performance to the most directly comparable U.S. GAAP financial measures is presented below.
(Dollars in thousands, except per share amounts)
Adjusted Net Income and Earnings Per Share
Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset remeasurement adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares - assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
A
B
C
D
Earnings per share - assuming dilution
Earnings per share - assuming dilution, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted earnings per share - assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A/C
B/C
Earnings per share - basic
Earnings per share - basic, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A/D
B/D
For The
Year Ended
12/31/2017
$
$
6,572
6,643
13,215
3,486,589
3,486,510
$
$
$
$
1.88
3.79
1.89
3.79
Adjusted ROE
Average shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E
$
143,646
ROE, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A/E
B/E
4.58 %
9.20 %
Adjusted ROA
Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F
$
1,463,139
ROA, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A/F
B/F
0.45 %
0.90 %
(1) The letters included in this column are provided to show how certain non-U.S. GAAP amounts presented herein
are calculated.
66
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 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
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, by investing in securities with terms that manage the
Corporation’s overall interest rate risk, and in some cases by using derivative contracts to reduce the Corporation’s overall
exposure to changes in interest rates. The Corporation does not enter into interest rate-sensitive instruments for trading
purposes.
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.
67
The simulation analysis results are presented in the table below. These results, based on a measurement date balance
sheet as of December 31, 2018, indicate that the Corporation would expect net interest income to decrease over the next
twelve months 8.86 percent assuming an immediate downward shift in market interest rates of 200 basis points (BP) and
to increase 5.42 percent if rates shifted upward to the same degree.
One-Year Net Interest Income Simulation (dollars in thousands)
Hypothetical Change in Net
Interest Income
Over the Next Twelve Months
as of December 31,
2018
2017
Assumed Market Interest Rate Shift
-200 BP shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,897)
+200 BP shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,223
Dollars
Percentage Dollars
(8.86)% $ (6,742)
5.42 % $ 3,671
Percentage
(8.39)%
4.57 %
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, 2018 indicate that the
EVE would decrease 17.04 percent assuming an immediate downward shift in market interest rates of 200 BP and would
increase 7.98 percent if rates shifted upward to the same degree.
Static EVE Change (dollars in thousands)
Hypothetical Change in EVE
as of December 31,
2018
2017
Assumed Market Interest Rate Shift
-200 BP shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (45,371)
+200 BP shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,237
Dollars
Percentage Dollars
Percentage
(17.04)% $ (44,093) (18.86)%
10.88 %
7.98 % $ 25,439
In the simulation analysis 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 the Corporation’s borrowings and deposits
primarily due to the shorter maturity or repricing dates of its interest-bearing deposits in other banks and its loan portfolio.
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 the Corporation’s borrowings and deposits due to the shorter maturity or repricing dates of its interest-bearing
deposits in other banks and its loan portfolio as compared to time deposits and borrowings and the longer average life of
non-maturing deposits, such as interest checking and money market accounts.
The Corporation uses interest rate swaps to manage select exposures 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 has interest rate swaps that
qualify as cash flow hedges. The cash flow hedges effectively modify the Corporation’s exposure to interest rate risk
associated with the Corporation’s trust preferred capital notes by converting variable rates of interest on the trust preferred
68
capital notes to fixed rates of interest until September 2020 or December 2019, as applicable. Also, as part of the
Corporation’s overall strategy for maximizing net interest income while managing interest rate risk, the Corporation
maintained interest-rate swaps on loans to certain commercial borrowers in order to effectively retain variable-rate loans
while providing a fixed rate to borrowers.
C&F Mortgage enters into IRLCs with customers to originate loans for which the interest rates are determined prior
to funding. C&F Mortgage then mitigates interest rate risk on these 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, 2018, each
loan held for sale and IRLC held by C&F Mortgage was subject to a forward sales agreement on a best efforts basis. The
fair value of these derivative instruments is reported in “Other assets” in the Consolidated Balance Sheets.
We believe that our current interest rate exposure is manageable and does not indicate any significant exposure to
interest rate changes.
69
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except 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 $216,650 and
$218,168, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net of allowance for loan losses of $34,023 and $35,726, respectively . . . . . .
Restricted stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned, net of valuation allowance of $57 and $57, respectively . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit and other amortizable intangible assets, net . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2018
2017
14,138 $
100,875
115,013
14,070
105,353
119,423
214,910
41,895
1,028,097
3,247
37,100
246
7,436
14,425
1,142
16,065
12,193
29,642
218,976
55,384
992,062
3,298
36,969
168
7,589
14,425
1,594
15,589
12,093
31,486
1,521,411 $ 1,509,056
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
271,360 $
563,741
346,560
1,181,661
14,917
119,529
25,245
920
27,181
1,369,453
247,669
575,807
347,953
1,171,429
20,621
122,029
25,210
838
27,227
1,367,354
Commitments and contingent liabilities (Note 16)
Shareholders’ Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,497,122 and
3,495,845 shares issued and outstanding, respectively, includes 139,455 and
137,880 of unvested shares, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,358
12,752
140,520
(4,672)
151,958
3,358
12,800
127,431
(1,887)
141,702
1,521,411 $ 1,509,056
See notes to consolidated financial statements.
70
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 maturities, calls and sales of available for sale securities . .
Wealth management services income, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average number of shares outstanding - basic . . . . . . . . . . . . . . . .
Weighted average number of shares outstanding - assuming dilution . . . . .
Year Ended December 31,
2017
2018
2016
84,529 $
2,097
82,734 $
1,128
82,951
509
361
2,089
2,725
319
428
92,548
1,601
4,085
4,189
1,152
11,027
81,521
11,006
70,515
7,841
4,213
5,072
10
1,860
3,882
2,880
25,758
42,003
8,308
23,421
73,732
22,541
4,521
18,020 $
5.15 $
5.15 $
340
1,491
3,214
242
444
89,593
1,175
3,573
3,702
1,151
9,601
79,992
16,435
63,557
8,553
4,458
5,228
10
1,619
3,476
3,888
27,232
327
1,235
3,742
192
483
89,439
1,078
3,314
3,433
1,143
8,968
80,471
18,040
62,431
8,120
4,262
4,991
52
1,165
3,562
3,895
26,047
43,597
7,730
21,496
72,823
17,966
11,394
6,572 $
1.89 $
1.88 $
42,345
7,228
20,987
70,560
17,918
4,459
13,459
3.90
3.89
3,454,282
3,455,883
3,501,221
3,501,221
3,486,510
3,486,589
See notes to consolidated financial statements.
71
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
2017
2018
18,020 $
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive loss:
Defined benefit plan:
Net actuarial (losses) gains arising during the period . . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of recognized net actuarial losses into net income1 .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service credit into net income1 . . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges:
Unrealized holding gains arising during the period . . . . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,155)
242
125
(26)
(62)
13
(863)
123
(32)
91
6,572 $
148
(51)
154
(54)
(61)
21
157
223
(88)
135
2016
13,459
(286)
100
157
(55)
(60)
21
(123)
119
(46)
73
Securities available for sale:
Unrealized holding losses arising during the period . . . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of net realized gains into net income2 . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale, net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2,538)
533
(10)
2
(2,013)
(2,785)
15,235 $
(1,315)
460
(10)
4
(861)
(569)
6,003 $
(3,186)
1,115
(52)
18
(2,105)
(2,155)
11,304
1 These items are included in the computation of net periodic benefit cost and are included in “Noninterest income-
Other” on the Consolidated Statements of Income. See “Note 12: Employee Benefit Plans,” for additional information.
2 These items are included in “Net gains on maturities, calls and sales of available for sale securities” on the
Consolidated Statements of Income.
See notes to consolidated financial statements.
72
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
Balance December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . $
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 ($1.29 per
share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . .
Reclassification of certain tax effects1 . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock vested . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock purchased . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared – common stock ($1.33 per
share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock vested . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock purchased . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared – common stock ($1.41 per
Common
Stock
Additional
Paid - In
Capital
Accumulated
Other
Total
Retained
Earnings
Comprehensive Shareholders’
Loss
Equity
3,301 $
10,420 $
116,167 $
1,171 $
131,059
—
—
10
—
26
3
(9)
—
—
352
1,218
(26)
146
(405)
13,459
—
—
—
—
—
—
—
3,331
—
11,705
(4,464)
125,162
—
—
—
2
—
32
3
(10)
—
—
—
82
1,451
(32)
144
(550)
6,572
—
334
—
—
—
—
—
—
3,358
—
12,800
(4,637)
127,431
—
—
—
26
3
(29)
—
—
1,345
(26)
141
(1,508)
18,020
—
—
—
—
—
—
(2,155)
—
—
—
—
—
—
(984)
—
(569)
(334)
—
—
—
—
—
—
(1,887)
—
(2,785)
—
—
—
—
13,459
(2,155)
362
1,218
—
149
(414)
(4,464)
139,214
6,572
(569)
—
84
1,451
—
147
(560)
(4,637)
141,702
18,020
(2,785)
1,345
—
144
(1,537)
share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . $
—
3,358 $
—
12,752 $
(4,931)
140,520 $
—
(4,672) $
(4,931)
151,958
1 Reclassification relates to the adoption of ASU 2018-02 in the year ended December 31, 2017 for stranded tax effects
related to the reduction in the enacted federal corporate income tax rate.
See notes to consolidated financial statements.
73
(Dollars in thousands)
Operating activities:
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2017
2018
2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$
18,020
$
6,572
$
13,459
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for indemnifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for other real estate owned losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net accretion of certain acquisition-related discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of discounts and amortization of premiums on securities, net . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains on calls of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized losses (gains) on sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains on sale of corporate premises and equipment . . . . . . . . . . . . . . . . . . . . . .
Income from bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 and calls of securities available for sale and payments on
mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sales (purchases) of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of loans held for investment by non-bank affiliates . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments on loans held for investment by non-bank affiliates . . . . . . . . . . . . . . . . . . . . . . .
Net increase in retail banking loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of corporate premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of corporate premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Net increase in demand, interest-bearing demand and savings deposits . . . . . . . . . . . . . . . . . .
Net (decrease) increase in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of common stock, excluding shares withheld to pay taxes . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers from loans to other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value of shares withheld at vesting for employee taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on cash flow hedging instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,220
632
11,006
52
—
1,345
403
(3,000)
(3,034)
1,783
451
(10)
2
(204)
(424)
(699,028)
720,358
(7,841)
2,771
9,405
16,435
186
—
1,451
627
(1,500)
(1,706)
1,676
676
(10)
(10)
(45)
(433)
(744,780)
749,976
(8,553)
153
3,481
82
(325)
47,122
51,067
(51,322)
51
(133,484)
117,014
(27,720)
—
18
(3,374)
227
(47,523)
11,625
(1,393)
(5,705)
—
(2,500)
144
(1,105)
—
(4,931)
(144)
(4,009)
(4,410)
119,423
115,013
10,909
821
(2,548)
(98)
432
123
$
$
$
(328)
(3,900)
135
(2,870)
25,775
41,520
(53,461)
(40)
(121,644)
117,018
(39,659)
—
245
(4,180)
289
(59,912)
47,970
3,538
3,257
—
—
147
—
84
(4,637)
—
50,359
16,222
103,201
119,423
9,430
5,133
(1,325)
(208)
560
223
$
$
$
See notes to consolidated financial statements.
2,666
(23)
18,040
290
135
1,218
656
(1,000)
(3,106)
1,456
754
(52)
(134)
(246)
(927)
(674,317)
674,410
(8,120)
(432)
(1,558)
5
3,803
26,977
57,355
(52,547)
(58)
(145,377)
118,500
(83,870)
(20)
1,384
(2,708)
1,017
(106,324)
41,605
4,683
(12,730)
7,500
(7,500)
149
—
362
(4,464)
—
29,605
(49,742)
152,943
103,201
8,927
2,311
(3,238)
(618)
414
119
$
$
$
74
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 liabilities 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.
C&F Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company
(C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc., and
CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in
September 1995, was formed to originate and sell residential mortgages and through its subsidiary, Certified Appraisals
LLC, provides ancillary mortgage loan production services for residential appraisals. C&F Finance, acquired on
September 1, 2002, is a finance company purchasing automobile, marine and recreational vehicle (RV) loans through
indirect lending programs. C&F Wealth Management, organized in April 1995, is a full-service brokerage firm offering a
comprehensive range of wealth management services and insurance products through third-party service providers. C&F
Insurance Services, Inc., was organized in July 1999, for the primary purpose of owning an equity interest in an
independent insurance agency that operates in Virginia and North Carolina. CVB Title Services, Inc. was organized for
the primary purpose of owning an equity interest in a full service title and settlement agency. 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, 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 the prior period financial statements to conform to the
current period presentation. None of these reclassifications are considered material. Additional information about
reclassifications related to the adoption of accounting standards is presented in Note 2.
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, 2018,
securities issued by the Commonwealth of Virginia and its political subdivisions comprised 13.7 percent of its state and
political subdivision portfolio and securities issued by the Virginia State Housing Authority comprised 3.6 percent of its
state and political subdivision portfolio. There are no concentrations of any state or issuer in the Corporation’s portfolio
of securities available for sale that exceed ten percent of stockholders’ equity at December 31, 2018, and the Corporation
does not have any other significant securities concentrations in any one industry or geographic region. Additional
information about the Corporation’s securities portfolio and investment activities is presented in Note 3.
States in which significant concentrations of the Corporation’s lending activities exist include Virginia, Tennessee,
Georgia and Ohio. At December 31, 2018, 42.9 percent of the Corporation’s loan portfolio consisted of commercial,
75
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, 26.8 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. Additional information about the
Corporation’s lending activities is presented in Note 4.
Business Combination: On October 1, 2013, the Corporation acquired Central Virginia Bankshares, Inc. (CVBK) and its
wholly-owned subsidiary Central Virginia Bank (CVB). 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.
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, 2018 and 2017, the minimum requirement was $1.07 million and $783,000, respectively. The Corporation
is required to maintain cash collateral against all loss positions in interest rate derivative relationships with dealer
counterparties, which are described in Note 19. At both December 31, 2018 and 2017, no collateral was required in
connection with the Corporation’s interest rate derivative relationships with dealer counterparties, as none of them was in
a loss position.
Securities: Investments in debt securities 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 debt securities are carried at estimated fair value with the corresponding unrealized gains and losses recognized in
other comprehensive income. Gains or losses are recognized in net income on the trade date using the amortized cost of
the specific security sold. Purchase premiums and discounts are recognized in interest income using the effective interest
rate method over the period from purchase to maturity or, for callable securities, the earliest call date.
Impairment of debt 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. The Corporation
regularly reviews unrealized losses in its investments in securities based on criteria including the extent to which market
value is below amortized cost, 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: The Corporation uses fair value accounting for its entire portfolio of loans held for sale (LHFS) in
accordance with Accounting Standards Codification (ASC) Topic 820 - Fair Value Measurement. 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.
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
76
between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred
to as the “nonaccretable difference,” and is not recorded. Any excess of cash flows expected at acquisition over the
estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the
loan when there is a reasonable expectation about the amount and timing of such cash flows. On a quarterly basis, the
Corporation evaluates its 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,
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 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 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. The Corporation’s
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 based on either the fair value
of the loan using the loan’s obtainable market price or the fair value of the collateral, if the loan is collateral dependent, or
using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair
value measurement. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Troubled debt restructurings (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 and are
evaluated individually. 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
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December 31, 2018 and 2017, the Corporation had $5.45 million and $10.90 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. 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 and consumer finance 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 and marine and recreational
vehicles (RVs)), 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.
The allowance consists of specific and general components. The specific component relates to loans that are individually
evaluated for impairment, and is established when the discounted cash flows (or collateral value or observable market
price) of an 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 individually evaluated for impairment. 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 these 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.
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• Special mention loans have a specific 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
nonaccrual 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.
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 that are
probable of arising from valid indemnification requests for loans that have been sold by C&F Mortgage. 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.
Restricted Stock: Restricted stock includes Federal Home Loan Bank (FHLB) stock. FHLB stock is carried at cost. No
ready market exists for this stock and it has no quoted market value. For presentation purposes, such stock is assumed to
have a market value that is equal to cost. Management reviews FHLB stock for impairment based on the ultimate
recoverability of the cost basis.
Other Real Estate Owned (OREO): Assets acquired through, or in lieu of, foreclosure are held for sale and are initially
recorded at fair value less estimated 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
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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 estimated 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 OREO expenses and improvements are capitalized.
Repossessed Assets: Repossessed assets primarily consist of vehicles repossessed by C&F Finance due to borrowers’
payment defaults. The repossession process is generally initiated after a loan becomes more than 60 days delinquent. Most
customers have an opportunity to redeem their repossessed vehicles by paying all outstanding balances, including finance
charges and fees. Vehicles that are not redeemed within a prescribed waiting period following repossession are then
reclassified from loans to repossessed assets available-for-sale (included in other assets) and recorded initially at fair value
less estimated costs to sell. The difference between the carrying amount of each loan and the fair value of the vehicle (i.e.,
the deficiency) is charged against the allowance for loan losses. The waiting period is determined as the length of time
after repossession that C&F Finance is prohibited to sell the vehicle under the laws of the state where the vehicle was
repossessed. Accounts still in process of collection or for which the Corporation does not have the legal right to sell
continue to be classified as loans until such legal authority is obtained. At December 31, 2018, repossessed vehicles at
fair value less estimated costs to sell included in other assets totaled $371,000, compared to $250,000 at December 31,
2017.
Repossession expense includes the costs to repossess and sell vehicles. These costs include transportation, storage,
rekeying, condition reports, legal fees, fees paid to repossession agents and auction fees. These costs are included in
noninterest expenses.
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, 2018, 2017 and 2016
was $3.22 million, $2.77 million and $2.67 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. The Corporation reviews the carrying value of goodwill at least
annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Corporation
may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the
totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit
is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired.
If the Corporation elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair
value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its
carrying amount to determine whether an impairment exists.
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.
Other Intangibles: During the fourth quarter of 2016, C&F Wealth Management acquired the assets of a registered
investment advisor with approximately $91.40 million in assets under management at the time of the acquisition. In
connection with the transaction, the Corporation recorded $1.40 million of amortizable assets, which primarily relate to
the value of the customer relationships. The Corporation is amortizing these intangible assets over the period of expected
benefit, which ranges from five to nine years using a straight-line method.
Transfer of Financial Assets: Transfers of loans are accounted for as sales when control over the loans has been
surrendered. Control over transferred loans is deemed to be surrendered when (1) the loans have been isolated from the
Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
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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 based on temporary 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 includes taxes on income or loss that is taxable in the period and changes during the
period in deferred tax assets and liabilities.
C&F Bank invests in qualified affordable housing projects through housing equity funds, the purpose of which is to
encourage investment in low-income residential property development in Virginia by providing a return on investment
through federal income tax credits and other tax benefits on losses generated by the projects. C&F Bank recognizes its
share of losses on these projects as a component of income tax expense.
The benefit of an uncertain 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 by
the applicable taxing authority, 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. Interest and penalties associated with unrecognized tax benefits are recognized as a
component of income tax expense.
Retirement Plan: The Corporation recognizes the overfunded or underfunded status of its defined benefit pension plan
as an asset or liability in its Consolidated Balance Sheets, measured as the difference between plan assets at fair value and
the projected benefit obligation as of December 31. Net periodic pension cost or income is recorded each period based on
actuarially determined amounts in accordance with GAAP and recognized in salaries and employment benefits and other
noninterest income in the Consolidated Statements of Income. Actuarial determinations of net periodic pension cost or
income are based on assumptions related to disount rates, rates of return on plan assets, employee compensation and
mortality and interest crediting rates. Other changes in the overfunded or underfunded status of the pension plan are
recorded in the year in which the changes occur through other comprehensive income.
Share-Based Compensation: Share-based 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 required service period. Forfeitures reduce compensation expense
for the periods in which forfeitures actually occur.
Earnings Per Share: The Corporation applies the two-class method of computing basic and diluted earnings per share
(EPS), which allocates a portion of undistributed earnings to the Corporation’s unvested restricted shares awarded to
employees and non-employee directors. These restricted shares are participating securities which contain rights to
nonforfeitable dividends prior to vesting. Accordingly, the weighted average number of shares outstanding used in the
calculation of basic and diluted EPS includes both common shares and unvested restricted 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 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 in the
Consolidated Balance Sheets when they are funded.
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Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an
other asset or other liability in the Consolidated Balance Sheets. The Corporation’s derivative financial instruments include
(1) 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, (2) interest rate swaps with certain qualifying
commercial loan customers and dealer counterparties and (3) interest rate swaps that qualify and are designated as cash
flow hedges on the Corporation’s trust preferred capital notes. Because the IRLCs, forward sales commitments and interest
rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect
unrealized gains and losses resulting from changes in the fair value of these instruments are reported as noninterest income
or noninterest expense, as applicable. 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 Corporation’s derivative financial instruments are described more fully
in Note 19.
Recent Significant Accounting Pronouncements:
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-
02, “Leases (Topic 842).” Subsequently, this ASU was amended when the FASB issued other updates, including ASU
2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842)” (collectively, ASC
842). Among other things in the amendments in ASC 842, 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 ASC 842 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing,
and operating leases) must apply a modified retrospective transition approach by either applying the new guidance as of
the beginning of the earliest comparative period presented in the financial statements or by electing an optional transition
method that will apply the new guidance as of the beginning of the period of adoption. Under the optional transition
method, prior periods will continue to be reported under current guidance. The modified retrospective approach would not
require any transition accounting for leases that expired before application date under either method. Lessees and lessors
may not apply a full retrospective transition approach.
The Corporation has completed an inventory of its leases, which comprise primarily leases of real estate and office
equipment in which the Corporation is the lessee, and all of which are accounted for as operating leases under current
guidance. The Corporation will adopt ASC 842 effective January 1, 2019 using the optional transition method. Under a
practical expedient available for transition, the classification of leases will remain the same upon adoption of ASC 842.
Upon transition, the Corporation will record a lease liability of approximately $3 million for its remaining payment
obligations as of January 1, 2019 for leases in effect at that time, based on the recognition criteria of ASC 842, and a
corresponding right of use asset. The Corporation has designed the financial reporting controls and procedures related to
accounting for leases under ASC 842 and will implement these controls in the first quarter of 2019. Adoption of ASC 842
is not expected to change the pattern of recognition of expense for the Corporation’s leases in effect as of December 31,
2018.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments,” as part of its project on financial instruments. Subsequently, this ASU was amended
when the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses”
(collectively, ASC 326). ASC 326 introduces an approach based on expected losses to estimate credit losses on certain
types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides
for a simplified accounting model for purchased financial assets with credit deterioration since their origination. For public
business entities that are SEC filers, the new standard is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption will be permitted for all organizations for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018. The amendments will be applied on a
modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to
opening retained earnings in the period of adoption. The Corporation has established a working group to prepare for and
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implement changes related to ASC 326 and has gathered historical loan loss data for purposes of evaluating appropriate
portfolio segmentation and modeling methods under the standard. The Corporation has performed procedures to validate
the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit
losses under ASC 326. The Corporation has engaged a vendor to assist in modeling expected lifetime losses under ASC
326, and expects to develop and refine an approach to estimating the allowance for credit losses during 2019. The adoption
of ASC 326 will result in significant changes to the Corporation’s consolidated financial statements, which may include
changes in the level of the allowance for credit losses that will be considered adequate, a reduction in shareholders’ equity
and regulatory capital of C&F Bank, differences in the timing of recognizing changes to the allowance for credit losses
and expanded disclosures about the allowance for credit losses. The Corporation has not yet determined an estimate of the
effect of these changes. The adoption of the standard will also result in significant changes in the Corporation’s internal
control over financial reporting related to the allowance for credit losses.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment,” which removes the requirement to compare the implied fair value of goodwill with its carrying
amount as part of step 2 of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its
annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU
2017-04 is effective for public business entities that are SEC filers for annual and interim periods beginning after
December 15, 2019. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2017-04 to have
a material effect on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—
Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modify the disclosure
requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description
of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments
are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of
the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted.
The Corporation does not expect the adoption of ASU 2018-13 to have a material effect on its consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General
(Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These
amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other
postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have
been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest
crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation
for the period. The amendments also clarify the disclosure requirements regarding the projected benefit obligation (PBO)
and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO)
and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years
ending after December 15, 2020. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2018-
14 to have a material effect on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected
to have a material effect on the Corporation’s financial position, results of operations or cash flows.
NOTE 2: Adoption of New Accounting Standards
On January 1, 2018, the Corporation adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and
all amendments thereto (collectively, ASU 2014-09), which (i) creates a single framework for recognizing revenue from
contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain/loss from the
transfer of nonfinancial assets, such as OREO. The Corporation adopted ASU 2014-09 using the modified retrospective
method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after
January 1, 2018 are presented under ASU 2014-09, while prior period amounts continue to be reported in accordance with
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pronouncements in effect prior to January 1, 2018. The adoption of ASU 2014-09 did not result in a change to the
accounting for any of the in-scope revenue streams; therefore, no cumulative effect adjustment was recorded.
Most revenue associated with the Corporation’s financial instruments, including interest income and gains/losses on
investment securities, derivatives and sales of financial instruments are outside the scope of ASU 2014-09. The
Corporation’s services that fall within the scope of ASU 2014-09 are presented within noninterest income and are
recognized as revenue as the Corporation satisfies its obligation to the customer. A description of the Corporation’s
primary revenue streams accounted for under ASU 2014-09 follows:
Service Charges on Deposit Accounts. The Corporation earns fees from its deposit customers for overdraft and account
maintenance services. Overdraft fees are recognized when the overdraft occurs. Account maintenance fees, which relate
primarily to monthly maintenance, are earned over the course of a month, representing the period over which the
Corporation satisfies the performance obligation.
Other Service Charges and Fees. The Corporation earns fees from its customers for transaction-based services. Such
services include ATM, stop payment and wire transfer fees at the retail banking segment and on-line payment processing
fees at the consumer finance segment. In each case, these service charges and fees are recognized in income at the time or
within the same period that the Corporation’s performance obligation is satisfied.
Interchange Income. The Corporation earns interchange fees from debit and credit cardholder transactions conducted
through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying
transaction value and are recognized daily, concurrently with the transaction processing services.
Wealth Management Services Income. The Corporation earns wealth management services income by providing
investment brokerage services and health and life insurance products to its customers through third-party service providers.
Fees that are transaction-based (e.g., execution of trades) are recognized on a monthly basis. Other fees, or commissions,
are earned over time as the contracted monthly or quarterly services are provided and are generally assessed based on
either account activity or the market value of assets under management at month or quarter end.
Gains/Losses on Sales of OREO. The Corporation records a gain/loss from the sale of OREO when control of the property
transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of
OREO to the buyer, the Corporation assesses whether the buyer is committed to perform the obligations under the contract
and whether collectability of the transaction price is probable. In determining the gain/loss on the sale, the Corporation
adjusts the transaction price and the related gain/loss on sale if a significant financing component is present.
On January 1, 2018, the Corporation adopted ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 makes targeted improvements
to several areas of U.S. GAAP including the disclosure of the fair value of financial instruments that are not measured at
fair value on a recurring basis. The new guidance, among other things, (i) eliminates the requirements to disclose the
methods and significant assumptions used to estimate the fair value and the description of the changes therein, if any,
during the period, (ii) requires the use of the exit price notion in calculating the fair values of financial instruments not
measured at fair value on a recurring basis and (iii) eliminates the guidance that allowed the use of the entry price notion
to calculate the fair value of certain financial instruments, such as loans and long-term debt. Accordingly, the Corporation
began disclosing the fair value of these financial instruments using an exit price notion rather than an entry price notion in
the first quarter of 2018 (see “Note 17: Fair Value of Assets and Liabilities”).
On January 1, 2018, the Corporation adopted ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires that
the service cost component of the net periodic benefit cost be presented with other employee compensation costs and that
the remaining components be presented in the aggregate with noninterest income or noninterest expense, as appropriate.
This guidance is required to be applied on a retrospective basis. Accordingly, income of $493,000 and $420,000 was
reclassified from “Salaries and employee benefits” to “Noninterest income – Other” on the Consolidated Statements of
Income for the year ended December 31, 2017 and 2016, respectively.
84
In the third quarter of 2018, the Corporation adopted ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities.” ASU 2017-12 improves the financial reporting of hedging
relationships to better portray the economic results of an entity’s risk management activities in its financial statements by
expanding the types of risk management activities to which hedge accounting can be applied and by simplifying its
application. As a result of the adoption of ASU 2017-12, any ineffectiveness in qualifying and designated cash flow
hedging relationships will be recorded in other comprehensive income rather than in earnings. The adoption of ASU 2017-
12 did not have a significant effect on the financial statements, and most of its provisions are effective for the Corporation
on a prospective basis.
In the third quarter of 2018, the Corporation also adopted ASU 2017-08, “Receivables – Nonrefundable Fees and Other
Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” which requires all entities that
hold investments in callable debt securities at a premium to amortize the premium to the earliest call date. The amendments
in ASU 2017-08 were applied on a modified retrospective basis as of January 1, 2018 and did not have a significant effect
on the financial statements.
NOTE 3: Securities
The Corporation’s debt securities, all of which are classified as available for sale, are summarized as follows:
December 31, 2018
Amortized
Gross
Unrealized
Gross
Unrealized
(Dollars in thousands)
U.S. government agencies and corporations . . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . .
Cost
18,008 $
106,787
91,855
$ 216,650 $
Gains
1 $
85
840
926 $
Losses
(536) $
Fair Value
17,473
104,983
92,454
(2,666) $ 214,910
(1,889)
(241)
December 31, 2017
Gross
Unrealized
Gross
Unrealized
Amortized
(Dollars in thousands)
U.S. government agencies and corporations . . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . .
Cost
16,514 $
97,677
103,977
$ 218,168 $
Gains
— $
142
2,022
2,164 $
Losses
Fair Value
16,173
97,058
105,745
(1,356) $ 218,976
(341) $
(761)
(254)
The amortized cost and estimated fair value of securities at December 31, 2018, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Cost
48,902 $
149,981
14,338
3,429
216,650 $
Fair Value
48,832
148,258
14,313
3,507
214,910
December 31, 2018
Amortized
The following table presents the gross realized gains and losses on and the proceeds from the (1) sale of securities and
(2) maturities and calls of securities for the years ended December 31, 2018, 2017 and 2016.
85
(Dollars in thousands)
Realized gains from sales of securities:
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of securities. . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains from maturities and calls of securities:
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities, calls and paydowns of securities . . . . . . .
Year Ended December 31,
2018
2017
2016
$
$
$
$
$
$
—
—
—
—
10
—
10
51,067
$
$
$
$
$
$
—
—
—
—
10
—
10
41,520
$
$
$
$
$
$
61
(26)
35
917
17
—
17
56,438
The Corporation pledges securities to primarily secure public deposits and repurchase agreements. Securities with an
aggregate amortized cost of $110.81 million and an aggregate fair value of $109.83 million were pledged at
December 31, 2018. Securities with an aggregate amortized cost of $118.70 million and an aggregate fair value of $119.26
million were pledged at December 31, 2017.
Securities in an unrealized loss position at December 31, 2018, by duration of the period of the unrealized loss, are shown
below.
(Dollars in thousands)
U.S. government agencies and corporations . $
Mortgage-backed securities . . . . . . . . . . . . . . 17,934
Obligations of states and political
997 $
Less Than 12 Months
Fair
Value
Unrealized
Loss
12 Months or More
Fair
Value
1 $ 15,725 $
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
132
72,830
1,757
90,764
535 $ 16,722 $
536
1,889
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . .
9,492
Total temporarily impaired securities . . . . . . $ 28,423 $
29
162 $ 109,110 $
20,555
212
30,047
2,504 $ 137,533 $
241
2,666
There were 237 debt securities totaling $137.53 million considered temporarily impaired at December 31, 2018. The
primary cause of the temporary impairments in the Corporation’s investments in debt securities was fluctuations in interest
rates. Interest rates increased during 2018, more significantly in the short-term portion of the United States Treasury
security yield curve, thereby increasing unrealized losses on the Corporation’s debt securities. The Corporation’s
mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored
enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full
faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and
interest payments. At December 31, 2018, approximately 97 percent of the Corporation’s obligations of states and political
subdivisions that were in a net unrealized loss position were rated “A” or better by Standard & Poor’s or Moody’s Investors
Service, as measured by market value. For the approximately three percent not rated “A” or better, as measured by market
value at December 31, 2018, the Corporation considers these to meet regulatory credit quality standards, meaning the
securities have low risk of default by the obligor, and the full and timely repayment of principal and interest is expected
over the expected life of the investment. Because the Corporation intends to hold these investments in debt securities to
maturity and it is more likely than not that the Corporation will not be required to sell these investments before a recovery
of unrealized losses, the Corporation does not consider these investments to be other-than-temporarily impaired at
December 31, 2018 and no other-than-temporary impairment loss has been recognized in net income.
86
Securities in an unrealized loss position at December 31, 2017, 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
Less Than 12 Months
Fair
Value
2,972 $
Unrealized
Loss
12 Months or More
Fair
Value
31 $ 13,201 $
Unrealized
Loss
57,116
341 22,545
Total
Fair
Value
Unrealized
Loss
310 $ 16,173 $
79,661
420
341
761
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . 18,644
Total temporarily impaired securities . . . . . . $ 78,732 $
117
489 $ 45,109 $
9,363
137
867 $ 123,841 $
28,007
254
1,356
The Corporation’s investment in restricted stock totaled $3.25 million at December 31, 2018 and consisted of Federal
Home Loan Bank (FHLB) stock. Restricted stock is generally viewed as a long-term investment, which is carried at cost
because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment,
its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value.
The Corporation did not consider its investment in restricted stock to be other-than-temporarily impaired at
December 31, 2018 and no impairment has been recognized.
NOTE 4: Loans
Major classifications of loans are summarized as follows:
December 31,
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate – construction 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial, financial and agricultural 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
184,901 $
54,461
455,935
55,660
15,009
296,154
1,062,120
(34,023)
2017
184,863
44,782
437,884
55,237
13,018
292,004
1,027,788
(35,726)
992,062
Less allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,028,097 $
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 $275,000 and $290,000 of demand deposit overdrafts at December 31, 2018 and 2017,
respectively.
87
The outstanding principal balance and the carrying amount of loans acquired pursuant to the Corporation's acquisition of
CVB on October 1, 2013 (or acquired loans) that were recorded at fair value at the acquisition date and are included in the
Consolidated Balance Sheets are as follows:
December 31, 2018
Acquired Loans - Acquired Loans -
December 31, 2017
Acquired Loans - Acquired Loans -
Purchased
Purchased
Credit Impaired Performing
Acquired Loans -
Total
Purchased
Credit Impaired
Purchased
Performing
Acquired Loans -
Total
(Dollars in thousands)
Outstanding principal
balance . . . . . . . . . . . . . . $
9,734 $
38,768 $
48,502 $
12,856 $
45,083 $
57,939
Carrying amount
Real estate – residential
mortgage . . . . . . . . . . $
284 $
8,823 $
9,107 $
492 $
10,855 $
11,347
Commercial, financial
and agricultural1 . . . . .
Equity lines . . . . . . . . . .
Consumer . . . . . . . . . . .
Total acquired loans . . . . . . $
1,461
90
—
1,835 $
18,982
9,063
6
20,443
9,153
6
36,874 $
38,709 $
2,472
139
—
3,103 $
22,305
9,621
12
42,793 $
24,777
9,760
12
45,896
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:
(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,
2018
2017
7,304 $
(3,737)
8,636
(2,657)
2,191
229
5,987 $
1,641
(316)
7,304
Loans on nonaccrual status at December 31, 2018 and 2017 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial, financial and agricultural:
Commercial real estate lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans on nonaccrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2018
2017
594 $
830
—
24
883
712
2,213 $
3,796
34
651
764
6,075
If interest income had been recognized on nonaccrual loans at their stated rates during the years ended December 31, 2018,
2017 and 2016, interest income would have increased by approximately $325,000, $462,000 and $304,000, respectively.
88
The past due status of loans as of December 31, 2018 was as follows:
—
—
315
—
—
—
—
—
—
324
90
—
—
78
—
—
2
136
—
—
306
(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
1,221 $
—
—
—
30 - 59 Days 60 - 89 Days 90+ Days Total
Past Due
Past Due
Past Due Past Due PCI
37 $ 1,258 $
— $
Current1
284 $
183,359 $
90+ Days
Past Due and
Total Loans Accruing
9
184,901 $
—
—
—
—
—
—
—
—
42,051
12,410
42,051
12,410
—
315
315 1,461
309,057
310,833
lending . . . . . . . . . . . . . . . . . . . . .
Builder line lending . . . . . . . . . . . . . .
Commercial business lending . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
163
46
31
11,419
12,880 $
—
—
19
584
—
1,965
2,568 $ 1,413 $ 16,861 $ 1,835 $ 1,043,424 $ 1,062,120 $
—
—
—
—
206
24
955
325
—
31
712 14,096
43,404
31,201
70,291
54,615
14,978
282,058
43,404
31,201
70,497
55,660
15,009
296,154
—
—
—
90
—
—
1
For the purposes of the table above, “Current” includes loans that are 1-29 days past due.
The table above includes nonaccrual loans that are current of $458,000, 30-59 days past due of $97,000, 60 - 89 days past
due of $560,000 and 90+ days past due of $1.10 million.
The past due status of loans as of December 31, 2017 was as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . $
Real estate – construction:
30 - 59 Days 60 - 89 Days 90+ Days Total
Past Due
Past Due
Past Due Past Due PCI
245 $ 2,164 $
14 $
1,905 $
Current1
Total Loans Accruing
90+ Days
Past Due and
492 $
182,207 $
184,863 $
Construction lending . . . . . . . . . . . . .
Consumer lot lending . . . . . . . . . . . . .
Commercial, financial and agricultural:
Commercial real estate lending . . . . .
Land acquisition and development
—
—
—
—
—
—
—
—
—
—
41,449
3,333
41,449
3,333
241
—
3,874
4,115 2,472
297,903
304,490
lending . . . . . . . . . . . . . . . . . . . . .
Builder line lending . . . . . . . . . . . . . .
Commercial business lending . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
685
—
550
9
12,273
15,663 $
—
—
—
—
—
2,061
2,075 $ 5,021 $ 22,759 $ 3,103 $ 1,001,926 $ 1,027,788 $
—
—
685
—
2
2
686
136
—
9
764 15,098
39,844
28,911
63,952
54,412
13,009
276,906
39,844
29,596
63,954
55,237
13,018
292,004
—
—
—
139
—
—
1
For the purposes of the table above, “Current” includes loans that are 1-29 days past due.
The table above includes nonaccrual loans that are current of $890,000, 30-59 days past due of $458,000, 60 - 89 days past
due of $14,000 and 90+ days past due of $4.71 million.
89
Loan modifications that were classified as TDRs, and the recorded investment in those loans at the time of their
modification, during the years ended December 31, 2018, 2017 and 2016 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . .
Commercial, financial and agricultural:
2018
Year Ended December 31,
2017
Number of Recorded Number of Recorded Number of Recorded
Investment
Loans
5 $ 1,136
Investment Loans
Investment Loans
365
2 $
1 $
140
2016
Commercial real estate lending . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
1
2 $
—
—
5
145
6,800
7
—
—
—
—
9 $ 7,165
227
3
125
2
1
291
11 $ 1,779
One TDR during the year ended December 31, 2018, nine during the year ended December 31, 2017 and ten during the
year ended December 31, 2016 included modifications of the loan’s interest rate. One TDR during the year ended
December 31, 2018 included a modification of the loan’s payment structure. Three TDRs during the year ended
December 31, 2017 and one during the year ended December 31, 2016 included a modification of the term of the loan.
All TDRs are considered impaired loans and are individually evaluated in the determination of the allowance for loan
losses. 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. The specific reserve associated with a TDR is reevaluated
when a TDR payment default occurs. There were no TDR payment defaults during the year ended December 31, 2018.
During the year ended December 31, 2017, TDR payment defaults occurred on three loans totaling $4.65 million that were
part of a single commercial relationship and became more than 90 days past due.
Impaired loans, which included TDRs of $5.45 million, and the related allowance at December 31, 2018 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . $ 3,057 $
Commercial, financial and agricultural:
Recorded
Investment
in Loans
without
Recorded
Investment
in Loans
with
Related
Average
Balance-
Impaired
Specific Reserve Specific Reserve Allowance Loans
Unpaid
Principal
Balance
1,288 $
1,677 $
92 $ 3,056 $
Interest
Income
Recognized
142
Commercial real estate lending . . . . . . .
Commercial business lending . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,928 $
2,468
33
365
5
1,498
25
31
—
2,842 $
927
—
326
5
2,935 $
10
—
326
—
2,653
26
359
5
428 $ 6,099 $
132
—
2
—
276
Impaired loans, which consisted solely of TDRs, and the related allowance at December 31, 2017 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . $ 3,745 $
Commercial, financial and agricultural:
Recorded
Investment
in Loans
without
Recorded
Investment
in Loans
with
Related
Average
Balance-
Impaired
Specific Reserve Specific Reserve Allowance Loans
Unpaid
Principal
Balance
1,603 $
2,033
$
214 $ 3,743 $
Interest
Income
Recognized
184
Commercial real estate lending . . . . . . . .
Commercial business lending . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,120 $
6,981
41
32
321
2,841
35
31
322
4,832 $
4,031
—
—
—
6,064
90
615
—
—
—
$
7,818
45
32
321
829 $ 11,959 $
168
—
2
13
367
NOTE 5: Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, 2018, 2017 and 2016 were as follows:
(Dollars in thousands)
Balance at December 31, 2015 . . . . . . . . . . . . . . $
Provision charged to operations . . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of loans previously charged off . . . .
Balance at December 31, 2016 . . . . . . . . . . . . . .
Provision charged to operations . . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of loans previously charged off . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . .
Provision charged to operations . . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of loans previously charged off . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . $
Real Estate
Residential Real Estate Financial & Equity
Lines
Mortgage Construction Agricultural
Commercial,
Consumer
Consumer Finance
2,471 $
7
(82)
163
2,559
(127)
(179)
118
2,371
(140)
(42)
57
2,246 $
94 $
722
—
—
816
(211)
—
—
605
122
—
—
727 $
7,755 $
(481)
(87)
206
7,393
413
(349)
21
7,478
(440)
(409)
59
6,688 $
1,052 $
(310)
(57)
—
685
43
(42)
2
688
418
—
—
1,106 $
243 $
63
(281)
236
261
82
(301)
189
231
140
(344)
230
257 $
23,954 $
18,039
(20,663)
4,022
25,352
16,235
(21,525)
4,291
24,353
10,906
(16,477)
4,217
22,999 $
Total
35,569
18,040
(21,170)
4,627
37,066
16,435
(22,396)
4,621
35,726
11,006
(17,272)
4,563
34,023
The following table presents, as of December 31, 2018, the balance of the allowance for loan losses, the allowance by
impairment methodology, total loans and loans by impairment methodology.
(Dollars in thousands)
Allowance balance attributable to loans:
Real Estate
Residential Real Estate Financial & Equity
Mortgage Construction Agricultural Lines
Commercial,
Consumer
Consumer Finance
Total
Individually evaluated for impairment . . . . . . . $
Collectively evaluated for impairment . . . . . . .
Acquired loans - PCI . . . . . . . . . . . . . . . . . . .
Total allowance . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans:
92 $
2,154
—
2,246 $
— $
727
—
727 $
10 $
6,678
—
6,688 $
326 $
780
—
1,106 $
— $
257
—
257 $
— $
22,999
—
22,999 $
428
33,595
—
34,023
Individually evaluated for impairment . . . . . . . $
Collectively evaluated for impairment . . . . . . .
Acquired loans - PCI . . . . . . . . . . . . . . . . . . .
2,965 $
181,652
284
— $
54,461
—
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 184,901 $
54,461 $
2,450 $
452,024
1,461
455,935 $
357 $
5 $
55,213
90
15,004
—
55,660 $ 15,009 $
— $
5,777
296,154 1,054,508
1,835
296,154 $ 1,062,120
—
The following table presents, as of December 31, 2017, the balance of the allowance for loan losses, the allowance by
impairment methodology, total loans and loans by impairment methodology.
(Dollars in thousands)
Allowance balance attributable to loans:
Real Estate
Residential Real Estate Financial & Equity
Mortgage Construction Agricultural Lines
Commercial,
Consumer
Consumer Finance
Total
Individually evaluated for impairment . . . . . . . $
Collectively evaluated for impairment . . . . . . .
Acquired loans - PCI . . . . . . . . . . . . . . . . . . .
Total allowance . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans:
214 $
2,157
—
2,371 $
— $
605
—
605 $
615 $
6,863
—
7,478 $
— $
688
—
688 $
— $
231
—
231 $
— $
24,353
—
24,353 $
829
34,897
—
35,726
— $
10,896
292,004 1,013,789
3,103
292,004 $ 1,027,788
—
Individually evaluated for impairment . . . . . . . $
Collectively evaluated for impairment . . . . . . .
Acquired loans - PCI . . . . . . . . . . . . . . . . . . .
3,636 $
180,735
492
— $
44,782
—
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 184,863 $
44,782 $
6,907 $
428,505
2,472
437,884 $
31 $
322 $
55,067
139
12,696
—
55,237 $ 13,018 $
91
Loans by credit quality indicators as of December 31, 2018 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . $
Real estate – construction:
Special
Mention
Pass
180,232 $ 2,832 $
Substandard
Substandard
Nonaccrual
1,243 $
594 $
Total1
184,901
Construction lending . . . . . . . . . . . . . . . . . . .
Consumer lot lending . . . . . . . . . . . . . . . . . . .
42,051
12,410
—
—
—
—
—
—
42,051
12,410
Commercial, financial and agricultural:
Commercial real estate lending . . . . . . . . . . .
Land acquisition and development lending .
Builder line lending . . . . . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
306,578
33,156
31,201
69,897
54,289
14,998
744,812 $ 17,851 $
3,801
10,248
—
576
389
5
454
—
—
—
99
6
1,802 $
—
—
—
24
883
—
1,501 $
310,833
43,404
31,201
70,497
55,660
15,009
765,966
1 At December 31, 2018, the Corporation did not have any loans classified as Doubtful or Loss.
Non-
(Dollars in thousands)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 295,442 $
Performing
Performing
Total
712 $ 296,154
Loans by credit quality indicators as of December 31, 2017 were as follows:
Special
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . $ 179,963 $
Real estate – construction:
Pass
Mention
Substandard
Substandard
Nonaccrual
Total1
1,235 $
2,835 $
830 $ 184,863
Construction lending . . . . . . . . . . . . . . . . . . . .
Consumer lot lending . . . . . . . . . . . . . . . . . . . .
41,449
3,333
—
—
—
—
—
—
41,449
3,333
Commercial, financial and agricultural:
Commercial real estate lending . . . . . . . . . . . .
Land acquisition and development lending . .
Builder line lending . . . . . . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
293,292
24,253
29,596
63,749
53,870
12,693
$ 702,198 $
2,874
—
—
34
465
3
4,611 $
4,528
15,591
—
137
251
322
23,664 $
3,796
—
—
34
651
—
304,490
39,844
29,596
63,954
55,237
13,018
5,311 $ 735,784
1 At December 31, 2017, the Corporation did not have any loans classified as Doubtful or Loss.
Non-
(Dollars in thousands)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 291,240 $
Performing
Performing
Total
764 $ 292,004
92
NOTE 6: OREO
At December 31, 2018 and 2017, OREO was $246,000 and $168,000, respectively. OREO is primarily comprised of
residential properties and non-residential properties associated with commercial relationships, and are located primarily in
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) gain on disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2018
2017
225
98
—
(18)
(2)
303
(57)
246
$
$
281
208
(29)
(245)
10
225
(57)
168
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,
2017
2016
2018
57 $
—
—
57 $
86 $
—
(29)
57 $
56
135
(105)
86
Other net noninterest expense applicable to OREO, other than the provision for losses, was $26,000, $72,000 and $22,000
for the years ended December 31, 2018, 2017 and 2016, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2018
8,300 $
36,390
34,501
79,191
(42,091)
37,100 $
2017
8,340
35,586
32,486
76,412
(39,443)
36,969
NOTE 8: Time Deposits
Time deposits are summarized as follows:
(Dollars in thousands)
Certificates of deposit, over $250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2018
72,880 $
273,680
346,560 $
2017
70,034
277,919
347,953
93
Remaining maturities on time deposits are as follows:
(Dollars in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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, 2018
198,357
87,336
23,249
17,591
10,353
9,674
346,560
$
December 31,
2018
14,917
22,912
18,883
$
$
$
1.12 %
0.71 %
$
14,917
2017
20,621
21,032
18,416
1.32 %
1.29 %
20,621
1 Consists of (1) repurchase transactions with customers, which generally mature the day following the day sold and
(2) at December 31, 2017 a repurchase agreement with a third-party correspondent bank, both types of which are
secured by investment securities.
Long-term borrowings at December 31, 2018 consist of 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
revolving bank line of credit, which matures in 2020, 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. The outstanding balance on this line was $75.03
million as of December 31, 2018. 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 2018. Long-term advances from the FHLB at
December 31, 2018 consist of $30.00 million of convertible advances and $14.50 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 at
December 31, 2018:
(Dollars in thousands)
Fixed Rate Hybrid Advances
Convertible Advances
Interest Rate
Maturity Date
Next
Conversion
Option Date
$ 7,000
$ 7,500
1.95 % 12/04/19
08/21/20
1.78
$ 7,500
$ 7,500
$ 5,000
$ 5,000
$ 5,000
1.48
1.96
2.32
2.53
2.83
09/19/22
09/29/23
10/25/24
11/28/25
12/29/26
09/20/21
09/29/22
10/25/23
11/29/24
12/29/25
94
The contractual maturities of long-term borrowings at December 31, 2018 are as follows:
(Dollars in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Rate Floating Rate
7,000 $
7,500
—
7,500
7,500
15,000
44,500 $
$
— $
75,029
—
—
—
—
75,029 $
Total
7,000
82,529
—
7,500
7,500
15,000
119,529
The Corporation’s unused lines of credit for future borrowings total approximately $292.72 million at December 31, 2018,
which consists of $107.85 million available from the FHLB, $44.97 million on C&F Finance’s revolving bank line of
credit, $19.90 million available from the FRB, $70.00 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 percent.
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 percent. 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
Trust I to the holder of the securities at a rate equal to the three-month LIBOR rate plus 1.57 percent. 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 percent. 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 percent.
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 percent. The
interest rate swap matures in December 2019. The principal asset of CVBK Trust I is $5.16 million of trust preferred
95
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 value on the date of acquisition of
CVBK. The resulting fair value adjustment was a discount of $716,000, which is being amortized over 20 years on a
straight-line basis, and the balance of which was $530,000 as of December 31, 2018.
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 Share
Shareholders’ Equity
During the year ended December 31, 2018, the Corporation repurchased 21,232 shares of its common stock under a share
repurchase program authorized by its Board of Directors for an aggregate cost of $1.11 million. Additionally, during the
years ended December 31, 2018, 2017 and 2016, the Corporation withheld 7,982 shares, 9,899 shares and 9,169 shares of
its common stock, respectively, from employees upon vesting of restricted stock to satisfy tax withholding obligations.
Accumulated Other Comprehensive Income (Loss)
The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of
deferred taxes of $1.23 million and $491,000 as of December 31, 2018 and 2017, respectively.
December 31,
(Dollars in thousands)
Net unrealized (losses) gains on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,375) $
638
Net unrecognized gains on cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
(2,649)
Net unrecognized losses on defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,672) $ (1,887)
215
(3,512)
2017
2018
Earnings Per Share (EPS)
The components of the Corporation’s EPS calculations are as follows:
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2017
2018
18,020 $
6,572 $
2016
13,459
Weighted average number of shares used in earnings per share—basic .
Effect of dilutive securities—stock option awards . . . . . . . . . . . . . . . . . .
Weighted average number of shares used in earnings per share—
3,501,221
—
3,486,510
79
3,454,282
1,601
assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,501,221
3,486,589
3,455,883
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 shares used in the calculation of basic and diluted EPS includes both vested and unvested
shares outstanding.
96
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,889 $ 1,989 $ 4,482
(23)
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,521 $ 11,394 $ 4,459
9,405
632
2016
2018
Year Ended December 31,
2017
Income tax expense for the years ended December 31, 2018, 2017 and 2016 differed from the federal statutory rate applied
to income before income taxes for the following reasons:
Year Ended December 31,
2018
2017
Amount Percent
Amount Percent
(Dollars in thousands)
Income tax at statutory rates . . . . . . . . . . . . . . . . . . . . . . . $ 4,734
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
575
Tax-exempt interest income . . . . . . . . . . . . . . . . . . . . . . . (592)
Carrying cost of tax-exempt assets . . . . . . . . . . . . . . . . .
18
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . (103)
Change in value of bank-owned life insurance . . . . . . . .
(89)
Investments in qualified housing projects . . . . . . . . . . . .
(85)
—
Remeasurement of net deferred tax assets . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
$ 4,521
21.0 % $ 6,288
2.6
348
(1,162)
(2.6)
0.1
32
(284)
(0.5)
(151)
(0.4)
(135)
(0.4)
6,643
—
(185)
0.3
20.1 % $ 11,394
2016
Amount Percent
35.0 %
2.2
(7.6)
0.2
(1.4)
(1.8)
(0.8)
—
(0.9)
24.9 %
35.0 % $ 6,272
403
1.9
(1,367)
(6.5)
36
0.2
(255)
(1.6)
(324)
(0.8)
(147)
(0.8)
—
37.0
(159)
(1.0)
63.4 % $ 4,459
The Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017, permanently lowered the federal
corporate income tax rate to 21 percent from the previous maximum rate of 35 percent, effective January 1, 2018. In the
year ended December 31, 2017, as a result of the reduction in the federal corporate income tax rate, the Corporation
recorded a one-time remeasurement adjustment to its net federal deferred tax asset of $6.64 million, which was recognized
in income tax expense.
97
The Corporation’s net deferred income taxes totaled $12.2 million and $12.1 million at December 31, 2018 and 2017,
respectively. The tax effects of each type of significant item that gave rise to deferred taxes are:
(Dollars in thousands)
Deferred tax asset
December 31,
2018
2017
Allowances for loan losses and OREO losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair value adjustments related to business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonqualified defined contribution plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for indemnification losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,567 $
1,643
2,925
825
663
346
365
1,415
16,749
9,004
2,123
2,460
769
641
475
—
1,286
16,758
Deferred tax liability
(2,886)
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(632)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(934)
Defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(43)
(170)
Net unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,665)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,193 $ 12,093
(2,838)
(1,024)
(620)
(74)
—
(4,556)
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 2015.
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 deferral of up to 95 percent of covered 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 18 and have at least one month 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 percent vested in C&F Bank’s contributions after two
years of service, 40 percent after three years, 60 percent after four years, 80 percent 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 $896,000, $799,000 and $653,000 in 2018, 2017 and 2016, respectively.
C&F Mortgage maintains a Defined Contribution 401(k) Savings Plan that authorizes a voluntary salary deferral of up to
100 percent of compensation (with a discretionary company match), subject to statutory limitations. Substantially all
employees who have attained the age of 18 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 percent in the employer’s contributions after two years of service, 50
percent after three years, 75 percent after four years, and fully vested after five years. The amounts charged to expense
under this plan were $220,000, $216,000 and $163,000 in 2018, 2017 and 2016, respectively.
C&F Finance maintains a Defined Contribution 401(k) and 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 $190,000, $223,000
and $239,000 in 2018, 2017 and 2016, respectively.
98
Individual performance bonuses are awarded annually to certain senior members of management of C&F Bank and C&F
Finance under the Corporation's Management Incentive Plan (MIP). The Corporation’s Compensation Committee
determines the bonuses to be paid to the Chief Executive Officer and the President of the Corporation. The Chief Executive
Officer recommends the bonuses to be paid to the remaining officers participating in the MIP. In determining the awards,
individual performance and the Corporation’s performance, including growth rate, returns on average assets and equity,
asset quality measures and absolute levels of income are considered. In addition, the Compensation Committee, based on
the recommendations of the Chief Executive Officer, determines the bonuses to be paid to other members of management
of C&F Bank and C&F Finance who do not participate in the MIP. The expense for these bonus awards is accrued in the
year of performance. Expenses under these plans were $1.95 million, $1.70 million and $1.44 million in 2018, 2017 and
2016, respectively. In accordance with employment agreements for certain senior officers of C&F Mortgage, performance
bonuses of $762,000, $759,000 and $780,000 were expensed in 2018, 2017 and 2016, respectively. Performance used in
determining the awards is directly related to the profitability of C&F Mortgage.
C&F Bank has a non-contributory, defined benefit pension plan (Cash Balance Plan) for all full-time employees over 21
years of age. Under the Cash Balance Plan, the benefit account for each participant will grow each year with annual pay
credits based on age and years of service and monthly interest credits based on the prior year’s December average yield
on 30-year Treasuries plus 150 basis points. C&F Bank funds pension costs in accordance with the funding provisions of
the Employee Retirement Income Security Act.
The Corporation has a nonqualified deferred compensation 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 $297,000,
$253,000 and $268,000 in 2018, 2017 and 2016, 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 at the time to provide post-retirement medical and dental insurance premiums for him and his spouse
for life. Expense under this arrangement was $88,000, $81,000, and $75,000 in 2018, 2017 and 2016, respectively, and
the related liability is included in other liabilities.
99
The following table summarizes the projected benefit obligations, plan assets, funded status and rate assumptions
associated with the Cash Balance Plan based upon actuarial valuations.
(Dollars in thousands)
Change in benefit obligation
December 31,
2018
2017
Projected benefit obligation, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,808
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,232
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
521
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,308)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,048)
Projected benefit obligation, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,205
Change in plan assets
19,254
Fair value of plan assets, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,050)
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,000
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,048)
Fair value of plan assets, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,156
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,951
Amounts recognized as an other asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,951
Amounts recognized in accumulated other comprehensive loss
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,017
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(572)
(933)
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,512
Weighted-average assumptions for benefit obligation at valuation date
$ 15,870
1,120
552
1,194
(928)
17,808
16,202
2,480
1,500
(928)
19,254
$ 1,446
$ 1,446
$ 3,987
(634)
(704)
$ 2,649
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest crediting rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.0 %
3.0
5.0
3.3 %
3.0
5.0
The accumulated benefit obligation was $17.21 million and $17.81 million as of the actuarial valuation dates December 31,
2018 and 2017, respectively.
100
The following table summarizes the components of net periodic benefit cost and rate assumptions associated with the Cash
Balance Plan.
(Dollars in thousands)
Components of net periodic benefit cost:
Year Ended December 31,
2017
2018
2016
Service cost, included in salaries and employee benefits . . . . . . . . . . . . . . . . . . . . $ 1,232 $ 1,120 $ 1,076
Other components of net periodic benefit cost:
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized net actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
521
(1,413)
(62)
125
552
(1,138)
(61)
154
528
(1,045)
(60)
157
Other components of net periodic benefit cost, included in other noninterest
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(829)
(493)
(420)
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
403 $
627
656
Weighted-average assumptions for net periodic benefit cost
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.3 %
7.3
3.0
3.7 %
7.3
3.0
3.8 %
7.5
3.0
January 1,
2018
2017
2016
The benefits expected to be paid by the plan in the next ten years are as follows:
(Dollars in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 – 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,904
628
811
815
1,454
6,587
$ 14,199
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).
101
C&F Bank’s defined benefit pension plan’s weighted average asset allocations by asset category are as follows:
Mutual funds-fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds-equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42 %
58
*
100 %
2018
2017
39 %
61
*
100 %
December 31,
* Less than one percent.
The following table summarizes the fair value of the defined benefit plan assets as of December 31, 2018 and 2017. For
more information about fair value measurements, see “Note 17: Fair Value of Assets and Liabilities.”
December 31, 2018
(Dollars in thousands)
Mutual funds-fixed income 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mutual funds-equity 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pension plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(Dollars in thousands)
Mutual funds-fixed income 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mutual funds-equity 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pension plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Assets at Fair
Fair Value Measurements Using
Level 1
8,497 $
11,659
—
20,156 $
Level 2 Level 3
— $
—
—
— $
— $
—
—
— $
Value
8,497
11,659
—
20,156
December 31, 2017
Fair Value Measurements Using
Level 1
7,510 $
11,744
—
19,254 $
Level 2 Level 3
— $
—
—
— $
— $
—
—
— $
Assets at Fair
Value
7,510
11,744
—
19,254
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 percent fixed income and 60 percent 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.
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NOTE 13: Related Party Transactions
Loans outstanding to directors and executive officers and certain of their affiliates totaled $2.05 million and $2.28 million
at December 31, 2018 and 2017, respectively. Loan advances totaled $51,000 and repayments totaled $284,000 in the year
ended December 31, 2018. Total deposits for directors and executive officers and certain of their affiliates were $4.93
million and $6.87 million at December 31, 2018 and 2017, 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 the
Corporation to issue 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 the
Corporation to issue 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 an exercise price equal to the fair market value of the Corporation’s common
stock on the date granted. As of December 31, 2017, there were no remaining outstanding stock options for the
Corporation’s common stock and none were granted in 2018. Stock option transactions under the various plans for the
periods indicated were as follows:
2016
Weighted-
Average
Exercise
Price
Shares
24,000 $
—
(9,750)
(12,000)
2,250
38.39
—
37.17
39.60
37.17
2017
Weighted-
Average
Exercise
(Dollars in thousands, except for per share amounts)
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding and exercisable at end of year . . . . . . . . . . . . .
Shares
Price
2,250 $
—
(2,250)
—
—
37.17
—
37.17
—
—
103
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 . . . . . . . . . . . . . . .
2018
Weighted-
Average
Grant Date
Shares
Fair Value
137,880 $ 43.52
52.82
30,185
42.41
(26,450)
42.54
(2,160)
45.75
139,455
2017
Weighted-
Average
Grant Date
Shares
Fair Value
141,755 $ 39.77
52.73
29,625
35.42
(31,810)
43.16
(1,690)
43.52
137,880
2016
Weighted-
Average
Grant Date
Shares
Fair Value
137,200 $ 36.50
43.48
32,630
27.30
(26,000)
38.59
(2,075)
39.77
141,755
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 2018, 2017 and
2016 was $52.82, $52.73 and $43.48, respectively. Compensation expense is charged to income ratably over the required
service periods, and was $1.35 million in 2018, $1.45 million in 2017 and $1.22 million in 2016. As of December 31, 2018,
there was $3.17 million of total unrecognized compensation cost related to restricted stock granted under the 2013 Plan.
This amount is expected to be recognized through 2023.
NOTE 15: Regulatory Requirements and Restrictions
The Bank is 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 Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are subject to qualitative
judgments by the regulators about components, risk weightings, and other factors. Federal banking regulations also impose
regulatory capital requirements on bank holding companies. However, in August 2018, the Federal Reserve Board issued
an interim final rule, which was effective August 30, 2018, that expanded its small bank holding company policy statement
to apply to certain bank holding companies with consolidated total assets of between $1 billion and $3 billion. As a result
of this interim final rule, the Corporation is no longer subject to the minimum regulatory capital requirements that apply
to bank holding companies.
As of December 31, 2018, the most recent notification from the FDIC 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, 2018, 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, 2018 and 2017 are presented in
the following table along with regulatory requirements for the Bank and requirements that apply to bank holding companies
that are subject to regulatory capital requirements for bank holding companies. Total risk-weighted assets at December 31,
2018 for both the Corporation and the Bank was $1.20 billion, and at December 31, 2017 for both the Corporation and
104
the Bank was $1.18 billion. Management believes that, as of December 31, 2018, the Bank met all capital adequacy
requirements to which it is subject.
(Dollars in thousands)
As of December 31, 2018:
Total Capital (to Risk-Weighted Assets)
Actual
Minimum Capital
Requirements
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount Ratio
Amount
Ratio Amount
Ratio
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,781 15.3 % $ 96,274
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96,088
181,685 15.1
8.0 %
8.0
N/A N/A
$ 120,110 10.0 %
Tier 1 Capital (to Risk-Weighted Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
168,504 14.0
166,437 13.9
72,205
72,066
6.0
6.0
N/A N/A
8.0
96,088
Common Equity Tier 1 Capital (to Risk-Weighted
Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Capital (to Average Assets)
143,590 11.9
166,437 13.9
54,154
54,050
4.5
4.5
N/A N/A
6.5
78,072
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
168,504 11.3
166,437 11.2
59,759
59,666
4.0
4.0
N/A N/A
5.0
74,582
As of December 31, 2017:
Total Capital (to Risk-Weighted Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 170,376 14.4 % $ 94,383
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,163
167,657 14.2
8.0 %
8.0
N/A N/A
$ 117,704 10.0 %
Tier 1 Capital (to Risk-Weighted Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
155,370 13.2
152,684 13.0
70,787
70,622
6.0
6.0
N/A N/A
8.0
94,163
Common Equity Tier 1 Capital (to Risk-Weighted
Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Capital (to Average Tangible Assets)
130,445 11.1
152,684 13.0
53,091
52,967
4.5
4.5
N/A N/A
6.5
76,507
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
155,370 10.5
152,684 10.4
59,083
58,934
4.0
4.0
N/A N/A
5.0
73,667
In addition to the regulatory risk-based capital amounts presented above, the Bank must maintain a capital conservation
buffer of additional total capital and CET1 as required by the Basel III Final Rule. The capital conservation buffer
requirement was first in effect on January 1, 2016, and was subject to phase-in from 2016 to 2019 in equal annual
installments of 0.625 percent. Accordingly, at December 31, 2018 and 2017, the Bank was required to maintain a capital
conservation buffer of 1.875 percent and 1.250 percent, respectively. At December 31, 2018, the Bank exceeded the total
capital conservation buffer and the CET1 capital conservation buffer by 525 and 748 basis points, respectively. At
December 31, 2017, the Bank exceeded the total capital conservation buffer and the CET1 capital conservation buffer by
499 and 722 basis points, respectively.
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
105
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, 2018 and 2017.
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, while other measures of capital adequacy may also restrict the Bank’s ability to declare
dividends. 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 Contingent Liabilities
The Corporation enters into commitments to extend credit in the normal course of business to meet the financing needs of
its customers, including loan commitments and standby letters of credit. These instruments involve elements of credit and
interest rate risk in excess of the amounts recorded on the Consolidated Balance Sheets. 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. Because 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 $244.17 million at December 31, 2018
and $224.50 million at December 31, 2017.
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 $19.34 million at December 31, 2018 and $15.46 million at December 31, 2017.
C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party counterparties (i.e.,
investors). As is customary in the industry, the agreements with these counterparties require C&F Mortgage to extend
representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment
performance. Under the agreements, the counterparties are entitled to make loss claims and repurchase requests of C&F
Mortgage for loans that contain covered deficiencies. C&F Mortgage has obtained early payment default recourse waivers
for a significant portion of its business. Recourse periods for early payment default for the remaining counterparties vary
from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have
a stated time limit. C&F Mortgage maintains an allowance for indemnifications that represents management’s estimate of
losses that are probable of arising under these recourse provisions. As performance data for loans that have been sold is
not made available to C&F Mortgage by the counterparties, the evaluation of potential losses is inherently subjective. A
schedule of expected losses on loans with claims or indemnifications is maintained to ensure the reserve is adequate to
cover estimated losses. 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,
2018
2017
2,489 $
52
—
2,541 $
2,303
186
—
2,489
The Corporation is committed under noncancelable operating leases for certain office locations. Rent expense associated
with the Corporation's operating leases was $1.46 million, $1.53 million and $1.41 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
106
Future minimum lease payments due under the Corporation's operating leases as of December 31, 2018 are set forth in the
following table, which includes minimum lease paymenets of $3.21 million related to two lease agreements that were
executed prior to December 31, 2018 where the Corporation did not yet occupy the real estate properties under lease.
(Dollars in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,503
1,434
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
830
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
327
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
227
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,216
$ 6,537
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 securities traded in an active exchange market, as well as U.S. Treasury securities.
• Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model based valuation techniques for which
all significant assumptions are observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
• Level 3—Valuation is determined using model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect the Corporation’s estimates of assumptions
that market participants would use in pricing the respective asset or liability. Valuation techniques may include
the use of pricing models, discounted cash flow models and similar techniques.
U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent
measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has 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, 2018 and 2017, 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 ICE Data Services (ICE) and Thomson Reuters Pricing Service (TRPS). 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. ICE provides evaluated prices for the Corporation's obligations of states and political
subdivisions category of securities. ICE uses proprietary pricing models and pricing systems, mathematical tools and
judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that
security or securities with similar characteristics. TRPS provides evaluated prices for the Corporation’s U.S. government
107
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 (MBS) 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 - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the
price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the
observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis.
All of the Corporation’s IRLCs are classified as Level 2.
Derivative asset/liability – interest rate swaps on loans. The Corporation recognizes interest rate swaps at fair value.
The Corporation has contracted with a third party vendor to provide valuations for these interest rate swaps using standard
valuation techniques. All of the Corporation’s interest rate swaps on loans are classified as Level 2.
Derivative asset - cash flow hedges. The Corporation recognizes cash flow hedges at fair value. 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 and liabilities measured at fair value on a recurring basis.
December 31, 2018
Fair Value Measurements Using
Level 2
Level 3
Level 1
Assets/Liabilities at
(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 - interest rate swaps on loans . . . . . . . . . . . .
Derivative asset - cash flow hedges . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
—
—
—
—
—
$
17,473
104,983
92,454
214,910
41,895
636
1,607
289
$ 259,337
Liabilities:
Derivative liability - interest rate swaps on loans . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
$
1,607
1,607
$
$
$
— $
—
—
—
—
—
—
—
— $
—
— $
108
Fair Value
17,473
104,983
92,454
214,910
41,895
636
1,607
289
259,337
1,607
1,607
Fair Value Measurements Using
Level 2
Level 3
Level 1
Assets/Liabilities at
December 31, 2017
(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 - interest rate swaps on loans . . . . . . . . . . . .
Derivative asset - cash flow hedges . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
—
—
—
—
—
$
16,173
97,058
105,745
218,976
55,384
528
1,261
166
$ 276,315
Liabilities:
Derivative liability - interest rate swaps on loans . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
$
1,261
1,261
$
$
$
— $
—
—
—
—
—
—
—
— $
—
— $
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair Value
16,173
97,058
105,745
218,976
55,384
528
1,261
166
276,315
1,261
1,261
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 U.S. 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. The Corporation
measures impairment either based on the fair value of the loan using the loan’s obtainable market price or the fair value of
the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the
loan’s effective interest rate, which is not a fair value measurement. The Corporation maintains a valuation allowance to
the extent that this measure of the impaired loan is less than the recorded investment in the loan. When an impaired loan
is measured at fair value based solely on observable market prices or a current appraisal without further adjustment for
unobservable inputs, the Corporation records the impaired loan as a nonrecurring fair value measurement classified as
Level 2. However, if based on management’s review, additional discounts to observed market prices or appraisals are
required or if observable inputs are not available, the Corporation records the impaired loan as a nonrecurring fair value
measurement classified as Level 3.
Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather
than the market rate of interest, are not recorded at fair value and are therefore excluded from fair value disclosure
requirements.
OREO. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less
estimated 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 estimated costs to sell if valuations
indicate a further deterioration in market conditions. As such, the Corporation records OREO as a nonrecurring fair value
measurement classified as Level 3.
109
The following table presents the balances of assets measured at fair value on a nonrecurring basis.
December 31, 2018
Fair Value Measurements Using
Assets at Fair
(Dollars in thousands)
Impaired loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level 1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
Level 2
—
—
—
$
Level 3
Value
$
$
102 $
246
348 $
102
246
348
—
—
—
(Dollars in thousands)
Impaired loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level 1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2017
Fair Value Measurements Using
Assets at Fair
$
Level 2
—
—
—
$
Level 3
Value
$
$
3,438 $
168
3,606 $
3,438
168
3,606
—
—
—
The following table presents quantitative information about Level 3 fair value measurements for financial assets
measured at fair value on a nonrecurring basis as of December 31, 2018:
Fair Value Measurements at December 31, 2018
(Dollars in thousands)
Impaired loans, net . . . . . . . . . . . . . . . . . $
102
Appraisals
Fair Value Valuation Technique(s)
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
30%
33%-47%
Other real estate owned, net . . . . . . . . . .
246
Appraisals
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
348
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. Additionally, in accordance with ASU 2016-01, which the Corporation adopted on January 1,
2018 on a prospective basis, the Corporation uses the exit price notion, rather than the entry price notion, in calculating
the fair values of financial instruments not measured at fair value on a recurring basis.
110
The following tables reflect the carrying amounts and estimated fair values of the Corporation’s financial instruments
whether or not recognized on the Consolidated Balance Sheets at fair value.
(Dollars in thousands)
Financial assets:
Carrying
Value
Fair Value Measurements at December 31, 2018 Using
Level 2
Level 1
Level 3
Total Fair
Value
115,013 $
Cash and short-term investments . . . . $
214,910
Securities available for sale . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . 1,028,097
41,895
Loans held for sale . . . . . . . . . . . . . . . .
Derivative asset - IRLC . . . . . . . . . . . .
636
Derivative asset - interest rate swaps
on loans . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset - cash flow hedges . .
Bank-owned life insurance . . . . . . . . .
Accrued interest receivable . . . . . . . . .
1,607
289
16,065
7,436
115,013 $
—
—
—
—
—
—
—
7,436
— $
214,910
—
41,895
636
1,607
289
16,065
—
Financial liabilities:
Demand deposits . . . . . . . . . . . . . . . . . $
Time deposits . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . .
Derivative liability - interest rate
swaps on loans . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . .
835,101 $
346,560
159,691
835,101 $
—
—
— $
343,507
152,015
1,607
920
—
920
1,607
—
— $
—
115,013
214,910
1,021,145 1,021,145
41,895
636
—
—
—
—
—
—
1,607
289
16,065
7,436
— $
—
—
835,101
343,507
152,015
—
—
1,607
920
(Dollars in thousands)
Financial assets:
Carrying
Value
Fair Value Measurements at December 31, 2017 Using
Level 1
Level 2
Level 3
Total Fair
Value
Cash and short-term investments . . . $ 119,423 $
Securities available for sale . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . .
Derivative asset - IRLC . . . . . . . . . . .
Derivative asset - interest rate swaps
218,976
992,062
55,384
528
on loans . . . . . . . . . . . . . . . . . . . . . .
Derivative asset - cash flow hedges .
Bank-owned life insurance . . . . . . . .
Accrued interest receivable . . . . . . . .
1,261
166
15,589
7,589
119,423 $
—
—
—
—
—
—
—
7,589
— $
218,976
—
55,384
528
1,261
166
15,589
—
Financial liabilities:
Demand deposits . . . . . . . . . . . . . . . . $ 823,476 $
Time deposits . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . .
Derivative liability - interest rate
347,953
167,860
swaps on loans . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . .
1,261
838
823,476 $
—
—
— $
350,681
159,670
—
838
1,261
—
— $ 119,423
218,976
—
983,620
983,620
55,384
—
528
—
—
—
—
—
1,261
166
15,589
7,589
— $ 823,476
350,681
—
159,670
—
—
—
1,261
838
The Corporation assumes interest rate risk (the risk that general interest rate levels will change) in the normal course of
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.
111
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 retail installment sales
contracts.
The Corporation’s other segment includes a full-service brokerage firm that derives revenues from offering wealth
management services and insurance products through third-party service providers and an insurance company that derives
revenues from owning an equity interest in an insurance agency that offers insurance products and 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.
Year Ended December 31, 2018
Retail
Banking
Mortgage Consumer
Banking
Finance
Other
Eliminations Consolidated
—
738
43,527
—
11,029
66,048
7,841
4,015
13,874
55,019 $ 2,018 $ 42,789 $
6 $
—
2,135
2,141
(Dollars in thousands)
Revenues:
Interest income . . . . . . . . . . . . . . . . . . . . $
Gains on sales of loans . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . .
Total operating income . . . . . . . . . . . . . .
Expenses:
11,006
100
Provision for loan losses . . . . . . . . . . . . .
11,027
6,842
Interest expense . . . . . . . . . . . . . . . . . . . .
Salaries and employee benefits . . . . . . .
42,003
26,355
31,729
20,160
Other noninterest expenses . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . .
95,765
53,457
22,541
12,591
Income (loss) before income taxes . . . . .
4,521
1,958
Income tax expense (benefit) . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . $
18,020
10,633 $ 1,903 $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 1,357,788 $ 56,101 $ 297,552 $ 5,055 $ (195,085) $ 1,521,411
14,425
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . $
3,374
Capital expenditures . . . . . . . . . . . . . . . . $
10,906
9,413
8,500
5,556
34,375
9,152
2,460
6,692 $ (1,208) $
—
(7,284)
—
—
(7,284)
—
—
— $
—
904
5,007
5,363
11,274
2,600
697
—
1,152
2,141
650
3,943
(1,802)
(594)
(7,284) $
—
—
(7,284)
— $ 10,723 $
59 $
92,548
7,841
17,917
118,306
3,702 $
3,178 $
— $
4 $
— $
— $
133 $
112
Year Ended December 31, 2017
Retail
Banking
Mortgage Consumer
Banking
Finance
Other
—
995
45,740
49,564 $
—
11,126
60,690
1,660 $ 44,745 $
8,553
4,653
14,866
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,341,879 $ 69,537 $ 292,438 $
— $ 10,723 $
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
232 $
Capital expenditures . . . . . . . . . . . . . . . . . . . $
200
6,076
25,757
17,951
49,984
10,706
5,727
4,979 $
—
587
6,503
5,185
12,275
2,591
1,606
—
1,151
1,948
669
3,768
(1,862)
(137)
16,235
8,164
9,389
5,421
39,209
6,531
4,198
2,333 $ (1,725) $
(604) $
— $
14 $
3,702 $
3,524 $
985 $
410 $
Eliminations Consolidated
1 $
—
1,905
1,906
(6,377) $
—
—
(6,377)
89,593
8,553
18,679
116,825
—
(6,377)
—
—
(6,377)
—
—
— $
16,435
9,601
43,597
29,226
98,859
17,966
11,394
6,572
(194,194) $ 1,509,056
14,425
4,180
— $
— $
Year Ended December 31, 2016
Eliminations Consolidated
Retail
Banking
Mortgage Consumer
Banking
Finance
2 $
Other
—
921
48,071
46,071 $
—
11,820
57,891
1,689 $ 47,150 $
8,120
3,913
13,722
(Dollars in thousands)
Revenues:
Interest income . . . . . . . . . . . . . . . . . . . . . . . $
Gains on sales of loans . . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . . .
Total operating income . . . . . . . . . . . . . . . . .
Expenses:
—
Provision for loan losses . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
1,143
1,546
Salaries and employee benefits . . . . . . . . . . .
Other noninterest expenses . . . . . . . . . . . . . .
530
3,219
Total operating expenses . . . . . . . . . . . . . . . .
(1,944)
Income (loss) before income taxes . . . . . . . .
(969)
Income tax expense (benefit) . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $
(975) $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,290,733 $ 65,351 $ 306,012 $ 6,005 $
— $
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
42 $
Capital expenditures . . . . . . . . . . . . . . . . . . . $
—
435
5,664
4,815
10,914
2,808
1,121
1,687 $
18,040
7,073
10,102
5,437
40,652
7,419
2,882
4,537 $
—
5,790
25,033
17,433
48,256
9,635
1,425
8,210 $
— $ 10,723 $
360 $
314 $
3,702 $
1,992 $
—
1,273
1,275
(5,473) $
—
—
(5,473)
89,439
8,120
17,927
115,486
—
(5,473)
—
—
(5,473)
—
—
— $
18,040
8,968
42,345
28,215
97,568
17,918
4,459
13,459
(216,109) $ 1,451,992
14,425
2,708
— $
— $
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 at rates ranging from 2.0 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: Derivative Financial Instruments
The Corporation uses derivative financial instruments (or “derivatives”) primarily to manage risks to the Corporation
associated with changing interest rates, and to assist customers with their risk management objectives. The Corporation
designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value
113
hedge). The remaining derivatives are classified as free standing derivatives consisting of customer accommodation loan
swaps (or “loan swaps”) and IRLCs.
Cash flow hedges. The Corporation designates derivatives as cash flow hedges when they are used to manage exposure
to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes. The
Corporation uses interest rate swap agreements as part of its hedging strategy by exchanging variable-rate interest
payments on a notional amount equal to the principal amount of the borrowings for fixed-rate interest payments. Interest
rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest
rates on the amount of the hedged interest payments, and the Corporation assesses the effectiveness of each hedging
relationship quarterly. As of December 31, 2018, the Corporation has designated cash flow hedges to manage its exposure
to variability in cash flows on certain variable rate borrowings for periods that end between December 2019 and
September 2020.
All interest rate swaps were entered into with counterparties that met the Corporation’s credit standards and the agreements
contain collateral provisions protecting the at-risk party. The Corporation believes that the credit risk inherent in these
derivative contracts is not significant.
The terms and conditions of the interest rate swaps vary and amounts receivable or payable are recognized in interest
expense in the Consolidated Statements of Income as accrued under the terms of the agreements. The derivatives’
unrealized gains or losses are recorded as a component of other comprehensive income and reclassified into earnings in
the same period(s) during which the hedged transactions affect earnings. The Corporation does not expect any unrealized
losses related to cash flow hedges to be reclassified into earnings in the next twelve months.
Loan swaps. The Bank also enters into interest rate swaps with certain qualifying commercial loan customers to meet
their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer
counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer
pays a fixed rate of interest and the Corporation receives a floating rate. These back-to-back loan swaps qualify as financial
derivatives with fair values reported in “Other assets” and “Other liabilities” in the Consolidated Balance Sheets. Changes
in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the
swaps.
IRLCs. C&F Mortgage enters into IRLCs with customers to originate loans for which the interest rates are determined
prior to funding. C&F Mortgage then mitigates interest rate risk on these 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. At December 31, 2018 and
2017, each loan held for sale by C&F Mortgage was subject to a forward sales agreement on a best efforts basis. The fair
value of these derivative instruments is reported in “Other assets” in the Consolidated Balance Sheets. Changes in fair
value are recorded as a component of gains on sales of loans.
The following tables summarize key elements of the Corporation’s derivative instruments:
(Dollars in thousands)
Cash flow hedges:
Interest rate swaps:
Notional
Amount
Positions
Assets
Liabilities
Collateral
Pledged1
December 31, 2018
Variable-rate to fixed-rate swaps with counterparty . $ 25,000
3 $
289 $
— $
—
Not designated as hedges:
Customer-related interest rate contracts:
Matched interest rate swaps with borrower . . . . . . . .
Matched interest rate swaps with counterparty . . . . .
45,961
45,961
8
8
216
1,391
1,391
216
Other contracts:
IRLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,906
357
636
—
—
—
—
114
(Dollars in thousands)
Cash flow hedges:
Interest rate swaps:
Notional
Amount
Positions
Assets
Liabilities
Collateral
Pledged1
December 31, 2017
Variable-rate to fixed-rate swaps with counterparty . $ 25,000
3 $
166 $
— $
—
Not designated as hedges:
Customer-related interest rate contracts:
Matched interest rate swaps with borrower . . . . . . . .
Matched interest rate swaps with counterparty . . . . .
41,295
41,295
6
6
284
977
977
284
Other contracts:
IRLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99,140
440
528
—
—
—
—
1 Collateral pledged may be comprised of cash or securities.
2
NOTE 20: Parent Company Condensed Financial Information
Financial information for the parent company is as follows:
(Dollars in thousands)
Condensed Balance Sheets
Assets
December 31,
2018
2017
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
407
3,147
163,892
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 178,237 $ 167,446
3,677
174,244
316 $
Liabilities and shareholders’ equity
Trust preferred capital notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,210
534
141,702
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 178,237 $ 167,446
25,245 $
1,034
151,958
(Dollars in thousands)
Condensed Statements of Comprehensive Income
Interest expense on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividends received from C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of C&F Bank. . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,235 $
(1,152) $
6,312
13,228
45
(413)
18,020
(2,785)
2018
(1,151) $ (1,143)
4,464
5,008
10,618
3,482
26
31
(506)
(798)
13,459
6,572
(2,155)
(569)
6,003 $ 11,304
Year Ended December 31,
2017
2016
115
(Dollars in thousands)
Condensed Statements of Cash Flows
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Financing activities:
Year Ended December 31,
2017
2018
2016
5,801 $
4,202 $ 3,796
Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
144
(1,105)
(4,931)
—
(5,892)
(91)
407
316 $
147
—
(4,637)
84
(4,406)
(204)
611
407 $
149
—
(4,464)
362
(3,953)
(157)
768
611
NOTE 21: Other Noninterest Expenses
The following table presents the significant components in the Consolidated Statements of Income line “Noninterest
Expenses-Other.”
(Dollars in thousands)
Data processing service and maintenance contracts . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and advertising expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunication expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel and educational expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
6,323
2,323
1,633
1,264
1,101
8,343
Total other noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,421 $ 21,496 $ 20,987
Year Ended December 31,
2017
6,687
2,416
1,522
1,300
1,077
8,494
2018
7,452
3,044
1,601
1,331
1,231
8,762
$
$
$
NOTE 22: Quarterly Condensed Statements of Income—Unaudited
2018 Quarter Ended
Dollars in thousands (except per share amounts)
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,744 $ 22,651 $
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 share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,987
7,241
18,761
6,467
5,070
1.45
0.34
16,868
6,446
18,539
4,775
3,892
1.11
0.34
September 30 December 31
23,462
17,172
5,444
17,758
4,858
3,957
1.13
0.37
23,691 $
18,488
6,627
18,674
6,441
5,101
1.46
0.36
March 31 June 30
2017 Quarter Ended
Dollars in thousands (except per share amounts)
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,021 $ 22,423 $
Net interest income after provision for loan losses . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share—assuming dilution . . . . . . . . . . . . . . . . .
Dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,978
7,412
18,403
5,987
4,139
1.19
0.33
15,351
6,270
17,969
3,652
2,731
0.78
0.33
September 30 December 31
22,446
15,451
6,708
18,080
4,079
(3,315)
(0.95)
0.34
22,703 $
15,777
6,842
18,371
4,248
3,017
0.87
0.33
March 31 June 30
116
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
C&F Financial Corporation
West Point, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of C&F Financial Corporation and Subsidiary (the
Corporation) as of December 31, 2018 and 2017, 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, 2018, and the
related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,
in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), C&F Financial Corporation and Subsidiary’s internal control over financial reporting as of
December 31, 2018, 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 February 26, 2019 expressed an
unqualified opinion on the effectiveness of C&F Financial Corporation and Subsidiary’s internal control over financial
reporting.
Basis for Opinion
These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an
opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Corporation in accordance with U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of
the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
We have served as the Corporation’s auditor since 1997.
Richmond, Virginia
February 26, 2019
117
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 Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and
procedures (as defined in Rule 13a-15(e) of 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, 2018 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, 2018. 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, 2018, 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, 2018 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 fourth quarter ended December 31, 2018 that have materially affected, or are reasonably likely
to materially affect, the Corporation’s internal control over financial reporting.
118
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(cid:3)
To the Shareholders and Board of Directors
C&F Financial Corporation
West Point, Virginia
Opinion on the Internal Control Over Financial Reporting
We have audited C&F Financial Corporation and Subsidiary’s (the Corporation’s) internal control over financial reporting
as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Corporation
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets as of December 31, 2018 and 2017, 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, 2018 of C&F Financial Corporation and Subsidiary, and our report dated February 26, 2019
expressed an unqualified opinion.
Basis for Opinion
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 in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Corporation in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) 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 (3) 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.
Richmond, Virginia
February 26, 2019
120
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 2019 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 2019 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 2019 Proxy
Statement under the caption “Audit Committee Report” 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 2019 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 2019 Proxy Statement are incorporated herein by reference. The information regarding director
compensation contained in the 2019 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 2019 Proxy Statement under the caption, “Security Ownership of Certain
Beneficial Owners and Management,” is incorporated herein by reference.
The information contained in the 2019 Proxy Statement under the caption, “Equity Compensation Plan
Information,” is incorporated herein by reference.
121
ITEM 13.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
The information contained in the 2019 Proxy Statement under the caption, “Interest of Management in Certain
Transactions,” is incorporated herein by reference. The information contained in the 2019 Proxy Statement under the
caption, “Director Independence,” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the 2019 Proxy Statement under the captions, “Principal Accountant Fees” and “Audit
Committee Pre-Approval Policy,” is incorporated herein by reference.
122
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)
Amended and Restated Articles of Incorporation of C&F Financial Corporation, effective March 7, 1994
(incorporated by reference to Exhibit 3.1 to Form 10-Q filed November 8, 2017)
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
C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Executives (incorporated by
reference to Exhibit 10.4 to Form 10-K filed March 8, 2018)
*10.4.1 Adoption Agreement for the C&F Financial Corporation Non-Qualified Deferred Compensation Plan for
Executives (As Restated Effective January 1, 2018) (incorporated by reference to Exhibit 10.4.1 to
Form 10-K filed March 8, 2018)
*10.4.2 Attachment to the Adoption Agreement for C&F Financial Corporation Non-Qualified Deferred
Compensation Plan for Executives (As Restated Effective January 1, 2018) (incorporated by reference to
Exhibit 10.4.2 to Form 10-K filed March 8, 2018)
*10.5
C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Directors (incorporated by
reference to Exhibit 10.5 to Form 10-K filed March 8, 2018)
*10.5.1 Adoption Agreement for the C&F Financial Corporation Non-Qualifed Deferred Compensation Plan for
Directors (As Restated Effective January 1, 2018) (incorporated by reference to Exhibit 10.5.1 to
Form 10-K filed March 8, 2018)
123
*10.9
C&F Financial Corporation Management Incentive Plan dated February 20, 2018 (incorporated by
reference to Exhibit 10.9 to Form 8-K filed February 26, 2018)
*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)
*10.12
*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)
10.19
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
10.19.5
10.19.6
10.19.7
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)
Fifth 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 1, 2016
(incorporated by reference to Exhibit 10.19.5 to Form 10-Q filed November 7, 2016)
Sixth 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 June 28, 2017
(incorporated by reference to Exhibit 10.19.6 to Form 10-Q filed August 8, 2017)
Seventh 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 December 21, 2017
(incorporated by reference to Exhibit 10.19.7 to Form 10-K filed March 8, 2018)
*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) (incorporated by reference to Exhibit 10.29.1 to Form 10-K filed March 4, 2016)
124
*10.29.2
Form of C&F Financial Corporation Restricted Stock Agreement for Key Employees (approved
December 15, 2015) (incorporated by reference to Exhibit 10.29.2 to Form 10-K filed March 4, 2016)
*10.29.3
Form of C&F Financial Corporation Restricted Stock Agreement for Non-Employee Directors (approved
December 15, 2015) (incorporated by reference to Exhibit 10.29.3 to Form 10-K filed March 4, 2016)
*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)
*10.33
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)
*10.35
Change in Control Agreement dated May 5, 2016 between C&F Financial Corporation and Jason E. Long
(incorporated by reference to Exhibit 10.35 to Form 10-Q filed May 9, 2016)
21
23
Subsidiaries of the Registrant
Consent of Yount, Hyde & Barbour, P.C.
31.1
Certification of CEO pursuant to Rule 13a-14(a)
31.2
Certification of CFO pursuant to Rule 13a-14(a)
32
Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
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
ITEM 16.
FORM 10-K SUMMARY
Not applicable.
125
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: February 26, 2019
By:
/S/ THOMAS F. CHERRY
Thomas F. Cherry
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/ THOMAS F. CHERRY
Thomas F. Cherry, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/S/ JASON E. LONG
Jason E. Long,
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/S/ DR. JULIE R. AGNEW
Dr. Julie R. Agnew, Director
/S/ J. P. CAUSEY JR.
J. P. Causey Jr., Director
/S/ BARRY R. CHERNACK
Barry R. Chernack, Director
Date: February 26, 2019
Date: February 26, 2019
Date: February 26, 2019
Date: February 26, 2019
Date: February 26, 2019
/S/ LARRY G. DILLON
Larry G. Dillon, Executive Chairman
Date: February 26, 2019
/S/ AUDREY D. HOLMES
Audrey D. Holmes, Director
/S/ JAMES H. HUDSON III
James H. Hudson III, Director
/S/ ELIZABETH R. KELLEY
Elizabeth R. Kelley, Director
/S/ JAMES T. NAPIER
James T. Napier, Director
/S/ C. ELIS OLSSON
C. Elis Olsson, Director
/S/ PAUL C. ROBINSON
Paul C. Robinson, Director
Date: February 26, 2019
Date: February 26, 2019
Date: February 26, 2019
Date: February 26, 2019
Date: February 26, 2019
Date: February 26, 2019
126
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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) a group of peer commercial financial institutions identified by the Corporation
(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, 2017 of between $900 million and $2.9 billion. For 2018, the Peer Group
consisted of 23 publicly-traded commercial financial institutions with a median asset size of $1.4 billion based on total
assets as of December 31, 2017. The following financial institutions were included in the Peer Group: Access National
Corporation (VA); American National Bankshares Inc. (VA); CapStar Financial Holdings, Inc. (TN); Community
Bankers Trust Corporation (VA): The Community Financial Corporation (MD); Entegra Financial Corp. (NC); First
Community Bancshares, Inc. (VA); First United Corporation (MD); HopFed Bancorp, Inc. (KY); Howard Bancorp,
Inc. (MD); Limestone Bancorp, Inc. (KY); MVB Financial Corp. (WV); 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); Reliant Bancorp, Inc. (TN); Select Bancorp, Inc. (NC); Shore Bancshares, Inc. (MD);
SmartFinancial, Inc. (TN); Southern National Bancorp of Virginia, Inc. (VA); and Summit Financial Group, Inc.
(WV).
The graph below assumes $100 invested on December 31, 2013 in the Corporation, the NASDAQ Composite
Index and the Peer Group, and shows the total return on such an investment as of December 31, 2018, 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
Index
C&F Financial Corporation
NASDAQ Composite Index
Peer Group
12/31/13
100.00
100.00
100.00
12/31/14
89.88
114.75
107.28
12/31/15
91.21
122.74
121.80
12/31/16
120.10
133.62
172.22
12/31/17
143.52
173.22
191.60
12/31/18
135.10
168.30
163.63
Period Ending
www.cffc.com
(757) 741-2201
3600 La Grange Parkway
Toano, Virginia 23168
(804) 843-2360
802 Main Street
PO Box 391
West Point, VA 23181