UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023

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 of incorporation or organization)	(I.R.S. Employer Identification No.)
3600 La Grange Parkway Toano, VA	23168
(Address of principal executive offices)	(Zip Code)

(804) 843-2360

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒	Emerging growth company	☐

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

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

At November 3, 2023, the latest practicable date for determination, 3,368,463 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 (Unaudited) – September 30, 2023 and December 31, 2022	3
	Consolidated Statements of Income (Unaudited) – Three and nine months ended September 30, 2023 and 2022	4
	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three and nine months ended September 30, 2023 and 2022	5
	Consolidated Statements of Equity (Unaudited) – Three and nine months ended September 30, 2023 and 2022	6
	Consolidated Statements of Cash Flows (Unaudited) – Nine months ended September 30, 2023 and 2022	8
	Notes to Consolidated Interim Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
Item 4.	Controls and Procedures	76
PART II - Other Information
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	77
Item 6.	Exhibits	78
	Signatures	79

2

Part I – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

	September 30,		December 31,
	2023		2022
Assets
Cash and due from banks	$	17,105	$	19,610
Interest-bearing deposits in other banks		53,407		7,051
Total cash and cash equivalents		70,512		26,661
Securities—available for sale at fair value, amortized cost of $510,597 and $557,128, respectively		460,653		512,591
Loans held for sale, at fair value		25,469		14,259
Loans, net of allowance for credit losses of $40,248 and $40,518, respectively		1,677,481		1,595,200
Restricted stock, at cost		4,801		1,120
Corporate premises and equipment, net		42,354		43,849
Accrued interest receivable		10,039		8,982
Goodwill		25,191		25,191
Other intangible assets, net		1,475		1,679
Bank-owned life insurance		21,248		20,909
Net deferred tax asset		23,434		22,014
Other assets		59,048		59,862
Total assets	$	2,421,705	$	2,332,317
Liabilities
Deposits
Noninterest-bearing demand deposits	$	574,102	$	605,210
Savings and interest-bearing demand deposits		857,038		1,017,356
Time deposits		597,289		381,294
Total deposits		2,028,429		2,003,860
Short-term borrowings		95,660		36,592
Long-term borrowings		25,975		30,106
Trust preferred capital notes		25,413		25,386
Accrued interest payable		3,188		950
Other liabilities		42,660		39,190
Total liabilities		2,221,325		2,136,084
Commitments and contingent liabilities (Note 11)
Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,379,619 and 3,476,614 shares issued and outstanding, respectively, includes 130,629 and 145,677 of unvested shares, respectively)		3,249		3,331
Additional paid-in capital		7,419		12,047
Retained earnings		230,168		217,214
Accumulated other comprehensive loss, net		(41,074)		(36,958)
Equity attributable to C&F Financial Corporation		199,762		195,634
Noncontrolling interest		618		599
Total equity		200,380		196,233
Total liabilities and equity	$	2,421,705	$	2,332,317

See notes to consolidated interim financial statements.

3

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest income
Interest and fees on loans	$	28,369	$	23,159	$	81,845	$	65,566
Interest on interest-bearing deposits and federal funds sold		379		521		836		1,021
Interest and dividends on securities
U.S. treasury, government agencies and corporations		795		961		2,785		1,800
Mortgage-backed securities		902		854		2,782		2,300
Tax-exempt obligations of states and political subdivisions		731		409		2,031		1,096
Taxable obligations of states and political subdivisions		178		188		545		475
Corporate and other		332		234		905		691
Total interest income		31,686		26,326		91,729		72,949
Interest expense
Savings and interest-bearing deposits		1,316		557		3,790		1,415
Time deposits		4,316		722		9,447		2,070
Borrowings		1,291		373		3,837		1,110
Trust preferred capital notes		301		294		890		867
Total interest expense		7,224		1,946		17,964		5,462
Net interest income		24,462		24,380		73,765		67,487
Provision for credit losses		2,050		1,200		5,800		1,402
Net interest income after provision for credit losses		22,412		23,180		67,965		66,085
Noninterest income
Gains on sales of loans		1,220		1,870		4,930		6,763
Interchange income		1,558		1,513		4,658		4,502
Service charges on deposit accounts		1,122		1,099		3,241		3,216
Investment income in other equity interests		211		64		480		294
Mortgage banking fee income		558		731		1,695		2,508
Wealth management services income, net		630		613		1,855		1,885
Mortgage lender services income		537		397		1,567		1,259
Other service charges and fees		364		403		1,134		1,179
Net losses on sales, maturities and calls of available for sale securities		—		—		(5)		—
Other income (loss), net		(180)		(561)		1,671		(3,085)
Total noninterest income		6,020		6,129		21,226		18,521
Noninterest expenses
Salaries and employee benefits		12,921		12,202		40,841		34,700
Occupancy		1,944		2,182		5,975		6,507
Other		6,467		6,705		19,408		19,192
Total noninterest expenses		21,332		21,089		66,224		60,399
Income before income taxes		7,100		8,220		22,967		24,207
Income tax expense		1,323		1,675		4,309		5,144
Net income		5,777		6,545		18,658		19,063
Less net (loss) income attributable to noncontrolling interest		(12)		65		122		212
Net income attributable to C&F Financial Corporation	$	5,789	$	6,480	$	18,536	$	18,851
Net income per share - basic and diluted	$	1.71	$	1.85	$	5.41	$	5.34

See notes to consolidated interim financial statements.

4

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	5,777	$	6,545	$	18,658	$	19,063
Other comprehensive income (loss), net of tax:
Securities available for sale		(5,821)		(15,443)		(4,272)		(40,213)
Defined benefit plan		20		(5)		61		(17)
Cash flow hedges		133		653		95		1,997
Other comprehensive loss, net of tax		(5,668)		(14,795)		(4,116)		(38,233)
Comprehensive income (loss)		109		(8,250)		14,542		(19,170)
Less comprehensive (loss) income attributable to noncontrolling interest		(12)		65		122		212
Comprehensive income (loss) attributable to C&F Financial Corporation	$	121	$	(8,315)	$	14,420	$	(19,382)

See notes to consolidated interim financial statements.

5

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

(Dollars in thousands, except per share amounts)

	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance June 30, 2023	$	3,269	$	8,168	$	225,867	$	(35,406)	$	630	$	202,528
Comprehensive income:
Net income (loss)		—		—		5,789		—		(12)		5,777
Other comprehensive loss		—		—		—		(5,668)		—		(5,668)
Share-based compensation		—		581		—		—		—		581
Restricted stock vested		4		(4)		—		—		—		—
Common stock issued		2		47		—		—		—		49
Common stock purchased		(26)		(1,373)		—		—		—		(1,399)
Cash dividends declared ($0.44 per share)		—		—		(1,488)		—		—		(1,488)
Distributions to noncontrolling interest		—		—		—		—		—		—
Balance September 30, 2023	$	3,249	$	7,419	$	230,168	$	(41,074)	$	618	$	200,380

	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance June 30, 2022	$	3,385	$	14,464	$	203,351	$	(25,525)	$	608	$	196,283
Comprehensive loss:
Net income		—		—		6,480		—		65		6,545
Other comprehensive loss		—		—		—		(14,795)		—		(14,795)
Share-based compensation		—		524		—		—		—		524
Restricted stock vested		2		(2)
Common stock issued		1		46		—		—		—		47
Common stock purchased		(35)		(1,661)		—		—		—		(1,696)
Cash dividends declared ($0.42 per share)		—		—		(1,468)		—		—		(1,468)
Balance September 30, 2022	$	3,353	$	13,371	$	208,363	$	(40,320)	$	673	$	185,440

6

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

(Dollars in thousands, except per share amounts)

	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance December 31, 2022	$	3,331	$	12,047	$	217,214	$	(36,958)	$	599	$	196,233
Adoption of new accounting standard (Note 1)		—		—		(1,072)		—		—		(1,072)
Comprehensive income:
Net income		—		—		18,536		—		122		18,658
Other comprehensive loss		—		—		—		(4,116)		—		(4,116)
Share-based compensation		—		1,508		—		—		—		1,508
Restricted stock vested		30		(30)		—		—		—		—
Common stock issued		3		142		—		—		—		145
Common stock purchased		(115)		(6,248)		—		—		—		(6,363)
Cash dividends declared ($1.32 per share)		—		—		(4,510)		—		—		(4,510)
Distributions to noncontrolling interest		—		—		—		—		(103)		(103)
Balance September 30, 2023	$	3,249	$	7,419	$	230,168	$	(41,074)	$	618	$	200,380

	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance December 31, 2021	$	3,405	$	15,189	$	193,811	$	(2,087)	$	706	$	211,024
Comprehensive loss:
Net income		—		—		18,851		—		212		19,063
Other comprehensive loss		—		—		—		(38,233)		—		(38,233)
Share-based compensation		—		1,532		—		—		—		1,532
Restricted stock vested		16		(16)		—		—		—		—
Common stock issued		3		134		—		—		—		137
Common stock purchased		(71)		(3,468)		—		—		—		(3,539)
Cash dividends declared ($1.22 per share)		—		—		(4,299)		—		—		(4,299)
Distributions to noncontrolling interest		—		—		—		—		(245)		(245)
Balance September 30, 2022	$	3,353	$	13,371	$	208,363	$	(40,320)	$	673	$	185,440

See notes to consolidated interim financial statements.

7

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2023		2022
Operating activities:
Net income	$	18,658	$	19,063
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		5,800		1,402
Accretion of certain acquisition-related discounts, net		(632)		(1,190)
Share-based compensation		1,508		1,532
Depreciation and amortization		2,919		3,305
Amortization of premiums and accretion of discounts on securities, net		1,041		1,960
(Reversal of) provision for indemnifications		(435)		(858)
Income from bank-owned life insurance		(299)		(295)
Pension expense		692		480
Proceeds from sales of loans held for sale		394,106		644,514
Origination of loans held for sale		(400,559)		(587,245)
Gains on sales of loans held for sale		(4,930)		(6,763)
Other gains, net		184		(13)
Change in other assets and liabilities:
Accrued interest receivable		(1,057)		(1,036)
Other assets		1,713		(2,555)
Accrued interest payable		2,238		(244)
Other liabilities		890		(3,032)
Net cash provided by operating activities		21,837		69,025
Investing activities:
Proceeds from sales, maturities and calls of securities available for sale and payments on mortgage-backed securities		75,560		43,681
Purchases of securities available for sale		(30,075)		(223,034)
Purchases of time deposits, net		(253)		494
Repayments on loans held for investment by non-bank affiliates		121,257		136,624
Purchases of loans held for investment by non-bank affiliates		(124,340)		(234,828)
Net increase in community banking loans held for investment		(84,113)		(61,516)
Purchases of corporate premises and equipment		(1,019)		(2,360)
Proceeds from sales of other real estate owned		—		915
Changes in collateral posted with other financial institutions, net		—		3,880
Other investing activities, net		(3,675)		(1,061)
Net cash used in investing activities		(46,658)		(337,205)
Financing activities:
Net (decrease) increase in demand and savings deposits		(191,426)		143,467
Net increase (decrease) in time deposits		215,995		(38,384)
Net increase in short-term borrowings		59,068		2,898
Repayments of long-term borrowings		(4,000)		—
Repurchases of common stock		(6,363)		(3,539)
Cash dividends paid		(4,510)		(4,299)
Other financing activities, net		(92)		(260)
Net cash provided by financing activities		68,672		99,883
Net increase (decrease) in cash and cash equivalents		43,851		(168,297)
Cash and cash equivalents at beginning of period		26,661		267,745
Cash and cash equivalents at end of period	$	70,512	$	99,448
Supplemental cash flow disclosures:
Interest paid	$	15,707	$	5,738
Income taxes paid		3,545		6,623
Supplemental disclosure of noncash investing and financing activities:
Transfers from corporate premises and equipment to other real estate owned	$	—		423
Adoption of new accounting standard (Note 1)		1,072		—
Liabilities assumed to acquire right of use assets under operating leases		181		888
Transfers from loans held for sale to loans held for investment		—		2,971

See notes to consolidated interim financial statements.

8

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM 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, 2022 (2022 Annual Report).  The accounting and reporting policies of the Corporation conform to U.S. GAAP and to predominant practices within the banking industry and are primarily disclosed in the 2022 Annual Report, except as described below related to the adoption of new accounting standards.

The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation), its direct wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or C&F Bank) and indirect subsidiaries that are wholly-owned or controlled. Subsidiaries that are less than wholly owned are fully consolidated if they are controlled by the Corporation or one of its subsidiaries, and the portion of any subsidiary not owned by the Corporation is reported as noncontrolling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Corporation owns all of the common stock of C&F Financial Statutory Trust I, C&F Financial Statutory Trust II and Central Virginia Bankshares Statutory Trust I, all of which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as liabilities of the Corporation.  

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. (C&F Insurance) and CVB Title Services, Inc. (CVB Title), all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, originates and sells residential mortgages, provides mortgage loan origination services to third-party lenders 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 and CVB Title were organized for the primary purpose of owning equity interests in an independent insurance agency and a full service title and settlement agency, respectively. Business segment data is presented in Note 10.

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 credit losses and evaluation of goodwill for 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 and did not affect net income or total equity.

9

Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the Consolidated Balance Sheets. The Corporation’s derivative financial instruments include (1) interest rate swaps that qualify and are designated as cash flow hedges on the Corporation’s trust preferred capital notes, (2) interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate contracts arising from mortgage banking activities, including interest rate lock commitments (IRLCs) on mortgage loans. The gain or loss on the Corporation’s cash flow hedges is reported as a component of other comprehensive income (loss), net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. IRLCs and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, and therefore changes in the fair value of these instruments are reported as noninterest income. The Corporation’s derivative financial instruments are described more fully in Note 12.

Recently Adopted Accounting Standard: On January 1, 2023, the Corporation adopted Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial instruments—Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842)—Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ASU 2020-02, “Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments”  and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures” (collectively, ASC 326).

ASC 326 introduced an approach based on current expected credit losses (CECL) to estimate credit losses on certain types of financial instruments, replacing the incurred loss methodology from prior GAAP. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. It modified the impairment model for available-for-sale debt securities and provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination.  It also modified the measurement principles for modifications of loans to borrowers experiencing financial difficulty, including how the allowance for credit losses (ACL) is measured for such loans.

The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, recording an increase in the reported balance of loans and the allowance for credit losses on loans, recognizing a liability for credit losses on commitments to extend credit, and reducing total equity of both the Corporation and of C&F Bank, which resulted in a reduction of regulatory capital of C&F Bank.  As a result of adopting ASC 326, the Corporation recorded a decrease to opening retained earnings of $1.1 million.

ASC 326 also replaced the Corporation’s previous accounting policies for purchased credit-impaired (PCI) loans and troubled-debt restructurings (TDRs). With the adoption of ASC 326, loans previously designated as PCI loans were designated as purchased loans with credit deterioration (PCD loans). The Corporation adopted ASC 326 using the prospective transition approach for PCD loans that were previously identified as PCI and accounted for under ASC 310-30. On January 1, 2023, the Corporation’s PCD loans were adjusted to reflect the addition of $604,000 of expected credit losses to the amortized cost basis of the loans and a corresponding increase to the ACL. The remaining noncredit discount, the difference between the adjusted amortized cost basis and the outstanding principal balance on PCD loans, will be accreted into interest income over the estimated remaining lives of the loans using the effective interest rate method. The evaluation of the ACL will include PCD loans together with other loans that share similar risk characteristics, rather than using the separate pools that were used under PCI accounting. The adoption of ASC 326 also replaced previous TDR accounting guidance, and the evaluation of the ACL will include loans previously designated as TDRs together with other loans that share similar risk characteristics.    

The adoption of ASC 326 did not affect the carrying value of debt securities or the amount of unrealized gains and losses recorded in accumulated other comprehensive loss. Upon adoption of ASC 326, the Corporation did not have any securities included in its portfolio where other-than-temporary-impairments had previously been recognized or that required an ACL.

The following table illustrates the impact of adopting ASC 326.

10

	December 31, 2022		January 1, 2023		January 1, 2023
	As Previously				As Reported
	Reported		Impact of		Under
(Dollars in thousands)	(Incurred Loss)		ASC 326		ASC 326
Assets:
Loans, gross	$	1,635,718	$	604	$	1,636,322
Allowance for credit losses:
Commercial		11,219		(22)		11,197
Consumer		3,330		107		3,437
Consumer finance		25,969		406		26,375
Allowance for credit losses		40,518		491		41,009
Loans, net		1,595,200		113		1,595,313
Net deferred tax asset		22,014		316		22,330
Liabilities:
Reserve for credit losses on unfunded commitments		—		1,501		1,501
Total equity:	$	196,233	$	(1,072)	$	195,161

The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022. Accounting policies applying to prior periods are described in the 2022 Annual Report, as discussed above.

Securities: Investments in debt securities are classified as either held to maturity, available for sale, or trading, based on management’s intent. Currently all of the Corporation’s debt securities are classified as available for sale. Available for sale debt securities are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income (loss). Gains or losses are recognized in net income on the trade date using the amortized cost of the specific security sold. Purchase premiums are recognized in interest income using the effective interest rate method over the period from purchase to maturity or, for callable securities, the earliest call date, and purchase discounts are recognized in the same manner from purchase to maturity.  

Impairment of debt securities occurs when the fair value of a security is less than its amortized cost. The Corporation has elected to exclude accrued interest receivable from the amortized cost basis. For debt securities available for sale, impairment is 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, the Corporation does not intend to sell the security and it is not more-likely-than-not that the Corporation will be required to sell the security before recovery, the Corporation evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of 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, or other factors such as changes in market interest rates. If a credit loss exists, an allowance for credit losses is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the security’s amortized cost basis exceeds its fair value. Changes in the allowance for credit losses are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities available for sale not resulting from credit losses are recorded in other comprehensive income (loss). The Corporation regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized

11

cost, the financial health of and specific prospects for the issuer, the Corporation’s intention with regard to holding the security to maturity and the likelihood that the Corporation would be required to sell the security before recovery.

Loans Held for Investment: The Corporation makes mortgage, commercial and consumer loans to customers. The Corporation’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for credit losses. The Corporation has elected to exclude accrued interest receivable from the amortized cost basis. Interest on loans is credited to operations based on the principal amount outstanding. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the level-yield method. The Corporation is amortizing these amounts over the estimated life of the related loans.

Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition. In the case of loans that have experienced more than insignificant deterioration in credit quality since origination as of the acquisition date, the loan’s amortized cost basis is increased above estimated fair value by the amount of expected credit losses as of the acquisition date, and a corresponding allowance for credit losses is also recorded. Any remaining non-credit discount or premium for such purchased loans with credit deterioration (or PCD loans) and any fair value discount or premium for non-PCD loans is accreted or amortized as an adjustment to yield over the estimated lives of the loans using the level-yield method. There is no allowance for credit losses established at the acquisition date for non-PCD loans.

A loan’s past due status is based on the contractual due date of the most delinquent payment due.  Loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income.  Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding.  A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.  These policies are applied consistently across our loan portfolio.

In the ordinary course of business, the Corporation has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.

Allowance for Credit Losses on Loans: The allowance for credit losses on loans is established through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. No allowance for credit loss is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a discounted cash flow approach for all loans except for overdraft balances, which are evaluated using a loss rate approach.  The discounted cash flow approach used by the Corporation utilizes loan-level cash flow projections and pool-level assumptions.

For commercial (except for loans to states and political subdivisions) and consumer loans, cash flow projections and estimated expected losses are based in part on twelve-month forecasts of the national unemployment rate that are reasonable and supportable and external observations of historical loan losses. Forecasts of the national unemployment rate are derived from the Federal Open Markets Committee of the Federal Reserve Board and incorporated into the estimate of expected credit losses using a statistical regression analysis. For periods beyond those for which reasonable and

12

supportable forecasts are available, projections are based on a reversion of the national unemployment rate from the last forecast to a historical average level over the following six months. Cash flow projections and estimated expected losses for loans to states and political subdivisions are based on external loss observations for state and municipal debt obligations. For consumer finance loans, cash flow projections and estimated expected losses reflect historical average loss experience based on internal observations for auto loans and based on external loss observations for marine and recreational vehicle loans.

Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the loss estimation process. Factors considered by management include changes and expected changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.  The evaluation also considers the following risk characteristics that are inherent in the loan portfolio:

● Commercial loans are comprised of mortgage loans on commercial real estate, real estate acquisition, development and constructions loans, and other business lending, and carry risks associated with the successful operation of a business or a real estate project and changes in the value of collateral. In addition to other risks associated with the ownership of real estate, the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. Construction loans, which include loans to individuals for the construction of a residence that generally will be occupied by the borrower, also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

● Consumer loans are comprised primarily of residential mortgage loans and home equity lines secured by residential real estate and carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.

● Consumer finance loans are comprised of indirect financing for purchases of automobiles and marine and recreational vehicles (RVs) and carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral, which are typically rapidly-depreciating vehicles. Consumer finance loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

Loans that do not share common risk characteristics with other loans are evaluated individually and are not included in the collective analysis. The allowance for credit losses on loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated costs to sell.

Reserve for Unfunded Commitments: The Corporation records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancelable by the Corporation.  The reserve for unfunded commitments is measured based on the principles utilized in estimating the allowance for credit losses on loans and an estimate of the amount of unfunded commitments expected to be advanced. Changes in the reserve for unfunded commitments are recorded through the provision for credit losses.

Recent Significant Accounting Pronouncements: In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”  Subsequently, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This guidance provides temporary, optional expedients and exceptions to ease the potential burden in accounting for modifications of loan contracts, borrowings, hedging relationships and other transactions related to reference rate reform associated with the LIBOR transition if certain criteria are met. The amendments are effective as of March 12, 2020 through December 31, 2024 and can be adopted at an instrument level. The Corporation has utilized certain optional expedients and exceptions

13

under Topic 848 in the case of modifications to certain loans, borrowings and cash flow hedges during 2022 and 2023. These modifications have not had and are not expected to have a material impact on the 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

On January 1, 2023, the Corporation adopted ASC 326, which made changes to accounting for available for sale debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires financial assets measured at amortized cost to measure an expected credit loss under the CECL methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. All securities information presented as of September 30, 2023 is in accordance with ASC 326. All securities information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update refer to Note 1.

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

	September 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	52,785	$	—	$	(1,391)	$	51,394
U.S. government agencies and corporations		106,455		—		(12,405)		94,050
Mortgage-backed securities		183,552		2		(23,239)		160,315
Obligations of states and political subdivisions		142,593		97		(8,525)		134,165
Corporate and other debt securities		25,212		—		(4,483)		20,729
	$	510,597	$	99	$	(50,043)	$	460,653

	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	60,886	$	—	$	(2,053)	$	58,833
U.S. government agencies and corporations		143,241		—		(12,967)		130,274
Mortgage-backed securities		200,393		65		(20,540)		179,918
Obligations of states and political subdivisions		127,317		300		(6,790)		120,827
Corporate and other debt securities		25,291		—		(2,552)		22,739
	$	557,128	$	365	$	(44,902)	$	512,591

The amortized cost and estimated fair value of securities at September 30, 2023, by the earlier of contractual maturity or expected maturity, are shown below. The Corporation has elected to exclude accrued interest receivable, totaling $2.82

14

million at September 30, 2023, from the amortized cost basis of securities.  Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

	September 30, 2023
	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	122,708	$	117,683
Due after one year through five years		180,708		161,000
Due after five years through ten years		123,319		105,599
Due after ten years		83,862		76,371
	$	510,597	$	460,653

The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of securities. During the three and nine months ended September 30, 2023 and 2022 there were no sales of securities.  

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Realized gains from sales, maturities and calls of securities:
Gross realized gains	$	—	$	—	$	—	$	—
Gross realized losses		—		—		(5)		—
Net realized losses	$	—	$	—	$	(5)	$	—
Proceeds from sales, maturities, calls and paydowns of securities	$	30,719	$	12,700	$	75,560	$	43,681

The Corporation pledges securities primarily to secure public deposits, repurchase agreements and lines of credit that provide liquidity to the Corporation and C&F Bank. Securities with an aggregate amortized cost of $215.22 million and an aggregate fair value of $190.51 million were pledged at September 30, 2023. Securities with an aggregate amortized cost of $237.15 million and an aggregate fair value of $213.58 million were pledged at December 31, 2022.

Securities in an unrealized loss position at September 30, 2023, 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. Treasury securities	$	—		—	$	51,394	$	1,391	$	51,394	$	1,391
U.S. government agencies and corporations		—		—		94,050		12,405		94,050		12,405
Mortgage-backed securities		10,704		697		149,535		22,542		160,239		23,239
Obligations of states and political subdivisions		44,075		1,657		71,081		6,868		115,156		8,525
Corporate and other debt securities		3,260		489		17,469		3,994		20,729		4,483
Total temporarily impaired securities	$	58,039	$	2,843	$	383,529	$	47,200	$	441,568	$	50,043

There were 615 debt securities with a fair value below the amortized cost basis, totaling $441.57 million of aggregate fair value as of September 30, 2023. The Corporation concluded that a credit loss does not exist in its securities portfolio at September 30, 2023, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) 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 its investment, and (4) issuers have continued to make timely payments of principal and interest. Additionally, 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. 

15

Securities in an unrealized loss position at December 31, 2022, 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. Treasury securities	$	50,556	$	1,368	$	8,277	$	685	$	58,833	$	2,053
U.S. government agencies and corporations		71,948		1,578		58,326		11,389		130,274		12,967
Mortgage-backed securities		73,301		5,441		104,563		15,099		177,864		20,540
Obligations of states and political subdivisions		60,838		2,434		32,120		4,356		92,958		6,790
Corporate and other debt securities		15,049		1,702		6,681		850		21,730		2,552
Total temporarily impaired securities	$	271,692	$	12,523	$	209,967	$	32,379	$	481,659	$	44,902

The Corporation’s investment in restricted stock totaled $4.80 million at September 30, 2023 and $1.12 million at December 31, 2022 and consisted of Federal Home Loan Bank of Atlanta (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 impaired at September 30, 2023 and no impairment has been recognized.

NOTE 3: Loans

On January 1, 2023, the Corporation adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update see Note 1. All loan information presented as of September 30, 2023 is in accordance with ASC 326. All loan information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

The Corporation’s loans are stated at their face amount, net of deferred fees and costs and discounts, and consist of the classes of loans included in the table below. The Corporation has elected to exclude accrued interest receivable, totaling $7.19 million at September 30, 2023, from the recorded balance of loans.

	September 30,		December 31,
(Dollars in thousands)	2023		2022
Commercial real estate	$	645,467	$	592,301
Commercial business		118,641		118,605
Construction - commercial real estate		62,994		49,136
Land acquisition and development		28,400		37,537
Builder lines		30,787		34,538
Construction - consumer real estate		12,046		10,539
Residential mortgage		290,325		266,267
Equity lines		48,027		43,300
Other consumer		9,867		8,938
Consumer finance - automobiles		403,154		411,112
Consumer finance - marine and recreational vehicles		68,021		63,445
Subtotal		1,717,729		1,635,718
Less allowance for credit losses		(40,248)		(40,518)
Loans, net	$	1,677,481	$	1,595,200

Other consumer loans included $207,000 and $284,000 of demand deposit overdrafts at September 30, 2023 and December 31, 2022, respectively.

16

The following table shows the aging of the Corporation’s loan portfolio, by class, at September 30, 2023:

	30-59		60-89		90+								90+ Days
	Days		Days		Days		Total						Past Due and
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current1		Total Loans		Accruing
Commercial real estate	$	614	$	—	$	424	$	1,038	$	644,429	$	645,467	$	160
Commercial business		52		30		—		82		118,559		118,641		—
Construction - commercial real estate		—		—		—		—		62,994		62,994		—
Land acquisition and development		—		—		—		—		28,400		28,400		—
Builder lines		—		—		—		—		30,787		30,787		—
Construction - consumer real estate		282		—		—		282		11,764		12,046		—
Residential mortgage		633		71		280		984		289,341		290,325		280
Equity lines		268		9		51		328		47,699		48,027		—
Other consumer		—		—		—		—		9,867		9,867		—
Consumer finance - automobiles		12,233		2,121		831		15,185		387,969		403,154		—
Consumer finance - marine and recreational vehicles		301		—		80		381		67,640		68,021		—
Total	$	14,383	$	2,231	$	1,666	$	18,280	$	1,699,449	$	1,717,729	$	440

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 $141,000, 60-89 days past due of $9,000 and 90+ days past due of $1.23 million.

The following table shows the Corporation’s recorded balance of loans on nonaccrual status as of September 30, 2023 and December 31, 2022. The Corporation recognized no interest income on loans on nonaccrual status as of September 30, 2023 and had no reversals and $14,000 of reversals of interest income upon placing loans on nonaccrual status during the three and nine months ended September 30, 2023, respectively. All nonaccrual loans at September 30, 2023 had an allowance for credit losses.

	September 30,		December 31,
(Dollars in thousands)	2023		2022
Commercial real estate	$	264	$	—
Residential mortgage		141		156
Equity lines		60		108
Consumer finance - automobiles		831		842
Consumer finance - marine and recreational vehicles		80		83
Total	$	1,376	$	1,189

Occasionally, the Corporation modifies loans to borrowers experiencing financial difficulties by providing principal forgiveness, term extensions, interest rate reductions or other-than-insignificant payment delays. As the effect of most modifications is already included in the allowance for credit losses due to the measurement methodologies used in its estimate, the allowance for credit losses is typically not adjusted upon modification. When principal forgiveness is provided at modification, the amount forgiven is charged against the allowance for credit losses.  In some cases, the Corporation may provide multiple types of modifications on one loan and when multiple types of modifications occur within the same period, the combination of modifications is separately reported.

The following table presents the amortized cost basis of loans as of September 30, 2023 that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023.

17

	Three Months Ended September 30, 2023					Nine Months Ended September 30, 2023
			% of Total					% of Total
			Class of					Class of
	Amortized		Financing			Amortized		Financing
(Dollars in thousands)	Cost		Receivable			Cost		Receivable
Term Extension
Commercial real estate	$	969		0.2	%	$	969		0.2	%
Residential mortgage		71		0.0			71		0.0
Total Term Extension	$	1,040				$	1,040
Combination Term Extension and Interest Rate Reduction
Commercial real estate		—		—			45		0.0
Total Combination Term Extension and Interest Rate Reduction	$	—				$	45
Total	$	1,040		0.1	%	$	1,085		0.1	%

The following table presents the financial effects of the loan modifications presented above to borrowers experiencing financial difficulty for the three and nine months ended September 30, 2023.

	Three Months Ended September 30, 2023					Nine Months Ended September 30, 2023
	Weighted-			Weighted-		Weighted-			Weighted-
	Average			Average		Average			Average
	Interest Rate			Term Extension		Interest Rate			Term Extension
(Dollars in thousands)	Reduction			(in years)		Reduction			(in years)
Commercial real estate		—	%		2.0		0.75	%		2.1
Residential mortgage		—			10.0		—			10.0
Total		—	%		2.5		0.75	%		2.6

The Corporation closely monitors the performance of modified loans to understand the effectiveness of its modification efforts.  Upon the determination that all or a portion of a modified loan is uncollectible, that amount is charged against the allowance for credit losses. There were no payment defaults during the three and nine months ended September 30, 2023 of modified loans that were modified during the previous twelve months and all were current as of September 30, 2023.

Prior to the adoption of ASC 326

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting.  The outstanding principal balance and the carrying amount at December 31, 2022 of loans acquired in business combinations were as follows:

	December 31, 2022
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	4,522	$	38,157	$	42,679
Carrying amount
Real estate – residential mortgage	$	300	$	8,587	$	8,887
Real estate – construction		—		—		—
Commercial, financial and agricultural1		1,114		23,023		24,137
Equity lines		15		5,047		5,062
Consumer		26		755		781
Total acquired loans	$	1,455	$	37,412	$	38,867

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

18

The following table presents a summary of the change in the accretable yield of loans classified as PCI:

		Nine Months Ended
(Dollars in thousands)	September 30, 2022
Accretable yield, balance at beginning of period	$	3,111
Accretion		(1,270)
Reclassification of nonaccretable difference due to improvement in expected cash flows		1,603
Other changes, net		178
Accretable yield, balance at end of period	$	3,622

The past due status of loans as of December 31, 2022 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
Residential mortgage	$	1,649	$	452	$	20	$	2,121	$	300	$	263,846	$	266,267	$	—
Real estate – construction:
Construction - commercial real estate		—		—		—		—		—		49,136		49,136		—
Construction - consumer real estate		—		—		—		—		—		10,539		10,539		—
Commercial, financial and agricultural:
Commercial real estate		—		—		—		—		1,114		591,187		592,301		—
Land acquisition and development		—		—		—		—		—		37,537		37,537		—
Builder lines		—		—		—		—		—		34,538		34,538		—
Commercial business		—		1		—		1		—		118,604		118,605		—
Equity lines		—		39		—		39		15		43,246		43,300		—
Other consumer		9		—		191		200		26		8,712		8,938		191
Consumer finance:
Automobiles		10,557		1,570		842		12,969		—		398,143		411,112		—
Marine and recreational vehicles		114		35		83		232		—		63,213		63,445		—
Total	$	12,329	$	2,097	$	1,136	$	15,562	$	1,455	$	1,618,701	$	1,635,718	$	191

1For 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 $244,000 and 90+ days past due of $945,000.

There were no loan modifications during the three and nine months ended September 30, 2022 that were classified as TDRs. There were no TDR payment defaults during the three and nine months ended September 30, 2022.

Impaired loans, which included TDRs of $823,000, and the related allowance at December 31, 2022 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	$	797	$	36	$	761	$	51	$	806	$	35
Equity lines		26		26		—		—		28		2
Total	$	823	$	62	$	761	$	51	$	834	$	37

19

NOTE 4: Allowance for Credit Losses

On January 1, 2023, the Corporation adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update see Note 1. All allowance for credit loss information presented as of September 30, 2023 is in accordance with ASC 326. All allowance for credit loss information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.

The following table shows the allowance for credit losses activity by loan portfolio for the nine months ended  September 30, 2023:

					Consumer
(Dollars in thousands)	Commercial		Consumer		Finance		Total
Allowance for credit losses:
Balance at December 31, 2022	$	11,219	$	3,330	$	25,969	$	40,518
Impact of ASC 326 adoption on non-PCD loans		(617)		98		406		(113)
Impact of ASC 326 adoption on PCD loans		595		9		—		604
Provision charged to operations		839		362		4,250		5,451
Loans charged off		(16)		(240)		(9,306)		(9,562)
Recoveries of loans previously charged off		144		136		3,070		3,350
Balance at September 30, 2023	$	12,164	$	3,695	$	24,389	$	40,248

The following table presents a breakdown of the provision for credit losses for the periods indicated.

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Provision for credit losses:
Provision for loans	$	2,100	$	1,200	$	5,451	$	1,402
Provision for unfunded commitments		(50)		—		349		—
Total	$	2,050	$	1,200	$	5,800	$	1,402

Commercial and consumer loans are assigned loan classification ratings based on their credit quality and risk of loss. These loan ratings are reviewed on a quarterly basis and updated as new information becomes available. 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.

20

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

● Doubtful 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.

The table below details the recorded balance of the classes of loans within the commercial and consumer loan portfolios by loan rating and year of origination as of September 30, 2023:

21

													Revolving		Revolving
	Term Loans Recorded Balance by Origination Year												Loans		Loans
													Recorded		Converted
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Balance		to Term		Total
Commercial real estate:
Loan Rating
Pass	$	64,729	$	124,701	$	155,982	$	107,937	$	38,611	$	146,396	$	—	$	119	$	638,475
Special Mention		—		—		5,763		—		—		965		—		—		6,728
Substandard Nonaccrual		—		—		—		—		—		264		—		—		264
Total	$	64,729	$	124,701	$	161,745	$	107,937	$	38,611	$	147,625	$	—	$	119	$	645,467
Commercial business:
Loan Rating
Pass	$	17,317	$	19,330	$	18,728	$	14,045	$	15,376	$	14,196	$	19,496	$	88	$	118,576
Special Mention		65		—		—		—		—		—		—		—		65
Total	$	17,382	$	19,330	$	18,728	$	14,045	$	15,376	$	14,196	$	19,496	$	88	$	118,641
Construction - commercial real estate:
Loan Rating
Pass	$	23,177	$	30,632	$	1,150	$	8,035	$	—	$	—	$	—	$	—	$	62,994
Total	$	23,177	$	30,632	$	1,150	$	8,035	$	—	$	—	$	—	$	—	$	62,994
Land acquisition and development:
Loan Rating
Pass	$	1,049	$	6,062	$	10,969	$	9,992	$	—	$	328	$	—	$	—	$	28,400
Total	$	1,049	$	6,062	$	10,969	$	9,992	$	—	$	328	$	—	$	—	$	28,400
Builder lines:
Loan Rating
Pass	$	16,390	$	9,202	$	4,585	$	—	$	404	$	—	$	206	$	—	$	30,787
Total	$	16,390	$	9,202	$	4,585	$	—	$	404	$	—	$	206	$	—	$	30,787
Construction - consumer real estate:
Loan Rating
Pass	$	5,543	$	5,735	$	768	$	—	$	—	$	—	$	—	$	—	$	12,046
Total	$	5,543	$	5,735	$	768	$	—	$	—	$	—	$	—	$	—	$	12,046
Residential mortgage:
Loan Rating
Pass	$	48,024	$	93,630	$	45,721	$	42,276	$	11,828	$	48,123	$	—	$	—	$	289,602
Special Mention		—		—		4		—		—		96		—		—		100
Substandard		—		—		—		104		—		378		—		—		482
Substandard Nonaccrual		—		—		—		—		—		141		—		—		141
Total	$	48,024	$	93,630	$	45,725	$	42,380	$	11,828	$	48,738	$	—	$	—	$	290,325
Equity lines:
Loan Rating
Pass	$	—	$	—	$	35	$	70	$	—	$	878	$	46,680	$	299	$	47,962
Substandard		—		—		—		—		5		—		—		—		5
Substandard Nonaccrual		—		—		—		—		—		9		—		51		60
Total	$	—	$	—	$	35	$	70	$	5	$	887	$	46,680	$	350	$	48,027
Other consumer:
Loan Rating
Pass	$	4,856	$	3,061	$	717	$	329	$	227	$	627	$	50	$	—	$	9,867
Total	$	4,856	$	3,061	$	717	$	329	$	227	$	627	$	50	$	—	$	9,867
Total:
Loan Rating
Pass	$	181,085	$	292,353	$	238,655	$	182,684	$	66,446	$	210,548	$	66,432	$	506	$	1,238,709
Special Mention		65		—		5,767		—		—		1,061		—		—		6,893
Substandard		—		—		—		104		5		378		—		—		487
Substandard Nonaccrual		—		—		—		—		—		414		—		51		465
Total	$	181,150	$	292,353	$	244,422	$	182,788	$	66,451	$	212,401	$	66,432	$	557	$	1,246,554

For consumer finance loans, the Corporation utilizes credit scores based on the methods developed and defined by the Fair Isaac Corporation (FICO) as a key indicator of the risk of loss to manage the portfolio and estimate the allowance for credit

22

losses.  A FICO Score is a three-digit number based on the information in an applicant’s credit reports. It helps lenders determine how likely an applicant is to repay a loan. This, in turn, affects the loan amount that may be approved, repayment terms, and interest rate. Consumer finance loans are assigned a credit rating based on borrowers’ credit scores at the time of origination and are categorized within ranges of credit ratings used internally that parallel FICO Score rating bands. The Corporation monitors the consumer finance loan portfolio by past due status (refer to Note 3) and by credit rating at the time of origination, which the Corporation believes serves as a relevant indicator of aggregate credit quality and risk of loan defaults in the portfolio based upon the use of FICO Scores over time for loan approval decisions and through experience analyzing loss patterns. The characteristics of these credit ratings are as follows:

● Very Good and Good credit rated borrowers are near or above the average FICO Score of consumers. Borrowers generally have limited to no prior credit difficulties or have shown extensive creditworthiness over a recent period of time.

● Fairly Good and Fair credit rated borrowers are approaching or slightly below the average FICO Score of consumers but typically have a credit profile acceptable to most lenders. Borrowers may have experienced minor credit difficulties or have a relatively limited credit history.

● Marginal credit rated borrowers are well below the average FICO Score of consumers. Borrowers may have limited access to traditional financing due to having experienced prior credit difficulties or have a limited credit history. The risk of future charge-offs is higher.

The table below details the recorded balance of the classes of loans within the consumer finance loan portfolio by credit rating and year of origination as of September 30, 2023:

															Revolving
	Term Loans Recorded Balance by Origination Year														Loans
													Revolving		Converted
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Consumer finance - automobiles:
Credit rating
Very good	$	7,814	$	13,655	$	4,904	$	1,170	$	338	$	34	$	—	$	—	$	27,915
Good		26,830		46,654		17,211		3,913		1,391		456		—		—		96,455
Fairly good		36,253		60,018		29,527		7,068		4,816		2,061		—		—		139,743
Fair		24,257		40,299		24,503		7,973		5,854		2,676		—		—		105,562
Marginal		5,538		9,690		8,647		3,733		3,410		2,461		—		—		33,479
Total	$	100,692	$	170,316	$	84,792	$	23,857	$	15,809	$	7,688	$	—	$	—	$	403,154
Consumer finance - marine and recreational vehicles:
Credit rating
Very good	$	6,475	$	15,774	$	10,291	$	10,386	$	2,654	$	2,556	$	—	$	—	$	48,136
Good		6,942		8,280		1,712		1,461		425		466		—		—		19,286
Fairly good		267		225		38		31		—		38		—		—		599
Total	$	13,684	$	24,279	$	12,041	$	11,878	$	3,079	$	3,060	$	—	$	—	$	68,021
Total:
Credit rating
Very good	$	14,289	$	29,429	$	15,195	$	11,556	$	2,992	$	2,590	$	—	$	—	$	76,051
Good		33,772		54,934		18,923		5,374		1,816		922		—		—		115,741
Fairly good		36,520		60,243		29,565		7,099		4,816		2,099		—		—		140,342
Fair		24,257		40,299		24,503		7,973		5,854		2,676		—		—		105,562
Marginal		5,538		9,690		8,647		3,733		3,410		2,461		—		—		33,479
Total	$	114,376	$	194,595	$	96,833	$	35,735	$	18,888	$	10,748	$	—	$	—	$	471,175

23

The following table details the current period gross charge-offs of loans by year of origination for the nine months ended September 30, 2023:

															Revolving
	Current Period Gross Charge-offs by Origination Year														Loans
													Revolving		Converted
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Commercial business	$	—	$	16	$	—	$	—	$	—	$	—	$	—	$	—	$	16
Equity lines		—		—		—		—		—		8		—		—		8
Other consumer1		199		25		—		3		2		3		—		—		232
Consumer finance - automobiles		490		4,396		2,628		583		477		567		—		—		9,141
Consumer finance - marine and recreational vehicles		—		82		—		40		6		37		—		—		165
Total	$	689	$	4,519	$	2,628	$	626	$	485	$	615	$	—	$	—	$	9,562

1 Gross charge-offs of other consumer loans for the nine months ended September 30, 2023 included $199,000 of demand deposit overdrafts that originated in 2023.

Gross charge-offs increased for the nine months ended  September 30, 2023 compared to the same period in 2022 due primarily to higher charge-offs within the consumer finance-automobile portfolio segment as a result of an increase in the number of delinquent loans following a period of historically low delinquencies during the COVID-19 pandemic, a decline in wholesale values of used automobiles from a recent peak during the COVID-19 pandemic and challenges in repossessing automobiles due to a decline in the number of repossession agencies, which results in a fully charged-off loan when the automobile cannot be repossessed.

As of September 30, 2023, the Corporation had no collateral dependent loans for which repayment was expected to be

derived substantially through the operation or sale of the collateral and where the borrower is experiencing financial

difficulty.

Prior to the adoption of ASC 326

The following table presents the changes in the allowance for loan losses by major classification during the nine months ended September 30, 2022:

	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, 2021	$	2,660	$	856	$	11,085	$	593	$	172	$	24,791	$	40,157
Provision (credited) charged to operations		(6)		(62)		(623)		(60)		83		2,070		1,402
Loans charged off		—		—		(11)		—		(193)		(4,115)		(4,319)
Recoveries of loans previously charged off		16		—		13		2		93		3,516		3,640
Balance at September 30, 2022	$	2,670	$	794	$	10,464	$	535	$	155	$	26,262	$	40,880

24

The following table presents, as of December 31, 2022, 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	$	51	$	—	$	—	$	—	$	—	$	—	$	51
Collectively evaluated for impairment		2,571		788		10,431		497		211		25,969		40,467
Acquired loans - PCI		—		—		—		—		—		—		—
Total allowance	$	2,622	$	788	$	10,431	$	497	$	211	$	25,969	$	40,518
Loans:
Individually evaluated for impairment	$	797	$	—	$	—	$	26	$	—	$	—	$	823
Collectively evaluated for impairment		265,170		59,675		781,867		43,259		8,912		474,557		1,633,440
Acquired loans - PCI		300		—		1,114		15		26		—		1,455
Total loans	$	266,267	$	59,675	$	782,981	$	43,300	$	8,938	$	474,557	$	1,635,718

Loans by credit quality indicators as of December 31, 2022 were as follows:

			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Residential mortgage	$	264,891	$	518	$	702	$	156	$	266,267
Real estate – construction:
Construction - commercial real estate		49,136		—		—		—		49,136
Construction - consumer real estate		10,539		—		—		—		10,539
Commercial, financial and agricultural:
Commercial real estate		585,707		738		5,856		—		592,301
Land acquisition and development		37,537		—		—		—		37,537
Builder lines		34,538		—		—		—		34,538
Commercial business		118,605		—		—		—		118,605
Equity lines		43,147		40		5		108		43,300
Other consumer		8,747		191		—		—		8,938
	$	1,152,847	$	1,487	$	6,563	$	264	$	1,161,161

1 At December 31, 2022, the Corporation did not have any loans classified as Doubtful or Loss.

			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance:
Automobiles	$	410,270	$	842	$	411,112
Marine and recreational vehicles		63,362		83		63,445
	$	473,632	$	925	$	474,557

25

NOTE 5: Goodwill and Other Intangible Assets

The carrying amount of goodwill was $25.19 million at September 30, 2023 and December 31, 2022. There were no changes in the recorded balance of goodwill during the three and nine months ended September 30, 2023 or 2022.

The Corporation had $1.48 million and $1.68 million of other intangible assets as of September 30, 2023 and December 31, 2022, respectively. Other intangible assets were recognized in connection with the core deposits acquired from Peoples Bankshares, Incorporated in 2020 and customer relationships acquired by C&F Wealth Management in 2016. The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets:

		September 30,				December 31,
		2023				2022
		Gross				Gross
		Carrying	Accumulated			Carrying	Accumulated
(Dollars in thousands)		Amount	Amortization			Amount	Amortization
Amortizable intangible assets:
Core deposit intangibles	$	1,711	$	(557)	$	1,711	$	(464)
Other amortizable intangibles		1,405		(1,084)		1,405		(973)
Total	$	3,116	$	(1,641)	$	3,116	$	(1,437)

Amortization expense was $68,000 and $75,000 for the three months ended September 30, 2023 and 2022, respectively, and $204,000 and $224,000 for the nine months ended September 30, 2023 and 2022, respectively.

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

Equity and Noncontrolling Interest

The Board of Directors authorized a program, effective December 1, 2022, to repurchase up to $10.00 million of the Corporation’s common stock through December 31, 2023 (the 2022 Repurchase Program). During the three and nine months ended September 30, 2023, the Corporation repurchased $1.31 million and $5.85 million, respectively, of its common stock under the 2022 Repurchase Program.  As of September 30, 2023, there was $3.70 million remaining available for repurchases of the Corporation’s common stock under the 2022 Repurchase Program.

The Corporation’s previous share repurchase program, which was authorized by the Board of Directors in November 2021, expired on November 30, 2022.  There were 34,262 shares and 66,143 shares, respectively, repurchased under the previous share repurchase program during the three and nine months ended September 30, 2022 for an aggregate cost of $1.69 million and $3.30 million, respectively.

Additionally during the nine months ended September 30, 2023 and 2022, the Corporation withheld 7,765 shares and 4,503 shares of its common stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock.  

Noncontrolling interest represents an ownership interest in C&F Select LLC, a subsidiary of C&F Mortgage, held by an unrelated investor.  

26

Accumulated Other Comprehensive Income (Loss), Net

Changes in each component of accumulated other comprehensive loss were as follows for the three months ended September 30, 2023 and 2022:

	Securities		Defined		Cash
	Available		Benefit		Flow
(Dollars in thousands)	For Sale		Plan		Hedges		Total
Accumulated other comprehensive (loss) income at June 30, 2023	$	(33,635)	$	(3,195)	$	1,424	$	(35,406)
Other comprehensive (loss) income arising during the period		(7,369)		—		179		(7,190)
Related income tax effects		1,548		—		(45)		1,503
		(5,821)		—		134		(5,687)
Reclassifications into net income		—		25		(1)		24
Related income tax effects		—		(5)		—		(5)
		—		20		(1)		19
Other comprehensive (loss) income, net of tax		(5,821)		20		133		(5,668)
Accumulated other comprehensive (loss) income at September 30, 2023	$	(39,456)	$	(3,175)	$	1,557	$	(41,074)

	Securities		Defined		Cash
	Available		Benefit		Flow
(Dollars in thousands)	For Sale		Plan		Hedges		Total
Accumulated other comprehensive (loss) income at June 30, 2022	$	(24,333)	$	(2,067)	$	875	$	(25,525)
Other comprehensive (loss) income arising during the period		(19,547)		—		882		(18,665)
Related income tax effects		4,104		—		(228)		3,876
		(15,443)		—		654		(14,789)
Reclassifications into net income		—		(7)		(1)		(8)
Related income tax effects		—		2		—		2
		—		(5)		(1)		(6)
Other comprehensive (loss) income, net of tax		(15,443)		(5)		653		(14,795)
Accumulated other comprehensive (loss) income at September 30, 2022	$	(39,776)	$	(2,072)	$	1,528	$	(40,320)

27

Changes in each component of accumulated other comprehensive loss were as follows for the nine months ended September 30, 2023 and 2022:

	Securities		Defined		Cash
	Available		Benefit		Flow
(Dollars in thousands)	For Sale		Plan		Hedges		Total
Accumulated other comprehensive (loss) income at December 31, 2022	$	(35,184)	$	(3,236)	$	1,462	$	(36,958)
Other comprehensive (loss) income arising during the period		(5,413)		—		131		(5,282)
Related income tax effects		1,137		—		(32)		1,105
		(4,276)		—		99		(4,177)
Reclassifications into net income		5		77		(5)		77
Related income tax effects		(1)		(16)		1		(16)
		4		61		(4)		61
Other comprehensive (loss) income, net of tax		(4,272)		61		95		(4,116)
Accumulated other comprehensive (loss) income at September 30, 2023	$	(39,456)	$	(3,175)	$	1,557	$	(41,074)

	Securities		Defined		Cash
	Available		Benefit		Flow
(Dollars in thousands)	For Sale		Plan		Hedges		Total
Accumulated other comprehensive income (loss) at December 31, 2021	$	437	$	(2,055)	$	(469)	$	(2,087)
Other comprehensive (loss) income arising during the period		(50,902)		—		2,695		(48,207)
Related income tax effects		10,689		—		(694)		9,995
		(40,213)		—		2,001		(38,212)
Reclassifications into net income		—		(22)		(5)		(27)
Related income tax effects		—		5		1		6
		—		(17)		(4)		(21)
Other comprehensive (loss) income, net of tax		(40,213)		(17)		1,997		(38,233)
Accumulated other comprehensive (loss) income at September 30, 2022	$	(39,776)	$	(2,072)	$	1,528	$	(40,320)

28

The following table provides information regarding reclassifications from accumulated other comprehensive loss into net income for the three and nine months ended September 30, 2023 and 2022:

	Three Months Ended September 30,				Nine Months Ended September 30,				Line Item In the Consolidated
(Dollars in thousands)	2023		2022		2023		2022		Statements of Income
Securities available for sale:
Reclassification of net realized losses into net income	$	—	$	—	$	(5)	$	—	Net losses on sales, maturities and calls of available for sale securities
Related income tax effects		—		—		1		—	Income tax expense
		—		—		(4)		—	Net of tax
Defined benefit plan:1
Reclassification of recognized net actuarial losses into net income		(42)		(10)		(128)		(29)	Noninterest expenses - Other
Amortization of prior service credit into net income		17		17		51		51	Noninterest expenses - Other
Related income tax effects		5		(2)		16		(5)	Income tax expense
		(20)		5		(61)		17	Net of tax
Cash flow hedges:
Amortization of hedging gains into net income		1		1		5		5	Interest expense - Trust preferred capital notes
Related income tax effects		—		—		(1)		(1)	Income tax expense
		1		1		4		4	Net of tax
Total reclassifications into net income	$	(19)	$	6	$	(61)	$	21

1 See “Note 8: Employee Benefit Plans,” for additional information.

Earnings Per Share (EPS)

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

	Three Months Ended September 30,
(Dollars in thousands)	2023		2022
Net income attributable to C&F Financial Corporation	$	5,789	$	6,480
Weighted average shares outstanding—basic and diluted		3,391,624		3,511,326

	Nine Months Ended September 30,
(Dollars in thousands)	2023		2022
Net income attributable to C&F Financial Corporation	$	18,536	$	18,851
Weighted average shares outstanding—basic and diluted		3,426,845		3,531,064

29

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: Share-Based Plans

As permitted under the 2022 Stock and Incentive Compensation Plan, and previously under the 2013 Stock and Incentive Compensation Plan until April 19, 2022, the Corporation awards shares of restricted stock to certain key employees, non-employee directors and consultants. Restricted shares awarded to employees generally vest over periods up to five years, and restricted shares awarded to non-employee directors generally vest over periods up to three years.  A summary of the activity for restricted stock awards for the periods indicated is presented below:

	2023
		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Unvested, December 31, 2022	145,677	$	48.88
Granted	18,540		57.32
Vested	(30,043)		51.53
Forfeited	(3,545)		49.37
Unvested, September 30, 2023	130,629		55.36

	2022
		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Unvested, December 31, 2021	140,577	$	48.57
Granted	16,430		50.56
Vested	(15,920)		50.95
Forfeited	(2,930)		48.23
Unvested, September 30, 2022	138,157		48.54

Share-based compensation expense, net of forfeitures, for the three and nine months ended September 30, 2023 was $581,000 ($412,000 after tax) and $1.51 million ($1.02 million after tax), respectively, for restricted stock granted during 2018 through 2023. Share-based compensation expense, net of forfeitures, for the three and nine months ended September 30, 2022 was $524,000 ($375,000 after tax) and $1.53 million ($1.09 million after tax), respectively, for restricted stock granted during 2017 through 2022. As of September 30, 2023, there was $2.90 million of total unrecognized compensation expense related to unvested restricted stock that will be recognized over the remaining requisite service periods.

30

NOTE 8: Employee Benefit Plans

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Components of net periodic benefit cost:
Service cost, included in salaries and employee benefits	$	344	$	459	$	1,032	$	1,378
Other components of net periodic benefit cost:
Interest cost		182		123		546		369
Expected return on plan assets		(321)		(415)		(963)		(1,245)
Amortization of prior service credit		(17)		(17)		(51)		(51)
Recognized net actuarial losses		42		10		128		29
Other components of net periodic benefit cost, included in other noninterest expense		(114)		(299)		(340)		(898)
Net periodic benefit cost	$	230	$	160	$	692	$	480

NOTE 9: 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).

31

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At September 30, 2023 and December 31, 2022, the Corporation’s entire securities portfolio was comprised of investments in debt securities classified as 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), Refinitiv, and Bloomberg Valuation Service (BVAL).  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.  Refinitiv and BVAL provide evaluated prices for the Corporation’s U.S. treasury, government agencies and corporations, mortgage-backed, and corporate categories of securities.  U.S. treasury securities and fixed-rate callable securities of U.S. government agencies and corporations are individually evaluated on an option adjusted spread basis for callable issues or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark curve for non-callable issues.  Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity.  Each aggregate is benchmarked to relative to-be-announced mortgage-backed securities (TBA securities) or other benchmark prices. TBA securities prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.  Each evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables. Fixed-rate securities issued by the Small Business Association in the mortgage backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.

Other investments. The Corporation holds equity investments in funds that provide debt and equity financing to small businesses. These investments are recorded at fair value and included in other assets in the Consolidated Balance Sheets.  Changes in fair value are recognized in net income.  The funds are managed by investment companies, and the net asset value of each fund is reported regularly by the investment companies. At September 30, 2023 and December 31, 2022, the combined fair value of these investments was $2.02 million and $2.16 million, respectively.  These investments, measured at net asset value, are not presented in the tables below related to fair value measurements. Changes in fair value of these investments resulted in the recognition of an unrealized loss of $9,000 and an unrealized gain of $136,000 for the three and nine months ended September 30, 2023 and unrealized losses of $96,000 and $77,000 for the three and nine months ended September 30, 2022, respectively.

The Corporation also holds certain equity investments consisting of equity interests in an independent insurance agency and a full service title and settlement agency (collectively, the agencies). These investments are subject to contractual sale restrictions that only permit the sale of the investments back to the agencies themselves.  These investments are recorded at fair value and included in other assets in the Consolidated Balance Sheets. At September 30, 2023 and December 31, 2022, the fair value of these investments was $3.63 million and $3.65 million, respectively. These investments are recorded at fair value based on the contractual redemption value of the Corporation’s proportionate share of the agencies’ equity.  Changes in fair value are recognized in net income and resulted in the recognition of unrealized gains of $120,000 and unrealized losses of $20,000 for the three and nine months ended September 30, 2023, respectively.  The Corporation’s investments in these agencies are classified as Level 2.

Loans held for sale. 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.

32

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 the discounted cash flow method. All of the Corporation’s interest rate swaps on loans are classified as Level 2.

Derivative asset/liability – cash flow hedges. The Corporation recognizes cash flow hedges at fair value. The Corporation has contracted with a third party vendor to provide valuations for these cash flow hedges 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. The fair value of forward sales of mortgage loans were not material to the consolidated financial statements of the Corporation at September 30, 2023 or December 31, 2022.

	September 30, 2023
	Fair Value Measurements Classified as						Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale
U.S. Treasury securities	$	—	$	51,394	$	—	$	51,394
U.S. government agencies and corporations		—		94,050		—		94,050
Mortgage-backed securities		—		160,315		—		160,315
Obligations of states and political subdivisions		—		134,165		—		134,165
Corporate and other debt securities		—		20,729		—		20,729
Total securities available for sale		—		460,653		—		460,653
Loans held for sale		—		25,469		—		25,469
Other investments		—		3,629		—		3,629
Derivatives
IRLC		—		563		—		563
Interest rate swaps on loans		—		7,132		—		7,132
Cash flow hedges		—		2,073		—		2,073
Total assets	$	—	$	499,519	$	—	$	499,519
Liabilities:
Derivatives
Interest rate swaps on loans	$	—	$	7,132	$	—	$	7,132
Total liabilities	$	—	$	7,132	$	—	$	7,132

33

	December 31, 2022
	Fair Value Measurements Classified as						Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale
U.S. Treasury securities	$	—	$	58,833	$	—	$	58,833
U.S. government agencies and corporations		—		130,274		—		130,274
Mortgage-backed securities		—		179,918		—		179,918
Obligations of states and political subdivisions		—		120,827		—		120,827
Corporate and other debt securities		—		22,739		—		22,739
Total securities available for sale		—		512,591		—		512,591
Loans held for sale		—		14,259		—		14,259
Other investments		—		3,649		—		3,649
Derivatives
IRLC		—		391		—		391
Interest rate swaps on loans		—		6,328		—		6,328
Cash flow hedges		—		1,941		—		1,941
Total assets	$	—	$	539,159	$	—	$	539,159
Liabilities:
Derivatives
Interest rate swaps on loans	$	—	$	6,328	$	—	$	6,328
Total liabilities	$	—	$	6,328	$	—	$	6,328

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.

Other Real Estate Owned (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less 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 indicate a further deterioration in market conditions. As such, the Corporation records OREO as a nonrecurring fair value measurement classified as Level 3.

At September 30, 2023 and December 31, 2022 there was no OREO that was measured at fair value.

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.

34

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

	Carrying		Fair Value Measurements at September 30, 2023 Classified as						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	73,002	$	70,512	$	2,490	$	—	$	73,002
Securities available for sale		460,653		—		460,653		—		460,653
Loans, net		1,677,481		—		—		1,618,671		1,618,671
Loans held for sale		25,469		—		25,469		—		25,469
Other investments		3,629		—		3,629		—		3,629
Derivatives
IRLC		563		—		563		—		563
Interest rate swaps on loans		7,132		—		7,132		—		7,132
Cash flow hedges		2,073		—		2,073		—		2,073
Bank-owned life insurance		21,248		—		21,248		—		21,248
Accrued interest receivable		10,039		10,039		—		—		10,039
Financial liabilities:
Demand and savings deposits		1,431,140		1,431,140		—		—		1,431,140
Time deposits		597,289		—		591,113		—		591,113
Borrowings		141,042		—		125,792		—		125,792
Derivatives
Interest rate swaps on loans		7,132		—		7,132		—		7,132
Accrued interest payable		3,188		3,188		—		—		3,188

	Carrying		Fair Value Measurements at December 31, 2022 Classified as						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	28,898	$	26,661	$	2,189	$	—	$	28,850
Securities available for sale		512,591		—		512,591		—		512,591
Loans, net		1,595,200		—		—		1,538,062		1,538,062
Loans held for sale		14,259		—		14,259		—		14,259
Other investments		3,649		—		3,649		—		3,649
Derivatives
IRLC		391		—		391		—		391
Interest rate swaps on loans		6,328		—		6,328		—		6,328
Cash flow hedges		1,941		—		1,941		—		1,941
Bank-owned life insurance		20,909		—		20,909		—		20,909
Accrued interest receivable		8,982		8,982		—		—		8,982
Financial liabilities:
Demand and savings deposits		1,622,566		1,622,566		—		—		1,622,566
Time deposits		381,294		—		374,267		—		374,267
Borrowings		85,943		—		71,906		—		71,906
Derivatives
Interest rate swaps on loans		6,328		—		6,328		—		6,328
Accrued interest payable		950		950		—		—		950

NOTE 10: Business Segments

The Corporation operates in a decentralized fashion in three business segments: community banking, mortgage banking and consumer finance. The community banking segment comprises C&F Bank, C&F Wealth Management, C&F Insurance and CVB Title.  Revenues from community banking operations consist primarily of net interest income related to investments in loans and securities and outstanding deposits and borrowings, fees earned on deposit accounts, debit card

35

interchange activity, and net revenues from offering wealth management services and insurance products through third-party service providers.  Through C&F Mortgage, mortgage banking operating revenues consist principally of gains on sales of loans in the secondary market, mortgage banking fee income related to loan originations, fees earned by providing mortgage loan origination functions to third-party lenders, and net interest income on mortgage loans held for sale. Revenues from consumer finance operations through C&F Finance consist primarily of net interest income earned on purchased retail installment sales contracts.

The standalone Corporation’s revenues and expenses are comprised primarily of interest expense associated with the Corporation’s trust preferred capital notes and subordinated debt, general corporate expenses, and changes in the value of the rabbi trust and deferred compensation liability related to its nonqualified deferred compensation plan.  The results of the Corporation, which includes funding and operating costs that are not allocated to the business segments, are included in the column labeled “Other” in the tables below.

	Three Months Ended September 30, 2023
	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Interest income	$	25,066	$	517	$	12,020	$	—	$	(5,917)	$	31,686
Interest expense		6,675		232		5,748		548		(5,979)		7,224
Net interest income		18,391		285		6,272		(548)		62		24,462
Gain on sales of loans		—		1,198		—		—		22		1,220
Other noninterest income		4,221		1,144		(19)		(496)		(50)		4,800
Net revenue		22,612		2,627		6,253		(1,044)		34		30,482
Provision for credit losses		500		—		1,550		—		—		2,050
Noninterest expense		15,129		2,631		3,761		(172)		(17)		21,332
Income (loss) before taxes		6,983		(4)		942		(872)		51		7,100
Income tax expense (benefit)		1,298		1		260		(246)		10		1,323
Net income (loss)	$	5,685	$	(5)	$	682	$	(626)	$	41	$	5,777
Other data:
Capital expenditures	$	251	$	12	$	146	$	—	$	—	$	409
Depreciation and amortization	$	838	$	18	$	100	$	—	$	—	$	956

	Three Months Ended September 30, 2022
	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Interest income	$	18,766	$	556	$	11,175	$	—	$	(4,171)	$	26,326
Interest expense		1,353		247		3,941		593		(4,188)		1,946
Net interest income		17,413		309		7,234		(593)		17		24,380
Gain on sales of loans		—		1,904		—		—		(34)		1,870
Other noninterest income		3,903		1,197		49		(826)		(64)		4,259
Net revenue		21,316		3,410		7,283		(1,419)		(81)		30,509
Provision for loan losses		—		—		1,200		—		—		1,200
Noninterest expense		14,621		3,398		3,639		(553)		(16)		21,089
Income (loss) before taxes		6,695		12		2,444		(866)		(65)		8,220
Income tax expense (benefit)		1,274		(12)		665		(238)		(14)		1,675
Net income (loss)	$	5,421	$	24	$	1,779	$	(628)	$	(51)	$	6,545
Other data:
Capital expenditures	$	961	$	3	$	—	$	—	$	—	$	964
Depreciation and amortization	$	923	$	57	$	102	$	—	$	—	$	1,082

36

	Nine Months Ended September 30, 2023
	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Interest income	$	72,531	$	1,312	$	35,313	$	—	$	(17,427)	$	91,729
Interest expense		16,268		513		17,060		1,696		(17,573)		17,964
Net interest income		56,263		799		18,253		(1,696)		146		73,765
Gain on sales of loans		—		4,983		—		—		(53)		4,930
Other noninterest income		12,173		3,413		25		840		(155)		16,296
Net revenue		68,436		9,195		18,278		(856)		(62)		94,991
Provision for loan losses		1,550		—		4,250		—		—		5,800
Noninterest expense		45,063		8,459		10,909		1,839		(46)		66,224
Income (loss) before taxes		21,823		736		3,119		(2,695)		(16)		22,967
Income tax expense (benefit)		4,081		168		858		(790)		(8)		4,309
Net income (loss)	$	17,742	$	568	$	2,261	$	(1,905)	$	(8)	$	18,658
Other data:
Capital expenditures	$	861	$	12	$	146	$	—	$	—	$	1,019
Depreciation and amortization	$	2,558	$	61	$	300	$	—	$	—	$	2,919

	Nine Months Ended September 30, 2022
	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Interest income	$	50,612	$	1,674	$	30,975	$	—	$	(10,312)	$	72,949
Interest expense		3,700		561		9,800		1,762		(10,361)		5,462
Net interest income		46,912		1,113		21,175		(1,762)		49		67,487
Gain on sales of loans		—		7,251		—		—		(488)		6,763
Other noninterest income		11,962		3,918		164		(4,174)		(112)		11,758
Net revenue		58,874		12,282		21,339		(5,936)		(551)		86,008
Provision for loan losses		(700)		32		2,070		—		—		1,402
Noninterest expense		42,605		10,045		10,978		(3,186)		(43)		60,399
Income (loss) before taxes		16,969		2,205		8,291		(2,750)		(508)		24,207
Income tax expense (benefit)		3,215		533		2,255		(752)		(107)		5,144
Net income (loss)	$	13,754	$	1,672	$	6,036	$	(1,998)	$	(401)	$	19,063
Other data:
Capital expenditures	$	2,232	$	65	$	17	$	—	$	—	$	2,314
Depreciation and amortization	$	2,817	$	180	$	308	$	—	$	—	$	3,305

	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Total assets at September 30, 2023	$	2,299,620	$	35,995	$	478,346	$	35,984	$	(428,240)	$	2,421,705
Total assets at December 31, 2022	$	2,206,299	$	24,500	$	479,864	$	43,241	$	(421,587)	$	2,332,317

The community banking segment extends two warehouse lines of credit to the mortgage banking segment, providing a portion of the funds needed to originate mortgage loans. The community banking segment charges the mortgage banking segment interest at the daily FHLB advance rate plus a spread ranging from 50 basis points to 175 basis points. The community banking segment also provides the consumer finance segment with a portion of the funds needed to purchase loan contracts by means of variable rate notes that carry interest at one-month term SOFR plus 211.5 basis points, with a floor of 3.5 percent and a ceiling of 6.0 percent, and fixed rate notes that carry interest at rates ranging from 3.2 percent to 5.1 percent. The community 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. In addition to unallocated expenses recorded by the holding company, certain overhead costs are incurred by the community banking segment and are not allocated to the mortgage banking and consumer finance segments.

37

NOTE 11: Commitments and Contingent Liabilities

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

Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of loan commitments at the Bank was $432.66 million at September 30, 2023 and $394.75 million at December 31, 2022, which does not include IRLCs at the mortgage banking segment, which are discussed in Note 12.

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 $10.42 million at September 30, 2023 and $16.26 million at December 31, 2022.

The mortgage banking segment sells the majority of the residential mortgage loans it originates to third-party investors. Additionally, the community banking segment purchases residential mortgage loans from the mortgage banking segment under terms and conditions similar to third-party investors. As is customary in the industry, the agreements with these investors require the mortgage banking segment to extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the agreements, the investors are entitled to make loss claims and repurchase requests of the mortgage banking segment for loans that contain covered deficiencies. The mortgage banking segment has obtained early payment default recourse waivers for a portion of its business. Recourse periods for early payment default for the remaining investors 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. The mortgage banking segment 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 the mortgage banking segment by the investors, the estimate of potential losses is inherently subjective and is based on historical indemnification payments and management’s assessment of current conditions that may contribute to indemnified losses on mortgage loans that have been sold in the secondary market.  For the three and nine months ended September 30, 2023, the Corporation recorded a reversal of provision for indemnifications of $200,000, and $435,000, respectively, and recorded a provision for indemnifications of $11,000 and a reversal of provision for indemnifications of $858,000 for the three and nine months ended September 30, 2022, respectively, which is included in “Noninterest Expenses – Other” on the Consolidated Statements of Income. No indemnification payments were made during the three and nine months ended September 30, 2023 or 2022. The allowance for indemnifications was $1.96 million and $2.39 million at September 30, 2023 and December 31, 2022.

NOTE 12: Derivative Financial Instruments

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

38

Cash flow hedges.  The Corporation designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Corporation’s borrowings for fixed-rate interest payments.  Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Corporation assesses the effectiveness of each hedging relationship quarterly. If the Corporation determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of September 30, 2023, 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 June 2024 and June 2029.

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

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

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

Mortgage banking.  The mortgage banking segment enters into IRLCs with customers to originate loans for which the interest rates are determined (or “locked”) prior to funding. The mortgage banking segment is exposed to interest rate risk through fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans are sold in the secondary market. The mortgage banking segment mitigates this interest rate risk by entering into forward sales contracts with investors, which at times includes the community banking segment, at the time that interest rates are locked for mortgage loans to be delivered on a best efforts basis. IRLCs are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets, along with the changes in fair value of the related forward sales of loans.  Changes in the fair value of mortgage banking derivatives are recorded as a component of gains on sales of loans.

At September 30, 2023, the mortgage banking segment had $40.91 million of IRLCs and $27.75 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $68.66 million in mortgage loans.  

At December 31, 2022, the mortgage banking segment had $42.28 million of IRLCs and $16.41 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $58.69 million in mortgage loans.  

39

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

	September 30, 2023
	Notional
(Dollars in thousands)	Amount		Assets		Liabilities
Cash flow hedges:
Interest rate swap contracts	$	25,000	$	2,073	$	—
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower		109,976		—		7,132
Matched interest rate swaps with counterparty		109,976		7,132		—
Mortgage banking contracts:
IRLCs		40,909		563		—

	December 31, 2022
	Notional
(Dollars in thousands)	Amount		Assets		Liabilities
Cash flow hedges:
Interest rate swap contracts	$	25,000	$	1,941	$	—
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower		85,856		—		6,328
Matched interest rate swaps with counterparty		85,856		6,328		—
Mortgage banking contracts:
IRLCs		42,284		391		—

The Corporation and the Bank are required to maintain cash collateral with dealer counterparties for interest rate swap relationships in a loss position. At both September 30, 2023 and December 31, 2022, there was no cash collateral maintained with dealer counterparties.

NOTE 13: Other Noninterest Expenses

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Data processing fees	$	2,567	$	2,675	$	7,863	$	7,921
Professional fees		707		684		2,096		2,179
Insurance expense		414		293		1,203		767
Marketing and advertising expenses		361		441		1,172		1,415
Telecommunication expenses		344		350		970		1,047
Mortgage banking loan processing expenses		272		404		854		1,405
Provision for indemnifications		(200)		11		(435)		(858)
All other noninterest expenses		2,002		1,847		5,685		5,316
Total other noninterest expenses	$	6,467	$	6,705	$	19,408	$	19,192

40

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition or results of operations, see “Cautionary Statement About Forward-Looking Statements” at the end of this discussion and analysis.

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 business segments:  community 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.

The following table presents selected financial performance highlights for the periods indicated:

TABLE 1: Financial Performance Highlights

(Dollars in thousands, except for per share data)	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Net Income (Loss):
Community Banking	$	5,685		$	5,421		$	17,742		$	13,754
Mortgage Banking		(5)			24			568			1,672
Consumer Finance		682			1,779			2,261			6,036
Other		(585)			(679)			(1,913)			(2,399)
Consolidated net income	$	5,777		$	6,545		$	18,658		$	19,063
Earnings per share - basic and diluted	$	1.71		$	1.85		$	5.41		$	5.34
Annualized return on average equity		11.28	%		13.20	%		12.22	%		12.63	%
Annualized return on average assets		0.96	%		1.12	%		1.04	%		1.10	%
Annualized return on average tangible common equity1		13.19	%		15.35	%		14.18	%		14.67	%

¹ Return on average tangible common equity (ROTCE), which excludes the effect of intangible assets, is a non-GAAP financial measure.  Refer to “Use of Certain Non-GAAP Financial Measures,” below, for information about these non-GAAP financial measures, including a quantitative reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Consolidated net income decreased $768,000 and $405,000 for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022 due primarily to lower net income of the consumer finance segment and the mortgage banking segment, partially offset by higher net income of the community banking segment.

A discussion of the performance of our business segments is included under the heading “Business Segments” in the “Results of Operations” section of this discussion and analysis.

41

Key highlights for the three and nine months ended September 30, 2023 are as follows.

● Community banking segment loans grew $86.1 million, or 9.9 percent annualized, compared to December 31, 2022;

● Consumer finance segment loans decreased $3.4 million, or 1.0 percent annualized, compared to December 31, 2022;

● Deposits increased $24.6 million, or 1.6 percent annualized, compared to December 31, 2022;

● The community banking segment recorded provision for credit losses of $500,000 for the third quarter of 2023 and recorded no provision for credit losses for the third quarter of 2022. For the first nine months of 2023, the community banking segment recorded provision for credit losses of $1.6 million and recorded net reversals of provision for credit losses of $700,000 for the first nine months of 2022;

● The consumer finance segment recorded provision for credit losses of $1.6 million and $1.2 million for the third quarters of 2023 and 2022, respectively and recorded provision for credit losses of $4.3 million and $2.1 million for the first nine months of 2023 and 2022, respectively;

● Consolidated annualized net interest margin was 4.29 percent for the third quarter of 2023 compared to 4.37 percent for the third quarter of 2022, and was unchanged from 4.29 percent in the second quarter of 2023;

● The consumer finance segment experienced net charge-offs at an annualized rate of 1.75 percent of average total loans for the first nine months of 2023, compared to 0.19 percent for the first nine months of 2022; and

● Mortgage banking segment loan originations decreased $54.6 million, or 29.6 percent, for the third quarter of 2023 compared to the third quarter of 2022.

Capital Management and Dividends

Total equity was $200.4 million at September 30, 2023, compared to $196.2 million at December 31, 2022. Under regulatory capital standards, the Corporation’s tier 1 risk-based capital and total risk-based capital ratios at September 30, 2023 were 12.5 percent and 14.8 percent, respectively, compared to 12.8 percent and 15.4 percent, respectively, at December 31, 2022. The decrease in the Corporation’s tier 1 risk-based capital and total risk-based capital ratios at September 30, 2023 compared to December 31, 2022 was due primarily to growth in risk-weighted assets resulting from higher balances of loans. At September 30, 2023, the book value per share of the Corporation’s common stock was $59.11, and tangible book value per share, which is a non-GAAP financial measure, was $51.22, compared to $56.27 and $48.54, respectively, at December 31, 2022.  

Total equity increased $4.1 million at September 30, 2023 compared to December 31, 2022, due to net income, partially offset by share repurchases, higher unrealized losses in the market value of securities available for sale, which are recognized as a component of other comprehensive loss, dividends paid on the Corporation’s common stock, and the Corporation’s adoption of the Current Expected Credit Loss (CECL) methodology for estimating credit losses, which resulted in a decrease to opening retained earnings of $1.1 million.  The Corporation’s securities available for sale are fixed income debt securities, and their unrealized loss position is a result of rising market interest rates since they were purchased. The Corporation expects to recover its investments in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Corporation or the Bank. The accumulated other comprehensive loss related to the Corporation’s securities available for sale increased to $39.5 million at September 30, 2023, compared to $35.2 million at December 31, 2022, as a result of an increase in market interest rates.

The Corporation declared a quarterly cash dividend of 44 cents per share during the third quarter of 2023, which was paid on October 1, 2023. This dividend represents a payout ratio of 25.7 percent of earnings per share for the third quarter of 2023. 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 levels and requirements and expected future earnings. In making its decision on the payment of dividends on the Corporation’s common stock, the Corporation’s Board of Directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors.

42

The Corporation has a share repurchase program that was authorized by the Board of Directors in November 2022 to repurchase up to $10.0 million of the Corporation’s common stock through December 31, 2023.  During the third quarter and first nine months of 2023, the Corporation repurchased 23,856 shares, or $1.3 million, and 106,864 shares, or $5.8 million, of its common stock under this share repurchase program, respectively.

CRITICAL ACCOUNTING ESTIMATES

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

Allowance for Credit Losses: We establish the allowance for credit losses through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. The measurement of the allowance for credit losses on commercial and consumer loans is based in part on forecasts of the national unemployment rate, which we believe to be indicative of risk factors related to the collectability of commercial and consumer loans. In addition, management’s estimate of expected credit losses is based on the remaining life of loans held for investment, and changes in expected prepayment behavior may result in changes in the remaining life of loans and expected credit losses. Management also assesses the risk of credit losses arising from changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral in determining the recorded balance of the allowance for credit losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. The level of the allowance is particularly sensitive to changes in the actual and forecasted national unemployment rate and changes in current conditions or reasonably expected future conditions affecting the collectability of loans.

Goodwill: The Corporation’s goodwill was recognized in connection with past business combinations and is reported at the community banking segment and the consumer finance segment. 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 community banking segment and the consumer finance segment, which was the annual evaluation in the fourth quarter of 2022, the Corporation concluded that no impairment existed based on an assessment of qualitative factors.

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, 2022.

43

RESULTS OF OPERATIONS

NET INTEREST INCOME

The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three and nine months ended September 30, 2023 and 2022. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented. Average balances of securities available for sale are included at amortized cost. 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 related to business combinations are included in the computation of yields on loans and investments and on the costs of deposits and borrowings. The accretion contributed approximately 7 basis points and 5 basis points to the yields on community banking segment loans and total loans, respectively, for the third quarter of 2023, and 4 basis points to both the yield on total earning assets and net interest margin for the third quarter of 2023 compared to approximately 9 basis points and 6 basis points to the yields on community banking segment loans and total loans, respectively, for the third quarter of 2022, and 4 basis points to both the yield on total earning assets and net interest margin, for the third quarter of 2022.  The accretion contributed approximately 8 basis points and 6 basis points to the yields on community banking segment loans and total loans, respectively, for the first nine months of 2023, and 4 basis points to both the yield on total earning assets and net interest margin for the first nine months of 2023, compared to approximately 17 basis points and 11 basis points to the yields on community banking segment loans and total loans, respectively, for the first nine months of 2022, and 8 basis points to both the yield on total earning assets and net interest margin, for the first nine months of 2022.

44

TABLE 2: Average Balances, Income and Expense, Yields and Rates

	Three Months Ended September 30,
	2023						2022
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	414,036	$	2,207	2.13	%	$	461,327	$	2,237	1.94	%
Tax-exempt		110,182		927	3.37			77,574		519	2.68
Total securities		524,218		3,134	2.39			538,901		2,756	2.05
Loans:
Community banking segment		1,224,791		15,887	5.15			1,082,947		11,470	4.20
Mortgage banking segment		30,210		517	6.79			44,216		556	4.99
Consumer finance segment		472,811		12,019	10.09			453,401		11,174	9.78
Total loans		1,727,812		28,423	6.53			1,580,564		23,200	5.82
Interest-bearing deposits in other banks		38,507		379	3.90			105,683		521	1.96
Total earning assets		2,290,537		31,936	5.54			2,225,148		26,477	4.72
Allowance for credit losses		(41,014)						(40,976)
Total non-earning assets		151,070						152,284
Total assets	$	2,400,593					$	2,336,456
Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	341,707		505	0.59		$	346,527		267	0.31
Money market deposit accounts		304,309		782	1.02			405,872		258	0.25
Savings accounts		204,042		29	0.06			236,481		32	0.05
Certificates of deposit		571,499		4,316	3.00			387,527		722	0.74
Total interest-bearing deposits		1,421,557		5,632	1.57			1,376,407		1,279	0.37
Borrowings:
Repurchase agreements		29,440		95	1.29			36,913		43	0.47
Other borrowings		122,250		1,497	4.90			55,585		624	4.49
Total borrowings		151,690		1,592	4.20			92,498		667	2.88
Total interest-bearing liabilities		1,573,247		7,224	1.83			1,468,905		1,946	0.53
Noninterest-bearing demand deposits		577,382						631,519
Other liabilities		45,124						37,669
Total liabilities		2,195,753						2,138,093
Equity		204,840						198,363
Total liabilities and equity	$	2,400,593					$	2,336,456
Net interest income			$	24,712					$	24,531
Interest rate spread					3.71	%					4.19	%
Interest expense to average earning assets					1.25	%					0.35	%
Net interest margin					4.29	%					4.37	%

45

	Nine Months Ended September 30,
	2023						2022
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	441,204	$	7,017	2.12	%	$	399,660	$	5,266	1.76	%
Tax-exempt		104,549		2,572	3.28			72,641		1,389	2.55
Total securities		545,753		9,589	2.34			472,301		6,655	1.88
Loans:
Community banking segment		1,199,560		45,375	5.06			1,054,842		33,027	4.19
Mortgage banking segment		26,713		1,312	6.57			53,792		1,674	4.16
Consumer finance segment		474,738		35,312	9.94			417,604		30,975	9.92
Total loans		1,701,011		81,999	6.45			1,526,238		65,676	5.75
Interest-bearing deposits in other banks		33,072		836	3.38			191,436		1,021	0.71
Total earning assets		2,279,836		92,424	5.42			2,189,975		73,352	4.48
Allowance for loan losses		(41,192)						(40,685)
Total non-earning assets		150,826						165,930
Total assets	$	2,389,470					$	2,315,220
Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	359,157		1,578	0.59		$	348,992		595	0.23
Money market deposit accounts		323,630		2,121	0.88			390,857		729	0.25
Savings accounts		213,940		91	0.06			230,011		91	0.05
Certificates of deposit		509,424		9,447	2.48			396,079		2,070	0.70
Total interest-bearing deposits		1,406,151		13,237	1.26			1,365,939		3,485	0.34
Borrowings:
Repurchase agreements		32,048		273	1.14			35,403		121	0.46
Other borrowings		122,984		4,454	4.83			55,646		1,856	4.45
Total borrowings		155,032		4,727	4.07			91,049		1,977	2.90
Total interest-bearing liabilities		1,561,183		17,964	1.54			1,456,988		5,462	0.50
Noninterest-bearing demand deposits		582,573						616,032
Other liabilities		42,108						41,019
Total liabilities		2,185,864						2,114,039
Equity		203,606						201,181
Total liabilities and equity	$	2,389,470					$	2,315,220
Net interest income			$	74,460					$	67,890
Interest rate spread					3.88	%					3.98	%
Interest expense to average earning assets					1.05	%					0.33	%
Net interest margin					4.37	%					4.15	%

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

46

TABLE 3: Rate-Volume Recap

	Three Months Ended September 30, 2023 from 2022
	Increase (Decrease)				Total
	Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)
Interest income:
Loans:
Community banking segment	$	2,797	$	1,620	$	4,417
Mortgage banking segment		167		(206)		(39)
Consumer finance segment		360		485		845
Securities:
Taxable		209		(239)		(30)
Tax-exempt		155		253		408
Interest-bearing deposits in other banks		318		(460)		(142)
Total interest income		4,006		1,453		5,459
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		242		(4)		238
Money market deposit accounts		603		(79)		524
Savings accounts		—		(3)		(3)
Certificates of deposit		3,111		483		3,594
Total interest-bearing deposits		3,956		397		4,353
Borrowings:
Repurchase agreements		63		(11)		52
Other borrowings		61		812		873
Total interest expense		4,080		1,198		5,278
Change in net interest income	$	(74)	$	255	$	181

	Nine Months Ended September 30, 2023 from 2022
	Increase (Decrease)				Total
	Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)
Interest income:
Loans:
Community banking segment	$	7,435	$	4,913	$	12,348
Mortgage banking segment		708		(1,070)		(362)
Consumer finance segment		63		4,274		4,337
Securities:
Taxable		1,161		590		1,751
Tax-exempt		467		716		1,183
Interest-bearing deposits in other banks		1,227		(1,412)		(185)
Total interest income		11,061		8,011		19,072
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		966		17		983
Money market deposit accounts		1,539		(147)		1,392
Savings accounts		9		(9)		—
Certificates of deposit		6,631		746		7,377
Total interest-bearing deposits		9,145		607		9,752
Borrowings:
Repurchase agreements		205		(10)		195
Other borrowings		168		2,387		2,555
Total interest expense		9,518		2,984		12,502
Change in net interest income	$	1,543	$	5,027	$	6,570

Net interest income, on a taxable-equivalent basis, for the third quarter of 2023 increased to $24.7 million, compared to $24.5 million for the third quarter of 2022.  Net interest income, on a taxable-equivalent basis, for the first nine months of 2023 increased to $74.5 million, compared to $67.9 million for the first nine months of 2022.  The increase in net interest income for the third quarter of 2023 as compared to the third quarter of 2022 was due primarily to higher average balances of earning assets, partially offset by a decrease in net interest margin. The increase in net interest income for the first nine months of 2023 as compared to the first nine months of 2022 was due primarily to an increase in net interest margin and higher average balances of earning assets. Annualized net interest margin decreased 8 basis points to 4.29 percent for the

47

third quarter of 2023, relative to the third quarter of 2022, due primarily to an increase in costs of interest-bearing deposits and a shift to higher cost deposits and borrowings, partially offset by an increase in yields of earning assets. Annualized net interest margin increased 22 basis points to 4.37 percent for the first nine months of 2023, relative to the first nine months of 2022 due primarily to the effect of rising interest rates on yields of earning assets, partially offset by rising costs associated with deposits and a shift to higher cost deposits and borrowings. The Federal Reserve Bank increased the target federal funds interest rate from an upper limit of 0.25 percent at December 31, 2021 to 4.50 percent by the end of 2022 and to 5.50 percent by the end of the third quarter of 2023. The yield on interest-earning assets increased by 82 basis points and 94 basis points for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.  The cost of interest-bearing liabilities increased by 130 basis points and 104 basis points for the third quarter and first nine months of 2023, respectively, compared to the same periods of 2022.  Average earning assets increased $65.4 million and $89.9 million for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. Average interest-bearing liabilities increased $104.3 million and $104.2 million for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. Average noninterest-bearing demand deposits decreased $54.1 million and $33.5 million for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.  

Average loans, which includes both loans held for investment and loans held for sale, increased $147.2 million to $1.73 billion for the third quarter of 2023 and increased $174.8 million to $1.70 billion for the first nine months of 2023, compared to the same periods in 2022. Average loans at the community banking segment increased $141.8 million, or 13.1 percent, for the third quarter of 2023 and increased $144.7 million, or 13.7 percent, for the first nine months of 2023, compared to the same periods in 2022 due primarily to growth in the commercial real estate and residential mortgage segments of the loan portfolio. Average loans at the consumer finance segment increased $19.4 million, or 4.3 percent, for the third quarter of 2023 and increased $57.1 million, or 13.7 percent, for the first nine months of 2023 compared to the same periods in 2022 due primarily to growth in the automobile segment of the loan portfolio. Average loans at the mortgage banking segment, which consist primarily of loans held for sale, decreased $14.0 million, or 31.7 percent, for the third quarter of 2023 and decreased $27.1 million, or 50.3 percent, for the first nine months of 2023 compared to the same periods in 2022, due primarily to lower mortgage loan production volume as a result of conditions in the housing markets and rising interest rates on mortgage loans.

The community banking segment average loan yield increased 95 basis points to 5.15 percent for the third quarter of 2023 and increased 87 basis points to 5.06 percent for the first nine months of 2023, compared to the same periods in 2022, due primarily to the effects of rising interest rates. The consumer finance segment average loan yield increased 31 basis points to 10.09 percent for the third quarter of 2023 and increased 2 basis points to 9.94 percent for the first nine months of 2023, compared to the same periods in 2022, due primarily to the effects of rising interest rates, which were partially offset by the effects of purchasing higher credit quality loan contracts which have lower yields. The mortgage banking segment average loan yield increased 180 basis points to 6.79 percent for the third quarter of 2023 and increased 241 basis points to 6.57 percent for the first nine months of 2023, compared to the same periods in 2022, due to the effects of rising interest rates.

Average securities available for sale decreased $14.7 million for the third quarter of 2023 compared to the same period in 2022 due primarily to maturities and paydowns of mortgage-backed and government agencies securities outpacing purchases. Average securities available for sale increased $73.5 million for the first nine months of 2023 compared to the same period in 2022 due primarily to purchases of obligations of states and political subdivisions and government agencies. The average yield on the securities portfolio on a taxable-equivalent basis increased 34 basis points to 2.39 percent for the third quarter of 2023 and increased 46 basis points to 2.34 percent for the first nine months of 2023, compared to the same periods in 2022, due primarily to rising interest rates, which allowed for purchases of securities at higher yields.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $67.2 million and $158.4 million for the third quarter and first nine months of 2023, respectively, compared to the same periods of 2022, due primarily to utilizing cash to fund growth in loans and securities purchases. The average yield on interest-bearing deposits in other banks increased 194 basis points for the third quarter of 2023 and increased 267 basis points for the first nine months of 2023, compared to the same periods in 2022 due to rising interest rates.

48

Average money market, savings and interest-bearing demand deposits decreased $138.8 million and $73.1 million for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022, due primarily to decreases in business checking, money market and savings accounts. Average noninterest-bearing demand deposits decreased $54.1 million and $33.5 million for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. The decreases in non-time deposits are due primarily to customers seeking higher yielding opportunities as a result of rising interest rates paid on time deposits. Average time deposits increased $184.0 million and $113.3 million for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. The average cost of interest-bearing deposits increased 120 basis points and 92 basis points for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022, due primarily to higher rates on deposits amid rising interest rates and increased competition for deposits.

Average borrowings increased $59.2 million and $64.0 million for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022, due primarily to increases in short-term Federal Home Loan Bank of Atlanta (FHLB) borrowings to support lending activities and securities purchases. The average cost of borrowings increased 132 basis points and 117 basis points for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022, due primarily to the effects of rising interest rates and a shift in the mix of borrowings from lower cost repurchase agreements to FHLB borrowings.

The Corporation believes that higher interest rates will continue to have a positive effect on yields of variable rate loans, new loan originations and purchases of securities available for sale. The Corporation also expects the cost of deposits to continue to rise amid competition for deposits and due to repricing of time deposits upon maturity, and that a portion of the Corporation’s funding will continue to be drawn from borrowings in the near term, resulting in a higher cost of funds.  The rate of increase in the cost of funds in the near-term is expected to exceed the increase in interest-earning asset yields, decreasing net interest margin for the remainder of 2023, as liabilities generally reprice on a delay compared to assets and are currently rising at a faster pace. The effect of these factors on the Corporation’s net interest margin will depend on a number of factors, including the Corporation’s ability to grow loans at the community banking segment and consumer finance segment, to compete for deposits, and to the extent of its reliance on borrowings. The Corporation can give no assurance as to the timing or extent of further increases in market interest rates or the impact of rising interest rates or any other factor on the Corporation's net interest margin. The Federal Reserve Bank increased the target federal funds interest rate by 0.25 percent to 5.50 percent at their July 2023 meeting and did not raise it at their September 2023 or November 2023 meetings. If market interest rates were to continue to rise further, net interest margin would be positively impacted as the Corporation generally expects its assets to reprice more quickly than its deposits and borrowings. Alternatively, if market interest rates begin to decline, the Corporation’s net interest margin would therefore be adversely affected as its assets reprice downward more quickly than its deposits and borrowings.

49

Noninterest Income

TABLE 4: Noninterest Income

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Gains on sales of loans	$	1,220	$	1,870	$	4,930	$	6,763
Interchange income		1,558		1,513		4,658		4,502
Service charges on deposit accounts		1,122		1,099		3,241		3,216
Wealth management services income, net		630		613		1,855		1,885
Mortgage banking fee income		558		731		1,695		2,508
Mortgage lender services income		537		397		1,567		1,259
Other service charges and fees		364		403		1,134		1,179
Investment income in other equity interests		211		64		480		294
Net losses on sales, maturities and calls of available for sale securities		—		—		(5)		—
Unrealized (loss) gain on rabbi trust		(487)		(833)		866		(4,212)
Other income (loss), net		307		272		805		1,127
Total noninterest income	$	6,020	$	6,129	$	21,226	$	18,521

Total noninterest income decreased $109,000, or 1.8 percent, for the third quarter of 2023 compared to the third quarter of 2022 due primarily to lower volume of mortgage loan production, which resulted in lower gains on sales of loans and mortgage banking fee income, partially offset by fluctuations in unrealized gains and losses on the rabbi trust, higher investment income in other equity investments and higher mortgage lender services income, as a result of an increase in the number of institutional customers and the types of services provided. Total noninterest income increased $2.7 million, or 14.6 percent, for the first nine months of 2023 compared to the first nine months of 2022 due primarily to fluctuations in unrealized gains and losses on the rabbi trust and higher mortgage lender services income, partially offset by lower volume of mortgage loan production, which resulted in lower gains on sales of loans and mortgage banking fee income.

Unrealized gains and losses on the Corporation’s rabbi trust are offset by changes in deferred compensation liabilities, recorded in salaries and employee benefits expense.

Noninterest Expense

TABLE 5: Noninterest Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Salaries and employee benefits:
Compensation, payroll taxes and employee benefits	$	13,408	$	13,035	$	39,975	$	38,912
(Decrease) increase in nonqualified deferred compensation plan liabilities		(487)		(833)		866		(4,212)
Total salaries and employee benefits		12,921		12,202		40,841		34,700
Occupancy expense		1,944		2,182		5,975		6,507
Other expenses:
Data processing		2,567		2,675		7,863		7,921
Professional fees		707		684		2,096		2,179
Mortgage banking loan processing expenses		272		404		854		1,405
Other real estate loss and expense, net		—		1		1		2
Provision for indemnifications		(200)		11		(435)		(858)
Other expenses		3,121		2,930		9,029		8,543
Total other expenses		6,467		6,705		19,408		19,192
Total noninterest expense	$	21,332	$	21,089	$	66,224	$	60,399

Total noninterest expenses increased $243,000, or 1.2 percent, in the third quarter of 2023 and increased $5.8 million, or 9.6 percent, in the first nine months of 2023 compared to the same periods in 2022. The increases were due primarily to

50

changes in deferred compensation liabilities, increases in compensation, payroll taxes and employee benefits at the community banking segment, which have generally increased in line with employment market conditions, and higher Federal Deposit Insurance Corporation (FDIC) assessment expenses, included in other expenses, due to statutory increases applicable to all insured depository institutions, partially offset by lower expenses tied to mortgage loan production volume at the mortgage banking segment, reported in compensation, payroll taxes and benefits and mortgage banking loan processing expenses. Additionally, the mortgage banking segment recorded a net reversal of provision for indemnifications for the third quarter of 2023 compared to provision for indemnifications expense in the third quarter of 2022 and a lower net reversal of provision for indemnifications for the first nine months of 2023 compared to the first nine months of 2022.

Changes in deferred compensation liabilities are offset by unrealized gains and losses on the Corporation’s rabbi trust, recorded in noninterest income.

Income Taxes

The Corporation’s consolidated effective income tax rate was 18.8 percent and 21.3 percent for the first nine months of 2023 and 2022, respectively. The Corporation’s consolidated effective tax rate for the first nine months of 2023 was lower compared to the same period in 2022 primarily as a result of a lower share of income at the consumer finance and mortgage banking segments, which are subject to state income taxes.

Business Segments

The Corporation operates in a decentralized manner in three business segments: community banking, mortgage banking and consumer finance.  An overview of the financial results for each of the Corporation’s business segments is presented below.

Community Banking:  The community banking segment comprises C&F Bank, C&F Wealth Management, C&F Insurance and CVB Title.  The following table presents the community banking segment operating results for the periods indicated.

51

TABLE 6: Community Banking Segment Operating Results

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Interest income	$	25,066	$	18,766	$	72,531	$	50,612
Interest expense		6,675		1,353		16,268		3,700
Net interest income		18,391		17,413		56,263		46,912
Provision for credit losses		500		—		1,550		(700)
Net interest income after provision for credit losses		17,891		17,413		54,713		47,612
Noninterest income:
Interchange income		1,558		1,513		4,658		4,502
Service charges on deposit accounts		1,138		1,114		3,286		3,259
Wealth management services income, net		630		613		1,855		1,885
Investment income in other equity interests		211		64		480		294
Other income, net		684		599		1,894		2,022
Total noninterest income		4,221		3,903		12,173		11,962
Noninterest expense:
Salaries and employee benefits		9,042		8,600		26,888		25,252
Occupancy expense		1,531		1,694		4,731		5,025
Data processing		1,953		2,026		6,141		5,907
Other real estate loss and expense, net		—		1		1		2
Other expenses		2,603		2,300		7,302		6,419
Total noninterest expenses		15,129		14,621		45,063		42,605
Income before income taxes		6,983		6,695		21,823		16,969
Income tax expense		1,298		1,274		4,081		3,215
Net income	$	5,685	$	5,421	$	17,742	$	13,754

The community banking segment reported net income of $5.7 million and $17.7 million for the third quarter and first nine months of 2023, respectively, compared to $5.4 million and $13.8 million for the same periods in 2022. The increases of $264,000 and $3.9 million for the third quarter and first nine months of 2023, compared to the same periods in 2022, were due primarily to higher net interest income, partially offset by an increase in provision for credit losses and higher noninterest expense.

Net interest income for the community banking segment increased by $978,000 to $18.4 million for the third quarter of 2023 and increased by $9.4 million to $56.3 million for the first nine months of 2023, respectively, compared to the same periods in 2022. Included in net interest income is interest income on variable rate loans to the consumer finance and mortgage banking segments. Average loan yields were higher for the third quarter and first nine months of 2023 compared to the same periods of 2022, due primarily to the effects of rising interest rates as market interest rates rose in 2022 and the first nine months of 2023. Average costs of interest-bearing liabilities were higher for the third quarter and first nine months of 2023 compared to the same periods of 2022, due primarily to the effects of rising interest rates and a shift in the mix from lower cost deposits to time deposits and borrowings. While the community banking segment expects loan yields to continue to rise, the impact on net interest margin is expected to be outpaced by the effect of rising deposit costs for the remainder of 2023.

The community banking segment recorded $500,000 in provision for credit losses for the third quarter of 2023 and recorded $1.6 million provision for credit losses for the first nine months of 2023 due primarily to growth in the loan portfolio and unfunded commitments. The community banking segment recorded no provision for credit losses for the third quarter of 2022 and recorded a net reversal of provision for credit losses of $700,000 for the first nine months of 2022 due primarily

52

to the resolution of certain impaired loans, which resulted in the reversal of specific reserves with no losses being realized. Noninterest income increased for the third quarter and first nine months of 2023 compared to the same periods in 2022 as a result of higher investment income in other equity investments and higher debit card interchange income.  Noninterest expenses increased during the third quarter and first nine months of 2023 compared to the same periods in 2022, due primarily to higher salaries and employee benefits and higher other expenses, due primarily to an increase in other components of net periodic pension cost and increased FDIC assessments from statutory increases applicable to all insured depository institutions.

Mortgage Banking:  The following table presents the mortgage banking operating results for the periods indicated.

TABLE 7: Mortgage Banking Segment Operating Results

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Interest income	$	517	$	556	$	1,312	$	1,674
Interest expense		232		247		513		561
Net interest income		285		309		799		1,113
Provision for credit losses		—		—		—		32
Net interest income after provision for credit losses		285		309		799		1,081
Noninterest income:
Gains of sales of loans		1,198		1,904		4,983		7,251
Mortgage banking fee income		592		780		1,805		2,577
Mortgage lender services fee income		537		397		1,567		1,259
Other income		15		20		41		82
Total noninterest income		2,342		3,101		8,396		11,169
Noninterest expense:
Salaries and employee benefits		1,762		1,998		5,610		6,238
Occupancy expense		251		322		768		982
Data processing		254		272		759		886
Other expenses		364		806		1,322		1,939
Total noninterest expenses		2,631		3,398		8,459		10,045
(Loss) income before income taxes		(4)		12		736		2,205
Income tax expense (benefit)		1		(12)		168		533
Net (loss) income	$	(5)	$	24	$	568	$	1,672

The mortgage banking segment reported a net loss of $5,000 and net income of $568,000 for the third quarter and first nine months of 2023 compared to $24,000 and $1.7 million for the same periods in 2022. The decrease in net income of the mortgage banking segment for the third quarter compared to the third quarter of 2022 was due primarily to lower volume of mortgage loan originations, partially offset by a net reversal of provision for indemnifications of $200,000 for the third quarter of 2023 compared to provision for indemnifications expense of $11,000 in the third quarter of 2022, which is included in other expenses. The decrease in net income for the mortgage banking segment for the first nine months of 2023 compared to the first nine months of 2022 was due primarily to lower volume of mortgage loan originations and a net reversal of provision for indemnifications of $435,000 for the first nine months of 2023 compared to $858,000 for the same period in 2022, partially offset by lower expenses tied to mortgage loan origination volume such as salaries and benefits, loan processing and data processing.

53

The following table presents mortgage loan originations and mortgage loans sold for the periods indicated.

TABLE 8: Mortgage Loan Originations

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Mortgage loan originations:
Purchases	$	117,777	$	165,997	$	360,335	$	493,206
Refinancings		11,881		18,285		40,224		92,052
Total mortgage loan originations1	$	129,658	$	184,282	$	400,559	$	585,258
Lock-adjusted originations2	$	114,548	$	147,585	$	399,350	$	571,051

1 Total mortgage loan originations does not include mortgage lender services.

2 Lock-adjusted originations includes an estimate of the effect of changes in the volume of mortgage loan applications in process that have not closed, net of volume not expected to close.

The rapid rise in mortgage interest rates during 2022 and first nine months of 2023, combined with higher home prices, has led to a substantial decline in mortgage loan originations for the mortgage industry so far in 2023 as compared to the same period in 2022.  Mortgage loan originations for the mortgage banking segment decreased 29.6 percent and 31.6 percent for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.  Gains on sales of loans, while driven in part by mortgage loan originations, also includes the effects of changes in locked loan commitments, which reflect the volume of mortgage loan applications that are in process and have not closed. Lock-adjusted originations for the mortgage banking segment decreased 22.4 percent and 30.1 percent for the third quarter and first nine months of 2023 compared to the same periods in 2022. Locked loan commitments were $40.9 million at September 30, 2023, compared to $42.3 million at December 31, 2022 and $67.3 million at September 30, 2022.

Mortgage lender services fee income is derived from providing mortgage origination functions to third-party mortgage lenders for a fee. Mortgage lender services fee income increased for the third quarter and first nine months of 2023 compared to the same periods in 2022 as a result of an increase in the number of institutional customers and the types of services provided, partially offset by the negative impacts of reduced mortgage loan volume in the industry.

The mortgage banking segment recorded a reversal of provision for indemnification losses of $200,000 and $435,000 for the third quarter and first nine months of 2023, respectively, compared to a provision for indemnification losses of $11,000 and a reversal of provision for indemnification losses of $858,000 for the same periods in 2022.  The release of indemnification reserves in 2022 and 2023 was due primarily to improvement in the mortgage banking segment’s assessment of borrower payment performance and other factors affecting expected losses on mortgage loans sold in the secondary market. Management believes that the indemnification reserve is sufficient to absorb losses related to loans that have been sold in the secondary market.

54

Consumer Finance:  The following table presents the consumer finance operating results for the periods indicated.

TABLE 9: Consumer Finance Segment Operating Results

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Interest income	$	12,020	$	11,175	$	35,313	$	30,975
Interest expense		5,748		3,941		17,060		9,800
Net interest income		6,272		7,234		18,253		21,175
Provision for credit losses		1,550		1,200		4,250		2,070
Net interest income after provision for credit losses		4,722		6,034		14,003		19,105
Noninterest income		(19)		49		25		164
Noninterest expense:
Salaries and employee benefits		2,389		2,234		6,840		6,800
Occupancy expense		160		168		475		501
Data processing		315		371		956		1,104
Other expenses		897		866		2,638		2,573
Total noninterest expenses		3,761		3,639		10,909		10,978
Income before income taxes		942		2,444		3,119		8,291
Income tax expense		260		665		858		2,255
Net income	$	682	$	1,779	$	2,261	$	6,036

The consumer finance segment reported net income of $682,000 and $2.3 million for the third quarter and first nine months of 2023 compared to $1.8 million and $6.0 million for the same periods in 2022. The decreases in consumer finance segment net income for the third quarter and first nine months of 2023, as compared to the same periods in 2022, were due primarily to higher interest expense on variable rate borrowings from the community banking segment as a result of increased market rates and higher provision for credit losses as a result of increased net charge-offs and loan growth, partially offset by higher interest income resulting from higher average balances of loans and higher yields.  Average loans outstanding increased $19.4 million, or 4.3 percent, for the third quarter of 2023 and increased $57.1 million, or 13.7 percent, for the first nine months of 2023 compared to the same periods in 2022.

Provision for credit losses increased as a result of increased net charge-offs and loan growth. Net charge-offs increased due primarily to an increase in the number of delinquent loans following a period of historically low delinquencies during the COVID-19 pandemic, a decline in wholesale values of used automobiles from a recent peak during the COVID-19 pandemic and continued recent challenges in repossessing automobiles due to a decline in the number of repossession agencies, which results in a fully charged-off loan when the automobile cannot be repossessed. If loan performance deteriorates, resulting in continued elevated delinquencies or net charge-offs, or if values of used vehicles decline, provision for credit losses may increase in future periods.

ASSET QUALITY

Allowance and Provision for Credit Losses

We conduct an analysis of the collectability of the loan portfolio on a regular basis. We use this analysis to assess the sufficiency of the allowance for credit losses on loans and to determine the necessary provision for credit losses.  

Upon adoption of ASC 326 on January 1, 2023, the Corporation segmented the loan portfolio into three loan portfolios based on common risk characteristics. The allowance for credit losses represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected.

55

Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a discounted cash flow approach for all loans except for overdraft balances, which are evaluated using a loss rate approach.  The discounted cash flow approach used by the Corporation utilizes loan-level cash flow projections and pool-level assumptions.

For commercial (except for loans to states and political subdivisions) and consumer loans, cash flow projections and estimated expected losses are based in part on forecasts of the national unemployment rate that are reasonable and supportable and external observations of historical loan losses. Forecasts of the national unemployment rate are derived from the Federal Open Markets Committee of the Federal Reserve Board. For periods beyond those for which reasonable and supportable forecasts are available, projections are based on a reversion of the national unemployment rate from the last forecast to a historical average level over the following six months. Cash flow projections and estimated expected losses for loans to states and political subdivisions are based on external loss observations for state and municipal debt obligations. For consumer finance loans, cash flow projections and estimated expected losses reflect historical average loss experience based on internal observations for auto loans and based on external loss observations for marine and recreational vehicle loans.

Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the loss estimation process. Factors considered by management include changes and expected changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.  The evaluation also considers the following risk characteristics that are inherent in the loan portfolio:

● Commercial loans are comprised of mortgage loans on commercial real estate, real estate acquisition, development and constructions loans, and other business lending, and carry risks associated with the successful operation of a business or a real estate project and changes in the value of collateral. In addition to other risks associated with the ownership of real estate, the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. Construction loans, which include loans to individuals for the construction of a residence that generally will be occupied by the borrower, also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

● Consumer loans are comprised primarily of residential mortgage loans and home equity lines secured by residential real estate and carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.

● Consumer finance loans are comprised of indirect financing for purchases of automobiles and marine and recreational vehicles (RVs) and carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral, which are typically rapidly-depreciating vehicles. Consumer finance loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

Allowance for Credit Losses Methodology – Commercial and Consumer. The review process generally begins with management assigning loan ratings to individual loans and identifying problem loans to be reviewed on an individual basis. This review of individual loans is limited to those loans that have specific risk characteristics not shared by other loans or that may result in significant losses to the Corporation, while all other loans, which may include delinquent loans and loans classified as special mention or substandard, are evaluated collectively in pools that share common risk characteristics. The allowance for loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated costs to sell. For these collateral dependent loans, we obtain an updated appraisal if we do not have a current one on file.  Appraisals

56

are performed by independent third party appraisers with relevant industry experience.  We may make adjustments to the appraised value based on recent sales of similar properties or general market conditions when appropriate. 

Commercial and consumer loans are assigned loan classification ratings based on their credit quality and risk of loss. These loan ratings are reviewed on a quarterly basis and updated as new information becomes available. 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.

● 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.

Allowance for Credit Losses Methodology – Consumer Finance. Cash flow projections and estimated expected losses reflect historical average loss experience based on internal observations for auto loans and based on external loss observations for marine and recreational vehicle loans. Automobile loans are evaluated in pools of loans that share the same internal credit rating based on borrowers’ credit scores at origination. The Corporation utilizes credit scores based on the methods developed and defined by the Fair Isaac Corporation (FICO) as a key indicator of the risk of loss to manage the portfolio and estimate the allowance for credit losses.  A FICO Score is a three-digit number based on the information in an applicant’s credit reports. It helps lenders determine how likely an applicant is to repay a loan. This, in turn, affects the loan amount that may be approved, repayment terms, and interest rate. The Corporation obtains FICO Scores in the credit reports provided by the car dealers that accept the consumer auto loan application, which may have been generated by any of the three major credit reporting bureaus, and also independently obtains a credit report on the borrower directly from Experian or Transunion. The Corporation utilizes an industry-specific FICO Score which is optimized for automobile credit products. Consumer finance loans are assigned a credit rating based on borrowers’ credit scores at the time of origination and are categorized within ranges of credit ratings used internally that parallel FICO Score rating bands. The Corporation monitors the consumer finance loan portfolio by past due status and by credit rating at the time of origination, which the Corporation believes serves as a relevant indicator of aggregate credit quality and risk of loan defaults in the portfolio based upon the use of FICO Scores over time for loan approval decisions and through experience analyzing loss patterns. The characteristics of these credit ratings are as follows:

57

● Very Good and Good credit rated borrowers are near or above the average FICO Score of consumers. Borrowers generally have limited to no prior credit difficulties or have shown extensive creditworthiness over a recent period of time.

● Fairly Good and Fair credit rated borrowers are approaching or slightly below the average FICO Score of consumers but typically have a credit profile acceptable to most lenders. Borrowers may have experienced minor credit difficulties or have a relatively limited credit history.

● Marginal credit rated borrowers are well below the average FICO Score of consumers. Borrowers may have limited access to traditional financing due to having experienced prior credit difficulties or have a limited credit history. The risk of future charge-offs is higher.

In accordance with its policies and guidelines and consistent with industry practices, the consumer finance segment, at times, offers payment deferrals, whereby the borrower is allowed to move up to two payments within a twelve-month rolling period to the end of the loan. A fee will be collected for extensions only in states that permit it. An account for which all delinquent payments are deferred is classified as current at the time the deferment is granted and therefore is not included as a delinquent account. Thereafter, such an account is aged based on the timely payment of future installments in the same manner as any other account. We evaluate the results of this deferment strategy based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, we believe that payment deferrals granted according to our policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections. Payment deferrals may affect the ultimate timing of when an account is charged off. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the allowance for credit losses and related provision for credit losses.

The allowance for credit losses represents an amount that, in our judgment, reduces the recorded investment in loans to the net amount expected to be collected. The provision for credit losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. Balances and ratios presented as of September 30, 2023 are in accordance with ASC 326, whereas balances and ratios presented as of December 31, 2022 or a prior date are presented in accordance with the previously applicable GAAP.

The following tables present the Corporation’s credit loss experience for the periods indicated.

TABLE 10: Allowance for Credit Losses

							Consumer
(Dollars in thousands)	Commercial			Consumer1			Finance			Total
For the three months ended September 30, 2023:
Balance at June 30, 2023	$	11,738		$	3,603		$	25,187		$	40,528
Provision charged to operations		407			143			1,550			2,100
Loans charged off		—			(83)			(3,372)			(3,455)
Recoveries of loans previously charged off		19			32			1,024			1,075
Balance at September 30, 2023	$	12,164		$	3,695		$	24,389		$	40,248
Average loans	$	885,340		$	340,720		$	472,811		$	1,698,871
Ratio of annualized net (recoveries) charge-offs to average loans		(0.01)	%		0.06	%		1.99	%		0.56	%

1Consumer loans includes provision, charge-offs and recoveries related to demand deposit overdrafts.

58

							Consumer
(Dollars in thousands)	Commercial			Consumer1			Finance			Total
For the nine months ended September 30, 2023:
Balance at December 31, 2022	$	11,219		$	3,330		$	25,969		$	40,518
Impact of ASC 326 adoption on non-PCD loans		(617)			98			406			(113)
Impact of ASC 326 adoption on PCD loans		595			9			—			604
Provision charged to operations		839			362			4,250			5,451
Loans charged off		(16)			(240)			(9,306)			(9,562)
Recoveries of loans previously charged off		144			136			3,070			3,350
Balance at September 30, 2023	$	12,164		$	3,695		$	24,389		$	40,248
Average loans	$	870,130		$	331,411		$	474,738		$	1,676,279
Ratio of annualized net (recoveries) charge-offs to average loans		(0.02)	%		0.04	%		1.75	%		0.49	%

1Consumer loans includes provision, charge-offs and recoveries related to demand deposit overdrafts.

	Real Estate						Commercial,
	Residential			Real Estate			Financial &			Equity						Consumer
(Dollars in thousands)	Mortgage			Construction			Agricultural			Lines			Consumer1			Finance			Total
For the three months ended September 30, 2022:
Balance at beginning of period	$	2,553		$	972		$	10,422		$	524		$	180		$	25,868		$	40,519
Provision charged to operations		112			(178)			34			11			21			1,200			1,200
Loans charged off		—			—			—			—			(77)			(1,793)			(1,870)
Recoveries of loans previously charged off		5			—			8			—			31			987			1,031
Balance at end of period	$	2,670		$	794		$	10,464		$	535		$	155		$	26,262		$	40,880
Average loans	$	235,002		$	78,980		$	730,653		$	41,512		$	8,108		$	453,401		$	1,547,656
Ratio of annualized net (recoveries) charge-offs to average loans		(0.01)	%		—	%		(0.00)	%		—	%		2.27	%		0.71	%		0.22	%

1Consumer loans includes provision, charge-offs and recoveries related to demand deposit overdrafts.

	Real Estate						Commercial,
	Residential			Real Estate			Financial &			Equity						Consumer
(Dollars in thousands)	Mortgage			Construction			Agricultural			Lines			Consumer1			Finance			Total
For the nine months ended September 30, 2022:
Balance at beginning of period	$	2,660		$	856		$	11,085		$	593		$	172		$	24,791		$	40,157
Provision charged to operations		(6)			(62)			(623)			(60)			83			2,070			1,402
Loans charged off		—			—			(11)			—			(193)			(4,115)			(4,319)
Recoveries of loans previously charged off		16			—			13			2			93			3,516			3,640
Balance at end of period	$	2,670		$	794		$	10,464		$	535		$	155		$	26,262		$	40,880
Average loans	$	222,919		$	80,934		$	712,285		$	40,899		$	8,112		$	417,604		$	1,482,753
Ratio of annualized net (recoveries) charge-offs to average loans		(0.01)	%		—	%		(0.00)	%		(0.01)	%		1.64	%		0.19	%		0.06	%

1Consumer loans includes provision, charge-offs and recoveries related to demand deposit overdrafts.

For further information regarding the adequacy of our allowance for credit losses, refer to “Table 15: Nonperforming Assets” and the accompanying disclosure below.

The allocation of the allowance for credit losses and the ratio of corresponding outstanding loan balances to total loans are as follows as of the dates indicated. Balances and ratios presented as of September 30, 2023 are in accordance with ASC 326, whereas balances and ratios presented as of December 31, 2022 or a prior date are presented in accordance with the previously applicable GAAP.

59

TABLE 11: Allocation of Allowance for Credit Losses

	September 30,
(Dollars in thousands)	2023
Allocation of allowance for credit losses:
Commercial	$	12,164
Consumer		3,695
Consumer Finance		24,389
Total allowance for credit losses	$	40,248
Ratio of loans to total period-end loans:
Commercial		52	%
Consumer		21
Consumer Finance		27
		100	%

	December 31,
(Dollars in thousands)	2022
Allocation of allowance for loan losses:
Real estate—residential mortgage	$	2,622
Real estate—construction		788
Commercial, financial and agricultural		10,431
Equity lines		497
Consumer		211
Consumer finance		25,969
Total allowance for loan losses	$	40,518
Ratio of loans to total period-end loans:
Real estate—residential mortgage		16	%
Real estate—construction		4
Commercial, financial and agricultural		48
Equity lines		2
Consumer		1
Consumer finance		29
		100	%

Loans are required to be measured at amortized cost and to be presented at the net amount expected to be collected. Off balance sheet credit exposures, including loan commitments, are not recorded on balance sheet, but expected credit losses arising from off balance sheet credit exposures are recorded as a reserve for unfunded commitments and reported in Other Liabilities. Credit losses on available for sale debt securities are accounted for as an allowance for credit losses, which is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value and the amount expected to be collected on the financial asset. The allowance for credit losses on loans and available for sale debt securities and the reserve for unfunded commitments are established through a provision for credit losses charged against earnings. Amounts reported for the three and nine months ended September 30, 2023 are in accordance with ASC 326, whereas amounts reported for periods prior to January 1, 2023 are presented in accordance with the previously applicable GAAP.

60

The following table presents a breakdown of the provision for credit losses for the periods indicated:

TABLE 12: Provision for Credit Losses

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
Provision for credit losses:
Provision for loans	$	2,100	$	1,200	$	5,451	$	1,402
Provision for unfunded commitments		(50)		—		349		—
Total	$	2,050	$	1,200	$	5,800	$	1,402

Loans by credit quality indicators are presented in Table 13 below.  Balances presented as of September 30, 2023 are in accordance with ASC 326, whereas balances presented as of December 31, 2022 or a prior date are presented in accordance with the previously applicable GAAP.

TABLE 13: Credit Quality Indicators

Loans by credit quality indicators as of September 30, 2023 were as follows:

			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Commercial real estate	$	638,475	$	6,728	$	—	$	264	$	645,467
Commercial business		118,576		65		—		—		118,641
Construction - commercial real estate		62,994		—		—		—		62,994
Land acquisition and development		28,400		—		—		—		28,400
Builder lines		30,787		—		—		—		30,787
Construction - consumer real estate		12,046		—		—		—		12,046
Residential mortgage		289,602		100		482		141		290,325
Equity lines		47,962		—		5		60		48,027
Other consumer		9,867		—		—		—		9,867
	$	1,238,709	$	6,893	$	487	$	465	$	1,246,554

1At September 30, 2023, the Corporation did not have any loans classified as Doubtful or Loss.

(Dollars in thousands)	Very Good		Good		Fairly Good		Fair		Marginal		Total
Consumer finance - automobiles	$	27,915	$	96,455	$	139,743	$	105,562	$	33,479	$	403,154
Consumer finance - marine and recreational vehicles		48,136		19,286		599		—		—		68,021
	$	76,051	$	115,741	$	140,342	$	105,562	$	33,479	$	471,175

Loans by credit quality indicators as of December 31, 2022 were as follows:

			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1
Real estate – residential mortgage	$	264,891	$	518	$	702	$	156	$	266,267
Real estate – construction 2		59,675		—		—		—		59,675
Commercial, financial and agricultural 3		776,387		738		5,856		—		782,981
Equity lines		43,147		40		5		108		43,300
Consumer		8,747		191		—		—		8,938
	$	1,152,847	$	1,487	$	6,563	$	264	$	1,161,161

61

			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance4	$	473,632	$	925	$	474,557

1 At December 31, 2022, 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.

4 Includes the Corporation’s automobile lending and marine and recreational vehicle lending.

Table 14 summarizes the Corporation’s credit ratios on a consolidated basis and Table 15 summarizes nonperforming assets by principal business segment as of September 30, 2023 and December 31, 2022.  Balances and ratios presented as of September 30, 2023 are in accordance with ASC 326, whereas balances and ratios presented as of December 31, 2022 or a prior date are presented in accordance with the previously applicable GAAP.

TABLE 14: Consolidated Credit Ratios

	September 30,			December 31,
(Dollars in thousands)	2023			2022
Total loans1	$	1,717,729		$	1,635,718
Nonaccrual loans	$	1,376		$	1,189
ACL	$	40,248		$	40,518
Nonaccrual loans to total loans		0.08	%		0.07	%
ACL to total loans		2.34	%		2.48	%
ACL to nonaccrual loans		2,925.00	%		3,407.74	%

1 Total loans does not include loans held for sale at the mortgage banking segment.

TABLE 15: Nonperforming Assets

Community Banking Segment

	September 30,			December 31,
(Dollars in thousands)	2023			2022
Total loans	$	1,246,554		$	1,160,454
Nonaccrual loans	$	465		$	115
Impaired loans1		n/a		$	823
ACL	$	15,859		$	14,513
Nonaccrual loans to total loans		0.04	%		0.01	%
ACL to total loans		1.27	%		1.25	%
ACL to nonaccrual loans		3,410.54	%		12,620.00	%
Annualized year-to-date net (recoveries) charge-offs to average total loans		(0.01)	%		0.02	%

1 The adoption of ASC 326 replaced previous impaired loans and TDR accounting guidance, and the evaluation of the ACL includes loans previously designated as impaired or TDRs together with other loans that share similar risk characteristics.

62

Mortgage Banking Segment

	September 30,			December 31,
(Dollars in thousands)	2023			2022
Total loans1	$	—		$	707
Nonaccrual loans	$	—		$	149
ACL	$	—		$	36
Nonaccrual loans to total loans		—	%		21.07	%
ACL to total loans		—	%		5.09	%
ACL to nonaccrual loans		—	%		24.16	%
Annualized year-to-date net charge-offs to average total loans		—	%		—	%

1 All loans have been transferred to the community banking segment. Total loans does not include loans held for sale.

Consumer Finance Segment

	September 30,			December 31,
(Dollars in thousands)	2023			2022
Total loans	$	471,175		$	474,557
Nonaccrual loans	$	911		$	925
Repossessed assets	$	580		$	352
ACL	$	24,389		$	25,969
Nonaccrual loans to total loans		0.19	%		0.19	%
ACL to total loans		5.18	%		5.47	%
ACL to nonaccrual loans		2,677.17	%		2,807.46	%
Annualized year-to-date net charge-offs to average total loans		1.75	%		0.59	%

The community banking segment’s nonaccrual loans were $465,000 at September 30, 2023 compared to $115,000 at December 31, 2022.  The community banking segment recorded $500,000 and $1.6 million in provision for credit losses for the third quarter and first nine months of 2023, respectively, compared to no provision for credit losses and a net reversal of provision for credit losses of $700,000, respectively, for the same periods in 2022. The increases in provision for credit losses are due primarily to growth in the loan portfolio, an increase in unfunded commitments, and the resolution of certain impaired loans in 2022, which resulted in the reversal of specific reserves with no losses being realized. At September 30, 2023, the allowance for credit losses increased to $15.9 million, compared to an allowance for loan losses of $14.5 million at December 31, 2022, due primarily to growth in the loan portfolio and the adoption of CECL, which resulted in an implementation adjustment on January 1, 2023 of $85,000. Management believes that the level of the allowance for credit losses is adequate to reflect the net amount expected to be collected.

Nonaccrual loans at the consumer finance segment were $911,000 at September 30, 2023, compared to $925,000 at December 31, 2022. Nonaccrual consumer finance loans remain low relative to the allowance for credit 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 credit losses. At September 30, 2023, repossessed vehicles available for sale totaled $580,000, compared to $352,000 at December 31, 2022.

The consumer finance segment experienced net charge-offs at an annualized rate of 1.99 percent and 1.75 percent of average total loans for the third quarter and first nine months of 2023, respectively, compared to 0.71 percent and 0.19 percent for the third quarter and first nine months of 2022, respectively, due primarily to an increase in the number of delinquent loans, a decline in wholesale values of used automobiles from a peak during the COVID-19 pandemic and challenges in repossessing automobiles due to a decline in the number of repossession agencies, which results in a fully charged-off loan when an automobile cannot be repossessed. At September 30, 2023, total delinquent loans as a percentage of total loans was 3.30 percent, compared to 2.78 percent at December 31, 2022 and 2.31 percent at September 30, 2022.

63

Although delinquent loans are increasing compared to prior periods, delinquency rates during 2022 were lower due in part to the effects of government stimulus measures in response to the pandemic that benefitted borrowers. While net charge-offs and delinquencies for the consumer finance segment as a whole may normalize lower than historical, pre-pandemic levels due to shifts in the composition and credit quality of the portfolio, delinquencies on the consumer finance segment’s auto loans as of September 30, 2023 have returned to levels consistent with pre-pandemic levels. The allowance for credit losses was $24.4 million at September 30, 2023, compared to an allowance for loan losses of $26.0 million at December 31, 2022. The allowance for credit losses as a percentage of total loans decreased to 5.18 percent at September 30, 2023, compared to an allowance for loan losses as a percentage of total loans of 5.47 percent at December 31, 2022, primarily as a result of growth in loans with stronger credit quality while balances of loans with lower credit quality declined, partially offset by the adoption of CECL, which resulted in an implementation adjustment on January 1, 2023 of $406,000.

As discussed above, the consumer finance segment at times offers payment deferrals to borrowers as a portfolio management technique to achieve higher ultimate cash collections on select loan accounts. Average amounts of payment deferrals on a monthly basis, which are not included in delinquent loans, were 2.20 percent and 1.73 percent as a percentage of average automobile loans outstanding for the third quarter of 2023 and 2022, respectively, and were 1.83 percent and 1.56 percent as a percentage of average automobile loans outstanding for the first nine months of 2023 and 2022, respectively.  

The consumer finance segment is an indirect lender that provides automobile financing through lending programs that are designed to serve customers in both the prime and “non-prime” markets, including those who may have limited access to traditional automobile financing due to having experienced prior credit difficulties. The preferred automobile is a later model, low mileage used vehicle because the value of new vehicles typically depreciates rapidly. In addition to automobile financing, marine and RV loan contracts are also purchased on an indirect basis through a referral program administered by a third party. The marine and RV loan contracts are for prime loans averaging less than $50,000 made to individuals with higher credit scores.

The consumer finance segment’s focus has included non-prime borrowers and, therefore, the anticipated rates of delinquencies, defaults, repossessions and losses on the consumer finance loans are higher than those experienced in the general automobile finance industry and could be more dramatically affected by changes in general economic conditions. Changes in economic conditions may also affect consumer demand for used automobiles and values of automobiles securing outstanding loans, due to changes in demand or changes in levels of inventory of used automobiles, which may directly affect the amount of a loss incurred by the consumer finance segment in the event of default. While we manage the higher risk inherent in loans made to non-prime borrowers through the underwriting criteria, portfolio management and collection methods employed by the consumer finance segment, we cannot guarantee that these criteria or methods will afford adequate protection against these risks. With the consumer finance segment’s implementation of a scorecard model for purchasing loan contracts, the credit-worthiness of borrowers at origination has improved for automobile loans purchased and the level of credit losses experienced has decreased. We cannot provide any assurance that the consumer finance segment’s net charge-off ratio will not increase in future periods.  However, we believe that the current allowance for credit losses is adequate to reflect the net amount expected to be collected on existing consumer finance segment loans that may become uncollectible. If factors influencing the consumer finance segment result in higher net charge-off ratios in future periods, the consumer finance segment may need to increase the level of its allowance for credit losses through additional provisions for credit losses, which could negatively affect future earnings of the consumer finance segment.

FINANCIAL CONDITION

At September 30, 2023, the Corporation had total assets of $2.4 billion, which was an increase of $89.4 million since December 31, 2022. The increase was attributable primarily to growth in loans held for investment, cash and cash equivalents and loans held for sale, funded by increases in deposits, brokered deposits, and short-term borrowings. The significant components of the Corporation’s Consolidated Balance Sheets are discussed below.

Loan Portfolio

Tables 16 and 17 present information pertaining to the composition of loans held for investment and the maturity/repricing of certain loans held for investment, respectively.

64

TABLE 16: Summary of Loans Held for Investment

	September 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		Percent		Amount		Percent
Commercial real estate	$	645,467	37	%	$	592,301	36	%
Commercial business		118,641	7			118,605	7
Construction - commercial real estate		62,994	4			49,136	3
Land acquisition and development		28,400	1			37,537	2
Builder lines		30,787	2			34,538	2
Construction - consumer real estate		12,046	1			10,539	1
Residential mortgage		290,325	17			266,267	16
Equity lines		48,027	3			43,300	3
Other consumer		9,867	1			8,938	1
Consumer finance - automobiles		403,154	23			411,112	25
Consumer finance - marine and recreational vehicles		68,021	4			63,445	4
Subtotal		1,717,729	100	%		1,635,718	100	%
Less allowance for credit losses		(40,248)				(40,518)
Loans, net	$	1,677,481			$	1,595,200

The increase in total loans from December 31, 2022 to September 30, 2023 was due primarily to growth in commercial real estate and residential mortgage lending at the community banking segment.

TABLE 17: Maturity/Repricing Schedule of Loans Held for Investment

	September 30, 2023
(Dollars in thousands)	Commercial		Consumer		Consumer Finance		Total
Variable Rate:
Within 1 year	$	213,139	$	49,222	$	—	$	262,361
1 to 5 years		78,404		1,480		—		79,884
5 to 15 years		19,495		55		—		19,550
After 15 years		—		—		—		—
Fixed Rate:
Within 1 year	$	32,120	$	18,365	$	5,340	$	55,825
1 to 5 years		240,320		39,688		215,739		495,747
5 to 15 years		287,105		209,989		250,096		747,190
After 15 years		15,706		41,466		—		57,172
	$	886,289	$	360,265	$	471,175	$	1,717,729

65

Securities

The investment portfolio plays a primary role in the management of the Corporation’s interest rate sensitivity. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The investment portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. At September 30, 2023 and December 31, 2022, all securities in the Corporation’s investment portfolio were classified as available for sale.

Table 18 sets forth the composition of the Corporation’s securities available for sale in dollar amounts at fair value and as a percentage of the Corporation’s total securities available for sale at the dates indicated.

TABLE 18: Securities Available for Sale

	September 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		Percent		Amount		Percent
U.S. Treasury securities	$	51,394	11	%	$	58,833	11	%
U.S. government agencies and corporations		94,050	21			130,274	26
Mortgage-backed securities		160,315	35			179,918	35
Obligations of states and political subdivisions		134,165	29			120,827	24
Corporate and other debt securities		20,729	4			22,739	4
Total available for sale securities at fair value	$	460,653	100	%	$	512,591	100	%

Securities available for sale decreased by $51.9 million to $460.7 million at September 30, 2023, compared to $512.6 million at December 31, 2022, due primarily to maturities, calls and paydowns of securities and an increase in net unrealized losses in the market value of securities available for sale, as a result of increases in market interest rates. Net unrealized losses in the market value of securities available for sale increased to $49.9 million at September 30, 2023 compared to net unrealized losses in the market value of securities available for sale of $44.5 million at December 31, 2022  

For more information about the Corporation’s securities available for sale, including information about securities in an unrealized loss position at September 30, 2023 and December 31, 2022, see Part I, Item 1, “Financial Statements” under the heading “Note 2: Securities” in this Quarterly Report on Form 10-Q.

Table 19 presents additional information pertaining to the composition of the securities portfolio at amortized cost, by the earlier of contractual maturity or expected maturity.  Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

66

TABLE 19: Maturity of Securities

	September 30, 2023
			Weighted
	Amortized		Average
(Dollars in thousands)	Cost		Yield 1
U.S. Treasury securities:
Maturing within 1 year	$	41,836	2.22	%
Maturing after 1 year, but within 5 years		10,949	1.56
Total U.S. Treasury securities		52,785	2.09
U.S. government agencies and corporations:
Maturing within 1 year		36,052	2.38
Maturing after 1 year, but within 5 years		31,079	1.21
Maturing after 5 years, but within 10 years		31,149	1.53
Maturing after 10 years		8,175	2.10
Total U.S. government agencies and corporations		106,455	1.77
Mortgage-backed securities:
Maturing within 1 year		30,465	1.90
Maturing after 1 year, but within 5 years		86,644	1.88
Maturing after 5 years, but within 10 years		51,220	1.92
Maturing after 10 years		15,223	2.33
Total mortgage-backed securities		183,552	1.93
States and municipals:1
Maturing within 1 year		12,580	1.85
Maturing after 1 year, but within 5 years		35,849	2.36
Maturing after 5 years, but within 10 years		33,700	2.43
Maturing after 10 years		60,464	4.13
Total states and municipals		142,593	3.08
Corporate and other debt securities:
Maturing within 1 year		1,775	2.48
Maturing after 1 year, but within 5 years		16,187	4.01
Maturing after 5 years, but within 10 years		7,250	3.94
Total corporate and other debt securities		25,212	3.88
Total securities:
Maturing within 1 year		122,708	2.35
Maturing after 1 year, but within 5 years		180,708	2.75
Maturing after 5 years, but within 10 years		123,319	2.15
Maturing after 10 years		83,862	3.46
Total securities	$	510,597	2.81

1. Yields on tax-exempt securities have been computed on a taxable-equivalent basis using the federal corporate income tax rate of 21 percent. The weighted average yield is calculated based on the relative amortized costs of the securities.

Deposits

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

During the first nine months of 2023, deposits increased $24.6 million to $2.03 billion at September 30, 2023. Noninterest bearing demand deposits decreased $31.1 million, savings and interest-bearing demand deposits decreased $160.3 million, and time deposits increased $216.0 million during the same period. The decrease in non-time deposits was due in part to a shift in balances toward time deposits as interest rates increased and to seasonal factors related to municipal deposits, which tend to increase with tax collections primarily in the fourth quarter of each year and decline with spending thereafter. The Corporation had $130.7 million in municipal deposits at September 30, 2023 compared to $178.9 million at December 31, 2022.

67

The Corporation had $18.5 million in brokered money market and time deposits outstanding at September 30, 2023 compared to $5,000 at December 31, 2022.  The Corporation may continue to use brokered deposits on a limited basis as a means of maintaining and diversifying liquidity and funding sources.

Borrowings

Borrowings increased to $147.0 million at September 30, 2023 from $92.1 million at December 31, 2022 due primarily to increased short-term borrowings from the FHLB to support lending activities and securities purchases.

Liquidity

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

Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled $340.7 million at September 30, 2023, compared to $325.7 million at December 31, 2022. The Corporation’s funding sources, including capacity, amount outstanding and amount available at September 30, 2023 are presented in Table 20.  The Corporation’s capacity and amount available increased $193.1 million and $128.2 million, respectively, from December 31, 2022 as a result of pledging additional loans in order to increase funding capacity under secured funding arrangements with the FHLB and Federal Reserve Bank.

TABLE 20: Funding Sources

	September 30, 2023
(Dollars in thousands)	Capacity		Outstanding		Available
Unsecured federal funds agreements	$	95,000	$	—	$	95,000
Repurchase lines of credit		35,000		—		35,000
Borrowings from FHLB		241,918		67,000		174,918
Borrowings from Federal Reserve Bank		255,916		—		255,916
Total	$	627,834	$	67,000	$	560,834

Certain unsecured federal funds agreements and repurchase lines of credit with borrowing capacity of $20.0 million and $35.0 million, respectively, are scheduled to terminate in the first quarter of 2024, however we have no reason to believe the remaining arrangements will not be renewed at maturity. Additional loans and securities are available that can be pledged as collateral for future borrowings from the FHLB and Federal Reserve Bank 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.

Uninsured deposits represent an estimate of amounts above the FDIC insurance coverage limit of $250,000. As of September 30, 2023, the Corporation’s uninsured deposits were approximately $555.8 million, or 27.4 percent of total deposits. Excluding intercompany cash holdings and municipal deposits which are secured with pledged securities, amounts uninsured were approximately $409.1 million, or 20.2 percent of total deposits as of September 30, 2023, compared to 19.2 percent of total deposits as of June 30, 2023. The Corporation’s liquid assets and borrowing availability as of September 30, 2023 totaled $901.5 million, exceeding uninsured deposits, excluding intercompany cash holdings and secured municipal deposits, by $492.4 million.

68

The Corporation’s internal policy limits brokered deposits to 20 percent of total deposits, representing approximately $387.2 million of additional net availability for additional brokered deposits as of September 30, 2023.

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 disclosure below presents the Corporation’s and the Bank’s actual 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.  Although the minimum regulatory capital requirements are not applicable to the Corporation, the Corporation calculates these ratios for its own planning and monitoring purposes. Total risk-weighted assets at September 30, 2023 for the Corporation were $1.94 billion and for the Bank were $1.91 billion. Total risk-weighted assets at December 31, 2022 for the Corporation were $1.82 billion and for the Bank were $1.80 billion. As of September 30, 2023, the Corporation and the Bank met all capital adequacy requirements to which it is subject.

TABLE 21: Regulatory Capital

	September 30, 2023
					Minimum Capital				Well Capitalized
	Actual				Requirements				Requirements
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
The Corporation
Total risk-based capital ratio	$	286,474	14.8	%	$	155,083	8.0	%	$	N/A	N/A	%
Tier 1 risk-based capital ratio		242,029	12.5			116,312	6.0			N/A	N/A
Common Equity Tier 1 capital ratio		217,029	11.2			87,234	4.5			N/A	N/A
Tier 1 leverage ratio		242,029	10.0			97,017	4.0			N/A	N/A
The Bank
Total risk-based capital ratio	$	268,097	14.0	%	$	153,096	8.0	%	$	191,370	10.0	%
Tier 1 risk-based capital ratio		243,958	12.7			114,822	6.0			153,096	8.0
Common Equity Tier 1 capital ratio		243,958	12.7			86,116	4.5			124,390	6.5
Tier 1 leverage ratio		243,958	10.1			96,165	4.0			120,207	5.0

	December 31, 2022
					Minimum Capital				Well Capitalized
	Actual				Requirements				Requirements
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
The Corporation
Total risk-based capital ratio	$	280,606	15.4	%	$	145,958	8.0	%	$	N/A	N/A	%
Tier 1 risk-based capital ratio		233,581	12.8			109,468	6.0			N/A	N/A
Common Equity Tier 1 capital ratio		208,581	11.4			82,101	4.5			N/A	N/A
Tier 1 leverage ratio		233,581	9.9			94,562	4.0			N/A	N/A
The Bank
Total risk-based capital ratio	$	255,719	14.2	%	$	144,074	8.0	%	$	180,093	10.0	%
Tier 1 risk-based capital ratio		232,985	12.9			108,056	6.0			144,074	8.0
Common Equity Tier 1 capital ratio		232,985	12.9			81,042	4.5			117,060	6.5
Tier 1 leverage ratio		232,985	9.9			93,856	4.0			117,320	5.0

69

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 and intangible assets; (2) Tier 1 capital which consists principally of CET1 plus the Corporation’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for credit losses and $20.0 million of outstanding subordinated notes of the Corporation. The Corporation repaid $4.0 million of subordinated notes during the second quarter of 2023. The Total Capital ratio, Tier  1 Capital ratio and CET1 ratio are calculated as a percentage of risk-weighted assets.  The Tier 1 Leverage ratio is calculated as a percentage of average tangible assets.  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.  As a result of this election, changes in AOCI, including unrealized losses on securities available for sale, do not affect regulatory capital amounts shown in the table above for the Corporation or the Bank. 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 17: Regulatory Requirements and Restrictions” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022.

The Basel III rules established a “capital conservation buffer” of 2.5 percent above the regulatory minimum risk-based capital ratios, which is not included in the table above.  Including the capital conservation buffer, the minimum ratios are a common equity Tier I risk-based capital ratio of 7.0 percent, a Tier I risk-based capital ratio of 8.5 percent, and a total risk-based capital ratio of 10.5 percent.  The Corporation and the Bank exceeded these ratios at September 30, 2023 and December 31, 2022.

The Corporation’s capital resources are impacted by its share repurchase programs. Under the 2022 Repurchase Program which was authorized by the Corporation’s Board of Directors during the fourth quarter of 2022, the Corporation is authorized to purchase up to $10.0 million of the Corporation’s common stock.  Repurchases under the 2022 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 and/or Rule 10b-18 under the Securities Exchange Act of 1934, as amended, 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 in its 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, and there is no assurance that the Corporation will purchase any shares under the 2022 Repurchase Program. The 2022 Repurchase Program is authorized through December 31, 2023, and, as of September 30, 2023, there was $3.7 million remaining available for repurchases of the Corporation’s common stock under the 2022 Repurchase Program.

On January 1, 2023, the Corporation adopted ASC 326.  Regulatory capital rules permitted C&F Bank to phase-in the day-one effects of adopting ASC 326 over a 3-year transition period.  C&F Bank elected not to take the phase-in but rather to reduce its regulatory capital in the first quarter of 2023 for the day-one effects of adopting ASC 326 in the amount of $1.1 million.

USE OF CERTAIN NON-GAAP FINANCIAL MEASURES

The accounting and reporting policies of the Corporation conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Corporation’s performance. These include net tangible income attributable to the Corporation,  ROTCE, tangible book value per share, and the following fully-taxable equivalent (FTE) measures: interest income on loans-FTE, interest income on securities-FTE, total interest income-FTE and net interest income-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

70

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of balances of intangible assets, including goodwill, that vary significantly between institutions, and tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Corporation to evaluate and measure the Corporation’s performance to the most directly comparable GAAP financial measures is presented below.

TABLE 22: Non-GAAP Table

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands except for per share data)	2023			2022			2023			2022
Reconciliation of Certain Non-GAAP Financial Measures
Return on Average Tangible Common Equity
Average total equity, as reported	$	204,840		$	198,363		$	203,606		$	201,181
Average goodwill		(25,191)			(25,191)			(25,191)			(25,191)
Average other intangible assets		(1,507)			(1,781)			(1,572)			(1,857)
Average noncontrolling interest		(484)			(525)			(668)			(769)
Average tangible common equity	$	177,658		$	170,866		$	176,175		$	173,364
Net income	$	5,777		$	6,545		$	18,658		$	19,063
Amortization of intangibles		68			75			204			224
Net income (loss) attributable to noncontrolling interest		12			(65)			(122)			(212)
Net tangible income attributable to C&F Financial Corporation	$	5,857		$	6,555		$	18,740		$	19,075
Annualized return on average tangible common equity		13.19	%		15.35	%		14.18	%		14.67	%
Fully Taxable Equivalent Net Interest Income1
Interest income on loans	$	28,369		$	23,159		$	81,845		$	65,566
FTE adjustment		54			41			154			110
FTE interest income on loans	$	28,423		$	23,200		$	81,999		$	65,676
Interest income on securities	$	2,938		$	2,646		$	9,048		$	6,362
FTE adjustment		196			110			541			293
FTE interest income on securities	$	3,134		$	2,756		$	9,589		$	6,655
Total interest income	$	31,686		$	26,326		$	91,729		$	72,949
FTE adjustment		250			151			695			403
FTE interest income	$	31,936		$	26,477		$	92,424		$	73,352
Net interest income	$	24,462		$	24,380		$	73,765		$	67,487
FTE adjustment		250			151			695			403
FTE net interest income	$	24,712		$	24,531		$	74,460		$	67,890

_____________________

1 Assuming a tax rate of 21%.

(Dollars in thousands except for per share data)	September 30, 2023		December 31, 2022
Tangible Book Value Per Share
Equity attributable to C&F Financial Corporation	$	199,762	$	195,634
Goodwill		(25,191)		(25,191)
Other intangible assets		(1,475)		(1,679)
Tangible equity attributable to C&F Financial Corporation	$	173,096	$	168,764
Shares outstanding		3,379,619		3,476,614
Book value per share	$	59.11	$	56.27
Tangible book value per share	$	51.22	$	48.54

71

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This report contains statements concerning the Corporation’s expectations, plans, objectives or beliefs regarding future financial performance and other statements that are not historical facts, which may constitute “forward-looking statements” as defined by federal securities laws.  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, are not statements of historical fact, and are based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available.  These statements may include, but are not limited to: statements regarding expected future operations and financial performance; expected trends in yields on loans; expected future recovery of investments in debt securities; expected renewal of unsecured federal funds agreements; expected impact of unrealized losses on earnings and regulatory capital of the Corporation or the Bank; future dividend payments; competition, our loan portfolio; our digital services; deposits; improving operational efficiencies; retention of qualified loan officers; higher quality automobile loan contracts, marine and RV lending; charge-offs and delinquencies; changes in net interest margin and items affecting net interest margin; strategic business initiatives and the anticipated effects thereof on mortgage loan originations; technology initiatives; our diversified business strategy; asset quality; credit quality; adequacy of allowances for credit losses and the level of future charge-offs; adequacy of the reserve for indemnification losses related to loans sold in the secondary market; capital levels; the effect of future market and industry trends; changes in interest rates and the effects of future interest rate levels and fluctuations; cybersecurity risks and inflation.  These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Corporation including, but not limited to, changes in:

● interest rates, such as volatility in short-term interest rates or yields on U.S. Treasury bonds, increases in interest rates following actions by the Federal Reserve and increases or volatility in mortgage interest rates

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

●general economic conditions, including unemployment levels, inflation rates, supply chain disruptions and slowdowns in economic growth, and also including the economic impacts of the COVID-19 pandemic

●market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises, war and other military conflicts (including the ongoing military conflicts between Russia and Ukraine and in the Middle East) or other major events, or the prospect of these events

●developments impacting the financial services industry, such as bank failures or concerns involving liquidity

●attracting, hiring, training, motivating and retaining qualified employees

●the legislative and regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB

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

●demand for financial services in the Corporation’s market areas

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

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

●the inventory level, demand and fluctuations in the pricing of used automobiles, including sales prices of repossessed vehicles

●the level of automobile loan delinquencies or defaults and our ability to repossess automobiles securing delinquent automobile finance installment contracts

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

●the level of indemnification losses related to mortgage loans sold

●demand for loan products

●deposit flows

●the strength of the Corporation’s counterparties

72

●the soundness of other financial institutions and any indirect exposure related to the closing of other financial institutions and their impact on the broader market through other customers, suppliers and partners, or that the conditions which resulted in the liquidity concerns experienced by closed financial institutions may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Corporation has commercial or deposit relationships

●competition from both banks and non-banks, including competition in the automobile finance and marine and recreational vehicle finance markets

●reliance on third parties for key services

●the commercial and residential real estate markets

●the demand for residential mortgages and conditions in the secondary residential mortgage loan markets

●the Corporation’s technology initiatives and other strategic initiatives

●the Corporation’s branch expansions and consolidations

●cyber threats, attacks or events

●expansion of C&F Bank’s product offerings

●accounting principles, policies and guidelines, and elections made by the Corporation thereunder, including, for example, our adoption of the CECL methodology and the potential volatility in the Corporation’s operating results due the application of the CECL methodology

These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of Part I of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022, in Item 1A. “Risk Factors,” of Part II of the Corporation’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023 and in Item 1A. “Risk Factors,” of Part II of this Quarterly Report on Form 10-Q should be considered in evaluating the forward-looking statements contained herein.

Readers should not place undue reliance on any forward-looking statement. There can be no assurance that actual results will not differ materially from historical results or those expressed in or implied by such forward-looking statements, or that the beliefs, assumptions and expectations underlying such forward-looking statements will be proven to be accurate. Forward-looking statements are made as of the date of this report and 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.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will affect the amount of interest income and expense the Corporation receives or pays on a significant portion of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short term until maturity. The Corporation does not subject itself to foreign currency exchange rate risk or commodity price risk due to the current nature of its operations. The Corporation has established a comprehensive enterprise risk management program to monitor risks related to its operations, including market risk, and the Corporation’s Chief Risk Officer has primary responsibility for the enterprise risk management program.

The Corporation’s Asset/Liability Committee meets at least quarterly with the primary objective of maximizing current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate. Thus the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level. The objective of the Corporation’s liquidity management is to meet the Corporation’s liquidity requirements by ensuring 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. Management continuously monitors cash flows, including deposit flows, loan fundings and draws, securities payments and borrowing maturities, and the impact of changes in interest rates on these cash flows. Additionally, management tracks uninsured deposits, unpledged securities and unpledged loans among other liquidity metrics.

73

The Corporation assumes interest rate risk in the normal course of operations. The fair values of most of the Corporation’s financial instruments will change when interest rates change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities and repricing dates of assets and liabilities to the extent believed necessary to balance minimizing interest rate risk and increasing net interest income in current market conditions. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates, maturities and repricing dates of assets and liabilities and attempts to manage interest rate risk by adjusting terms of new loans, deposits and borrowings, by investing in securities with terms that manage the Corporation’s overall interest rate risk, and in some cases by using derivative contracts to reduce the Corporation’s overall exposure to changes in interest rates. The Corporation does not enter into interest rate-sensitive instruments for trading purposes.

We use simulation analysis to assess earnings at risk and economic value of equity (EVE) analysis to assess economic value at risk. These methods allow management to regularly monitor both the direction and magnitude of the Corporation’s interest rate risk exposure. These modeling techniques involve assumptions and estimates that inherently cannot be measured with complete precision. Key assumptions in the analyses include maturity and repricing characteristics of both assets and liabilities, prepayments on amortizing assets, other embedded options, non-maturity deposit sensitivity and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of the Corporation’s interest rate risk position over time.

Simulation analysis evaluates the potential effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of the Corporation’s shorter-term interest rate risk. The analysis utilizes a “static” balance sheet approach, which assumes changes in interest rates without any management response to change the composition of the balance sheet. The measurement date balance sheet composition is maintained over the simulation time period with maturing and repayment dollars being rolled back into like instruments for new terms at current market rates. Additional assumptions are applied to modify volumes and pricing under the various rate scenarios. These assumptions include loan prepayments, time deposit early withdrawals, the sensitivity of deposit repricing to changes in market rates, withdrawal behavior of non-maturing deposits, and other factors that management deems significant.

The simulation analysis results, based on a measurement date balance sheet as of September 30, 2023, for hypothetical changes in net interest income over the next twelve months are presented in the table below.

 One-Year Net Interest Income Simulation (dollars in thousands)

	Hypothetical Change in Net
	Interest Income
	Over the Next Twelve Months
	as of
	September 30, 2023				December 31, 2022
Assumed Market Interest Rate Shift	Dollars		Percentage		Dollars		Percentage
-300 BP shock	$	(6,948)	(6.58)	%	$	(10,597)	(9.16)	%
-200 BP shock		(4,267)	(4.04)			(6,143)	(5.31)
-100 BP shock		(1,940)	(1.84)			(2,864)	(2.48)
+100 BP shock		809	0.77			1,403	1.21
+200 BP shock		1,636	1.55			2,747	2.37
+300 BP shock		2,384	2.26			4,021	3.48

74

These results indicate that the Corporation would expect net interest income to decrease over the next twelve months assuming an immediate downward shift in market interest rates of 100 BP to 300 BP and to increase if rates shifted upward to the same degree. The simulation analysis results show the Corporation is less asset sensitive as of September 30, 2023 compared to the results as of December 31, 2022 due primarily to shifts in the mix of earnings assets and in the mix of deposit.

The EVE analysis provides information on the risk inherent in the balance sheet that might not be taken into account in the simulation analysis due to the shorter time horizon used in that analysis. The EVE of the balance sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.

The EVE analysis results are presented in the table below.

Static EVE Change (dollars in thousands)

	Hypothetical Change in EVE
	as of
	September 30, 2023				December 31, 2022
Assumed Market Interest Rate Shift	Dollars		Percentage		Dollars		Percentage
-300 BP shock	$	(36,885)	(9.03)	%	$	(76,481)	(17.76)	%
-200 BP shock		(16,068)	(3.93)			(42,156)	(9.79)
-100 BP shock		(3,689)	(0.90)			(17,553)	(4.08)
+100 BP shock		152	0.04			10,547	2.45
+200 BP shock		47	0.01			18,038	4.19
+300 BP shock		(1,932)	(0.47)			22,632	5.25

These results as of September 30, 2023 indicate that the EVE would decrease assuming an immediate downward shift in market interest rates of 100 BP to 300 BP, would increase if rates shifted upward 100 BP and 200 BP and would decrease if rates shift upward 300 BP. As of September 30, 2023, the Corporation’s EVE is less asset sensitive compared to its position as of December 31, 2022 due primarily to the composition of its Consolidated Balance Sheets and the characteristics and assumptions of certain deposit accounts.  

Certain shortcomings are inherent in the methodology used in the above interest rate risk analyses.  Modeling changes in forecasted cash flows and EVE requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates, and certain assumed scenarios may be impractical to model under different economic circumstances.  In a falling rate environment, the analyses assume that rate-sensitive assets are repriced downward, subject to floors on certain loans, while certain deposit rates are not allowed to decrease below zero.

The Corporation uses interest rate swaps to manage select exposures to interest rate risk. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. The Corporation has interest rate swaps that qualify as cash flow hedges. The cash flow hedges effectively modify the Corporation’s exposure to interest rate risk associated with the Corporation’s trust preferred capital notes by converting variable rates of interest on the trust preferred capital notes to fixed rates of interest for periods ending between June 2024 and June 2029. Also, as part of the Corporation’s overall strategy for maximizing net interest income while managing interest rate risk, the Corporation enters into interest rate swaps in connection with originating loans to certain commercial borrowers as a means to offer a fixed-rate instrument to the borrower while effectively retaining a variable-rate exposure.

The mortgage banking segment enters into IRLCs with customers to originate loans for which the interest rates are determined prior to funding.  The mortgage banking segment then mitigates interest rate risk on these IRLCs and loans

75

held for sale by (1) entering into forward sales contracts with investors at the time that interest rates are locked for loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for unspecified mortgage backed securities (TBA securities) until it can enter into forward sales contracts with investors for loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments.  

We believe that our current interest rate exposure is manageable and does not indicate any significant exposure to interest rate changes.

ITEM 4.CONTROLS AND PROCEDURES

The Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2023 to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation or its subsidiary to disclose material information required to be set forth in the Corporation’s periodic reports.

There were no changes in the Corporation’s internal control over financial reporting during the three months ended September 30, 2023 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, 2022, except as set forth below.

Our business, financial condition, and results of operations could be adversely affected by developments impacting the financial services industry, such as bank failures or concerns involving liquidity.

Events in the financial services industry, including bank closures, cause general uncertainty and concern regarding the adequacy of liquidity of the financial services industry generally. While we rely on different sources of funding to meet potential liquidity needs, our business strategies are largely based on access to funding from customer deposits and supplemental funding provided by wholesale or other secondary liquidity sources. Deposit levels may be affected by various industry factors, including interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, conditions in the financial services industry specifically and general economic conditions that impact the amount of liquidity in the economy and savings levels, and also by factors that impact customers’ perception of our financial condition and capital and liquidity levels. The response to bank closures by the U.S. Government, including the U.S. Department of the Treasury, the FDIC, and the Federal Reserve, cannot be predicted and the policies and regulations implemented in response to past bank closures cannot be expected to be extended or repeated in response to a future bank closure. The Corporation cannot predict to what extent any such steps taken by the banking regulators will be effective in calming the financial markets and financial services industry generally, preventing further bank closures, or reducing the risk of deposit outflows, and particularly sudden deposit outflows, from banks. As a result of this uncertainty, we face the potential for deposit outflows, increased borrowing and funding costs, and increased competition for liquidity, any of which could have a material adverse impact on our financial performance or financial condition.

76

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Issuer Purchases of Equity Securities

The Corporation’s Board of Directors authorized a program, effective December 1, 2022, to repurchase up to $10.0 million of the Corporation’s common stock through December 31, 2023 (the 2022 Repurchase Program).  Repurchases under the 2022 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 and/or Rule 10b-18 under the Exchange Act and shares repurchased will be returned to the status of authorized and unissued shares of common stock. There were 23,856 shares repurchased under the 2022 Repurchase Program during the third quarter of 2023.  As of September 30, 2023, the Corporation has made aggregate common stock repurchases of 114,827 shares for an aggregate cost of $6.3 million under the 2022 Repurchase Program.  

The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended September 30, 2023.

					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
	Shares Purchased1	per Share		Programs	Programs
July 1, 2023 - July 31, 2023	10,036	$	54.58	10,000	$	4,459,062
August 1, 2023 - August 31, 2023	7,711	$	55.53	6,334	$	4,104,308
September 1, 2023 - September 30, 2023	7,522	$	54.33	7,522	$	3,695,600
Total	25,269	$	54.80	23,856

1 During the three months ended September 30, 2023, 1,413 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.

77

ITEM 6.EXHIBITS

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, effective January 8, 2009 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed January 14, 2009)
3.2	Amended and Restated Bylaws of C&F Financial Corporation, as adopted December 15, 2020 (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 17, 2020)
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	The following financial statements from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Consolidated Statements of Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited)
104	The cover page from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included within Exhibit 101)

78

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		C&F FINANCIAL CORPORATION
			(Registrant)
Date:	November 7, 2023	By:	/s/ Thomas F. Cherry
			Thomas F. Cherry
			President and Chief Executive Officer
			(Principal Executive Officer)
Date:	November 7, 2023		/s/ Jason E. Long
			Jason E. Long
			Executive Vice President, Chief Financial Officer and Secretary
			(Principal Financial and Accounting Officer)

79