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 March 31, 2019

or

☐ 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 ofincorporation or organization)	(I.R.S. EmployerIdentification No.)
802 Main Street West Point, VA	23181
(Address of principal executive offices)	(Zip Code)

(804) 843-2360

(Registrant’s telephone number, including area code)

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically 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, 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   ☒

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

At May 7, 2019, the latest practicable date for determination, 3,469,827 shares of common stock, $1.00 par value, of the registrant were outstanding.

TABLE OF CONTENTS

PART I - Financial Information		Page
Item 1.	Financial Statements	3
	Consolidated Balance Sheets –  March 31, 2019 (unaudited) and December 31, 2018	3
	Consolidated Statements of Income (unaudited) – Three months ended March  31, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income (unaudited) – Three months ended March 31, 2019 and 2018	5
	Consolidated Statements of Equity (unaudited) – Three months ended March 31, 2019 and 2018	6
	Consolidated Statements of Cash Flows (unaudited) – Three months ended March 31, 2019 and 2018	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	51
PART II - Other Information
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6.	Exhibits	53
	Signatures	54

2

Part I – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for per share amounts)

	March 31,		December 31,
	2019		2018
Assets		(unaudited)		*
Cash and due from banks	$	11,777	$	14,138
Interest-bearing deposits in other banks		125,674		100,875
Total cash and cash equivalents		137,451		115,013
Securities—available for sale at fair value, amortized cost of $208,925 and $216,650, respectively		209,007		214,910
Loans held for sale, at fair value		36,035		41,895
Loans, net of allowance for loan losses of $33,589 and $34,023, respectively		1,042,052		1,028,097
Restricted stock, at cost		3,257		3,247
Corporate premises and equipment, net		36,934		37,100
Other real estate owned, net of valuation allowance of $57 and $57, respectively		246		246
Accrued interest receivable		7,267		7,436
Goodwill		14,425		14,425
Core deposit and other amortizable intangible assets, net		1,065		1,142
Bank-owned life insurance		16,162		16,065
Net deferred tax asset		11,838		12,193
Other assets		33,621		29,642
Total assets	$	1,549,360	$	1,521,411
Liabilities
Deposits
Noninterest-bearing demand deposits	$	276,275	$	271,360
Savings and interest-bearing demand deposits		547,769		563,741
Time deposits		378,150		346,560
Total deposits		1,202,194		1,181,661
Short-term borrowings		17,024		14,917
Long-term borrowings		119,529		119,529
Trust preferred capital notes		25,254		25,245
Accrued interest payable		1,166		920
Other liabilities		29,293		27,181
Total liabilities		1,394,460		1,369,453
Commitments and contingent liabilities (Note 10)
Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,476,799 and 3,497,122 shares issued and outstanding, respectively, includes 139,995 and 139,455 of unvested shares, respectively)		3,337		3,358
Additional paid-in capital		11,362		12,752
Retained earnings		143,003		140,520
Accumulated other comprehensive loss, net		(3,292)		(4,672)
Equity attributable to C&F Financial Corporation		154,410		151,958
Noncontrolling interest		490		—
Total equity		154,900		151,958
Total liabilities and equity	$	1,549,360	$	1,521,411

*     Derived from audited consolidated financial statements.

See notes to consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except for per share amounts)

	Three Months Ended March 31,
	2019		2018
Interest income
Interest and fees on loans	$	20,920	$	20,817
Interest on interest-bearing deposits and federal funds sold		589		464
Interest and dividends on securities
U.S. government agencies and corporations		101		87
Mortgage-backed securities		611		546
Tax-exempt obligations of states and political subdivisions		583		715
Taxable obligations of states and political subdivisions		93		71
Other		54		44
Total interest income		22,951		22,744
Interest expense
Savings and interest-bearing deposits		602		364
Time deposits		1,306		956
Borrowings		1,111		973
Trust preferred capital notes		285		283
Total interest expense		3,304		2,576
Net interest income		19,647		20,168
Provision for loan losses		2,395		3,300
Net interest income after provision for loan losses		17,252		16,868
Noninterest income
Gains on sales of loans		2,136		2,239
Service charges on deposit accounts		918		1,049
Other service charges and fees		1,068		1,060
Net gains on maturities and calls of available for sale securities		4		5
Wealth management services income, net		449		425
Interchange income		958		906
Other		1,570		762
Total noninterest income		7,103		6,446
Noninterest expenses
Salaries and employee benefits		11,907		10,733
Occupancy		2,190		2,031
Other		5,580		5,775
Total noninterest expenses		19,677		18,539
Income before income taxes		4,678		4,775
Income tax expense		907		883
Net income		3,771		3,892
Less net income attributable to noncontrolling interest		—		—
Net income attributable to C&F Financial Corporation	$	3,771	$	3,892
Net income per share - basic and diluted	$	1.08	$	1.11

See notes to consolidated financial statements.

4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019		2018
Net income	$	3,771	$	3,892
Other comprehensive income (loss):
Defined benefit plan:
Reclassification of recognized net actuarial losses into net income1		42		29
Related income tax effects		(9)		(6)
Amortization of prior service credit into net income1		(17)		(15)
Related income tax effects		4		3
Defined benefit plan, net of tax		20		11
Cash flow hedges:
Unrealized holding (losses) gains arising during the period		(108)		212
Related income tax effects		28		(55)
Cash flow hedges, net of tax		(80)		157
Securities available for sale:
Unrealized holding gains (losses) arising during the period		1,826		(2,538)
Related income tax effects		(383)		533
Reclassification of net realized gains into net income2		(4)		(5)
Related income tax effects		1		1
Securities available for sale, net of tax		1,440		(2,009)
Other comprehensive income (loss), net of tax		1,380		(1,841)
Comprehensive income		5,151		2,051
Less comprehensive income attributable to noncontrolling interest		—		—
Comprehensive income attributable to C&F Financial Corporation	$	5,151	$	2,051

¹ These items are included in the computation of net periodic benefit cost and are included in “Noninterest income-Other” on the Consolidated Statements of Income. See “Note 7: Employee Benefit Plans,” for additional information.

² 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.

5

CONSOLIDATED STATEMENTS OF EQUITY

(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		—		—		3,771		—		—		3,771
Other comprehensive income		—		—		—		1,380		—		1,380
Issuance of noncontrolling interest		—		—		—		—		490		490
Share-based compensation		—		457		—		—		—		457
Restricted stock vested		15		(15)		—		—		—		—
Common stock issued		1		35		—		—		—		36
Common stock purchased		(37)		(1,867)		—		—		—		(1,904)
Cash dividends declared ($0.37 per share)		—		—		(1,288)		—		—		(1,288)
Balance March 31, 2019	$	3,337	$	11,362	$	143,003	$	(3,292)	$	490	$	154,900

	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		—		—		3,892		—		—		3,892
Other comprehensive loss		—		—		—		(1,841)		—		(1,841)
Share-based compensation		—		319		—		—		—		319
Restricted stock vested		14		(14)		—		—		—		—
Common stock issued		1		35		—		—		—		36
Common stock purchased		(4)		(215)		—		—		—		(219)
Cash dividends declared ($0.34 per share)		—		—		(1,190)		—		—		(1,190)
Balance March 31, 2018	$	3,369	$	12,925	$	130,133	$	(3,728)	$	—	$	142,699

See notes to consolidated financial statements.

6

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019		2018
Operating activities:
Net income	$	3,771	$	3,892
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		916		750
Provision for loan losses		2,395		3,300
Provision for indemnifications		—		36
Share-based compensation		457		319
Pension expense		141		135
Pension contribution		—		(3,000)
Net accretion of certain acquisition-related discounts		(365)		(894)
Accretion of discounts and amortization of premiums on securities, net		410		445
Amortization of intangible assets		78		134
Net realized gains on maturities and calls of securities available for sale		(4)		(5)
Net realized gains on sale of corporate premises and equipment		(10)		(27)
Income from bank-owned life insurance		(83)		(81)
Origination of loans held for sale		(138,705)		(143,903)
Proceeds from sales of loans held for sale		146,701		161,872
Gains on sales of loans held for sale		(2,136)		(2,239)
Change in other assets and liabilities:
Accrued interest receivable		169		400
Other assets		1,138		173
Accrued interest payable		246		7
Other liabilities		(3,322)		795
Net cash provided by operating activities		11,797		22,109
Investing activities:
Proceeds from maturities and calls of securities available for sale and payments on mortgage-backed securities		15,657		12,735
Purchases of securities available for sale		(8,338)		(15,150)
Net purchases of restricted stock		(10)		(55)
Purchases of loans held for investment by non-bank affiliates		(36,854)		(31,886)
Repayments on loans held for investment by non-bank affiliates		30,599		28,121
Net (increase) decrease in retail banking loans held for investment		(9,740)		886
Purchases of corporate premises and equipment		(753)		(621)
Proceeds from sales of corporate premises and equipment		13		—
Net cash used in investing activities		(9,426)		(5,970)
Financing activities:
Net (decrease) increase in demand and savings deposits		(11,057)		8,260
Net increase in time deposits		31,590		6,404
Net increase (decrease) in short-term borrowings		2,107		(880)
Issuance of common stock		36		36
Purchase of common stock, excluding shares withheld to pay taxes		(1,667)		—
Issuance of noncontrolling interest		490		—
Cash dividends paid		(1,288)		(1,190)
Other financing activities		(144)		(144)
Net cash  provided by financing activities		20,067		12,486
Net increase in cash and cash equivalents		22,438		28,625
Cash and cash equivalents at beginning of period		115,013		119,423
Cash and cash equivalents at end of period	$	137,451	$	148,048
Supplemental cash flow disclosures:
Interest paid	$	3,049	$	2,560
Income taxes paid		8		8
Supplemental disclosure of noncash investing and financing activities:
Value of shares withheld at vesting for employee taxes	$	237	$	219

See notes to consolidated financial statements.

7

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 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.

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

8

(1) interest rate lock commitments (IRLCs) on mortgage loans that will be sold in the secondary market on a best efforts basis and the related forward commitments to sell mortgage loans, (2) interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate swaps that qualify and are designated as cash flow hedges on the Corporation’s trust preferred capital notes. Because the IRLCs, forward sales commitments and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in the fair value of these instruments are reported as noninterest income or noninterest expense, as applicable. The gain or loss on the Corporation’s cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Corporation’s derivative financial instruments are described more fully in Note 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 first quarter of 2019 was $457,000  ($290,000 after tax) for restricted stock granted during 2014 through 2019. As of March 31, 2019, there was $3.30 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 three 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	16,100		51.73
Vested	(15,490)		41.31
Forfeited	(70)		60.95
Unvested, March 31, 2019	139,995		46.92

	2018
		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Unvested, December 31, 2017	137,880	$	43.52
Granted	11,210		58.40
Vested	(14,125)		40.05
Forfeited	(1,615)		42.78
Unvested, March 31, 2018	133,350		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

9

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 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” (collectively, ASC 326).  ASC 326 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.  For public business entities that are SEC filers, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The amendments will be applied on a modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption. The Corporation has established a working group to prepare for and implement changes related to ASC 326 and has gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard.  The Corporation has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under ASC 326. The Corporation has engaged a vendor to assist in modeling expected lifetime losses under ASC 326, and expects to develop and refine an approach to estimating the allowance for credit losses during 2019. The adoption of ASC 326 will result in significant changes to the Corporation’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in shareholders’ equity and regulatory capital of C&F Bank, differences in the timing of recognizing changes to the allowance for credit losses and expanded disclosures about the allowance for credit losses. The Corporation has not yet determined an estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Corporation’s internal control over financial reporting related to the allowance for credit losses.

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

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

In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These

10

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:

	March 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
U.S. government agencies and corporations	$	17,650	$	—	$	(256)	$	17,394
Mortgage-backed securities		101,159		279		(848)		100,590
Obligations of states and political subdivisions		90,116		1,005		(98)		91,023
	$	208,925	$	1,284	$	(1,202)	$	209,007

	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 March 31, 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.

	March 31, 2019
	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	47,052	$	47,097
Due after one year through five years		141,597		141,414
Due after five years through ten years		15,447		15,513
Due after ten years		4,829		4,983
	$	208,925	$	209,007

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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 March 31,
(Dollars in thousands)	2019		2018
Realized gains from maturities and calls of securities:
Gross realized gains	$	4	$	5
Gross realized losses		—		—
Net realized gains	$	4	$	5
Proceeds from maturities, calls and paydowns of securities	$	15,657	$	12,735

The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $103.41 million and aggregate fair value of $103.33 million were pledged at March 31, 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 March 31, 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	$	—	$	—	$	16,005	$	256	$	16,005	$	256
Mortgage-backed securities		1,754		1		67,941		847		69,695		848
Obligations of states and political subdivisions		1,899		1		18,062		97		19,961		98
Total temporarily impaired securities	$	3,653	$	2	$	102,008	$	1,200	$	105,661	$	1,202

There were 180 debt securities totaling $105.7 million considered temporarily impaired at March 31, 2019. The primary cause of the temporary impairments in the Corporation's investments in debt securities was fluctuations in interest rates as debt securities, especially those purchased prior to 2018, have declined in value as interest rates have risen. 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 March 31, 2019, approximately 97 percent of the Corporation's obligations of states and political subdivisions, as measured by market value, were rated “A” or better by Standard & Poor's (S&P) or Moody's Investors Service (Moody’s). Of those in an unrealized loss position, approximately 99 percent were rated “A” or better by S&P or Moody’s, as measured by market value, at March 31, 2019. For the approximately one percent not rated “A” or better, as measured by market value at March 31, 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 March 31, 2019 and no other-than-temporary impairment loss has been recognized in net income. 

12

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 March 31, 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 March 31, 2019 and no impairment has been recognized. 

NOTE 3: Loans

Major classifications of loans are summarized as follows:

	March 31,		December 31,
(Dollars in thousands)	2019		2018
Real estate – residential mortgage	$	183,697	$	184,901
Real estate – construction 1		65,588		54,461
Commercial, financial and agricultural 2		459,820		455,935
Equity lines		54,111		55,660
Consumer		12,833		15,009
Consumer finance		299,592		296,154
		1,075,641		1,062,120
Less allowance for loan losses		(33,589)		(34,023)
Loans, net	$	1,042,052	$	1,028,097

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

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

Consumer loans included $199,000 and $275,000 of demand deposit overdrafts at March  31, 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 (or acquired loans) that were recorded at fair value at the acquisition date and are included in the Consolidated Balance Sheets are as follows:

13

	March 31, 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	$	9,537	$	37,687	$	47,224	$	9,734	$	38,768	$	48,502
Carrying amount
Real estate – residential mortgage	$	280	$	8,543	$	8,823	$	284	$	8,823	$	9,107
Commercial, financial and agricultural1		1,489		18,110		19,599		1,461		18,982		20,443
Equity lines		90		9,224		9,314		90		9,063		9,153
Consumer		—		5		5		—		6		6
Total acquired loans	$	1,859	$	35,882	$	37,741	$	1,835	$	36,874	$	38,709

¹ Includes acquired loans classified by the Corporation as commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

The following table presents a summary of the change in the accretable yield of the PCI loan portfolio:

	Three Months Ended March 31,
(Dollars in thousands)	2019		2018
Accretable yield, balance at beginning of period	$	5,987	$	7,304
Accretion		(469)		(977)
Reclassification of nonaccretable difference due to improvement in expected cash flows		256		871
Other changes, net		162		(398)
Accretable yield, balance at end of period	$	5,936	$	6,800

Loans on nonaccrual status were as follows:

	March 31,		December 31,
(Dollars in thousands)	2019		2018
Real estate – residential mortgage	$	701	$	594
Commercial, financial and agricultural:
Commercial business lending		29		24
Equity lines		760		883
Consumer		124		—
Consumer finance		520		712
Total loans on nonaccrual status	$	2,134	$	2,213

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The past due status of loans as of March 31, 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	$	969	$	—	$	136	$	1,105	$	280	$	182,312	$	183,697	$	6
Real estate – construction:
Construction lending		—		—		—		—		—		53,319		53,319		—
Consumer lot lending		—		—		—		—		—		12,269		12,269		—
Commercial, financial and agricultural:
Commercial real estate lending		64		—		315		379		1,489		301,212		303,080		315
Land acquisition and development lending		—		—		—		—		—		45,245		45,245		—
Builder line lending		—		—		—		—		—		29,180		29,180		—
Commercial business lending		45		—		29		74		—		82,241		82,315		—
Equity lines		299		122		619		1,040		90		52,981		54,111		—
Consumer		52		—		—		52		—		12,781		12,833		7
Consumer finance		6,573		870		520		7,963		—		291,629		299,592		—
Total	$	8,002	$	992	$	1,619	$	10,613	$	1,859	$	1,063,169	$	1,075,641	$	328

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

The table above includes nonaccrual loans that are current of $616,000, 30-59 days past due of $90,000, 60-89 days past due of $122,000 and 90+ days past due of $1.31 million.

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

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

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

There were no  loan modifications that were classified as troubled debt restructurings (TDRs) during the three months ended March 31, 2019 and 2018.    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 three months ended March 31, 2019 and 2018.  

15

Impaired loans, which included TDRs of $4.68 million, and the related allowance at March 31, 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	$	3,134	$	1,273	$	1,760	$	127	$	3,099	$	35
Commercial, financial and agricultural:
Commercial real estate lending		1,752		3		1,710		69		1,768		23
Builder line lending		437		437		—		—		437		7
Equity lines		225		30		187		187		217		—
Consumer		131		—		128		124		129		—
Total	$	5,679	$	1,743	$	3,785	$	507	$	5,650	$	65

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 three months ended March 31, 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 charged (credited) to operations		(47)		114		(25)		(205)		163		2,395		2,395
Loans charged off		—		—		—		—		(76)		(3,890)		(3,966)
Recoveries of loans previously charged off		5		—		1		—		42		1,089		1,137
Balance at March 31, 2019	$	2,204	$	841	$	6,664	$	901	$	386	$	22,593	$	33,589

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The following table presents the changes in the allowance for loan losses by major classification during the three months ended March 31, 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 charged (credited) to operations		(16)		251		(238)		—		3		3,300		3,300
Loans charged off		—		—		(2)		—		(71)		(4,583)		(4,656)
Recoveries of loans previously charged off		22		—		5		—		48		1,155		1,230
Balance at March 31, 2018	$	2,377	$	856	$	7,243	$	688	$	211	$	24,225	$	35,600

The following table presents, as of March 31, 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	$	127	$	—	$	69	$	187	$	124	$	—	$	507
Collectively evaluated for impairment		2,077		841		6,595		714		262		22,593		33,082
Acquired loans - PCI		—		—		—		—		—		—		—
Total allowance	$	2,204	$	841	$	6,664	$	901	$	386	$	22,593	$	33,589
Loans:
Individually evaluated for impairment	$	3,033	$	—	$	2,150	$	217	$	128	$	—	$	5,528
Collectively evaluated for impairment		180,384		65,588		456,181		53,804		12,705		299,592		1,068,254
Acquired loans - PCI		280		—		1,489		90		—		—		1,859
Total loans	$	183,697	$	65,588	$	459,820	$	54,111	$	12,833	$	299,592	$	1,075,641

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

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Loans by credit quality indicators as of March 31, 2019 were as follows:

			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Real estate – residential mortgage	$	179,808	$	2,210	$	978	$	701	$	183,697
Real estate – construction:
Construction lending		53,319		—		—		—		53,319
Consumer lot lending		12,269		—		—		—		12,269
Commercial, financial and agricultural:
Commercial real estate lending		299,627		3,008		445		—		303,080
Land acquisition and development lending		35,151		10,094		—		—		45,245
Builder line lending		28,743		—		437		—		29,180
Commercial business lending		81,735		551		—		29		82,315
Equity lines		52,895		409		47		760		54,111
Consumer		12,697		9		3		124		12,833
	$	756,244	$	16,281	$	1,910	$	1,614	$	776,049

¹ At March 31, 2019, the Corporation did not have any loans classified as Doubtful or Loss.

			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	299,072	$	520	$	299,592

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

¹ 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

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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 months ended March 31, 2019 is set forth in the table below.

	Three Months Ended
(Dollars in thousands)	March 31, 2019
Operating lease cost	$	414
Short-term lease cost		39
Variable lease cost		14
Total lease cost	$	467

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 months ended March 31, 2019 was $306,000.  As of March 31, 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 of $3.67 million were included in other assets and lease liabilities of $3.68 million were included in other liabilities as of March 31, 2019. During the three months ended March 31, 2019, the Corporation obtained right-of-use assets in exchange for lease liabilities of $821,000.

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 months ended March 31, 2018, the Corporation recognized lease expense of $439,000.

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)	March 31, 2019
2019	$	1,131
2020		1,392
2021		758
2022		236
2023		109
Thereafter		249
Total		3,875
Imputed interest		(193)
Lease liabilities	$	3,682

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 March 31, 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 first three months of 2019, the Corporation repurchased 32,407 shares of its common stock for an aggregate cost of $1.67 million under a share repurchase program authorized by its Board of Directors. Additionally during the first

19

three months of 2019 and 2018, the Corporation withheld 4,641 shares and 3,737 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 $864,000 and $1.23 million as of March 31, 2019 and December 31, 2018, respectively.

	March 31,		December 31,
(Dollars in thousands)	2019		2018
Net unrealized gains (losses) on securities	$	65	$	(1,375)
Net unrecognized gains on cash flow hedges		135		215
Net unrecognized losses on defined benefit plan		(3,492)		(3,512)
Total accumulated other comprehensive loss	$	(3,292)	$	(4,672)

Earnings Per Share (EPS)

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

	Three Months Ended March 31,
(Dollars in thousands)	2019		2018
Net income attributable to C&F Financial Corporation	$	3,771	$	3,892
Weighted average shares outstanding—basic and diluted		3,484,592		3,501,164

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 March 31,
(Dollars in thousands)	2019		2018
Components of net periodic benefit cost:
Service cost, included in salaries and employee benefits	$	293	$	306
Other components of net periodic benefit cost:
Interest cost		153		133
Expected return on plan assets		(330)		(318)
Amortization of prior service credit		(17)		(15)
Recognized net actuarial losses		42		29
Other components of net periodic benefit cost, included in other noninterest income		(152)		(171)
Net periodic benefit cost	$	141	$	135

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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 March 31, 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.  Fixed-rate securities issued by the Small Business Association in the U.S. government agencies and corporations category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics. Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity.  Each aggregate is benchmarked to a relative mortgage-backed to-be-announced (TBA) or other benchmark price. TBA prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.  Each

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evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables.

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

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

	March 31, 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	$	—	$	17,394	$	—	$	17,394
Mortgage-backed securities		—		100,590		—		100,590
Obligations of states and political subdivisions		—		91,023		—		91,023
Total securities available for sale		—		209,007		—		209,007
Loans held for sale		—		36,035		—		36,035
Derivative asset - IRLC		—		1,396		—		1,396
Derivative asset - interest rate swaps on loans		—		1,378		—		1,378
Derivative asset - cash flow hedges		—		182		—		182
Total assets	$	—	$	247,998	$	—	$	247,998
Liabilities:
Derivative liability - interest rate swaps on loans		—		1,378		—		1,378
Total liabilities	$	—	$	1,378	$	—	$	1,378

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	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
Derivative asset - IRLC		—		636		—		636
Derivative asset - interest rate swaps on loans		—		1,607		—		1,607
Derivative asset - cash flow hedges		—		289		—		289
Total assets	$	—	$	259,337	$	—	$	259,337
Liabilities:
Derivative liability - 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

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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.

	March 31, 2019
	Fair Value Measurements Using						Assets at Fair
(Dollars in thousands)	Level 1		Level 2		Level 3		Value
Impaired loans, net	$	—	$	—	$	155	$	155
Other real estate owned, net		—		—		246		246
Total	$	—	$	—	$	401	$	401

	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 March 31, 2019
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Inputs	Range of Inputs
Impaired loans, net	$	155	Appraisals	Discount to reflect current market conditions and estimated selling costs	30%-38%
Other real estate owned, net		246	Appraisals	Discount to reflect current market conditions and estimated selling costs	33%-47%
Total	$	401

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.

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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 March 31, 2019 Using						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	137,451	$	137,451	$	—	$	—	$	137,451
Securities available for sale		209,007		—		209,007		—		209,007
Loans, net		1,042,052		—		—		1,038,191		1,038,191
Loans held for sale		36,035		—		36,035		—		36,035
Derivative asset - IRLC		1,396		—		1,396		—		1,396
Derivative asset - interest rate swaps on loans		1,378		—		1,378		—		1,378
Derivative asset - cash flow hedges		182		—		182		—		182
Bank-owned life insurance		16,162		—		16,162		—		16,162
Accrued interest receivable		7,267		7,267		—		—		7,267
Financial liabilities:
Demand deposits		824,044		824,044		—		—		824,044
Time deposits		378,150		—		375,881		—		375,881
Borrowings		161,807		—		154,451		—		154,451
Derivative liability - interest rate swaps on loans		1,378		—		1,378		—		1,378
Accrued interest payable		1,166		1,166		—		—		1,166

	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
Derivative asset - IRLC		636		—		636		—		636
Derivative asset - interest rate swaps on loans		1,607		—		1,607		—		1,607
Derivative asset - 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
Derivative liability - 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.

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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 March 31, 2019
	Retail		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	14,324	$	350	$	10,145	$	2	$	(1,870)	$	22,951
Gains on sales of loans		—		2,136		—		—		—		2,136
Other noninterest income		2,935		1,318		196		518		—		4,967
Total operating income		17,259		3,804		10,341		520		(1,870)		30,054
Expenses:
Provision for loan losses		—		—		2,395		—		—		2,395
Interest expense		2,175		163		2,551		285		(1,870)		3,304
Salaries and employee benefits		7,475		1,627		2,252		553		—		11,907
Other noninterest expenses		4,903		1,244		1,375		248		—		7,770
Total operating expenses		14,553		3,034		8,573		1,086		(1,870)		25,376
Income (loss) before income taxes		2,706		770		1,768		(566)		—		4,678
Income tax expense (benefit)		416		203		483		(195)		—		907
Net income (loss)	$	2,290	$	567	$	1,285	$	(371)	$	—	$	3,771
Total assets	$	1,380,790	$	53,642	$	301,579	$	6,836	$	(193,487)	$	1,549,360
Goodwill	$	3,702	$	—	$	10,723	$	—	$	—	$	14,425
Capital expenditures	$	722	$	24	$	8	$	—	$	—	$	754

	Three Months Ended March 31, 2018
	Retail		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	13,160	$	367	$	10,849	$	—	$	(1,632)	$	22,744
Gains on sales of loans		—		2,239		—		—		—		2,239
Other noninterest income		2,619		857		248		483		—		4,207
Total operating income		15,779		3,463		11,097		483		(1,632)		29,190
Expenses:
Provision for loan losses		—		—		3,300		—		—		3,300
Interest expense		1,617		143		2,165		283		(1,632)		2,576
Salaries and employee benefits		6,486		1,443		2,265		539		—		10,733
Other noninterest expenses		4,981		1,275		1,307		243		—		7,806
Total operating expenses		13,084		2,861		9,037		1,065		(1,632)		24,415
Income (loss) before income taxes		2,695		602		2,060		(582)		—		4,775
Income tax expense (benefit)		383		167		562		(229)		—		883
Net income (loss)	$	2,312	$	435	$	1,498	$	(353)	$	—	$	3,892
Total assets	$	1,356,936	$	54,516	$	292,417	$	5,066	$	(184,009)	$	1,524,926
Goodwill	$	3,702	$	—	$	10,723	$	—	$	—	$	14,425
Capital expenditures	$	572	$	21	$	28	$	—	$	—	$	621

The retail banking segment extends a warehouse line of credit to the mortgage banking segment, providing a portion of the funds needed to originate mortgage loans. The retail banking segment charges the mortgage banking segment interest at the daily FHLB advance rate plus 50 basis points. The retail banking segment also provides the consumer finance

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

NOTE 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 was $253.98 million at March  31, 2019 and $244.17 million at December 31, 2018.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $19.56 million at March  31, 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.

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 derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge). The remaining derivatives are classified as free standing derivatives consisting of customer accommodation loan swaps and IRLCs.

Cash flow hedges.  The Corporation designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes. The Corporation uses interest rate swap agreements as part of its hedging strategy by exchanging variable-rate interest payments on a notional amount equal to the principal amount of the borrowings for fixed-rate interest payments.  Interest rate swaps

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designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of the hedged interest payments, and the Corporation assesses the effectiveness of each hedging relationship quarterly.  As of March  31, 2019, the Corporation has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between December 2019 and September 2020.

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

The terms and conditions of the interest rate swaps vary and amounts receivable or payable are recognized in interest expense in the Consolidated Statements of Income as accrued under the terms of the agreements.  The derivatives’ unrealized gains or losses are recorded as a component of other comprehensive income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. The Corporation does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months. 

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

IRLCs.  C&F Mortgage enters into IRLCs with customers to originate loans for which the interest rates are determined prior to funding. C&F Mortgage then mitigates interest rate risk on these IRLCs and loans held for sale by (a) entering into forward loan sales contracts with investors for loans to be delivered on a best efforts basis or (b) entering into forward sales contracts of mortgage backed securities for loans to be delivered on a mandatory basis. At March 31, 2019, each loan held for sale by C&F Mortgage was subject to a forward sales agreement on a best efforts basis. The fair value of these derivative instruments is reported in “Other assets” in the Consolidated Balance Sheets. Changes in fair value are recorded as a component of gains on sales of loans.

The following tables summarize key elements of the Corporation’s derivative instruments:

	March 31, 2019
	Notional								Collateral
(Dollars in thousands)	Amount		Positions		Assets		Liabilities		Pledged1
Cash flow hedges:
Interest rate swaps:
Variable-rate to fixed-rate swaps with counterparty	$	25,000		3	$	182	$	—	$	—
Not designated as hedges:
Customer-related interest rate contracts:
Matched interest rate swaps with borrower		45,785		8		589		789		—
Matched interest rate swaps with counterparty		45,785		8		789		589		390
Other contracts:
IRLCs		95,921		380		1,396		—		—

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	December 31, 2018
	Notional								Collateral
(Dollars in thousands)	Amount		Positions		Assets		Liabilities		Pledged1
Cash flow hedges:
Interest rate swaps:
Variable-rate to fixed-rate swaps with counterparty	$	25,000		3	$	289	$	—	$	—
Not designated as hedges:
Customer-related interest rate contracts:
Matched interest rate swaps with borrower		45,961		8		216		1,391		—
Matched interest rate swaps with counterparty		45,961		8		1,391		216		—
Other contracts:
IRLCs		44,324		181		636		—		—

¹ 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 March 31,
(Dollars in thousands)	2019		2018
Data processing fees	$	1,921	$	1,827
Professional fees		564		739
Travel and educational expenses		403		371
Marketing and advertising expenses		373		460
Telecommunication expenses		317		346
All other noninterest expenses		2,002		2,032
Total other noninterest expenses	$	5,580	$	5,775

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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; 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; 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 increases; 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:

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

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

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

· the legislative/regulatory climate with respect to financial institutions, including the Dodd-Frank Act and regulations promulgated thereunder, the 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 of 2018 and regulations promulgated thereunder

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

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

· demand for loan products

· the quality or composition of the loan portfolios and the value of the collateral securing those loans

· the commercial and residential real estate markets

· 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

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· deposit flows

· demand in the secondary residential mortgage loan markets

· the level of indemnification losses related to mortgage loans sold

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

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

· demand for financial services in the Corporation’s market area

· the Corporation's branch and market expansions and technology initiatives

· cyber threats, attacks or events

· reliance on third parties for key services

· C&F Bank’s product offerings

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

These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018, 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.

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

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Our judgment in determining the level of the allowance is based on evaluations of the collectibility of loans

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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.

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

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

The Corporation accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the

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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.

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 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 lock commitments (IRLCs) on mortgage loans that will be held for sale and the related forward sales commitments, (2) interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate swaps that qualify and are designated as cash flow hedges of the Corporation’s trust preferred capital notes. The Corporation recognizes derivative financial instruments at fair value as either an other asset or

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other liability in the Consolidated Balance Sheets.  Because the IRLCs, forward sales commitments and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported in the Consolidated Statements of Income. The gains or losses on the Corporation’s cash flow hedges are reported as a component of other comprehensive income, net of deferred income taxes, and are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.

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 $3.8 million for the first quarter of 2019, or $1.08 per share, compared with net income of $3.9 million for the first quarter of 2018, or $1.11 per share.

The Corporation’s annualized ROE and ROA were 9.96 percent and 1.00 percent, respectively,for the first quarter of 2019, compared to 11.05 percent and 1.04 percent, respectively, for the first quarter of 2018.   The decrease in ROE for the first quarter of 2019, compared to the first quarter of 2018, resulted from lower net income and an increase in capital.  The decrease in ROA during the same period resulted from lower net income and an increase in the average balance of total assets.

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 $2.3 million for both the first quarter of 2019 and the first quarter of 2018.

Positive factors affecting net income of C&F Bank for the first quarter of 2019 compared to the same period in 2018 included (1) higher interest income from loans, due to higher average loans outstanding and higher yields and (2) higher yields on excess cash balances. These factors were offset by (1) an increase in average rates on interest-bearing customer deposits, (2) higher operating expenses associated with C&F Bank (a) strengthening its technology infrastructure and (b)

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expanding its lending capabilities and administrative and compliance functions, and (3) lower service charges on deposit accounts resulting from fewer overdraft fees charged.

Average loans increased $41.6 million or 5.7 percent during the first quarter of 2019, compared to the same period in 2018,  primarily due to growth in the commercial business lending and commercial real estate segments of the loan portfolio. C&F Bank’s total nonperforming assets were $1.8 million at March 31, 2019, compared to $1.7 million at December 31, 2018. Nonperforming assets at March  31, 2019 consisted primarily of $1.6 million in nonaccrual loans, compared to $1.5 million at December 31, 2018.

Mortgage Banking:  The mortgage banking segment reported net income of $567,000 for the first quarter of 2019, compared to net income of $435,000 for the first quarter of 2018.

The increase in net income of the mortgage banking segment for the first quarter of 2019 compared to the same period in 2018 was due primarily to a decrease in operating expenses resulting from operational efficiencies and management of personnel costs, which was partially offset by lower gains on sales of loans, resulting primarily from lower loan production during the first quarter of 2019 compared to the first quarter of 2018 as competition for loans in the mortgage industry has increased since the first quarter of 2018.  Mortgage loan originations during the quarter ended March 31, 2019 for refinancings and home purchases were $20.8 million and $117.9 million, respectively, compared to $24.5 million and $119.4 million, respectively, during the quarter ended March 31, 2018.

Consumer Finance:  The consumer finance segment reported net income of $1.3 million for the first quarter of 2019, compared to net income of $1.5 million for the first quarter of 2018. 

Factors contributing to the decrease in net income of C&F Finance Company for the first quarter of 2019 compared to the same period in 2018 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, as well as relatively lower yields on marine and RV loans, and (2) higher-cost variable-rate borrowings resulting from increases in short-term interest rates since the first quarter of 2018, which were partially offset by a decline in the provision for loan losses of $905,000 as a result of lower charge-offs and improving credit quality of the portfolio, as discussed below.

The annualized net charge-off ratio for the first quarter of 2019 decreased to 3.79 percent from 4.69 percent for the first quarter of 2018. The decline reflects a lower number of charge-offs during the first quarter of 2019 as a result of C&F Finance Company’s purchasing automobile loan contracts with higher credit metrics beginning in 2016. At March 31, 2019, total delinquent loans as a percentage of total loans was 2.66 percent, compared to 4.76 percent at December 31, 2018 and 3.31 percent at March 31, 2018. The allowance for loan losses was $22.6 million, or 7.54 percent of total loans at March 31, 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 primarily due to lower net charge-offs on non-prime automobile loans and was partially offset by loan growth during the first quarter of 2019.  During the first quarter of 2019, C&F Finance Company continued the expansion of its indirect lending programs into marine and RV loans that it began in 2018.  These contracts are for prime loans made to individuals with higher credit scores and are expected to require both a lower provision for loan losses and allowance for loan losses than the consumer finance segment’s non-prime automobile loans. At March 31, 2019, compared to December 31, 2018, the higher composition within the consumer finance segment’s loan portfolio of marine and RV loans accounted for approximately 4 basis points of the 23 basis points decrease in the ratio of the allowance for loan losses to total loans. If factors influencing the consumer finance segment result in a higher net charge-off ratio in the future, or if the consumer finance segment’s loan portfolio should grow, the segment may need to increase the level of its allowance for loan losses, which would negatively affect future earnings.

Capital Management. Total equity was $154.9 million at March 31, 2019, compared to $152.0 million at December 31, 2018. Capital growth resulted primarily from earnings for the first  quarter of 2019, which was offset in part by dividends declared of 37 cents per share during the first quarter of 2019. The first quarter dividend was paid on April 1, 2019 and equated to a payout ratio of 34.3 percent of first quarter earnings per share. 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. 

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On April 18, 2018, the Board of Directors reauthorized the Corporation’s share repurchase program for the Corporation’s outstanding common stock (the Repurchase Program) to purchase up to $5.0 million of the Corporation’s common stock through May 31, 2019.  As of March 31, 2019, the Corporation had repurchased 53,639 shares of its common stock at an aggregate cost of $2.8 million, and remained authorized to purchase up to $2.2 million of the Corporation’s common stock under the Repurchase Program.

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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 months ended March 31, 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 16 basis points to the yield on loans and 13 basis points to both the yield on interest earning assets and the net interest margin for the first quarter of 2019, compared to approximately 35 basis points to the yield on loans and 26 basis points to both the yield on interest earning assets and the net interest margin for the first quarter 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 the first quarters of 2019 and 2018.

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

	Three Months Ended March 31,
	2019						2018
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	139,895	$	859	2.46	%	$	133,935	$	748	2.24	%
Tax-exempt		76,314		738	3.87			89,776		906	4.03
Total securities		216,209		1,597	2.95			223,711		1,654	2.96
Total loans		1,099,638		20,926	7.72			1,059,149		20,824	7.97
Interest-bearing deposits in other banks		103,807		589	2.30			128,031		464	1.47
Total earning assets		1,419,654		23,112	6.60			1,410,891		22,942	6.59
Allowance for loan losses		(34,116)						(35,781)
Total non-earning assets		127,959						127,485
Total assets	$	1,513,497					$	1,502,595
Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	225,072		312	0.56		$	229,220		185	0.33
Money market deposit accounts		205,461		260	0.51			223,961		157	0.28
Savings accounts		120,531		30	0.10			114,033		22	0.08
Certificates of deposit, $100 or more		182,015		717	1.60			172,498		521	1.22
Other certificates of deposit		176,650		589	1.35			179,602		435	0.98
Interest-bearing deposits		909,729		1,908	0.85			919,314		1,320	0.58
Borrowings		159,986		1,396	3.49			166,769		1,256	3.01
Total interest-bearing liabilities		1,069,715		3,304	1.25			1,086,083		2,576	0.96
Noninterest-bearing demand deposits		263,000						249,100
Other liabilities		29,264						26,541
Total liabilities		1,361,979						1,361,724
Equity		151,518						140,871
Total liabilities and equity	$	1,513,497					$	1,502,595
Net interest income			$	19,808					$	20,366
Interest rate spread					5.35	%					5.63	%
Interest expense to average earning assets (annualized)					0.94	%					0.74	%
Net interest margin (annualized)					5.66	%					5.85	%

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

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in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.

TABLE 2: Rate-Volume Recap

	Three Months Ended March 31, 2019 from 2018
	Increase (Decrease)				Total
	Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)
Interest income:
Loans	$	(671)	$	773	$	102
Securities:
Taxable		77		34		111
Tax-exempt		(35)		(133)		(168)
Interest-bearing deposits in other banks		225		(100)		125
Total interest income		(404)		574		170
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		130		(3)		127
Money market deposit accounts		117		(14)		103
Savings accounts		7		1		8
Certificates of deposit, $100 or more		167		29		196
Other certificates of deposit		161		(7)		154
Total interest-bearing deposits		582		6		588
Borrowings		193		(53)		140
Total interest expense		775		(47)		728
Change in net interest income	$	(1,179)	$	621	$	(558)

Net interest income, on a taxable-equivalent basis, for the three months ended March 31, 2019 was $19.8 million, compared to $20.4 million for the three months ended March 31, 2018. Annualized net interest margin decreased 19 basis points to 5.66 percent for the first quarter of 2019, relative to the same period in 2018. The net interest margin decline resulted from a 29 basis points increase in the cost of interest-bearing liabilities in the first quarter of 2019, compared to the same period in 2018, resulting from higher costs of deposits and borrowings.  The yield on interest-earning assets increased by 1 basis point as a higher yield on interest-bearing deposits in other banks and a higher composition of loans as a percentage of earning assets were offset by a decline in the yield on loans of 25 basis points. The decrease in the net interest margin was offset in part by average earning asset growth of $8.8 million for the first quarter of 2019, over the first quarter of 2018. 

Average loans, which includes both loans held for investment and loans held for sale, increased $40.5 million to $1.1 billion for the first quarter of 2019, compared to the same period in 2018. Average loans held for investment of the retail banking segment increased $41.6 million, or 5.7 percent, for the first quarter of 2019, compared to the same period in 2018, primarily due to growth in the commercial business lending and commercial real estate segments of the loan portfolio. Average loans held for investment at the consumer finance segment increased $3.7 million, or 1.3 percent for the first quarter of 2019, compared to the same period of 2018, as a result of the consumer finance segment’s expansion into purchases of marine and RV loan contracts beginning in the first quarter of 2018.  Average loans held for sale decreased $4.9 million, or 15.1 percent for the first quarter of 2019, compared to the same period in 2018.

The overall yield on average loans decreased 25 basis points to 7.72 percent for the first quarter of 2019, compared to the same period in 2018.  Negative factors affecting average loan yield for the first quarter of 2019, compared to the same period in 2018, were (1) the increased composition within the loan portfolio of lower-yielding loans at the retail banking segment relative to the higher-yielding loans of the consumer finance segment, (2) the decline in the average yield on loans at the consumer finance segment due primarily to continued competition in the non-prime automobile loan business and the acquisition of loan contracts with higher credit metrics, as well as relatively lower yields on marine and recreational vehicle loans as a result of higher credit quality, and (3) lower interest income on PCI loans, which includes accretion of purchase accounting adjustments, as prepayments and improvements in expectations of the timing and amount of future payments resulted in an acceleration in the recognition of interest income in the first quarter of 2018. Partially offsetting these factors were higher yields on loans at the retail banking segment resulting from increases in interest rates. 

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Average securities available for sale decreased $7.5 million for the first quarter of 2019, compared to the same period in 2018. The average yield on the securities portfolio decreased one basis point for the first quarter of 2019, compared to the same period in 2018. 

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $24.2 million during the first quarter of 2019, compared to the same period in 2018. The decrease during the first quarter of 2019 resulted primarily from loan growth at the retail banking segment. The average yield on these overnight funds increased 83 basis points for the first quarter of 2019 compared to the same period in 2018, as the Federal Reserve Bank increased the interest rate on excess cash reserve balances from 1.50 percent in December 2017 to 2.40 percent by the end of the first quarter of 2019. 

Average savings and interest-bearing demand deposits decreased $16.2 million for the first quarter  of 2019 and average time deposits increased $6.6 million for the first quarter of 2019, compared to the same period in 2018.  The average cost of interest-bearing deposits increased 27 basis points for the first quarter of 2019, compared to the first quarter of 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.

Average borrowings decreased $6.8 million for the first quarter of 2019, compared to the same period in 2018.  The decrease resulted from maturities during 2018 of a $5.0 million repurchase agreement with a third-party correspondent bank and a $2.5 million advance from the Federal Home Loan Bank (FHLB).  The average cost of borrowings increased 48 basis points during the first quarter of 2019, compared to the same period in 2018, because of increases in short-term interest rates, to which variable-rate borrowings at the consumer finance segment are indexed.

The Corporation believes that it may be challenging to maintain net interest margin at its current level, even with the projected loan growth at the Bank during 2019, because of (1) repricing of maturing time deposits at current market rates, (2) lower yields on consumer finance segment loans resulting from continued market competition and growth in lower-yielding higher-quality loans (including marine and RV loans), and (3) lower accretion of purchase discounts on PCI loans, which is included in yields on loans.

Noninterest Income

TABLE 3: Noninterest Income

	Three Months Ended March 31, 2019
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	2,136	$	—	$	—	$	2,136
Service charges on deposit accounts		918		—		—		—		918
Other service charges and fees		298		769		1		—		1,068
Net gains on calls of available for sale securities		4		—		—		—		4
Wealth management services income, net		—		—		—		449		449
Interchange income		958		—		—		—		958
Other income		757		549		195		69		1,570
Total noninterest income	$	2,935	$	3,454	$	196	$	518	$	7,103

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	Three Months Ended March 31, 2018
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	2,239	$	—	$	—	$	2,239
Service charges on deposit accounts		1,049		—		—		—		1,049
Other service charges and fees		307		751		2		—		1,060
Net gains on calls of available for sale securities		5		—		—		—		5
Wealth management services income, net		—		—		—		425		425
Interchange income		906		—		—		—		906
Other income		352		106		246		58		762
Total noninterest income	$	2,619	$	3,096	$	248	$	483	$	6,446

Total noninterest income increased $657,000, or 10.2 percent, in the first quarter of 2019, compared to the first quarter of 2018.  This increase in noninterest income was primarily due to net unrealized gains of $1.0 million in the first quarter of 2019 included primarily in other income of the retail banking and mortgage banking segments related to the Corporation’s non-qualified deferred compensation plan compared to $33,000 in the first quarter of 2018, partially offset by (1) a decrease in gains on sales of loans at the mortgage banking segment as a result of lower mortgage loan volume and pricing pressure due to competition in the secondary mortgage market and (2) decreased service charges on deposit accounts at the retail banking segment as a result of fewer overdraft fees charged.

Noninterest Expense

TABLE 4: Noninterest Expense

	Three Months Ended March 31, 2019
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	7,475	$	1,627	$	2,252	$	553	$	11,907
Occupancy expense		1,486		479		203		22		2,190
Other expenses:
Data processing		1,584		10		309		18		1,921
Other expenses		1,833		755		863		208		3,659
Total other expenses		3,417		765		1,172		226		5,580
Total noninterest expense	$	12,378	$	2,871	$	3,627	$	801	$	19,677

	Three Months Ended March 31, 2018
	Retail		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	6,486	$	1,443	$	2,265	$	539	$	10,733
Occupancy expense		1,343		471		203		14		2,031
Other expenses:
Data processing		1,491		15		310		11		1,827
Other expenses		2,147		789		794		218		3,948
Total other expenses		3,638		804		1,104		229		5,775
Total noninterest expense	$	11,467	$	2,718	$	3,572	$	782	$	18,539

Total noninterest expenses increased $1.1 million, or 6.1 percent, in the first quarter of 2019, compared to the same period in 2018. This increase in noninterest expenses resulted primarily from (1) an increase in salaries and employee benefits expense associated with the Corporation’s nonqualified deferred compensation plan, primarily at the retail banking and mortgage banking segments and (2) higher operating costs at the retail banking segment attributable to (a) increased personnel costs associated with expanding the Bank’s lending capabilities and administrative and compliance functions and (b) higher data processing and occupancy expenses associated with enhancing the technology infrastructure and expanding our digital product offerings. Partially offsetting these factors were decreased personnel costs at the mortgage banking segment resulting from lower loan origination volume, operating efficiencies and managing personnel costs.

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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 $1.0 million was recorded in the first quarter of 2019 as compared to the first quarter of 2018, and was offset by gains recorded in noninterest income, as discussed above.

Income Taxes

Income tax expense for the first quarter of 2019 was $907,000 resulting in an effective tax rate of 19.4 percent, compared with $883,000, or an effective tax rate of 18.5 percent, for the first quarter of 2018.  The higher effective tax rate in the first quarter of 2019 compared to the first quarter of 2018 resulted primarily from lower tax benefits of share-based compensation and tax-exempt investment securities income.

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 March 31,
(Dollars in thousands)	2019			2018
Balance, beginning of period	$	34,023		$	35,726
Provision for loan losses:
Retail Banking		—			—
Mortgage Banking		—			—
Consumer Finance		2,395			3,300
Total provision for loan losses		2,395			3,300
Loans charged off:
Commercial, financial and agricultural1		—			(2)
Consumer		(76)			(71)
Consumer finance		(3,890)			(4,583)
Total loans charged off		(3,966)			(4,656)
Recoveries of loans previously charged off:
Real estate—residential mortgage		5			22
Commercial, financial and agricultural1		1			5
Consumer		42			48
Consumer finance		1,089			1,155
Total recoveries		1,137			1,230
Net loans charged off		(2,829)			(3,426)
Balance, end of period	$	33,589		$	35,600
Ratio of net charge-offs to average total loans outstanding during period for Retail Banking		0.01	%		—	%
Ratio of net charge-offs to average total loans outstanding during period for Consumer Finance		3.79	%		4.69	%

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

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

TABLE 6: Allocation of Allowance for Loan Losses

	March 31,			December 31,
(Dollars in thousands)	2019			2018
Allocation of allowance for loan losses:
Real estate—residential mortgage	$	2,204		$	2,246
Real estate—construction 1		841			727
Commercial, financial and agricultural 2		6,664			6,688
Equity lines		901			1,106
Consumer		386			257
Consumer finance		22,593			22,999
Total allowance for loan losses	$	33,589		$	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	%

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

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

Loans by credit quality 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.

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· 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 March 31, 2019 were as follows:

			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Real estate – residential mortgage	$	179,808	$	2,210	$	978	$	701	$	183,697
Real estate – construction 2		65,588		—		—		—		65,588
Commercial, financial and agricultural 3		445,256		13,653		882		29		459,820
Equity lines		52,895		409		47		760		54,111
Consumer		12,697		9		3		124		12,833
	$	756,244	$	16,281	$	1,910	$	1,614	$	776,049

			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	299,072	$	520	$	299,592

¹ At March 31, 2019, the Corporation did not have any loans classified as Doubtful or Loss.

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

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

Loans by credit quality indicators as of December 31, 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

¹ At December 31, 2018, the Corporation did not have any loans classified as Doubtful or Loss.

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

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

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Table 8 summarizes nonperforming assets as of the dates indicated.

TABLE 8: Nonperforming Assets

Retail Banking Segment

	March 31,			December 31,
(Dollars in thousands)	2019			2018
Loans, excluding purchased loans	$	734,856		$	723,778
Purchased performing loans1		35,882			36,874
Purchased credit impaired loans1		1,859			1,835
Total loans	$	772,597		$	762,487
Nonaccrual loans	$	1,577		$	1,464
OREO		246			246
Total nonperforming assets	$	1,823		$	1,710
Accruing loans past due for 90 days or more	$	328		$	324
Troubled debt restructurings (TDRs)2	$	4,682		$	5,451
Allowance for loan losses (ALL)	$	10,398		$	10,426
Nonperforming assets to total loans and OREO		0.24	%		0.22	%
ALL to total loans, excluding purchased credit impaired loans		1.35			1.37
ALL to total nonaccrual loans		659.35			712.16
Annualized net charge-offs to average total loans		0.01			0.06

¹ Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The remaining discount for the purchased performing loans was $1.8 million at March 31, 2019 and $1.9 million at December 31, 2018. The remaining discount for the purchased credit impaired loans was $7.7 million at March 31, 2019 and $7.9 million at December 31, 2018.

² Nonaccrual loans include nonaccrual TDRs of $139,000 at March 31, 2019 and $166,000 at December 31, 2018.

Mortgage Banking Segment

	March 31,			December 31,
(Dollars in thousands)	2019			2018
Nonaccrual loans	$	37		$	37
Total loans	$	3,452		$	3,479
ALL	$	598		$	598
Nonaccrual loans to total loans		1.07	%		1.06	%
ALL to total loans		17.32			17.19

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Consumer Finance Segment

	March 31,			December 31,
(Dollars in thousands)	2019			2018
Nonaccrual loans	$	520		$	712
Accruing loans past due for 90 days or more	$	—		$	—
Repossessed assets	$	391		$	371
Total loans	$	299,592		$	296,154
ALL	$	22,593		$	22,999
Nonaccrual consumer finance loans to total consumer finance loans		0.17	%		0.24	%
ALL to total consumer finance loans		7.54			7.77
Annualized net charge-offs to average total loans		3.79			4.14

Nonperforming assets of the retail banking segment totaled $1.8 million at March 31, 2019, compared to $1.7 million at December 31, 2018. Nonperforming assets at March 31, 2019 consisted primarily of $1.6 million in nonaccrual loans, compared to $1.5 million at December 31, 2018.

The allowance for loan losses as a percentage of total loans, excluding PCI loans, at March 31, 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 $520,000 at March 31, 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 March 31, 2019, repossessed vehicles available for sale totaled $391,000, compared to $371,000 at December 31, 2018.

The consumer finance segment’s allowance for loan losses decreased $406,000 to $22.6 million at March 31, 2019 from $23.0 million at December 31, 2018, and its provision for loan losses decreased $905,000 for the first quarter of 2019, compared to the same period 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 quarter of 2019.  Delinquent loans as a percentage of total loans decreased to 2.66 percent at March 31, 2019 from 4.76 percent at December 31, 2018. The annualized net charge-off ratio for the first quarter of 2019 decreased to 3.79 percent from 4.69 percent for the first quarter of 2018 because of the lower number of charge-offs during the first quarter of 2019. The allowance for loan losses as a percentage of loans decreased to 7.54 percent at March 31, 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 primarily due to lower charge-offs on non-prime automobile loans and was partially offset by loan growth during the first quarter of 2019. At March 31, 2019, compared to December 31, 2018, the higher composition within the consumer finance segment’s loan portfolio of marine and RV loans accounted for approximately 4 basis points of the 23 basis points decrease in this ratio. 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.

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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 9: Impaired Loans

Impaired loans, which included TDRs of $4.7 million, and the related allowance at March 31, 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	$	3,134	$	1,273	$	1,760	$	127	$	3,099	$	35
Commercial, financial and agricultural:
Commercial real estate lending		1,752		3		1,710		69		1,768		23
Builder line lending		437		437		—		—		437		7
Equity lines		225		30		187		187		217		—
Consumer		131		—		128		124		129		—
Total	$	5,679	$	1,743	$	3,785	$	507	$	5,650	$	65

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 March 31, 2019 and December 31, 2018 were as follows:

TABLE 10: Troubled Debt Restructurings

	March 31,		December 31,
(Dollars in thousands)	2019		2018
Accruing TDRs	$	4,543	$	5,285
Nonaccrual TDRs1		139		166
Total TDRs2	$	4,682	$	5,451

¹ Included in nonaccrual loans in Table 8: Nonperforming Assets.

² Included in impaired loans in Table 9: Impaired Loans.

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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 March 31, 2019, the Corporation had total assets of $1.5 billion, which was an increase of $27.9 million since December 31, 2018. The increase resulted primarily from an increase in time deposit and noninterest-bearing demand deposit balances.

Loan Portfolio

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

TABLE 11: Summary of Loans Held for Investment

	March 31, 2019				December 31, 2018
(Dollars in thousands)	Amount		Percent		Amount		Percent
Real estate—residential mortgage	$	183,697	17	%	$	184,901	18	%
Real estate—construction 1		65,588	6			54,461	5
Commercial, financial, and agricultural 2		459,820	43			455,935	43
Equity lines		54,111	5			55,660	5
Consumer		12,833	1			15,009	1
Consumer finance		299,592	28			296,154	28
Total loans		1,075,641	100	%		1,062,120	100	%
Less allowance for loan losses		(33,589)				(34,023)
Total loans, net	$	1,042,052			$	1,028,097

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

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

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 March 31, 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.

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TABLE 12: Securities Available for Sale

	March 31, 2019				December 31, 2018
(Dollars in thousands)	Amount		Percent		Amount		Percent
U.S. government agencies and corporations	$	17,394	8	%	$	17,473	8	%
Mortgage-backed securities		100,590	48			104,983	49
Obligations of states and political subdivisions		91,023	44			92,454	43
Total available for sale securities at fair value	$	209,007	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 March 31, 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.

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 quarter of 2019, deposits increased $20.5 million to $1.20 billion at March 31, 2019, compared to $1.18 billion at December 31, 2018. This increase resulted primarily from a $31.6 million increase in time deposits and a $4.9 million increase in noninterest-bearing demand deposits.  Partially offsetting this increase was a $16.0 million decrease in savings and interest-bearing demand deposits.

The Corporation had $1.3 million in brokered money market deposits outstanding at March 31, 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 $161.8 million at March 31, 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 March 31, 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.

Contractual Obligations

As of March 31, 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.

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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 $15.0 million and $10.0 million of the Corporation’s trust preferred capital notes to fixed rates of interest until December 2019 and September 2020, respectively. The cash flow hedges’ total notional amount is $25.0 million. At March 31, 2019, the cash flow hedges had a fair value of $182,000, which is recorded in other assets.  The net gain on the cash flow hedges is recognized as a component of other comprehensive income.

Pursuant to a program the Corporation initiated during 2016, the Corporation also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs.  The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms.  The net effect of these interest rate swaps and the related loans is that the customer pays a fixed rate of interest and the Corporation receives a floating rate.  At March 31, 2019, the total notional amount of the interest rate swaps related to these loans was $91.6 million and the interest rate swaps had a net fair value of zero, with $1.4 million recognized in other assets and $1.4 million recognized in other liabilities.  These swaps are not designated as hedging instruments; therefore, changes in fair value are recorded in other noninterest expense.

Liquidity

The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to satisfy the credit needs of our customers and the demands of our depositors, creditors and investors. Stable core deposits and a strong capital position are the components of a solid foundation for the Corporation’s liquidity position. Additional sources of liquidity available to the Corporation include cash flows from operations, loan payments and payoffs, deposit growth, sales of securities, the issuance of brokered certificates of deposit and the capacity to borrow additional funds.

Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled $243.13 million at March 31, 2019, compared to $220.1 million at December 31, 2018. The increase since December 31, 2018 was primarily the result of an increase in nonpledged securities. The Corporation’s funding sources , including capacity, amount outstanding and amount available at March 31, 2019 are presented in Table 13.

TABLE 13: Funding Sources

	March 31, 2019
(Dollars in thousands)	Capacity		Outstanding		Available
Unsecured federal funds agreements	$	65,000	$	—	$	65,000
Repurchase lines of credit		50,000		—		50,000
Borrowings from FHLB		159,033		44,500		114,533
Borrowings from Federal Reserve Bank		19,871		—		19,871
Revolving bank line of credit		120,000		75,029		44,971
Total	$	413,904	$	119,529	$	294,375

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.

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As a result of the Corporation’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Corporation maintains overall liquidity sufficient to satisfy its operational requirements and contractual obligations.

Capital Resources

The 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 March 31, 2019:
Total Capital (to Risk-Weighted Assets)
Corporation	$	184,854	15.0	%	$	98,505	8.0	%		N/A	N/A
C&F Bank		180,505	14.7			98,285	8.0		$	122,857	10.0	%
Tier 1 Capital (to Risk-Weighted Assets)
Corporation		169,577	13.8			73,879	6.0			N/A	N/A
C&F Bank		164,923	13.4			73,714	6.0			98,285	8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Corporation		144,577	11.7			55,409	4.5			N/A	N/A
C&F Bank		164,923	13.4			55,285	4.5			79,857	6.5
Tier 1 Capital (to Average Assets)
Corporation		169,577	11.3			59,998	4.0			N/A	N/A
C&F Bank		164,923	11.0			59,909	4.0			74,886	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

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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 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 March 31, 2019, the Bank was required to maintain a capital conservation buffer of 2.5 percent and exceeded the total capital conservation buffer and the CET1 capital conservation buffer by 420 basis points and 640 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 CET1 capital conservation buffer by 525 and 748 basis points, respectively.

The Corporation's capital resources may be affected by the Corporation's Repurchase Program, which was reauthorized by the Corporation's Board of Directors during the second quarter of 2018. Under the Repurchase Program the Corporation is authorized to purchase up to $5.0 million of its common stock. Repurchases under the program may be made through privately-negotiated transactions or open-market transactions, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares repurchased under the program will be determined by management and the Board of Directors in their discretion and will depend on a number of factors, including the market price of the shares, general market and economic conditions, applicable legal requirements and other conditions. The Repurchase Program is authorized through May 31, 2019. As of March 31, 2019, $2.2 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.

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.

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 March 31, 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,

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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 March 31, 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

There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

Issuer Purchases of Equity Securities

The Corporation’s Board of Directors authorized a share repurchase program for the Corporation’s common stock (the Repurchase Program) in May 2014 and subsequently reauthorized the Repurchase Program annually, most recently in April 2018 for up to $5.0 million of the Corporation’s common stock through May 31, 2019. Repurchases under the Repurchase Program may be made through privately-negotiated transactions, or open-market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 of the Exchange Act and/or Rule 10b-18 of the Exchange Act.  As of March 31, 2019, $2.2 million of the Corporation’s common stock may be purchased under the Repurchase Program.

The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended March 31, 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
January 1, 2019 - January 31, 2019	17,829	$	51.78	13,850	$	3,174
February 1, 2019 - February 28, 2019	10,400		50.22	10,400		2,652
March 1, 2019 - March 31, 2019	8,819		52.01	8,157		2,228
Total	37,048		51.40	32,407

¹ During the three months ended March 31, 2019, 4,641 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.

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ITEM 6.EXHIBITS 

2.1	Agreement and Plan of Merger dated as of June 10, 2013 by and among C&F Financial Corporation, Special Purpose Sub, Inc. and Central Virginia Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K filed June 14, 2013)
3.1	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)
10.19.8	Eighth Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A., various financial institutions and C&F Finance Company dated as of April 30, 2019
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

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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:	May 8, 2019	By:	/s/ Thomas F. Cherry
			Thomas F. Cherry
			President and Chief Executive Officer
			(Principal Executive Officer)
Date:	May 8, 2019		/s/ Jason E. Long
			Jason E. Long
			Senior Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

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