C & F FINANCIAL CORP - Quarter Report: 2019 September (Form 10-Q)

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, 2019


☐	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)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1.00 par value per share	CFFI	The NASDAQ Stock Market LLC

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

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

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

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

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

At November 6, 2019, the latest practicable date for determination, 3,423,548 shares of common stock, $1.00 par value, of the registrant were outstanding.

Table of Contents

TABLE OF CONTENTS


PART I - Financial Information		Page

Item 1.	Financial Statements	3

	Consolidated Balance Sheets – September 30, 2019 (unaudited) and December 31, 2018	3

	Consolidated Statements of Income (unaudited) – Three and nine months ended September 30, 2019 and 2018	4

	Consolidated Statements of Comprehensive Income (unaudited) – Three and nine months ended September 30, 2019 and 2018	5

	Consolidated Statements of Equity (unaudited) – Three months ended September 30, 2019 and 2018	6

	Consolidated Statements of Equity (unaudited) – Nine months ended September 30, 2019 and 2018	7

	Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2019 and 2018	8

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	62

PART II - Other Information

Item 1A.	Risk Factors	62

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 6.	Exhibits	65

	Signatures	66

Table of Contents

Part I – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for per share amounts)


	September 30,		December 31,
	2019		2018
Assets		(unaudited)		*
Cash and due from banks	$	10,923	$	14,138
Interest-bearing deposits in other banks		134,871		100,875
Total cash and cash equivalents		145,794		115,013
Securities—available for sale at fair value, amortized cost of $188,876 and $216,650, respectively		190,869		214,910
Loans held for sale, at fair value		98,357		41,895
Loans, net of allowance for loan losses of $33,218 and $34,023, respectively		1,055,320		1,028,097
Restricted stock, at cost		3,257		3,247
Corporate premises and equipment, net		35,504		37,100
Other real estate owned, net of valuation allowance of $88 and $57, respectively		1,103		246
Accrued interest receivable		6,685		7,436
Goodwill		14,425		14,425
Core deposit and other amortizable intangible assets, net		951		1,142
Bank-owned life insurance		16,348		16,065
Net deferred tax asset		11,615		12,193
Other assets		39,153		29,642
Total assets	$	1,619,381	$	1,521,411

Liabilities
Deposits
Noninterest-bearing demand deposits	$	321,068	$	271,360
Savings and interest-bearing demand deposits		515,168		563,741
Time deposits		412,344		346,560
Total deposits		1,248,580		1,181,661
Short-term borrowings		16,859		14,917
Long-term borrowings		119,529		119,529
Trust preferred capital notes		25,272		25,245
Accrued interest payable		1,263		920
Other liabilities		45,817		27,181
Total liabilities		1,457,320		1,369,453

Commitments and contingent liabilities (Note 10)

Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,423,327 and 3,497,122 shares issued and outstanding, respectively, includes 137,455 and 139,455 of unvested shares, respectively)		3,286		3,358
Additional paid-in capital		9,345		12,752
Retained earnings		151,183		140,520
Accumulated other comprehensive loss, net		(2,247)		(4,672)
Equity attributable to C&F Financial Corporation		161,567		151,958
Noncontrolling interest		494		—
Total equity		162,061		151,958
Total liabilities and equity	$	1,619,381	$	1,521,411

* Derived from audited consolidated financial statements.

See notes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except for per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Interest income
Interest and fees on loans	$	22,254	$	21,673	$	65,497	$	63,116
Interest on interest-bearing deposits and federal funds sold		460		527		1,631		1,544
Interest and dividends on securities
U.S. government agencies and corporations		109		90		311		265
Mortgage-backed securities		528		583		1,706		1,694
Tax-exempt obligations of states and political subdivisions		504		675		1,643		2,086
Taxable obligations of states and political subdivisions		86		84		272		229
Other		51		59		159		152
Total interest income		23,992		23,691		71,219		69,086
Interest expense
Savings and interest-bearing deposits		538		411		1,737		1,123
Time deposits		1,868		1,020		4,798		2,957
Borrowings		1,091		1,081		3,322		3,102
Trust preferred capital notes		272		291		867		861
Total interest expense		3,769		2,803		10,724		8,043
Net interest income		20,223		20,888		60,495		61,043
Provision for loan losses		1,800		2,400		6,005		7,700
Net interest income after provision for loan losses		18,423		18,488		54,490		53,343
Noninterest income
Gains on sales of loans		3,205		1,752		8,296		6,399
Service charges on deposit accounts		1,012		1,031		2,874		3,121
Other service charges and fees		1,769		1,296		4,521		3,900
Net gains on maturities and calls of available for sale securities		3		5		8		9
Wealth management services income, net		529		441		1,453		1,325
Interchange income		1,105		981		3,134		2,868
Other		607		1,121		3,249		2,692
Total noninterest income		8,230		6,627		23,535		20,314
Noninterest expenses
Salaries and employee benefits		11,730		10,967		35,132		32,773
Occupancy		2,226		2,207		6,564		6,262
Other		6,346		5,500		17,832		16,939
Total noninterest expenses		20,302		18,674		59,528		55,974
Income before income taxes		6,351		6,441		18,497		17,683
Income tax expense		1,466		1,340		3,999		3,620
Net income		4,885		5,101		14,498		14,063
Less net income attributable to noncontrolling interest		5		—		4		—
Net income attributable to C&F Financial Corporation	$	4,880	$	5,101	$	14,494	$	14,063
Net income per share - basic and diluted	$	1.42	$	1.46	$	4.19	$	4.02

See notes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income	$	4,885	$	5,101	$	14,498	$	14,063
Other comprehensive income (loss):
Defined benefit plan:
Reclassification of recognized net actuarial losses into net income1		47		32		141		93
Related income tax effects		(10)		(7)		(30)		(20)
Amortization of prior service credit into net income1		(17)		(16)		(51)		(46)
Related income tax effects		4		4		11		10
Defined benefit plan, net of tax		24		13		71		37

Cash flow hedges:
Unrealized holding (losses) gains arising during the period		(563)		(5)		(773)		245
Related income tax effects		145		1		199		(63)
Amortization of hedging gains into net income2		(28)		—		(28)		—
Related income tax effects		7		—		7		—
Cash flow hedges, net of tax		(439)		(4)		(595)		182

Securities available for sale:
Unrealized holding gains (losses) arising during the period		368		(1,252)		3,741		(4,438)
Related income tax effects		(78)		263		(786)		932
Reclassification of net realized gains into net income3		(3)		(5)		(8)		(9)
Related income tax effects		1		1		2		2
Securities available for sale, net of tax		288		(993)		2,949		(3,513)
Other comprehensive (loss) income, net of tax		(127)		(984)		2,425		(3,294)
Comprehensive income		4,758		4,117		16,923		10,769
Less comprehensive income attributable to noncontrolling interest		5		—		4		—
Comprehensive income attributable to C&F Financial Corporation	$	4,753	$	4,117	$	16,919	$	10,769

These items are included in the computation of net periodic benefit cost and are included in “Noninterest income – Other” on the Consolidated Statements of Income. See “Note 7: Employee Benefit Plans,” for additional information.

These items are included in “Interest expense – Trust preferred capital notes” on the Consolidated Statements of Income.

These items are included in “Net gains on maturities and calls of available for sale securities” on the Consolidated Statements of Income.

See notes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

(Dollars in thousands, except for per share amounts)


	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss		Interest		Equity
Balance June 30, 2019	$	3,305	$	10,107	$	147,570	$	(2,120)	$	489	$	159,351
Comprehensive income:
Net income		—		—		4,880		—		5		4,885
Other comprehensive loss		—		—		—		(127)		—		(127)
Share-based compensation		—		306		—		—		—		306
Restricted stock vested		2		(2)		—		—		—		—
Common stock issued		1		36		—		—		—		37
Common stock purchased		(22)		(1,102)		—		—		—		(1,124)
Cash dividends declared ($0.37 per share)		—		—		(1,267)		—		—		(1,267)
Balance September 30, 2019	$	3,286	$	9,345	$	151,183	$	(2,247)	$	494	$	162,061


	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss		Interest		Equity
Balance June 30, 2018	$	3,370	$	13,268	$	134,012	$	(4,197)	$	—	$	146,453
Comprehensive income:
Net income		—		—		5,101		—		—		5,101
Other comprehensive loss		—		—		—		(984)		—		(984)
Share-based compensation		—		316		—		—		—		316
Restricted stock vested		—		—		—		—		—		—
Common stock issued		—		35		—		—		—		35
Common stock purchased		—		—		—		—		—		—
Cash dividends declared ($0.36 per share)		—		—		(1,262)		—		—		(1,262)
Balance September 30, 2018	$	3,370	$	13,619	$	137,851	$	(5,181)	$	—	$	149,659

See notes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

(Dollars in thousands, except for per share amounts)


	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Income (Loss)		Interest		Equity
Balance December 31, 2018	$	3,358	$	12,752	$	140,520	$	(4,672)	$	—	$	151,958
Comprehensive income:
Net income		—		—		14,494		—		4		14,498
Other comprehensive income		—		—		—		2,425		—		2,425
Issuance of noncontrolling interest		—		—		—		—		490		490
Share-based compensation		—		1,073		—		—		—		1,073
Restricted stock vested		18		(18)		—		—		—		—
Common stock issued		2		105		—		—		—		107
Common stock purchased		(92)		(4,567)		—		—		—		(4,659)
Cash dividends declared ($1.11 per share)		—		—		(3,831)		—		—		(3,831)
Balance September 30, 2019	$	3,286	$	9,345	$	151,183	$	(2,247)	$	494	$	162,061


	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss		Interest		Equity
Balance December 31, 2017	$	3,358	$	12,800	$	127,431	$	(1,887)	$	—	$	141,702
Comprehensive income:
Net income		—		—		14,063		—		—		14,063
Other comprehensive loss		—		—		—		(3,294)		—		(3,294)
Share-based compensation		—		956		—		—		—		956
Restricted stock vested		15		(15)		—		—		—		—
Common stock issued		1		106		—		—		—		107
Common stock purchased		(4)		(228)		—		—		—		(232)
Cash dividends declared ($1.04 per share)		—		—		(3,643)		—		—		(3,643)
Balance September 30, 2018	$	3,370	$	13,619	$	137,851	$	(5,181)	$	—	$	149,659

See notes to consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,
	2019		2018
Operating activities:
Net income	$	14,498	$	14,063
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		2,722		2,345
Provision for loan losses		6,005		7,700
Share-based compensation		1,073		956
Pension expense		487		315
Pension contribution		—		(3,000)
Net accretion of certain acquisition-related discounts		(2,179)		(2,329)
Accretion of discounts and amortization of premiums on securities, net		1,177		1,349
Amortization of intangible assets		190		360
Net realized gains on maturities and calls of securities available for sale		(8)		(9)
Income from bank-owned life insurance		(250)		(248)
Origination of loans held for sale		(663,787)		(538,704)
Proceeds from sales of loans held for sale		623,049		554,508
Gains on sales of loans held for sale		(8,296)		(6,399)
Other gains and losses		(44)		(152)
Change in other assets and liabilities:
Accrued interest receivable		751		235
Other assets		(3,358)		2,501
Accrued interest payable		343		78
Other liabilities		3,473		2,644
Net cash (used in) provided by operating activities		(24,154)		36,213
Investing activities:
Proceeds from maturities and calls of securities available for sale and payments on mortgage-backed securities		55,593		35,267
Purchases of securities available for sale		(28,988)		(39,192)
Net (purchases) proceeds from sale of restricted stock		(10)		51
Purchases of loans held for investment by non-bank affiliates		(117,261)		(103,759)
Repayments on loans held for investment by non-bank affiliates		93,028		87,644
Net (increase) decrease in retail banking loans held for investment		(7,125)		471
Proceeds from sales of other real estate owned		521		—
Purchases of corporate premises and equipment		(2,001)		(2,447)
Proceeds from sales of corporate premises and equipment		79		223
Net cash used in investing activities		(6,164)		(21,742)
Financing activities:
Net increase (decrease) in demand and savings deposits		1,135		(11,263)
Net increase (decrease) in time deposits		65,784		(1,711)
Net increase (decrease) in short-term borrowings		1,943		(5,591)
Repayments of long-term borrowings		—		(2,500)
Issuance of common stock		107		107
Repurchases of common stock		(4,385)		—
Issuance of noncontrolling interest		490		—
Cash dividends paid		(3,831)		(3,643)
Other financing activities		(144)		(144)
Net cash provided by (used in) financing activities		61,099		(24,745)
Net increase (decrease) in cash and cash equivalents		30,781		(10,274)
Cash and cash equivalents at beginning of period		115,013		119,423
Cash and cash equivalents at end of period	$	145,794	$	109,149
Supplemental cash flow disclosures:
Interest paid	$	10,355	$	7,938
Income taxes paid		1,020		190
Supplemental disclosure of noncash investing and financing activities:
Value of shares withheld at vesting for employee taxes	$	274	$	232
Transfers from loans to other real estate owned		496		20
Transfers of property from corporate premises to other real estate owned		835		—

See notes to consolidated financial statements.

Table of Contents

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, 2018.

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, the Corporation owns all of the common stock of C&F Financial Statutory Trust I, C&F Financial Statutory Trust II and Central Virginia Bankshares Statutory Trust I, all of which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as liabilities of the Corporation. The accounting and reporting policies of C&F Financial Corporation and Subsidiary conform to U.S. GAAP and to predominant practices within the banking industry.

Nature of Operations: The Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its subsidiary, C&F Bank, which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia.

C&F Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. and CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, was formed to originate and sell residential mortgages and through its subsidiary, Certified Appraisals LLC, provides ancillary mortgage loan production services for residential appraisals. C&F Mortgage owns a 51 percent interest in C&F Select LLC, which was organized in January 2019 and is also engaged in the business of originating and selling residential mortgages. C&F Finance, acquired in September 2002, is a finance company purchasing automobile, marine and recreational vehicle (RV) loans through indirect lending programs. C&F Wealth Management, organized in April 1995, is a full-service brokerage firm offering a comprehensive range of wealth management services and insurance products through third-party service providers. C&F Insurance Services, Inc., was organized in July 1999, for the primary purpose of owning an equity interest in an independent insurance agency that operates in Virginia and North Carolina. CVB Title Services, Inc. was organized for the primary purpose of owning an equity interest in a full service title and settlement agency. Business segment data is presented in Note 9.

On August 13, 2019, the Corporation entered into an agreement with Peoples Bankshares, Incorporated (Peoples), pursuant to which Peoples has agreed to merge with and into the Corporation. Peoples and its wholly-owned Virginia chartered commercial banking subsidiary, Peoples Community Bank, serve the Northern Neck area of eastern Virginia through five bank branch locations. Following the proposed merger of Peoples with and into the Corporation, Peoples Community Bank is expected to be merged with and into C&F Bank. Completion of the transaction remains subject to certain conditions, including approval of the transaction by appropriate federal and state banking regulatory agencies and approval of the transaction by Peoples shareholders. Upon completion of the transaction, Peoples shareholders will receive 0.5366 shares of the Corporation’s common stock and $27.00 in cash for each share of Peoples common stock. The stock and cash consideration has an aggregate value of approximately $21.32 million based on the November 6, 2019 closing price of $51.20 per share of the Corporation’s common stock. The Corporation expects to complete the acquisition of Peoples in early 2020.

During the third quarter of 2019, C&F Bank consolidated its Bellgrade branch in Midlothian, Virginia into a nearby branch, and reclassified $835,000 of land and buildings from corporate premises, net into other real estate owned.

Table of Contents

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 (OREO), the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes and goodwill impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. None of these reclassifications are considered material.

Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the Consolidated Balance Sheets. The Corporation’s derivative financial instruments include (1) interest rate swaps that qualify and are designated as cash flow hedges on the Corporation’s trust preferred capital notes, (2) interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate contracts arising from mortgage banking activities, including interest rate lock commitments (IRLCs) on mortgage loans and related forward sales of mortgage loans and mortgage backed securities. The gain or loss on the Corporation’s cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. IRLCs, forward sales contracts and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, and therefore changes in the fair value of these instruments are reported as noninterest income or noninterest expense, as applicable. The Corporation’s derivative financial instruments are described more fully in Note 11.

Leases: The Corporation recognizes a lease liability and a right-of-use asset in connection with leases in which it is a lessee, except for leases with a term of twelve months or less. A lease liability represents the Corporation’s obligation to make future payments under lease contracts, and a right-of-use asset represents the Corporation’s right to control the use of the underlying property during the lease term. Lease liabilities and right-of-use assets are recognized upon commencement of a lease and measured as the present value of lease payments over the lease term, discounted at the incremental borrowing rate of the lessee. The Corporation has elected not to separate lease and nonlease components within the same contract and instead to account for the entire contract as a lease.

Share-Based Compensation: Share-based compensation expense, net of forfeitures, for the third quarter of 2019 and the first nine months of 2019 was $306,000 ($211,000 after tax) and $1.07 million ($713,000 after tax), respectively, for restricted stock granted during 2014 through 2019. As of September 30, 2019, there was $2.69 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 2019 and 2018 is presented below:


	2019
		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Unvested, December 31, 2018	139,455	$	45.75
Granted	16,670		51.79
Vested	(17,990)		41.55
Forfeited	(680)		50.44
Unvested, September 30, 2019	137,455		47.01

Table of Contents


	2018
		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Unvested, December 31, 2017	137,880	$	43.52
Granted	11,610		58.30
Vested	(14,625)		40.47
Forfeited	(1,960)		43.26
Unvested, September 30, 2018	132,905		45.14

Recently Adopted Accounting Pronouncements:

On January 1, 2019, the Corporation adopted Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)” and related amendments (collectively, ASC 842), which resulted in recognition of a lease liability and right-of-use asset in connection with leases in which the Corporation is the lessee. Under ASC 842, lessor accounting is largely unchanged. The Corporation elected an optional transition method to apply ASC 842 as of the adoption date on a modified retrospective basis. Periods prior to January 1, 2019 have not been restated. Upon adoption, the Corporation recorded a lease liability of approximately $3.14 million for its remaining payment obligations as of January 1, 2019 for leases in effect at that time, excluding leases with an original term of twelve months or less, and a corresponding right-of-use asset. All of the Corporation’s existing leases upon adoption of ASC 842 were classified as operating leases based on the classification of each lease under previous U.S. GAAP; classification of these leases was not reconsidered upon adoption of ASC 842. Refer to Note 5 for further information about the Corporation’s leases.

Recent Significant Accounting Pronouncements:

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as part of its project on financial instruments. Subsequently, this ASU was amended when the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” (collectively, ASC 326). ASC 326 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. For public business entities that are SEC filers, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. In August 2019, the FASB issued a proposed ASU that would provide a deferral of the effective date of ASC 326 for many entities, including some entities that are SEC filers. At its meeting on October 16, 2019, the FASB affirmed its decision to issue a deferral, and an ASU is expected to be issued in the fourth quarter of 2019. Based on the proposed ASU, the Corporation expects that ASC 326 will be effective for the Corporation beginning on January 1, 2023.

The amendments of ASC 326, upon adoption, will be applied on a modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption. The Corporation has established a working group to prepare for and implement changes related to ASC 326 and has gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard. The Corporation has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under ASC 326. The Corporation has engaged a vendor to assist in modeling expected lifetime losses under ASC 326. The adoption of ASC 326 will result in significant changes to the Corporation’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in shareholders’ equity and regulatory capital of C&F Bank, differences in the timing of recognizing changes to the allowance for credit losses and expanded disclosures about the allowance for credit losses. The Corporation has not yet determined an estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Corporation’s internal control over financial reporting related to the allowance for credit losses.

Table of Contents

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public business entities that are SEC filers for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2017-04 to have a material effect on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2018-13 to have a material effect on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements regarding the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Corporation does not expect the adoption of ASU 2018-14 to have a material effect on its consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Corporation’s financial position, results of operations or cash flows.

NOTE 2: Securities

The Corporation’s debt securities, all of which are classified as available for sale, are summarized as follows:


	September 30, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
U.S. government agencies and corporations	$	22,204	$	2	$	(26)	$	22,180
Mortgage-backed securities		88,933		879		(111)		89,701
Obligations of states and political subdivisions		77,739		1,264		(15)		78,988
	$	188,876	$	2,145	$	(152)	$	190,869

Table of Contents


	December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
U.S. government agencies and corporations	$	18,008	$	1	$	(536)	$	17,473
Mortgage-backed securities		106,787		85		(1,889)		104,983
Obligations of states and political subdivisions		91,855		840		(241)		92,454
	$	216,650	$	926	$	(2,666)	$	214,910

The amortized cost and estimated fair value of securities at September 30, 2019, 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, 2019
	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	37,681	$	37,796
Due after one year through five years		133,691		135,024
Due after five years through ten years		12,834		13,066
Due after ten years		4,670		4,983
	$	188,876	$	190,869

The following table presents the gross realized gains and losses on and the proceeds from the maturities, calls and paydowns of securities. There were no sales of securities during the periods presented.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Realized gains from maturities and calls of securities:
Gross realized gains	$	3	$	5	$	8	$	10
Gross realized losses		—		—		—		(1)
Net realized gains	$	3	$	5	$	8	$	9
Proceeds from maturities, calls and paydowns of securities	$	21,954	$	12,865	$	55,593	$	35,267

The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $94.83 million and aggregate fair value of $95.89 million were pledged at September 30, 2019. Securities with an aggregate amortized cost of $110.81 million and an aggregate fair value of $109.83 million were pledged at December 31, 2018.

Securities in an unrealized loss position at September 30, 2019, by duration of the period of the unrealized loss, are shown below.


	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
U.S. government agencies and corporations	$	7,442	$	1	$	8,821	$	25	$	16,263	$	26
Mortgage-backed securities		10,828		22		13,762		89		24,590		111
Obligations of states and political subdivisions		5,777		6		2,590		9		8,367		15
Total temporarily impaired securities	$	24,047	$	29	$	25,173	$	123	$	49,220	$	152

Table of Contents

There were 85 debt securities totaling $49.22 million considered temporarily impaired at September 30, 2019. The primary cause of the temporary impairments in the Corporation's investments in debt securities was fluctuations in interest rates, especially in debt securities purchased prior to 2018. The value of debt securities declines as interest rates rise, and interest rates were higher at September 30, 2019 than at the time these securities were purchased. The Corporation’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments. At September 30, 2019, approximately 95 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 (S&P) or Moody's Investors Service (Moody’s). Of those in an unrealized loss position, approximately 97 percent were rated “A” or better by S&P or Moody’s, as measured by market value, at September 30, 2019. For the approximately three percent not rated “A” or better, as measured by market value at September 30, 2019, the Corporation considers these to meet regulatory credit quality standards, meaning that the securities have low risk of default by the obligor and the full and timely repayment of principal and interest is expected over the expected life of the investment. Because the Corporation intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Corporation will not be required to sell these investments before a recovery of unrealized losses, the Corporation does not consider these investments to be other-than-temporarily impaired at September 30, 2019 and no other-than-temporary impairment loss has been recognized in net income.

Securities in an unrealized loss position at December 31, 2018, by duration of the period of the unrealized loss, are shown below.


	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
U.S. government agencies and corporations	$	997	$	1	$	15,725	$	535	$	16,722	$	536
Mortgage-backed securities		17,934		132		72,830		1,757		90,764		1,889
Obligations of states and political subdivisions		9,492		29		20,555		212		30,047		241
Total temporarily impaired securities	$	28,423	$	162	$	109,110	$	2,504	$	137,533	$	2,666

The Corporation’s investment in restricted stock totaled $3.26 million at September 30, 2019 and consisted of Federal Home Loan Bank (FHLB) stock. Restricted stock is generally viewed as a long-term investment, which is carried at cost because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value. The Corporation did not consider its investment in restricted stock to be other-than-temporarily impaired at September 30, 2019 and no impairment has been recognized.

Table of Contents

NOTE 3: Loans

Major classifications of loans are summarized as follows:


	September 30,		December 31,
(Dollars in thousands)	2019		2018
Real estate – residential mortgage	$	179,960	$	184,901
Real estate – construction 1		62,554		54,461
Commercial, financial and agricultural 2		466,349		455,935
Equity lines		52,411		55,660
Consumer		13,521		15,009
Consumer finance		313,743		296,154
		1,088,538		1,062,120
Less allowance for loan losses		(33,218)		(34,023)
Loans, net	$	1,055,320	$	1,028,097

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

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

Consumer loans included $255,000 and $275,000 of demand deposit overdrafts at September 30, 2019 and December 31, 2018, respectively.

The outstanding principal balance and the carrying amount of loans acquired pursuant to the Corporation's acquisition of Central Virginia Bank (CVB) on October 1, 2013 that were recorded at fair value at the acquisition date in the Consolidated Balance Sheets are as follows:


	September 30, 2019						December 31, 2018
	Acquired Loans -		Acquired Loans -				Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -		Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total		Credit Impaired		Performing		Total
Outstanding principal balance	$	6,658	$	32,920	$	39,578	$	9,734	$	38,768	$	48,502
Carrying amount
Real estate – residential mortgage	$	110	$	7,216	$	7,326	$	284	$	8,823	$	9,107
Commercial, financial and agricultural1		433		15,588		16,021		1,461		18,982		20,443
Equity lines		35		8,520		8,555		90		9,063		9,153
Consumer		—		3		3		—		6		6
Total acquired loans	$	578	$	31,327	$	31,905	$	1,835	$	36,874	$	38,709

Includes acquired loans classified by the Corporation as commercial real estate lending and commercial business lending.

Table of Contents

The following table presents a summary of the change in the accretable yield of loans classified as purchased credit impaired (PCI):


	Nine Months Ended September 30,
(Dollars in thousands)	2019		2018
Accretable yield, balance at beginning of period	$	5,987	$	7,304
Accretion		(2,745)		(2,892)
Reclassification of nonaccretable difference due to improvement in expected cash flows		1,286		1,410
Other changes, net		581		(324)
Accretable yield, balance at end of period	$	5,109	$	5,498

Loans on nonaccrual status were as follows:


	September 30,		December 31,
(Dollars in thousands)	2019		2018
Real estate – residential mortgage	$	563	$	594
Commercial, financial and agricultural:
Commercial business lending		—		24
Equity lines		302		883
Consumer		119		—
Consumer finance		527		712
Total loans on nonaccrual status	$	1,511	$	2,213

The past due status of loans as of September 30, 2019 was as follows:


															90+ Days
	30 - 59 Days		60 - 89 Days		90+ Days		Total								Past Due and
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		PCI		Current1		Total Loans		Accruing
Real estate – residential mortgage	$	1,120	$	163	$	352	$	1,635	$	110	$	178,215	$	179,960	$	318
Real estate – construction:
Construction lending		—		—		—		—		—		48,164		48,164		—
Consumer lot lending		—		—		—		—		—		14,390		14,390		—
Commercial, financial and agricultural:
Commercial real estate lending		1,331		1,233		315		2,879		433		309,072		312,384		315
Land acquisition and development lending		—		—		—		—		—		41,241		41,241		—
Builder line lending		—		—		—		—		—		29,606		29,606		—
Commercial business lending		125		120		—		245		—		82,873		83,118		—
Equity lines		73		97		397		567		35		51,809		52,411		92
Consumer		20		7		7		34		—		13,487		13,521		7
Consumer finance		8,841		1,558		527		10,926		—		302,817		313,743		—
Total	$	11,510	$	3,178	$	1,598	$	16,286	$	578	$	1,071,674	$	1,088,538	$	732

For the purposes of the table above, “Current” includes loans that are 1-29 days past due.

The table above includes nonaccrual loans that are current of $431,000, 30-59 days past due of $213,000 and 90+ days past due of $867,000.

Table of Contents

The past due status of loans as of December 31, 2018 was as follows:


															90+ Days
	30 - 59 Days		60 - 89 Days		90+ Days		Total								Past Due and
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		PCI		Current1		Total Loans		Accruing
Real estate – residential mortgage	$	1,221	$	—	$	37	$	1,258	$	284	$	183,359	$	184,901	$	9
Real estate – construction:
Construction lending		—		—		—		—		—		42,051		42,051		—
Consumer lot lending		—		—		—		—		—		12,410		12,410		—
Commercial, financial and agricultural:
Commercial real estate lending		—		—		315		315		1,461		309,057		310,833		315
Land acquisition and development lending		—		—		—		—		—		43,404		43,404		—
Builder line lending		—		—		—		—		—		31,201		31,201		—
Commercial business lending		163		19		24		206		—		70,291		70,497		—
Equity lines		46		584		325		955		90		54,615		55,660		—
Consumer		31		—		—		31		—		14,978		15,009		—
Consumer finance		11,419		1,965		712		14,096		—		282,058		296,154		—
Total	$	12,880	$	2,568	$	1,413	$	16,861	$	1,835	$	1,043,424	$	1,062,120	$	324

For the purposes of the table above, “Current” includes loans that are 1-29 days past due.

The table above includes nonaccrual loans that are current of $458,000, 30-59 days past due of $97,000, 60‑89 days past due of $560,000 and 90+ days past due of $1.10 million.

Loan modifications that were classified as troubled debt restructurings (TDRs) and the recorded investment in those loans at the time of their modification, during the three and nine months ended September 30, 2019 and 2018 were as follows:


	Three Months Ended September 30,
	2019			2018
	Number of	Recorded		Number of	Recorded
(Dollars in thousands)	Loans	Investment		Loans	Investment
Real estate – residential mortgage	2	$	95	—	$	—
Consumer	—		—	1		5
Total	2	$	95	1	$	5


	Nine Months Ended September 30,
	2019			2018
	Number of	Recorded		Number of	Recorded
(Dollars in thousands)	Loans	Investment		Loans	Investment
Real estate – residential mortgage	2	$	95	—	$	—
Consumer	1		121	1	$	5
Total	3	$	216	1	$	5

Both TDRs during the three months ended September 30, 2019 included a modification of the loan’s payment structure. One TDR during the nine months ended September 30, 2019 included a modification of the loan’s interest rate. One TDR during the three and nine months ended September 30, 2018 included a modification of the loan’s interest rate.

All TDRs are considered impaired loans and are individually evaluated in the determination of the allowance for loan losses. A TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due. The specific reserve associated with a TDR is reevaluated when a TDR payment default occurs. There were no TDR payment defaults during the nine months ended September 30, 2019 and 2018.

Table of Contents

Impaired loans, which included TDRs of $4.53 million, and the related allowance at September 30, 2019 were as follows:



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income
(Dollars in thousands)	Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	2,921	$	1,279	$	1,525	$	81	$	2,904	$	105
Commercial, financial and agricultural:
Commercial real estate lending		1,588		7		1,564		75		1,601		62
Equity lines		225		30		187		187		217		2
Consumer		131		—		123		119		124		—
Total	$	4,865	$	1,316	$	3,399	$	462	$	4,846	$	169

Impaired loans, which included TDRs of $5.45 million, and the related allowance at December 31, 2018 were as follows:



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income
(Dollars in thousands)	Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	3,057	$	1,288	$	1,677	$	92	$	3,056	$	142
Commercial, financial and agricultural:
Commercial real estate lending		2,468		1,498		927		10		2,653		132
Commercial business lending		33		25		—		—		26		—
Equity lines		365		31		326		326		359		2
Consumer		5		—		5		—		5		—
Total	$	5,928	$	2,842	$	2,935	$	428	$	6,099	$	276

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, 2019:


	Real Estate				Commercial,
	Residential		Real Estate		Financial &		Equity				Consumer
(Dollars in thousands)	Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total
Allowance for loan losses:
Balance at December 31, 2018	$	2,246	$	727	$	6,688	$	1,106	$	257	$	22,999	$	34,023
Provision (credited) charged to operations		(85)		77		103		(214)		229		5,895		6,005
Loans charged off		(46)		—		(29)		(19)		(261)		(10,092)		(10,447)
Recoveries of loans previously charged off		20		—		4		—		173		3,440		3,637
Balance at September 30, 2019	$	2,135	$	804	$	6,766	$	873	$	398	$	22,242	$	33,218

The following table presents the changes in the allowance for loan losses by major classification during the nine months ended September 30, 2018:


	Real Estate				Commercial,
	Residential		Real Estate		Financial &		Equity				Consumer
(Dollars in thousands)	Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total
Allowance for loan losses:
Balance at December 31, 2017	$	2,371	$	605	$	7,478	$	688	$	231	$	24,353	$	35,726
Provision (credited) charged to operations		(122)		174		(625)		450		123		7,700		7,700
Loans charged off		—		—		(2)		—		(248)		(11,743)		(11,993)
Recoveries of loans previously charged off		52		—		46		—		174		3,254		3,526
Balance at September 30, 2018	$	2,301	$	779	$	6,897	$	1,138	$	280	$	23,564	$	34,959

Table of Contents

The following table presents, as of September 30, 2019, the balance of the allowance for loan losses and the balance of loans by impairment methodology.


	Real Estate				Commercial,
	Residential		Real Estate		Financial &		Equity				Consumer
(Dollars in thousands)	Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	81	$	—	$	75	$	187	$	119	$	—	$	462
Collectively evaluated for impairment		2,054		804		6,691		686		279		22,242		32,756
Acquired loans - PCI		—		—		—		—		—		—		—
Total allowance	$	2,135	$	804	$	6,766	$	873	$	398	$	22,242	$	33,218
Loans:
Individually evaluated for impairment	$	2,804	$	—	$	1,571	$	217	$	123	$	—	$	4,715
Collectively evaluated for impairment		177,046		62,554		464,345		52,159		13,398		313,743		1,083,245
Acquired loans - PCI		110		—		433		35		—		—		578
Total loans	$	179,960	$	62,554	$	466,349	$	52,411	$	13,521	$	313,743	$	1,088,538

The following table presents, as of December 31, 2018, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology.


	Real Estate				Commercial,
	Residential		Real Estate		Financial &		Equity				Consumer
(Dollars in thousands)	Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	92	$	—	$	10	$	326	$	—	$	—	$	428
Collectively evaluated for impairment		2,154		727		6,678		780		257		22,999		33,595
Acquired loans - PCI		—		—		—		—		—		—		—
Total allowance	$	2,246	$	727	$	6,688	$	1,106	$	257	$	22,999	$	34,023
Loans:
Individually evaluated for impairment	$	2,965	$	—	$	2,450	$	357	$	5	$	—	$	5,777
Collectively evaluated for impairment		181,652		54,461		452,024		55,213		15,004		296,154		1,054,508
Acquired loans - PCI		284		—		1,461		90		—		—		1,835
Total loans	$	184,901	$	54,461	$	455,935	$	55,660	$	15,009	$	296,154	$	1,062,120

Loans by credit quality indicators as of September 30, 2019 were as follows:


			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Real estate – residential mortgage	$	176,844	$	1,313	$	1,240	$	563	$	179,960
Real estate – construction:
Construction lending		48,164		—		—		—		48,164
Consumer lot lending		14,390		—		—		—		14,390
Commercial, financial and agricultural:
Commercial real estate lending		311,126		867		391		—		312,384
Land acquisition and development lending		32,017		9,224		—		—		41,241
Builder line lending		29,606		—		—		—		29,606
Commercial business lending		82,673		376		69		—		83,118
Equity lines		51,699		237		173		302		52,411
Consumer		13,401		—		1		119		13,521
	$	759,920	$	12,017	$	1,874	$	984	$	774,795

At September 30, 2019, the Corporation did not have any loans classified as Doubtful or Loss.


			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	313,216	$	527	$	313,743

Table of Contents

Loans by credit quality indicators as of December 31, 2018 were as follows:


			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Real estate – residential mortgage	$	180,232	$	2,832	$	1,243	$	594	$	184,901
Real estate – construction:
Construction lending		42,051		—		—		—		42,051
Consumer lot lending		12,410		—		—		—		12,410
Commercial, financial and agricultural:
Commercial real estate lending		306,578		3,801		454		—		310,833
Land acquisition and development lending		33,156		10,248		—		—		43,404
Builder line lending		31,201		—		—		—		31,201
Commercial business lending		69,897		576		—		24		70,497
Equity lines		54,289		389		99		883		55,660
Consumer		14,998		5		6		—		15,009
	$	744,812	$	17,851	$	1,802	$	1,501	$	765,966

At December 31, 2018, the Corporation did not have any loans classified as Doubtful or Loss.


			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	295,442	$	712	$	296,154

NOTE 5: Leases

The Corporation’s leases comprise primarily leases of real estate and office equipment in which the Corporation is the lessee, and all of which are classified as operating leases. Lease cost for the three and nine months ended September 30, 2019 is set forth in the table below.


	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2019
Operating lease cost	$	422	$	1,256
Short-term lease cost		30		98
Variable lease cost		19		37
Total lease cost	$	471	$	1,391

Variable lease payments primarily represent payments for common area maintenance related to real estate leases and taxes and fees related to equipment leases.

Cash paid for amounts included in the measurement of lease liabilities during the three and nine months ended September 30, 2019 were $427,000 and $1.16 million, respectively. As of September 30, the weighted average remaining lease term and discount rate for the Corporation’s leases were 3.0 years and 3.3%, respectively. Right-of-use assets and lease liabilities of $3.17 million each were included in other assets and other liabilities, respectively, as of September 30, 2019. During the three and nine months ended September 30, 2019, the Corporation obtained right-of-use assets in exchange for lease liabilities of $72,000 and $1.12 million, respectively.

The Corporation adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Corporation measured lease expense in accordance with FASB Accounting Standards Codification (ASC) Topic 840. During the three and nine months ended September 30, 2018, the Corporation recognized lease expense of $344,000 and $1.28 million, respectively.

Table of Contents

Certain of the Corporation’s leases contain options to extend the lease term beyond the initial term. Options to extend the lease term are recognized as part of the Corporation’s lease liabilities and right-of-use assets at the commencement of a lease to the extent the Corporation is reasonably certain to exercise such options.

Maturities of the Corporation’s lease liabilities are set forth in the table below.


	As of
(Dollars in thousands)	September 30, 2019
2019	$	282
2020		1,497
2021		902
2022		288
2023		126
Thereafter		225
Total		3,320
Imputed interest		(149)
Lease liabilities	$	3,171

The table above excludes payments of $4.94 million related to two lease agreements that have been executed where the Corporation has not obtained control of the real estate properties under lease as of September 30, 2019 and has therefore not recognized a lease liability or right-of-use asset.

NOTE 6: Equity, Other Comprehensive Income and Earnings Per Share

Equity and Noncontrolling Interest

During the third quarter and first nine months of 2019, the Corporation repurchased 21,337 and 86,523 shares of its common stock, respectively, for an aggregate cost of $1.10 million and $4.39 million, respectively, under share repurchase programs authorized by its Board of Directors. Additionally during the first nine months of 2019 and 2018, the Corporation withheld 5,341 shares and 3,947 shares of its common stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock.

In the first quarter of 2019, C&F Select LLC, a subsidiary of C&F Mortgage, issued a 49 percent ownership interest to an unrelated third party in exchange for $490,000. The holder of this noncontrolling interest financed the investment through a loan obtained from C&F Bank.

Accumulated Other Comprehensive Loss

The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of deferred taxes of $628,000 and $1.23 million as of September 30, 2019 and December 31, 2018, respectively.


	September 30,		December 31,
(Dollars in thousands)	2019		2018
Net unrealized gains (losses) on securities	$	1,575	$	(1,375)
Net unrecognized (losses) gains on cash flow hedges		(381)		215
Net unrecognized losses on defined benefit plan		(3,441)		(3,512)
Total accumulated other comprehensive loss	$	(2,247)	$	(4,672)

Table of Contents

Earnings Per Share (EPS)

The components of the Corporation’s EPS calculations are as follows:


	Three Months Ended September 30,
(Dollars in thousands)	2019		2018
Net income attributable to C&F Financial Corporation	$	4,880	$	5,101
Weighted average shares outstanding—basic and diluted		3,430,298		3,503,371


	Nine Months Ended September 30,
(Dollars in thousands)	2019		2018
Net income attributable to C&F Financial Corporation	$	14,494	$	14,063
Weighted average shares outstanding - basic and diluted		3,459,191		3,502,550

The Corporation has applied the two-class method of computing basic and diluted EPS for each period presented because the Corporation’s unvested restricted shares outstanding contain rights to nonforfeitable dividends equal to dividends on the Corporation’s common stock. Accordingly, the weighted average number of shares used in the calculation of basic and diluted EPS includes both vested and unvested shares outstanding.

NOTE 7: Employee Benefit Plans

The following table summarizes the components of net periodic benefit cost for the Bank’s non-contributory cash balance pension plan.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Components of net periodic benefit cost:
Service cost, included in salaries and employee benefits	$	305	$	309	$	914	$	923

Other components of net periodic benefit cost:
Interest cost		152		138		456		384
Expected return on plan assets		(324)		(373)		(973)		(1,039)
Amortization of prior service credit		(17)		(16)		(51)		(46)
Recognized net actuarial losses		47		32		141		93
Other components of net periodic benefit cost, included in other noninterest income		(142)		(219)		(427)		(608)

Net periodic benefit cost	$	163	$	90	$	487	$	315

Table of Contents

NOTE 8: Fair Value of Assets and Liabilities

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

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

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

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

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected to use fair value accounting for its entire portfolio of loans held for sale (LHFS).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a recurring basis in the financial statements.

Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At September 30, 2019 and December 31, 2018, the Corporation’s entire investment securities portfolio was comprised of securities available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security valuation are ICE Data Services (ICE) and Thomson Reuters Pricing Service (TRPS). Each source provides opinions, known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are partially based on available market data, including prices for similar instruments in active markets and prices for identical assets in markets that are not active. ICE provides evaluated prices for the Corporation’s obligations of states and political subdivisions category of securities. ICE uses proprietary pricing models and pricing systems, mathematical tools and judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that security or securities with similar characteristics. TRPS provides evaluated prices for the Corporation’s U.S. government agencies and corporations and mortgage-backed categories of securities. Fixed-rate callable securities of the U.S. government agencies and corporations category are individually evaluated on an option adjusted spread basis for callable issues or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark curve for non-callable issues. Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity. Each aggregate is benchmarked to relative to-be-announced mortgage-backed securities (TBA securities) or other benchmark prices. TBA securities prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics. Each evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables. Fixed-rate securities issued by the Small Business Association in the mortgage backed category are individually

Table of Contents

evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.

Loans held for sale (LHFS). Fair value of the Corporation’s LHFS is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Corporation conducts business. The Corporation’s portfolio of LHFS is classified as Level 2.

Derivative asset - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Corporation’s IRLCs are classified as Level 2.

Derivative asset/liability – interest rate swaps on loans. The Corporation recognizes interest rate swaps at fair value. The Corporation has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques. All of the Corporation’s interest rate swaps on loans are classified as Level 2.

Derivative asset/liability – cash flow hedges. The Corporation recognizes cash flow hedges at fair value. The fair value of the Corporation’s cash flow hedges is determined using the discounted cash flow method. All of the Corporation’s cash flow hedges are classified as Level 2.

Derivative asset/liability – forward sales of TBA securities. The Corporation recognizes forward sales of TBA securities at fair value. The fair value of forward sales of TBA securities is based on prices obtained from market makers and live trading systems for TBA securities of similar issuer programs, coupons and maturities. All of the Corporation’s forward sales of TBA securities are classified as Level 2.

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


	September 30, 2019
	Fair Value Measurements Using						Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale
U.S. government agencies and corporations	$	—	$	22,180	$	—	$	22,180
Mortgage-backed securities		—		89,701		—		89,701
Obligations of states and political subdivisions		—		78,988		—		78,988
Total securities available for sale		—		190,869		—		190,869
Loans held for sale		—		98,357		—		98,357
Derivatives
IRLC		—		1,760		—		1,760
Interest rate swaps on loans		—		3,484		—		3,484
Total assets	$	—	$	294,470	$	—	$	294,470

Liabilities:
Derivatives
Interest rate swaps on loans	$	—	$	3,484	$	—	$	3,484
Cash flow hedges		—		592		—		592
Forward sales of TBA securities		—		56		—		56
Total liabilities	$	—	$	4,132	$	—	$	4,132

Table of Contents


	December 31, 2018
	Fair Value Measurements Using						Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale
U.S. government agencies and corporations	$	—	$	17,473	$	—	$	17,473
Mortgage-backed securities		—		104,983		—		104,983
Obligations of states and political subdivisions		—		92,454		—		92,454
Total securities available for sale		—		214,910		—		214,910
Loans held for sale		—		41,895		—		41,895
Derivatives
IRLC		—		636		—		636
Interest rate swaps on loans		—		1,607		—		1,607
Cash flow hedges		—		289		—		289
Total assets	$	—	$	259,337	$	—	$	259,337

Liabilities:
Derivatives - interest rate swaps on loans	$	—	$	1,607	$	—	$	1,607
Total liabilities	$	—	$	1,607	$	—	$	1,607

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

Impaired loans. The Corporation does not record loans held for investment at fair value on a recurring basis. However, there are instances when a loan is considered impaired and an allowance for loan losses is established. The Corporation measures impairment either based on the fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. The Corporation maintains a valuation allowance to the extent that this measure of the impaired loan is less than the recorded investment in the loan. When an impaired loan is measured at fair value based solely on observable market prices or a current appraisal without further adjustment for unobservable inputs, the Corporation records the impaired loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to observed market prices or appraisals are required or if observable inputs are not available, the Corporation records the impaired loan as a nonrecurring fair value measurement classified as Level 3.

Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest, are not recorded at fair value and are therefore excluded from fair value disclosure requirements.

OREO. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Corporation obtains from independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intent with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations

Table of Contents

indicate a further deterioration in market conditions. As such, the Corporation records OREO as a nonrecurring fair value measurement classified as Level 3.

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


	September 30, 2019
	Fair Value Measurements Using						Assets at Fair
(Dollars in thousands)	Level 1		Level 2		Level 3		Value
Impaired loans, net	$	—	$	—	$	102	$	102
Other real estate owned, net		—		—		268		268
Total	$	—	$	—	$	370	$	370


	December 31, 2018
	Fair Value Measurements Using						Assets at Fair
(Dollars in thousands)	Level 1		Level 2		Level 3		Value
Impaired loans, net	$	—	$	—	$	102	$	102
Other real estate owned, net		—		—		246		246
Total	$	—	$	—	$	348	$	348

The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a nonrecurring basis:


	Fair Value Measurements at September 30, 2019
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Inputs	Range of Inputs
Impaired loans, net	$	102	Appraisals	Discount to reflect current market conditions and estimated selling costs	30%
Other real estate owned, net		268	Appraisals	Discount to reflect current market conditions and estimated selling costs	33%-75%
Total	$	370

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 Corporation uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

Table of Contents

The following tables reflect the carrying amounts and estimated fair values of the Corporation’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.


	Carrying		Fair Value Measurements at September 30, 2019 Using						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	145,794	$	145,794	$	—	$	—	$	145,794
Securities available for sale		190,869		—		190,869		—		190,869
Loans, net		1,055,320		—		—		1,061,512		1,061,512
Loans held for sale		98,357		—		98,357		—		98,357
Derivatives
IRLC		1,760		—		1,760		—		1,760
Interest rate swaps on loans		3,484		—		3,484		—		3,484
Bank-owned life insurance		16,348		—		16,348		—		16,348
Accrued interest receivable		6,685		6,685		—		—		6,685
Financial liabilities:
Demand deposits		836,236		836,236		—		—		836,236
Time deposits		412,344		—		412,374		—		412,374
Borrowings		161,660		—		155,269		—		155,269
Derivatives
Cash flow hedges		592		—		592		—		592
Interest rate swaps on loans		3,484		—		3,484		—		3,484
Forward sales of TBA securities		56		—		56		—		56
Accrued interest payable		1,263		1,263		—		—		1,263


	Carrying		Fair Value Measurements at December 31, 2018 Using						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	115,013	$	115,013	$	—	$	—	$	115,013
Securities available for sale		214,910		—		214,910		—		214,910
Loans, net		1,028,097		—		—		1,021,145		1,021,145
Loans held for sale		41,895		—		41,895		—		41,895
Derivatives
IRLC		636		—		636		—		636
Interest rate swaps on loans		1,607		—		1,607		—		1,607
Cash flow hedges		289		—		289		—		289
Bank-owned life insurance		16,065		—		16,065		—		16,065
Accrued interest receivable		7,436		7,436		—		—		7,436
Financial liabilities:
Demand deposits		835,101		835,101		—		—		835,101
Time deposits		346,560		—		343,507		—		343,507
Borrowings		159,691		—		152,015		—		152,015
Derivatives - interest rate swaps on loans		1,607		—		1,607		—		1,607
Accrued interest payable		920		920		—		—		920

NOTE 9: Business Segments

The Corporation operates in a decentralized fashion in three principal business segments: retail banking, mortgage banking and consumer finance. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest earned on mortgage loans held for sale. Revenues from consumer finance consist primarily of interest earned on purchased retail installment sales contracts.

Table of Contents

The Corporation’s other segment includes a full-service brokerage firm that derives revenues from offering wealth management services and insurance products through third-party service providers and an insurance company that derives revenues from owning an equity interest in an insurance agency that offers insurance products and services. The results of the other segment are not significant to the Corporation as a whole and have been included in “Other.” Revenue and expenses of the Corporation are also included in “Other,” and consist primarily of interest expense associated with the Corporation’s trust preferred capital notes and other general corporate expenses.


	Three Months Ended September 30, 2019
	Retail		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	15,060	$	814	$	10,442	$	—	$	(2,324)	$	23,992
Gains on sales of loans		—		3,205		—		—		—		3,205
Other noninterest income		2,874		1,426		132		593		—		5,025
Total operating income		17,934		5,445		10,574		593		(2,324)		32,222
Expenses:
Provision for loan losses		—		—		1,800		—		—		1,800
Interest expense		2,684		541		2,596		272		(2,324)		3,769
Salaries and employee benefits		7,173		1,742		2,233		582		—		11,730
Other noninterest expenses		5,224		1,526		1,334		488		—		8,572
Total operating expenses		15,081		3,809		7,963		1,342		(2,324)		25,871
Income (loss) before income taxes		2,853		1,636		2,611		(749)		—		6,351
Income tax expense (benefit)		460		426		710		(130)		—		1,466
Net income (loss)	$	2,393	$	1,210	$	1,901	$	(619)	$	—	$	4,885
Total assets	$	1,436,986	$	115,547	$	316,158	$	6,000	$	(255,310)	$	1,619,381
Goodwill	$	3,702	$	—	$	10,723	$	—	$	—	$	14,425
Capital expenditures	$	453	$	60	$	17	$	—	$	—	$	530


	Three Months Ended September 30, 2018
	Retail		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	14,350	$	602	$	10,650	$	4	$	(1,915)	$	23,691
Gains on sales of loans		—		1,752		—		—		—		1,752
Other noninterest income		2,971		1,246		142		516		—		4,875
Total operating income		17,321		3,600		10,792		520		(1,915)		30,318
Expenses:
Provision for loan losses		—		—		2,400		—		—		2,400
Interest expense		1,727		282		2,418		291		(1,915)		2,803
Salaries and employee benefits		6,851		1,406		2,160		550		—		10,967
Other noninterest expenses		4,958		1,248		1,381		120		—		7,707
Total operating expenses		13,536		2,936		8,359		961		(1,915)		23,877
Income (loss) before income taxes		3,785		664		2,433		(441)		—		6,441
Income tax expense (benefit)		627		174		664		(125)		—		1,340
Net income (loss)	$	3,158	$	490	$	1,769	$	(316)	$	—	$	5,101
Total assets	$	1,329,507	$	60,592	$	300,389	$	4,396	$	(195,280)	$	1,499,604
Goodwill	$	3,702	$	—	$	10,723	$	—	$	—	$	14,425
Capital expenditures	$	692	$	52	$	12	$	3	$	—	$	759

Table of Contents


	Nine Months Ended September 30, 2019
	Retail		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	44,803	$	1,833	$	30,952	$	4	$	(6,373)	$	71,219
Gains on sales of loans		—		8,296		—		—		—		8,296
Other noninterest income		8,899		4,232		465		1,643		—		15,239
Total operating income		53,702		14,361		31,417		1,647		(6,373)		94,754
Expenses:
Provision for loan losses		110		—		5,895		—		—		6,005
Interest expense		7,352		1,113		7,765		867		(6,373)		10,724
Salaries and employee benefits		21,718		5,133		6,581		1,700		—		35,132
Other noninterest expenses		15,267		4,105		4,120		904		—		24,396
Total operating expenses		44,447		10,351		24,361		3,471		(6,373)		76,257
Income (loss) before income taxes		9,255		4,010		7,056		(1,824)		—		18,497
Income tax expense (benefit)		1,501		1,051		1,921		(474)		—		3,999
Net income (loss)	$	7,754	$	2,959	$	5,135	$	(1,350)	$	—	$	14,498
Total assets	$	1,436,986	$	115,547	$	316,158	$	6,000	$	(255,310)	$	1,619,381
Goodwill	$	3,702	$	—	$	10,723	$	—	$	—	$	14,425
Capital expenditures	$	1,741	$	136	$	57	$	67	$	—	$	2,001


	Nine Months Ended September 30, 2018
	Retail		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	40,719	$	1,468	$	32,230	$	4	$	(5,335)	$	69,086
Gains on sales of loans		—		6,399		—		—		—		6,399
Other noninterest income		8,486		3,349		552		1,528		—		13,915
Total operating income		49,205		11,216		32,782		1,532		(5,335)		89,400
Expenses:
Provision for loan losses		—		—		7,700		—		—		7,700
Interest expense		4,975		642		6,900		861		(5,335)		8,043
Salaries and employee benefits		20,091		4,409		6,653		1,620		—		32,773
Other noninterest expenses		14,776		3,841		4,076		508		—		23,201
Total operating expenses		39,842		8,892		25,329		2,989		(5,335)		71,717
Income (loss) before income taxes		9,363		2,324		7,453		(1,457)		—		17,683
Income tax expense (benefit)		1,449		620		2,030		(479)		—		3,620
Net income (loss)	$	7,914	$	1,704	$	5,423	$	(978)	$	—	$	14,063
Total assets	$	1,329,507	$	60,592	$	300,389	$	4,396	$	(195,280)	$	1,499,604
Goodwill	$	3,702	$	—	$	10,723	$	—	$	—	$	14,425
Capital expenditures	$	2,286	$	111	$	47	$	3	$	—	$	2,447

The retail banking segment extends two warehouse lines 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 a spread ranging from 50 basis points to 175 basis points. The retail banking segment also provides the consumer finance segment with a portion of the funds needed to purchase loan contracts by means of variable rate notes that carry interest at one-month LIBOR plus 200 basis points and fixed rate notes that carry interest at rates ranging from 2.0 percent to 8.0 percent. The retail banking segment acquires certain residential real estate loans from the mortgage banking segment at prices similar to those paid by third-party investors. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the retail banking segment are not allocated to the mortgage banking, consumer finance and other segments.

Table of Contents

NOTE 10: Commitments and Contingent Liabilities

The Corporation enters into commitments to extend credit in the normal course of business to meet the financing needs of its customers, including loan commitments and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amounts recorded on the Consolidated Balance Sheets. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral is obtained based on management’s credit assessment of the customer.

Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of loan commitments at the Bank was $254.17 million at September 30, 2019 and $244.17 million at December 31, 2018, which does not include IRLCs at C&F Mortgage, which are discussed in Note 11.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $18.51 million at September 30, 2019 and $19.34 million at December 31, 2018.

C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party counterparties (i.e., investors). As is customary in the industry, the agreements with these counterparties require C&F Mortgage to extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the agreements, the counterparties are entitled to make loss claims and repurchase requests of C&F Mortgage for loans that contain covered deficiencies. C&F Mortgage has obtained early payment default recourse waivers for a significant portion of its business. Recourse periods for early payment default for the remaining counterparties vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. C&F Mortgage maintains an allowance for indemnifications that represents management’s estimate of losses that are probable of arising under these recourse provisions. As performance data for loans that have been sold is not made available to C&F Mortgage by the counterparties, the evaluation of potential losses is inherently subjective. A schedule of expected losses on loans with claims or indemnifications is maintained to ensure the reserve is adequate to cover estimated losses. The allowance for indemnifications was $2.47 million at September 30, 2019 and $2.54 million at December 31, 2018.

NOTE 11: Derivative Financial Instruments

The Corporation uses derivative financial instruments primarily to manage risks to the Corporation associated with changing interest rates, and to assist customers with their risk management objectives. The Corporation designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income. Derivative contracts that are not designated in a qualifying hedging relationship include customer accommodation loan swaps and contracts related to mortgage banking activities.

Cash flow hedges. The Corporation designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Corporation’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Corporation assesses the effectiveness of each hedging relationship quarterly. If the Corporation determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of September 30, 2019, the

Table of Contents

Corporation has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2024 and June 2029.

All interest rate swaps were entered into with counterparties that met the Corporation’s credit standards and the agreements contain collateral provisions protecting the at-risk party. The Corporation believes that the credit risk inherent in these derivative contracts is not significant.

Unrealized gains or losses recorded in other comprehensive income related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Corporation does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.

Loan swaps. The Bank also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest expense and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties.

Mortgage banking. C&F Mortgage enters into IRLCs with customers to originate loans for which the interest rates are determined (or “locked”) prior to funding. C&F Mortgage is exposed to interest rate risk by holding fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans are sold in the secondary market. C&F Mortgage mitigates this interest rate risk by either (1) entering into forward sales contracts with investors at the time that interest rates are locked for mortgage loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for unspecified mortgage backed securities (TBA securities) until it can enter into forward sales contracts with investors for mortgage loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets. Changes in the fair value of mortgage banking derivatives are recorded as a component of gains on sales of loans.

At September 30, 2019, C&F Mortgage had best-efforts forward sales contracts for $84.22 million of its mortgage loans held for sale and $95.99 million of IRLCs offered to customers, and it had mandatory-delivery forward sales contracts for $5.44 million of its mortgage loans held for sale. At December 31, 2018, C&F Mortgage had best-efforts forward sales contracts for all of its mortgage loans held for sale and IRLCs.

The following tables summarize key elements of the Corporation’s derivative instruments other than forward sales of mortgage loans. The fair values of forward sales of mortgage loans were not material to the consolidated financial statements of the Corporation at September 30, 2019 or December 31, 2018.

Table of Contents


	September 30, 2019
	Notional						Collateral
(Dollars in thousands)	Amount		Assets		Liabilities		Pledged1
Cash flow hedges:
Interest rate swap contracts	$	25,000	$	—	$	592	$	—
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower		66,305		3,484		—		—
Matched interest rate swaps with counterparty		66,305		—		3,484		—
Mortgage banking contracts:
IRLCs		116,927		1,760		—		—
Forward sales of TBA securities		23,250		—		56		—


	December 31, 2018
	Notional						Collateral
(Dollars in thousands)	Amount		Assets		Liabilities		Pledged1
Cash flow hedges:
Interest rate swap contracts	$	25,000	$	289	$	—	$	—
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower		45,961		216		1,391		—
Matched interest rate swaps with counterparty		45,961		1,391		216		—
Mortgage banking contracts:
IRLCs		44,324		636		—		—

Collateral pledged may be comprised of cash or securities.

NOTE 12: Other Noninterest Expenses

The following table presents the significant components in the Consolidated Statements of Income line “Noninterest Expenses-Other.”


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Data processing fees	$	2,093	$	1,879	$	5,989	$	5,524
Professional fees		1,061		634		2,414		2,152
Marketing and advertising expenses		485		379		1,293		1,222
Travel and educational expenses		290		257		996		928
Telecommunication expenses		337		336		985		1,015
All other noninterest expenses		2,080		2,015		6,155		6,098
Total other noninterest expenses	$	6,346	$	5,500	$	17,832	$	16,939

Table of Contents

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 expected future financial performance; expected likelihood, timing and effects of the Corporation’s pending acquisition (the Merger) of Peoples Bankshares, Incorporated (Peoples), including the expected levels of merger related expenses to be incurred by the Corporation and the potential impact of the Merger on the Corporation’s and C&F Bank’s liquidity and capital levels; strategic business initiatives and the anticipated effects thereof, including personnel additions and the expansion of the indirect lending program to include marine and recreational vehicles (RVs); technology initiatives; liquidity and capital levels; net interest margin compression and the Corporation’s ability to manage net interest margin; the effect of future market and industry trends, including competitive trends in the non-prime consumer finance markets, the Corporation’s and each business segment’s loan portfolio, and business prospects related to each segment’s loan portfolio, including future lending and growth in loans outstanding; asset quality and adequacy of the allowance for loan losses and the level of future charge-offs; trends regarding the provision for loan losses, net loan charge-offs, levels of nonperforming assets and troubled debt restructurings (TDRs); expenses associated with nonperforming assets; the utilization of scorecard models and the performance of loans purchased using those models; the effects of future interest rate levels and fluctuations; the amount and timing of accretion associated with the fair value accounting adjustments recorded in connection with the 2013 acquisition of Central Virginia Bankshares, Inc. (CVBK); adequacy of the allowance for indemnification losses; levels of noninterest income and expense; interest rates and yields including possible future interest rate changes; the deposit portfolio including trends in deposit maturities and rates; interest rate sensitivity; market risk; regulatory developments; monetary policy implemented by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) including changes to the Federal Funds rate; capital requirements; growth strategy; hedging strategy; and, financial and other goals. 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:

the ability of the Corporation to complete the pending Merger, including obtaining the required regulatory approvals and the approval of Peoples shareholders within the expected time period

the possibility that any of the anticipated benefits of the pending Merger will not be realized or will not be realized within the expected time period

the ability of the Corporation to successfully integrate the operations of Peoples Community Bank into C&F Bank

customer and employee relationships and business operations as a result of disruptions caused by the pending Merger

interest rates, such as changes or volatility in the Federal Funds rate, yields on U.S. Treasury securities or mortgage rates

general business conditions, as well as conditions within the financial markets

general economic conditions, including unemployment levels and slowdowns in economic growth

the legislative/regulatory climate with respect to financial institutions, including the Dodd-Frank Act and regulations promulgated thereunder, the Consumer Financial Protection Bureau (CFPB) and the regulatory and enforcement activities of the CFPB, the application of the Basel III capital standards to the Corporation and C&F Bank and the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 and regulations promulgated thereunder

Table of Contents

monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve Board, and the effect of these policies on interest rates and business in our markets

the value of securities held in the Corporation’s investment portfolios

demand for loan products and the impact of changes in demand on loan growth

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 new and used automobiles, including sales prices of repossessed vehicles

the level of net charge-offs on loans and the adequacy of our allowance for loan losses

deposit flows

demand in the secondary residential mortgage loan markets

the level of indemnification losses related to mortgage loans sold

the strength of the Corporation’s counterparties and the economy in general

competition from both banks and non-banks, including competition in the non-prime automobile finance markets

demand for financial services in the Corporation’s market area

the Corporation's branch and market expansions, technology initiatives and other strategic initiatives

cyber threats, attacks or events

reliance on third parties for key services

C&F Bank’s product offerings

accounting principles, policies and guidelines, and elections made by the Corporation thereunder.

These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018, and in Item 1A. “Risk Factors,” of Part II of this Quarterly Report on Form 10-Q, should be considered in evaluating the forward-looking statements contained herein.

Forward-looking statements are inherently uncertain. Forward-looking statements are based on management’s beliefs, assumptions and expectations as of the date of this report regarding future events or performance, taking into account all information currently available, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions. There can be no assurance that the underlying beliefs, assumptions or expectations will be proven to be accurate. We caution readers not to place undue reliance on those forward-looking statements. Actual results may differ materially from historical results or those expressed in or implied by such forward-looking statements. We undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which the statement was made, except as otherwise required by law.

Table of Contents

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

Loans Acquired in a Business Combination: Acquired loans are classified as either (i) purchased credit-impaired (PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Corporation will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Table of Contents

On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan or pool(s) of loans. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.

The Corporation's PCI loans currently consist of loans acquired in connection with the acquisition of Central Virginia Bank (CVB), the banking subsidiary of CVBK. PCI loans that were classified as nonperforming loans by CVB are no longer classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

The Corporation accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.

Impairment of Securities: Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it is not more-likely-than-not that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.

We regularly review unrealized losses in our investments in securities based on criteria including the extent to which market value is below amortized cost, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.

Other Real Estate Owned (OREO): Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the fair value less estimated costs to sell at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. Assets previously held and used as corporate premises and equipment are reclassified as OREO when the Corporation has decided to dispose of such assets and they are marketed for sale.

Goodwill: The Corporation's goodwill was recognized in connection with the Corporation's acquisition of CVBK in October 2013 and C&F Bank's acquisition of C&F Finance Company in September 2002. The Corporation reviews the carrying value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Corporation may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Corporation elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of

Table of Contents

goodwill at the retail banking segment and the consumer finance segment, which was the annual evaluation in the fourth quarter of 2018, the Corporation concluded that no impairment existed based on an assessment of qualitative factors.

Retirement Plan: C&F Bank maintains a non-contributory, defined benefit pension plan for eligible full-time employees as specified by the plan. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are measured at fair value. The projected benefit obligation and net periodic pension cost or income are actuarially determined using a number of key assumptions, which may include discount rates, rates of return on plan assets, employee compensation and mortality and interest crediting rates. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may affect the projected benefit obligation in the year of the change, and may affect net periodic pension cost or income in the year of the change or in future periods.

Derivative Financial Instruments: The Corporation uses derivatives primarily to manage risk associated with changing interest rates and to assist customers with their risk management objectives. The Corporation’s derivative financial instruments may include (1) interest rate swaps that qualify and are designated as cash flow hedges on the Corporation’s trust preferred capital notes, (2) interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate contracts arising from mortgage banking activities, including interest rate lock commitments (IRLCs) on mortgage loans and related forward sales of mortgage loans and mortgage backed securities. The gain or loss on the Corporation’s cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. IRLCs, forward sales contracts and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, and therefore changes in the fair value of these instruments are reported in the Consolidated Statements of Income.

Income Taxes: Determining the Corporation’s effective tax rate requires judgment. The Corporation’s net deferred tax asset is determined annually based on temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. In addition, there may be transactions and calculations for which the ultimate tax outcomes are uncertain and the Corporation’s tax returns are subject to audit by various tax authorities. Although we believe that estimates related to income taxes are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the consolidated financial statements.

For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.

OVERVIEW

Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth initiatives that will enhance long-term shareholder value. We track three primary financial performance measures in order to assess the level of success in achieving these goals: (1) return on average assets (ROA), (2) return on average equity (ROE), and (3) growth in earnings. In addition to these financial performance measures, we track the performance of the Corporation’s three principal business segments: retail banking, mortgage banking, and consumer finance. We also actively manage our capital through growth, dividends and share repurchases, while considering the need to maintain a strong capital position.

Financial Performance Measures

Net income for the Corporation was $4.9 million for the third quarter of 2019, or $1.42 per share, compared with net income of $5.1 million for the third quarter of 2018, or $1.46 per share. Net income for the Corporation was $14.5 million for the first nine months of 2019, or $4.19 per share, compared with net income of $14.1 million for the first nine months of 2018, or $4.02 per share. The Corporation’s annualized ROE and ROA were 12.28 percent and 1.25 percent, respectively, for the third quarter of 2019, compared to 13.81 percent and 1.35 percent, respectively, for the third quarter

Table of Contents

of 2018. The Corporation’s annualized ROE and ROA were 12.45 percent and 1.25 percent, respectively, for the first nine months of 2019, compared to 13.02 percent and 1.24 percent, respectively, for the first nine months of 2018.

Excluding merger related costs incurred in connection with the Corporation’s pending acquisition of Peoples, adjusted net income for the third quarter and first nine months of 2019 was $5.3 million, or $1.54 per share, and $14.9 million, or $4.30 per share, respectively. Adjusted ROE and adjusted ROA, which exclude merger related costs, were 13.26 percent and 1.35 percent, respectively, for the third quarter of 2019. Adjusted ROE and adjusted ROA for the first nine months of 2019 were 12.78 percent and 1.29 percent, respectively. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net income, adjusted earnings per share, adjusted ROE and adjusted ROA, which are non-GAAP financial measures, to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Principal Business Segments

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

Retail Banking: The retail banking segment reported net income of $2.4 million for the third quarter of 2019, compared to net income of $3.2 million for the third quarter of 2018. For the first nine months of 2019, the retail banking segment reported net income of $7.8 million, compared to $7.9 million for the first nine months of 2018. Retail banking segment net income for the third quarter and first nine months of 2019 included merger related expenses of $104,000 ($89,000 after income taxes).

For the third quarter of 2019, compared to the third quarter of 2018, retail banking segment net income decreased primarily as a result of (1) lower interest income on certain purchased loans, as discussed below, (2) higher operating expenses associated with C&F Bank adding new talent to its commercial lending team in the Richmond and Charlottesville markets and investing in technology infrastructure to support continued growth, (3) higher average rates on interest-bearing deposit accounts and (4) merger related expenses, which were partially offset by (1) higher average loans outstanding, which contributed to higher interest income, (2) higher interchange income and (3) lower expense associated with the Federal Deposit Insurance Corporation (FDIC) insurance assessment as a result of credits available to banks with less than $10 billion in total assets. For the first nine months of 2019, compared to the first nine months of 2018, retail banking segment net income decreased primarily as a result of (1) higher operating expenses as discussed above, (2) higher average rates on interest-bearing deposit accounts, (3) lower service charges on deposit accounts resulting from fewer overdraft fees charged and (4) merger related expenses, which were partially offset by (1) higher average loans outstanding and higher yields on loans, which contributed to higher interest income, (2) higher interchange income and (3) lower expense associated with the FDIC insurance assessment.

The recognition of interest income on purchased credit impaired (PCI) loans is based on management’s expectation of future payments of principal and interest. Certain PCI loans have paid off earlier than expected during 2019 and 2018, affecting the recognition of interest income as repayments occur. Interest income recognized on PCI loans was $985,000 and $2.7 million for the third quarter and first nine months of 2019, respectively, compared to $1.5 million and $2.9 million for the third quarter and first nine months of 2018, respectively.

Average loans increased $44.6 million or 6.1 percent for the third quarter of 2019 and $42.9 million or 5.9 percent for the first nine months of 2019, compared to the same periods in 2018, due primarily to growth in the commercial business lending, acquisition and development, and commercial real estate segments of the loan portfolio. C&F Bank’s total nonperforming assets were $2.1 million at September 30, 2019, compared to $1.7 million at December 31, 2018. Nonperforming assets at September 30, 2019 included $1.1 million in other real estate owned, compared to $246,000 at December 31, 2018, and $950,000 in nonaccrual loans, compared to $1.5 million at December 31, 2018. As previously announced, C&F Bank consolidated its Bellgrade branch in Midlothian, Virginia into a nearby branch in the third quarter of 2019, and reclassified $835,000 of land and buildings into other real estate owned.

Mortgage Banking: The mortgage banking segment reported net income of $1.2 million for the third quarter of 2019, compared to net income of $490,000 for the third quarter of 2018. For the first nine months of 2019, the mortgage banking segment reported net income of $3.0 million, compared to net income of $1.7 million for the first nine months of 2018.

Table of Contents

The increase in net income of the mortgage banking segment for the third quarter and first nine months of 2019 compared to the same periods in 2018 was due primarily to higher gains on sales of loans, resulting from higher loan production, which was partially offset by higher compensation expense related to higher loan volume. Mortgage loan originations for the mortgage banking segment were $286.9 million and $672.4 million in the third quarter and first nine months of 2019, respectively, compared to $191.1 million and $538.7 million for the same periods in 2018. Loan production for the third quarter of 2019 was the highest reported by the mortgage banking segment for any fiscal quarter since the second quarter of 2009 when home sales were supported by a federal income tax credit for first-time home buyers. Lower interest rates on mortgage loans have contributed to an increase in volume in the mortgage industry in the third quarter and first nine months of 2019 compared to the same periods in 2018.

Mortgage loan originations during the third quarter of 2019 for refinancings and home purchases were $93.4 million and $193.5 million, respectively, compared to $21.0 million and $170.0 million, respectively, during the third quarter of 2018. Mortgage loan originations during the first nine months of 2019 for refinancings and home purchases were $147.1 million and $525.4 million, respectively, compared to $64.6 million and $474.1 million, respectively, during the first nine months of 2018.

Consumer Finance: The consumer finance segment reported net income of $1.9 million for the third quarter of 2019, compared to net income of $1.8 million for the third quarter of 2018. For the first nine months of 2019, the consumer finance segment reported net income of $5.1 million, compared to net income of $5.4 million for the first nine months of 2018.

Factors having a favorable effect on the net income of the consumer finance segment for the third quarter and first nine months of 2019 compared to the same periods in 2018 included a decline in the provision for loan losses of $600,000 and $1.8 million, respectively, as a result of lower charge-offs and improving credit quality of the portfolio, as discussed below. Factors having an unfavorable effect on the net income of the consumer finance segment for the same periods included (1) lower loan yields resulting from competition in the non-prime automobile loan business and the acquisition of automobile loan contracts with higher credit metrics and lower interest rates, as well as relatively lower yields on prime marine and recreational vehicle (RV) loans, and (2) an increase in the cost of variable-rate borrowings resulting from higher short-term interest rates during the third quarter and first nine months of 2019 compared to the same periods in 2018.

The annualized net charge-off ratio for the first nine months of 2019 decreased to 2.91 percent from 3.84 percent for the first nine months of 2018. The decline reflects a lower number of charge-offs during 2019 as a result of the consumer finance segment’s purchasing automobile loan contracts with higher credit metrics beginning in 2016. At September 30, 2019, total delinquent loans as a percentage of total loans was 3.48 percent, compared to 4.76 percent at December 31, 2018 and 4.30 percent at September 30, 2018. The allowance for loan losses was $22.2 million, or 7.09 percent of total loans at September 30, 2019, compared to $23.0 million, or 7.77 percent of total loans at December 31, 2018. The decrease in the level of the allowance for loan losses as a percentage of total loans was due primarily to lower net charge-offs on non-prime automobile loans. At September 30, 2019, compared to December 31, 2018, the higher composition within the consumer finance segment’s loan portfolio of prime marine and RV loans accounted for approximately 15 basis points of the 68 basis points decrease in the ratio of the allowance for loan losses to total loans.

Acquisition of Peoples. On August 13, 2019, the Corporation entered into an agreement with Peoples, pursuant to which Peoples has agreed to merge with and into the Corporation. Peoples and its wholly-owned Virginia chartered commercial banking subsidiary, Peoples Community Bank, serve the Northern Neck area of eastern Virginia through five bank branch locations. Following the proposed merger of Peoples with and into the Corporation, Peoples Community Bank is expected to be merged with and into C&F Bank. Completion of the transaction remains subject to certain conditions, including approval of the transaction by appropriate federal and state banking regulatory agencies and approval of the transaction by Peoples shareholders. Upon completion of the Merger, Peoples shareholders will receive 0.5366 shares of the Corporation’s common stock and $27.00 in cash for each share of Peoples common stock. The stock and cash consideration has an aggregate value of approximately $21.32 million based on the November 6, 2019 closing price of $51.20 per share of the Corporation’s common stock. The Corporation expects to complete the Merger in early 2020.

Table of Contents

In the third quarter and first nine months of 2019, the Corporation recorded merger related expenses of $409,000 ($389,000 after income taxes) in connection with its pending acquisition of Peoples, of which $104,000 ($89,000 after income taxes) was allocated to the retail banking segment and the remainder was recorded as a holding company expense. The Corporation estimates that it will incur aggregate merger related expenses of approximately $2.0 million after income taxes in connection with the Merger.

Capital Management. Total equity was $162.1 million at September 30, 2019, compared to $152.0 million at December 31, 2018. Capital growth resulted primarily from earnings for the first nine months of 2019, which was offset in part by share repurchases of $4.7 million, as further described below, and dividends declared of $1.11 per share during the first nine months of 2019. For the third quarter of 2019, the Corporation paid a cash dividend on October 1, 2019 of $0.37 per share, which equated to a payout ratio of 26.1 percent of third quarter earnings per share. The dividend payout ratio was 26.5 percent for the first nine months of 2019. The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital requirements and expected future earnings.

On May 21, 2019, the Board of Directors authorized a program, effective June 1, 2019, to repurchase up to $5.0 million of the Corporation’s common stock through May 31, 2020 (the Repurchase Program). As of September 30, 2019, the Corporation had repurchased 33,437 shares of its common stock at an aggregate cost of $1.7 million, and remained authorized to purchase up to $3.3 million of the Corporation’s common stock under the Repurchase Program. Under the previous share repurchase program, which was last authorized by the Board of Directors in April 2018 and which expired on May 31, 2019, the Corporation made aggregate repurchases of its common stock of $3.8 million between November 2018 and May 2019. At September 30, 2019, the book value per share of the Corporation’s common stock was $47.34, and tangible book value per share was $42.85, compared to $42.72 and $38.25, respectively, at September 30, 2018.

The pending acquisition of Peoples is expected to generate goodwill and other intangible assets that will be excluded from the regulatory capital of C&F Bank, which may result in a decrease in C&F Bank’s regulatory capital ratios. C&F Bank expects to remain well-capitalized following the completion of the pending acquisition and to have sufficient deployable capital to support future growth opportunities.

Table of Contents

RESULTS OF OPERATIONS

NET INTEREST INCOME

The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three and nine months ended September 30, 2019 and 2018. Loans include loans held for sale. Loans placed on a nonaccrual status are included in the balances and are included in the computation of yields, but had no material effect. Accretion and amortization of fair value purchase adjustments are included in the computation of yields on loans and investments and on the cost of borrowings acquired in connection with the purchase of CVB. The CVB accretion contributed approximately 34 basis points to the yield on loans and 27 basis points to both the yield on interest earning assets and the net interest margin for the third quarter of 2019, compared to approximately 40 basis points to the yield on loans and 30 basis points to both the yield on interest earning assets and the net interest margin for the third quarter of 2018. The CVB accretion contributed approximately 32 basis points to the yield on loans and 25 basis points to both the yield on interest earning assets the net interest margin for the first nine months of 2019, compared to approximately 32 basis points to the yield on loans and 24 basis points to both the yield on interest earning assets and the net interest margin for the first nine months of 2018. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis, which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

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


	Three Months Ended September 30,
	2019						2018
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	128,505	$	774	2.41	%	$	139,198	$	815	2.34	%
Tax-exempt		68,868		638	3.71			86,011		855	3.98
Total securities		197,373		1,412	2.86			225,209		1,670	2.97
Total loans		1,176,729		22,260	7.51			1,083,456		21,679	7.94
Interest-bearing deposits in other banks		94,625		460	1.93			112,071		527	1.87
Total earning assets		1,468,727		24,132	6.52			1,420,736		23,876	6.67
Allowance for loan losses		(33,730)						(35,336)
Total non-earning assets		131,305						127,644
Total assets	$	1,566,302					$	1,513,044

Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	209,128		275	0.52		$	213,727		211	0.39
Money market deposit accounts		192,354		236	0.49			214,549		173	0.32
Savings accounts		120,170		27	0.09			117,233		27	0.09
Certificates of deposit, $100 or more		215,655		1,070	1.97			172,300		551	1.27
Other certificates of deposit		188,114		798	1.68			176,539		469	1.05
Interest-bearing deposits		925,421		2,406	1.03			894,348		1,431	0.63
Borrowings		160,340		1,363	3.40			166,295		1,372	3.30
Total interest-bearing liabilities		1,085,761		3,769	1.38			1,060,643		2,803	1.05
Noninterest-bearing demand deposits		286,211						276,555
Other liabilities		35,224						28,142
Total liabilities		1,407,196						1,365,340
Equity		159,106						147,704
Total liabilities and equity	$	1,566,302					$	1,513,044
Net interest income			$	20,363					$	21,073
Interest rate spread					5.14	%					5.62	%
Interest expense to average earning assets (annualized)					1.02	%					0.79	%
Net interest margin (annualized)					5.50	%					5.88	%

Table of Contents


	Nine Months Ended September 30,
	2019						2018
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	134,125	$	2,448	2.43	%	$	136,411	$	2,339	2.29	%
Tax-exempt		73,169		2,080	3.79			88,066		2,641	4.00
Total securities		207,294		4,528	2.91			224,477		4,980	2.96
Total loans		1,138,532		65,514	7.69			1,070,387		63,135	7.89
Interest-bearing deposits in other banks		100,495		1,631	2.17			123,208		1,544	1.68
Total earning assets		1,446,321		71,673	6.62			1,418,072		69,659	6.57
Allowance for loan losses		(33,887)						(35,587)
Total non-earning assets		129,621						127,042
Total assets	$	1,542,055					$	1,509,527

Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	217,080		894	0.55		$	222,746		570	0.34
Money market deposit accounts		198,355		757	0.51			217,970		480	0.29
Savings accounts		120,515		86	0.10			116,432		73	0.08
Certificates of deposit, $100 or more		201,022		2,716	1.81			173,538		1,601	1.23
Other certificates of deposit		182,793		2,082	1.52			177,958		1,356	1.02
Interest-bearing deposits		919,765		6,535	0.95			908,644		4,080	0.60
Borrowings		159,963		4,189	3.49			166,763		3,963	3.17
Total interest-bearing liabilities		1,079,728		10,724	1.33			1,075,407		8,043	1.00
Noninterest-bearing demand deposits		275,269						263,037
Other liabilities		31,804						27,141
Total liabilities		1,386,801						1,365,585
Equity		155,254						143,942
Total liabilities and equity	$	1,542,055					$	1,509,527
Net interest income			$	60,949					$	61,616
Interest rate spread					5.29	%					5.57	%
Interest expense to average earning assets (annualized)					0.99	%					0.76	%
Net interest margin (annualized)					5.63	%					5.81	%

Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the period-to-period changes in the components of net interest income on a taxable-equivalent basis. The Corporation calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.

Table of Contents

TABLE 2: Rate-Volume Recap


	Three Months Ended September 30, 2019 from 2018
	Increase (Decrease)				Total
	Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)
Interest income:
Loans	$	(1,217)	$	1,798	$	581
Securities:
Taxable		23		(64)		(41)
Tax-exempt		(55)		(162)		(217)
Interest-bearing deposits in other banks		17		(84)		(67)
Total interest income		(1,232)		1,488		256
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		69		(5)		64
Money market deposit accounts		83		(20)		63
Savings accounts		—		—		—
Certificates of deposit, $100 or more		356		163		519
Other certificates of deposit		296		33		329
Total interest-bearing deposits		804		171		975
Borrowings		41		(50)		(9)
Total interest expense		845		121		966
Change in net interest income	$	(2,077)	$	1,367	$	(710)


	Nine Months Ended September 30, 2019 from 2018
	Increase (Decrease)				Total
	Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)
Interest income:
Loans	$	(1,613)	$	3,992	$	2,379
Securities:
Taxable		147		(38)		109
Tax-exempt		(133)		(428)		(561)
Interest-bearing deposits in other banks		403		(316)		87
Total interest income		(1,196)		3,210		2,014
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		338		(14)		324
Money market deposit accounts		324		(47)		277
Savings accounts		12		1		13
Certificates of deposit, $100 or more		835		280		1,115
Other certificates of deposit		688		38		726
Total interest-bearing deposits		2,197		258		2,455
Borrowings		391		(165)		226
Total interest expense		2,588		93		2,681
Change in net interest income	$	(3,784)	$	3,117	$	(667)

Net interest income, on a taxable-equivalent basis, for the three months ended September 30, 2019 was $20.4 million, compared to $21.1 million for the three months ended September 30, 2018. Net interest income, on a taxable-equivalent basis, for the first nine months of 2019 was $60.9 million, compared to $61.6 million for the first nine months of 2018. Annualized net interest margin decreased 38 basis points to 5.50 percent for the third quarter of 2019 and decreased 18 basis points to 5.63 percent for the first nine months of 2019, relative to the same periods in 2018, as costs of interest-bearing liabilities increased for both periods, while the yields on interest-earning assets decreased for the third quarter of 2019 as compared to the third quarter of 2018. For the third quarter of 2019, the yield on interest-earning assets decreased by 15 basis points compared to the third quarter of 2018 as the average yield on loans decreased, which was partially offset by the effect of loans growing as a percentage of average earning assets. For the first nine months of 2019, the yield on interest-earning assets increased by five basis points compared to the first nine months of 2018 as loans grew as a percentage of average earning assets, while the average yield on loans decreased. Average earning assets grew by $48.0 million and $28.2 million for the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018. The cost of interest-bearing liabilities increased by 33 basis points for both the third quarter and first nine months of 2019 compared to the same periods in 2018, resulting primarily from higher costs of deposits and borrowings.

Table of Contents

Average loans, which includes both loans held for investment and loans held for sale, increased $93.3 million to $1.2 billion for the third quarter of 2019 and increased $68.1 million to $1.1 billion for the first nine months of 2019, compared to the same periods in 2018. Average loans held for investment at the retail banking segment increased $44.6 million, or 6.1 percent, for the third quarter of 2019 and increased $42.8 million, or 5.9 percent, for the first nine months of 2019, compared to the same periods in 2018, due primarily to growth in the commercial business lending and acquisition and development lending segments of the loan portfolio. Average loans held for investment at the consumer finance segment increased $14.6 million, or 4.9 percent, for the third quarter of 2019 compared to the third quarter of 2018 as a result of the continued expansion of the consumer finance segment’s purchases of marine and RV loan contracts and growth in automobile loans outstanding, and increased $9.4 million, or 3.2 percent, for the first nine months of 2019 compared to the first nine months of 2018, due to purchases of marine and RV loan contracts. Average loans held for sale at the mortgage banking segment increased $34.2 million, or 71.3 percent for the third quarter of 2019, and increased $15.9 million or 39.4 percent for the first nine months of 2019, compared to the same periods in 2018, due to higher loan production.

The overall yield on average loans decreased 43 basis points to 7.51 percent for the third quarter of 2019 compared to the third quarter of 2018 due primarily to lower interest income on PCI loans at the retail banking segment, lower average yields on loans at the consumer finance segment, and higher growth in loans at the retail banking and mortgage banking segments than the consumer finance segment. The overall yield on average loans decreased 20 basis points to 7.69 percent for the first nine months of 2019 compared to the first nine months of 2018 due primarily to higher growth in loans at the retail banking and mortgage banking segments than the consumer finance segment and lower average yields on loans at the consumer finance segment, the effects of which were partially offset by higher average yields on loans at the retail banking segment. Higher loan growth at the retail banking and mortgage banking segments than the consumer finance segment results in a decrease in the overall yield on loans, as loan yields are higher on average at the consumer finance segment. Lower average yields on loans at the consumer finance segment in the third quarter and first nine months of 2019 compared to the same periods in 2018 were due primarily to continued competition in the non-prime automobile loan business and to the consumer finance segment’s pursuing growth in higher quality, lower yielding loans, which include prime marine and RV loans. The higher average yield on loans at the retail banking segment for the first nine months of 2019 compared to the first nine months of 2018 was primarily a result of higher yields on home equity lines of credit and construction loans.

Average securities available for sale decreased $27.8 million and $17.2 million for the third quarter and first nine months of 2019, compared to the same periods in 2018, due to higher calls and maturities of obligations of states and political subdivisions and lower purchases during the first nine months of 2019. The average yield on the securities portfolio on a taxable-equivalent basis decreased 11 basis points and 5 basis points for the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $17.4 million and $22.7 million during the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018. The decrease during the third quarter and first nine months of 2019 resulted primarily from loan growth outpacing deposit growth. The average yield on these overnight funds increased six basis points and 49 basis points for the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018, as the Federal Reserve Bank increased the interest rate on excess cash reserve balances from 1.50 percent in December 2017 to 2.20 percent by the end of the third quarter of 2018 and to 2.40 percent by the end of the second quarter of 2019. The Federal Reserve Bank then decreased the interest rate on excess cash reserve balances to 1.80 percent by the end of the third quarter of 2019.

Average money market, savings and interest-bearing demand deposits decreased $23.9 million and $21.2 million for the third quarter and first nine months of 2019, respectively, and average time deposits increased $54.9 million and $32.3 million for the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018, as money market customers sought the higher returns of time deposits. The average cost of interest-bearing deposits increased 40 basis points and 35 basis points for the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018, due to increases in interest rates on time deposits, interest-bearing demand deposits, and money market deposits driven by changes in market interest rates.

Table of Contents

Average borrowings decreased $6.0 million and $6.8 million for the third quarter and first nine months of 2019, respectively compared to the same periods in 2018. The decrease resulted from maturities during the third quarter of 2018 of a $5.0 million repurchase agreement with a third-party correspondent bank and a $2.5 million advance from the Federal Home Loan Bank (FHLB). The average cost of borrowings increased 10 basis points and 32 basis points during the third quarter and first nine months of 2019, compared to the same periods in 2018, because of increases in short-term interest rates, to which variable-rate borrowings at the consumer finance segment are indexed. At September 30, 2019, the current cost of these variable rate borrowings was lower than any period since the third quarter of 2018 as a result of decreases in short-term interest rates during the second and third quarters of 2019.

The Corporation believes that it may be challenging to maintain net interest margin at its current level based on the effects of (1) the current interest rate environment, which includes an inverted yield curve and decreases in short-term interest rates, (2) possible lower yields on consumer finance segment loans resulting from continued market competition and growth in lower-yielding higher-quality loans (including marine and RV loans), (3) lower accretion of purchase discounts on PCI loans from the acquisition of CVBK, which is included in yields on loans, (4) lower loan production at the mortgage banking segment following historically high levels during the first nine months of 2019 and (5) the pending acquisition of Peoples, which has a lower net interest margin than the Corporation. The Corporation expects to be able to mitigate the effects of these factors with future loan growth at the retail banking segment and the consumer finance segment.

Noninterest Income

TABLE 3: Noninterest Income


	Three Months Ended September 30, 2019
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	3,205	$	—	$	—	$	3,205
Service charges on deposit accounts		1,012		—		—		—		1,012
Other service charges and fees		395		1,373		1		—		1,769
Net gains on calls of available for sale securities		3		—		—		—		3
Wealth management services income, net		—		—		—		529		529
Interchange income		1,105		—		—		—		1,105
Other income		359		53		131		64		607
Total noninterest income	$	2,874	$	4,631	$	132	$	593	$	8,230


	Three Months Ended September 30, 2018
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	1,752	$	—	$	—	$	1,752
Service charges on deposit accounts		1,031		—		—		—		1,031
Other service charges and fees		304		990		2		—		1,296
Net losses on calls of available for sale securities		5		—		—		—		5
Wealth management services income, net		—		—		—		441		441
Interchange income		981		—		—		—		981
Other income		650		256		140		75		1,121
Total noninterest income	$	2,971	$	2,998	$	142	$	516	$	6,627

Table of Contents


	Nine Months Ended September 30, 2019
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	8,296	$	—	$	—	$	8,296
Service charges on deposit accounts		2,874		—		—		—		2,874
Other service charges and fees		1,108		3,410		3		—		4,521
Net gains on calls of available for sale securities		8		—		—		—		8
Wealth management services income, net		—		—		—		1,453		1,453
Interchange income		3,134		—		—		—		3,134
Other income		1,775		822		462		190		3,249
Total noninterest income	$	8,899	$	12,528	$	465	$	1,643	$	23,535


	Nine Months Ended September 30, 2018
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	6,399	$	—	$	—	$	6,399
Service charges on deposit accounts		3,121		—		—		—		3,121
Other service charges and fees		1,062		2,833		5		—		3,900
Net gains on calls of available for sale securities		9		—		—		—		9
Wealth management services income, net		—		—		—		1,325		1,325
Interchange income		2,868		—		—		—		2,868
Other income		1,426		516		547		203		2,692
Total noninterest income	$	8,486	$	9,748	$	552	$	1,528	$	20,314

Total noninterest income increased $1.6 million, or 24.2 percent, in the third quarter of 2019, compared to the third quarter of 2018, and increased $3.2 million, or 15.9 percent, in the first nine months of 2019, compared to the first nine months of 2018. These increases in noninterest income were due primarily to (1) an increase in gains on sales of loans and other service charges and fees at the mortgage banking segment as a result of higher mortgage loan production for the third quarter and first nine months of 2019 compared to the same periods in 2018, as lower mortgage loan interest rates contributed to an increase in volume in the mortgage industry, (2) an increase in debit card interchange income at the retail banking segment and (3) net unrealized gains of $1.4 million in the first nine months of 2019 included primarily in other income of the retail banking and mortgage banking segments related to the Corporation’s nonqualified deferred compensation plan compared to $499,000 in the first nine months of 2018. These increases were partially offset by decreased service charges on deposit accounts at the retail banking segment resulting from fewer overdraft fees charged.

Table of Contents

Noninterest Expense

TABLE 4: Noninterest Expense


	Three Months Ended September 30, 2019
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	7,173	$	1,742	$	2,233	$	582	$	11,730
Occupancy expense		1,438		607		158		23		2,226
Other expenses:
Data processing		1,726		14		333		20		2,093
Professional fees		543		57		140		321		1,061
Other expenses		1,517		848		703		124		3,192
Total other expenses		3,786		919		1,176		465		6,346
Total noninterest expense	$	12,397	$	3,268	$	3,567	$	1,070	$	20,302


	Three Months Ended September 30, 2018
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	6,851	$	1,406	$	2,160	$	550	$	10,967
Occupancy expense		1,451		519		221		16		2,207
Other expenses:
Data processing		1,556		13		301		9		1,879
Professional fees		473		22		138		1		634
Other expenses		1,478		694		721		94		2,987
Total other expenses		3,507		729		1,160		104		5,500
Total noninterest expense	$	11,809	$	2,654	$	3,541	$	670	$	18,674


	Nine Months Ended September 30, 2019
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	21,718	$	5,133	$	6,581	$	1,700	$	35,132
Occupancy expense		4,359		1,623		528		54		6,564
Other expenses:
Data processing		4,909		38		982		60		5,989
Professional fees		1,449		114		425		426		2,414
Other expenses		4,550		2,330		2,185		364		9,429
Total other expenses		10,908		2,482		3,592		850		17,832
Total noninterest expense	$	36,985	$	9,238	$	10,701	$	2,604	$	59,528


	Nine Months Ended September 30, 2018
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	20,091	$	4,409	$	6,653	$	1,620	$	32,773
Occupancy expense		4,104		1,479		632		47		6,262
Other expenses:
Data processing		4,527		40		928		29		5,524
Professional fees		1,530		91		404		127		2,152
Other expenses		4,615		2,231		2,112		305		9,263
Total other expenses		10,672		2,362		3,444		461		16,939
Total noninterest expense	$	34,867	$	8,250	$	10,729	$	2,128	$	55,974

Total noninterest expenses increased $1.6 million, or 8.7 percent, in the third quarter of 2019, compared to the same period in 2018, and increased $3.6 million, or 6.3 percent in the first nine months of 2019, compared to the first nine months of

Table of Contents

2018. The increase in noninterest expenses for the third quarter of 2019, compared to the third quarter of 2018, was due primarily to (1) an increase in salaries and employee benefits expense (a) at the retail banking segment associated with C&F Bank adding new talent to its commercial lending team in the Richmond and Charlottesville markets and (b) at the mortgage banking segment resulting from higher mortgage loan production, (2) merger related expenses associated with the pending acquisition of Peoples and (3) higher data processing and occupancy expenses associated with enhancing the technology infrastructure and expanding our digital product offerings. Partially offsetting these increases was a decrease in the FDIC insurance assessment expense at the retail banking segment, which is included in “Other expenses,” as a result of credits available to banks with less than $10 billion in total assets. In addition to these factors which affected the third quarter of 2019, noninterest expenses for first nine months of 2019, compared to the first nine months of 2018, were also affected unfavorably by higher salaries and employee benefits expense in 2019 associated with the Corporation’s nonqualified deferred compensation plan, primarily at the retail banking and mortgage banking segments, and were affected favorably by (1) lower salaries and employee benefits expense in 2019 at the consumer finance segment as a result of efficiencies in loan servicing associated with purchasing loan contracts with higher credit quality and (2) higher professional fees in 2018 at the retail banking segment related to improving compliance processes. Merger related expenses in the third quarter and first nine months of 2019 included $104,000 at the retail banking segment, of which $102,000 was professional fees expense, and $305,000 at the holding company, shown in the “Other” segment, above, of which $290,000 was professional fees expense. Compensation expense related to the Corporation’s nonqualified deferred compensation plan is recorded based in part on changes in the fair value of assets held in trust for the plan, which are allocated to participants. As a result of unrealized gains related to the nonqualified plan, additional compensation expense of $1.4 million was recorded in the first nine months of 2019 compared to $499,000 in the first nine months of 2018, and was offset by gains recorded in noninterest income, as discussed above.

Income Taxes

Income tax expense for the third quarter of 2019 was $1.5 million resulting in an effective tax rate of 23.1 percent, compared with $1.3 million, or an effective tax rate of 20.8 percent, for the third quarter of 2018. Income tax expense for the first nine months of 2019 was $4.0 million resulting in an effective tax rate of 21.6 percent, compared with $3.6 million, or an effective tax rate of 20.5 percent for the first nine months of 2018. The higher effective tax rate in the third quarter and first nine months of 2019 compared to the same periods of 2018 resulted primarily from lower tax benefits of tax-exempt investment securities income and share-based compensation, and certain merger related expenses in 2019 which were non-deductible.

Table of Contents

ASSET QUALITY

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. Table 5 summarizes the allowance activity for the periods indicated:

TABLE 5: Allowance for Loan Losses


	Three Months Ended September 30,
(Dollars in thousands)	2019			2018
Balance, beginning of period	$	33,401		$	35,393
Provision for loan losses:
Retail Banking		—			—
Consumer Finance		1,800			2,400
Total provision for loan losses		1,800			2,400
Loans charged off:
Real estate—residential mortgage		(1)			—
Equity lines		(19)			—
Consumer		(99)			(115)
Consumer finance		(3,126)			(3,795)
Total loans charged off		(3,245)			(3,910)
Recoveries of loans previously charged off:
Real estate—residential mortgage		11			17
Commercial, financial and agricultural1		1			24
Consumer		58			79
Consumer finance		1,192			956
Total recoveries		1,262			1,076
Net loans charged off		(1,983)			(2,834)
Balance, end of period	$	33,218		$	34,959
Ratio of annualized net charge-offs to average total loans outstanding during period for Retail Banking		0.03	%		—	%
Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance		2.47	%		3.81	%

Table of Contents


	Nine Months Ended September 30,
(Dollars in thousands)	2019			2018
Balance, beginning of period	$	34,023		$	35,726
Provision for loan losses:
Retail Banking		110			—
Consumer Finance		5,895			7,700
Total provision for loan losses		6,005			7,700
Loans charged off:
Real estate—residential mortgage		(46)			—
Commercial, financial and agricultural1		(29)			(2)
Equity lines		(19)			—
Consumer		(261)			(248)
Consumer finance		(10,092)			(11,743)
Total loans charged off		(10,447)			(11,993)
Recoveries of loans previously charged off:
Real estate—residential mortgage		20			52
Commercial, financial and agricultural1		4			46
Consumer		173			174
Consumer finance		3,440			3,254
Total recoveries		3,637			3,526
Net loans charged off		(6,810)			(8,467)
Balance, end of period	$	33,218		$	34,959
Ratio of annualized net charge-offs to average total loans outstanding during period for Retail Banking		0.03	%		—	%
Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance		2.91	%		3.84	%

1Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

Table of Contents

Table 6 presents the allocation of the allowance for loan losses as of the dates indicated.

TABLE 6: Allocation of Allowance for Loan Losses


	September 30,			December 31,
(Dollars in thousands)	2019			2018
Allocation of allowance for loan losses:
Real estate—residential mortgage	$	2,135		$	2,246
Real estate—construction 1		804			727
Commercial, financial and agricultural 2		6,766			6,688
Equity lines		873			1,106
Consumer		398			257
Consumer finance		22,242			22,999
Total allowance for loan losses	$	33,218		$	34,023
Ratio of loans to total period-end loans:
Real estate—residential mortgage		17	%		17	%
Real estate—construction 1		6			5
Commercial, financial and agricultural 2		43			43
Equity lines		5			5
Consumer		1			2
Consumer finance		28			28
		100	%		100	%

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

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

Loans by credit quality indicators 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 may be characterized by late payments. The Corporation’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Corporation’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Corporation. There is a distinct possibility that the Corporation will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet the Corporation’s definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Corporation will be unable to collect all amounts due.

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

Table of Contents

Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high.

Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

TABLE 7: Credit Quality Indicators

Loans by credit quality indicators as of September 30, 2019 were as follows:


			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Real estate – residential mortgage	$	176,844	$	1,313	$	1,240	$	563	$	179,960
Real estate – construction 2		62,554		—		—		—		62,554
Commercial, financial and agricultural 3		455,422		10,467		460		—		466,349
Equity lines		51,699		237		173		302		52,411
Consumer		13,401		—		1		119		13,521
	$	759,920	$	12,017	$	1,874	$	984	$	774,795


			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	313,216	$	527	$	313,743

At September 30, 2019, the Corporation did not have any loans classified as Doubtful or Loss.

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

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

Loans by credit quality indicators as of December 31, 2018 were as follows:


			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Real estate – residential mortgage	$	180,232	$	2,832	$	1,243	$	594	$	184,901
Real estate – construction 2		54,461		—		—		—		54,461
Commercial, financial and agricultural 3		440,832		14,625		454		24		455,935
Equity lines		54,289		389		99		883		55,660
Consumer		14,998		5		6		—		15,009
	$	744,812	$	17,851	$	1,802	$	1,501	$	765,966


			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	295,442	$	712	$	296,154

At December 31, 2018, the Corporation did not have any loans classified as Doubtful or Loss.

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

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

Table of Contents

Table 8 summarizes nonperforming assets as of the dates indicated.

TABLE 8: Nonperforming Assets

Retail Banking Segment


	September 30,			December 31,
(Dollars in thousands)	2019			2018
Loans, excluding purchased loans	$	739,709		$	723,778
Purchased performing loans1		31,327			36,874
Purchased credit impaired loans1		578			1,835
Total loans	$	771,614		$	762,487

Nonaccrual loans	$	950		$	1,464
OREO2		1,103			246
Total nonperforming assets	$	2,053		$	1,710

Accruing loans past due for 90 days or more	$	732		$	324
Troubled debt restructurings (TDRs)3	$	4,528		$	5,451
Allowance for loan losses (ALL)	$	10,378		$	10,426
Nonperforming assets to total loans and OREO		0.27	%		0.22	%
ALL to total loans, excluding purchased credit impaired loans		1.35			1.37
ALL to total nonaccrual loans		1,092.42			712.16
Annualized net charge-offs to average total loans		0.03			0.06

Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The remaining discount for the purchased performing loans was $1.6 million at September 30, 2019 and $1.9 million at December 31, 2018. The remaining discount for the purchased credit impaired loans was $6.1 million at September 30, 2019 and $7.9 million at December 31, 2018.

OREO includes $835,000 at September 30, 2019 related to the land and buildings of the Bellgrade branch, which was consolidated into a nearby branch in the third quarter of 2019.

Nonaccrual loans include nonaccrual TDRs of $256,000 at September 30, 2019 and $166,000 at December 31, 2018.

Mortgage Banking Segment


	September 30,			December 31,
(Dollars in thousands)	2019			2018
Nonaccrual loans	$	34		$	37
Total loans	$	3,180		$	3,479
ALL	$	598		$	598
Nonaccrual loans to total loans		1.07	%		1.06	%
ALL to total loans		18.81			17.19

Consumer Finance Segment


	September 30,			December 31,
(Dollars in thousands)	2019			2018
Nonaccrual loans	$	527		$	712
Accruing loans past due for 90 days or more	$	—		$	—
Repossessed assets	$	369		$	371
Total loans	$	313,744		$	296,154
ALL	$	22,242		$	22,999
Nonaccrual consumer finance loans to total consumer finance loans		0.17	%		0.24	%
ALL to total consumer finance loans		7.09			7.77
Annualized net charge-offs to average total loans		2.91			4.14

Table of Contents

Nonperforming assets of the retail banking segment totaled $2.1 million at September 30, 2019, compared to $1.7 million at December 31, 2018. Nonperforming assets at September 30, 2019 consisted of $1.1 million in OREO, compared to $246,000 at December 31, 2018, and $950,000 in nonaccrual loans, compared to $1.5 million at December 31, 2018. The increase in OREO from December 31, 2018 to September 30, 2019 was primarily related to C&F Bank’s Bellgrade branch in Midlothian, Virginia, which was consolidated into a nearby branch in the third quarter of 2019. C&F bank reclassified $835,000 of land and buildings into OREO upon consolidating the branch.

The allowance for loan losses as a percentage of total loans, excluding PCI loans, at September 30, 2019 decreased to 1.35 percent, compared to 1.37 percent at December 31, 2018. We believe that the current level of the allowance for loan losses at the retail banking segment is adequate to absorb probable losses inherent in the loan portfolio, based on the relevant history of charge-offs and recoveries, current economic conditions, overall portfolio quality and review of specifically criticized loans. If loan concentrations within the retail banking segment’s loan portfolio result in higher credit risk or if economic conditions deteriorate in future periods, a higher level of nonperforming loans may be experienced, which may then require a higher provision for loan losses.

Nonaccrual loans at the consumer finance segment were $527,000 at September 30, 2019, compared to $712,000 at December 31, 2018. Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent. Repossessed vehicles of the consumer finance segment are classified as other assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the deficiency) is charged against the allowance for loan losses. At September 30, 2019, repossessed vehicles available for sale totaled $369,000, compared to $371,000 at December 31, 2018.

The consumer finance segment’s allowance for loan losses decreased $758,000 to $22.2 million at September 30, 2019 from $23.0 million at December 31, 2018, and its provision for loan losses decreased $600,000 and $1.8 million for the third quarter and first nine months of 2019, compared to the same periods in 2018. The decrease in the allowance and the lower provision resulted from lower charge-offs and an overall improvement in the credit quality of the portfolio in the first nine months of 2019. Delinquent loans as a percentage of total loans decreased to 3.48 percent at September 30, 2019 compared to 4.76 percent at December 31, 2018. The annualized net charge-off ratio for the first nine months of 2019 decreased to 2.91 percent from 3.84 percent for the first nine months of 2018 because of the lower number of charge-offs during the first nine months of 2019. The allowance for loan losses as a percentage of loans decreased to 7.09 percent at September 30, 2019, compared to 7.77 percent at December 31, 2018. The decrease in the level of the allowance for loan losses as a percentage of total loans was due primarily to lower charge-offs on non-prime automobile loans. Also, at September 30, 2019, compared to December 31, 2018, the higher composition within the consumer finance segment’s loan portfolio of prime marine and RV loans accounted for approximately 15 basis points of the 68 basis points decrease in the ratio of the allowance for loan losses to total loans. We believe that the current level of the allowance for loan losses at the consumer finance segment is adequate to absorb probable losses inherent in the loan portfolio.

Impaired Loans

We measure impaired loans either based on fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment in the loan. 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 of Contents

TABLE 9: Impaired Loans

Impaired loans, which included TDRs of $4.5 million, and the related allowance at September 30, 2019, were as follows:



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income
(Dollars in thousands)	Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	2,921	$	1,279	$	1,525	$	81	$	2,904	$	105
Commercial, financial and agricultural:
Commercial real estate lending		1,588		7		1,564		75		1,601		62
Equity lines		225		30		187		187		217		2
Consumer		131		—		123		119		124		—
Total	$	4,865	$	1,316	$	3,399	$	462	$	4,846	$	169

Impaired loans, which included TDRs of $5.5 million, and the related allowance at December 31, 2018, were as follows:



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income
(Dollars in thousands)	Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	3,057	$	1,288	$	1,677	$	92	$	3,056	$	142
Commercial, financial and agricultural:
Commercial real estate lending		2,468		1,498		927		10		2,653		132
Commercial business lending		33		25		—		—		26		—
Equity lines		365		31		326		326		359		2
Consumer		5		—		5		—		5		—
Total	$	5,928	$	2,842	$	2,935	$	428	$	6,099	$	276

TDRs at September 30, 2019 and December 31, 2018 were as follows:

TABLE 10: Troubled Debt Restructurings


	September 30,		December 31,
(Dollars in thousands)	2019		2018
Accruing TDRs	$	4,272	$	5,285
Nonaccrual TDRs1		256		166
Total TDRs2	$	4,528	$	5,451

Included in nonaccrual loans in Table 8: Nonperforming Assets.

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 management concludes that the borrower is able to make such modified payments, and there are no other factors or circumstances that would cause management to conclude otherwise, the TDR will remain on an accruing status.

FINANCIAL CONDITION

At September 30, 2019, the Corporation had total assets of $1.6 billion, which was an increase of $98.0 million since December 31, 2018. The increase resulted primarily from an increase in deposits of $66.9 million. This increase in deposits, together with maturities and calls of securities available for sale, was used to fund growth in loans held for sale and gross loans held for investment of $56.5 million and $26.4 million, respectively.

Table of Contents

Loan Portfolio

Table 11 presents information pertaining to the composition of loans held for investment.

TABLE 11: Summary of Loans Held for Investment


	September 30, 2019				December 31, 2018
(Dollars in thousands)	Amount		Percent		Amount		Percent
Real estate—residential mortgage	$	179,960	17	%	$	184,901	18	%
Real estate—construction 1		62,554	6			54,461	5
Commercial, financial, and agricultural 2		466,349	43			455,935	43
Equity lines		52,411	5			55,660	5
Consumer		13,521	1			15,009	1
Consumer finance		313,743	28			296,154	28
Total loans		1,088,538	100	%		1,062,120	100	%
Less allowance for loan losses		(33,218)				(34,023)
Total loans, net	$	1,055,320			$	1,028,097

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

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

Investment Securities

The investment portfolio plays a primary role in the management of the Corporation’s interest rate sensitivity. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The investment portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. At September 30, 2019 and December 31, 2018, 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 in dollar amounts 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, 2019				December 31, 2018
(Dollars in thousands)	Amount		Percent		Amount		Percent
U.S. government agencies and corporations	$	22,180	12	%	$	17,473	8	%
Mortgage-backed securities		89,701	47			104,983	49
Obligations of states and political subdivisions		78,988	41			92,454	43
Total available for sale securities at fair value	$	190,869	100	%	$	214,910	100	%

For more information about the Corporation's securities available for sale, including information about securities in an unrealized loss position at September 30, 2019 and December 31, 2018, see Part I, Item 1, “Financial Statements” under the heading “Note 2: Securities” in this Quarterly Report on Form 10-Q.

Table of Contents

Deposits

The Corporation’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings and money market accounts and time deposits. The Corporation’s deposits are principally provided by individuals and businesses located within the communities served.

During the first nine months of 2019, deposits increased $66.9 million to $1.25 billion at September 30, 2019, compared to $1.18 billion at December 31, 2018. This increase resulted primarily from a $65.8 million increase in time deposits and a $49.7 million increase in noninterest-bearing demand deposits. Partially offsetting this increase was a $48.6 million decrease in savings and interest-bearing demand deposits.

The Corporation had $1.3 million in brokered money market deposits outstanding at September 30, 2019. 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 $161.7 million at September 30, 2019 from $159.7 million at December 31, 2018 due to fluctuations in repurchase agreements with commercial deposit customers.

Off-Balance Sheet Arrangements

As of September 30, 2019, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance-Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.

At September 30, 2019, C&F Mortgage had aggregate interest rate lock commitments (IRLCs) to originate mortgage loans of $116.9 million and loans held for sale of $98.4 million. C&F Mortgage manages interest rate risk arising from these fixed-rate IRLCs and mortgage loans by either (1) entering into forward sales contracts with investors at the time that interest rates are locked for loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for unspecified mortgage backed securities (TBA securities) until it can enter into forward sales contracts with investors for loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments. At September 30, 2019, C&F Mortgage had best-efforts forward sales contracts for $84.2 million of its mortgage loans held for sale and $96.0 million of IRLCs offered to customers, and it had mandatory-delivery forward sales contracts for $5.4 million of its mortgage loans held for sale.

The Corporation uses derivatives to manage exposure to interest rate risk through the use of interest rate swaps. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts.

The Corporation has interest rate swaps that qualify and are designated as cash flow hedges. The Corporation’s cash flow hedges effectively modify the Corporation’s exposure to interest rate risk by converting variable rates of interest on $25.0 million of the Corporation’s trust preferred capital notes to fixed rates of interest for periods that end between June 2024 and June 2029. The cash flow hedges’ total notional amount is $25.0 million. At September 30, 2019, the cash flow hedges had a fair value of $592,000, which is recorded in other liabilities. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings.

Pursuant to a program the Corporation initiated during 2016, the Corporation also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net effect of these interest rate swaps and the related loans is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. At September 30, 2019, the total notional amount of the interest rate swaps related to these loans was $132.6 million and the interest rate swaps had a net fair value of zero, with $3.5 million recognized in

Table of Contents

other assets and $3.5 million recognized in other liabilities. These swaps are not designated as hedging instruments; therefore, changes in fair value are recorded in other noninterest expense.

Contractual Obligations

As of September 30, 2019, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in Part II, Item 7, “Management's Discussion and Analysis," under the heading “Table 20: Contractual Obligations” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.

Liquidity

The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to satisfy the credit needs of our customers and the demands of our depositors, creditors and investors. Stable core deposits and a strong capital position are the components of a solid foundation for the Corporation’s liquidity position. Additional sources of liquidity available to the Corporation include cash flows from operations, loan payments and payoffs, deposit growth, maturities, calls and 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 and nonpledged securities available for sale, totaled $240.8 million at September 30, 2019, compared to $220.1 million at December 31, 2018. The increase since December 31, 2018 was primarily the result of an increase in cash and cash equivalents.

The Corporation expects to pay approximately $10.6 million in cash consideration upon completion of the pending acquisition of Peoples in early 2020. Completion of the transaction remains subject to various conditions, as described in greater detail above.

The Corporation’s funding sources, including capacity, amount outstanding and amount available at September 30, 2019 are presented in Table 13.

TABLE 13: Funding Sources


	September 30, 2019
(Dollars in thousands)	Capacity		Outstanding		Available
Unsecured federal funds agreements	$	85,000	$	—	$	85,000
Repurchase lines of credit		50,000		—		50,000
Borrowings from FHLB		203,448		44,500		158,948
Borrowings from Federal Reserve Bank		19,876		—		19,876
Revolving bank line of credit		120,000		75,029		44,971
Total	$	478,324	$	119,529	$	358,795

We have no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank or the FHLB above the current lendable collateral value. Our ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets. Depending on our liquidity levels, our capital position, conditions in the capital markets, our business operations and initiatives, and other factors, we may from time to time consider the issuance of debt, equity or other securities or other possible capital market transactions, the proceeds of which could provide additional liquidity for our operations.

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.

Table of Contents

Capital Resources

The table below presents the Bank’s actual regulatory capital amounts and ratios under currently applicable regulatory capital standards. Under the small bank holding company policy statement of the Federal Reserve Board, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Corporation is not subject to regulatory capital requirements. The table below reflects the Corporation’s consolidated capital as determined under regulations that apply to bank holding companies that are not small bank holding companies and minimum capital requirements that would apply to the Corporation if it were not a small bank holding company.


									Minimum To Be
									Well Capitalized
									Under Prompt
					Minimum Capital				Corrective Action
	Actual				Requirements				Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2019:
Total Capital (to Risk-Weighted Assets)
Corporation	$	192,107	15.0	%	$	102,499	8.0	%		N/A	N/A
C&F Bank		188,563	14.7			102,376	8.0		$	127,971	10.0	%
Tier 1 Capital (to Risk-Weighted Assets)
Corporation		175,879	13.7			76,874	6.0			N/A	N/A
C&F Bank		172,354	13.5			76,782	6.0			102,376	8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Corporation		150,879	11.8			57,656	4.5			N/A	N/A
C&F Bank		172,354	13.5			57,587	4.5			83,181	6.5
Tier 1 Capital (to Average Assets)
Corporation		175,879	11.3			62,114	4.0			N/A	N/A
C&F Bank		172,354	11.1			61,993	4.0			77,492	5.0

As of December 31, 2018:
Total Capital (to Risk-Weighted Assets)
Corporation	$	183,781	15.3	%	$	96,274	8.0	%		N/A	N/A
C&F Bank		181,685	15.1			96,088	8.0		$	120,110	10.0	%
Tier 1 Capital (to Risk-Weighted Assets)
Corporation		168,504	14.0			72,205	6.0			N/A	N/A
C&F Bank		166,437	13.9			72,066	6.0			96,088	8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Corporation		143,590	11.9			54,154	4.5			N/A	N/A
C&F Bank		166,437	13.9			54,050	4.5			78,072	6.5
Tier 1 Capital (to Average Tangible Assets)
Corporation		168,504	11.3			59,759	4.0			N/A	N/A
C&F Bank		166,437	11.2			59,666	4.0			74,582	5.0

The regulatory risk-based capital amounts presented above include: (1) common equity tier 1 capital (CET1) which consists principally of common stock (including surplus) and retained earnings with adjustments for goodwill, intangible assets and deferred tax assets; (2) Tier 1 capital which consists principally of CET1 plus the Corporation’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for loan losses. In addition, the Corporation has made the one-time irrevocable election to continue treating accumulated other comprehensive income (AOCI) under regulatory standards that were in place prior to the Basel III Final Rule in order to eliminate volatility of regulatory capital that can result from fluctuations in AOCI and the inclusion of AOCI in regulatory capital, as would otherwise be required under the Basel III Capital Rule. For additional information

Table of Contents

about the Basel III Final Rules, see “Item 1. Business” under the heading “Regulation and Supervision” and “Item 8. Financial Statements and Supplementary Data,” under the heading “Note 15: Regulatory Requirements and Restrictions” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.

In addition to the regulatory risk-based capital amounts presented above, the Bank must maintain a capital conservation buffer of additional total capital and CET1 as required by the Basel III Final Rule. The capital conservation buffer requirement was phased in from January 1, 2016 until January 1, 2019 in equal annual installments of 0.625 percent. Accordingly, at September 30, 2019, the Bank was required to maintain a capital conservation buffer of 2.5 percent and exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by 423 basis points and 497 basis points, respectively. At December 31, 2018, the Bank was required to maintain a capital conservation buffer of 1.875 percent and exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by 525 and 598 basis points, respectively.

The Corporation’s capital resources may be affected by the Corporation’s pending acquisition of Peoples. Upon completion of the transaction, which remains subject to various conditions as described in greater detail above, Peoples shareholders will receive aggregate merger consideration of approximately $10.6 million in cash and 210,052 shares of the Corporation’s common stock. The pending acquisition of Peoples is expected to generate goodwill and other intangible assets that will be excluded from the regulatory capital of C&F Bank, which may result in a decrease in C&F Bank’s regulatory capital ratios. Additionally, the Corporation expects to incur aggregate merger related expenses of approximately $2.0 million after income taxes. In the third quarter of 2019, the Corporation recorded merger related expenses of $409,000 ($389,000 after income taxes). Of this amount, C&F Bank recorded merger related expenses of $104,000 ($89,000 after income taxes). C&F Bank expects that it will remain well-capitalized following the completion of the pending acquisition.

The Corporation's capital resources may be affected by the Corporation's Repurchase Program, which was authorized by the Corporation's Board of Directors during the second quarter of 2019. Under the Repurchase Program the Corporation is authorized to purchase up to $5.0 million of its common stock. Repurchases under the program may be made through privately-negotiated transactions or open-market transactions, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares repurchased under the program will be determined by management and the Board of Directors in their discretion and will depend on a number of factors, including the market price of the shares, general market and economic conditions, applicable legal requirements and other conditions. The Repurchase Program is authorized through May 31, 2020. As of September 30, 2019, $3.3 million of the Corporation's common stock may be purchased under the Corporation's Repurchase Program.

Effects of Inflation and Changing Prices

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

USE OF CERTAIN NON-GAAP FINANCIAL MEASURES

The accounting and reporting policies of the Corporation conform to U.S. GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Corporation’s performance. These include adjusted net income, adjusted earnings per share, adjusted ROE and adjusted ROA excluding the one-time effect of merger related costs in connection with the pending acquisition of Peoples, and tangible book value per share.

Table of Contents

Management believes that the use of these non-GAAP measures provide meaningful information about operating performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing operating performance, including non-recurring gains or charges, and balances of intangible assets, including goodwill, that vary significantly between institutions. These non-GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Corporation to evaluate and measure the Corporation’s performance to the most directly comparable U.S. GAAP financial measures is presented below.


	As of and For The						As of and For The
	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
(Dollars in thousands, except for share and per share data)	2019			2018			2019			2018
Adjusted Net Income and Earnings Per Share	(unaudited)						(unaudited)
Net income, as reported	$	4,885		$	5,101		$	14,498		$	14,063
Merger related costs		409			-			409			-
Related income taxes		(20)			-			(20)			-
Adjusted net income	$	5,274		$	5,101		$	14,887		$	14,063

Weighted average shares - basic and diluted		3,430,298			3,503,371			3,459,191			3,502,550

Earnings per share - basic and diluted
Earnings per share - basic and diluted, as reported	$	1.42		$	1.46		$	4.19		$	4.02
Adjusted earnings per share - basic and diluted	$	1.54		$	1.46		$	4.30		$	4.02

Adjusted Return on Average Equity (ROE)
Average shareholders' equity, as reported	$	159,106		$	147,704		$	155,254		$	143,942

Annualized ROE, as reported		12.28	%		13.81	%		12.45	%		13.02	%
Adjusted annualized ROE		13.26	%		13.81	%		12.78	%		13.02	%

Adjusted Return on Average Assets (ROA)
Average assets, as reported	$	1,566,302		$	1,513,044		$	1,542,055		$	1,509,527

Annualized ROA, as reported		1.25	%		1.35	%		1.25	%		1.24	%
Adjusted annualized ROA		1.35	%		1.35	%		1.29	%		1.24	%

Tangible Book Value Per Share
Total equity	$	162,061		$	149,659		$	162,061		$	149,659
Less goodwill		14,425			14,425			14,425			14,425
Less other intangible assets		951			1,234			951			1,234
Tangible equity	$	146,685		$	134,000		$	146,685		$	134,000

Shares outstanding		3,423,327			3,503,399			3,423,327			3,503,399

Book value per share	$	47.34		$	42.72		$	47.34		$	42.72
Tangible book value per share	$	42.85		$	38.25		$	42.85		$	38.25

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, 2018.

Table of Contents

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, 2019 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.

There were no changes in the Corporation’s internal control over financial reporting during the three months ended September 30, 2019 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

The following risk factors related to the pending acquisition (the Merger) of Peoples Bankshares, Incorporated (Peoples) should be considered in addition to the risk factors disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.

Combining Peoples into the Corporation may be more difficult, costly or time-consuming than we expect.

The success of the Merger will depend, in part, on the Corporation's ability to realize the anticipated benefits and cost savings from combining the business of Peoples into the business of the Corporation without materially disrupting the existing customer relationships of Peoples or the Corporation. If the Corporation is not able to achieve these objectives, the anticipated benefits and cost savings of the Merger may not be realized fully, or at all, or may take longer to realize than expected.

The Corporation and Peoples have operated, and, until the completion of the Merger, will continue to operate, independently. The success of the Merger will depend, in part, on the Corporation's ability to successfully combine the businesses of the Corporation and Peoples. To realize these anticipated benefits, after the completion of the Merger, the Corporation will integrate Peoples's business into its own. The integration process in the Merger could result in the disruption of each party's ongoing business, inconsistencies in standards, controls, procedures, and policies that affect adversely either party's ability to maintain relationships with customers and employees or achieve the anticipated benefits of the Merger. If the Corporation experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized, fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause the Corporation and Peoples to lose customers or cause customers to withdraw their deposits from Peoples's or the Corporation's banking subsidiaries, or other unintended consequences that could have a material adverse effect on the Corporation's results of operations or financial condition after the Merger. These integration matters could have an adverse effect on each of Peoples and the Corporation during this transition period and for an indeterminate period after consummation of the Merger.

The Corporation may not be able to effectively integrate the operations of Peoples Community Bank into C&F Bank.

The future operating performance of the Corporation and C&F Bank will depend, in part, on the success of the merger of Peoples Community Bank with and into C&F Bank, which is expected to occur after the merger of Peoples with and into

Table of Contents

the Corporation. The success of the subsidiary bank merger will, in turn, depend on a number of factors, including the Corporation's ability to (i) integrate the operations and branches of Peoples Community Bank and C&F Bank, (ii) retain the deposits and customers of Peoples Community Bank and C&F Bank, (iii) control the incremental increase in noninterest expense arising from the Merger in a manner that enables the combined bank to improve its overall operating efficiencies, and (iv) retain and integrate the appropriate personnel of Peoples Community Bank into the operations of C&F Bank, and reduce overlapping bank personnel. The integration of Peoples Community Bank and C&F Bank following the subsidiary bank merger will require the dedication of the time and resources of the banks' management teams and may temporarily distract managements' attention from the day-to-day business of the banks. If C&F Bank is unable to successfully integrate Peoples Community Bank, C&F Bank may not be able to realize expected operating efficiencies and eliminate redundant costs.

The Merger may distract management of the Corporation and Peoples from their other responsibilities.

The Merger and the subsidiary bank merger could cause the respective management teams of the Corporation and Peoples to focus their time and energy on matters related to the transaction that otherwise would be directed to their business and operations. Any such distraction on the part of either company's management could affect its ability to service existing business and develop new business and adversely affect the business and earnings of the Corporation or Peoples before the Merger, or the business and earnings of the Corporation after the Merger.

Termination of the Merger Agreement could negatively impact the Corporation or Peoples.

If the Merger Agreement is terminated, the Corporation's or Peoples's business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. Additionally, if the Merger Agreement is terminated, the market price of the Corporation's or Peoples's common stock could decline to the extent that the current market prices reflect a market assumption that the Merger will be completed. Furthermore, costs relating to the Merger, such as legal, accounting and financial advisory fees, must be paid even if the Merger is not completed. If the Merger Agreement is terminated under certain circumstances, Peoples may be required to pay to the Corporation a termination fee of $900,000.

Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.

Before the Merger may be completed, the Corporation and Peoples must obtain approvals from the Federal Reserve Board and the Bureau of Financial Institutions of the Virginia State Corporation Commission (Virginia SCC). C&F Bank and Peoples Community Bank must obtain approval from the FDIC and the Bureau of Financial Institutions of the Virginia SCC for the subsidiary bank merger. Other approvals, waivers or consents from regulators may also be required. These regulators may impose conditions on the completion of the Merger or require changes to the terms of the Merger. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying completion of the Merger and the subsidiary bank merger, imposing additional costs on the combined company or limiting the revenues of the combined company, any of which might have an adverse effect on the combined company following the Merger. Furthermore, such conditions or changes may constitute, result in or be reasonably expected to result in a burdensome condition that may allow the Corporation to refuse to complete the Merger.

A significant delay in the completion of the Merger could have a material adverse effect on the Corporation and Peoples as a combined company.

The Merger Agreement is subject to a number of conditions that must be fulfilled in order to complete the Merger. Those conditions include, among others: (1) approval of the Merger Agreement by the Peoples shareholders, (2) receipt of all required approvals from bank regulatory authorities and expiration of all applicable waiting periods, (3) absence of any statute, rule, regulation, judgment, decree, injunction or other order prohibiting the completion of the Merger, and (4) effectiveness of the Corporation’s registration statement.

If these conditions to the completion of the Merger are not fulfilled when expected and, as a result, the completion of the Merger is delayed, the diversion of management attention from pursuing other opportunities, the constraints in the

Table of Contents

Merger Agreement on the ability to make significant changes to each company's ongoing business during the pendency of the Merger, the incurrence of additional merger related expenses, and other market and economic factors could have a material adverse effect on the combined company's business, financial condition and results of operations.

The Corporation and Peoples will be subject to business uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on the Corporation and Peoples. These uncertainties may impair the Corporation's and Peoples's ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with the Corporation and Peoples to seek to change existing business relationships with the Corporation and Peoples. Retention of certain employees by the Corporation and Peoples may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with the Corporation or Peoples. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Corporation or Peoples, the Corporation's or Peoples's business, or the business of the combined company following the Merger, could be harmed. In addition, subject to certain exceptions, the Corporation and Peoples have each agreed to operate its business in the ordinary course prior to closing and refrain from taking certain specified actions until the Merger occurs, which may prevent Peoples from pursuing attractive business opportunities that may arise prior to the completion of the Merger.

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

Issuer Purchases of Equity Securities

The Corporation’s Board of Directors authorized programs to repurchase the Corporation’s common stock in May 2014 (which was subsequently reauthorized, most recently in April 2018), for repurchases of up to $5.0 million of the Corporation’s common stock through May 31, 2019, and in May 2019 for repurchases of up to $5.0 million of the Corporation’s common stock from June 1, 2019 through May 31, 2020. Repurchases under either program could be made through privately-negotiated transactions, or open-market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 of the Exchange Act and/or Rule 10b-18 of the Exchange Act. Under the repurchase program last reauthorized in April 2018, the Corporation made aggregate common stock repurchases of $3.8 million between November 2018 and May 2019. As of September 30, 2019, the Corporation has made aggregate common stock repurchases of $1.7 million under the repurchase program authorized in May 2019.

The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended September 30, 2019.


					Maximum Number
					(or Approximate
				Total Number of	Dollar Value) of
				Shares Purchased as	Shares that May Yet
				Part of Publicly	Be Purchased
	Total Number of	Average Price Paid		Announced Plans or	Under the Plans or
(Dollars in thousands, except for per share amounts)	Shares Purchased1	per Share		Programs	Programs
July 1, 2019 - July 31, 2019	12,800		52.59	12,800	$	3,723
August 1, 2019 - August 31, 2019	7,436		50.42	6,937	$	3,375
September 1, 2019 - September 30, 2019	1,600		47.48	1,600	$	3,299
Total	21,836	$	51.48	21,337

During the three months ended September 30, 2019, 499 shares were withheld upon the vesting of restricted shares granted to employees of the Corporation and its subsidiaries in order to satisfy tax withholding obligations.

Table of Contents

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)

2.2	Agreement and Plan of Reorganization dated as of August 13, 2019 by and among C&F Financial Corporation and Peoples Bankshares, Incorporated (incorporated by reference to Appendix A to Pre-Effective Amendment No. 1 to Form S-4 filed October 15, 2019)

3.1	Amended and Restated Articles of Incorporation of C&F Financial Corporation, effective March 7, 1994 (incorporated by reference to Exhibit 3.1 to Form 10-Q filed November 8, 2017)

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

3.2	Amended and Restated Bylaws of C&F Financial Corporation, as adopted February 23, 2016 (incorporated by reference to Exhibit 3.1 to Form 8-K filed February 29, 2016)

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

Table of Contents

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, 2019	By:	/s/ Thomas F. Cherry
			Thomas F. Cherry
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	November 7, 2019		/s/ Jason E. Long
			Jason E. Long
			Senior Vice President, Chief Financial Officer and Secretary
			(Principal Financial and Accounting Officer)