NOTE 15: Commitments and Financial Instruments with Off-Balance-Sheet Risk

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commitments to sell loans, and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount on the balance sheet. The contract amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral is obtained based on management's credit assessment of the customer.

Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of loan commitments was $83.50 million and $83.37 million at December 31, 2011 and 2010, respectively.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $9.27 million and $7.12 million at December 31, 2011 and 2010, respectively.

At December 31, 2011, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to approximately $60.48 million and loans held for sale of $70.06 million. C&F Mortgage has entered into corresponding commitments with third party investors to sell loans of approximately $130.54 million. Under the contractual relationship with these investors, C&F Mortgage is obligated to sell the loans, and the investors are obligated to purchase the loans, only if the loans close. No other obligation exists. As a result of these contractual relationships with these investors, C&F Mortgage is not exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.

C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party 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:

	Year Ended December 31,
(Dollars in thousands)	2011			2010			2009
Allowance, beginning of period	$	1,291		$	2,538		$	603
Provision for indemnification losses		807			3,745			2,490
Payments		(396	)		(4,992	)		(555	)
Allowance, end of period	$	1,702		$	1,291		$	2,538

As part of the Bank's 2009 Community Reinvestment Act (CRA) evaluation by the FDIC, the Bank received a “Needs to Improve” rating because the FDIC concluded that C&F Mortgage violated the Equal Credit Opportunity Act (the ECOA), Federal Reserve Regulation B, and the Fair Housing Act in connection with certain of its lending practices. While the Bank's board of directors and management strongly disagreed with the FDIC's conclusion, C&F Mortgage has strengthened and continues to strengthen its policies, procedures and monitoring of its lending practices to address the issues raised by the FDIC. As required by statute, the FDIC referred its conclusions regarding the alleged violations to the Department of Justice (DOJ) in 2011. As a result of the referral, the DOJ conducted an investigation and alleged a violation of the ECOA and the Fair Housing Act in connection with certain of C&F Mortgage's lending practices during 2007. In September 2011, C&F Mortgage entered into a settlement with the DOJ and agreed to (i) implement certain policies, procedures and monitoring of its lending practices and (ii) provide a $140,000 settlement fund for borrowers who may have been affected. The DOJ investigation and settlement resulted in no factual findings or adjudications with respect to any matter of the alleged violation. The results of the DOJ investigation and the settlement did not have a material adverse effect on the Corporation's results of operations or financial condition. Upon the conclusion of the FDIC's CRA examination in January 2012, the FDIC upgraded C&F Bank's CRA rating to “Satisfactory.” As a result of the improvement in C&F Bank's CRA rating in January 2012, limitations on certain business activities that had been imposed by statute while C&F Bank had a “Needs to Improve” CRA rating have been removed.

The Corporation is committed under noncancelable operating leases for certain office locations. Rent expense associated with these operating leases was $1.49 million, $1.26 million and $1.23 million, for the years ended December 31, 2011, 2010 and 2009, respectively.

Future minimum lease payments due under these leases as of December 31, 2011 are as follows:

(Dollars in thousands)
2012	$	1,378
2013		779
2014		457
2015		396
2016		181
Thereafter		--
	$	3,191