Commitments and Financial Instruments with Off-Balance-Sheet Risk

9 Months Ended

Sep. 30, 2011

Commitments and Financial Instruments with Off-Balance-Sheet Risk [Abstract]

Commitments and Financial Instruments with Off-Balance-Sheet Risk

NOTE 10: Commitments and Financial Instruments with Off-Balance-Sheet Risk

C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party investors, some of whom may require the repurchase of loans in the event of loss due to borrower misrepresentation, fraud or early default. Mortgage loans and their related servicing rights are sold under agreements that define certain eligibility criteria for the mortgage loans. Recourse periods for early payment default vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. C&F Mortgage maintains an indemnification reserve for potential claims made under these recourse provisions. During the second quarter of 2010, C&F Mortgage reached an agreement with its largest third-party investor that resolved all known and unknown indemnification obligations for loans sold to this investor prior to 2010. Risks also arise from the possible inability of counterparties to meet the terms of their contracts. C&F Mortgage has procedures in place to evaluate the credit risk of investors and does not expect any counterparty to fail to meet its obligations. The following table presents the changes in the allowance for indemnification losses for the periods presented:

	Three Months Ended September 30,
(Dollars in thousands)	2011		2010
Allowance, beginning of period	$	1,536	$	5,328
Provision for indemnification losses		146		338
Payments		66		4,605
Allowance, end of period	$	1,616	$	1,061

	Nine Months Ended September 30,
(Dollars in thousands)	2011		2010
Allowance, beginning of period	$	1,291	$	2,538
Provision for indemnification losses		552		3,515
Payments		227		4,992
Allowance, end of period	$	1,616	$	1,061

In April 2011, the Bank reached an agreement to settle a lawsuit seeking the return of tax credits transferred to the Bank by a customer for payment of principal, interest and operating reserves related to an existing loan and the extension of an additional loan in the period prior to the customer entering bankruptcy. The settlement agreement called for the Bank to return certain unused tax credits and make a one-time cash payment. As a result, during the first quarter of 2011, the Corporation increased the provision for loan losses by $300,000 resulting from the charge-off of previously recognized principal payments. This is in addition to an accrual of other expenses of $200,000 recorded during 2010. The Corporation will not accrue any additional expenses related to the settlement subsequent to the first quarter of 2011.

As previously disclosed, the FDIC referred to the Department of Justice an alleged violation of the Equal Credit Opportunity Act and the Fair Housing Act in connection with certain lending practices of C&F Mortgage, a wholly-owned subsidiary of C&F Bank.  On September 30, 2011, C&F Mortgage entered into a settlement with the Department of Justice pursuant to a consent order with respect to certain mortgage company practices.  While there has been no factual finding or adjudication with respect to any matter of the alleged violation, C&F Mortgage and the Department of Justice have mutually decided to reach a settlement to avoid the burden of litigation and the associated distractions.  As part of the consent order, C&F Mortgage agreed to implement certain policies, procedures and monitoring of its lending practices and to provide a $140,000 settlement fund for borrowers who may have been affected.  The Corporation's board of directors and management strongly disagree with the alleged violations and deny that it violated any fair lending law or regulation or engaged in any wrongdoing.  However, prior to the settlement, C&F Mortgage had already taken steps to strengthen its internal processes to address the issues raised by the Department of Justice.  C&F Mortgage does not tolerate discrimination in its lending practices and will continue to be committed to fair lending.  The results of this settlement, which is pending court approval, are not expected to have a material adverse impact on the Corporation's results of operations or financial condition.