C & F FINANCIAL CORP - Quarter Report: 2013 September (Form 10-Q)

cffi20130930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-23423

C&F Financial Corporation

(Exact name of registrant as specified in its charter)

Virginia		54-1680165
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

802 Main Street West Point, VA		23181
(Address of principal executive offices)		(Zip Code)

(804) 843-2360

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

_____________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

At November 5, 2013, the latest practicable date for determination, 3,352,877 shares of common stock, $1.00 par value, of the registrant were outstanding.

TABLE OF CONTENTS

		Page

Part I - Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets – September 30, 2013 (unaudited) and December 31, 2012	2

	Consolidated Statements of Income (unaudited) - Three and nine months ended September 30, 2013 and 2012	3

	Consolidated Statements of Comprehensive Income (unaudited) – Three and nine months ended September 30, 2013 and 2012	4

	Consolidated Statements of Shareholders' Equity (unaudited) - Nine months ended September 30, 2013 and 2012	5

	Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 2013 and 2012	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55

Item 4.	Controls and Procedures	55

Part II - Other Information

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6.	Exhibits	57

Signatures		58

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share amounts)

	September 30, 2013		December 31, 2012
	(Unaudited)
ASSETS
Cash and due from banks	$	7,801	$	8,079
Interest-bearing deposits in other banks		36,531		17,541
Total cash and cash equivalents		44,332		25,620
Securities-available for sale at fair value, amortized cost of $144,719 and $143,661, respectively		147,161		152,817
Loans held for sale at fair value and lower of cost or market, respectively		55,911		72,727
Loans, net of allowance for loan losses of $34,861 and $35,907, respectively		649,276		640,283
Federal Home Loan Bank stock, at cost		3,525		3,744
Corporate premises and equipment, net		28,538		27,083
Other real estate owned, net of valuation allowance of $4,135 and $3,937, respectively		3,780		6,236
Accrued interest receivable		5,609		5,673
Goodwill		10,724		10,724
Other assets		34,775		32,111
Total assets	$	983,631	$	977,018

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing demand deposits	$	123,996	$	105,721
Savings and interest-bearing demand deposits		284,274		293,854
Time deposits		276,962		286,609
Total deposits		685,232		686,184
Short-term borrowings		13,653		9,139
Long-term borrowings		132,987		132,987
Trust preferred capital notes		20,620		20,620
Accrued interest payable		774		837
Other liabilities		20,986		25,054
Total liabilities		874,252		874,821

Commitments and contingent liabilities		—		—

Shareholders’ equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,330,887 and 3,259,823 shares issued and outstanding, respectively)		3,225		3,162
Additional paid-in capital		8,311		5,624
Retained earnings		97,379		88,695
Accumulated other comprehensive income, net		464		4,716
Total shareholders’ equity		109,379		102,197
Total liabilities and shareholders’ equity	$	983,631	$	977,018

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except for share and per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Interest income
Interest and fees on loans	$	18,325	$	18,284	$	54,062	$	53,584
Interest on money market investments		28		2		89		15
Interest and dividends on securities
U.S. government agencies and corporations		111		49		317		158
Tax-exempt obligations of states and political subdivisions		1,149		1,141		3,427		3,514
Corporate bonds and other		41		29		112		88
Total interest income		19,654		19,505		58,007		57,359

Interest expense
Savings and interest-bearing deposits		168		184		573		634
Certificates of deposit, $100 or more		358		452		1,087		1,639
Other time deposits		458		565		1,411		1,926
Borrowings		896		960		2,662		2,900
Trust preferred capital notes		189		250		566		747
Total interest expense		2,069		2,411		6,299		7,846

Net interest income		17,585		17,094		51,708		49,513
Provision for loan losses		3,840		2,965		10,140		8,550

Net interest income after provision for loan losses		13,745		14,129		41,568		40,963

Noninterest income
Gains on sales of loans		1,790		2,618		7,068		5,580
Service charges on deposit accounts		1,010		823		2,930		2,449
Other service charges and fees		1,655		1,685		4,631		4,661
Net gains on sales/calls of available for sale securities		270		3		276		11
Other income		914		856		2,795		2,537
Total noninterest income		5,639		5,985		17,700		15,238

Noninterest expenses
Salaries and employee benefits		7,862		7,416		23,160		20,895
Occupancy expenses		1,791		1,701		5,329		5,099
Other expenses		4,871		4,285		13,612		11,833
Total noninterest expenses		14,524		13,402		42,101		37,827

Income before income taxes		4,860		6,712		17,167		18,374
Income tax expense		1,494		2,179		5,617		5,880

Net income		3,366		4,533		11,550		12,494
Effective dividends on preferred stock		—		—		—		311

Net income available to common shareholders	$	3,366	$	4,533	$	11,550	$	12,183

Per common share data
Net income – basic	$	1.01	$	1.41	$	3.51	$	3.80
Net income – assuming dilution	$	0.97	$	1.36	$	3.37	$	3.69
Cash dividends declared	$	0.29	$	0.27	$	0.87	$	0.79
Weighted average number of shares – basic		3,318,687		3,220,906		3,287,146		3,206,739
Weighted average number of shares – assuming dilution		3,484,961		3,332,970		3,423,097		3,298,030

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net income	$	3,366		$	4,533		$	11,550		$	12,494
Other comprehensive income (loss), net:
Changes in defined benefit plan assets and benefit obligations
Changes in net loss arising during the period¹		30			28			91			80
Tax effect		(11	)		(9	)		(32	)		(28	)
Amortization of prior service cost arising during the period¹		(17	)		(17	)		(51	)		(51	)
Tax effect		6			5			18			18
Net of tax amount		8			7			26			19
Unrealized gain (loss) on cash flow hedging instruments
Unrealized holding gain (loss) arising during the period		25			(23	)		141			(51	)
Tax effect		(10	)		7			(55	)		19
Net of tax amount		15			(16	)		86			(32	)
Unrealized holding (losses) gains on securities
Unrealized holding (losses) gains arising during the period		(655	)		709			(6,440	)		2,110
Tax effect		222			(248	)		2,247			(739	)
Reclassification adjustment for gains included in net income²		(270	)		(3	)		(276	)		(11	)
Tax effect		103			1			105			4
Net of tax amount		(600	)		459			(4,364	)		1,364
Other comprehensive income (loss), net:		(577	)		450			(4,252	)		1,351
Comprehensive income, net	$	2,789		$	4,983		$	7,298		$	13,845

¹ These items are included in the computation of net periodic benefit cost. See Note 6, Employee Benefit Plans, for additional information.

² Gains are included in "Net gains on sales/calls of available for sale securities" on the income statement.

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands, except per share amounts)

	Preferred Stock		Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income, Net			Total Shareholders’ Equity
Balance December 31, 2012	$	—	$	3,162	$	5,624		$	88,695		$	4,716		$	102,197
Comprehensive income:
Net income		—		—		—			11,550			—			11,550
Other comprehensive (loss) , net		—		—		—			—			(4,252	)		(4,252	)
Stock options exercised		—		55		2,157			—			—			2,212
Share-based compensation		—		—		454			—			—			454
Restricted stock vested		—		6		(6	)		—			—			—
Common stock issued		—		2		82			—			—			84
Cash dividends paid – common stock ($0.87 per share)		—		—		—			(2,866	)		—			(2,866	)
Balance September 30, 2013	$	—	$	3,225	$	8,311		$	97,379		$	464		$	109,379

	Preferred Stock			Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income, Net		Total Shareholders’ Equity
Balance December 31, 2011	$	10		$	3,091	$	13,438		$	76,167		$	3,384	$	96,090
Comprehensive income:
Net income		—			—		—			12,494			—		12,494
Other comprehensive income, net		—			—		—			—			1,351		1,351
Stock options exercised		—			36		763			—			—		799
Share-based compensation		—			—		365			—			—		365
Restricted stock vested		—			3		(3	)		—			—		—
Preferred stock redemption		(10	)		—		(9,990	)		—			—		(10,000	)
Accretion of preferred stock discount		—			—		172			(172	)		—		—
Common stock issued		—			4		116			—			—		120
Cash dividends paid – common stock ($0.79 per share)		—			—		—			(2,539	)		—		(2,539	)
Cash dividends paid – preferred stock (5% per annum)		—			—		—			(203	)		—		(203	)
Balance September 30, 2012	$	—		$	3,134	$	4,861		$	85,747		$	4,735	$	98,477

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2013			2012
Operating activities:
Net income	$	11,550		$	12,494
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,674			1,690
Provision for loan losses		10,140			8,550
Provision for indemnifications		492			955
Provision for other real estate owned losses		459			800
Share-based compensation		454			365
Accretion of discounts and amortization of premiums on securities, net		497			548
Net realized gains on sales/calls of securities		(276	)		(11	)
Realized gains on sales of other real estate owned		(102	)		(54	)
Proceeds from sales of loans held for sale		608,458			611,449
Origination of loans held for sale		(591,642	)		(619,459	)
Change in other assets and liabilities:
Accrued interest receivable		64			(352	)
Other assets		(112	)		(898	)
Accrued interest payable		(63	)		(190	)
Other liabilities		(4,379	)		2,896
Net cash provided by operating activities		37,214			18,783

Investing activities:
Proceeds from maturities, calls and sales of securities available for sale		17,566			28,334
Purchases of securities available for sale		(19,116	)		(22,733	)
Redemption of Federal Home Loan Bank stock		219			23
Net increase in customer loans		(19,401	)		(38,355	)
Other real estate owned improvements		—			(205	)
Proceeds from sales of other real estate owned		2,367			1,450
Purchases of corporate premises and equipment, net		(3,129	)		(855	)
Net cash used in investing activities		(21,494	)		(32,341	)

Financing activities:
Net increase in demand, interest-bearing demand and savings deposits		8,695			33,139
Net decrease in time deposits		(9,647	)		(15,343	)
Net increase in borrowings		4,514			9,827
Proceeds from exercise of stock options		2,212			799
Issuance of common stock		84			120
Redemption of preferred stock		—			(10,000	)
Cash dividends		(2,866	)		(2,742	)
Net cash provided by financing activities		2,992			15,800

Net increase in cash and cash equivalents		18,712			2,242
Cash and cash equivalents at beginning of period		25,620			11,507
Cash and cash equivalents at end of period	$	44,332		$	13,749

Supplemental disclosure
Interest paid	$	6,362		$	8,036
Income taxes paid		5,058			6,536
Supplemental disclosure of noncash investing and financing activities
Unrealized (losses) gains on securities available for sale	$	(6,716	)	$	2,099
Loans transferred to other real estate owned		268			553
Pension adjustment		40			27
Unrealized gain (loss) on cash flow hedging instrument		141			(51	)

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies

Principles of Consolidation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission (the SEC). They do not include all of the information and notes required by U.S. GAAP for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2012.

The unaudited consolidated financial statements are prepared as of and for the three and nine months ended September 30, 2013 and do not include the effect of any subsequent events, including C&F Financial Corporation's acquisition of Central Virginia Bankshares, Inc. (CVB) effective October 1, 2013. See Note 12, Subsequent Events, for additional information about this acquisition. The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation) and its wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or C&F Bank). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, C&F Financial Corporation owns C&F Financial Statutory Trust I and C&F Financial Statutory Trust II, which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as a liability of the Corporation.

Nature of Operations: C&F Financial Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its subsidiary, Citizens and Farmers Bank, which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia. The Bank and its subsidiaries offer a wide range of banking and related financial services to both individuals and businesses. Effective October 1, 2013, the Corporation acquired CVB and CVB's wholly-owned subsidiary, Central Virginia Bank. Beginning October 1, 2013, CVB is a wholly-owned subsidiary of the Corporation and continues to be the registered bank holding company of Central Virginia Bank. Central Virginia Bank offers a wide range of banking and related financial services to both individuals and businesses.

The Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation and Subsidiaries (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Title Agency, Inc., C&F Investment Services, Inc. and C&F Insurance 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 subsidiaries, Hometown Settlement Services LLC and Certified Appraisals LLC, provides ancillary mortgage loan production services, such as loan settlements, title searches and residential appraisals. C&F Finance, acquired on September 1, 2002, is a regional finance company providing automobile loans. C&F Title Agency, Inc., organized in October 1992, primarily sells title insurance to the mortgage loan customers of the Bank and C&F Mortgage. C&F Investment Services, Inc., organized in April 1995, is a full-service brokerage firm offering a comprehensive range of investment services. C&F Insurance Services, Inc., organized in July 1999, owns an equity interest in an insurance agency that sells insurance products to customers of the Bank, C&F Mortgage and other financial institutions that have an equity interest in the agency. Business segment data is presented in Note 8.

Basis of Presentation: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the allowance for indemnifications, impairment of loans, impairment of securities, the valuation of other real estate owned, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes, fair value measurements and goodwill impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

Reclassification: Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or an other liability in the consolidated balance sheet. The Corporation’s derivative financial instruments as of September 30, 2013 consisted of (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will be sold in the secondary market and the related forward commitments to sell mortgage loans and mortgage-backed securities (MBS) and (2) interest rate swaps that qualified as cash flow hedges of a portion of the Corporation's trust preferred capital notes. Adjustments to reflect unrealized gains and losses resulting from changes in fair value of the Corporation's IRLCs and forward sales commitments and realized gains and losses upon ultimate sale of the loans are classified as noninterest income. The Corporation's IRLCs and forward loan sales commitments are described more fully in Note 7 and Note 9. The effective portion of the gain or loss on the Corporation's cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period or period(s) during which the hedged transaction affects earnings. The cash flow hedges are described more fully in Note 10.

Share-Based Compensation: Compensation expense for the third quarter and first nine months of 2013 included expense, net of forfeitures, of $172,000 ($107,000 after tax) and $461,000 ($286,000 after tax), respectively, for restricted stock granted since 2008. As of September 30, 2013, there was $1.86 million of total unrecognized compensation expense related to unvested restricted stock that will be recognized over the remaining requisite service periods.

A summary of activity for restricted stock awards during the first nine months of 2013 is presented below:

	Shares			Weighted- Average Grant Date Fair Value
Unvested, January 1, 2013		97,700		$	24.69
Granted		15,250		$	44.38
Vested		(5,900	)	$	20.73
Cancelled		(1,400	)	$	27.00
Unvested, September 30, 2013		105,650		$	27.79

Stock option activity during the nine months ended September 30, 2013 and stock options outstanding at September 30, 2013 are summarized below:

	Shares			Exercise Price*		Remaining Contractual Life (in years)*		Intrinsic Value of Unexercised In-The Money Options (in 000’s)
Options outstanding at January 1, 2013		276,432		$	39.14		2.30
Exercised		(55,532	)		39.82
Expired		(13,500	)		40.50
Options outstanding and exercisable at September 30, 2013		207,400		$	38.86		1.59	$	1,978

Weighted average

At the 2013 Annual Meeting of Shareholders of the Corporation held on April 16, 2013 (the Annual Meeting), the Corporation's shareholders approved the C&F Financial Corporation 2013 Stock and Incentive Compensation Plan (the 2013 Plan), which was approved by the Corporation's Board of Directors on February 27, 2013, subject to shareholder approval. The 2013 Plan, which became effective upon shareholder approval at the Annual Meeting, replaces the Amended and Restated C&F Financial Corporation 2004 Incentive Stock Plan (the 2004 Plan). Awards previously granted under the 2004 Plan will remain outstanding in accordance with their terms, but no new awards will be granted under the 2004 Plan following the Annual Meeting. A detailed description of the 2013 Plan is contained in, and the full text of the 2013 Plan is included as Appendix A to, the Corporation's definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission (SEC) on March 15, 2013 in connection with the Annual Meeting, both of which are incorporated herein by reference.

Recent Significant Accounting Pronouncements:

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. An entity is required to apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Corporation has included the required disclosures from ASU 2013-02 in the Corporation's financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment. The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset's fair value when testing an indefinite-lived intangible asset for impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of ASU 2012-02 did not have a material effect on the Corporation's financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet - Disclosures about Offsetting Assets and Liabilities. This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of ASU 2011-11 did not have a material effect on the Corporation's financial statements.

In January 2013, the FASB issued ASU 2013-01, Balance Sheet - Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of ASU 2013-01 did not have a material effect on the Corporation’s consolidated financial statements.

NOTE 2: Securities

Debt and equity securities, all of which were classified as available for sale, are summarized as follows:

September 30, 2013

(Dollars in thousands)

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Estimated

Fair Value

U.S. government agencies and corporations

23,042

(1,586

)

21,457

Mortgage-backed securities

3,042

(88

)

2,986

Obligations of states and political subdivisions

118,635

4,808

(725

)

122,718

144,719

4,841

(2,399

)

147,161

	December 31, 2012
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government agencies and corporations	$	24,628	$	24	$	(3	)	$	24,649
Mortgage-backed securities		2,127		62		—			2,189
Obligations of states and political subdivisions		116,879		9,069		(73	)		125,875
Preferred stock		27		77		—			104
	$	143,661	$	9,232	$	(76	)	$	152,817

The amortized cost and estimated fair value of securities, all of which were classified as available for sale, at September 30, 2013, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

	September 30, 2013
(Dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	28,628	$	27,856
Due after one year through five years		43,339		44,902
Due after five years through ten years		46,151		46,912
Due after ten years		26,601		27,491
	$	144,719	$	147,161

Proceeds from the maturities, calls and sales of securities available for sale for the nine months ended September 30, 2013 were $17.56 million.

The Corporation pledges securities primarily as collateral for public deposits and repurchase agreements. Securities with an aggregate amortized cost of $111.13 million and an aggregate fair value of $113.25 million were pledged at September 30, 2013. Securities with an aggregate amortized cost of $107.87 million and an aggregate fair value of $115.14 million were pledged at December 31, 2012.

Securities in an unrealized loss position at September 30, 2013, by duration of the period of the unrealized loss, are shown below.

	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. government agencies and corporations	$	20,836	$	1,586	$	—	$	—	$	20,836	$	1,586
Mortgage backed securities		2,026		88		—		—		2,026		88
Obligations of states and political subdivisions		18,526		674		1,436		51		19,962		725
Total temporarily impaired securities	$	41,388	$	2,348	$	1,436	$	51	$	42,824	$	2,399

There are 103 debt securities with fair values totaling $42.8 million considered temporarily impaired at September 30, 2013. The primary cause of the temporary impairments in the Corporation's investments in debt securities was fluctuations in interest rates. During the third quarter of 2013, the municipal bond sector, which is included in the Corporation's obligations of states and political subdivisions category of securities, and securities of U.S. government agencies and corporations experienced falling securities prices as concerns remained that the Federal Reserve would reduce its efforts to stimulate economic recovery through its bond-buying program known as "quantitative easing." Interest rates rose during the third quarter of 2013, causing corresponding unrealized losses on the Corporation's portfolio of securities of U.S. government agencies and corporations and obligations of states and political subdivisions. Additionally, the municipal bond sector experienced additional turmoil related to negative headlines and industry coverage about certain bond issuers, such as Puerto Rico and Detroit. This negative coverage and increased headline risk caused significant outflows from municipal bond mutual funds, thereby increasing the available supply of municipal bond securities and depressing securities prices. The vast majority of the Corporation's municipal bond portfolio is made up of securities where the issuing municipalities have unlimited taxing authority to support their debt service obligations. At September 30, 2013, approximately 97 percent of the Corporation's obligations of states and political subdivisions, as measured by market value, were rated “A” or better by Standard & Poor's or Moody's Investors Service. Of those in a net unrealized loss position, approximately 97 percent were rated, as measured by market value, “A” or better at September 30, 2013. 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 September 30, 2013 and no other-then-temporary impairment has been recognized.

Securities in an unrealized loss position at December 31, 2012, by duration of the period of the unrealized loss, are shown below.

	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. government agencies and corporations	$	5,479	$	3	$	—	$	—	$	5,479	$	3
Obligations of states and political subdivisions		5,804		71		263		2		6,067		73
Total temporarily impaired securities	$	11,283	$	74	$	263	$	2	$	11,546	$	76

The Corporation’s investment in Federal Home Loan Bank (FHLB) stock totaled $3.53 million at September 30, 2013 and $3.74 million at December 31, 2012. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Corporation does not consider this investment to be other-than-temporarily impaired at September 30, 2013 and no impairment has been recognized. FHLB stock is shown as a separate line item on the balance sheet and is not a part of the available for sale securities portfolio.

NOTE 3: Loans

Major classifications of loans are summarized as follows:

(Dollars in thousands)	September 30, 2013			December 31, 2012
Real estate – residential mortgage	$	155,453		$	149,257
Real estate – construction ¹		6,187			5,062
Commercial, financial and agricultural ²		195,914			205,052
Equity lines		33,534			33,324
Consumer		4,938			5,309
Consumer finance		288,111			278,186
		684,137			676,190
Less allowance for loan losses		(34,861	)		(35,907	)
Loans, net	$	649,276		$	640,283

1	Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

2	Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

Consumer loans included $241,000 and $293,000 of demand deposit overdrafts at September 30, 2013 and December 31, 2012, respectively.

Loans on nonaccrual status were as follows:

(Dollars in thousands)	September 30, 2013		December 31, 2012
Real estate – residential mortgage	$	1,993	$	1,805
Commercial, financial and agricultural:
Commercial real estate lending		1,503		3,426
Land acquisition and development lending		—		5,234
Builder line lending		14		15
Commercial business lending		374		759
Equity lines		173		31
Consumer		188		191
Consumer finance		1,253		655
Total loans on nonaccrual status	$	5,498	$	12,116

The past due status of loans as of September 30, 2013 was as follows:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Accruing
Real estate – residential mortgage	$	664	$	610	$	961	$	2,235	$	153,218	$	155,453	$	—
Real estate – construction:
Construction lending		—		—		—		—		3,343		3,343		—
Consumer lot lending		—		—		—		—		2,844		2,844		—
Commercial, financial and agricultural:
Commercial real estate lending		4,556		937		153		5,646		117,154		122,800		—
Land acquisition and development lending		—		—		—		—		19,217		19,217		—
Builder line lending		—		—		—		—		12,312		12,312		—
Commercial business lending		248		107		440		795		40,790		41,585		95
Equity lines		697		—		—		697		32,837		33,534		—
Consumer		51		—		188		239		4,699		4,938		1
Consumer finance		9,985		2,685		1,253		13,923		274,188		288,111		—
Total	$	16,201	$	4,339	$	2,995	$	23,535	$	660,602	$	684,137	$	96

For the purposes of the above table, “Current” includes loans that are 1-29 days past due. In addition, the above table includes nonaccrual loans that are current of $2.1 million, 30-59 days past due of $245,000, 60-89 days past due of $200,000 and 90+ days past due of $2.9 million.

The past due status of loans as of December 31, 2012 was as follows:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Accruing
Real estate – residential mortgage	$	1,402	$	456	$	641	$	2,499	$	146,758	$	149,257	$	—
Real estate – construction:
Construction lending		—		—		—		—		3,157		3,157		—
Consumer lot lending		—		—		—		—		1,905		1,905		—
Commercial, financial and agricultural:
Commercial real estate lending		7,650		496		324		8,470		111,177		119,647		—
Land acquisition and development lending		—		—		5,234		5,234		28,903		34,137		—
Builder line lending		—		—		—		—		15,948		15,948		—
Commercial business lending		794		—		40		834		34,486		35,320		—
Equity lines		270		—		22		292		33,032		33,324		—
Consumer		69		—		191		260		5,049		5,309		—
Consumer finance		10,111		2,052		655		12,818		265,368		278,186		—
Total	$	20,296	$	3,004	$	7,107	$	30,407	$	645,783	$	676,190	$	—

For the purposes of the above table, “Current” includes loans that are 1-29 days past due. In addition, the above table includes nonaccrual loans that are current of $1.2 million, 30-59 days past due of $3.4 million, 60-89 days past due of $421,000 and 90+ days past due of $7.1 million.

Impaired loans, which consisted solely of troubled debt restructurings (TDRs), and the related allowance at September 30, 2013 were as follows:

(Dollars in thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance-Impaired Loans		Interest Income Recognized
Real estate – residential mortgage	$	1,987	$	2,063	$	408	$	2,012	$	70
Commercial, financial and agricultural:
Commercial real estate lending		2,756		2,789		506		2,770		62
Builder line lending		14		16		4		14		—
Commercial business lending		507		507		132		516		6
Consumer		7		7		1		8		8
Total	$	5,271	$	5,382	$	1,051	$	5,320	$	146

Impaired loans, which consist solely of TDRs, and the related allowance at December 31, 2012 were as follows:

(Dollars in thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance-Impaired Loans		Interest Income Recognized
Real estate – residential mortgage	$	2,230	$	2,283	$	433	$	2,266	$	124
Commercial, financial and agricultural:
Commercial real estate lending		7,892		8,190		1,775		8,260		254
Land acquisition and development lending		5,234		5,234		1,432		5,443		236
Builder line lending		—		—		—		1,407		—
Commercial business lending		812		817		112		827		13
Consumer		324		324		49		324		16
Total	$	16,492	$	16,848	$	3,801	$	18,527	$	643

Loan modifications that were classified as TDRs during the three and nine months ended September 30, 2013 and 2012 were as follows:

	Three Months Ended September 30,
	2013				2012
(Dollars in thousands)	Number of Loans		Post-Modification Recorded Investment		Number of Loans		Post-Modification Recorded Investment
Real estate - residential mortgage - interest reduction		—	$	—		—	$	—
Real estate - residential mortgage - interest rate concession		—		—		—		—
Commercial, financial and agricultural:
Commercial real estate lending - interest rate concession		2		1,350		4		3,853
Builder line lending - interest rate concession		—		—		—		—
Commercial business lending - interest rate concession		—		—		—		—
Total		2	$	1,350		4	$	3,853

	Nine Months Ended September 30,
	2013				2012
(Dollars in thousands)	Number of Loans		Post-Modification Recorded Investment		Number of Loans		Post-Modification Recorded Investment
Real estate - residential mortgage - interest reduction		—	$	—		1	$	122
Real estate - residential mortgage - interest rate concession		1		89		—		—
Commercial, financial and agricultural:
Commercial real estate lending - interest rate concession		4		1,829		6		4,226
Builder line lending - interest rate concession		1		17		—		—
Commercial business lending - interest rate concession		—		—		—		—
Consumer – interest reduction		—		—		1		108
Total		6	$	1,935		8	$	4,456

TDR payment defaults during the three and nine months ended September 30, 2013 and 2012 were as follows:

	Three Months Ended September 30,
	2013				2012

(Dollars in thousands)	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Real estate-residential mortgage		—	$	—		1	$	83
Commercial, financial and agricultural:
Builder line lending		—		—		—		—
Commercial business lending		—		—		—		—
Total		—	$	—		1	$	83

	Nine Months Ended September 30,
	2013				2012

(Dollars in thousands)	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Real estate-residential mortgage		—	$	—		1	$	83
Commercial, financial and agricultural:
Commercial real estate lending		1		3		—		—
Builder line lending		—		—		1		88
Commercial business lending		—		—		3		363
Total		1	$	3		5	$	534

For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due.

NOTE 4: Allowance for Loan Losses

The following table presents the changes in the allowance for loan losses by major classification during the nine months ended September 30, 2013.

(Dollars in thousands)

Real Estate

Residential

Mortgage

Real Estate

Construction

Commercial,

Financial and

Agricultural

Equity Lines

Consumer

Finance

Total

Allowance for loan losses:

Balance at December 31, 2012

2,358

424

9,824

885

283

22,133

35,907

Provision charged to operations

537

328

149

9,065

10,140

Loans charged off

(744

)

—

(2,297

)

(126

)

(287

)

(10,656

)

(14,110

)

Recoveries of loans previously charged off

—

170

103

2,525

2,924

Balance at September 30, 2013

2,250

474

8,025

797

248

23,067

34,861

The following table presents the changes in the allowance for loan losses by major classification during the nine months ended September 30, 2012.

(Dollars in thousands)	Real Estate Residential Mortgage			Real Estate Construction			Commercial, Financial and Agricultural			Equity Lines			Consumer			Consumer Finance			Total
Allowance for loan losses:
Balance at December 31, 2011	$	2,379		$	480		$	10,040		$	912		$	319		$	19,547		$	33,677
Provision charged to operations		714			(94	)		1,219			130			116			6,465			8,550
Loans charged off		(780	)		—			(1,874	)		(120	)		(245	)		(6,731	)		(9,750	)
Recoveries of loans previously charged off		27			—			120			79			155			2,132			2,513
Balance at September 30, 2012	$	2,340		$	386		$	9,505		$	1,001		$	345		$	21,413		$	34,990

The following table presents, as of September 30, 2013, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), total loans, and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

(Dollars in thousands)	Real Estate Residential Mortgage		Real Estate Construction		Commercial, Financial and Agricultural		Equity Lines		Consumer		Consumer Finance		Total
Allowance for loan losses:
Balance at September 30, 2013	$	2,250	$	474	$	8,025	$	797	$	248	$	23,067	$	34,861
Ending balance: individually evaluated for impairment	$	408	$	—	$	642	$	—	$	1	$	—	$	1,051
Ending balance: collectively evaluated for impairment	$	1,842	$	474	$	7,383	$	797	$	247	$	23,067	$	33,810
Loans:
Balance at September 30, 2013	$	155,453	$	6,187	$	195,914	$	33,534	$	4,938	$	288,111	$	684,137
Ending balance: individually evaluated for impairment	$	1,987	$	—	$	3,277	$	—	$	7	$	—	$	5,271
Ending balance: collectively evaluated for impairment	$	153,466	$	6,187	$	192,637	$	33,534	$	4,931	$	288,111	$	678,866

The following table presents, as of December 31, 2012, the total allowance for loan losses, the allowance by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment), total loans, and loans by impairment methodology (individually evaluated for impairment or collectively evaluated for impairment).

(Dollars in thousands)	Real Estate Residential Mortgage		Real Estate Construction		Commercial, Financial and Agricultural		Equity Lines		Consumer		Consumer Finance		Total
Allowance for loan losses:
Balance at December 31, 2012	$	2,358	$	424	$	9,824	$	885	$	283	$	22,133	$	35,907
Ending balance: individually evaluated for impairment	$	433	$	—	$	3,319	$	—	$	49	$	—	$	3,801
Ending balance: collectively evaluated for impairment	$	1,925	$	424	$	6,505	$	885	$	234	$	22,133	$	32,106
Loans:
Balance at December 31, 2012	$	149,257	$	5,062	$	205,052	$	33,324	$	5,309	$	278,186	$	676,190
Ending balance: individually evaluated for impairment	$	2,230	$	—	$	13,938	$	—	$	324	$	—	$	16,492
Ending balance: collectively evaluated for impairment	$	147,027	$	5,062	$	191,114	$	33,324	$	4,985	$	278,186	$	659,698

Loans by credit quality indicators as of September 30, 2013 were as follows:

(Dollars in thousands)

Pass

Special

Mention

Substandard

Nonaccrual

Total¹

Real estate – residential mortgage

149,836

1,768

1,856

1,993

155,453

Real estate – construction:

Construction lending

694

—

2,649

—

3,343

Consumer lot lending

2,844

—

2,844

Commercial, financial and agricultural:

Commercial real estate lending

112,277

980

8,040

1,503

122,800

Land acquisition and development lending

17,062

1,717

438

—

19,217

Builder line lending

10,407

1,278

613

12,312

Commercial business lending

31,720

225

9,266

374

41,585

Equity lines

31,591

1,066

704

173

33,534

Consumer

4,695

188

4,938

361,126

7,037

23,618

4,245

396,026

¹	At September 30, 2013, the Corporation did not have any loans classified as Doubtful or Loss.

(Dollars in thousands)

Performing

Non-Performing

Total

Consumer finance

286,858

1,253

288,111

Loans by credit quality indicators as of December 31, 2012 were as follows:

(Dollars in thousands)	Pass		Special Mention		Substandard		Substandard Nonaccrual		Total¹
Real estate – residential mortgage	$	143,947	$	1,374	$	2,131	$	1,805	$	149,257
Real estate – construction:
Construction lending		228		—		2,929		—		3,157
Consumer lot lending		1,905		—		—		—		1,905
Commercial, financial and agricultural:
Commercial real estate lending		102,472		2,776		10,973		3,426		119,647
Land acquisition and development lending		19,422		1,789		7,692		5,234		34,137
Builder line lending		13,469		1,926		538		15		15,948
Commercial business lending		32,330		187		2,044		759		35,320
Equity lines		31,199		1,327		767		31		33,324
Consumer		4,746		3		369		191		5,309
	$	349,718	$	9,382	$	27,443	$	11,461	$	398,004

¹	At December 31, 2012, the Corporation did not have any loans classified as Doubtful or Loss.

(Dollars in thousands)		Performing				Non-Performing				Total
Consumer finance		$	277,531			$	655			$	278,186

NOTE 5: Stockholders’ Equity and Earnings Per Common Share

Stockholders’ Equity - Other Comprehensive Income

The following table presents the cumulative balances of the components of other comprehensive income, net of deferred tax of $227,000 and $2.51 million as of September 30, 2013 and December 31, 2012, respectively.

(Dollars in thousands)	September 30, 2013			December 31, 2012
Net unrealized gains on securities	$	1,587		$	5,951
Net unrecognized loss on cash flow hedges		(227	)		(313	)
Net unrecognized losses on defined benefit pension plan		(896	)		(922	)
Total cumulative other comprehensive income	$	464		$	4,716

Earnings Per Common Share

The components of the Corporation’s earnings per common share calculations are as follows:

(Dollars in thousands)	Three Months Ended September 30,
	2013		2012
Net income	$	3,366	$	4,533
Accumulated dividends on Series A Preferred Stock		—		—
Accretion of Series A Preferred Stock discount		—		—
Net income available to common shareholders	$	3,366	$	4,533
Weighted average number of common shares used in earnings per common share – basic		3,318,687		3,220,906
Effect of dilutive securities:
Stock option awards and Warrant		166,274		112,064
Weighted average number of common shares used in earnings per common share – assuming dilution		3,484,961		3,332,970

(Dollars in thousands)	Nine Months Ended September 30,
	2013		2012
Net income	$	11,550	$	12,494
Accumulated dividends on Series A Preferred Stock		—		(139	)
Accretion of Series A Preferred Stock discount		—		(172	)
Net income available to common shareholders	$	11,550	$	12,183
Weighted average number of common shares used in earnings per common share – basic		3,287,146		3,206,739
Effect of dilutive securities:
Stock option awards and Warrant		135,951		91,291
Weighted average number of common shares used in earnings per common share – assuming dilution		3,423,097		3,298,030

Potential common shares that may be issued by the Corporation for its stock option awards and Warrant (defined below) are determined using the treasury stock method. Approximately 69,700 shares issuable upon exercise of options were not included in computing diluted earnings per common share for the three months ended September 30 2012, and approximately 23,400 and 207,567 shares issuable upon exercise of options were not included in computing diluted earnings per common share for the nine months ended September 30, 2013 and 2012, respectively, because they were anti-dilutive. There were no anti-dilutive shares issuable upon exercise of options for the three months ended September 30, 2013.

In January 2009, the Corporation issued to the United States Department of the Treasury (Treasury) under the Capital Purchase Program (CPP) $20.00 million of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock) and a warrant to purchase 167,504 shares of the Corporation’s common stock (the Warrant). On July 27, 2011, the Corporation redeemed $10.00 million of the Preferred Stock, and on April 12, 2012, the Corporation redeemed the remaining $10.00 million of the Preferred Stock. As a result of this redemption, the Corporation will pay no future dividends on the Preferred Stock. Further, in connection with this redemption, the Corporation accelerated the accretion of the remaining preferred stock discount during April 2012, which reduced net income available to common shareholders by approximately $151,000.

NOTE 6: Employee Benefit Plan

The Bank has a non-contributory defined benefit plan for which the components of net periodic benefit cost are as follows:

(Dollars in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Service cost	$	194		$	159		$	582		$	477
Interest cost		106			99			319			296
Expected return on plan assets		(187	)		(158	)		(561	)		(475	)
Amortization of prior service cost		(17	)		(17	)		(51	)		(51	)
Amortization of net loss		30			26			91			80
Net periodic benefit cost	$	126		$	109		$	380		$	327

NOTE 7: Fair Value of Assets and Liabilities

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

•

Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities.

•

Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3—Valuation is determined using model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Corporation's estimates of assumptions that market participants would use in pricing the respective asset or liability. Valuation techniques may include the use of pricing models, discounted cash flow models and similar techniques.

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Other than as described in this Note 7, the Corporation has not made any fair value option elections.

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 future composition of the portfolio. At September 30, 2013 and December 31, 2012, the Corporation's entire investment securities portfolio was valued using Level 2 fair value measurements. The Corporation has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The vendor's sources for security valuation are Standard & Poor's Securities Evaluations Inc. ("SPSE") and Thomson Reuters Pricing Service (“TRPS”). Both sources provide opinions, known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are partially based on available market data, including prices for similar instruments in active markets and prices for identical assets in markets that are not active. SPSE provides evaluated prices for the Corporation's obligations of states and political subdivisions category of securities. SPSE 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 agencies and corporations and mortgage-backed categories of securities. Securities in 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. Securities in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity. Each aggregate is benchmarked to a relative mortgage-backed to-be-announced (“TBA”) price. TBA prices are obtained from market makers and live trading systems.

Loans held for sale. During the third quarter of 2013, the Corporation elected to begin using fair value accounting for its entire portfolio of loans held for sale (LHFS) in accordance with ASC 820 - Fair Value Measurement and Disclosures. Fair value of the Corporation's LHFS is based on observable market prices for the identical 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.

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.

Forward sales commitments. Forward commitments to sell mortgage loans and MBS are used to mitigate interest rate risk for residential mortgage loans held for sale and IRLCs. Forward commitments to sell mortgage loans and MBS are considered derivatives and are recorded at fair value, based on (i) committed sales prices from investors for commitments to sell mortgage loans or (ii) observable market data inputs for commitments to sell MBS. The Corporation's forward sales commitments are classified as Level 2.

Derivative liability - cash flow hedges. The fair value of the Corporation's cash flow hedges is determined using the discounted cash flow method. All of the Corporation's cash flow hedges are classified as Level 2.

The following table presents the balances of financial assets measured at fair value on a recurring basis.

September 30, 2013

Fair Value Measurements Using

Assets at

Fair

(Dollars in thousands)

Level 1

Level 2

Level 3

Value

Assets:

Securities available for sale

U.S. government agencies and corporations

—

21,457

—

21,457

Mortgage-backed securities

—

2,986

—

2,986

Obligations of states and political subdivisions

—

122,718

—

122,718

Total securities available for sale

—

147,161

—

147,161

Loans held for sale

—

55,911

—

55,911

Interest rate lock commitments included in other assets

—

748

—

748

Total assets measured at fair value on a recurring basis

—

203,820

—

203,820

Liabilities:

Forward sales commitments included in other liabilities

—

207

—

207

Cash flow hedges included in other liabilities

—

372

—

372

Total liabilities measured at fair value on a recurring basis

—

579

—

579

	December 31, 2012
	Fair Value Measurements Using						Assets at Fair
(Dollars in thousands)	Level 1		Level 2		Level 3			Value
Assets:
Securities available for sale
U.S. government agencies and corporations	$	—	$	24,649	$	—	$	24,649
Mortgage-backed securities		—		2,189		—		2,189
Obligations of states and political subdivisions		—		125,875		—		125,875
Preferred stock		—		104		—		104
Total securities available for sale	$	—	$	152,817	$	—	$	152,817
Liabilities:
Derivative liability - cash flow hedges	$	—	$	513	$	—	$	513

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Corporation may be required, from time to time, to measure and recognize certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Impaired loans. The Corporation does not record loans held for investment at fair value on a recurring basis. However, there are instances when a loan is considered impaired and an allowance for loan losses is established. A loan is considered impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. All TDRs are considered impaired loans. The Corporation measures impairment on a loan-by-loan basis for commercial, construction and residential loans in excess of $500,000 by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Additionally, management reviews current market conditions, borrower history, past experience with similar loans and economic conditions. Based on management's review, additional write-downs to fair value may be incurred. The Corporation maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. When the fair value of an impaired loan is based solely on observable cash flows, market price or a current appraisal, the Corporation records the impaired loan as nonrecurring Level 2. However, if based on management's review, additional write-downs to fair value are required, the Corporation records the impaired loan as nonrecurring Level 3.

The measurement of impaired loans of less than $500,000 is based on each loan's future cash flows discounted at the loan's effective interest rate rather than the market rate of interest, which is not a fair value measurement and is therefore excluded from fair value disclosure requirements.

Other real estate owned (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Corporation obtains from independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of like properties, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further other-than-temporary deterioration in market conditions. As such, we record OREO as nonrecurring Level 3.

The following table presents the balances of financial assets measured at fair value on a non-recurring basis.

September 30, 2013

Fair Value Measurements Using

Assets at

Fair

(Dollars in thousands)

Level 1

Level 2

Level 3

Value

Impaired loans, net

—

1,150

Other real estate owned, net

—

3,780

December 31, 2012

Fair Value Measurements Using

Assets at

Fair

(Dollars in thousands)

Level 1

Level 2

Level 3

Value

Impaired loans, net

—

9,074

Other real estate owned, net

—

6,236

The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a non-recurring basis as of September 30, 2013:

	Fair Value Measurements at September 30, 2013

(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Inputs	Range of Inputs
Impaired loans, net	$	1,150	Appraisals	Discount to reflect current market conditions and estimated selling costs		15%
Other real estate owned, net	$	3,780	Appraisals	Discount to reflect current market conditions and estimated selling costs	10%	-	50%

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

The following describes the valuation techniques used by the Corporation to measure its financial instruments at fair value as of September 30, 2013 and December 31, 2012.

Cash and short-term investments. The nature of these instruments and their relatively short maturities provide for the reporting of fair value equal to the historical cost.

Loans, net. The fair value of performing loans is estimated using a discounted expected future cash flows analysis based on current rates being offered on similar products in the market. An overall valuation adjustment is made for specific credit risks as well as general portfolio risks. Based on the valuation methodologies used in assessing the fair value of loans and the associated valuation allowance, these loans are considered Level 3.

Loan totals, as listed in the table below, include impaired loans. For valuation techniques used in relation to impaired loans, see the Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis section in this Note 7.

Loans held for sale, net. As described in Note 7, the Corporation elected to carry its portfolio of loans held for sale at fair value, measured on a recurring basis, during the second quarter of 2013. Loans held for sale as of December 31, 2012 were carried at the lower of cost or market value. In addition, all loans held for sale as of December 31, 2012 were originated on a best efforts delivery basis. Therefore, as of December 31, 2012, the fair value of loans held for sale was based on purchase prices agreed to by third party investors, which were obtained simultaneously with the rate lock commitments made to individual borrowers.

Accrued interest receivable. The carrying amount of accrued interest receivable approximates fair value.

Deposits. The fair value of all demand deposit accounts is the amount payable at the report date. For all other deposits, the fair value is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products in active markets (Level 2).

Borrowings. The fair value of borrowings is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products in active markets (Level 2).

Accrued interest payable. The carrying amount of accrued interest payable approximates fair value.

Letters of credit. The estimated fair value of letters of credit is based on estimated fees the Corporation would pay to have another entity assume its obligation under the outstanding arrangements. These fees are not considered material.

Unused portions of lines of credit. The estimated fair value of unused portions of lines of credit is based on estimated fees the Corporation would pay to have another entity assume its obligation under the outstanding arrangements. These fees are not considered material.

The following tables reflect the carrying amounts and estimated fair values of the Corporation's financial instruments whether or not recognized on the balance sheet at fair value.

Fair Value Measurements at September 30, 2013 Using

(Dollars in thousands)

Carrying Value

Level 1

Level 2

Level 3

Total Fair Value

Financial assets:

Cash and short-term investments

44,332

—

44,332

Securities available for sale

147,161

Loans, net

649,276

—

661,315

Loans held for sale, net

55,911

—

55,911

—

55,911

Derivative asset

748

—

748

—

748

Accrued interest receivable

5,609

—

5,609

Financial liabilities:

Demand deposits

408,270

—

408,270

Time deposits

276,962

—

280,683

—

280,683

Borrowings

167,260

—

159,948

—

159,948

Derivative liabilities

579

—

579

—

579

Accrued interest payable

774

—

774

			Fair Value Measurements at December 31, 2012 Using
(Dollars in thousands)	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and short-term investments	$	25,620	$	25,620	$	—	$	—	$	25,620
Securities available for sale		152,817				152,817				152,817
Loans, net		640,283		—		—		651,133		651,133
Loans held for sale, net		72,727		—		74,964		—		74,964
Accrued interest receivable		5,673		5,673		—		—		5,673
Financial liabilities:
Demand deposits	$	399,575	$	399,575	$	—	$	—	$	399,575
Time deposits		286,609		—		290,483		—		290,483
Borrowings		162,746		—		158,027		—		158,027
Derivative liability		513				513				513
Accrued interest payable		837		837		—		—		837

The Corporation assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporation’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to balance minimizing interest rate risk and increasing net interest income in current market conditions. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors interest rates, maturities and repricing dates of assets and liabilities and attempts to manage interest rate risk by adjusting terms of new loans, deposits and borrowings and by investing in securities with terms that mitigate the Corporation’s overall interest rate risk.

NOTE 8: 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 automobile retail installment sales contracts.

The Corporation’s other segment includes an investment company that derives revenues from brokerage services, an insurance company that derives revenues from insurance services, and a title company that derives revenues from title insurance services. The results of the other segment are not significant to the Corporation as a whole and have been included in “Other.” Certain 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.

Three Months Ended September 30, 2013

(Dollars in thousands)

Retail

Banking

Mortgage

Banking

Consumer

Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

8,094

566

12,316

—

(1,322

)

19,654

Gains on sales of loans

—

1,790

—

1,790

Other noninterest income

1,849

1,146

259

594

3,849

Total operating income

9,943

3,502

12,575

594

(1,321

)

25,293

Expenses:

Interest expense

1,458

1,645

189

(1,322

)

2,069

Provision for loan losses

—

3,825

—

3,840

Salaries and employee benefits

4,531

1,086

2,047

198

—

7,862

Other noninterest expenses

3,396

1,799

1,059

408

—

6,662

Total operating expenses

9,385

2,999

8,576

795

(1,322

)

20,433

Income (loss) before income taxes

558

503

3,999

(201

)

4,860

Provision for (benefit from) income taxes

(233

)

201

1,559

(33

)

—

1,494

Net income (loss)

791

302

2,440

(168

)

3,366

Total assets

816,906

70,865

289,252

4,892

(198,284

)

983,631

Capital expenditures

1,273

329

—

1,621

	Three Months Ended September 30, 2012
(Dollars in thousands)	Retail Banking			Mortgage Banking		Consumer Finance		Other			Eliminations			Consolidated
Revenues:
Interest income	$	8,075		$	644	$	12,097	$	—		$	(1,311	)	$	19,505
Gains on sales of loans		—			2,618		—		—			—			2,618
Other noninterest income		1,574			1,180		281		332			—			3,367
Total operating income		9,649			4,442		12,378		332			(1,311	)		25,490
Expenses:
Interest expense		1,728			135		1,608		251			(1,311	)		2,411
Provision for loan losses		450			30		2,485		—			—			2,965
Salaries and employee benefits		4,006			1,302		1,926		182			—			7,416
Other noninterest expenses		3,052			1,747		1,084		103			—			5,986
Total operating expenses		9,236			3,214		7,103		536			(1,311	)		18,778
Income (loss) before income taxes		413			1,228		5,275		(204	)		—			6,712
Provision for (benefit from) income taxes		(292	)		492		2,057		(78	)		—			2,179
Net income (loss)	$	705		$	736	$	3,218	$	(126	)	$	—		$	4,533
Total assets	$	792,494		$	90,164	$	272,907	$	3,062		$	(196,808	)	$	961,819
Capital expenditures	$	120		$	46	$	29	$	—		$	—		$	195

Nine Months Ended September 30, 2013

(Dollars in thousands)

Retail

Banking

Mortgage

Banking

Consumer

Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

23,693

1,409

36,808

(3,904

)

58,007

Gains on sales of loans

—

7,068

—

7,068

Other noninterest income

5,249

3,310

833

1,239

10,632

Total operating income

28,942

11,787

37,641

1,240

(3,903

)

75,707

Expenses:

Interest expense

4,475

272

4,889

567

(3,904

)

6,299

Provision for loan losses

1,000

9,065

—

10,140

Salaries and employee benefits

12,740

3,840

5,981

599

—

23,160

Other noninterest expenses

9,649

4,543

3,233

1,516

—

18,941

Total operating expenses

27,864

8,730

23,168

2,682

(3,904

)

58,540

Income (loss) before income taxes

1,078

3,057

14,473

(1,442

)

17,167

Provision for (benefit from) income taxes

(908

)

1,223

5,644

(342

)

—

5,617

Net income (loss)

1,986

1,834

8,829

(1,100

)

11,550

Total assets

816,906

70,865

289,252

4,892

(198,284

)

983,631

Capital expenditures

3,005

460

—

3,527

	Nine Months Ended September 30, 2012
(Dollars in thousands)	Retail Banking			Mortgage Banking		Consumer Finance		Other			Eliminations			Consolidated
Revenues:
Interest income	$	24,238		$	1,784	$	35,131	$	—		$	(3,794	)	$	57,359
Gains on sales of loans		—			5,580		—		—			—			5,580
Other noninterest income		4,604			3,275		775		1,004			—			9,658
Total operating income		28,842			10,639		35,906		1,004			(3,794	)		72,597

Expenses:
Interest expense		5,806			354		4,732		748			(3,794	)		7,846
Provision for loan losses		1,950			135		6,465		—			—			8,550
Salaries and employee benefits		11,754			2,836		5,648		657			—			20,895
Other noninterest expenses		8,823			4,692		3,058		359			—			16,932
Total operating expenses		28,333			8,017		19,903		1,764			(3,794	)		54,223
Income (loss) before income taxes		509			2,622		16,003		(760	)		—			18,374
Provision for (benefit from) income taxes		(1,121	)		1,049		6,241		(289	)		—			5,880
Net income (loss)	$	1,630		$	1,573	$	9,762	$	(471	)	$	—		$	12,494
Total assets	$	792,494		$	90,164	$	272,907	$	3,062		$	(196,808	)	$	961,819
Capital expenditures	$	472		$	255	$	128	$	—		$	—		$	855

The Retail Banking segment extends a warehouse line of credit to the Mortgage Banking segment, providing a portion of the funds needed to originate mortgage loans. The Retail Banking segment charges the Mortgage Banking segment interest at the daily FHLB advance rate plus 50 basis points. The Retail Banking segment also provides the Consumer Finance segment with a portion of the funds needed to originate loans by means of a variable rate line of credit that carries interest at one-month LIBOR plus 200 basis points and fixed rate loans that carry interest rates ranging from 3.8 percent to 8.0 percent. The Retail Banking segment acquires certain residential real estate loans from the Mortgage Banking segment at prices similar to those paid by third-party investors. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the Retail Banking segment are not allocated to the Mortgage Banking, Consumer Finance and Other segments.

NOTE 9: Commitments and Financial Instruments with Off-Balance-Sheet Risk

C&F Mortgage enters into IRLCs with customers and will sell the underlying loans to investors on either a best efforts or a mandatory basis. C&F Mortgage mitigates interest rate risk on IRLCs and loans held for sale by (a) entering into forward loan sales contracts with investors for loans to be delivered on a best efforts basis or (b) entering into forward sales contracts of MBS for loans to be delivered on a mandatory basis. Both the IRLCs with customers and the forward sales contracts are considered derivative financial instruments. At September 30, 2013, the Corporation had derivative financial instruments with a notional value of $113.0 million. The fair value of these derivative instruments at September 30, 2013 was $541,000.

C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party counterparties. As is customary in the industry, the agreements with these counterparties require C&F Mortgage to extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the agreements, the counterparties are entitled to make loss claims and repurchase requests of C&F Mortgage for loans that contain covered deficiencies. C&F Mortgage has obtained early payment default recourse waivers for a significant portion of its business. Recourse periods for early payment default for the remaining counterparties vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. C&F Mortgage maintains an indemnification reserve for potential claims made under these recourse provisions. The following table presents the changes in the allowance for indemnification losses for the periods presented:

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands)	2013		2012			2013			2012
Allowance, beginning of period	$	2,232	$	1,657		$	2,092		$	1,702
Provision for indemnification losses		117		500			492			955
Payments		—		(200	)		(235	)		(700	)
Allowance, end of period	$	2,349	$	1,957		$	2,349		$	1,957

NOTE 10: Interest Rate Swaps

The Corporation uses interest rate swaps to manage exposure of a portion of its trust preferred capital notes to interest rate risk. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. The Corporation’s interest rate swaps qualify as cash flow hedges. The Corporation’s cash flow hedges effectively modify a portion of the Corporation’s exposure to interest rate risk by converting variable rates of interest on $10.00 million of the Corporation’s trust preferred capital notes to fixed rates of interest until September 2015.

The cash flow hedges total notional amount is $10.00 million. At September 30, 2013, the cash flow hedges had a fair value of ($372,000), which is recorded in other liabilities. The cash flow hedges were fully effective at September 30, 2013 and therefore the loss on the cash flow hedges was recognized as a component of other comprehensive income (loss), net of deferred income taxes.

NOTE 11: Other Noninterest Expenses

The following table presents the significant components in the consolidated statements of income line “Noninterest Expenses – Other Expenses.”

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2013		2012		2013		2012
Loan and OREO expenses	$	440	$	564	$	880	$	1,219
Data processing fees		668		591		1,985		1,650
Provision for indemnification losses		117		500		492		955
Telecommunication expenses		284		292		876		879
Professional fees		476		361		1,436		1,215
Acquisition transaction costs		279		—		1,061		—
All other noninterest expenses		2,607		1,977		6,882		5,915
Total Other Noninterest Expenses	$	4,871	$	4,285	$	13,612	$	11,833

NOTE 12: Subsequent Events

On October 1, 2013, the Corporation completed the previously announced acquisition of Central Virginia Bankshares, Inc. (CVB), the one-bank holding company for Central Virginia Bank. As of September 30, 2013, CVB reported $369.61 in total assets, $164.81 in net loans and $313.71 in deposits. CVB has seven retail bank branches located in the Virginia counties of Powhatan, Cumberland, Chesterfield and Henrico. As a result of the acquisition, the Corporation will expand its presence in the central Virginia region.

Pursuant to the Agreement and Plan of Merger dated June 10, 2013, CVB's shareholders received $0.32 for each share of CVB common stock they owned, or approximately $853,000 in the aggregate. In addition, the Corporation purchased from the U.S. Treasury for $3.35 million all of CVB's preferred stock and warrants issued to the U.S Treasury under the Capital Purchase Program, including accrued and unpaid dividends on the preferred stock. Through September 30, 2013, the Corporation recognized approximately $1.06 million in pre-tax acquisition transaction costs which are presented as a component of other expenses on the Corporation's income statement for the three and nine months ended September 30, 2013. See Note 11, Other Noninterest Expenses, for more information related to acquisition transaction costs.

The acquisition will be accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets and liabilities of CVB will be recorded at their respective acquisition date fair values. Any excess consideration over the aggregate fair value of the net assets acquired will be recorded as goodwill; conversely, any excess of the aggregate fair value of the net assets acquired will be recorded as negative goodwill. The calculations to determine the fair values of the assets acquired and liabilities assumed were incomplete at the time of filing this Current Report on Form 10-Q. Until the determination of fair values is complete, it is not considered practical or meaningful to include disclosures related to the fair values of assets acquired and liabilities assumed.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 profitability, liquidity, the Corporation’s and each business segment’s loan portfolio, allowance for loan losses, trends regarding the provision for loan losses, trends regarding net loan charge-offs and expected future charge-off activity, trends regarding levels of nonperforming assets and troubled debt restructurings and expenses associated with nonperforming assets, provision for indemnification losses, levels of noninterest income and expense, interest rates and yields, competitive trends in the Corporation's businesses and markets, the deposit portfolio including trends in deposit maturities and rates, interest rate sensitivity, market risk, regulatory developments, monetary policy implemented by the Federal Reserve including quantitative easing programs, capital requirements, growth strategy including the outcome of the pending business combination and financial and other goals. These statements may address issues that involve estimates and assumptions made by management and risks and uncertainties. Actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in:

	•	interest rates, such as the current volatility in yields on U.S. Treasury bonds and increases in mortgage rates
	•	general business conditions, as well as conditions within the financial markets
	•	general economic conditions, including unemployment levels
	•	the legislative/regulatory climate, including the Dodd-Frank Act and regulations promulgated thereunder, the Consumer Financial Protection Bureau (CFPB) and the regulatory and enforcement activities of the CFPB and rules promulgated under the Basel III framework
	•	monetary and fiscal policies of the U.S. Government, including policies of the Treasury and the Federal Reserve Board
	•	the ability to achieve the operations and results expected after the CVB acquisition, including achieving anticipated costs savings, continued relationships with major customers and deposit retention
	•	the value of securities held in the Corporation’s investment portfolios
	•	the quality or composition of the loan portfolios and the value of the collateral securing those loans
	•	the commercial and residential real estate markets
	•	the inventory level and pricing of used automobiles, including sales prices of repossessed vehicles
	•	the level of net charge-offs on loans and the adequacy of our allowance for loan losses
	•	demand in the secondary residential mortgage loan markets
	•	the level of indemnification losses related to mortgage loans sold
	•	demand for loan products
	•	deposit flows
	•	the strength of the Corporation’s counterparties
	•	competition from both banks and non-banks
	•	demand for financial services in the Corporation’s market area
	•	the Corporation's expansion and technology initiatives
	•	reliance on third parties for key services
	•	accounting principles, policies and guidelines

These risks are exacerbated by the turbulence over the past several years in the global and United States financial markets. Continued weakness in the global and United States financial markets could further affect the Corporation’s performance, both directly by affecting the Corporation’s revenues and the value of its assets and liabilities, and indirectly by affecting the Corporation’s counterparties and the economy in general. While there are some signs of improvement in the economic environment, there was a prolonged period of volatility and disruption in the markets, and unemployment has risen to, and remains at, high levels. There can be no assurance that these unprecedented developments will not continue to materially and adversely affect our business, financial condition and results of operations, as well as our ability to raise capital for liquidity and business purposes.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, and other institutions. As a result, defaults by, or even rumors or questions about defaults by, one or more financial services institutions, or the financial services industry generally, could create another market-wide liquidity crisis similar to that experienced in late 2008 and early 2009 and could lead to losses or defaults by us or by other institutions. There is no assurance that any such losses would not materially adversely affect the Corporation’s results of operations.

There can be no assurance that the actions taken by the federal government and regulatory agencies will alleviate the industry or economic factors that may adversely affect the Corporation’s business and financial performance. Further, many aspects of the Dodd-Frank Act remain subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall effect on the Corporation’s business and financial performance.

These risks and uncertainties, and the risks discussed in more detail in Item 1A, "Risk Factors" of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2012 and in Part II, Item 1A, "Risk Factors" of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, should be considered in evaluating the forward-looking statements contained herein. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report.

The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Corporation. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require our most difficult, subjective or complex judgments affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.

Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Our judgment in determining the level of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available.

Allowance for Indemnifications: The allowance for indemnifications is established through charges to earnings in the form of a provision for indemnifications, which is included in other noninterest expenses. A loss is charged against the allowance for indemnifications under certain conditions when a purchaser of a loan (investor) sold by C&F Mortgage incurs a loss due to borrower misrepresentation, fraud, early default, or underwriting error. The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses arising from indemnification requests. Management’s judgment in determining the level of the allowance is based on the volume of loans sold, historical experience, current economic conditions and information provided by investors. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Impairment of Loans: We consider a loan impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during a period of delay in payment if we expect the ultimate collection of all amounts due. We measure impairment on a loan-by-loan basis for commercial, construction and residential loans in excess of $500,000 by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. Troubled debt restructurings (TDRs) are also considered impaired loans, even if the loan balance is less than $500,000. A TDR occurs when we agree to significantly modify the original terms of a loan due to the deterioration in the financial condition of the borrower.

Impairment of Securities: Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it is not more-likely-than-not that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. We regularly review each investment security for other-than-temporary impairment based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.

Other Real Estate Owned (OREO): Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of like properties, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further other-than-temporary deterioration in market conditions.

Goodwill: All of the Corporation's goodwill was recognized in connection with the Bank's acquisition of C&F Finance Company in September 2002. With the adoption of Accounting Standards Update 2011-08, Intangible-Goodwill and Other-Testing Goodwill for Impairment, in 2012, the Corporation is no longer required to perform a test for impairment unless, based on an assessment of qualitative factors related to goodwill, we determine that it is more likely than not that the fair value of C&F Finance Company is less than its carrying amount. If the likelihood of impairment is more than 50 percent, the Corporation must perform a test for impairment and we may be required to record impairment charges. In assessing the recoverability of the Corporation’s goodwill, major assumptions used in determining impairment are increases in future income, sales multiples in determining terminal value and the discount rate applied to future cash flows. As part of any impairment test, we will perform a sensitivity analysis by increasing the discount rate, lowering sales multiples and reducing increases in future income.

Retirement Plan: The Bank maintains a non-contributory, defined benefit pension plan for eligible full-time employees as specified by the plan. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are valued using market quotations. The Bank’s actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the interest crediting rate, the estimated future return on plan assets and the anticipated rate of future salary increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may affect pension assets, liabilities or expense.

Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet. The Corporation's derivative financial instruments consist of (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will be held for sale and related forward sale commitments and (2) interest rate swaps that qualify as cash flow hedges of a portion of the Corporation's trust preferred capital notes. Because the IRLCs and forward sale commitments are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of the Corporation's IRLCs and forward sales commitments and realized gains and losses upon ultimate sale of the loans are classified as noninterest income. The effective portion of the gain or loss on the Corporation's cash flow hedges is reported as a component of other comprehensive income, net of deferred taxes, and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. For more information concerning fair value measurements of these instruments, see Part I, Item 1, "Financial Statements" in this Quarterly Report on Form 10-Q under the heading "Note 7: Fair Value of Assets and Liabilities."

Accounting for Income Taxes: Determining the Corporation’s effective tax rate requires judgment. In the ordinary course of business, there are transactions and calculations for which the ultimate tax outcomes are uncertain. In addition, the Corporation’s tax returns are subject to audit by various tax authorities. Although we believe that the estimates are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the income tax provision and accrual.

For further information concerning accounting policies, refer to Item 8, “Financial Statements and Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2012.

OVERVIEW

Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth initiatives that will enhance long-term shareholder value. We track three primary financial performance measures in order to assess the level of success in achieving these goals: (i) return on average assets (ROA), (ii) return on average common equity (ROE), and (iii) growth in earnings. In addition to these financial performance measures, we track the performance of the Corporation’s three principal business activities: retail banking, mortgage banking, and consumer finance. We also actively manage our capital through growth and dividends, while considering the need to maintain a strong regulatory capital position.

On October 1, 2013, the Corporation completed its acquisition of Central Virginia Bankshares, Inc. (or CVB), the one-bank holding company for Central Virginia Bank. For more information on this acquisition, see Part I, Item I, "Financial Statements" in this Quarterly Report on Form 10-Q under the heading "Note 12: Subsequent Events" and the Corporation's Current Report on Form 8-K filed with the SEC on October 2, 2013.

Financial Performance Measures

Net income for the Corporation was $3.4 million for the three months ended September 30, 2013, compared with $4.5 million for the three months ended September 30, 2012. Net income for the Corporation was $11.6 million for the first nine months of 2013, compared with $12.5 million for the first nine months of 2012. Net income available to common shareholders was $3.4 million, or $0.97 per common share assuming dilution, for the three months ended September 30, 2013, compared with $4.5 million, or $1.36 per common share assuming dilution, for the three months ended September 30, 2012. Net income available to common shareholders was $11.6 million, or $3.37 per common share assuming dilution for the first nine months of 2013, compared with $12.2 million, or $3.69 per common share assuming dilution for the first nine months of 2012. The difference between reported net income and net income available to common shareholders for 2012 is a result of the Preferred Stock dividends and amortization of the Warrant related to the Corporation’s participation in the CPP. In April 2012, the Corporation redeemed the remainder of the Preferred Stock issued in January 2009 under the CPP.

The Corporation’s earnings for the third quarter and first nine months of 2013 were attributable to profitability at all three of its principal business segments. During the three and nine months ended September 30, 2013, the Consumer Finance segment continued to benefit from (1) sustained loan growth and (2) the low funding costs on its variable-rate borrowings, which were offset in part by higher provisions for loan losses, lower loan yields and higher personnel costs. During the nine months ended September 30, 2013, the Mortgage Banking segment benefited from lower provisions for indemnification losses, as well as the effect of electing to use fair value accounting for loans held for sale and interest rate lock commitments, and for forward sales commitments that are used to hedge the effect of changes in interest rates on loans that are to be sold in the secondary market. However, the Mortgage Banking segment and the mortgage banking industry were negatively affected by interest rate volatility during the third quarter of 2013, which resulted in fewer loan applications, lower loan production and a loss on fair value adjustments. The Retail Banking segment benefited from the effects of (1) the continued low interest rate environment on the cost of deposits and the renewal rates on borrowings from the Federal Home Loan Bank, (2) improvements is asset quality resulting in lower provisions for loan losses and (3) increased activity-based interchange and overdraft fee income, which were offset in part by the decline in average loans and higher personnel costs.

The Corporation’s ROE and ROA were 12.58 percent and 1.37 percent, respectively, on an annualized basis for the third quarter of 2013, compared with 18.48 percent and 1.88 percent, respectively, for the third quarter of 2012. For the first nine months of 2013, on an annualized basis, the Corporation’s ROE and ROA were 14.52 percent and 1.56 percent, respectively, compared with 17.74 percent and 1.75 percent, respectively, for the first nine months of 2012. The decline in ROE and ROA for the third quarter and the first nine months of 2013, as compared to the same periods in 2012, resulted from capital and asset growth coupled with lower earnings during the comparative periods.

Principal Business Activities. An overview of the financial results for each of the Corporation’s principal business segments is presented below. A more detailed discussion is included in “Results of Operations.”

Retail Banking: C&F Bank reported net income of $791,000 for the third quarter of 2013, compared to a net income of $705,000 for the third quarter of 2012. For the first nine months of 2013, C&F Bank reported net income of $2.0 million, compared to a net income of $1.6 million for the first nine months of 2012. Factors contributing to the improved financial results for the three and nine months ended September 30, 2013 were the effects of the continued low interest rate environment on the cost of deposits and on the renewal rates on borrowings from the FHLB, a shift in deposit mix to lower rate non-term deposit accounts, the effects of improved credit quality on the loan loss provision and expenses associated with loan work-outs, lower expenses related to the holding costs of foreclosed properties and increased activity-based interchange and overdraft fee income. Partially offsetting these positive factors were: (1) a decrease in average loans to nonaffiliates resulting from weak loan demand in the current economic environment and intense competition for loans in our markets, (2) higher personnel costs associated with increased staff levels throughout the branch network and the addition of new personnel dedicated to growing C&F Bank's commercial and small business loan portfolios, (3) higher occupancy expenses associated with depreciation and maintenance of technology related to expanding the banking services offered to customers and improving operational efficiency and security, (4) higher data processing expenses related to check card processing and mobile banking products and services.

The Bank’s nonperforming assets were $8.0 million at September 30, 2013, compared to $17.7 million at December 31, 2012. Nonperforming assets at September 30, 2013 included $4.2 million in nonaccrual loans, compared to $11.5 million at December 31, 2012, and $3.8 million in foreclosed properties, compared to $6.2 million at December 31, 2012. Troubled debt restructurings (TDRs) were $5.3 million at September 30, 2013, of which $2.6 million were included in nonaccrual loans, as compared to $16.5 million of TDRs at December 31, 2012, of which $9.8 million were included in nonaccrual loans. The decrease in nonaccrual loans and TDRs was primarily a result of (1) the sale of $10.9 million of notes related to one commercial relationship, $5.2 million of which was classified as nonaccrual at December 31, 2012 and (2) the pay-off of $3.0 million of TDRs related to one commercial relationship, which resulted in a $1.7 million decline in nonaccrual loans. The sale of $10.9 million of notes resulted in a $2.1 million charge-off, which was previously provided for in the allowance for loan losses and which contributed to the decline in the Bank’s allowance for loan losses as a percentage of total loans to 2.88 percent at September 30, 2013 from 3.38 percent at December 31, 2012. Management believes it has provided adequate loan loss reserves for the Retail Banking segment’s loans.

Mortgage Banking: C&F Mortgage Corporation reported net income of $302,000 for the third quarter of 2013, compared to $736,000 for the third quarter of 2012. For the first nine months of 2013, C&F Mortgage Corporation reported net income of $1.8 million compared to $1.5 million for the first nine months of 2012.

During the second quarter of 2013, the Mortgage Banking segment began selling a portion of loans originated for sale on a mandatory delivery basis, while continuing to sell the majority of its loans on a best efforts delivery basis. In accordance with Accounting Standards Codification Topic 820-Fair Value Measurement and Disclosures, we have elected to use fair value accounting for loans held for sale and interest rate lock commitments, as well as for forward loan sales commitments and hedging instruments that are used to reduce the effect of changes in interest rates on loans that are to be sold in the secondary market. Under fair value accounting, gains on loans sold in the secondary market are recognized as loans progress through the origination pipeline, as opposed to recognizing gains when the loans are sold, as was done in the past. The decline in pre-tax income for the third quarter of 2013 compared to the third quarter of 2012 included a negative fair value adjustment of $473,000; whereas, the increase in pre-tax income for the first nine months of 2013 compared to the same period of 2012 included a favorable fair value adjustment of $823,000, which included $1.1 million attributable to the implementation of fair value accounting in April 2013.

Net income at the Mortgage Banking segment for the three and nine months ended September 30, 2013, compared to the same periods in 2012, benefited from lower provisions for indemnification losses. Net income at the Mortgage Banking segment was negatively affected by (1) fluctuations in mortgage interest rates during the third quarter of 2013 which caused industry wide lower application volume and lower loan production for the three and nine months ended September 30, 2013, (2) lower net interest income resulting from the decline in loan production and (3) higher non-production based personnel costs associated with expansion into Virginia Beach, Virginia and with regulatory compliance. If volatility in mortgage interest rates continues, there may be a continuation of lower loan demand, particularly for refinancings, which could negatively affect earnings of the Mortgage Banking segment for the remainder of 2013 and possibly beyond.

Consumer Finance: C&F Finance Company reported net income of $2.4 million for the third quarter of 2013, compared with $3.2 million for the third quarter of 2012. For the first nine months of 2013, C&F Finance Company reported net income of $8.8 million, compared to $9.8 million for the first nine months of 2012. Average loans outstanding increased 7.08 percent and 9.74 percent, respectively, during the three and nine months ended September 30, 2013. Additionally, the Consumer Finance segment continued to benefit from the low funding costs related to its variable-rate borrowings. Offsetting these benefits were (1) increases in the segment’s provision for loan losses resulting from higher loan charge-offs due to the continued uncertain economic environment, lower resale values on repossessed vehicles and borrowers’ willingness to default on existing debt in response to credit easing by competitors, (2) a decline in average loan yields as a result of aggressive loan pricing strategies used by competitors attempting to grow market share in automobile financing and (3) higher personnel expenses resulting from an increase in the number of personnel to support loan growth and expansion into new markets.

The allowance for loan losses as a percentage of loans at September 30, 2013 was 8.01 percent, as compared with 7.96 percent at December 31, 2012. Management believes that the current allowance for loan losses is adequate to absorb probable losses in the consumer finance loan portfolio. However, if the current economic environment and credit easing by new entrants into the automobile financing sector continues to contribute to an increase in the segment's defaults, the Consumer Finance segment could continue to experience an elevated level of charge-offs for the remainder of 2013 and possibly beyond, which may result in higher provisions for loan losses.

Other Segments: Other segments reported an aggregate net loss of $168,000 for the third quarter of 2013, compared to a net loss of $126,000 for the third quarter of 2012. For the first nine months of 2013, Other segments reported an aggregate net loss of $1.1 million, compared to a net loss of $471,000 for the first nine months of 2012. Other segments includes the corporation’s holding company, which recognized $220,000 and $868,000 in transactions costs, net of taxes, ($286,000 and $1.1 million before taxes, respectively) during the third quarter and first nine months of 2013, respectively, associated with the corporation’s acquisition of CVB, which was offset in part by a $270,000 gain during the third quarter on the sale of preferred stock that was classified as available-for-sale. Additional information related to the acquisition of CVB is provided in Part I, Item I, "Financial Statements" in this Quarterly Report on Form 10-Q under the heading "Note 12: Subsequent Events".

Capital Management. Total shareholders' equity was $109.4 million at September 30, 2013, compared to $102.2 million at December 31, 2012. Capital growth resulted from earnings for the first nine months of 2013 and stock option exercises that occurred in response to the improvements in the Corporation's stock price, offset in part by dividends declared and a decline in unrealized holding gains on securities available for sale, which are a component of accumulated other comprehensive income. The Corporation declared cash dividends of 29 cents and 87 cents per common share during the third quarter and first nine months of 2013, respectively, which was a 28.7 percent and a 24.8 percent payout ratio of net income available to common shareholders for the third quarter and first nine months of 2013, respectively.

RESULTS OF OPERATIONS

The following table presents 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 the three months and nine months ended September 30, 2013 and 2012. Loans include loans held for sale. Loans placed on nonaccrual status are included in the balances and are included in the computation of yields, but had no material effect. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid using the federal corporate income tax rate of 34 percent).

TABLE 1: Average Balances, Income and Expense, Yields and Rates

	Three Months Ended September 30,
	2013								2012
(Dollars in thousands)	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets
Securities:
Taxable	$	29,720		$	152		2.05	%	$	19,327		$	78		1.61	%
Tax-exempt		118,650			1,740		5.87			116,333			1,729		5.95
Total securities		148,370			1,892		5.10			135,660			1,807		5.33
Loans		732,924			18,335		9.93			747,239			18,297		9.74
Interest-bearing deposits in other banks and Federal funds sold		48,845			29		0.24			5,351			2		0.15
Total earning assets		930,139			20,256		8.64			888,250			20,106		9.01
Allowance for loan losses		(34,731	)							(35,829	)
Total non-earning assets		90,459								93,482
Total assets	$	985,867							$	945,903
Liabilities and Shareholders’ Equity
Time and savings deposits:
Interest-bearing demand deposits	$	116,398		$	71		0.24	%	$	102,985		$	78		0.30	%
Money market deposit accounts		124,099			87		0.28			104,098			94		0.36
Savings accounts		49,667			10		0.08			45,921			12		0.10
Certificates of deposit, $100 or more		123,285			358		1.15			130,884			452		1.37
Other certificates of deposit		156,512			458		1.16			162,018			565		1.39
Total time and savings deposits		569,961			984		0.68			545,906			1,201		0.87
Borrowings		166,425			1,085		2.55			168,287			1,210		2.82
Total interest-bearing liabilities		736,386			2,069		1.10			714,193			2,411		1.33
Noninterest-bearing demand deposits		117,987								109,459
Other liabilities		24,501								25,808
Total liabilities		878,874								849,460
Shareholders’ equity		106,993								96,443
Total liabilities and shareholders’ equity	$	985,867							$	945,903
Net interest income				$	18,187							$	17,695
Interest rate spread							7.54	%							7.68	%
Interest expense to average earning assets (annualized)							0.88	%							1.07	%
Net interest margin (annualized)							7.77	%							7.94	%

	Nine Months Ended September 30,
	2013								2012
(Dollars in thousands)	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets
Securities:
Taxable	$	30,918		$	429		1.85	%	$	20,197		$	246		1.62	%
Tax-exempt		116,367			5,192		5.95			117,856			5,324		6.02
Total securities		147,285			5,621		5.09			138,053			5,570		5.38
Loans		727,548			54,093		9.94			726,599			53,624		9.86
Interest-bearing deposits in other banks and Federal funds sold		50,872			89		0.23			10,413			15		0.19
Total earning assets		925,705			59,803		8.64			875,065			59,209		9.04
Allowance for loan losses		(34,918	)							(35,045	)
Total non-earning assets		93,679								92,709
Total assets	$	984,466							$	932,729
Liabilities and Shareholders’ Equity
Time and savings deposits:
Interest-bearing demand deposits	$	125,284		$	292		0.31	%	$	108,278		$	317		0.39	%
Money market deposit accounts		118,532			250		0.28			94,564			284		0.40
Savings accounts		49,434			31		0.08			45,101			33		0.10
Certificates of deposit, $100 or more		124,542			1,087		1.17			136,291			1,639		1.61
Other certificates of deposit		158,237			1,411		1.19			164,858			1,926		1.56
Total time and savings deposits		576,029			3,071		0.71			549,092			4,199		1.02
Borrowings		165,474			3,228		2.57			162,443			3,647		2.99
Total interest-bearing liabilities		741,503			6,299		1.12			711,535			7,846		1.47
Noninterest-bearing demand deposits		112,043								102,460
Other liabilities		25,094								22,914
Total liabilities		878,640								836,909
Shareholders’ equity		105,826								95,820
Total liabilities and shareholders’ equity	$	984,466							$	932,729
Net interest income				$	53,504							$	51,363
Interest rate spread							7.52	%							7.57	%
Interest expense to average earning assets (annualized)							0.90	%							1.20	%
Net interest margin (annualized)							7.73	%							7.84	%

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 presents the direct causes of the period-to-period changes in the components of net interest income on a taxable-equivalent basis. We calculated the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each. Loans include both nonaccrual loans and loans held for sale.

TABLE 2: Rate-Volume Recap

	Three Months Ended September 30, 2013 from 2012
	Increase (Decrease) Due to						Total Increase
(Dollars in thousands)	Rate			Volume			(Decrease)
Interest income:
Loans	$	1,426		$	(1,388	)	$	38
Securities:
Taxable		25			49			74
Tax-exempt		(106	)		117			11
Interest-bearing deposits in other banks and Federal funds sold		2			25			27
Total interest income		1,347			(1,197	)		150

Interest expense:
Time and savings deposits:
Interest-bearing deposits		(52	)		45			(7	)
Money market deposit accounts		(81	)		74			(7	)
Savings accounts		(7	)		5			(2	)
Certificates of deposit, $100 or more		(69	)		(25	)		(94	)
Other certificates of deposit		(89	)		(18	)		(107	)
Total time and savings deposits		(298	)		81			(217	)
Borrowings (including Trust preferred capital notes)		(112	)		(13	)		(125	)
Total interest expense		(410	)		68			(342	)
Change in net interest income	$	1,757		$	(1,265	)	$	492

	Nine Months Ended September 30, 2013 from 2012
	Increase (Decrease) Due to						Total Increase
(Dollars in thousands)	Rate			Volume			(Decrease)
Interest income:
Loans	$	404		$	65		$	469
Securities:
Taxable		39			144			183
Tax-exempt		(64	)		(68	)		(132	)
Interest-bearing deposits in other banks and Federal funds sold		4			70			74
Total interest income		383			211			594

Interest expense:
Time and savings deposits:
Interest-bearing deposits		(88	)		63			(25	)
Money market deposit accounts		(121	)		87			(34	)
Savings accounts		(7	)		5			(2	)
Certificates of deposit, $100 or more		(420	)		(132	)		(552	)
Other certificates of deposit		(440	)		(75	)		(515	)
Total time and savings deposits		(1,076	)		(52	)		(1,128	)
Borrowings (including Trust preferred capital notes)		(530	)		111			(419	)
Total interest expense		(1,606	)		59			(1,547	)
Change in net interest income	$	1,989		$	152		$	2,141

Net interest income, on a taxable-equivalent basis, for the three months ended September 30, 2013 was $18.2 million, compared to $17.7 million for the three months ended September 30, 2012. Net interest income, on a taxable-equivalent basis, for the first nine months of 2013 was $53.5 million, compared to $51.4 million for the first nine months of 2012. The increase in net interest income for the three and nine months ended September 30, 2013, compared to the same periods in 2012, was a result of an increase in average earning assets for both periods, offset in part by a decrease in the net interest margin for both periods. Net interest margin decreased 17 basis points to 7.77 percent for the third quarter of 2013 and decreased 11 basis points to 7.73 percent for the first nine months of 2013 relative to the same periods in 2012. The decreases in net interest margin during 2013 can be attributed to a decrease in the yield on interest-earning assets offset in part by decreases in the cost of interest-bearing liabilities and an increase in demand deposits that pay no interest. The decrease in the yield on interest-earning assets was primarily attributable to a large increase in interest-bearing deposits in other banks and federal funds sold, which segment of earning assets provides the lowest yield of all segments of earning assets, and a decrease in the yield on the investment portfolio. The decrease in the cost of interest-bearing liabilities is a result of the sustained low interest rate environment and the repricing of higher-rate certificates of deposit and borrowings as they mature to lower rates. In addition, the mix in interest bearing deposits has shifted to non-term deposits, including demand deposits and low-cost interest-bearing demand deposits, money market deposits and savings accounts.

Average loans, which includes both loans held for investment and loans held for sale, declined $14.3 million to $732.9 million for the third quarter of 2013 from $747.2 million for the third quarter of 2012. However, average loans increased slightly to $727.5 million for the first nine months of 2013 from $726.6 million for the first nine months of 2012. In total, average loans to nonaffiliates held for investment increased $3.6 million during the third quarter of 2013 and $12.7 million during the first nine months of 2013, compared to the same periods of 2012. Increases in average loans during 2013 were primarily related to increases in the Consumer Finance segment's average loan portfolio, which increased $19.0 million during the third quarter of 2013 and $25.2 million during the first nine months of 2013. The increase in average loans at the Consumer Finance segment was offset in part by $15.9 million and $12.7 million decreases during the three months and nine months ended September 30, 2013, respectively, in the Retail Banking segment's portfolio of average loans held for investment, where loan production has been negatively affected by weak demand for new loans in the current economic environment and intense competition for loans in our markets. The Mortgage Banking segment's average portfolio of loans held for sale decreased $17.9 million during the third quarter and $11.8 million during the first nine months of 2013, compared to the same periods of 2012. The decline in demand for mortgage borrowing and refinancing activity during the third quarter of 2013 resulted in decreases in loan originations of $38.1 million and $27.8 million in the three and nine months ended September 30, 2013, respectively, when compared to the same periods of 2012. The Mortgage Banking segment's average balance of loans held for sale also fluctuates depending on the period of time between mortgage loan origination and sale to a third-party investor.

The overall yield on average loans increased 19 basis points to 9.93 percent for the third quarter of 2013 and eight basis points to 9.94 percent for the first nine months of 2013, when compared to the same periods of 2012. These increases were principally the result of the lower average balance of the Mortgage Banking segment's lower-yielding loans held for sale, the decline in average balance of the Retail Banking segment's loans to nonaffiliates, and the higher average balance of the Consumer Finance segment's higher-yielding loans as a percentage of total loans. In addition, interest income on loans during the three and nine months ended September 30, 2013 includes $307,000 of nonaccrual interest collected in the third quarter of 2013 in connection with the pay-off of $3.0 million of TDRs related to one commercial relationship. The recognition of this interest contributed approximately eight basis points to the yield on loans, the total yield on interest earning assets and the net interest margin for the third quarter of 2013.

Average securities available for sale increased $12.7 million for the third quarter of 2013 and $9.2 million for the first nine months of 2013, compared to the same periods of 2012. The average balance of shorter-term securities of U.S. government agencies and corporations increased $10.0 million and $10.6 million, respectively, while the average balance of longer-term tax exempt municipal securities increased $2.3 million during the third quarter of 2013 and decreased $1.5 million during the first nine months of 2013. Shifts in the mix of investments were attributable to (1) collateral requirements to support public deposits and (2) reinvesting the proceeds from calls and maturities of longer-term investments to shorter-term investments to limit the Corporation's exposure to potential future rising interest rate environments. The lower yield on the securities portfolio during the third quarter and first nine months of 2013 resulted from the calls and maturities of higher-yielding securities and purchases of lower-yielding shorter-term securities, as described above.

Average interest-bearing deposits in other banks and Federal funds sold increased $43.5 million and $40.5 million, respectively, during the third quarter and first nine months of 2013, when compared to the same periods of 2012, as a result of deposit growth and lower loan funding needs of the Retail Banking and Mortgage Banking segments. The average yield on these overnight funds increased nine basis points and four basis points during the third quarter and first nine months of 2013, respectively.

Average interest-bearing time and savings deposits increased $24.1 million in the third quarter of 2013 and $26.9 million in the first nine months of 2013, compared to the same periods in 2012. These increases were a result of higher average interest-bearing demand, money market and savings deposits, which was offset in part by lower average certificates of deposit. The average cost of interest-bearing deposits declined 19 basis points during the third quarter of 2013 and 31 basis points during the first nine months of 2013, compared to the same periods of 2012. These decreases resulted from (1) the repricing of time deposits that matured throughout 2012 and into 2013 to lower interest rates, (2) a decline in interest rates paid on NOW, money market deposit and savings accounts in the sustained low interest rate environment and (3) a shift in deposit composition to non-term savings and money market deposits, which pay lower interest rates.

Average borrowings increased $1.9 million and $3.0 million during the third quarter and first nine months of 2013, compared to the same periods of 2012. These increases occurred in retail overnight repurchase agreements with commercial depositors. The average cost of borrowings declined 27 basis points and 42 basis points during the third quarter and first nine months of 2013, compared to the same period of 2012, because of the maturity of $10.0 million of FHLB advances during the third quarter of 2012, which were replaced by advances carrying lower interest rates. In addition, $5.0 million of trust preferred capital notes issued in 2007 converted to a lower variable rate from a higher fixed rate near the end of 2012.

It will be challenging to maintain the Retail Banking segment's net interest margin at its current level if funds obtained from loan repayments and from deposit growth cannot be fully used to originate new loans and instead are reinvested in lower-yielding earning assets, and if the reduction in earning asset yields exceeds interest rate declines in interest-bearing liabilities, which are approaching their interest rate floors. If the current volatility in the ten-year treasury yield and in mortgage interest rates continues, the Mortgage Banking segment may continue to experience lower loan demand, particularly for refinancings, which could reduce interest income on loans originated for sale, further contributing to a deterioration in net interest margin. The net interest margin at the Consumer Finance segment will be most affected by increasing competition and loan pricing strategies that competitors may use to grow market share in automobile financing. This increased competition may result in lower yields as the Consumer Finance segment responds to competitive pricing pressures and fewer purchases of automobile retail installment sales contracts.

Noninterest Income

TABLE 3: Noninterest Income

(Dollars in thousands)

Three Months Ended September 30, 2013

Retail

Banking

Mortgage

Banking

Consumer

Finance

Other and

Eliminations

Total

Gains on sales of loans

—

1,790

—

1,790

Service charges on deposit accounts

1,010

—

1,010

Other service charges and fees

682

920

1,655

Gains on calls of available for sale securities

—

270

Other income

157

226

257

274

914

Total noninterest income

1,849

2,936

259

595

5,639

(Dollars in thousands)	Three Months Ended September 30, 2012

	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations		Total
Gains on sales of loans*	$	—	$	2,618	$	—	$	—	$	2,618
Service charges on deposit accounts		823		—		—		—		823
Other service charges and fees		623		1,006		3		53		1,685
Gains on calls of available for sale securities		3		—		—		—		3
Other income		125		174		278		279		856
Total noninterest income	$	1,574	$	3,798	$	281	$	332	$	5,985

(Dollars in thousands)

Nine Months Ended September 30, 2013

Retail

Banking

Mortgage

Banking

Consumer

Finance

Other and

Eliminations

Total

Gains on sales of loans

—

7,068

—

7,068

Service charges on deposit accounts

2,930

—

2,930

Other service charges and fees

2,003

2,493

129

4,631

Gains on calls of available for sale securities

—

270

276

Other income

310

817

827

841

2,795

Total noninterest income

5,249

10,378

833

1,240

17,700

(Dollars in thousands)	Nine Months Ended September 30, 2012

	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations		Total
Gains on sales of loans*	$	—	$	5,580	$	—	$	—	$	5,580
Service charges on deposit accounts		2,449		—		—		—		2,449
Other service charges and fees		1,801		2,707		9		144		4,661
Gains on calls of available for sale securities		11		—		—		—		11
Other income		343		568		766		860		2,537
Total noninterest income	$	4,604	$	8,855	$	775	$	1,004	$	15,238

* Gains on sales of loans at the Mortgage Banking segment have been restated to conform to current year presentation.

Total noninterest income decreased $346,000, or 5.8 percent, in the third quarter of 2013 and increased $2.5 million, or 16.2 percent, in the first nine months of 2013, compared to the same periods in 2012. The changes in total noninterest income for the three and nine months ended September 30, 2013 were affected by the Mortgage Banking segment's election in the second quarter of 2013 to use fair value accounting for its portfolio of loans held for sale and IRLCs, which resulted in a negative $473,000 fair value adjustment during the third quarter of 2013 and an $823,000 favorable fair value adjustment during the first nine months of 2013. Noninterest income for the Mortgage Banking segment was further affected by volatility in mortgage interest rates, which caused declines of 15.9 percent and 4.5 percent in loan origination volumes during the three and nine months ended September 30, 2013 compared to the same periods in 2012. The Retail Banking segment recognized higher activity-based debit card interchange and overdraft fee income during the third quarter and first nine months of 2013, compared to the same periods in 2012. The Corporation' holding company also recognized a $270,000 gain occurring in the third quarter of 2013 from the sale of preferred stock of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

Noninterest Expense

TABLE 4: Noninterest Expenses

(Dollars in thousands)

Three Months Ended September 30, 2013

Retail

Banking

Mortgage

Banking

Consumer

Finance

Other and

Eliminations

Total

Salaries and employee benefits

4,531

1,086

2,047

198

7,862

Occupancy expenses

1,115

463

208

1,791

Other expenses:

OREO expenses

290

—

290

Provision for indemnification losses

—

117

—

117

Other expenses

1,991

1,219

851

403

4,464

Total other expenses

2,281

1,336

851

403

4,871

Total noninterest expenses

7,927

2,885

3,106

606

14,524

(Dollars in thousands)	Three Months Ended September 30, 2012
	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations		Total
Salaries and employee benefits*	$	4,006	$	1,302	$	1,926	$	182	$	7,416
Occupancy expenses		1,018		468		211		4		1,701
Other expenses:
OREO expenses		485		—		—		—		485
Provision for indemnification losses		—		500		—		—		500
Other expenses		1,549		779		873		99		3,300
Total other expenses		2,034		1,279		873		99		4,285
Total noninterest expenses	$	7,058	$	3,049	$	3,010	$	285	$	13,402

(Dollars in thousands)

Nine Months Ended September 30, 2013

Retail

Banking

Mortgage

Banking

Consumer

Finance

Other and

Eliminations

Total

Salaries and employee benefits

12,740

3,840

5,981

599

23,160

Occupancy expenses

3,292

1,407

618

5,329

Other expenses:

OREO expenses

674

—

674

Provision for indemnification losses

—

492

—

492

Other expenses

5,683

2,644

2,615

1,504

12,446

Total other expenses

6,357

3,136

2,615

1,504

13,612

Total noninterest expenses

22,389

8,383

9,214

2,115

42,101

(Dollars in thousands)	Nine Months Ended September 30, 2012
	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations		Total
Salaries and employee benefits*	$	11,754	$	2,836	$	5,648	$	657	$	20,895
Occupancy expenses		3,024		1,429		629		17		5,099
Other expenses:
OREO expenses		927		—		—		—		927
Provision for indemnification losses		—		955		—		—		955
Other expenses		4,872		2,308		2,429		342		9,951
Total other expenses		5,799		3,263		2,429		342		11,833
Total noninterest expenses	$	20,577	$	7,528	$	8,706	$	1,016	$	37,827

*Salaries and employee benefits for prior periods at the Mortgage Banking segment have been restated to conform to current year presentation.

Total noninterest expenses increased $1.1 million, or 8.4 percent, in the third quarter of 2013 and increased $4.3 million or 11.3 percent, in the first nine months of 2013, compared to the same periods in 2012. These increases resulted primarily from higher personnel costs at (1) the Retail Banking segment for the three and nine months ended September 30, 2013 due to increased staffing in the branch network to support customer service initiatives and the addition of new personnel dedicated to growing the Bank's commercial and small business loan portfolio and (2) the Consumer Finance segment for the three and nine months ended September 30, 2013 due to an increase in the number of personnel to support expansion into new markets and loan growth. Personnel costs at the Mortgage Banking segment declined during the third quarter of 2013 compared to the third quarter of 2012 due to lower production-based expenses because of the lower volume of loan originations; however personnel costs at the Mortgage Banking segment increased during the first nine months of 2013 compared to the first nine months of 2012 due to higher income-based expenses, as well as higher non-production based compensation associated with the expansion into Virginia Beach, Virginia and with regulatory compliance. In addition, the Retail Banking segment recognized a loss on the sale of a facility previously used for the Bank's deposit operations in West Point, Virginia and the Corporation's holding company recognized $1.1 million in transaction costs associated with the Corporation's acquisition of CVB. These increases were partially offset by a lower provision for indemnification losses in connection with loans sold to investors at the Mortgage Banking segment and lower foreclosed properties expenses at the Retail Banking segment.

Income Taxes

Income tax expense for the third quarter of 2013 totaled $1.5 million, resulting in an effective tax rate of 30.7 percent, compared to $2.2 million and 32.5 percent for the third quarter of 2012. Income tax expense for the first nine months of 2013 totaled $5.6 million, resulting in an effective tax rate of 32.7 percent, compared to $5.9 million and 32.0 percent for the first nine months of 2012. The decline in the effective tax rate during the third quarter of 2013 compared to the third quarter of 2012 was a result of higher earnings at the Retail Banking segment, which generates tax-exempt income and is exempt from state income taxes. The increase in the effective tax rate during the first nine months of 2013 was a result of $549,000 of nondeductible transaction expenses during the first nine months of 2013 associated with the acquisition of CVB, compared to no such expenses in 2012.

ASSET QUALITY

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The following tables summarize the allowance activity for the periods indicated:

TABLE 5: Allowance for Loan Losses

	Three Months Ended September 30,
(Dollars in thousands)	2013			2012
Allowance, beginning of period	$	34,769		$	35,457
Provision for loan losses:
Retail Banking segment		—			450
Mortgage Banking segment		15			30
Consumer Finance segment		3,825			2,485
Total provision for loan losses		3,840			2,965
Loans charged off:
Real estate—residential mortgage		269			142
Real estate—construction ¹		—			—
Commercial, financial and agricultural ²		27			1,472
Equity lines		89			—
Consumer		59			73
Consumer finance		4,295			2,629
Total loans charged off		4,739			4,316
Recoveries of loans previously charged off:
Real estate—residential mortgage		13			4
Real estate—construction ¹		—			—
Commercial, financial and agricultural ²		110			84
Equity lines		—			79
Consumer		24			56
Consumer finance		844			661
Total recoveries		991			884
Net loans charged off		3,748			3,432
Allowance, end of period	$	34,861		$	34,990
Ratio of annualized net charge-offs to average total loans outstanding during period for Retail Banking and Mortgage Banking		0.30	%		1.44	%
Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance		5.17	%		2.93	%

	Nine Months Ended September 30,
(Dollars in thousands)	2013			2012
Allowance, beginning of period	$	35,907		$	33,677
Provision for loan losses:
Retail Banking segment		1,000			1,950
Mortgage Banking segment		75			135
Consumer Finance segment		9,065			6,465
Total provision for loan losses		10,140			8,550
Loans charged off:
Real estate—residential mortgage		744			780
Real estate—construction ¹		—			—
Commercial, financial and agricultural ²		2,297			1,874
Equity lines		126			120
Consumer		287			245
Consumer finance		10,656			6,731
Total loans charged off		14,110			9,750
Recoveries of loans previously charged off:
Real estate—residential mortgage		99			27
Real estate—construction ¹		—			—
Commercial, financial and agricultural ²		170			120
Equity lines		27			79
Consumer		103			155
Consumer finance		2,525			2,132
Total recoveries		2,924			2,513
Net loans charged off		11,186			7,237
Allowance, end of period	$	34,861		$	34,990
Ratio of annualized net charge-offs to average total loans outstanding during period for Retail Banking and Mortgage Banking		1.03	%		0.87	%
Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance		3.83	%		2.37	%

¹	Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

²	Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

For the nine months ended September 30, 2013, the annualized net charge-off ratio for the combined Retail Banking and Mortgage Banking segments includes a $2.1 million charge-off for a single commercial lending relationship. As of September 30, 2013, the Corporation does not anticipate incurring similar charge-offs of large lending relationships during the remainder of 2013.

Table 6 discloses the allocation of the allowance for loan losses at September 30, 2013 and December 31, 2012.

TABLE 6: Allocation of Allowance for Loan Losses

(Dollars in thousands)	September 30, 2013		December 31, 2012
Allocation of allowance for loan losses:
Real estate—residential mortgage	$	2,250	$	2,358
Real estate—construction ¹		474		424
Commercial, financial and agricultural ²		8,025		9,824
Equity lines		797		885
Consumer		248		283
Consumer finance		23,067		22,133
Balance	$	34,861	$	35,907

¹	Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

²	Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

Loans by credit quality ratings are presented in Table 7 below. 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 our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Corporation will be unable to collect all amounts due.

•

Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a nonaccrual classification because it is probable that the Corporation will not be able to collect all amounts due.

•

Doubtful 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 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.

TABLE 7: Credit Quality Indicators

Loans by credit quality indicators as of September 30, 2013 were as follows:

(Dollars in thousands)

Pass

Special

Mention

Substandard

Nonaccrual

Total¹

Real estate—residential mortgage

149,836

1,768

1,856

1,993

155,453

Real estate—construction ²

3,538

—

2,649

—

6,187

Commercial, financial and agricultural ³

171,466

4,200

18,357

1,891

195,914

Equity lines

31,591

1,066

704

173

33,534

Consumer

4,695

188

4,938

361,126

7,037

23,618

4,245

396,026

(Dollars in thousands)

Performing

Non-Performing

Total

Consumer finance

286,858

1,253

288,111

¹	At September 30, 2013, the Corporation did not have any loans classified as Doubtful or Loss.

²	Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

³	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, 2012 were as follows:

(Dollars in thousands)	Pass		Special Mention		Substandard		Substandard Nonaccrual		Total¹
Real estate – residential mortgage	$	143,947	$	1,374	$	2,131	$	1,805	$	149,257
Real estate – construction ²		2,133		—		2,929		—		5,062
Commercial, financial and agricultural ³		167,693		6,678		21,247		9,434		205,052
Equity lines		31,199		1,327		767		31		33,324
Consumer		4,746		3		369		191		5,309
	$	349,718	$	9,382	$	27,443	$	11,461	$	398,004

(Dollars in thousands)		Performing				Non-Performing				Total
Consumer finance		$	277,531			$	655			$	278,186

¹	At December 31, 2012, the Corporation did not have any loans classified as Doubtful or Loss.

²	Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

³	Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

The combined Retail Banking and Mortgage Banking segments’ allowance for loan losses decreased $2.0 million since December 31, 2012, and the provision for loan losses at these combined segments decreased $465,000 and $1.0 million during the third quarter and first nine months of 2013, compared to the same periods in 2012. The allowance for loan losses to total loans for these combined segments declined to 2.98 percent at September 30, 2013, compared to 3.46 percent at December 31, 2012. These declines resulted from improved credit quality in part due to the resolution of certain nonperforming notes, as discussed below. Substandard nonaccrual loans decreased to $4.2 million at September 30, 2013 from $11.5 million at December 31, 2012. The decline in these balances and the allowance ratio occurred primarily as a result of (1) the sale of $10.9 million of TDRs related to one commercial relationship, $5.2 million of which was classified as nonaccruing at December 31, 2012 and (2) the pay-off of $2.0 million of TDRs related to one commercial relationship, which was classified as nonaccrual at December 31, 2012. The sale of notes referred to above resulted in a $2.1 million charge-off. Loss reserves that had previously been recorded for this relationship were adequate to cover the associated charge-off. Special mention and substandard loans also decreased as a result of improved loan performance. We believe that the current level of the allowance for loan losses at the combined Retail Banking and Mortgage Banking segments is adequate to absorb any losses on existing loans that may become uncollectible. If current economic conditions continue or worsen, a higher level of nonperforming loans may be experienced in future periods, which may then require a higher provision for loan losses.

The Consumer Finance segment’s allowance for loan losses increased to $23.1 million at September 30, 2013 from $22.1 million at December 31, 2012, and its provision for loan losses increased $1.3 million and $2.6 million during the third quarter and first nine months of 2013, compared to the same periods in 2012. The allowance for loan losses as a percentage of loans at September 30, 2013 was 8.01 percent, compared with 7.96 percent at December 31, 2012. The increase in the provision for loan losses during the three and nine months ended September 30, 2013 was primarily attributable to higher net charge-offs, which resulted from the uncertain economic conditions, lower resale prices of repossessed vehicles and borrowers' willingness to default on existing debt in response to credit easing by competitors. We believe that the current level of the allowance for loan losses at the Consumer Finance segment is adequate to absorb any losses on existing loans that may become uncollectible. However, if unemployment levels remain elevated or increase in the future, or if the level of the inventory of repossessed vehicles increases resulting in declining values of automobiles securing outstanding loans, or if the current economic environment and credit easing by competitors in the automobile financing sector continues to contribute to an increase in the segment's defaults, a higher provision for loan losses may become necessary.

Nonperforming Assets

Table 8 summarizes nonperforming assets at September 30, 2013 and December 31, 2012.

TABLE 8: Nonperforming Assets

Retail Banking and Mortgage Banking Segments

(Dollars in thousands)	September 30, 2013			December 31, 2012
Nonaccrual loans* - Retail Banking	$	4,245		$	11,461
Nonaccrual loans - Mortgage Banking		—			—
OREO** - Retail Banking		3,780			6,236
OREO** - Mortgage Banking		—			—
Total nonperforming assets	$	8,025		$	17,697
Accruing loans past due for 90 days or more	$	96		$	—
Troubled debt restructurings	$	3,921		$	16,492
Total loans	$	396,027		$	398,004
Allowance for loan losses	$	11,794		$	13,774
Nonperforming assets to total loans and OREO*		2.01	%		4.38	%
Allowance for loan losses to total loans		2.98			3.46
Allowance for loan losses to nonaccrual loans		277.83			120.18

*	Nonaccrual loans include nonaccrual TDRs of $2.63 million at September 30, 2013 and $9.80 million at December 31, 2012.

**	OREO is recorded at its estimated fair value less cost to sell.

Consumer Finance Segment

(Dollars in thousands)	September 30, 2013			December 31, 2012
Nonaccrual loans	$	1,253		$	655
Accruing loans past due for 90 days or more	$	—		$	—
Total loans	$	288,111		$	278,186
Allowance for loan losses	$	23,067		$	22,133
Nonaccrual consumer finance loans to total consumer finance loans		0.43	%		0.24	%
Allowance for loan losses to total consumer finance loans		8.01			7.96

Nonperforming assets of the combined Retail Banking and Mortgage Banking segments totaled $8.0 million at September 30, 2013, compared to $17.7 million at December 31, 2012, a 57 percent decrease during the first nine months of 2013. Nonperforming assets at September 30, 2013 included $4.2 million of nonaccrual loans at the Retail Banking segment, compared to $11.5 million at December 31, 2012, and $3.8 million of OREO compared to $6.2 million at December 31, 2012. The decrease in nonaccrual loans since December 31, 2012 was primarily attributable to the sale of notes related to one commercial relationship, $5.2 million of which was on nonaccrual status at December 31, 2012, as well as the pay-off of notes related to another commercial relationship, $1.7 million of which was on noaacrual status at December 31, 2012. The note sale resulted in a $2.1 million charge-off which reduced the combined Retail Banking and Mortgage Banking segments' ratio of the allowance for loan losses to total loans to 2.98 percent at September 30, 2013 from 3.46 percent at December 31, 2012. Despite the decline in this ratio, the ratio of the allowance for loan losses to nonaccrual loans increased to 277.83 percent at September 30, 2013 from 120.18 percent at December 31, 2012. We believe we have provided adequate loan loss reserves based on current appraisals or evaluations of the collateral. In some cases, appraisals have been adjusted to reflect current trends including sales prices, expenses, absorption periods and other current relevant factors. OREO properties at September 30, 2013 primarily consisted of residential and non-residential properties associated with commercial relationships. These properties have been written down to their estimated fair values less cost to sell. The 39.4 percent decline in OREO properties since December 31, 2012 resulted from sales during the first nine months of 2013 as the Corporation continues to focus efforts on disposing of OREO property, as well as additional write-downs based on updated appraisals.

Nonaccrual loans at the Consumer Finance segment increased to $1.3 million at September 30, 2013 from $655,000 at December 31, 2012. As noted above, the allowance for loan losses at the Consumer Finance segment increased from $22.1 million at December 31, 2012 to $23.1 million at September 30, 2013, and the ratio of the allowance for loan losses to total consumer finance loans was 8.01 percent as of September 30, 2013, compared with 7.96 percent at December 31, 2012. Nonaccrual consumer finance loans remain relatively low compared to the allowance for loan losses and the total consumer finance loan portfolio because the Consumer Finance segment generally initiates repossession of loan collateral once a loan is 60 days or more past due but before the loan reaches 90 days or more past due and is evaluated for nonaccrual status.

We measure impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs occur when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions typically are made for loss mitigation purposes and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired loans.

TABLE 9: Impaired Loans

Impaired loans, which consisted solely of TDRs, and the related allowance at September 30, 2013, were as follows:

(Dollars in thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance-Impaired Loans		Interest Income Recognized
Real estate – residential mortgage	$	1,987	$	2,063	$	408	$	2,012	$	70
Commercial, financial and agricultural:
Commercial real estate lending		2,756		2,789		506		2,770		62
Builder line lending		14		16		4		14		—
Commercial business lending		507		507		132		516		6
Consumer		7		7		1		8		8
Total	$	5,271	$	5,382	$	1,051	$	5,320	$	146

Impaired loans, which consisted solely of TDRs, and the related allowance at December 31, 2012, were as follows:

(Dollars in thousands)	Recorded Investment in Loans		Unpaid Principal Balance		Related Allowance		Average Balance- Impaired Loans		Interest Income Recognized
Real estate – residential mortgage	$	2,230	$	2,283	$	433	$	2,266	$	124
Commercial, financial and agricultural:
Commercial real estate lending		7,892		8,190		1,775		8,260		254
Land acquisition and development lending		5,234		5,234		1,432		5,443		236
Builder line lending		—		—		—		1,407		—
Commercial business lending		812		817		112		827		13
Consumer		324		324		49		324		16
Total	$	16,492	$	16,848	$	3,801	$	18,527	$	643

Impaired loans at September 30, 2013 and December 31, 2012 were $5.3 million and $16.5 million, respectively. As previously described, the decline in impaired loans during the first nine months of 2013 resulted primarily from the sale and pay-off of notes, $10.9 million of which were TDRs at December 31, 2012. The Corporation has no obligation to fund additional advances on its impaired loans.

TDRs at September 30, 2013 and December 31, 2012 were as follows:

TABLE 10: Troubled Debt Restructurings

(Dollars in thousands)	September 30, 2013		December 31, 2012
Accruing TDRs	$	2,645	$	6,692
Nonaccrual TDRs¹		2,626		9,800
Total TDRs²	$	5,271	$	16,492

¹	Included in nonaccrual loans in Table 8: Nonperforming Assets.
2	Included in impaired loans in Table 9: Impaired Loans.

While TDRs are considered impaired loans, not all TDRs are on nonaccrual status. If a loan was on nonaccrual status at the time of the TDR modification, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on the Corporation’s policy for returning loans to accrual status. If a loan was accruing prior to being modified as a TDR and if the Corporation concludes that the borrower is able to make such modified payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the TDR will remain on an accruing status.

FINANCIAL CONDITION

At September 30, 2013, the Corporation had total assets of $983.6 million compared to $977.0 million at December 31, 2012. The increase was principally a result of an increase in consumer finance loans and an increase in interest-bearing deposits in other banks due to excess liquidity provided by reduced loan funding needs of the Mortgage Banking segment, which were partially offset by a decline in OREO due to sales during 2013 and a decline in the fair value of the Corporation's investment portfolio. The decision to deploy excess liquidity in interest-bearing deposits in other banks was influenced by the lack of attractively-priced investment securities available for purchase during the first nine months of 2013 and continued weak loan demand at the Retail Banking segment in the current economic environment and intense competition for loans.

Loan Portfolio

The following table sets forth the composition of the Corporation’s loans held for investment in dollar amounts and as a percentage of the Corporation’s total gross loans held for investment at the dates indicated.

TABLE 11: Summary of Loans Held for Investment

	September 30, 2013						December 31, 2012
(Dollars in thousands)	Amount			Percent			Amount			Percent
Real estate – residential mortgage	$	155,453			23	%	$	149,257			22	%
Real estate – construction ¹		6,187			1			5,062			1
Commercial, financial and agricultural ²		195,914			28			205,052			30
Equity lines		33,534			5			33,324			5
Consumer		4,938			1			5,309			1
Consumer finance		288,111			42			278,186			41
Total loans		684,137			100	%		676,190			100	%
Less allowance for loan losses		(34,861	)					(35,907	)
Total loans, net	$	649,276					$	640,283

¹	Includes the Corporation’s real estate construction lending and consumer real estate lot lending.

²	Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

The increase in loans held for investment since December 31, 2012 was primarily attributable to growth in the Retail Banking segment's residential mortgage loan portfolio and in the Consumer Finance segment's loan portfolio. These increases were offset in part by a decline in the Retail Banking segment's commercial loan portfolio.

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, changes in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. At September 30, 2013 and December 31, 2012, all securities in the Corporation’s investment portfolio were classified as available for sale.

The following table sets forth the composition of the Corporation’s securities available for sale at fair value and as a percentage of the Corporation’s total securities available for sale at the dates indicated.

TABLE 12: Securities Available for Sale

	September 30, 2013					December 31, 2012
(Dollars in thousands)	Amount		Percent			Amount		Percent
U.S. government agencies and corporations	$	21,457		15	%	$	24,649		16	%
Mortgage-backed securities		2,986		2			2,189		2
Obligations of states and political subdivisions		122,718		83			125,875		82
Total debt securities		147,161		100	%		152,713		100	%
Preferred stock		—		—			104		*
Total available for sale securities at fair value	$	147,161		100	%	$	152,817		100	%

*	Less than one percent.

For more information about the Corporation's securities available for sale, including a description of securities in an unrealized loss position at September 30, 2013 and December 31, 2012, see Note 2 to the consolidated financial statements filed with this Report.

Deposits

The Corporation’s predominant source of funds is depository accounts, which consist 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 $685.2 million at September 30, 2013, compared to $686.2 million at December 31, 2012. This decline resulted primarily from (1) a $26.5 million decrease in public deposits, which fluctuate in accordance with funding requirements of the municipal depositors and (2) a $9.6 million decrease in time deposits as depositors continue to shift funds to non-term deposits. These decreases were mostly offset by increases in money market accounts and noninterest-bearing demand deposits, which reflects depositors' preference for non-term deposits. The Corporation had $2.3 million in brokered money market deposits outstanding at September 30, 2013, compared to $2.8 million at December 31, 2012. 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.

Borrowings

Borrowings increased to $167.3 million at September 30, 2013 from $162.7 million at December 31, 2012 as a result of a $4.6 million increase in retail overnight repurchase agreements with commercial depositors, the level of which is a function of the deposit balances maintained by these depositors.

Off-Balance Sheet Arrangements

During the second quarter of 2013, the Corporation began selling a portion of loans originated for sale on a mandatory delivery basis, while continuing to sell the majority of its loans on a best efforts delivery basis. In order to mitigate the effect of changes in interest rates on loans that are to be sold in the secondary market, the Corporation entered into forward sales contracts on loans and MBS. Forward sales contracts are recorded at fair value with changes in fair value recorded in noninterest income. As of September 30, 2013, the notional value and fair value of the Corporation's forward sales contracts were $113.0 million and $541,000, respectively.

Contractual Obligations

As of September 30, 2013, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in “Management’s Discussion and Analysis” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012.

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 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, at September 30, 2013 totaled $77.7 million, compared to $63.3 million at December 31, 2012. The increase in liquid assets since December 31, 2012 resulted primarily from reduced funding needs of the Mortgage Banking segment, coupled with deposit growth. The Corporation’s funding sources for borrowings, including the capacity, amount outstanding and amount available at September 30, 2013 are presented in Table 13.

TABLE 13: Funding Sources

	September 30, 2013
(Dollars in thousands)	Capacity		Outstanding		Available
Federal funds purchased	$	59,000	$	—	$	59,000
Wholesale repurchase agreements		5,000		5,000		—
Borrowings from FHLB		126,699		52,500		74,199
Borrowings from Federal Reserve Bank		42,331		—		42,331
Revolving line of credit		120,000		75,487		44,513
Total	$	353,030	$	132,987	$	220,043

We have no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are also available that can be pledged as collateral for future borrowings from the Federal Reserve Bank and 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.

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

The Corporation’s and the Bank’s actual regulatory capital amounts and ratios are presented in the following table.

TABLE 14: Capital Ratios

Actual

Minimum

Capital

Requirements

Minimum To Be Well

Capitalized

Under Prompt

Corrective Action

Provisions

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2013:

Total Capital (to Risk-Weighted Assets)

Corporation

130,229

18.2

57,108

8.0

N/A

Bank

126,444

17.8

56,835

8.0

71,044

10.0

Tier 1 Capital (to Risk-Weighted Assets)

Corporation

120,986

17.0

28,554

4.0

N/A

Bank

117,292

16.5

28,418

4.0

42,626

6.0

Tier 1 Capital (to Average Assets)

Corporation

120,986

12.4

39,057

4.0

N/A

Bank

117,292

12.1

38,917

4.0

48,647

5.0

As of December 31, 2012:

Total Capital (to Risk-Weighted Assets)

Corporation

118,824

16.6

57,216

8.0

N/A

Bank

115,892

16.3

56,970

8.0

71,213

10.0

Tier 1 Capital (to Risk-Weighted Assets)

Corporation

109,552

15.3

28,608

4.0

N/A

Bank

106,657

15.0

28,485

4.0

42,728

6.0

Tier 1 Capital (to Average Assets)

Corporation

109,552

11.5

38,205

4.0

N/A

Bank

106,657

11.2

38,091

4.0

47,613

5.0

The Corporation’s Tier 1 Capital and Total Capital presented in Table 14 include $20.0 million of trust preferred securities. Under the changes to the regulatory capital framework that were approved on July 9, 2013 by the federal banking agencies (Basel III Final Rule), the Corporation's trust preferred securities will continue to be included in Tier 1 Capital and Total Capital until they mature, pursuant to a "grandfathering" provision that exempts C&F's securities from the more stringent regulatory capital treatment contained in the Basel III Final Rule for trust preferred securities. In addition to "grandfathering" certain previously outstanding trust preferred securities for community banks, the Basel III Final Rule introduces a new Common Equity Tier 1 Capital measure, increases the applicable minimum regulatory capital levels and certain prompt corrective action capital levels, and establishes a capital conservation buffer and new risk weights for certain types of assets. The Basel III Final Rule is effective for community banks on January 1, 2015 and has a transition period applicable to certain regulatory capital changes until January 1, 2019.

Effects of Inflation and Changing Prices

The Corporation’s financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). GAAP presently requires the Corporation to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on the operations of the Corporation is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Corporation, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes from the quantitative and qualitative disclosures about market risk made in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 4.

CONTROLS AND PROCEDURES

The Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2013 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 subsidiary to disclose material information required to be set forth in the Corporation’s periodic reports.

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). There were no changes in the Corporation’s internal control over financial reporting during the Corporation’s third quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1A.

RISK FACTORS

Other than as disclosed in this Item 1A, "Risk Factors," there have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2012, as supplemented by those disclosed in the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table summarizes repurchases of the Corporation's Common Stock that occurred during the three months ended September 30, 2013.

(Dollars in thousands)

Total Number of Shares Purchased ¹

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number

(or Approximate Dollar Value) of Shares that May

Yet Be Purchased Under the Plans or Programs

July 1, 2013 - July 31, 2013

—

August 1, 2013 - August 31, 2013

125

57.43

—

September 1, 2013 - September 30, 2013

—

Total

125

57.43

—

¹These shares were withheld from an employee to satisfy tax withholding obligations arising upon the vesting of restricted shares.

ITEM 6.

EXHIBITS

2.1	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)

3.1	Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit 3.1 to Form 10-KSB filed March 29, 1996)

3.1.1	Amendment to Articles of Incorporation of C&F Financial Corporation establishing Series A Preferred Stock, effective January 8, 2009 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed January 14, 2009)

3.2	Amended and Restated Bylaws of C&F Financial Corporation, as adopted October 16, 2007 (incorporated by reference to Exhibit 3.2 to Form 8-K filed October 22, 2007)

4.1	Certificate of Designations for 20,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed January 14, 2009)

4.2	Warrant to Purchase up to 167,504 shares of Common Stock, dated January 9, 2009 (incorporated by reference to Exhibit 4.2 to Form 8-K filed January 14, 2009)

10.31	Securities Purchase Agreement dated as of July 17, 2013 by and among the United States Department of the Treasury, Central Virginia Bankshares, Inc. and C&F Financial Corporation (incorporated by reference to Exhibit 10.31 to Form 8-K filed July 22, 2013)

10.32	Amendment No. 1 to Securities Purchase Agreement dated as of September 13, 2013 by and among the United States Department of the Treasury, Central Virginia Bankshares, Inc. and C&F Financial Corporation (incorporated by reference to Exhibit 10.32 to Form 8-K filed October 2, 2013)

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

SIGNATURES

Pursuant to the requirements 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.

		C&F FINANCIAL CORPORATION
			(Registrant)

Date	November 7, 2013		/s/ Larry G. Dillon
			Larry G. Dillon
			Chairman, President and Chief Executive Officer (Principal Executive Officer)

Date	November 7, 2013		/s/ Thomas F. Cherry
			Thomas F. Cherry
			Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)