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, ~~2020~~2021


☐	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, 2020,~~October 29, 2021, the latest practicable date for determination, ~~3,649,705~~3,538,713 shares of common stock, $1.00 par value, of the registrant were outstanding.

Table of Contents

TABLE OF CONTENTS


PART I - Financial Information		Page

Item 1.	Financial Statements	3

	Consolidated Balance Sheets (Unaudited) – September 30, ~~2020 (unaudited)~~2021 and December 31, ~~2019~~2020	3

	Consolidated Statements of Income ~~(unaudited)~~(Unaudited) – Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	4

	Consolidated Statements of Comprehensive Income ~~(unaudited)~~(Unaudited) – Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	5

	Consolidated Statements of Equity ~~(unaudited)~~(Unaudited) – Three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	6

	Consolidated Statements of ~~Equity (unaudited)~~Cash Flows (Unaudited) – Nine months ended September 30, ~~2020~~2021 and ~~2019~~	7

	~~Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30,~~ 2020 ~~and 2019~~	8

	Notes to Consolidated Interim Financial Statements ~~(unaudited)~~(Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3735

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7069

Item 4.	Controls and Procedures	7069

PART II - Other Information

Item 1A.	Risk Factors	7170

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7270

Item 6.	Exhibits	7371

	Signatures	7472

Table of Contents

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,


2020

2019

Assets

(unaudited)

*

Cash and due from banks

$
15,022

$
21,148

Interest-bearing deposits in other banks

10,751

144,285

Total cash and cash equivalents

25,773

165,433

Securities—available for sale at fair value, amortized cost of
$266,401 and $187,759, respectively

272,091

189,733

Loans held for sale, at fair value

274,851

90,500

Loans, net of allowance for loan losses of $38,856 and $32,873, respectively

1,319,500

1,082,318

Restricted stock, at cost

3,209

3,257

Corporate premises and equipment, net

42,754

35,261

Other real estate owned, net of valuation allowance of $146 and $88, respectively

1,107

1,103

Accrued interest receivable

7,829

6,776

Goodwill

25,191

14,425

Other intangible assets, net

2,374

912

Bank-owned life insurance

19,984

16,044

Net deferred tax asset

12,449

11,219

Other assets

73,739

40,451

Total assets

$
2,080,851

$
1,657,432

Liabilities

Deposits

Noninterest-bearing demand deposits

$
484,280

$
296,985

Savings and interest-bearing demand deposits

700,091

572,209

Time deposits

479,142

422,056

Total deposits

1,663,513

1,291,250

Short-term borrowings

60,481

16,360

Long-term borrowings

67,486

119,529

Trust preferred capital notes

25,307

25,281

Accrued interest payable

1,091

1,291

Other liabilities

73,921

38,442

Total liabilities

1,891,799

1,492,153

Commitments and contingent liabilities (Note 11)

Equity

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,647,898 and 3,438,126 shares issued and outstanding, respectively, includes 136,705 and 142,020 of unvested shares, respectively)

3,511

3,296

Additional paid-in capital

21,402

9,503

Retained earnings

164,205

154,248

Accumulated other comprehensive loss, net

(730)

(2,249)

Equity attributable to C&F Financial Corporation

188,388

164,798

Noncontrolling interest

664

481

Total equity

189,052

165,279

Total liabilities and equity

$
2,080,851

$
1,657,432


	September 30,		December 31,
	2021		2020
Assets
Cash and due from banks	$	15,001	$	17,742
Interest-bearing deposits in other banks		186,494		68,927
Total cash and cash equivalents		201,495		86,669
Securities—available for sale at fair value, amortized cost of $360,981 and $280,824, respectively		363,413		286,389
Loans held for sale, at fair value		116,789		214,266
Loans, net of allowance for loan losses of $39,447 and $39,156, respectively		1,351,564		1,313,250
Restricted stock, at cost		1,027		1,636
Corporate premises and equipment, net		45,397		44,132
Other real estate owned, net of valuation allowance of $32 and $207, respectively		857		907
Accrued interest receivable		7,125		8,103
Goodwill		25,191		25,191
Other intangible assets, net		2,055		2,291
Bank-owned life insurance		20,382		20,205
Net deferred tax asset		13,977		13,555
Other assets		60,136		69,716
Total assets	$	2,209,408	$	2,086,310

Liabilities
Deposits
Noninterest-bearing demand deposits	$	576,065	$	501,945
Savings and interest-bearing demand deposits		835,915		780,645
Time deposits		441,105		469,583
Total deposits		1,853,085		1,752,173
Short-term borrowings		37,006		20,455
Long-term borrowings		30,441		30,398
Trust preferred capital notes		25,343		25,316
Accrued interest payable		581		1,109
Other liabilities		57,770		62,388
Total liabilities		2,004,226		1,891,839

Commitments and contingent liabilities (Note 11)

Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,537,894 and 3,670,301 shares issued and outstanding, respectively, includes 149,762 and 155,945 of unvested shares, respectively)		3,388		3,514
Additional paid-in capital		15,390		21,427
Retained earnings		189,301		170,819
Accumulated other comprehensive loss, net		(3,647)		(1,955)
Equity attributable to C&F Financial Corporation		204,432		193,805
Noncontrolling interest		750		666
Total equity		205,182		194,471
Total liabilities and equity	$	2,209,408	$	2,086,310

* Derived from audited consolidated financial statements.

See notes to consolidated interim financial statements.

Table of Contents

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,


2020

2019

2020

2019
Interest income

Interest and fees on loans

$
22,506

$
22,254

$
67,607

$
65,497
Interest on interest-bearing deposits and federal funds sold

32

460

682

1,631
Interest and dividends on securities

U.S. government agencies and corporations

109

109

355

311
Mortgage-backed securities

533

528

1,596

1,706
Tax-exempt obligations of states and political subdivisions

498

504

1,507

1,643
Taxable obligations of states and political subdivisions

102

86

302

272
Other

42

51

135

159
Total interest income

23,822

23,992

72,184

71,219
Interest expense

Savings and interest-bearing deposits

346

538

1,287

1,737
Time deposits

1,938

1,868

6,368

4,798
Borrowings

404

1,091

1,962

3,322
Trust preferred capital notes

289

272

865

867
Total interest expense

2,977

3,769

10,482

10,724
Net interest income

20,845

20,223

61,702

60,495
Provision for loan losses

3,300

1,800

9,550

6,005
Net interest income after provision for loan losses

17,545

18,423

52,152

54,490
Noninterest income

Gains on sales of loans

9,706

3,205

17,987

8,296
Mortgage banking fee income

2,206

1,373

5,497

3,410
Interchange income

1,268

1,105

3,498

3,134
Service charges on deposit accounts

785

1,012

2,426

2,874
Wealth management services income, net

640

529

1,973

1,453
Other service charges and fees

390

396

1,159

1,111
Net gains on sales, maturities and calls of available for sale securities

4

3

11

8
Other

1,939

607

2,963

3,249
Total noninterest income

16,938

8,230

35,514

23,535
Noninterest expenses

Salaries and employee benefits

15,767

11,730

40,938

35,132
Occupancy

2,131

1,974

6,331

5,992
Other

7,433

6,598

21,939

18,404
Total noninterest expenses

25,331

20,302

69,208

59,528
Income before income taxes

9,152

6,351

18,458

18,497
Income tax expense

2,234

1,466

4,158

3,999
Net income

6,918

4,885

14,300

14,498
Less net income attributable to noncontrolling interest

125

5

183

4
Net income attributable to C&F Financial Corporation

$
6,793

$
4,880

$
14,117

$
14,494
Net income per share - basic and diluted

$
1.86

$
1.42

$
3.87

$
4.19


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest income
Interest and fees on loans	$	22,120	$	22,506	$	66,399	$	67,607
Interest on interest-bearing deposits and federal funds sold		77		32		171		682
Interest and dividends on securities
U.S. government agencies and corporations		198		109		498		355
Mortgage-backed securities		536		533		1,451		1,596
Tax-exempt obligations of states and political subdivisions		395		498		1,300		1,507
Taxable obligations of states and political subdivisions		104		102		288		302
Other		174		42		439		135
Total interest income		23,604		23,822		70,546		72,184
Interest expense
Savings and interest-bearing deposits		346		346		1,049		1,287
Time deposits		888		1,938		3,249		6,368
Borrowings		462		404		1,365		1,962
Trust preferred capital notes		290		289		861		865
Total interest expense		1,986		2,977		6,524		10,482
Net interest income		21,618		20,845		64,022		61,702
Provision for loan losses		430		3,300		110		9,550
Net interest income after provision for loan losses		21,188		17,545		63,912		52,152
Noninterest income
Gains on sales of loans		5,660		9,706		18,665		17,987
Mortgage banking fee income		1,630		2,206		5,134		5,497
Interchange income		1,461		1,268		4,250		3,498
Service charges on deposit accounts		992		785		2,639		2,426
Wealth management services income, net		708		640		2,095		1,973
Mortgage lender services income		598		706		1,991		1,348
Other service charges and fees		386		390		1,188		1,159
Net gains on sales, maturities and calls of available for sale securities		3		4		41		11
Other income, net		604		1,233		3,495		1,615
Total noninterest income		12,042		16,938		39,498		35,514
Noninterest expenses
Salaries and employee benefits		13,915		15,767		45,242		40,938
Occupancy		2,231		2,131		6,781		6,331
Other		7,030		7,433		21,355		21,939
Total noninterest expenses		23,176		25,331		73,378		69,208
Income before income taxes		10,054		9,152		30,032		18,458
Income tax expense		2,227		2,234		6,950		4,158
Net income		7,827		6,918		23,082		14,300
Less net income attributable to noncontrolling interest		153		125		339		183
Net income attributable to C&F Financial Corporation	$	7,674	$	6,793	$	22,743	$	14,117
Net income per share - basic and diluted	$	2.16	$	1.86	$	6.27	$	3.87

See notes to consolidated interim financial statements.

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,


2020

2019

2020

2019
Net income

$
6,918

$
4,885

$
14,300

$
14,498
Other comprehensive income (loss):

Defined benefit plan:

Reclassification of recognized net actuarial losses into net income¹

49

47

148

141
Related income tax effects

(10)

(10)

(31)

(30)
Amortization of prior service credit into net income¹

(17)

(17)

(51)

(51)
Related income tax effects

4

4

11

11
Defined benefit plan, net of tax

26

24

77

71

Cash flow hedges:

Unrealized holding gains (losses) arising during the period

127

(563)

(2,001)

(773)
Related income tax effects

(32)

145

515

199
Amortization of hedging gains into net income²

(3)

(28)

(9)

(28)
Related income tax effects

—

7

2

7
Cash flow hedges, net of tax

92

(439)

(1,493)

(595)

Securities available for sale:

Unrealized holding (losses) gains arising during the period

(261)

368

3,727

3,741
Related income tax effects

54

(78)

(783)

(786)
Reclassification of net realized gains into net income³

(4)

(3)

(11)

(8)
Related income tax effects

1

1

2

2
Securities available for sale, net of tax

(210)

288

2,935

2,949
Other comprehensive (loss) income, net of tax

(92)

(127)

1,519

2,425
Comprehensive income

6,826

4,758

15,819

16,923
Less comprehensive income attributable to noncontrolling interest

125

5

183

4
Comprehensive income attributable to C&F Financial Corporation

$
6,701

$
4,753

$
15,636

$
16,919


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	7,827	$	6,918	$	23,082	$	14,300
Other comprehensive income (loss):
Defined benefit plan:
Reclassification of recognized net actuarial losses into net income¹		61		49		182		148
Related income tax effects		(13)		(10)		(38)		(31)
Amortization of prior service credit into net income¹		(17)		(17)		(51)		(51)
Related income tax effects		4		4		11		11
Defined benefit plan, net of tax		35		26		104		77

Cash flow hedges:
Unrealized holding gains (losses) arising during the period		166		127		921		(2,001)
Related income tax effects		(43)		(32)		(237)		515
Amortization of hedging gains into net income²		(1)		(3)		(5)		(9)
Related income tax effects		—		—		1		2
Cash flow hedges, net of tax		122		92		680		(1,493)

Securities available for sale:
Unrealized holding (losses) gains arising during the period		(1,112)		(261)		(3,094)		3,727
Related income tax effects		234		54		650		(783)
Reclassification of net realized gains into net income³		(3)		(4)		(41)		(11)
Related income tax effects		1		1		9		2
Securities available for sale, net of tax		(880)		(210)		(2,476)		2,935
Other comprehensive (loss) income, net of tax		(723)		(92)		(1,692)		1,519
Comprehensive income		7,104		6,826		21,390		15,819
Less comprehensive income attributable to noncontrolling interest		153		125		339		183
Comprehensive income attributable to C&F Financial Corporation	$	6,951	$	6,701	$	21,051	$	15,636

1	These items are included in the computation of net periodic benefit cost and are included in “Noninterest income – ~~Other”~~Other income, net” on the Consolidated Statements of Income. See “Note 8: Employee Benefit Plans,” for additional information.

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

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

See notes to consolidated interim financial statements.

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(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, 2021	$	3,439	$	17,643	$	183,043	$	(2,924)	$	597	$	201,798
Comprehensive income:
Net income		—		—		7,674		—		153		7,827
Other comprehensive loss		—		—		—		(723)		—		(723)
Share-based compensation		—		386		—		—		—		386
Restricted stock vested		1		(1)		—		—		—		—
Common stock issued		—		48		—		—		—		48
Common stock purchased		(52)		(2,686)		—		—		—		(2,738)
Cash dividends declared ($0.40 per share)		—		—		(1,416)		—		—		(1,416)
Balance September 30, 2021	$	3,388	$	15,390	$	189,301	$	(3,647)	$	750	$	205,182


	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, 2020	$	3,510	$	21,055	$	158,799	$	(638)	$	539	$	183,265
Comprehensive income:
Net income		—		—		6,793		—		125		6,918
Other comprehensive loss		—		—		—		(92)		—		(92)
Share-based compensation		—		311		—		—		—		311
Restricted stock vested		1		(1)		—		—		—		—
Common stock issued		—		38		—		—		—		38
Common stock purchased		—		(1)		—		—		—		(1)
Cash dividends declared ($0.38 per share)		—		—		(1,387)		—		—		(1,387)
Balance September 30, 2020	$	3,511	$	21,402	$	164,205	$	(730)	$	664	$	189,052

See notes to consolidated interim financial statements.

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUIT~~EQUITY~~Y

FOR THE ~~THREE~~NINE MONTHS ENDED SEPTEMBER 30, ~~2020~~2021 AND ~~2019~~2020

(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, 2020

$
3,510

$
21,055

$
158,799

$
(638)

$
539

$
183,265

Comprehensive income:

Net income

—

—

6,793

—

125

6,918

Other comprehensive loss

—

—

—

(92)

—

(92)

Share-based compensation

—

311

—

—

—

311

Restricted stock vested

1

(1)

—

—

—

—

Common stock issued

—

38

—

—

—

38

Common stock purchased

—

(1)

—

—

—

(1)

Cash dividends declared ($0.38 per share)

—

—

(1,387)

—

—

(1,387)

Balance September 30, 2020

$
3,511

$
21,402

$
164,205

$
(730)

$
664

$
189,052

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, 2019

$
3,305

$
10,107

$
147,570

$
(2,120)

$
489

$
159,351

Comprehensive income:

Net income

—

—

4,880

—

5

4,885

Other comprehensive loss

—

—

—

(127)

—

(127)

Share-based compensation

—

306

—

—

—

306

Restricted stock vested

2

(2)

—

—

—

—

Common stock issued

1

36

—

—

—

37

Common stock purchased

(22)

(1,102)

—

—

—

(1,124)

Cash dividends declared ($0.37 per share)

—

—

(1,267)

—

—

(1,267)

Balance September 30, 2019

$
3,286

$
9,345

$
151,183

$
(2,247)

$
494

$
162,061

~~See notes to consolidated financial statements.~~

~~Table of Contents~~

~~C&F FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF~~ ~~EQUITY~~

~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019~~

~~(Unaudited)~~

~~(Dollars in thousands, except per share amounts)~~


	Attributable to C&F Financial Corporation												Attributable to C&F Financial Corporation
							Accumulated												Accumulated
			Additional				Other								Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total		Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity		Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance December 31, 2019		3,296		9,503		154,248		(2,249)		481		165,279
Balance December 31, 2020													$	3,514	$	21,427	$	170,819	$	(1,955)	$	666	$	194,471
Comprehensive income:
Net income		—		—		14,117		—		183		14,300		—		—		22,743		—		339		23,082
Other comprehensive income		—		—		—		1,519		—		1,519
Other comprehensive loss														—		—		—		(1,692)		—		(1,692)
Share-based compensation		—		1,012		—		—		—		1,012		—		1,206		—		—		—		1,206
Restricted stock vested		17		(17)		—		—		—		—		21		(21)		—		—		—		—
Acquisition of Peoples Bankshares, Incorporated		210		11,402		—		—		—		11,612
Common stock issued		2		107		—		—		—		109		3		131		—		—		—		134
Common stock purchased		(14)		(605)		—		—		—		(619)		(150)		(7,353)		—		—		—		(7,503)
Cash dividends declared ($1.14 per share)		—		—		(4,160)		—		—		(4,160)
Balance September 30, 2020	$	3,511	$	21,402	$	164,205	$	(730)	$	664	$	189,052
Cash dividends declared ($1.18 per share)														—		—		(4,261)		—		—		(4,261)
Distributions to noncontrolling interest														—		—		—		—		(255)		(255)
Balance September 30, 2021													$	3,388	$	15,390	$	189,301	$	(3,647)	$	750	$	205,182


	Attributable to C&F Financial Corporation												Attributable to C&F Financial Corporation
	��						Accumulated												Accumulated
			Additional				Other								Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total		Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity		Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance December 31, 2018	$	3,358	$	12,752	$	140,520	$	(4,672)	$	—	$	151,958
Balance December 31, 2019													$	3,296	$	9,503	$	154,248	$	(2,249)	$	481	$	165,279
Comprehensive income:
Net income		—		—		14,494		—		4		14,498		—		—		14,117		—		183		14,300
Other comprehensive income		—		—		—		2,425		—		2,425		—		—		—		1,519		—		1,519
Issuance of noncontrolling interest		—		—		—		—		490		490
Share-based compensation		—		1,073		—		—		—		1,073		—		1,012		—		—		—		1,012
Restricted stock vested		18		(18)		—		—		—		—		17		(17)		—		—		—		—
Acquisition of Peoples Bankshares, Incorporated														210		11,402		—		—		—		11,612
Common stock issued		2		105		—		—		—		107		2		107		—		—		—		109
Common stock purchased		(92)		(4,567)		—		—		—		(4,659)		(14)		(605)		—		—		—		(619)
Cash dividends declared ($1.11 per share)		—		—		(3,831)		—		—		(3,831)
Balance September 30, 2019	$	3,286	$	9,345	$	151,183	$	(2,247)	$	494	$	162,061
Cash dividends declared ($1.14 per share)														—		—		(4,160)		—		—		(4,160)
Balance September 30, 2020													$	3,511	$	21,402	$	164,205	$	(730)	$	664	$	189,052

See notes to consolidated interim financial ~~statements.~~statements

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2021		2020
Operating activities:
Net income	$	14,300	$	14,498	$	23,082	$	14,300
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		2,780		2,722
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		9,550		6,005		110		9,550
Accretion of certain acquisition-related discounts, net						(2,401)		(2,631)
Share-based compensation		1,012		1,073		1,206		1,012
Pension expense		593		487
Accretion of certain acquisition-related discounts, net		(2,631)		(2,179)
Amortization of intangible assets		248		190
Net realized gains on sales, maturities and calls of securities available for sale		(11)		(8)
Depreciation and amortization						3,578		3,028
Accretion of discounts and amortization of premiums on securities, net		1,564		1,177		2,629		1,564
Income from bank-owned life insurance		(320)		(250)		(312)		(320)
Pension expense						652		593
Proceeds from sales of loans held for sale		1,070,338		613,120		1,276,899		1,070,338
Origination of loans held for sale		(1,226,538)		(653,852)		(1,163,845)		(1,226,538)
Gains on sales of loans held for sale		(17,987)		(8,296)		(18,665)		(17,987)
Other losses (gains), net		873		(44)
Other (gains) losses, net						(519)		862
Change in other assets and liabilities:
Accrued interest receivable		(623)		751		978		(623)
Other assets		5,934		2,432		447		5,934
Accrued interest payable		(460)		343		(528)		(460)
Other liabilities		4,056		1,090		(3,544)		4,056
Net cash used in operating activities		(137,322)		(20,741)
Net cash provided by (used in) operating activities						119,767		(137,322)
Investing activities:
Acquisition of Peoples Bankshares, Incorporated		19,101		—		—		19,101
Disposition of assets related to business combination		8,004		—		—		8,004
Proceeds from sales, maturities and calls of securities available for sale and payments on mortgage-backed securities		101,068		55,593		85,293		101,068
Purchases of securities available for sale		(164,094)		(28,988)		(168,040)		(164,094)
Purchases of time deposits, net		(6,466)		—
Maturities (purchases) of time deposits, net						4,692		(6,466)
Repayments on loans held for investment by non-bank affiliates		96,460		93,028		120,088		96,460
Purchases of loans held for investment by non-bank affiliates		(98,760)		(117,261)		(156,677)		(98,760)
Net increase in community banking loans held for investment		(118,640)		(6,635)
Net decrease (increase) in community banking loans held for investment						3,330		(118,640)
Purchases of corporate premises and equipment		(7,655)		(2,001)		(4,377)		(7,655)
Proceeds from sales of other real estate owned						457		—
Changes in collateral posted with other financial institutions, net		(9,340)		(3,380)		3,960		(9,340)
Other investing activities, net		310		557		834		310
Net cash used in investing activities		(180,012)		(9,087)		(110,440)		(180,012)
Financing activities:
Net increase in demand and savings deposits		220,379		1,135		129,390		220,379
Net (decrease) increase in time deposits		(19,723)		65,784
Net decrease in time deposits						(28,269)		(19,723)
Net increase in short-term borrowings		44,121		1,943		16,551		44,121
Proceeds from long-term borrowings		20,000		—		—		20,000
Repayments of long-term borrowings		(82,553)		—		—		(82,553)
Repurchases of common stock		(355)		(4,385)		(7,503)		(355)
Cash dividends paid		(4,160)		(3,831)		(4,261)		(4,160)
Other financing activities, net		(35)		(37)		(409)		(35)
Net cash provided by financing activities		177,674		60,609		105,499		177,674
Net (decrease) increase in cash and cash equivalents		(139,660)		30,781
Net increase (decrease) in cash and cash equivalents						114,826		(139,660)
Cash and cash equivalents at beginning of period		165,433		115,013		86,669		165,433
Cash and cash equivalents at end of period	$	25,773	$	145,794	$	201,495	$	25,773
Supplemental cash flow disclosures:
Interest paid	$	11,195	$	10,355	$	7,295	$	11,195
Income taxes paid		3,847		1,020		8,429		3,847
Supplemental disclosure of noncash investing and financing activities:
Value of shares withheld at vesting for employee taxes	$	264	$	274
Transfers from loans to other real estate owned		62		496
Transfers from corporate premises and equipment to other real estate owned		—		835
Issuance of noncontrolling interest		—		490
Liabilities assumed to acquire right of use assets under operating leases						1,931		842
Liabilities assumed to acquire right of use assets under finance leases						—		6,359
Transfers from loans held for sale to loans held for investment						2,911		1,810

See notes to consolidated interim financial statements.

Table of Contents

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, ~~2019.~~2020.

The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation) ~~and~~, 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. The accounting and reporting policies of the Corporation conform to U.S. GAAP and to predominant practices within the banking industry.

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

C&F Bank has 5 wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. and CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, 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 Services, Inc.~~, was organized in July 1999, for the primary purpose of owning an equity interest in an independent insurance agency that operates in Virginia~~ and ~~North Carolina.~~ CVB Title Services, Inc. ~~was~~were organized for the primary purpose of owning equity interests in an ~~equity interest in~~independent insurance agency and a full service title and settlement ~~agency.~~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 loan losses, impairment of loans 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.

The COVID-19 pandemic has caused a significant disruption in economic activity worldwide, including in market areas served by the Corporation. Estimates for the allowance for loan losses at September 30, ~~2020~~2021 include probable losses related to the pandemic. ~~The Corporation expects that~~While there have been signals of economic recovery and a resumption of many types of business activity, there remains significant uncertainty involved in the ~~pandemic will continue to have an effect on its results~~measurement of ~~operations.~~these losses. If economic conditions

Table of Contents

~~economic conditions~~ deteriorate further, then additional provision for loan losses may be required in future periods. It is unknown how long these conditions will last and what the ultimate financial impact will be to the Corporation. ~~Depending on the severity and duration of the economic consequences of the pandemic, the Corporation’s goodwill may become impaired.~~

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.

Business Combination: On January 1, 2020, the Corporation completed the acquisition of Peoples Bankshares, Incorporated (Peoples) and its banking subsidiary, Peoples Community Bank for an aggregate purchase price of $22.19 million of cash and stock. Additional information about the acquisition is presented in Note 2.

~~Subordinated Notes:~~ On September 29, 2020, the Corporation completed the issuance of $20.0 million in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction. The subordinated notes will initially bear interest at a fixed rate of 4.875 percent for five years and at the three month SOFR plus 475.5 basis points thereafter.

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

~~Leases:~~ The Corporation’s leases comprise primarily operating leases of real estate and office equipment in which the Corporation or one of its subsidiaries is the lessee. During the nine months ended September 30, 2020 and 2019, the Corporation obtained right of use assets in exchange for lease liabilities under operating leases of $842,000 and $1.12 ~~million, respectively. During the nine months ended September 30, 2020, the Corporation obtained right of use assets in exchange for lease liabilities under finance leases of~~ $6.36 million. The Corporation’s right of use assets, which are presented in other assets in the Consolidated Balance Sheets, and lease liabilities, which are presented in other liabilities and long-term borrowings in the Consolidated Balance Sheets for operating and finance leases, respectively, are presented in the table below.

September 30,

December 31,
(Dollars in thousands)

2020

2019
Operating leases:

Right of use assets

$
2,345

$
2,785
Lease liabilities

2,439

2,813

Finance leases:

Right of use assets

$
6,271

$
—
Lease liabilities

6,370

—

Income Taxes: The Corporation’s effective tax rate was ~~22.5~~23.1 percent and ~~21.6~~22.5 percent for the first nine months of ~~2020~~2021 and ~~2019,~~2020, respectively. The higher effective tax rate for the first nine months of 2020 includes the effects of a higher apportionment for state income taxes and a limitation on the deductibility of executive compensation, which was partially offset byCorporation recognized income tax benefits of $23,000 and $326,000 in the three and nine months ended September 30, 2020 ~~related to prior tax years of Peoples~~ arising from a change in tax law enacted in response to the COVID-19 ~~pandemic.~~pandemic which changed the tax rate applied to certain net operating losses related to prior tax years of Peoples. The effects of changes in tax law are recognized in income tax expense in the period in which the changes are enacted.

~~Table of Contents~~

Share-Based Compensation: Share-based compensation expense, net of forfeitures, for the three and nine months ended September 30, 2021 was $386,000 ($271,000 after tax) and $1.21 million ($863,000 after tax), respectively, for restricted stock granted during 2016 through 2021. Share-based compensation expense, net of forfeitures, for the three and nine months ended September 30, 2020 was $311,000 ($219,000 after tax) and $1.01 million ($654,000 after tax), respectively, for restricted stock granted during 2015 through 2020. As of September 30, ~~2020,~~2021, there was ~~$2.95~~$3.18 million of total unrecognized compensation expense related to unvested restricted stock that will be recognized over the remaining requisite service periods.

A summary of activity for restricted stock awards during the first nine months of ~~2020~~2021 and ~~2019~~2020 is presented below:

2020

2021

Weighted-

Average

Grant Date

Shares

Fair Value

Shares

Fair Value

Unvested, December 31, 2019

142,020

48.88

Unvested, December 31, 2020

155,945

48.52

Granted

14,770

53.03

20,462

44.13

Vested

(16,555)

40.20

(21,195)

44.18

Forfeited

(3,530)

52.86

(5,450)

45.89

Unvested, September 30, 2020

136,705

50.32

Unvested, September 30, 2021

149,762

48.63

2019

Weighted-

Average

Grant Date

Shares

Fair Value

Unvested, December 31, 2018

139,455

$
45.75

Granted

16,670

51.79

Vested

(17,990)

41.55

Forfeited

(680)

50.44

Unvested, September 30, 2019

137,455

47.01

~~Paycheck Protection Program:~~ ~~Beginning in April 2020, the Corporation originated loans under the Paycheck Protection Program (PPP)~~Table of the Small Business Administration (SBA). PPP loans are fully guaranteed by the SBA, and in some cases borrowers may be eligible to obtain forgiveness of the loans, in which case loans would be repaid by the SBA. As repayment of the PPP loans is guaranteed by the SBA, the Corporation does not recognize a reserve for PPP loans in its allowance for loan losses. The Corporation received fees from the SBA of 1 percent to 5 percent of the principal amount of each loan originated under the PPP. Fees received from the SBA are recognized net of direct origination costs in interest income over the life of the related loans. Recognition of fees related to PPP loans is dependent upon the timing of ultimate repayment or forgiveness.Contents

~~Recently Adopted Accounting Pronouncements:~~

~~On January 1, 2020, the Corporation adopted Accounting Standards Update (ASU) 2018-13,~~ ~~“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”~~ These amendments modified the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. The applicable amendments of ASU 2018-13 were applied prospectively and did not have a material effect on the Corporation’s consolidated financial statements.


	2020
		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Unvested, December 31, 2019	142,020	$	48.88
Granted	14,770		53.03
Vested	(16,555)		40.20
Forfeited	(3,530)		52.86
Unvested, September 30, 2020	136,705		50.32

Recent Significant Accounting Pronouncements:

In June 2016, the Financial Accounting Standards Board (FASB) issued ~~ASU~~Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as part of its project on financial instruments. Subsequently, this ASU was amended when the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial Instruments—

~~Table of Contents~~

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)” and ASU 2020-03, “Codification Improvements to Financial Instruments” (collectively, ASC 326). ASC 326 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new standard will be effective for the Corporation beginning on January 1, 2023. Early adoption of the new standard is permitted.

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

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

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

NOTE 2: Business Combination

On January 1, 2020, the Corporation completed its acquisition of Peoples. Peoples shareholders received 0.5366 shares of the Corporation’s common stock and $27.00 in cash for each share of Peoples common stock, with cash paid in lieu of any fractional shares of the Corporation’s common stock. In connection with the transaction, the Corporation paid aggregate cash consideration of $10.58 million and issued 209,871 shares of its common stock to the shareholders of Peoples.

Table of Contents

The Corporation accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the acquisition and the common stock of the Corporation issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value. During the measurement period, the acquirer shall adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the

~~Table of Contents~~

acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. The measurement period may not exceed one year from the acquisition date.

The following table presents as of January 1, 2020 the total consideration paid by the Corporation in connection with the acquisition of Peoples, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill.


	Amounts
	Recognized as of
(Dollars in thousands)	January 1, 2020
Purchase price:
Cash paid	$	10,579
Common stock issued		11,612
Total purchase price	$	22,191

Identifiable assets acquired:
Cash and cash equivalents	$	29,680
Securities available for sale		17,169
Loans		124,195
Accrued interest receivable		430
Corporate premises and equipment		3,105
Other real estate owned		281
Core deposit intangible asset		1,711
Bank-owned life insurance		3,591
Investment in small business investment company		1,493
Other receivables		5,234
Other assets		3,658
Total identifiable assets acquired		190,547

Identifiable liabilities assumed:
Demand and savings deposits		94,798
Time deposits		77,018
Borrowings		4,245
Accrued interest payable		260
Salaries, benefits and deferred compensation		2,054
Other liabilities		747
Total identifiable liabilities assumed		179,122

Net identifiable assets acquired	$	11,425

Goodwill resulting from acquisition	$	10,766

In connection with the acquisition, the Corporation recorded approximately $10.77 million of goodwill and $1.71 million of other intangible assets related to the core deposits of Peoples. The goodwill arising from the acquisition of Peoples is not deductible for income taxes. The core deposit intangible asset (CDI) will be amortized over a period of 15 years using a declining balance method.

Table of Contents

Loans acquired from Peoples had aggregate outstanding principal of $131.92 million and an estimated fair value of $124.20 million. The discount between the outstanding principal balance and fair value represents expected credit losses and adjustments for market interest rates. Under the acquisition method, the allowance for loan losses recorded in the books of Peoples in the amount of $2.87 million was not carried over into the books of the Corporation. Loans that have evidence of deterioration in credit quality since origination are categorized as purchased credit impaired (PCI). PCI loans acquired from Peoples included medical student loans with an outstanding principal balance of $4.28 million and a fair value of $635,000 at January 1, 2020, which were purchased by Peoples and the performance of which was previously backed by surety bonds. The surety bonds were terminated in 2018 when the issuer of the bond was placed into liquidation by its insurance regulator, and replacement surety bond coverage ~~has~~was not ~~been~~ obtained. The Bank subsequently sold these medical student loans during the year ending December 31, 2020.

~~Table of Contents~~

Information about PCI loans acquired from Peoples as of January 1, 2020 is as follows:


(Dollars in thousands)	January 1, 2020		January 1, 2020
Contractual principal and interest due	$	20,310	$	20,310
Nonaccretable difference		(7,679)		(7,679)
Expected cash flows		12,631		12,631
Accretable yield		(3,372)		(3,372)
Purchase credit impaired loans - estimated fair value	$	9,259
Purchased credit impaired loans - estimated fair value			$	9,259

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Loans: The acquired loans were recorded at fair value at the acquisition date without carryover of ~~People's~~Peoples’ allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then discounting those cash flows based on a discount rate that would be required by a market participant. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, loan purpose and loan structure. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios and lien position, and past loan performance. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities).

Core Deposit Intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the ~~FHLB.~~Federal Home Loan Bank (FHLB). The life of the deposit base and projected deposit attrition rates were determined using Peoples’ historical deposit data. The CDI was estimated at $1.71 million or 1.8% of non-maturity deposits.

Deposits: The fair value adjustment of deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity from three months to five years is a $557,000 premium and is being amortized into income over a period of two years.

The following table presents certain unaudited pro forma information as if the acquisition had taken place on January 1, 2019. These results combine the historical results of Peoples and the Corporation for the period prior to the merger. While certain adjustments were made for estimated effects resulting from the application of the acquisition method, including certain fair value adjustments, this pro forma information is not indicative of what would have occurred had the acquisition actually taken place on January 1, 2019. Pro forma adjustments for the three and nine months ended September 30, 2019 include the net impact of accretion of loan discounts related to market interest rates, amortization of premiums on deposits and borrowings, amortization of intangible assets and related income taxes. Unaudited pro forma net income for the three and nine months ended September 30, 2019 includes after tax merger related expenses of $665,000 and $694,000, respectively, or $(0.18) and $(0.19) per share, respectively. These amounts include $276,000 and $304,000 recorded by Peoples, which was primarily related to legal costs. Additionally, the Corporation expects to achieve further operational cost savings and other efficiencies as a result of the acquisition which are not reflected in the unaudited pro forma amounts below.

Unaudited Pro Forma

Unaudited Pro Forma


Three Months Ended

Nine Months Ended

(Dollars in thousands, except per share amounts)

September 30, 2019

September 30, 2019

Total revenues (net interest income plus nonintererest income)

$
30,329

$
89,792

Net income

$
5,257

$
15,515

Net income per share, basic and diluted

$
1.44

$
4.23

~~The~~ revenue and earnings amounts specific to Peoples ~~since the acquisition date~~ that are included in the consolidated results for 2020 are not readily determinable. Disclosure of these amounts is impracticable due to the merging of certain processes and systems at the acquisition date.

~~Table of Contents~~

The Corporation recorded merger related expenses in connection with the acquisition of Peoples of $1.40 million ($1.13 million after income taxes) for the nine months ended September 30, 2020. There were 0 merger related expenses during the three months ended September 30, 2020. ~~Merger related expenses for the three and nine months ended September 30, 2019 were $409,000 ($389,000, after income taxes). As of September 30, 2020, the~~The Corporation ~~has~~ recorded aggregate merger related expenses of $2.10 million ($1.78 million after income taxes)~~. These costs included~~ during 2019 and 2020, including the integration of systems and operations and legal and consulting expenses, which ~~have been~~were expensed as incurred. ~~The Corporation believes that any further merger related expenses incurred in future periods will not be significant to the Corporation as a whole.~~

Table of Contents

NOTE 3: Securities

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

September 30, 2020

September 30, 2021

Gross

Amortized

Unrealized

Amortized

Unrealized

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

U.S. government agencies and corporations

48,180

126

(14)

48,292

63,271

(772)

62,572

Mortgage-backed securities

112,587

3,304

(53)

115,838

184,548

2,105

(533)

186,120

Obligations of states and political subdivisions

98,672

2,403

(51)

101,024

94,872

1,748

(315)

96,305

Corporate and other debt securities

6,962

(26)

6,937

18,290

190

(64)

18,416

266,401

5,834

(144)

272,091

360,981

4,116

(1,684)

363,413


	December 31, 2019								December 31, 2020
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
U.S. government agencies and corporations	$	21,454	$	3	$	(17)	$	21,440	$	48,171	$	121	$	(10)	$	48,282
Mortgage-backed securities		85,649		979		(43)		86,585		120,664		3,165		(115)		123,714
Obligations of states and political subdivisions		80,656		1,111		(59)		81,708		100,405		2,436		(36)		102,805
Corporate and other debt securities										11,584		47		(43)		11,588
	$	187,759	$	2,093	$	(119)	$	189,733	$	280,824	$	5,769	$	(204)	$	286,389

The amortized cost and estimated fair value of securities at September 30, ~~2020,~~2021, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

September 30, 2020

September 30, 2021

Amortized

(Dollars in thousands)

Cost

Fair Value

Cost

Fair Value

Due in one year or less

66,586

66,844

62,145

62,010

Due after one year through five years

143,712

148,133

200,714

203,445

Due after five years through ten years

53,135

54,051

89,131

89,136

Due after ten years

2,968

3,063

8,991

8,822

266,401

272,091

360,981

363,413

The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of securities. There were 0 sales of securities during the three months ended September 30, 2021 or 2020. During the nine months ended September 30, 2021 and 2020, $2.30 million and $5.99 million of proceeds, respectively, were related to sales of securities.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Realized gains from sales, maturities and calls of securities:
Gross realized gains	$	3	$	4	$	41	$	11
Gross realized losses		—		—		—		—
Net realized gains	$	3	$	4	$	41	$	11
Proceeds from sales, maturities, calls and paydowns of securities	$	29,798	$	30,288	$	85,293	$	101,068

1514

Table of Contents

The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of securities. During the nine months ended September 30, 2020, $5.99 million in proceeds were related to sales of assets acquired in the acquisition of Peoples. There were 0 sales of securities during the three and nine months ended September 30, 2019.

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in thousands)

2020

2019

2020

2019
Realized gains from sales, maturities and calls of securities:

Gross realized gains

$
4

$
3

$
11

$
8
Gross realized losses

—

—

—

—
Net realized gains

$
4

$
3

$
11

$
8
Proceeds from sales, maturities, calls and paydowns of securities

$
30,288

$
21,954

$
101,068

$
55,593

The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of ~~$113.06~~$157.62 million and an aggregate fair value of ~~$116.60~~$159.86 million were pledged at September 30, ~~2020.~~2021. Securities with an aggregate amortized cost of ~~$126.22~~$146.66 million and an aggregate fair value of ~~$127.47~~$150.13 million were pledged at December 31, ~~2019.~~2020.

Securities in an unrealized loss position at September 30, ~~2020,~~2021, by duration of the period of the unrealized loss, are shown below.


	Less Than 12 Months				12 Months or More				Total				Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair			Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value			Loss
U.S. government agencies and corporations	$	15,345	$	14	$	—	$	—	$	15,345	$	14	$	46,809	$	724	$	1,451	$	48	$	48,260	��	$	772
Mortgage-backed securities		10,335		53		—		—		10,335		53		94,098		511		4,341		22		98,439			533
Obligations of states and political subdivisions		7,900		51		—		—		7,900		51		20,132		279		1,273		36		21,405			315
Corporate and other debt securities		1,684		26		—		—		1,684		26		9,077		64		—		—		9,077			64
Total temporarily impaired securities	$	35,264	$	144	$	—	$	—	$	35,264	$	144	$	170,116	$	1,578	$	7,065	$	106	$	177,181		$	1,684

There were 29133 debt securities totaling ~~$35.26~~$177.18 million of aggregate fair value considered temporarily impaired at September 30, ~~2020.~~2021. The primary cause of the temporary impairments in the Corporation’s investments in debt securities was fluctuations in interest rates. The Corporation concluded that no other-than-temporary impairment existed in its securities portfolio at September 30, ~~2020,~~2021, and 0 other-than-temporary impairment loss has been recognized in net income, based primarily on the fact that changes in fair value were caused primarily by fluctuations in interest rates, there were 0 securities with unrealized losses that were significant relative to their carrying amounts, ~~0 securities have been in an unrealized loss position continuously for more than 12 months,~~ securities with unrealized losses had generally high credit quality, 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 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.

~~Table of Contents~~

Securities in an unrealized loss position at December 31, ~~2019,~~2020, by duration of the period of the unrealized loss, are shown below.


	Less Than 12 Months				12 Months or More				Total				Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss
U.S. government agencies and corporations	$	6,256	$	11	$	4,094	$	6	$	10,350	$	17	$	12,719	$	10	$	—	$	—	$	12,719	$	10
Mortgage-backed securities		4,099		7		10,166		36		14,265		43		15,691		115		—		—		15,691		115
Obligations of states and political subdivisions		9,187		53		1,368		6		10,555		59		5,110		36		—		—		5,110		36
Corporate and other debt securities														4,271		43		—		—		4,271		43
Total temporarily impaired securities	$	19,542	$	71	$	15,628	$	48	$	35,170	$	119	$	37,791	$	204	$	—	$	—	$	37,791	$	204

The Corporation’s investment in restricted stock totaled ~~$3.21~~$1.03 million at September 30, ~~2020~~2021 and consisted of ~~Federal Home Loan Bank (FHLB)~~FHLB stock. Restricted stock is generally viewed as a long-term investment, which is carried at cost because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value. The Corporation did not consider its investment in restricted stock to be other-than-temporarily impaired at September 30, ~~2020~~2021 and 0 impairment has been recognized.

Table of Contents

NOTE 4: Loans

Major classifications of loans are summarized as follows:


	September 30,		December 31,		September 30,		December 31,
(Dollars in thousands)	2020		2019		2021		2020
Real estate – residential mortgage	$	208,044	$	181,295	$	215,166	$	218,298
Real estate – construction ¹		66,187		54,246		53,845		62,147
Commercial, financial and agricultural ²		708,867		500,812		721,824		700,215
Equity lines		49,405		52,083		42,881		48,466
Consumer		13,907		13,756		8,165		11,028
Consumer finance		311,946		312,999		349,130		312,252
		1,358,356		1,115,191		1,391,011		1,352,406
Less allowance for loan losses		(38,856)		(32,873)		(39,447)		(39,156)
Loans, net	$	1,319,500	$	1,082,318	$	1,351,564	$	1,313,250

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

2	Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending (which includes loans originated under the ~~PPP)~~Paycheck Protection Program).

Consumer loans included ~~$216,000~~$232,000 and ~~$449,000~~$284,000 of demand deposit overdrafts at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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 September 30, 2021 and December 31, 2020 of loans acquired in business combinations were as follows:


	September 30, 2021						December 31, 2020
	Acquired Loans -		Acquired Loans -				Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -		Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total		Credit Impaired		Performing		Total
Outstanding principal balance	$	10,517	$	62,063	$	72,580	$	12,760	$	89,043	$	101,803
Carrying amount
Real estate – residential mortgage	$	854	$	11,125	$	11,979	$	1,473	$	15,117	$	16,590
Real estate – construction		—		1,246		1,246		—		1,077		1,077
Commercial, financial and agricultural¹		4,510		39,739		44,249		4,758		58,796		63,554
Equity lines		35		7,482		7,517		80		10,182		10,262
Consumer		41		1,319		1,360		48		1,924		1,972
Total acquired loans	$	5,440	$	60,911	$	66,351	$	6,359	$	87,096	$	93,455

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

Table of Contents

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


	Nine Months Ended September 30,
(Dollars in thousands)	2021		2020
Accretable yield, balance at beginning of period	$	4,048	$	4,721
Acquisition of Peoples		—		3,372
Accretion		(1,901)		(2,172)
Reclassification of nonaccretable difference due to improvement in expected cash flows		713		440
Other changes, net		477		(1,492)
Accretable yield, balance at end of period	$	3,337	$	4,869

Loans on nonaccrual status were as follows:


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Real estate – residential mortgage	$	317	$	276
Commercial, financial and agricultural:
Commercial business lending		2,235		2,428
Equity lines		185		191
Consumer		4		107
Consumer finance		198		402
Total loans on nonaccrual status	$	2,939	$	3,404

The past due status of loans as of September 30, 2021 was as follows:


															90+ Days
	30 - 59 Days		60 - 89 Days		90+ Days		Total								Past Due and
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		PCI		Current¹		Total Loans		Accruing
Real estate – residential mortgage	$	768	$	251	$	301	$	1,320	$	854	$	212,992	$	215,166	$	—
Real estate – construction:
Construction lending		—		—		—		—		—		36,159		36,159		—
Consumer lot lending		—		—		—		—		—		17,686		17,686		—
Commercial, financial and agricultural:
Commercial real estate lending		43		—		—		43		4,510		495,772		500,325		—
Land acquisition and development lending		—		—		—		—		—		37,242		37,242		—
Builder line lending		—		—		—		—		—		29,748		29,748		—
Commercial business lending		—		—		—		—		—		154,509		154,509		—
Equity lines		—		50		72		122		35		42,724		42,881		72
Consumer		6		—		—		6		41		8,118		8,165		—
Consumer finance		5,694		801		198		6,693		—		342,437		349,130		—
Total	$	6,511	$	1,102	$	571	$	8,184	$	5,440	$	1,377,387	$	1,391,011	$	72

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 $2.44 million and 90+ days past due of $499,000.

Table of Contents

~~Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method~~The past due status of ~~accounting. The outstanding principal balance and the carrying amount at September 30, 2020 and~~loans as of December 31, ~~2019 of loans acquired in business combinations were~~2020 was as follows:


	September 30, 2020						December 31, 2019
	Acquired Loans -		Acquired Loans -				Acquired Loans -		Acquired Loans -																		90+ Days
	Purchased		Purchased		Acquired Loans -		Purchased		Purchased		Acquired Loans -		30 - 59 Days		60 - 89 Days		90+ Days		Total								Past Due and
(Dollars in thousands)	Credit Impaired		Performing		Total		Credit Impaired		Performing		Total		Past Due		Past Due		Past Due		Past Due		PCI		Current¹		Total Loans		Accruing
Outstanding principal balance	$	18,319	$	103,982	$	122,301	$	6,262	$	27,839	$	34,101
Carrying amount
Real estate – residential mortgage	$	1,724	$	19,628	$	21,352	$	107	$	7,035	$	7,142	$	1,100	$	154	$	176	$	1,430	$	1,473	$	215,395	$	218,298	$	145
Real estate – construction		—		3,153		3,153		—		—		—
Commercial, financial and agricultural¹		5,398		66,384		71,782		563		11,338		11,901
Real estate – construction:
Construction lending														—		—		—		—		—		49,659		49,659		—
Consumer lot lending														—		—		—		—		—		12,488		12,488		—
Commercial, financial and agricultural:
Commercial real estate lending														—		—		—		—		4,758		437,145		441,903		—
Land acquisition and development lending														—		—		—		—		—		37,724		37,724		—
Builder line lending														—		—		—		—		—		18,194		18,194		—
Commercial business lending														24		—		—		24		—		202,370		202,394		—
Equity lines		81		10,387		10,468		35		8,046		8,081		52		—		—		52		80		48,334		48,466		—
Consumer		371		2,164		2,535		—		3		3		2		—		—		2		48		10,978		11,028		—
Total acquired loans	$	7,574	$	101,716	$	109,290	$	705	$	26,422	$	27,127
Consumer finance														8,249		967		402		9,618		—		302,634		312,252		—
Total													$	9,427	$	1,121	$	578	$	11,126	$	6,359	$	1,334,921	$	1,352,406	$	145

~~Includes acquired~~For the purposes of the table above, “Current” includes loans ~~classified by the Corporation as commercial real estate lending and commercial business lending.~~that are 1-29 days past due.

The table above includes nonaccrual loans that are current of $2.86 million, 30-59 days past due of $115,000 and 90+ days past due of $433,000.

There were 0 loan modifications during the three months ended September 30, 2021 that were classified as a troubled debt restructuring (TDR). There were 2 loan modifications during the three months ended September 30, 2020 that were classified as TDRs. These TDRs were a modification of the payment structure of residential mortgage loans with a recorded investment of $176,000 at the time of the modification. There was 1 loan modification during the nine months ended September 30, 2021 that was classified as a TDR. This TDR was a modification of the payment structure of a residential mortgage loan with a recorded investment of $4,000 at the time of the modification. There were 3 loan modifications during the nine months ended September 30, 2020 that were classified as TDRs. These TDRs were a modification of the payment structure of 2 residential mortgage loans with a recorded investment of $176,000 at the time of modification and an equity line with a recorded investment of $84,000 at the time of modification.

All TDRs are considered impaired loans and are individually evaluated in the determination of the allowance for loan losses. A TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due. The specific reserve associated with a TDR is reevaluated when a TDR payment default occurs. There were 0 TDR payment defaults during the three and nine months ended September 30, 2021 and 2020.

Impaired loans, which included TDRs of $2.70 million, and the related allowance at September 30, 2021 were as follows:

Recorded

Investment

Average

Unpaid

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

(Dollars in thousands)

Balance

Specific Reserve

Allowance

Loans

Recognized

Real estate – residential mortgage

1,550

402

1,042

1,566

Commercial, financial and agricultural:

Commercial real estate lending

1,391

—

1,393

1,394

Commercial business lending

2,318

—

2,235

263

2,320

—

Equity lines

118

108

—

115

Consumer

—

Total

5,377

510

4,670

417

5,395

102

Table of Contents

Impaired loans, which included TDRs of $3.58 million, and the related allowance at December 31, 2020 were as follows:



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income
(Dollars in thousands)	Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	2,326	$	931	$	1,279	$	77	$	2,353	$	105
Commercial, financial and agricultural:
Commercial real estate lending		1,397		—		1,397		89		1,404		73
Commercial business lending		2,430		—		2,428		585		2,573		—
Equity lines		120		111		—		—		119		2
Consumer		147		—		132		128		154		3
Total	$	6,420	$	1,042	$	5,236	$	879	$	6,603	$	183

NOTE 5: Allowance for Loan Losses

The following table presents ~~a summary of~~ the ~~change~~changes in the ~~accretable yield of loans classified as purchased credit impaired (PCI):~~allowance for loan losses by major classification during the nine months ended September 30, 2021:

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, 2020

2,914

975

10,696

687

371

23,513

39,156

Provision (credited) charged to operations

(99)

(183)

422

(90)

(160)

220

110

Loans charged off

—

(128)

(3,443)

(3,571)

Recoveries of loans previously charged off

—

3,637

3,752

Balance at September 30, 2021

2,834

792

11,120

598

176

23,927

39,447

The following table presents the changes in the allowance for loan losses by major classification during the nine months ended September 30, 2020:

Nine Months Ended September 30,

(Dollars in thousands)

2020

2019

Accretable yield, balance at beginning of period

$
4,721

$
5,987

Additions

3,372

—

Accretion

(2,172)

(1,760)

Reclassification of nonaccretable difference due to improvement in expected cash flows

440

727

Other changes, net

(1,492)

349

Accretable yield, balance at end of period

$
4,869

$
5,303

~~Loans on nonaccrual status were as follows:~~

September 30,

December 31,

(Dollars in thousands)

2020

2019

Real estate – residential mortgage

$
758

$
1,526

Commercial, financial and agricultural:

Commercial business lending

—

11

Equity lines

193

229

Consumer

419

118

Consumer finance

282

611

Total loans on nonaccrual status

$
1,652

$
2,495


	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, 2019	$	2,080	$	681	$	7,121	$	733	$	465	$	21,793	$	32,873
Provision charged (credited) to operations		337		232		3,446		(78)		(37)		5,650		9,550
Loans charged off		(9)		—		(18)		—		(174)		(7,005)		(7,206)
Recoveries of loans previously charged off		79		—		3		—		135		3,422		3,639
Balance at September 30, 2020	$	2,487	$	913	$	10,552	$	655	$	389	$	23,860	$	38,856

1819

Table of Contents

~~The past due status of loans as of September 30, 2020 was as follows:~~

90+ Days

30 - 59 Days

60 - 89 Days

90+ Days

Total

Past Due and

(Dollars in thousands)

Past Due

Past Due

Past Due

Past Due

PCI

Current¹

Total Loans

Accruing

Real estate – residential mortgage

$
971

$
339

$
618

$
1,928

$
1,724

$
204,392

$
208,044

$
—

Real estate – construction:

Construction lending

—

—

—

—

—

50,971

50,971

—

Consumer lot lending

—

—

—

—

—

15,216

15,216

—

Commercial, financial and agricultural:

Commercial real estate lending

—

—

—

—

5,398

430,804

436,202

—

Land acquisition and development lending

—

—

—

—

—

43,169

43,169

—

Builder line lending

—

—

—

—

—

20,023

20,023

—

Commercial business lending

116

—

—

116

—

209,357

209,473

—

Equity lines

182

—

8

190

81

49,134

49,405

8

Consumer

267

—

—

267

371

13,269

13,907

—

Consumer finance

6,602

842

282

7,726

—

304,220

311,946

—

Total

$
8,138

$
1,181

$
908

$
10,227

$
7,574

$
1,340,555

$
1,358,356

$
8

~~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 $442,000 and 90+ days past due of $901,000 as well as nonaccrual loans that are PCI of $309,000.~~

~~The past due status of loans as of December 31, 2019 was as follows:~~

90+ Days

30 - 59 Days

60 - 89 Days

90+ Days

Total

Past Due and

(Dollars in thousands)

Past Due

Past Due

Past Due

Past Due

PCI

Current¹

Total Loans

Accruing

Real estate – residential mortgage

$
1,428

$
161

$
1,016

$
2,605

$
107

$
178,583

$
181,295

$
—

Real estate – construction:

Construction lending

—

—

—

—

—

40,943

40,943

—

Consumer lot lending

—

—

—

—

—

13,303

13,303

—

Commercial, financial and agricultural:

Commercial real estate lending

—

—

—

—

563

325,991

326,554

—

Land acquisition and development lending

—

—

—

—

—

42,891

42,891

—

Builder line lending

—

—

—

—

—

26,373

26,373

—

Commercial business lending

73

18

—

91

—

104,903

104,994

—

Equity lines

229

56

223

508

35

51,540

52,083

109

Consumer

20

10

—

30

—

13,726

13,756

—

Consumer finance

11,034

1,420

611

13,065

—

299,934

312,999

—

Total

$
12,784

$
1,665

$
1,850

$
16,299

$
705

$
1,098,187

$
1,115,191

$
109

~~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 $547,000, 30-59 days past due of $197,000, 60-89 days past due of $10,000 and 90+ days past due of $1.74 million.~~

Loan modifications that were classified as troubled debt restructurings (TDRs), and the recorded investment in those loans at the time of their modification, during the three and nine months ended September 30, 2020 and 2019 were as follows:

Three Months Ended September 30,

2020

2019

Number of

Recorded

Number of

Recorded

(Dollars in thousands)

Loans

Investment

Loans

Investment

Real estate – residential mortgage

2

$
176

2

$
95

Total

2

$
176

2

$
95

~~Table of Contents~~

Nine Months Ended September 30,

2020

2019

Number of

Recorded

Number of

Recorded

(Dollars in thousands)

Loans

Investment

Loans

Investment

Real estate – residential mortgage

2

$
176

2

$
95

Equity lines

1

84

—

—

Consumer

—

—

1

$
121

Total

3

$
260

3

$
216

Each of the TDRs during the three and nine months ended September 30, 2020 and 2 of the TDRs during the three and nine months ended September 30, 2019 included modifications of the loan’s payment structure. NaN TDR during the nine months ended September 30, 2019 included a modification of the loan’s interest rate.

In response to the effects of the COVID-19 pandemic, including economic disruption and adverse impacts to commercial and consumer borrowers, the Bank has accommodated certain borrowers by granting short-term payment deferrals or periods of interest-only payments which generally were less than six months for each borrower. As of September 30, 2020, there were $28.30 million of loans whose modification periods had not ended or had been extended. Generally, a short-term payment deferral does not result in a loan modification being classified as a TDR.

~~Impaired loans, which included TDRs of $3.95 million, and the related allowance at September 30, 2020 were as follows:~~

Recorded

Recorded

Investment

Investment

Average

Unpaid

in Loans

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

(Dollars in thousands)

Balance

Specific Reserve

Specific Reserve

Allowance

Loans

Recognized

Real estate – residential mortgage

$
3,054

$
1,384

$
1,520

$
129

$
3,068

$
83

Commercial, financial and agricultural:

Commercial real estate lending

1,399

—

1,399

106

1,406

55

Equity lines

120

112

—

—

119

1

Consumer

123

—

110

105

113

—

Total

$
4,696

$
1,496

$
3,029

$
340

$
4,706

$
139

~~Impaired loans, which included TDRs of $4.35 million, and the related allowance at December 31, 2019 were as follows:~~

Recorded

Recorded

Investment

Investment

Average

Unpaid

in Loans

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

(Dollars in thousands)

Balance

Specific Reserve

Specific Reserve

Allowance

Loans

Recognized

Real estate – residential mortgage

$
3,891

$
2,192

$
1,479

$
72

$
3,506

$
155

Commercial, financial and agricultural:

Commercial real estate lending

1,459

4

1,447

77

1,581

82

Equity lines

31

31

—

—

32

2

Consumer

130

—

121

118

123

—

Total

$
5,511

$
2,227

$
3,047

$
267

$
5,242

$
239

~~Table of Contents~~

~~NOTE 5: Allowance for Loan Losses~~

~~The following table presents the changes in the allowance for loan losses by major classification during the nine months ended September 30, 2020:~~

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, 2019

$
2,080

$
681

$
7,121

$
733

$
465

$
21,793

$
32,873

Provision charged (credited) to operations

337

232

3,446

(78)

(37)

5,650

9,550

Loans charged off

(9)

—

(18)

—

(174)

(7,005)

(7,206)

Recoveries of loans previously charged off

79

—

3

—

135

3,422

3,639

Balance at September 30, 2020

$
2,487

$
913

$
10,552

$
655

$
389

$
23,860

$
38,856

~~The following table presents the changes in the allowance for loan losses by major classification during the nine months ended September 30, 2019:~~

Real Estate



Commercial,








Residential

Real Estate

Financial &

Equity

Consumer

(Dollars in thousands)

Mortgage

Construction

Agricultural

  Lines

Consumer

   Finance

   Total

Allowance for loan losses:

Balance at December 31, 2018

$
2,246

$
727

$
6,688

$
1,106

$
257

$
22,999

$
34,023

Provision (credited) charged to operations

(85)

77

103

(214)

229

5,895

6,005

Loans charged off

(46)

—

(29)

(19)

(261)

(10,092)

(10,447)

Recoveries of loans previously charged off

20

—

4

—

173

3,440

3,637

Balance at September 30, 2019

$
2,135

$
804

$
6,766

$
873

$
398

$
22,242

$
33,218

~~The following table presents, as of September 30, 2020, the balance of the allowance for loan losses and the balance of loans by impairment methodology.~~

Real Estate



Commercial,








Residential

Real Estate

Financial &

Equity

Consumer

(Dollars in thousands)

Mortgage

Construction

Agricultural

Lines

Consumer

Finance

Total

Allowance balance attributable to loans:

Individually evaluated for impairment

$
129

$
—

$
106

$
—

$
105

$
—

$
340

Collectively evaluated for impairment

2,358

913

10,446

655

284

23,860

38,516

Acquired loans - PCI

—

—

—

—

—

—

—

Total allowance

$
2,487

$
913

$
10,552

$
655

$
389

$
23,860

$
38,856

Loans:

Individually evaluated for impairment

$
2,904

$
—

$
1,399

$
112

$
110

$
—

$
4,525

Collectively evaluated for impairment

203,416

66,187

702,070

49,212

13,426

311,946

1,346,257

Acquired loans - PCI

1,724

—

5,398

81

371

—

7,574

Total loans

$
208,044

$
66,187

$
708,867

$
49,405

$
13,907

$
311,946

$
1,358,356

~~Table of Contents~~

The following table presents, as of ~~December 31, 2019,~~September 30, 2021, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology.


	Real Estate				Commercial,										Real Estate				Commercial,
	Residential		Real Estate		Financial &		Equity				Consumer				Residential		Real Estate		Financial &		Equity				Consumer
(Dollars in thousands)	Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total		Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	72	$	—	$	77	$	—	$	118	$	—	$	267	$	68	$	—	$	349	$	—	$	—	$	—	$	417
Collectively evaluated for impairment		2,008		681		7,044		733		347		21,793		32,606		2,766		792		10,771		598		176		23,927		39,030
Acquired loans - PCI		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total allowance	$	2,080	$	681	$	7,121	$	733	$	465	$	21,793	$	32,873	$	2,834	$	792	$	11,120	$	598	$	176	$	23,927	$	39,447
Loans:
Individually evaluated for impairment	$	3,671	$	—	$	1,451	$	31	$	121	$	—	$	5,274	$	1,444	$	—	$	3,628	$	108	$	—	$	—	$	5,180
Collectively evaluated for impairment		177,517		54,246		498,798		52,017		13,635		312,999		1,109,212		212,868		53,845		713,686		42,738		8,124		349,130		1,380,391
Acquired loans - PCI		107		—		563		35		—		—		705		854		—		4,510		35		41		—		5,440
Total loans	$	181,295	$	54,246	$	500,812	$	52,083	$	13,756	$	312,999	$	1,115,191	$	215,166	$	53,845	$	721,824	$	42,881	$	8,165	$	349,130	$	1,391,011

The following table presents, as of December 31, 2020, 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	$	77		$	—	$	674	$	—	$	128	$	—	$	879
Collectively evaluated for impairment		2,837			975		10,022		687		243		23,513		38,277
Acquired loans - PCI		—			—		—		—		—		—		—
Total allowance	$	2,914		$	975	$	10,696	$	687	$	371	$	23,513	$	39,156
Loans:
Individually evaluated for impairment	$	2,210		$	—	$	3,825	$	111	$	132	$	—	$	6,278
Collectively evaluated for impairment		214,615	��		62,147		691,632		48,275		10,848		312,252		1,339,769
Acquired loans - PCI		1,473			—		4,758		80		48		—		6,359
Total loans	$	218,298		$	62,147	$	700,215	$	48,466	$	11,028	$	312,252	$	1,352,406

Loans by credit quality indicators as of September 30, ~~2020~~2021 were as follows:

Special

Substandard

Special

Substandard

(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total¹

Pass

Mention

Substandard

Nonaccrual

Total¹

Real estate – residential mortgage

205,126

1,245

915

758

208,044

213,523

873

453

317

215,166

Real estate – construction:

Construction lending

50,971

—

50,971

36,159

—

36,159

Consumer lot lending

15,216

—

15,216

17,686

—

17,686

Commercial, financial and agricultural:

Commercial real estate lending

408,667

16,840

10,695

—

436,202

477,246

15,484

7,595

—

500,325

Land acquisition and development lending

36,767

6,402

—

43,169

37,242

—

37,242

Builder line lending

20,023

—

20,023

29,748

—

29,748

Commercial business lending

203,669

5,704

100

—

209,473

150,974

1,300

—

2,235

154,509

Equity lines

49,039

165

193

49,405

42,475

137

185

42,881

Consumer

13,426

419

13,907

8,161

—

8,165

1,002,904

30,414

11,722

1,370

1,046,410

1,013,214

17,794

8,132

2,741

1,041,881

1	At September 30, ~~2020,~~2021, the Corporation did not have any loans classified as Doubtful or Loss.

Included in the table above are loans purchased in connection with the acquisition of Peoples of $83.71 million pass rated, $1.39 million special mention, $2.70 million substandard and $309,000 substandard nonaccrual.

Non-

(Dollars in thousands)

Performing

Total

Performing

Total

Consumer finance

311,664

282

311,946

348,932

198

349,130

2220

Table of Contents

Loans by credit quality indicators as of December 31, ~~2019~~2020 were as follows:


			Special				Substandard						Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total¹		Pass		Mention		Substandard		Nonaccrual		Total¹
Real estate – residential mortgage	$	177,049	$	1,839	$	881	$	1,526	$	181,295	$	215,712	$	1,715	$	595	$	276	$	218,298
Real estate – construction:
Construction lending		40,943		—		—		—		40,943		49,659		—		—		—		49,659
Consumer lot lending		13,303		—		—		—		13,303		12,488		—		—		—		12,488
Commercial, financial and agricultural:
Commercial real estate lending		323,218		3,266		70		—		326,554		415,506		15,507		10,890		—		441,903
Land acquisition and development lending		33,870		9,021		—		—		42,891		37,724		—		—		—		37,724
Builder line lending		25,995		378		—		—		26,373		18,194		—		—		—		18,194
Commercial business lending		104,291		692		—		11		104,994		196,743		3,124		99		2,428		202,394
Equity lines		51,662		181		11		229		52,083		48,140		132		3		191		48,466
Consumer		13,632		6		—		118		13,756		10,832		48		41		107		11,028
	$	783,963	$	15,383	$	962	$	1,884	$	802,192	$	1,004,998	$	20,526	$	11,628	$	3,002	$	1,040,154

1	At December 31, ~~2019,~~2020, the Corporation did not have any loans classified as Doubtful or Loss.


			Non-						Non-
(Dollars in thousands)	Performing		Performing		Total		Performing		Performing		Total
Consumer finance	$	312,388	$	611	$	312,999	$	311,850	$	402	$	312,252

NOTE 6: Goodwill and Other Intangible Assets

The carrying amount of goodwill was $25.19 million ~~and $14.43 million~~ at September 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. The following table presents the changes in goodwill during the nine months ended September 30, 2020. There were 0 changes in the recorded balance of goodwill during the three and nine months ended September 30, ~~2020.~~2021.


	Community		Consumer
(Dollars in thousands)	Banking		Finance		Total
Balance as of January 1, 2020	$	3,702	$	10,723	$	14,425
Acquisition of Peoples Bankshares, Incorporated		10,766		—		10,766
Balance at September 30, 2020	$	14,468	$	10,723	$	25,191

The Corporation had ~~$2.37~~$2.06 million and ~~$912,000~~$2.29 million of other intangible assets as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Other intangible assets were recognized in connection with the core deposits acquired from Peoples 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,

September 30,

December 31,

2020

2019

2021

2020

Gross

Carrying

Accumulated

Carrying

Accumulated

Carrying

Accumulated

Carrying

Accumulated

(Dollars in thousands)

Amount

Amortization

Amount

Amortization

Amount

Amortization

Amount

Amortization

Amortized intangible assets:

Amortizable intangible assets:

Core deposit intangibles

1,711

(128)

—

1,711

(287)

1,711

(171)

Other intangibles

1,405

(614)

1,405

(493)

Other amortizable intangibles

1,405

(774)

1,405

(654)

Total

3,116

(742)

1,405

(493)

3,116

(1,061)

3,116

(825)

Amortization expense was ~~$83,000~~$79,000 and ~~$49,000~~$83,000 for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$248,000~~$236,000 and ~~$190,000~~$248,000 for the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively.

~~Table of Contents~~

Table of Contents

NOTE 7: Equity, Other Comprehensive Income and Earnings Per Share

Equity and Noncontrolling Interest

The Corporation’s Board of Directors authorized a program, effective November 17, 2020 to repurchase up to 365,000 shares of the Corporation’s common stock through November 30, 2021 (the Repurchase Program). As of September 30, 2021, the Corporation has made aggregate common stock repurchases of 150,333 shares for an aggregate cost of $7.46 million under the Repurchase Program. There were 52,619 shares and 142,874 shares repurchased under the Repurchase Program during the three and nine months ended September 30, 2021, respectively, for an aggregate cost of $2.72 million and $7.19 million, respectively.

The Corporation’s previous share repurchase program, which was authorized by the Board of Directors in May 2019, expired on May 31, 2020. During the nine months ended September 30, 2020, the Corporation repurchased 8,963 shares of its common stock for an aggregate cost of $355,000, under its previous share repurchase programs authorized by its Board of Directors. During the three and nine months ended September 30, 2019, the Corporation repurchased 21,337 and 86,523 shares of its common stock, respectively, for an aggregate cost of $1.10 million and $4.39 million under the share repurchase programs.program. The Corporation did 0t0t repurchase any of its common stock during the three months ended September 30, 2020.

Additionally during the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the Corporation withheld ~~5,084~~7,596 shares and ~~5,341~~5,084 shares of its common stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock. ~~The Corporation’s current share repurchase program expired on May 31, 2020 and has not been renewed or extended at this time.~~

~~In the first quarter of 2019,~~Noncontrolling interest represents an ownership interest in C&F Select LLC, a subsidiary of C&F Mortgage, ~~issued a 49 percent ownership interest to~~held by an unrelated investor. In exchange for issuing this noncontrolling interest in C&F Select LLC, C&F Bank received a note receivable from the investor for $490,000, which is included in loans in the Consolidated Balance Sheets and is secured by cash deposits at C&F Bank.

Accumulated Other Comprehensive Loss, Net

The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of deferred taxes of ~~$320,000~~$1.02 million and ~~$604,000~~$630,000 as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.


	September 30,		December 31,		September 30,		December 31,
(Dollars in thousands)	2020		2019		2021		2020
Net unrealized gains on securities	$	4,495	$	1,560	$	1,921	$	4,397
Net unrecognized losses on cash flow hedges		(1,562)		(69)		(687)		(1,367)
Net unrecognized losses on defined benefit plan		(3,663)		(3,740)		(4,881)		(4,985)
Total accumulated other comprehensive loss, net	$	(730)	$	(2,249)	$	(3,647)	$	(1,955)

Earnings Per Share (EPS)

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

Three Months Ended September 30,

(Dollars in thousands)

2020

2019

2021

2020

Net income attributable to C&F Financial Corporation

6,793

4,880

7,674

6,793

Weighted average shares outstanding—basic and diluted

3,648,515

3,430,298

3,550,001

3,648,515

Nine Months Ended September 30,

(Dollars in thousands)

2020

2019

2021

2020

Net income attributable to C&F Financial Corporation

14,117

14,494

22,743

14,117

Weighted average shares outstanding—basic and diluted

3,646,951

3,459,191

3,626,083

3,646,951

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

Table of Contents

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.

~~Table of Contents~~

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,				Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Components of net periodic benefit cost:
Service cost, included in salaries and employee benefits	$	401	$	305	$	1,202	$	914	$	493	$	401	$	1,478	$	1,202

Other components of net periodic benefit cost:
Interest cost		138		152		413		456		114		138		343		413
Expected return on plan assets		(374)		(324)		(1,119)		(973)		(433)		(374)		(1,300)		(1,119)
Amortization of prior service credit		(17)		(17)		(51)		(51)		(17)		(17)		(51)		(51)
Amortization of net obligation at transition		—		—		—		—
Recognized net actuarial losses		49		47		148		141		61		49		182		148
Other components of net periodic benefit cost, included in other noninterest income		(204)		(142)		(609)		(427)		(275)		(204)		(826)		(609)

Net periodic benefit cost	$	197	$	163	$	593	$	487	$	218	$	197	$	652	$	593

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).

2523

Table of Contents

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, ~~2020~~2021 and December 31, ~~2019,~~2020, the Corporation’s entire investment securities portfolio was comprised of securities available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security valuation are ICE Data Services (ICE) and Thomson Reuters Pricing Service (TRPS). Each source provides opinions, known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are partially based on available market data, including prices for similar instruments in active markets and prices for identical assets in markets that are not active. ICE provides evaluated prices for the Corporation’s obligations of states and political subdivisions category of securities. ICE uses proprietary pricing models and pricing systems, mathematical tools and judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that security or securities with similar characteristics. TRPS provides evaluated prices for the Corporation’s U.S. government agencies and corporations, mortgage-backed, and corporate categories of securities. Fixed-rate callable securities of the U.S. government agencies and corporations category are individually evaluated on an option adjusted spread basis for callable issues or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark curve for non-callable issues. Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity. Each aggregate is benchmarked to relative to-be-announced mortgage-backed securities (TBA securities) or other benchmark prices. TBA securities prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics. Each evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables. Fixed-rate securities issued by the Small Business Association in the mortgage backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.

Investments in small business investment company funds. The Corporation holds an investment in a small business investment company fund, which is recorded at fair value and included in other assets in the Consolidated Balance Sheets. Changes in fair value are recognized in net income. At September 30, 2021 and December 31, 2020, the fair value of the Corporation’s investment in small business investment companies, based on net asset value, was ~~$1.43 million.~~$1.42 million and $1.48 million, respectively. Investments in small business investment company funds measured at net asset value are not presented in the tables below related to fair value measurements. Changes in fair value of small business investment company funds resulted in the recognition of unrealized ~~losses~~gains of ~~$124,000~~$88,000 and $135,000 for the three and nine months ended September 30, ~~2020.~~2021, respectively, and unrealized gains of $40,000 and unrealized losses of $84,000 for the three and nine months ended September 30, 2020, respectively.

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.

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

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

2624

Table of Contents

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

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

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


	September 30, 2020								September 30, 2021
	Fair Value Measurements Using						Assets/Liabilities at		Fair Value Measurements Classified as						Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale
U.S. government agencies and corporations	$	—	$	48,292	$	—	$	48,292	$	—	$	62,572	$	—	$	62,572
Mortgage-backed securities		—		115,838		—		115,838		—		186,120		—		186,120
Obligations of states and political subdivisions		—		101,024		—		101,024		—		96,305		—		96,305
Corporate and other debt securities		—		6,937		—		6,937		—		18,416		—		18,416
Total securities available for sale		—		272,091		—		272,091		—		363,413		—		363,413
Loans held for sale		—		274,851		—		274,851		—		116,789		—		116,789
Derivatives
IRLC		—		5,942		—		5,942		—		2,875		—		2,875
Interest rate swaps on loans		—		9,355		—		9,355		—		4,961		—		4,961
Forward sales of TBA securities										—		45		—		45
Total assets	$	—	$	562,239	$	—	$	562,239	$	—	$	488,083	$	—	$	488,083

Liabilities:
Derivatives
Interest rate swaps on loans	$	—	$	9,355	$	—	$	9,355	$	—	$	4,961	$	—	$	4,961
Cash flow hedges		—		2,147		—		2,147		—		960		—		960
Forward sales of TBA securities		—		52		—		52
Total liabilities	$	—	$	11,554	$	—	$	11,554	$	—	$	5,921	$	—	$	5,921

2725

Table of Contents

December 31, 2019

Fair Value Measurements Using

Assets/Liabilities at

(Dollars in thousands)

Level 1

Level 2

Level 3

Fair Value

Assets:

Securities available for sale

U.S. government agencies and corporations

$
—

$
21,440

$
—

$
21,440

Mortgage-backed securities

—

86,585

—

86,585

Obligations of states and political subdivisions

—

81,708

—

81,708

Total securities available for sale

—

189,733

—

189,733

Loans held for sale

—

90,500

—

90,500

Derivatives

IRLC

—

1,083

—

1,083

Interest rate swaps on loans

—

2,462

—

2,462

Total assets

$
—

$
283,778

$
—

$
283,778

Liabilities:

Derivatives

Interest rate swaps on loans

$
—

$
2,462

$
—

$
2,462

Cash flow hedges

—

145

—

145

Forward sales of TBA securities

—

25

—

25

Total liabilities

$
—

$
2,632

$
—

$
2,632


	December 31, 2020
	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. government agencies and corporations	$	—	$	48,282	$	—	$	48,282
Mortgage-backed securities		—		123,714		—		123,714
Obligations of states and political subdivisions		—		102,805		—		102,805
Corporate and other debt securities		—		11,588		—		11,588
Total securities available for sale		—		286,389		—		286,389
Loans held for sale		—		214,266		—		214,266
Derivatives
IRLC		—		4,582		—		4,582
Interest rate swaps on loans		—		8,185		—		8,185
Total assets	$	—	$	513,422	$	—	$	513,422

Liabilities:
Derivatives
Interest rate swaps on loans	$	—	$	8,185	$	—	$	8,185
Cash flow hedges		—		1,882		—		1,882
Forward sales of TBA securities		—		47		—		47
Total liabilities	$	—	$	10,114	$	—	$	10,114

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

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

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

~~OREO.~~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~~

2826

Table of Contents

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.

The following table presents the balances of assets measured at fair value on a nonrecurring basis. At September 30, 2021 and December 31, 2020 there were 0 impaired loans that were measured at fair value.


	September 30, 2020								September 30, 2021
	Fair Value Measurements Using						Assets at Fair		Fair Value Measurements Classified as						Assets at Fair
(Dollars in thousands)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Impaired loans, net	$	—	$	—	$	82	$	82
Other real estate owned, net	$	—	$	—	$	272	$	272	$	—	$	—	$	22	$	22
Total	$	—	$	—	$	354	$	354	$	—	$	—	$	22	$	22


	December 31, 2019								December 31, 2020
	Fair Value Measurements Using						Assets at Fair		Fair Value Measurements Classified as						Assets at Fair
(Dollars in thousands)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Impaired loans, net	$	—	$	—	$	102	$	102
Other real estate owned, net		—		—		268		268	$	—	$	—	$	72	$	72
Total	$	—	$	—	$	370	$	370	$	—	$	—	$	72	$	72

The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a nonrecurring ~~basis:~~basis as of September 30, 2021 and December 31, 2020:

Fair Value Measurements at September 30, 2020

Fair Value Measurements

(Dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range (Weighted Average)¹

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range (Weighted Average)¹

Impaired loans, net

Appraisals

Discount to reflect current market conditions and estimated selling costs

25% (25%)

At September 30, 2021:

Other real estate owned, net

272

Appraisals

Discount to reflect current market conditions and estimated selling costs

33%-75% (53%)

Appraisals

Discount to reflect current market conditions and estimated selling costs

75% (75%)

Total

354

At December 31, 2020:

Other real estate owned, net

Appraisals

Discount to reflect current market conditions and estimated selling costs

75% - 80% (79%)

Total

1	The weighted average of unobservable inputs is calculated based on the relative asset fair values.

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.

2927

Table of Contents

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

Carrying

Fair Value Measurements at September 30, 2020 Using

Total Fair

Carrying

Fair Value Measurements at September 30, 2021 Classified as

Total Fair

(Dollars in thousands)

Value

Level 1

Level 2

Level 3

Value

Level 1

Level 2

Level 3

Value

Financial assets:

Cash and short-term investments

25,773

—

25,773

204,475

201,495

2,479

—

203,974

Securities available for sale

272,091

—

272,091

—

272,091

363,413

—

363,413

—

363,413

Loans, net

1,319,500

—

1,321,885

1,351,564

—

1,368,093

Loans held for sale

274,851

—

274,851

—

274,851

116,789

—

116,789

—

116,789

Derivatives

IRLC

5,942

—

5,942

—

5,942

2,875

—

2,875

—

2,875

Interest rate swaps on loans

9,355

—

9,355

—

9,355

4,961

—

4,961

—

4,961

Forward sales of TBA securities

—

Bank-owned life insurance

19,984

—

19,984

—

19,984

20,382

—

20,382

—

20,382

Accrued interest receivable

7,829

—

7,829

7,125

—

7,125

Financial liabilities:

Demand deposits

1,184,371

—

1,184,371

Demand and savings deposits

1,411,980

—

1,411,980

Time deposits

479,142

—

487,735

—

487,735

441,105

—

444,446

—

444,446

Borrowings

153,274

—

155,759

—

155,759

86,394

—

91,484

—

91,484

Derivatives

Cash flow hedges

2,147

—

2,147

—

2,147

960

—

960

—

960

Interest rate swaps on loans

9,355

—

9,355

—

9,355

4,961

—

4,961

—

4,961

Forward sales of TBA securities

—

Accrued interest payable

1,091

—

1,091

581

—

581


	Carrying		Fair Value Measurements at December 31, 2019 Using						Total Fair		Carrying		Fair Value Measurements at December 31, 2020 Classified as						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value		Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	165,433	$	165,433	$	—	$	—	$	165,433	$	94,342	$	86,669	$	7,710	$	—	$	94,379
Securities available for sale		189,733		—		189,733		—		189,733		286,389		—		286,389		—		286,389
Loans, net		1,082,318		—		—		1,082,783		1,082,783		1,313,250		—		—		1,308,569		1,308,569
Loans held for sale		90,500		—		90,500		—		90,500		214,266		—		214,266		—		214,266
Derivatives
IRLC		1,083		—		1,083		—		1,083		4,582		—		4,582		—		4,582
Interest rate swaps on loans		2,462		—		2,462		—		2,462		8,185		—		8,185		—		8,185
Bank-owned life insurance		16,044		—		16,044		—		16,044		20,205		—		20,205		—		20,205
Accrued interest receivable		6,776		6,776		—		—		6,776		8,103		8,103		—		—		8,103
Financial liabilities:
Demand deposits		869,194		869,194		—		—		869,194
Demand and savings deposits												1,282,590		1,282,590		—		—		1,282,590
Time deposits		422,056		—		423,605		—		423,605		469,583		—		474,154		—		474,154
Borrowings		161,170		—		154,964		—		154,964		69,864		—		71,119		—		71,119
Derivatives
Cash flow hedges		145		—		145		—		145		1,882		—		1,882		—		1,882
Interest rate swaps on loans		2,462		—		2,462		—		2,462		8,185		—		8,185		—		8,185
Forward sales of TBA securities		25		—		25				25		47		—		47				47
Accrued interest payable		1,291		1,291		—		—		1,291		1,109		1,109		—		—		1,109

NOTE 10: Business Segments

The Corporation operates in a decentralized fashion in 3 ~~principal~~ business segments: community banking, mortgage banking and consumer finance. Beginning with the first quarter of 2021, the community banking segment comprises C&F Bank

Table of Contents

and C&F Wealth Management. Prior to 2021, the segment comprised only C&F Bank, and prior periods have been restated to conform to the current period presentation. Revenues from community banking operations consist primarily of net interest ~~earned on~~income related to investments in loans and ~~investment~~ securities and outstanding deposits and borrowings, fees earned on deposit accounts and debit card interchange ~~activity. Previously, the community banking segment was referred to as the retail banking segment.~~activity, and net revenues from offering wealth management services and insurance products through third-party service providers. Mortgage banking ~~operating~~ revenues consist primarily 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 earned on mortgage loans held for sale. Revenues from consumer finance consist primarily of net interest income earned on purchased retail installment sales contracts.

The 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 assets 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, 2021

Community

Mortgage

Consumer

(Dollars in thousands)

Banking

Finance

Other

Eliminations

Consolidated

Interest income

15,924

863

9,388

—

(2,571)

23,604

Interest expense

1,301

240

2,424

589

(2,568)

1,986

Net interest income

14,623

623

6,964

(589)

(3)

21,618

Gain on sales of loans

—

5,691

—

(31)

5,660

Other noninterest income

4,202

2,266

(115)

(16)

6,382

Net revenue

18,825

8,580

7,009

(704)

(50)

33,660

Provision for loan losses

—

400

—

430

Noninterest expense

13,827

5,643

3,580

126

—

23,176

Income (loss) before taxes

4,998

2,907

3,029

(830)

(50)

10,054

Income tax expense (benefit)

832

799

835

(229)

(10)

2,227

Net income (loss)

4,166

2,108

2,194

(601)

(40)

7,827

Other data:

Capital expenditures

234

644

—

933

Depreciation and amortization

1,015

112

—

1,188


	Three Months Ended September 30, 2020
	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Interest income	$	15,242	$	1,503	$	9,628	$	—	$	(2,551)	$	23,822
Interest expense		2,547		449		2,191		342		(2,552)		2,977
Net interest income		12,695		1,054		7,437		(342)		1		20,845
Gain on sales of loans		—		9,755		—		—		(49)		9,706
Other noninterest income		3,526		2,915		93		701		(3)		7,232
Net revenue		16,221		13,724		7,530		359		(51)		37,783

Provision for loan losses		1,500		—		1,800		—		—		3,300
Noninterest expense		13,260		7,634		3,530		907		—		25,331
Income (loss) before taxes		1,461		6,090		2,200		(548)		(51)		9,152
Income tax expense (benefit)		149		1,640		599		(154)		—		2,234
Net income (loss)	$	1,312	$	4,450	$	1,601	$	(394)	$	(51)	$	6,918

Other data:
Capital expenditures	$	3,234	$	14	$	954	$	—	$	—	$	4,202
Depreciation and amortization	$	958	$	71	$	42	$	—	$	—	$	1,071

3029

Table of Contents

principally of gains on sales of loans in the secondary market, mortgage banking fee income related to loan originations, and interest earned on mortgage loans held for sale. Revenues from consumer finance consist primarily of interest earned on purchased retail installment sales contracts.

C&F Wealth Management derives revenues from offering wealth management services and insurance products through third-party service providers. The Corporation’s revenues and expenses are comprised primarily of interest expense associated with the Corporation’s trust preferred capital notes, 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 C&F Wealth Management and the Corporation are not significant to the Corporation on a consolidated basis and are included in “Other.”

Three Months Ended September 30, 2020


Community

Mortgage

Consumer






(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

$
15,242

$
1,503

$
9,628

$
—

$
(2,551)

$
23,822

Gains on sales of loans

—

9,755

—

—

(49)

9,706

Other noninterest income

2,831

2,915

93

1,396

(3)

7,232

Total operating income

18,073

14,173

9,721

1,396

(2,603)

40,760

Expenses:

Provision for loan losses

1,500

—

1,800

—

—

3,300

Interest expense

2,547

449

2,191

342

(2,552)

2,977

Salaries and employee benefits

7,442

4,872

2,190

1,263

—

15,767

Depreciation and amortization

916

71

42

43

—

1,072

Other noninterest expenses

4,435

2,691

1,298

68

—

8,492

Total operating expenses

16,840

8,083

7,521

1,716

(2,552)

31,608

Income (loss) before income taxes

1,233

6,090

2,200

(320)

(51)

9,152

Income tax expense (benefit)

90

1,640

599

(95)

—

2,234

Net income (loss)

$
1,143

$
4,450

$
1,601

$
(225)

$
(51)

$
6,918

Total assets

$
1,923,207

$
294,808

$
311,898

$
42,402

$
(491,464)

$
2,080,851

Capital expenditures

$
3,234

$
14

$
954

$
—

$
—

$
4,202

Three Months Ended September 30, 2019


Community

Mortgage

Consumer






(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

$
15,060

$
814

$
10,442

$
—

$
(2,324)

$
23,992

Gains on sales of loans

—

3,205

—

—

—

3,205

Other noninterest income

2,862

1,453

128

582

—

5,025

Total operating income

17,922

5,472

10,570

582

(2,324)

32,222

Expenses:

Provision for loan losses

—

—

1,800

—

—

1,800

Interest expense

2,684

541

2,596

272

(2,324)

3,769

Salaries and employee benefits

7,161

1,769

2,229

571

—

11,730

Depreciation and amortization

852

60

48

126

—

1,086

Other noninterest expenses

4,372

1,466

1,286

362

—

7,486

Total operating expenses

15,069

3,836

7,959

1,331

(2,324)

25,871

Income (loss) before income taxes

2,853

1,636

2,611

(749)

—

6,351

Income tax expense (benefit)

460

426

710

(130)

—

1,466

Net income (loss)

$
2,393

$
1,210

$
1,901

$
(619)

$
—

$
4,885

Total assets

$
1,430,083

$
110,452

$
315,278

$
18,878

$
(255,310)

$
1,619,381

Capital expenditures

$
453

$
60

$
17

$
—

$
—

$
530

~~Table of Contents~~

Nine Months Ended September 30, 2020


Community

Mortgage

Consumer






(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

$
46,051

$
3,261

$
29,418

$
—

$
(6,546)

$
72,184

Gains on sales of loans

—

18,036

—

—

(49)

17,987

Other noninterest income

7,684

6,913

290

2,643

(3)

17,527

Total operating income

53,735

28,210

29,708

2,643

(6,598)

107,698

Expenses:

Provision for loan losses

3,900

—

5,650

—

—

9,550

Interest expense

8,409

1,034

6,567

1,019

(6,547)

10,482

Salaries and employee benefits

23,142

8,989

6,567

2,240

—

40,938

Depreciation and amortization

2,550

216

133

129

—

3,028

Other noninterest expenses

14,456

6,508

3,696

582

—

25,242

Total operating expenses

52,457

16,747

22,613

3,970

(6,547)

89,240

Income (loss) before income taxes

1,278

11,463

7,095

(1,327)

(51)

18,458

Income tax (benefit) expense

(503)

3,149

1,926

(414)

—

4,158

Net income (loss)

$
1,781

$
8,314

$
5,169

$
(913)

$
(51)

$
14,300

Total assets

$
1,923,207

$
294,808

$
311,898

$
42,402

$
(491,464)

$
2,080,851

Capital expenditures

$
5,554

$
340

$
1,761

$
—

$
—

$
7,655


	Nine Months Ended September 30, 2019												Nine Months Ended September 30, 2021
	Community		Mortgage		Consumer								Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated		Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	44,803	$	1,833	$	30,952	$	4	$	(6,373)	$	71,219	$	47,035	$	3,011	$	28,058	$	—	$	(7,558)	$	70,546
Gains on sales of loans		—		8,296		—		—		—		8,296
Interest expense														4,481		925		6,926		1,759		(7,567)		6,524
Net interest income														42,554		2,086		21,132		(1,759)		9		64,022
Gain on sales of loans														—		18,753		—		—		(88)		18,665
Other noninterest income		8,193		3,626		367		3,053		—		15,239		12,022		7,298		231		1,341		(59)		20,833
Total operating income		52,996		13,755		31,319		3,057		(6,373)		94,754
Expenses:
Net revenue														54,576		28,137		21,363		(418)		(138)		103,520

Provision for loan losses		110		—		5,895		—		—		6,005		(200)		90		220		—		—		110
Interest expense		7,352		1,113		7,765		867		(6,373)		10,724
Salaries and employee benefits		21,012		4,527		6,483		3,110		—		35,132
Depreciation and amortization		2,445		181		150		136		—		2,912
Other noninterest expenses		12,822		3,924		3,970		768		—		21,484
Total operating expenses		43,741		9,745		24,263		4,881		(6,373)		76,257
Income (loss) before income taxes		9,255		4,010		7,056		(1,824)		—		18,497
Noninterest expense														41,631		18,838		10,711		2,198		—		73,378
Income (loss) before taxes														13,145		9,209		10,432		(2,616)		(138)		30,032
Income tax expense (benefit)		1,501		1,051		1,921		(474)		—		3,999		2,261		2,588		2,836		(706)		(29)		6,950
Net income (loss)	$	7,754	$	2,959	$	5,135	$	(1,350)	$	—	$	14,498	$	10,884	$	6,621	$	7,596	$	(1,910)	$	(109)	$	23,082
Total assets	$	1,430,083	$	110,452	$	315,278	$	18,878	$	(255,310)	$	1,619,381

Other data:
Capital expenditures	$	1,741	$	136	$	57	$	67	$	—	$	2,001	$	584	$	118	$	3,675	$	—	$	—	$	4,377
Depreciation and amortization													$	3,115	$	193	$	270	$	—	$	—	$	3,578


	Nine Months Ended September 30, 2020
	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Interest income	$	46,051	$	3,261	$	29,418	$	—	$	(6,546)	$	72,184
Interest expense		8,409		1,034		6,567		1,019		(6,547)		10,482
Net interest income		37,642		2,227		22,851		(1,019)		1		61,702
Gain on sales of loans		—		18,036		—		—		(49)		17,987
Other noninterest income		9,829		6,913		290		498		(3)		17,527
Net revenue		47,471		27,176		23,141		(521)		(51)		97,216

Provision for loan losses		3,900		—		5,650		—		—		9,550
Noninterest expense		41,644		15,713		10,396		1,455		—		69,208
Income (loss) before taxes		1,927		11,463		7,095		(1,976)		(51)		18,458
Income tax expense (benefit)		(336)		3,149		1,926		(581)		—		4,158
Net income (loss)	$	2,263	$	8,314	$	5,169	$	(1,395)	$	(51)	$	14,300

Other data:
Capital expenditures	$	5,554	$	340	$	1,761	$	—	$	—	$	7,655
Depreciation and amortization	$	2,679	$	216	$	133	$	—	$	—	$	3,028


	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Total assets at September 30, 2021	$	2,061,796	$	139,406	$	353,319	$	41,813	$	(386,926)	$	2,209,408
Total assets at December 31, 2020	$	1,951,622	$	239,417	$	314,746	$	43,826	$	(463,301)	$	2,086,310

During the nine months ended September 30, 2020, the Corporation recorded merger related expenses of $1.40 million ($1.13 million after income taxes), in connection with its acquisition of Peoples, of which $1.30 million ($1.03 million after income taxes) was allocated to the community banking segment and recorded as ~~$119,000~~$998,000 of ~~salaries and benefits expense, $879,000 of other~~ noninterest expense and a loss on disposal of equipment of $298,000 included in other noninterest income. The remainder was recorded as other noninterest expense at the holding ~~company. NaN~~company and included in the “Other” column above. No merger related expenses were recorded during the three months ended September 30, 2020. In the third quarter and first nine months of 2019, the Corporation recorded merger related expenses of $409,000 ($389,000 after income taxes) in connection with its pending acquisition of Peoples, of which $104,000 ($89,000 after income taxes) was allocated to the retail banking segment and recorded as other noninterest expense. The remainder was recorded as other noninterest expense at the holding company.

Table of Contents

The community banking segment extends 2 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

~~Table of Contents~~

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 LIBOR plus 200 basis points, with a floor of 3.5 percent, and fixed rate notes that carry interest at rates ranging from ~~2.4~~2.2 percent to 8.0 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. ~~Certain corporate~~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 ~~and other~~ segments.

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 ~~$311.06~~$314.65 million at September 30, ~~2020~~2021 and ~~$256.15~~$326.98 million at December 31, ~~2019,~~2020, 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 ~~$17.86~~$19.17 million at September 30, ~~2020~~2021 and ~~$16.60~~$19.07 million at December 31, ~~2019.~~2020.

The mortgage banking segment sells substantially all of the residential mortgage loans it originates 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 significant 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 ~~evaluation~~estimate of potential losses is inherently ~~subjective. A schedule~~subjective and is based on historical indemnification payments and management’s assessment of ~~expected~~current conditions that may contribute to indemnified losses on mortgage loans ~~with claims or indemnifications is maintained to ensure~~that have been sold in the ~~reserve is adequate to cover estimated losses.~~secondary market. For the three and nine months ended September 30, ~~2020,~~2021, the Corporation recorded ~~$9,000~~$20,000 and ~~$172,000~~$52,000 of provision for indemnifications, respectively, compared to 0$9,000 and $172,000 provision for

Table of Contents

indemnifications for the three and nine months ended September 30, ~~2019,~~2020, respectively. The allowance for indemnifications was ~~$2.65~~$3.41 million at September 30, ~~2020~~2021 and ~~$2.48~~$3.36 million at December 31, ~~2019.~~2020.

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. Derivative contracts that are not

~~Table of Contents~~

designated in a qualifying hedging relationship include customer accommodation loan swaps and contracts related to mortgage banking activities.

Cash flow hedges. The Corporation designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Corporation’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Corporation assesses the effectiveness of each hedging relationship quarterly. If the Corporation determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of September 30, ~~2020,~~2021, 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 related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Corporation does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.

Loan swaps. The Bank also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest ~~expense~~income and sum to 0 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 either (1) entering into forward sales contracts with investors at the time that interest rates are locked for mortgage loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for TBA securities until it can enter into forward sales contracts with investors for mortgage loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets. Changes in the fair value of mortgage banking derivatives are recorded as a component of gains on sales of loans.

At September 30, 2020, the mortgage banking segment had $307.39 million of IRLCs and $250.91 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $558.30 million in mortgage loans. Also at September 30, 2020, the mortgage banking segment had $10.40 million of IRLCs and $14.79 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of $15.25 million of TBA securities and mandatory-delivery forward sales contracts for $7.89 million in mortgage loans.

At December 31, 2019, the mortgage banking segment had $63.35 million of IRLCs and $65.77 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $129.12

3432

Table of Contents

At September 30, 2021, the mortgage banking segment had $136.01 million of IRLCs and $102.11 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $238.12 million in mortgage loans. Also at ~~December 31, 2019,~~September 30, 2021, the mortgage banking segment had ~~$11.72~~$12.13 million of IRLCs and ~~$21.98~~$10.55 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of ~~$24.0~~$16.50 million of TBA securities and mandatory-delivery forward sales contracts for ~~$6.73~~$5.34 million in mortgage loans.

At December 31, 2020, the mortgage banking segment had $190.96 million of IRLCs and $200.88 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $391.84 million in mortgage loans. Also at December 31, 2020, the mortgage banking segment had $7.67 million of IRLCs and $5.63 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of $8.00 million of TBA securities and mandatory-delivery forward sales contracts for $3.94 million in mortgage loans.

The following tables summarize key elements of the Corporation’s derivative instruments other than forward sales of mortgage loans. The fair values of forward sales of mortgage loans were not material to the consolidated financial statements of the Corporation at September 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

September 30, 2020

September 30, 2021

Notional

(Dollars in thousands)

Amount

Assets

Liabilities

Amount

Assets

Liabilities

Cash flow hedges:

Interest rate swap contracts

25,000

—

2,147

25,000

—

960

Not designated as hedges:

Customer-related interest rate swap contracts:

Matched interest rate swaps with borrower

85,028

9,355

—

83,819

4,794

167

Matched interest rate swaps with counterparty

85,028

—

9,355

83,819

167

4,794

Mortgage banking contracts:

IRLCs

317,783

5,942

—

148,144

2,875

—

Forward sales of TBA securities

15,250

—

16,500

—

December 31, 2019


Notional






(Dollars in thousands)

Amount

Assets

Liabilities

Cash flow hedges:

Interest rate swap contracts

$
25,000

$
—

$
145

Not designated as hedges:

Customer-related interest rate swap contracts:

Matched interest rate swaps with borrower

74,266

2,454

8

Matched interest rate swaps with counterparty

74,266

8

2,454

Mortgage banking contracts:

IRLCs

75,073

1,083

—

Forward sales of TBA securities

24,000

—

25


	December 31, 2020
	Notional
(Dollars in thousands)	Amount		Assets		Liabilities
Cash flow hedges:
Interest rate swap contracts	$	25,000	$	—	$	1,882
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower		84,753		8,185		—
Matched interest rate swaps with counterparty		84,753		—		8,185
Mortgage banking contracts:
IRLCs		198,632		4,582		—
Forward sales of TBA securities		8,000		—		47

The Corporation is required to maintain cash collateral with dealer counterparties for ~~derivative instruments~~interest rate swap relationships in a loss ~~position, subject to certain thresholds and offsets.~~position. At September 30, ~~2020~~2021 and at December 31, ~~2019, $11.86~~2020, $5.96 million and ~~$2.52~~$9.92 million, respectively, of cash collateral was maintained with dealer counterparties and was included in “Other assets” in the Consolidated Balance Sheets.

3533

Table of Contents

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,				Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Data processing fees	$	2,607	$	2,345	$	8,142	$	6,561	$	2,791	$	2,607	$	8,519	$	8,142
Mortgage banking loan processing expenses										697		916		2,458		2,180
Professional fees		706		1,061		2,424		2,414		675		706		2,159		2,424
Tax service and investor fees		554		359		1,335		797
Telecommunication expenses										390		311		1,151		1,092
Marketing and advertising expenses		369		485		1,207		1,293		374		369		1,178		1,207
Telecommunication expenses		311		337		1,092		985
Travel and educational expenses		430		290		974		996		263		430		620		974
Other real estate (gain)/loss and expenses, net										2		76		(400)		84
All other noninterest expenses		2,456		1,721		6,765		5,358		1,838		2,018		5,670		5,836
Total other noninterest expenses	$	7,433	$	6,598	$	21,939	$	18,404	$	7,030	$	7,433	$	21,355	$	21,939

The table above includes merger related expenses for the nine months ended September 30, 2020 of $898,000, of which $501,000 was included in data processing fees, $336,000 was included in professional fees, and $61,000 was included in all other noninterest expenses. There were 0 merger related expenses ~~recorded~~ during the three or nine months ended September 30, 2021 or the three months ended September 30, 2020. The table above includes merger related expenses for the three and nine months ended September 30, 2019 of $409,000, of which $392,000 was included in professional fees, $1,000 was included in telecommunication expenses and $16,000 was included in all other noninterest expenses.

3634

Table of Contents

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 ~~“Forward-Looking~~“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 ~~principal~~ 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.

Financial Performance ~~Measures~~Highlights

Consolidated net income for the Corporation was $7.8 million for the third quarter of 2021, or $2.16 per share, compared with $6.9 million for the third quarter of 2020, or $1.86 per ~~share, compared with consolidated net income of $4.9 million for the third quarter of 2019, or $1.42 per~~ share. Consolidated net income for the Corporation was $23.1 million for the first nine months of 2021, or $6.27 per share, compared with $14.3 million for the first nine months of 2020, or $3.87 per ~~share, compared with consolidated net income of $14.5 million for the first nine months of 2019, or $4.19 per~~ share. The Corporation’s annualized ROE and ROA were 15.66 percent and 1.44 percent, respectively, for the third quarter of 2021, compared to 15.47 percent and 1.39 percent, respectively, for the third quarter of ~~2020, compared to 12.28 percent and 1.25 percent, respectively, for the third quarter of 2019.~~2020. The Corporation’s annualized ROE and ROA were 15.77 percent and 1.43 percent, respectively, for the first nine months of 2021, compared to 10.73 percent and 0.99 percent, respectively, for the first nine months of ~~2020, compared to 12.45 percent and 1.25 percent, respectively, for the first nine months of 2019.~~2020.

~~Consolidated~~The Corporation uses adjusted net income, ~~for~~which is a non-GAAP measure of financial performance, to provide meaningful information about operating performance by excluding the ~~third quarter and first nine months~~effects of ~~2020 and 2019 were affected by~~ certain items that management does not expect to have an ongoing impact on consolidated net income. Adjusted net income ~~including~~for the third quarter and first nine months of 2021 and 2020 excludes the effects of merger related expenses incurred in connection with the ~~Corporation’s~~ acquisition of Peoples Bankshares, Incorporated (Peoples), ~~which was completed on January 1, 2020, impairment charges~~branch consolidation activity and a change in income tax law related to ~~branch consolidation, and provisions~~the carryback of ~~the Coronavirus Aid, Recovery, and Economic Security Act (the CARES Act), enacted in March 2020, which provided income tax benefits in 2020 related to prior tax years of Peoples.~~net operating losses. Excluding the effects of these items, adjusted net income was $7.7 million, or 2.13 per share, and $23.0 million, or 6.24 per share, for the third quarter and first nine months of ~~2020 was~~2021, respectively, compared to $6.9 million, or $1.85 per share, ~~compared to $5.3~~and $15.3 million, or ~~$1.54~~$4.15 per share, for the third quarter ~~of 2019. Adjusted net income for the~~and first nine months of 2020, ~~was $15.3 million, or $4.15 per share, compared to $14.9 million, or $4.30 per share, for the first nine months of 2019.~~respectively. Adjusted ROE and adjusted ROA, on an annualized basis were 15.44 percent and 1.42 percent, respectively, for the third quarter of 2021, compared to 15.42 percent and 1.38 percent, respectively, for the third quarter of ~~2020, compared to 13.26 percent and 1.35 percent, respectively, for the third quarter of 2019.~~2020. Adjusted ROE and adjusted ROA, on an annualized basis were 15.69 percent and 1.43 percent, respectively, for the first nine months of 2021, compared to 11.50 percent and 1.06 percent, respectively, for the first nine months of 2020, ~~compared to 12.78 percent and 1.29 percent, respectively, for the first nine months of 2019.~~respectively. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net income, adjusted earnings per share, adjusted ROE and adjusted ROA, which are non-GAAP financial measures, to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Consolidated net income ~~and earnings per share~~ increased ~~41.6~~13.1 percent and ~~31.1~~61.4 percent ~~respectively,~~ for the third quarter ~~of 2020,~~ and ~~decreased 1.4 percent and 7.6 percent, respectively, for the~~ first nine months of ~~2020,~~2021, respectively, compared to the same periods in ~~2019.~~2020. Adjusted net income ~~and adjusted earnings per share~~ increased ~~30.7~~12.0 percent and ~~20.3~~49.9 percent ~~respectively,~~ for the third quarter ~~of 2020,~~ and ~~increased 3.0 percent and decreased 3.5 percent, respectively, for the~~ first nine months of ~~2020,~~2021, respectively, compared to the same periods in ~~2019.~~2020. The ~~increase~~increases in net income and adjusted ~~earnings per share~~net income for the third quarter and first nine months of ~~2020~~2021 compared to the ~~third quarter~~same periods of ~~2019 is~~2020 were due primarily to higher net income of the community banking segment and consumer finance segment, partially offset by lower net income of the mortgage banking ~~segment net income,~~segment.

3735

Table of Contents

~~partially offset by higher provision~~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.

Key highlights for the three and nine months ended September 30, 2021 are as follows.

●

Average loans outstanding at the community banking segment, excluding Paycheck Protection Program (PPP) loans, increased 5.7 percent for the third quarter of 2021 and 3.9 percent for the first nine months of 2021 compared to the same periods in 2020;

●

Average loans outstanding at the consumer finance segment increased 10.0 percent for the third quarter of 2021 and 6.4 percent for the first nine months of 2021 compared to the same periods in 2020;

●

Interest expense decreased $991,000 for the third quarter of 2021 and $4.0 million for the first nine months of 2021 compared to the same periods in 2020 due primarily to lower rates on time deposits and a shift in funding to lower cost deposits;

●

The community banking segment recognized net origination fees related to PPP loans of $1.3 million and $3.4 million for the third quarter and first nine months of 2021, respectively, primarily as a result of PPP loans that were forgiven or repaid, compared to $455,000 and $832,000, respectively in the same periods in 2020;

●

The Corporation recorded provision for loan losses of $430,000 and $110,000 for the third quarter and first nine months of 2021 on a consolidated basis. This represents a decrease in the provision for loan losses of $2.9 million and $9.4 million for the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020, as a result of recoveries exceeding charge-offs at the consumer finance segment and decreases to the allowance for loan losses at the community banking segment and consumer finance segment as a result of strong asset quality, which were partially offset by loan growth. During the first nine months of 2021, the consumer finance segment and community banking segment released a portion of the reserves recognized during 2020, as credit deterioration since the onset of the COVID-19 pandemic has so far not been experienced to the extent previously anticipated;

●

Consolidated annualized net interest margin was 4.25 percent for the third quarter of 2021, compared to 4.54 percent and 4.37 percent for the third quarter of 2020 and second quarter of 2021, respectively, and was 4.31 percent for the first nine months of 2021, compared to 4.68 percent for the first nine months of 2020. The decrease in the third quarter of 2021 compared to the second quarter of 2021 was due primarily to loan growth at the consumer finance segment being outpaced by lower-yielding cash generated from repayments of PPP loans and sales of mortgage loans, as well as lower average loan yields, especially at the consumer finance segment, partially offset by lower cost of deposits;

●

Mortgage banking segment net income decreased 53 percent for the third quarter of 2021 and decreased 20 percent for the first nine months of 2021, respectively, compared to the same periods in 2020, as mortgage loan originations decreased 33 percent for the third quarter of 2021 and decreased 7 percent for the first nine months of 2021 as compared to the record loan production experienced in 2020;

●

The consumer finance segment experienced net recoveries at an annualized rate of 0.08 percent of average total loans for the first nine months of 2021, compared to net charge-offs of 1.56 percent for the first nine months of 2020, due to borrowers generally benefitting from government stimulus measures related to the COVID-19 pandemic, continued improvement in the credit quality of purchased loans and elevated values for used autos, which result in lower charge-offs upon sale of repossessed autos; and

●

The consumer finance segment’s average loan yields for the third quarter and first nine months of 2021 were lower than the same periods in 2020 due to continued competition for non-prime auto loans and growth in higher quality, lower-yielding loans, including marine and recreational vehicle loans.

Capital Management

Total equity was $205.2 million at September 30, 2021, compared to $194.5 million at December 31, 2020. Under regulatory capital standards, the ~~community banking segment, lower net interest income~~Corporation’s tier 1 capital and total capital ratios at ~~the consumer finance segment~~September 30, 2021 were 12.7 percent and ~~the issuance of 209,871 shares of common stock in connection with the acquisition of Peoples. The decrease in adjusted~~15.5 percent, respectively, compared to 12.5 percent and 15.2 percent, respectively, at December 31, 2020. Capital growth resulted primarily from earnings ~~per share~~ for the first nine months of ~~2020 compared to~~2021, which was partially offset by share repurchases of $7.2 million and cash dividends declared of $1.18 per share during the first nine months of 2019 is due primarily to higher provision for loan losses and higher operating expenses at the community banking segment and the issuance of common stock in connection with the acquisition of Peoples, partially offset by higher net income at the mortgage banking segment.

~~Impact of and Response to the COVID-19 Pandemic~~

The COVID-19 pandemic has caused a significant disruption in economic activity worldwide, and has had a significant impact on businesses and consumers in our market areas and on our results of operations, which the Corporation expects to continue. Many businesses temporarily closed or reduced their availability at the beginning of the pandemic; and while many people have returned to work, the U.S. unemployment rate was 7.9 percent in2021. At September after reaching 14.7 percent in April. There remains substantial uncertainty about critical factors that may affect the economy and employment, including a rising trend in new cases of COVID-19 in the U.S.; the development, efficacy and availability of a vaccine against COVID-19, potential re-tightening of policies that had previously allowed businesses to open; any further government stimulus efforts, including the nature, timing and extent of such stimulus; and the timing of reopening of schools, many of which are currently being conducted virtually.

The COVID-19 pandemic presents significant risks and uncertainties to our businesses; however, at this time we cannot determine the ultimate impact of this pandemic on the results of operations of the Corporation. The federal government and state and local governments have responded to this crisis with unprecedented relief efforts and economic stimulus. We cannot predict the duration or severity of the pandemic, the extent of government intervention during and following the pandemic or the effects the pandemic will have on the Corporation. We believe that as a result of the COVID-19 pandemic, our results of operations may be impacted by elevated loan losses, net interest margin compression, falling demand for loans and potential impairments of securities available for sale and goodwill.

~~Risks to Results of Operations~~

~~Elevated loan losses.~~ The COVID-19 pandemic has had a significant impact on businesses and consumers in our market areas. Many businesses temporarily closed or have faced declines in revenue since the beginning of the pandemic as consumers were instructed to stay at home. Even as businesses reopen, many restrictions remain, including limited gathering sizes. This disruption has caused employers to lay off or reduce compensation of certain employees, and some people not to receive steady incomes because they have become ill or have had to care for children or family members and are not able to work, resulting in many households facing reduced income. Commercial and consumer borrowers affected by the pandemic may not be able to make timely payments on loans, which may lead to an increase in delinquencies or defaults and may ultimately result in increases in net charge-offs and provision for loan losses. Furthermore, collateral values may decline as a result of decreased economic activity and increased uncertainty during the crisis, which may contribute to an increase in loan losses during and after the pandemic.

In the third quarter and first nine months of 2020, the Corporation recorded additional provision for loan losses of approximately $2.5 million and $8.0 million, respectively, as a result of asset quality deterioration that is expected to arise as a result of the COVID-19 pandemic and related economic disruption. Management continues to monitor changes in economic conditions and asset quality resulting from the COVID-19 pandemic, and if conditions deteriorate further then additional provision for loan losses may be required in future periods.

~~Net interest margin compression.~~ Since December 31, 2019, the Federal Reserve Bank’s Federal Open Market Committee has reduced its benchmark interest rate target to near zero by announcing rate cuts of 50 basis points on March 3, 2020 and 100 basis points on March 15, 2020. Treasury yields for all maturities are also lower since the outbreak of COVID-19. Lower market interest rates have resulted in lower average yields on all classes of earning assets. While average costs of deposits and borrowings have also decreased, and we expect the average cost of time deposits to continue to decrease due to the repricing of time deposits at maturity, the effect on net interest margin may not offset the effect of lower yields on earning assets.

30, 2021,

3836

Table of Contents

~~Falling demand for loans.~~ ~~As businesses and consumers have been affected by~~ the pandemic, new investment and consumer spending may decline, resulting in lower demand for loans. Our recent performance and strategic planning have depended in part on growth in lending at the community banking segment, and we have invested in expanding our commercial lending team. While loans outstanding at the community banking segment grew during the second quarter (which included loans originated under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA)) and third quarter of 2020, there can be no assurance that loan growth will continue during or after the pandemic. Lower demand for loans in our markets as a result of the COVID-19 pandemic, combined with lower interest rates on new loans, may negatively impact interest income from loans.

~~Impairment of securities and goodwill.~~ A broad decrease in economic activity as a result of the COVID-19 pandemic is expected to affect tax revenues of states and political subdivisions, and increased uncertainty has resulted in volatility in the market price of investments. The Corporation holds securities issued by states and political subdivisions that may experience shortfalls in general revenues or an inability to repay obligations when due as a result of the crisis, and there is a risk that these securities may become impaired, which would have a negative impact on the Corporation’s results of operations. Additionally, depending on the severity and duration of the economic consequences of the COVID-19 pandemic, the Corporation’s goodwill may become impaired, which would have a negative impact on the Corporation’s results of operations.

~~Our Response to the Crisis~~

~~The Corporation has taken steps in various areas of our businesses in response to the changes in circumstances arising from the COVID-19 pandemic.~~

●

We have adapted our technology and processes to allow a substantial portion of administrative personnel to work remotely beginning in mid-March 2020. As of September 30, 2020, most employees have returned to our offices on a full-time or part-time basis, but a significant number continue to work remotely.

●

~~We have implemented safe and healthy practices of social distancing and enhanced cleaning to protect our employees and customers as we continue to operate and serve our communities.~~

●

Our Bank branch lobbies reopened in September 2020, after being temporarily closed except by appointment. Bank customers have had continuous access to our products and services during the pandemic through our online and mobile platforms, ATMs and drive-thru facilities.

●

~~We originated 1,257 PPP loans, with an aggregate principal amount of $89.8 million.~~

●

We are working proactively with borrowers affected by the crisis, including offering short-term loan modifications, such as payment deferrals or interest only periods, for borrowers who are temporarily unable to make loan payments. As of September 30, 2020, we have provided such modifications, typically for periods of less than six months, on loans with aggregate balances of $103.6 million, of which 73 percent have either resumed regular payments or have paid off.

~~Principal Business Segments~~

~~An overview of the financial results for each~~book value per share of the Corporation’s ~~principal segments~~common stock was $57.78, and tangible book value per share, which is ~~presented below. A more detailed discussion is included in the section “Results of Operations.”~~

~~Community Banking:~~ ~~The community banking segment reported net income of $1.1 million for the third quarter of 2020,~~a non-GAAP financial measure, was $50.08, compared to net income of $2.4 million for the third quarter of 2019. For the first nine months of 2020, the community banking segment reported net income of $1.8 million, compared to $7.8 million for the first nine months of 2019. Previously, the community banking segment was referred to as the retail banking segment. There have been no changes to the composition of the community banking segment.

~~The decrease in community banking segment net income for the third quarter~~$52.80 and first nine months of 2020, compared to the same periods in 2019, was due primarily to (1) higher provision for loan losses, as the COVID-19 pandemic continues to have a disruptive economic impact in the markets that C&F Bank serves, even as many businesses have reopened; (2) higher operating expenses, including assuming certain operating costs of Peoples and investing in technology infrastructure to support continued growth; (3) lower yields on loans, securities, and interest-earning deposits with other banks; (4) higher

~~Table of Contents~~

average balances on interest-bearing deposit accounts; (5) lower service charges on deposit accounts and (6) higher expense associated with the FDIC insurance assessment, as credits available to banks with less than $10 billion in consolidated assets were used to offset assessment expense for portions of 2019 and 2020 and were fully utilized by the end of the first quarter of 2020. These factors were partially offset by (1) higher average loans outstanding, which contributed to higher interest income for the third quarter and first nine months of 2020 compared to the same periods in 2019, (2) higher non-interest income from debit card interchange fees and (3) income tax benefits in the third quarter and first nine months of 2020 of $23,000 and $326,000,$45.32, respectively, related to prior tax years of Peoples as a result of the CARES Act. For the third quarter of 2020, compared to the third quarter of 2019, these factors were partially offset by lower merger related expenses. For the first nine months of 2020, compared to the same period in 2019, the decrease in community banking segment net income was also due in part to (1) higher merger related expenses and (2) a write-down of assets ($281,000) in connection with the consolidation of the Bank’s former main office in West Point, VA into a nearby branch office and the donation of the building to the Town of West Point, which was completed in October 2020.

Average loans increased $243.7 million or 31.3 percent for the third quarter of 2020 and $206.5 million, or 26.7 percent, for the first nine months of 2020, compared to the same periods in 2019. These increases included $94.0 million and $105.1 million for the third quarter and first nine months of 2020, respectively, of average balances of loans acquired in the acquisition of Peoples, and $89.6 million and $52.5 million, respectively, of average balances of loans originated under the PPP. The increase in average loans outstanding for the third quarter and first nine months of 2020 compared to the same periods in 2019 excluding the acquisition of Peoples and the PPP was due primarily to growth in the commercial real estate and commercial business lending segments of the loan portfolio. Average loan yields were lower for the third quarter and first nine months of 2020 compared to the same periods in 2019 due to repricing of variable rate loans, lower average yields on new lending, including PPP loans, and lower interest income on purchased credit impaired (PCI) loans. The recognition of interest income on PCI loans is based on management’s expectation of future payments of principal and interest. Earlier than expected repayments of certain PCI loans resulted in the recognition of additional interest income in the first nine months of 2020 and 2019. Interest income recognized on PCI loans was $485,000 and $2.2 million for the third quarter and first nine months of 2020, respectively, compared to $985,000 and $2.7 million for the third quarter and first nine months of 2019, respectively.

~~C&F Bank’s total nonperforming assets were $2.4 million at September 30, 2020, compared to $2.6 million~~ at December 31, 2019. Nonperforming assets at September 30, 2020 included $1.3 million in nonaccrual loans, compared to $1.5 million at December 31, 2019 and included $1.1 million in other real estate owned at both September 30, 2020 and December 31, 2019. Nonaccrual loans were comprised primarily of residential mortgages and equity lines at September 30, 2020 and December 31, 2019. The community banking segment recorded provision for loan losses of $1.5 million and $3.9 million in the third quarter and first nine months of 2020, respectively, primarily to add to reserves based on qualitative adjustments as a result of the COVID-19 pandemic and due to loan growth, compared to zero and $110,000 for the same periods in 2019. As of September 30, 2020, compared to December 31, 2019, there have not been significant changes in the overall credit quality of the loan portfolio, although management believes the effects of PPP loans, payment deferrals and government stimulus may be delaying signs of credit deterioration. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there is further deterioration in economic conditions, additional provision may be required in future periods.

The community banking segment opened two new financial centers in Charlottesville and Downtown Richmond in the third quarter of 2020, and consolidated its former main office in West Point, VA into a nearby branch effective October 16, 2020.

~~Mortgage Banking:~~ The mortgage banking segment reported net income of $4.5 million for the third quarter of 2020, compared to net income of $1.2 million for the third quarter of 2019. For the first nine months of 2020, the mortgage banking segment reported net income of $8.3 million, compared to net income of $3.0 million for the first nine months of 2019.

The increase in net income of the mortgage banking segment for the third quarter and first nine months of 2020 compared to the same periods in 2019 was due primarily to higher gains on sales of loans and mortgage banking fee income, resulting from record loan production and higher margins, higher fee income for providing mortgage origination functions to third parties and higher net interest income due to higher balances of loans held for sale. Partially offsetting these factors were

~~Table of Contents~~

higher compensation expense, loan expense and data processing expense related to higher loan volume. Mortgage loan originations for the mortgage banking segment were $534.7 million and $1.24 billion for the third quarter and first nine months of 2020, respectively, compared to $286.9 million and $672.4 million for the third quarter and first nine months of 2019, respectively. Loan production for the third quarter and first nine months of 2020 was the highest reported by the mortgage banking segment for any quarter and for the first nine months of any calendar year in the Corporation’s history. Lower interest rates on mortgage loans have contributed to an increase in volume in the broader mortgage industry in the first nine months of 2020 compared to the same period in the prior year. Mortgage loan originations for the mortgage banking segment during the third quarter of 2020 for refinancings and home purchases were $285.3 million and $249.4 million, respectively, compared to $93.4 million and $193.5 million, respectively, during the third quarter of 2019. Mortgage loan originations for the mortgage banking segment during the first nine months of 2020 for refinancings and home purchases were $625.4 million and $618.0 million, respectively, compared to $147.1 million and $525.3 million, respectively, during the first nine months of 2019.

~~Consumer Finance:~~ The consumer finance segment reported net income of $1.6 million for the third quarter of 2020, compared to net income of $1.9 million for the third quarter of 2019. For the first nine months of 2020, the consumer finance segment reported net income of $5.2 million, compared to net income of $5.1 million for the first nine months of 2019.

Favorable factors affecting net income of the consumer finance segment for the third quarter and first nine months of 2020 compared to the same periods in 2019 included a decrease in interest expense due to lower average cost of borrowings and lower net charge-offs, requiring less provision for loan losses to maintain the level of the allowance for loan losses. Unfavorable factors affecting net income of the consumer finance segment for the third quarter and first nine months of 2020 compared to the same periods in 2019 included lower interest income from loans, due primarily to lower average yields, and provision for loan losses in the third quarter and first nine months of 2020, to add to reserves based on qualitative adjustments as a result of the COVID-19 pandemic. The average yield on loans for the third quarter and first nine months of 2020 was lower compared to the same periods of 2019 due to continued competition in the non-prime automobile loan business, including the effect of a lower interest rate environment, and the consumer finance segment’s pursuing growth in higher quality, lower yielding loans, which include prime marine and recreational vehicle (RV) loans.

The annualized net charge-off ratio for the first nine months of 2020 decreased to 1.56 percent from 2.91 percent for the first nine months of 2019. The decline reflects a lower number of charge-offs during 2020, due to improvement in loan performance, and lower losses per loan charged off as a result of a strong used car market. Improvement in loan performance has resulted from C&F Finance Company continuing to purchase higher quality loans as well as borrowers benefitting from the government’s stimulus measures in response to the pandemic during 2020. C&F Finance Company offers payment deferrals at times to non-prime automobile borrowers as a management technique to achieve higher ultimate cash collections. C&F Finance Company offered a higher number of payment deferrals during the first and second quarters of 2020 to borrowers impacted by the pandemic, and as of September 30, 2020, most borrowers who received a deferral had resumed making payments and were current. Monthly payment deferrals, as a percentage of non-prime automobile loans outstanding, rose to as high as 8.25 percent during the second quarter of 2020 and decreased to 1.57 percent by the end of the third quarter of 2020. The average amount deferred on a monthly basis during the third quarter and first nine months of 2020 was 2.04 percent and 3.38 percent, respectively, of non-prime automobile loans outstanding, compared to 1.90 percent and 1.91 percent, respectively, during the same periods in 2019. At September 30, 2020, total delinquent loans, which does not include loans that have been granted a payment deferral, as a percentage of total loans was 2.48 percent, compared to 4.17 percent at December 31, 2019 and 3.48 percent at September 30, 2019. The allowance for loan losses was $23.9 million, or 7.65 percent of total loans at September 30, 2020, compared to $21.8 million, or 6.96 percent of total loans at December 31, 2019. The increase in the level of the allowance for loan losses as a percentage of total loans reflects losses that management believes are probable as a result of the economic impacts of the COVID-19 pandemic. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there is further deterioration in economic conditions, additional provision may be required in future periods.

~~Merger Related Expenses.~~ In the third quarter of 2020, there were no merger related expenses recorded in connection with the acquisition of Peoples. For the first nine months of 2020, the Corporation recorded merger related expenses of $1.4 million ($1.1 million after income taxes), of which $1.3 million ($1.0 million after income taxes) was allocated to the community banking segment and $100,000 ($100,000 after income taxes) was recorded as a holding company expense.

~~Table of Contents~~

For the third quarter and first nine months of 2019, the Corporation recorded merger related expenses of $409,000 ($389,000 after income taxes), of which $104,000 ($89,000 after income taxes) was allocated to the community banking segment and $305,000 ($300,000 after income taxes) was recorded as a holding company expense. As of September 30, 2020, the Corporation has recorded aggregate merger related expenses of $2.1 million ($1.8 million after income taxes) and expects that any further merger related expenses incurred in future periods will not be significant to the Corporation as a whole.

~~Issuance of Subordinated Notes.~~ On September 29, 2020, the Corporation completed the issuance of $20.0 million in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction. The subordinated notes will initially bear interest at a fixed rate of 4.875% for five years and at the three month SOFR plus 475.5 basis points thereafter. These notes are included in Tier 2 capital of the Corporation, and the proceeds will be used for general corporate purposes and to support future growth opportunities.

~~Capital Management.~~ Total equity was $189.1 million at September 30, 2020, compared to $165.3 million at December 31, 2019. Capital growth resulted primarily from earnings for the first nine months of 2020 and the issuance of $11.6 million of common equity in connection with the acquisition of Peoples on January 1, 2020, which was partially offset by cash dividends declared of $1.14 per share during the first nine months of 2020. For the third quarter of ~~2020,~~2021, the Corporation’s cash dividend equated to a payout ratio of ~~20.4~~18.5 percent of ~~third quarter~~ earnings per share. The Corporation cannot predict what impact the COVID-19 pandemic will ultimately have on its earnings and capital levels. At this time, the Corporation expects to continue paying a regular quarterly dividend. 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, ~~(including the impact of COVID-19),~~ current and future capital levels and requirements and expected future earnings.

In ~~May 2019,~~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. The Corporation has a share repurchase program that was authorized ~~a program, effective June 1, 2019,~~by the Board of Directors in November 2020 to repurchase up to ~~$5.0 million~~365,000 shares of the Corporation’s common stock ~~(the Repurchase Program)~~ through ~~May 31, 2020. The~~November 30, 2021. During the third quarter and first nine months of 2021, the Corporation ~~made no repurchases~~repurchased $2.7 million and $7.2 million, respectively, of its common stock ~~during the three months ended September 30, 2020. Repurchases~~ under the Corporation’s share repurchase ~~program~~program.

COVID-19 Pandemic

New infections of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in our market areas and a potential threat to the progress of the economic recovery. There have been encouraging signs of strength in the economies in our markets, including growth in consumer spending and improvement in the labor market, and we have experienced strong demand for our services through growth in commercial loans, consumer finance loans, and deposit accounts. However, many businesses appear to be experiencing difficulty in hiring needed employees in a tighter labor market and businesses and consumers are challenged by supply chain disruptions and price pressure as recent economic data have broadly indicated rising inflation in 2021. There remains substantial uncertainty about the path of this economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the expiration of government stimulus programs, including expanded unemployment benefits and relief for renters that have ended. We continue to carefully monitor the pandemic and economic recovery and their impact on our market areas, our customers and our employees, and we believe that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans; however, at this time we cannot determine the ultimate impact of the pandemic on the results of operations of the Corporation. During the year ended December 31, 2020, we increased our allowance for loan losses by adding reserves based on qualitative adjustments related to the pandemic. As of September 30, 2021, credit deterioration since the onset of the COVID-19 pandemic has so far not been experienced to the extent previously anticipated. During the first nine months of ~~2020 were $355,000. The Corporation had made aggregate common stock repurchases~~2021, we released a portion of ~~$2.1 million under the Repurchase Program when the program expired on May 31, 2020. The Repurchase Program has not been renewed or extended~~these added reserves through a reduction of provision for loan losses, but continue to maintain reserves for loan losses at ~~this time. At~~ September 30, ~~2020,~~2021 related to the ~~book value per share~~pandemic and believe that our allowance for loan losses will be adequate to absorb probable losses that are inherent in our loan portfolio. If loan losses ultimately are not realized to the extent of the ~~Corporation’s common stock was $51.64,~~reserves provided for during the pandemic, our allowance for loan losses may be reduced in future periods through further reductions of provision for loan losses, which could benefit our results of operations for any such future period. However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or challenges related to continuing supply chain disruption and ~~tangible book value per share was $44.08, compared to $48.07 and $43.61, respectively, at December 31, 2019.~~lower overall employment, additional provision for loan losses may be required in future periods.

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Our judgment in determining the level of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes

Table of Contents

in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available.

Impairment of Loans: We consider a loan impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during a period of delay in payment if we expect the ultimate collection of all amounts due. We measure impairment on a loan-by-loan basis based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s

~~Table of Contents~~

obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment in the loan. All troubled debt restructurings (TDRs) are also considered impaired loans and are evaluated individually. A TDR occurs when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. For more information see the section titled “Asset Quality” within this Item 2.

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

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

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

PCI loans are not classified as nonperforming loans by the Corporation at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

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

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

Table of Contents

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 ~~2019,~~2020, the Corporation concluded that no impairment existed based on an assessment of qualitative factors. As the COVID-19 pandemic and the related economic disruption has caused a recession and resulted in recognition of higher provisions for loan losses and a decrease in net income of the community banking segment and consumer finance segment, management considered the impact of the pandemic on goodwill and determined that a triggering event had not occurred as of September

~~Table of Contents~~

30, 2020. Depending on the severity and duration of the economic consequences of the COVID-19 pandemic and their impact on the Corporation, management may determine that goodwill should be evaluated for impairment.existed.

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

For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies” in the Corporation's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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, ~~2020~~2021 and ~~2019.~~2020. 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 16 basis points and 11 basis points to the yields on community banking segment loans and total loans, respectively, and 8 basis points to both the yield on total earning assets and net interest margin for the third quarter of 2021, compared to approximately 22 basis points and 15 basis points to the ~~yield~~yields on community banking segment loans and total loans, respectively, and 12 basis points to both the yield on ~~interest~~total earning assets and ~~the~~ net interest margin, for the third quarter of ~~2020, compared to~~2020. The accretion contributed approximately 3427 basis points and 20 basis points to the ~~yield~~yields on community banking segment loans and 27total loans, respectively, and 14 basis points to both the yield on ~~interest~~total earning assets and ~~the~~ net interest margin for the ~~third quarter~~first nine months of ~~2019. The accretion contributed~~2021, compared to approximately 32 basis points and 22 basis points to the ~~yield~~yields on community banking segment loans and total loans, respectively, and 18 basis points to both the yield on ~~interest~~total earning assets and ~~the~~ net interest margin, for the first nine months of 2020, compared to approximately 32 basis points to the yield on loans and 25 basis points to both the yield on interest earning assets and the net interest margin for the first nine months of 2019. Fees collected on PPP loans are recognized net of direct origination costs over the life of the loans and contributed 12 basis points and 8 basis points to the yield on loans for the third quarter and first nine months of 2020, respectively, and contributed 10 and 6 basis points for the third quarter and first nine months of 2020, respectively, to both the yield on earning assets and net interest margin.2020. 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.

4439

Table of Contents

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


	Three Months Ended September 30,												Three Months Ended September 30,
	2020						2019						2021						2020
	Average		Income/		Yield/		Average		Income/		Yield/		Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	168,659	$	788	1.87	%	$	128,505	$	774	2.41	%	$	280,018	$	1,012	1.45	%	$	168,659	$	788	1.87	%
Tax-exempt		83,776		629	3.00			68,868		638	3.71			77,695		501	2.58			83,776		629	3.00
Total securities		252,435		1,417	2.25			197,373		1,412	2.86			357,713		1,513	1.69			252,435		1,417	2.25
Loans:
Community banking segment														1,033,291		11,895	4.57			1,021,593		11,407	4.43
Mortgage banking segment														113,436		864	3.02			214,422		1,503	2.78
Consumer finance segment														339,283		9,386	10.98			308,374		9,627	12.39
Total loans		1,544,389		22,537	5.81			1,176,729		22,260	7.51			1,486,010		22,145	5.91			1,544,389		22,537	5.81
Interest-bearing deposits in other banks		44,523		32	0.29			94,625		460	1.93			184,603		77	0.17			44,523		32	0.29
Total earning assets		1,841,347		23,986	5.18			1,468,727		24,132	6.52			2,028,326		23,735	4.64			1,841,347		23,986	5.18
Allowance for loan losses		(37,417)						(33,730)						(39,215)						(37,417)
Total non-earning assets		188,314						131,305						189,631						188,314
Total assets	$	1,992,244					$	1,566,302					$	2,178,742					$	1,992,244

Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	253,950		102	0.16		$	209,128		275	0.52		$	295,761		118	0.16		$	253,950		102	0.16
Money market deposit accounts		271,652		219	0.32			192,354		236	0.49			319,172		198	0.25			271,652		219	0.32
Savings accounts		170,296		25	0.06			120,170		27	0.09			214,881		30	0.06			170,296		25	0.06
Certificates of deposit, $100 or more		273,668		1,182	1.72			215,655		1,070	1.97			258,217		583	0.90			273,668		1,182	1.72
Other certificates of deposit		212,101		756	1.42			188,114		798	1.68			186,609		305	0.65			212,101		756	1.42
Interest-bearing deposits		1,181,667		2,284	0.77			925,421		2,406	1.03			1,274,640		1,234	0.38			1,181,667		2,284	0.77
Borrowings		99,097		693	2.80			160,340		1,363	3.40			85,412		752	3.52			99,097		693	2.80
Total interest-bearing liabilities		1,280,764		2,977	0.93			1,085,761		3,769	1.38			1,360,052		1,986	0.58			1,280,764		2,977	0.93
Noninterest-bearing demand deposits		478,232						286,211						568,275						478,232
Other liabilities		54,405						35,224						50,461						54,405
Total liabilities		1,813,401						1,407,196						1,978,788						1,813,401
Equity		178,843						159,106						199,954						178,843
Total liabilities and equity	$	1,992,244					$	1,566,302					$	2,178,742					$	1,992,244
Net interest income			$	21,009					$	20,363					$	21,749					$	21,009
Interest rate spread					4.25	%					5.14	%					4.06	%					4.25	%
Interest expense to average earning assets (annualized)					0.64	%					1.02	%
Net interest margin (annualized)					4.54	%					5.50	%
Interest expense to average earning assets																	0.39	%					0.64	%
Net interest margin																	4.25	%					4.54	%

4540

Table of Contents

Nine Months Ended September 30,


2020

2019


Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Assets

Securities:

Taxable

$
150,598

$
2,390

2.12
%
$
134,125

$
2,448

2.43
%
Tax-exempt

80,328

1,908

3.17

73,169

2,080

3.79

Total securities

230,926

4,298

2.48

207,294

4,528

2.91

Total loans

1,431,280

67,699

6.32

1,138,532

65,514

7.69

Interest-bearing deposits in other banks

111,329

682

0.82

100,495

1,631

2.17

Total earning assets

1,773,535

72,679

5.47

1,446,321

71,673

6.62

Allowance for loan losses

(34,937)

(33,887)

Total non-earning assets

193,370

129,621

Total assets

$
1,931,968

$
1,542,055

Liabilities and Equity

Interest-bearing deposits:

Interest-bearing demand deposits

$
256,143

443

0.23

$
217,080

894

0.55

Money market deposit accounts

252,598

759

0.40

198,355

757

0.51

Savings accounts

158,755

85

0.07

120,515

86

0.10

Certificates of deposit, $100 or more

264,642

3,669

1.85

201,022

2,716

1.81

Other certificates of deposit

230,411

2,699

1.56

182,793

2,082

1.52

Total interest-bearing deposits

1,162,549

7,655

0.88

919,765

6,535

0.95

Borrowings

133,477

2,827

2.82

159,963

4,189

3.49

Total interest-bearing liabilities

1,296,026

10,482

1.08

1,079,728

10,724

1.33

Noninterest-bearing demand deposits

408,876

275,269

Other liabilities

49,436

31,804

Total liabilities

1,754,338

1,386,801

Equity

177,630

155,254

Total liabilities and equity

$
1,931,968

$
1,542,055

Net interest income

$
62,197

$
60,949

Interest rate spread

4.39
%

5.29
%
Interest expense to average earning assets

0.79
%

0.99
%
Net interest margin

4.68
%

5.63
%


	Nine Months Ended September 30,
	2021						2020
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	246,391	$	2,676	1.45	%	$	150,598	$	2,390	2.12	%
Tax-exempt		82,551		1,646	2.66			80,328		1,908	3.17
Total securities		328,942		4,322	1.75			230,926		4,298	2.48
Loans:
Community banking segment		1,039,242		35,400	4.55			980,847		35,020	4.77
Mortgage banking segment		141,837		3,012	2.84			143,745		3,261	3.03
Consumer finance segment		326,333		28,057	11.50			306,688		29,418	12.82
Total loans		1,507,412		66,469	5.90			1,431,280		67,699	6.32
Interest-bearing deposits in other banks		158,635		171	0.14			111,329		682	0.82
Total earning assets		1,994,989		70,962	4.75			1,773,535		72,679	5.47
Allowance for loan losses		(39,432)						(34,937)
Total non-earning assets		190,993						193,370
Total assets	$	2,146,550					$	1,931,968

Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	301,374		369	0.16		$	256,143		443	0.23
Money market deposit accounts		312,265		594	0.25			252,598		759	0.40
Savings accounts		204,829		86	0.06			158,755		85	0.07
Certificates of deposit, $100 or more		263,152		2,093	1.06			264,642		3,669	1.85
Other certificates of deposit		191,019		1,156	0.81			230,411		2,699	1.56
Total interest-bearing deposits		1,272,639		4,298	0.45			1,162,549		7,655	0.88
Borrowings		80,228		2,226	3.70			133,477		2,827	2.82
Total interest-bearing liabilities		1,352,867		6,524	0.64			1,296,026		10,482	1.08
Noninterest-bearing demand deposits		547,118						408,876
Other liabilities		51,409						49,436
Total liabilities		1,951,394						1,754,338
Equity		195,156						177,630
Total liabilities and equity	$	2,146,550					$	1,931,968
Net interest income			$	64,438					$	62,197
Interest rate spread					4.11	%					4.39	%
Interest expense to average earning assets					0.44	%					0.79	%
Net interest margin					4.31	%					4.68	%

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.

4641

Table of Contents

TABLE 2: Rate-Volume Recap

Three Months Ended September 30, 2020 from 2019

Three Months Ended September 30, 2021 from 2020

Increase (Decrease)

Total

Increase (Decrease)

Total

Due to

Increase

Due to

Increase

(Dollars in thousands)

Rate

Volume

(Decrease)

Rate

Volume

(Decrease)

Interest income:

Loans

(5,715)

5,992

277

Loans:

Community banking segment

358

130

488

Mortgage banking segment

121

(760)

(639)

Consumer finance segment

(1,154)

913

(241)

Securities:

Taxable

(196)

210

(207)

431

224

Tax-exempt

(134)

125

(9)

(84)

(44)

(128)

Interest-bearing deposits in other banks

(264)

(164)

(428)

(18)

Total interest income

(6,309)

6,163

(146)

(984)

733

(251)

Interest expense:

Interest-bearing deposits:

Interest-bearing demand deposits

(222)

(173)

—

Money market deposit accounts

(97)

(17)

(54)

(21)

Savings accounts

(11)

(2)

—

Certificates of deposit, $100 or more

(149)

261

112

(536)

(63)

(599)

Other certificates of deposit

(134)

(42)

(369)

(82)

(451)

Total interest-bearing deposits

(613)

491

(122)

(959)

(91)

(1,050)

Borrowings

(212)

(458)

(670)

163

(104)

Total interest expense

(825)

(792)

(796)

(195)

(991)

Change in net interest income

(5,484)

6,130

646

(188)

928

740

Nine Months Ended September 30, 2020 from 2019

Nine Months Ended September 30, 2021 from 2020

Increase (Decrease)

Total

Increase (Decrease)

Total

Due to

Increase

Due to

Increase

(Dollars in thousands)

Rate

Volume

(Decrease)

Rate

Volume

(Decrease)

Interest income:

Loans

(12,901)

15,086

2,185

Loans:

Community banking segment

(1,653)

2,033

380

Mortgage banking segment

(206)

(43)

(249)

Consumer finance segment

(3,162)

1,801

(1,361)

Securities:

Taxable

(335)

277

(58)

(1,014)

1,300

286

Tax-exempt

(362)

190

(172)

(314)

(262)

Interest-bearing deposits in other banks

(1,109)

160

(949)

(721)

210

(511)

Total interest income

(14,707)

15,713

1,006

(7,070)

5,353

(1,717)

Interest expense:

Interest-bearing deposits:

Interest-bearing demand deposits

(596)

145

(451)

(145)

(74)

Money market deposit accounts

(182)

184

(320)

155

(165)

Savings accounts

(28)

(1)

(16)

Certificates of deposit, $100 or more

891

953

(1,555)

(21)

(1,576)

Other certificates of deposit

560

617

(1,138)

(405)

(1,543)

Total interest-bearing deposits

(687)

1,807

1,120

(3,174)

(183)

(3,357)

Borrowings

(731)

(631)

(1,362)

725

(1,326)

(601)

Total interest expense

(1,418)

1,176

(242)

(2,449)

(1,509)

(3,958)

Change in net interest income

(13,289)

14,537

1,248

(4,621)

6,862

2,241

Net interest income, on a taxable-equivalent basis, for the ~~three months ended September 30, 2020~~third quarter of 2021 was ~~$21.0~~$21.7 million, compared to ~~$20.4~~$21.0 million for the ~~three months ended September 30, 2019.~~third quarter of 2020. Net interest income, on a taxable-equivalent basis, for the first nine months of ~~2020~~2021 was ~~$62.2~~$64.4 million, compared to ~~$60.9~~$62.2 million for the first nine months of ~~2019.~~ 2020. The increase in net interest income for the third quarter of 2021 compared to the third quarter of 2020 was due primarily to higher accretion of net PPP origination fees, lower cost of deposits, and higher average balances of consumer finance segment loans, community banking segment loans and securities, partially offset by lower average yields on loans and securities. The increase in net interest income for the first nine months of 2021 compared to the first nine months of 2020 was due primarily to lower cost of deposits, higher accretion of net PPP origination fees, and using deposit growth to fund higher average balances of loans and securities and repayment of borrowings, partially offset by lower average yields on loans, securities, and cash reserves.

Table of Contents

Annualized net interest margin decreased 9629 basis points to ~~4.54~~4.25 percent for the third quarter of 2021 compared to the third quarter of 2020, due primarily to growth in lower yielding securities and cash reserves outpacing loan growth at the consumer finance and community banking segment, and lower average yields on securities and cash reserves, partially offset by lower average cost of deposits (including growth in noninterest-bearing demand deposits). Annualized net interest margin decreased 9537 basis points to ~~4.68~~4.31 percent for the first nine months of ~~2020, relative~~2021 compared to the ~~same periods in 2019,~~first nine months of 2020, due primarily to lower average yields on loans, securities and ~~other earning assets,~~cash reserves, and growth in lower yielding securities and cash reserves outpacing loan growth, partially offset by ~~(1)~~lower average cost of deposits (including growth in noninterest-bearing demand deposits) and using ~~lower-yielding excess cash~~lower cost deposits to fund growth in loans and securities and repay ~~borrowings and (2) growth in low cost deposits, including noninterest-bearing demand deposits.~~borrowings. The yield on interest-earning assets and cost of interest-bearing liabilities decreased by ~~134~~54 basis points and 4535 basis points, respectively, for the third quarter of ~~2020~~2021 and decreased by ~~115~~72 basis points and 2544 basis points, respectively, for the first nine months of ~~2020,~~2021 compared to the same periods in 2019. Average earning assets grew by $372.6 million and $327.2 million for the third quarter and first nine months of 2020, compared to the same periods in 2019, primarily due to growth in loans (including PPP loans) and securities funded by deposit growth as well as the acquisition of Peoples on January 1, 2020.

~~Table of Contents~~

Average loans, which includes both loans held for investment and loans held for sale, ~~increased $367.7~~decreased $58.4 million to ~~$1.5~~$1.49 billion for the third quarter of ~~2020, compared to the same period in 2019,~~2021 and increased ~~$292.7~~$76.1 million to ~~$1.4~~$1.51 billion for the first nine months of ~~2020,~~2021, compared to the same ~~period~~periods in ~~2019.~~2020. Average loans ~~held for investment~~ at the community banking segment increased ~~$243.7~~$11.7 million, or ~~31.3~~1.1 percent, for the third quarter of ~~2020,~~2021, and increased ~~$206.5~~$58.4 million, or ~~26.7~~6.0 percent, for the first nine months of ~~2020~~2021 compared to the same periods in ~~2019. These increases included $94.0~~2020. Excluding the impact of PPP loans, average loans at the community banking segment increased $53.1 million, or 5.7 percent, for the third quarter of 2021 and $36.3 million, or 3.9 percent, for the first nine months of 2021, compared to the same periods in 2020. The increase in average loans at the community banking segment excluding PPP loans for the third quarter and first nine months of 2021 compared to the same periods in 2020 resulted primarily from growth in the commercial real estate segment of the loan portfolio. Average loans at the consumer finance segment increased $30.9 million, or 10.0 percent, for the third quarter of 2021, and increased $19.6 million, or 6.4 percent, for the first nine months of 2021, compared to the same periods in 2020 due to higher average balances of non-prime auto loans and prime marine and RV loans. Average loans at the mortgage banking segment, which consist primarily of loans held for sale, decreased $101.0 million, or 47.1 percent, for the third quarter of 2021 and decreased $1.9 million, or 1.3 percent, for the first nine months of 2021, compared to the same periods in 2020, due primarily to lower mortgage loan production volume and reducing the average holding period for loans held for sale in the first nine months of 2021 compared to the first nine months of 2020 due to lower volume and increased capacity for processing and sale of loans.

The overall yield on average loans increased 10 basis points to 5.91 percent for the third quarter of 2021 compared to the third quarter of 2020 due primarily to growth in higher yielding consumer finance loans as a share of the loan portfolio, as average balances of loans grew at the consumer finance and community banking segments and the average balance of lower yielding mortgage loans held for sale decreased. The overall yield on average loans decreased 42 basis points to 5.90 percent for the first nine months of 2021 compared to the first nine months of 2020 due primarily to lower average yields across the loan portfolio. The community banking segment average loan yield increased 14 basis points to 4.57 percent for the third quarter of 2021 and decreased 22 basis points to 4.55 percent for the first nine months of 2021, compared to the same periods in 2020. Comparisons of average loan yields for the community banking segment were significantly impacted by recognition of net PPP origination fees and interest income on PCI loans, as described in more detail below. Excluding the effects of these items, average yields on loans at the community banking segment decreased for the third quarter and first nine months of 2021 compared to the same periods in 2020, due primarily to changes in interest rates in 2020, resulting in repricing of variable rate loans and lower average yields on new lending. PPP loans earn interest at a note rate of one percent as well as net origination fees that are amortized over the contractual term of the related loan or accelerated into interest income upon repayment of the loan. Net PPP origination fees recognized in the third quarter and first nine months of 2021 were $1.3 million and ~~$105.1~~$3.4 million, respectively, compared to net PPP origination fees recognized in the third quarter and first nine months of 2020 of $455,000 and $832,000, respectively. Deferred net PPP origination fees that remained unrecognized at September 30, 2021 were $1.4 million, which are expected to be recognized in 2021 and 2022. The recognition of interest income on PCI loans, which were acquired in connection with past mergers and acquisitions, is based on management’s expectation of future payments of principal and interest, which are inherently uncertain. Earlier than expected repayments of certain PCI loans resulted in the recognition of additional interest income during the third quarters and first nine months of 2021 and 2020. Interest income recognized on PCI loans was $364,000 and $485,000 for the third quarters of 2021 and 2020, respectively, and $1.9 million and $2.2 million for the first nine months of 2021 and 2020, respectively. The consumer finance segment average loan yield decreased 141 basis points to 10.98 percent and decreased 132 basis points to 11.50 percent for the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020, due to purchases of loan contracts at lower yields than the portfolio average yield, partially as a

Table of Contents

result of lower interest rates for non-prime auto loans and the consumer finance segment continuing to pursue loan contracts of higher credit quality, including prime marine and RV loans. The mortgage banking segment average loan yield increased 24 basis points to 3.02 percent for the third quarter of 2021 and decreased 19 basis points to 2.84 percent for the first nine months of 2021, compared to the same periods in 2020.

Average securities available for sale increased $105.3 million and $98.0 million for the third quarter and first nine months of 2020, respectively, of average balances of loans acquired in the acquisition of Peoples, and $89.6 million and $52.5 million, respectively, of average balances of loans originated under the PPP. The remaining increase in average loans outstanding at the community banking segment for the third quarter and first nine months of 20202021, compared to the same periods in 2019 was due primarily to growth in the commercial real estate and commercial business lending segments of the loan portfolio. Average loans held for investment at the consumer finance segment decreased $4.6 million, or 1.5 percent, for the third quarter of 2020, and increased $2.3 million, or 0.8 percent, for the first nine months of 2020, compared to the same periods of 2019 as average marine and RV loans increased due to the continued expansion of the consumer finance segment’s purchases of those loan contracts and average automobile loans decreased due to continuing competition for loan contracts. Average loans held for sale at the mortgage banking segment increased $127.0 million, or 154.6 percent, for the third quarter of 2020, and increased $82.6 million, or 147.0 percent, for the first nine months of 2020, compared to the same periods in 2019, due to higher loan production.

The overall yield on average loans decreased 170 basis points to 5.81 percent for the third quarter of 2020 and decreased 137 basis points to 6.32 percent for the first nine months of 2020, compared to the same periods of 2019 due primarily to changes in the composition of the loan portfolio, lower market interest rates, and loans originated under the PPP, which have lower yields relative to other loans. In addition, yields at the consumer finance segment were lower due to continued competition in the non-prime automobile loan business, including the effect of a lower interest rate environment, and the consumer finance segment continuing to pursue growth in higher quality, lower yielding loans, which includes prime marine and RV loans. Lower interest income on PCI loans at the community banking segment for the third quarter and first nine months of 2020 as compared to the same periods of 2019 also contributed to the decrease in yield. While yields on loans originated under the PPP were lower than the average yield of other loans at the community banking segment during the third quarter and first nine months of 2020, unrecognized net deferred fees of $2.9 million at September 30, 2020 may result in higher yields in future periods as they are recognized over the remaining life of those loans, a portion of which are expected to be repaid by the SBA prior to maturity in accordance with the forgiveness provisions of the PPP.

~~Average securities available for sale increased $55.1 million and $23.6 million for the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019,~~ due primarily to higher purchases of mortgage-backed securities and ~~the acquisition of Peoples.~~U.S. government agency debt securities with short maturities, in order to utilize excess liquidity by investing in debt securities rather than holding lower-yielding cash reserves. The average yield on the securities portfolio on a taxable-equivalent basis decreased ~~61 and 43~~56 basis points to 1.69 percent for the third quarter of 2021 and decreased 73 basis points to 1.75 percent for the first nine months of ~~2020, respectively,~~2021, compared to the same periods in ~~2019,~~2020, due to purchases of securities in 2020 and 2021 at lower average yields relative to the average yield of the portfolio as a ~~whole.~~whole, increased calls of securities that were issued during periods of higher market interest rates, and accelerated amortization of premiums on mortgage-backed securities as a result of increased prepayment activity.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, ~~decreased $50.1 million and~~ increased ~~$10.8~~$140.1 million for the third quarter of 2021 and increased $47.3 million for the first nine months of ~~2020, respectively,~~2021, compared to the same periods in ~~2019, as the Corporation utilized~~2020 due primarily to excess ~~cash to fund~~liquidity resulting from deposit growth and decreases in loans held for sale exceeding growth in ~~loans and~~ securities and ~~repay borrowings.~~loans at the consumer finance and community banking segments. The average yield on interest-bearing deposits in other banks decreased ~~164 and 135~~12 basis points for the third quarter of 2021 and decreased 68 basis points for the first nine months of ~~2020, respectively,~~2021, compared to the same periods in ~~2019, due to lower average rates on excess cash reserves, partially offset by an increase in purchased time deposits.~~2020. The Federal Reserve Bank decreased the interest rate on excess cash reserve balances from ~~2.40~~1.55 percent at ~~September 30,~~December 31, 2019 ~~to 1.55 percent by the end of 2019, and then further decreased the interest rate~~ to 0.10 percent by the end of the ~~third~~first quarter of 2020 in response to the COVID-19 ~~pandemic.~~pandemic, and increased the interest rate to 0.15 during the second quarter of 2021.

Average money market, savings and interest-bearing demand deposits increased ~~$174.2~~$133.9 million and ~~$131.5~~$151.0 million for the third quarter and first nine months of ~~2020,~~2021, respectively, and average time deposits ~~increased $82.0~~decreased $40.9 million ~~and $111.2 million~~ for both of the third quarter and first nine months of ~~2020,~~2021, respectively, compared to the same periods in ~~2019.~~2020, due to growth in consumer and business deposits primarily as a result of new accounts and liquidity from government stimulus programs as well as a shift to non-time deposits as a result of lower interest rates. Average noninterest-bearing demand deposits increased $192.0 million and $133.6 million for the third quarter and first nine months of 2020, compared to the same periods in 2019. Higher average deposit balances are due primarily to deposit growth during 2020 and the acquisition of Peoples. The increases in average money market, savings and interest bearing-demand deposits included $49.1$90.0 million for the third quarter of ~~2020~~2021 and ~~$61.3~~increased $138.2 million for the first nine months of ~~2020, and the increases in average time deposits~~

~~Table of Contents~~

~~included $77.4 million for the third quarter of 2020 and $77.8 million for the first nine months of 2020, related~~2021, compared to the ~~acquisition of Peoples. Deposit growth was also impacted by the effect of PPP loans and direct government payments received by depositors.~~same periods in 2020. The average cost of interest-bearing deposits decreased ~~26 basis points and 7~~39 basis points for the third quarter of 2021 and decreased 43 basis points for the first nine months of ~~2020, respectively,~~2021, compared to the same periods in ~~2019,~~2020, due primarily to lower rates on ~~money~~time deposits and a shift in composition toward non-time deposits. Offered rates on interest-bearing deposit accounts were reduced in response to changes in market ~~savings and interest-bearing demand deposits, which~~interest rates beginning in March 2020. While changes in rates take effect immediately ~~upon a change in offered rates. Offered rates on time deposits were also lower during the third quarter~~for interest checking, money market and ~~first nine months of 2020, compared to the same periods in 2019. Changes~~savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity. Rates on outstanding time deposits continued to decrease during the first nine months of 2021 as accounts at higher rates matured.

Average borrowings decreased ~~$61.2 million and $26.5~~$13.7 million for the third quarter of 2021 and decreased $53.2 million for the first nine months of ~~2020,~~2021, compared to the same periods in ~~2019~~2020 due primarily to the repayment of long-term borrowings in 2020, partially offset by the ~~assumption~~issuance of ~~$4.0~~$20.0 million of subordinated ~~debt upon~~notes by the ~~acquisition of Peoples. Repayment of long-term borrowings included paying off a revolving bank line of credit~~Corporation in the ~~second~~third quarter of ~~2020 using excess cash.~~2020. The average cost of borrowings ~~decreased 60 and 67~~increased 72 basis points ~~during~~for the third quarter of 2021 and increased 88 basis points for the first nine months of ~~2020,~~2021, compared to the same periods in ~~2019,~~2020 due primarily to the ~~payoff~~higher cost of the ~~revolving bank line of credit and lower short-term interest rates.~~subordinated notes relative to borrowings that were repaid.

The Corporation believes that ~~its~~it may be challenging to maintain net interest margin ~~may be affected in future periods by several factors that are difficult~~at its current level based on the effects of (1) continued pressure on loan yields at the community banking segment and consumer finance segment related to ~~predict, including (1) changes in~~the current environment of low interest rates ~~which may depend~~and competition for loans, (2) the temporary effect on ~~the severity~~loan yields of ~~adverse economic conditions, the timing and extent~~recognition of ~~any economic recovery, and the extent of government stimulus measures, which are inherently uncertain, (2)~~net PPP origination fees, (3) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment, ~~(3)~~(4) lower accretion of purchase discounts on loans related to acquisitions, which is included in yields on loans, (5) lower mortgage loan production, and ~~may fluctuate based on~~therefore lower average

Table of Contents

loans held for sale, at the ~~timing of repayment, (4) the~~mortgage banking segment and (6) repricing of ~~higher-rate~~ time deposits ~~and borrowings as they mature to~~at lower rates upon maturity, which may ~~occur at a slower rate than~~lag or may not offset the ~~repricing~~effects of ~~interest bearing assets and (5) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or forgiveness.~~lower average loan yields.

Noninterest Income

TABLE 3: Noninterest Income


	Three Months Ended September 30, 2020
	Community		Mortgage		Consumer		Other and				Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total		2021		2020		2021		2020
Gains on sales of loans	$	—	$	9,755	$	—	$	(49)	$	9,706	$	5,660	$	9,706	$	18,665	$	17,987
Mortgage banking fee income		—		2,209		—		(3)		2,206		1,630		2,206		5,134		5,497
Interchange income		1,268		—		—		—		1,268		1,461		1,268		4,250		3,498
Service charges on deposit accounts		785		—		—		—		785		992		785		2,639		2,426
Wealth management services income, net		—		—		—		640		640		708		640		2,095		1,973
Mortgage lender services income												598		706		1,991		1,348
Other service charges and fees		390		—		—		—		390		386		390		1,188		1,159
Net gains on sales, maturities and calls of available for sale securities		4		—		—		—		4		3		4		41		11
Other income (loss), net		384		706		93		756		1,939
Other income, net												604		1,233		3,495		1,615
Total noninterest income	$	2,831	$	12,670	$	93	$	1,344	$	16,938	$	12,042	$	16,938	$	39,498	$	35,514

Three Months Ended September 30, 2019


Community

Mortgage

Consumer

Other and


(Dollars in thousands)

Banking

Banking

Finance

Eliminations

Total

Gains on sales of loans

$
—

$
3,205

$
—

$
—

$
3,205

Mortgage banking fee income

—

1,373

—

—

1,373

Interchange income

1,105

—

—

—

1,105

Service charges on deposit accounts

1,012

—

—

—

1,012

Wealth management services income, net

—

—

—

529

529

Other service charges and fees

395

—

1

—

396

Net gains on sales, maturities and calls of available for sale securities

3

—

—

—

3

Other income (loss), net

347

80

127

53

607

Total noninterest income

$
2,862

$
4,658

$
128

$
582

$
8,230

Total noninterest income decreased $4.9 million, or 28.9 percent, in the third quarter of 2021 compared to the third quarter of 2020 due primarily to (1) lower gains on sales of loans as a result of lower mortgage loan production volume, partially offset by higher margins on loans originated for resale, (2) lower fee income from mortgage banking and mortgage lender services as a result of lower mortgage loan production volume, and (3) unrealized losses in the third quarter of 2021 compared to unrealized gains in the third quarter of 2020 related to the Corporation’s nonqualified deferred compensation plan, included in other income, net, partially offset by (1) an increase in debit card interchange activity and (2) higher overdraft fees on deposit accounts.

Total noninterest income increased $4.0 million, or 11.2 percent, in the first nine months of 2021 compared to the first nine months of 2020 due primarily to (1) higher gains on sales of loans primarily as a result of higher margins on loans originated for resale, partially offset by lower mortgage loan production volume, (2) an increase in debit card interchange activity, (3) higher fee income from mortgage lender services as a result of serving a growing number of third-party lenders, (4) asset write-downs of $579,000 in the first nine months of 2020, included in other income, related to branch consolidation and merger related costs recognized upon disposition of assets acquired from Peoples, and (5) higher unrealized gains in the Corporation’s nonqualified deferred compensation plan, included in other income, net, partially offset by (1) lower mortgage banking fee income as a result of lower mortgage loan production volume.

The Corporation recognized unrealized losses related to its nonqualified deferred compensation plan of $122,000 and unrealized gains of $1.3 million for the third quarter and first nine months of 2021, respectively, compared to unrealized gains of $705,000 and $475,000 for the same periods in 2020, respectively. Unrealized gains and losses in the Corporation’s nonqualified deferred compensation plan are offset by changes in deferred compensation, recorded in salaries and employee benefits expense.

4945

Table of Contents

Nine Months Ended September 30, 2020


Community

Mortgage

Consumer

Other and


(Dollars in thousands)

Banking

Banking

Finance

Eliminations

Total

Gains on sales of loans

$
—

$
18,036

$
—

$
(49)

$
17,987

Mortgage banking fee income

—

5,500

—

(3)

5,497

Interchange income

3,498

—

—

—

3,498

Service charges on deposit accounts

2,426

—

—

—

2,426

Wealth management services income, net

1

—

—

1,972

1,973

Other service charges and fees

1,158

—

1

—

1,159

Net gains on sales, maturities and calls of available for sale securities

11

—

—

—

11

Other income (loss), net

590

1,413

289

671

2,963

Total noninterest income

$
7,684

$
24,949

$
290

$
2,591

$
35,514

Nine Months Ended September 30, 2019


Community

Mortgage

Consumer

Other and


(Dollars in thousands)

Banking

Banking

Finance

Eliminations

Total

Gains on sales of loans

$
—

$
8,296

$
—

$
—

$
8,296

Mortgage banking fee income

—

3,410

—

—

3,410

Interchange income

3,134

—

—

—

3,134

Service charges on deposit accounts

2,874

—

—

—

2,874

Wealth management services income, net

—

—

—

1,453

1,453

Other service charges and fees

1,108

—

3

—

1,111

Net gains on sales, maturities and calls of available for sale securities

8

—

—

—

8

Other income (loss), net

1,069

216

364

1,600

3,249

Total noninterest income

$
8,193

$
11,922

$
367

$
3,053

$
23,535

Total noninterest income increased $8.7 million, or 105.8 percent, in the third quarter of 2020, compared to the third quarter of 2019, and increased $12.0 million, or 50.9 percent, in the first nine months of 2020, compared to the first nine months of 2019. These increases in noninterest income were due primarily to (1) higher gains on sales of loans and mortgage banking fee income at the mortgage banking segment, which resulted from higher loan production, as lower mortgage loan interest rates made mortgage products more attractive to consumers and contributed to an increase in volume in the mortgage industry, and higher margins, (2) higher fee income at the mortgage banking segment, included in “Other income (loss), net,” for providing mortgage origination functions to third parties, as a result of higher mortgage industry volume and serving a growing number of third-party lenders (3) an increase in debit card interchange income at the community banking segment and (4) an increase in wealth management services income, partially offset by asset write-downs at the community banking segment of $579,000 in the first nine months of 2020 and lower service charges on deposit accounts at the community banking segment due to fewer overdraft fees charged. Asset write-downs, included in “Other income (loss), net,” at the community banking segment included $298,000 of merger related costs recognized in connection with disposition of assets acquired from Peoples and $281,000 related to branch consolidation. Noninterest income was also affected by an increase of $716,000 for the third quarter of 2020 and a decrease of $935,000 for the first nine months of 2020, compared to the same periods in 2019, related to unrealized gains and losses in the Corporation’s nonqualified deferred compensation plan, which are included in “Other income, net” in the “Other and Eliminations” column in the tables above. Unrealized gains and losses on the Corporation’s nonqualified deferred compensation plan are offset by expenses, as discussed below.

~~Table of Contents~~

Noninterest Expense

TABLE 4: Noninterest Expense

Three Months Ended September 30, 2020

Community

Mortgage

Consumer

Other and

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

Banking

Finance

Eliminations

Total

2021

2020

2021

2020

Salaries and employee benefits

7,442

4,872

2,190

1,263

15,767

13,915

15,767

45,242

40,938

Occupancy expense

1,541

417

161

2,131

2,231

2,131

6,781

6,331

Other expenses:

Data processing

1,770

508

310

2,607

2,791

2,607

8,519

8,142

Mortgage banking loan processing expenses

697

916

2,458

2,180

Professional fees

355

163

220

(32)

706

675

706

2,159

2,424

Mortgage banking loan processing expenses

—

916

—

916

Other real estate loss/(gain) and expense, net

(400)

Other expenses

1,685

758

649

112

3,204

2,865

3,128

8,619

9,109

Total other expenses

3,810

2,345

1,179

7,433

7,030

7,433

21,355

21,939

Total noninterest expense

12,793

7,634

3,530

1,374

25,331

23,176

25,331

73,378

69,208

Three Months Ended September 30, 2019

Community

Mortgage

Consumer

Other and

(Dollars in thousands)

Banking

Banking

Finance

Eliminations

Total

Salaries and employee benefits

$
7,161

$
1,769

$
2,229

$
571

$
11,730

Occupancy expense

1,438

355

158

23

1,974

Other expenses:

Data processing

1,726

266

333

20

2,345

Professional fees

543

57

140

321

1,061

Mortgage banking loan processing expenses

—

506

—

—

506

Other expenses

1,517

342

703

124

2,686

Total other expenses

3,786

1,171

1,176

465

6,598

Total noninterest expense

$
12,385

$
3,295

$
3,563

$
1,059

$
20,302

Nine Months Ended September 30, 2020


Community

Mortgage

Consumer

Other and


(Dollars in thousands)

Banking

Banking

Finance

Eliminations

Total

Salaries and employee benefits

$
23,142

$
8,989

$
6,567

$
2,240

$
40,938

Occupancy expense

4,614

1,186

486

45

6,331

Other expenses:

Data processing

5,933

1,235

918

56

8,142

Professional fees

1,405

345

422

252

2,424

Mortgage banking loan processing expenses

—

2,180

—

—

2,180

Other expenses

5,054

1,778

2,003

358

9,193

Total other expenses

12,392

5,538

3,343

666

21,939

Total noninterest expense

$
40,148

$
15,713

$
10,396

$
2,951

$
69,208

Nine Months Ended September 30, 2019

Community

Mortgage

Consumer

Other and

(Dollars in thousands)

Banking

Banking

Finance

Eliminations

Total

Salaries and employee benefits

$
21,012

$
4,527

$
6,483

$
3,110

$
35,132

Occupancy expense

4,359

1,051

528

54

5,992

Other expenses:

Data processing

4,909

610

982

60

6,561

Professional fees

1,449

114

425

426

2,414

Mortgage banking loan processing expenses

—

1,189

—

—

1,189

Other expenses

4,550

1,141

2,185

364

8,240

Total other expenses

10,908

3,054

3,592

850

18,404

Total noninterest expense

$
36,279

$
8,632

$
10,603

$
4,014

$
59,528

~~Table of Contents~~

Total noninterest expenses ~~increased $5.0~~decreased $2.2 million, or ~~24.8~~8.5 percent, in the third quarter of ~~2020,~~2021 compared to the ~~third quarter~~same period in 2020, due primarily to lower salaries and benefits expense and mortgage banking loan processing expenses at the mortgage banking segment, both primarily as a result of ~~2019, and~~lower mortgage loan production volume.

Total noninterest expenses increased ~~$9.7~~$4.2 million, or ~~16.3~~6.0 percent, in the first nine months of ~~2020,~~2021, compared to the ~~first nine months of 2019. This increase~~same period in ~~noninterest expenses was~~2020, due primarily to (1) higher ~~mortgage loan production volume at~~salaries and benefits expense, driven primarily by the mortgage banking segment, ~~resulting in~~(2) higher ~~expenses related to volume included in salaries and employee benefits, data processing, professional fees and~~ mortgage banking loan processing ~~expenses, (2)~~expense as a result of increased ~~merger related expenses associated with the acquisition~~sales of ~~Peoples for the first nine months of 2020 compared to the first nine months of 2019,~~loans, (3) ~~the assumption of certain operating costs of Peoples Community Bank~~higher occupancy expense at the community banking segment ~~included primarily~~related to the opening of two new financial centers in ~~salaries~~the third quarter of 2020, and ~~employee benefits and data processing expenses,~~ (4) higher data processing expenses ~~associated with investing in technology infrastructure to support continued growth, (5) higher expense associated with the FDIC insurance assessment~~primarily at the community banking segment, ~~included~~partially offset by (1) lower merger related expenses and cost savings related to the integration of Peoples and (2) net gains on other real estate in ~~“Other expenses,” as credits available~~2021 related primarily to ~~banks with less than $10 billion~~the sale of one property.

In addition to these factors, changes in ~~consolidated assets were used to offset assessment~~deferred compensation liabilities decreased salaries and employee benefits expense ~~for portions~~by $161,000 and increased salaries and employee benefits expense by $1.3 million in the third quarter and first nine months of ~~2019~~2021, respectively, and ~~2020~~increased salaries and ~~were fully utilized~~employee benefits expense by ~~the end of the first quarter of 2020~~$705,000 and ~~(6) provision for indemnifications at the mortgage banking segment, included~~$475,000 in ~~“Other expenses,” of $9,000 and $172,000 for~~ the third quarter and first nine months of 2020, ~~compared to~~respectively, and are offset by unrealized gains and losses recorded in noninterest income.

There were no ~~provision for indemnifications in 2019. Noninterest expense was also affected by an increase of $716,000~~merger related expenses for the third quarter ~~of 2020 and a decrease of $935,000 for the~~or first nine months of ~~2020, compared to~~2021 or the same periods in 2019, in salaries and employee benefits expense related to unrealized gains and losses in the Corporation’s nonqualified deferred compensation plan, which are shown in the “Other and Eliminations” column in the tables above.

third quarter of 2020. Merger related expenses for the first nine months of 2020 were $1.4 million, ~~including $1.3 million at the community banking segment,~~ of which $501,000 was data processing expense, ~~$236,000~~$336,000 was professional fees expense, $119,000 was salaries and employee benefits expense, $81,000 was occupancy expense, $61,000 was included in all other noninterest expenses, and $298,000 was a loss on disposition of assets and was recorded in noninterest income. Merger related expenses for the first nine months of 2020 also included $100,000 at the holding company, shown in the “Other and Eliminations” column in the tables above, which was professional fees expense. There were no merger related expenses recorded during the third quarter of 2020. Merger related expenses in the third quarter and first nine months of 2019 included $104,000 at the retail banking segment, of which $102,000 was professional fees expense and $2,000 was included in all other noninterest expenses, and $305,000 at the holding company, shown in the “Other and Eliminations” column in the tables above, of which $290,000 was professional fees expense and $15,000 was included in all other noninterest expenses.

The community banking segment expects cost savings resulting from the integration of Peoples to be realized by December 31, 2020, and a majority of those cost savings have been realized as of September 30, 2020. Additionally, the community banking segment expects to realize annualized cost savings of approximately $220,000 by the second quarter of 2021 in connection with the consolidation of C&F Bank’s main office in West Point, VA.

Income Taxes

The Corporation’s consolidated effective income tax rate was ~~22.5~~23.1 percent and ~~21.6~~22.5 percent for the first nine months of ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~higher effective~~Corporation recognized income tax ~~rate for~~benefits of $23,000 and $326,000 in the third quarter and first nine months of 2020 ~~compared~~arising from a change in tax law enacted in response to the ~~same~~COVID-19 pandemic which changed the tax rate applied to certain net operating losses related to prior tax years of Peoples. The effects of changes in tax law are recognized in income tax expense in the period in ~~2019 resulted primarily from higher~~which the changes are enacted. The Corporation’s consolidated effective tax rate was also affected by lower state income taxes in 2021, as a greater share of income before taxes was earned at ~~the mortgage banking segment,~~C&F Bank, which is not subject to state income tax, and ~~a limitation on the deductibility of executive compensation, partially offset by~~ income tax benefits ~~of $326,000~~recorded in ~~2020 arising from a change in income tax law enacted in response to the COVID-19 pandemic which provided income tax benefits in the current year~~2021 related to ~~prior tax years~~branch consolidation activities of ~~Peoples.~~$107,000.

5246

Table of Contents

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: Beginning with the first quarter of 2021, the community banking segment comprises C&F Bank and C&F Wealth Management. Prior to the first quarter of 2021, the segment comprised only C&F Bank, and prior periods have been restated to conform to the current period presentation. The following table presents the community banking segment operating results for the periods indicated.

Table of Contents

TABLE 5: Community Banking Segment Operating Results


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Interest income	$	15,924	$	15,242	$	47,035	$	46,051
Interest expense		1,301		2,547		4,481		8,409
Net interest income		14,623		12,695		42,554		37,642
Provision for loan losses		—		1,500		(200)		3,900
Net interest income after provision for loan losses		14,623		11,195		42,754		33,742
Noninterest income:
Interchange income		1,461		1,268		4,250		3,498
Service charges on deposit accounts		992		785		2,639		2,426
Investment services income		708		640		2,095		1,973
Other income, net		1,041		833		3,038		1,932
Total noninterest income		4,202		3,526		12,022		9,829
Noninterest expense:
Salaries and employee benefits		8,083		7,831		24,640		24,386
Occupancy expense		1,707		1,554		5,124		4,659
Data processing		2,001		1,783		6,012		5,962
Other real estate loss/(gain) and expense, net		2		76		(400)		84
Other expenses		2,034		2,016		6,255		6,553
Total noninterest expenses		13,827		13,260		41,631		41,644
Income before income taxes		4,998		1,461		13,145		1,927
Income tax expense (benefit)		832		149		2,261		(336)
Net income	$	4,166	$	1,312	$	10,884	$	2,263

The community banking segment reported net income of $4.2 million and $10.9 million for the third quarter and first nine months of 2021, respectively, compared to $1.3 million and $2.3 million respectively, for the same periods in 2020. The increase in community banking segment net income for the third quarter and first nine months of 2021 compared to the same periods in 2020 was due primarily to higher adjusted net income, as described below, and merger related expenses and branch consolidation charges recognized in 2020, and income tax benefits recognized in 2021 as a result of branch consolidation activities, partially offset by benefits of a change in tax law recognized in 2020. There were no merger related expenses in the first nine months of 2021.

Adjusted net income of the community banking segment, which excludes the effects of merger related expenses, branch consolidation charges and one-time income tax benefits, was $4.1 million and $10.8 million for the third quarter and first nine months of 2021, respectively, compared to $1.3 million and $3.2 million, respectively, for the same periods in 2020. The increase in adjusted net income of the community banking segment for the third quarter of 2021 compared to the third quarter of 2020 was due primarily to higher net interest income, lower provision for loan losses, higher overdraft charges and account maintenance fees on deposit accounts, and higher income from debit card interchange, partially offset by higher data processing expenses primarily related to enhancing products and services and serving a greater number of deposit accounts. The increase in adjusted net income of the community banking segment for the first nine months of 2021 compared to the first nine months of 2020 was due primarily to higher net interest income, lower provision for loan losses, higher income from debit card interchange, net gains on other real estate in 2021 related primarily to the sale of one property and cost savings related to the integration of Peoples, partially offset by (1) higher expenses related to occupancy as a result of two new financial centers opened during the third quarter of 2020, (2) higher data processing expenses primarily related to enhancing products and services and serving a greater number of deposit accounts, (3) higher cost of employee medical benefits and (4) lower fee income from interest rate swaps for commercial borrowers.

Table of Contents

Net interest income for the community banking segment increased $1.9 million for the third quarter of 2021 and increased $4.9 million for the first nine months of 2021, compared to the same periods in 2020. This increase was due primarily to (1) lower average costs of deposits, resulting from lower rates and a shift in composition toward non-time deposits, (2) higher interest income on loans and (3) lower interest expense on borrowings, due to lower borrowings outstanding. Comparisons of interest income on loans were significantly impacted by recognition of net PPP origination fees, which was higher in the third quarter and first nine months of 2021 than in the same periods in 2020, and interest income on PCI loans, which was lower for the third quarter of 2021 and for the first nine months of 2021 compared to the same periods in 2020. In addition to the effects of these items, higher average advances to fund loans at subsidiaries and loan growth contributed to the increases in interest income on loans for the first nine months of 2021 compared to the first nine months of 2020, partially offset by lower average yields on other loans as a result of changes in interest rates. Higher average advances to subsidiaries resulted primarily from the repayment of a third-party bank line of credit at the consumer finance segment in the second quarter of 2020 that was previously used to fund consumer finance loans. Net PPP origination fees recognized in the third quarter and first nine months of 2021 were $1.3 million and $3.4 million, respectively, compared to net PPP origination fees recognized in the third quarter and first nine months of 2020 of $455,000 and $832,000, respectively. Deferred net PPP origination fees that remained unrecognized at September 30, 2021 were $1.4 million, which are expected to be recognized in 2021 and 2022. Interest income recognized on PCI loans was $364,000 and $485,000 for the third quarters of 2021 and 2020, respectively, and $1.9 million and $2.2 million for the first nine months of 2021 and 2020, respectively.

Provision for loan losses for the community banking segment decreased $1.5 million for the third quarter of 2021 and decreased $4.1 million for the first nine months of 2021, compared to the same periods in 2020, due primarily to reserves recognized in 2020 related to the COVID-19 pandemic, a portion of which were released in the first nine months of 2021 as credit deterioration since the onset of the pandemic has so far not been experienced to the extent previously anticipated, and improvement in impaired loans, partially offset by loan growth. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or challenges related to continuing supply chain disruption and lower overall employment, additional provision for loan losses may be required in future periods.

There were no merger related expenses in the third quarter or first nine months of 2021 or the third quarter of 2020. Merger related expenses at the community banking segment of $1.3 million ($1.0 million after income taxes) were recorded in the first nine months of 2020, of which $501,000 was data processing expense, $236,000 was professional fees expense, $119,000 was salaries and employee benefits expense, $81,000 was occupancy expense, $61,000 was included in all other noninterest expenses, and $298,000 was a loss on disposition of assets and was recorded in other noninterest income. Cost savings related to the integration of Peoples were realized primarily in salaries and employee benefits expense.

Branch consolidation activity resulted in income tax benefits recognized in the third quarter and first nine months of 2021 of $107,000 and pre-tax charges of $281,000 ($222,000 after income taxes) recorded in the first nine months of 2020 in other noninterest income. Income tax benefits of $23,000 and $326,000 were recorded in the third quarter and first nine months of 2020 related to a change in tax law enacted in response to the COVID-19 pandemic which changed the tax rate applied to certain net operating losses related to prior tax years of Peoples.

Table of Contents

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

TABLE 6: Mortgage Banking Segment Operating Results


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Interest income	$	863	$	1,503	$	3,011	$	3,261
Interest expense		240		449		925		1,034
Net interest income		623		1,054		2,086		2,227
Provision for loan losses		30		—		90		—
Net interest income after provision for loan losses		593		1,054		1,996		2,227
Noninterest income:
Gains of sales of loans		5,691		9,755		18,753		18,036
Mortgage banking fee income		1,646		2,209		5,193		5,500
Mortgage lender services fee income		598		706		1,991		1,348
Other income		22		—		114		65
Total noninterest income		7,957		12,670		26,051		24,949
Noninterest expense:
Salaries and employee benefits		3,595		4,872		12,134		8,989
Occupancy expense		356		416		1,132		1,186
Data processing		453		508		1,524		1,235
Other expenses		1,239		1,838		4,048		4,303
Total noninterest expenses		5,643		7,634		18,838		15,713
Income before income taxes		2,907		6,090		9,209		11,463
Income tax expense		799		1,640		2,588		3,149
Net income	$	2,108	$	4,450	$	6,621	$	8,314

The mortgage banking segment reported net income of $2.1 million and $6.6 million for the third quarter and first nine months of 2021, respectively, compared to $4.5 million and $8.3 million, respectively, for the same periods in 2020. The decrease in mortgage banking segment net income of $2.3 for the third quarter of 2021 compared to the third quarter of 2020 was due primarily to (1) lower mortgage loan production volume, which resulted in lower gains on sales of loans and mortgage banking fee income as well as lower expenses related to mortgage loan production, and (2) lower interest income due to lower average balances of loans held for sale, partially offset by higher margins on loans originated for resale.

The decrease in mortgage banking segment net income for the first nine months of 2021 compared to the first nine months of 2020 was due primarily to (1) higher expenses related to loan production and (2) lower mortgage banking fee income as a result of lower mortgage loan production volume, partially offset by (1) higher gains on sales of loans resulting primarily from higher margins on loans originated for resale and (2) higher fee income from mortgage lender services as a result of serving a growing number of third-party lenders. While mortgage loan originations decreased for the first nine months of 2021 compared to the first nine months of 2020, salaries and benefits expense increased as a result of higher average rates of loan officer commissions and the addition of operations staff to meet the demands of higher mortgage loan production volume, and certain expenses increased related to sales of mortgage loans, which outpaced origination volume as the balance of loans held for sale declined.

Table of Contents

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

TABLE 7: Mortgage Loan Originations & Mortgage Loans Sold


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Mortgage loan originations:
Purchases	$	263,207	$	249,386	$	723,574	$	617,960
Refinancings		95,044		285,297		438,488		625,354
Total mortgage loan originations¹	$	358,251	$	534,683	$	1,162,062	$	1,243,314

Mortgage loans sold	$	360,170	$	443,835	$	1,255,907	$	1,065,367

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

Mortgage loan originations for the mortgage banking segment decreased 33.0 percent for the third quarter of 2021 and decreased 6.5 percent for the first nine months of 2021 compared to the same periods in 2020, while remaining substantially above mortgage loan origination levels experienced prior to the record levels of 2020. We believe sustained historically low interest rates on mortgage loans and higher demand in the housing market have contributed to continued higher volume in the broader mortgage industry during the first nine months of 2021. Production of the mortgage banking segment began to moderate beginning in the second quarter of 2021, but remains elevated relative to historical levels. Refinancings, which increased as a share of mortgage loan originations during 2020 compared to historical levels, declined for the third quarter and first nine months of 2021 compared to the same periods in 2020, and purchase volume for the third quarter and first nine months of 2021 has grown compared to the same periods in 2020, which contributed to higher average margins on sales of loans for the third quarter and first nine months of 2021 compared to the same periods in 2020. 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. Locked loan commitments decreased by $6.6 million in the third quarter of 2021 and grew by $69.9 million in the third quarter of 2020. Locked loan commitments decreased by $50.5 million in the first nine months of 2021 and grew by $242.7 million in the first nine months of 2020. Locked loan commitments were $148.1 million at September 30, 2021, compared to $198.6 million at December 31, 2020 and $317.8 million at September 30, 2020. Mortgage lender services fee income is derived from providing mortgage origination functions to third-party mortgage lenders. Mortgage lender services volume decreased for the third quarter of 2021 compared to the third quarter of 2020 as a result of lower mortgage industry volume, and increased for the first nine months of 2021 compared to the first nine months of 2020 as a result of business with new customers as well as higher volume with existing customers.

Table of Contents

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

TABLE 8: Consumer Finance Segment Operating Results


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Interest income	$	9,388	$	9,628	$	28,058	$	29,418
Interest expense		2,424		2,191		6,926		6,567
Net interest income		6,964		7,437		21,132		22,851
Provision for loan losses		400		1,800		220		5,650
Net interest income after provision for loan losses		6,564		5,637		20,912		17,201

Noninterest income		45		93		231		290
Noninterest expense:
Salaries and employee benefits		2,184		2,190		6,630		6,567
Occupancy expense		168		161		525		486
Data processing		332		310		967		918
Other expenses		896		869		2,589		2,425
Total noninterest expenses		3,580		3,530		10,711		10,396
Income before income taxes		3,029		2,200		10,432		7,095
Income tax expense		835		599		2,836		1,926
Net income	$	2,194	$	1,601	$	7,596	$	5,169

The consumer finance segment reported net income of $2.2 million and $7.6 million for the third quarter and first nine months of 2021, respectively, compared to $1.6 million and $5.2 million, respectively, for the same periods of 2020. The increase in consumer finance segment net income was due primarily to lower provision for loan losses, partially offset by lower net interest income.

Interest income decreased $240,000 and $1.4 million for the third quarter and first nine months of 2021, respectively, compared to the same periods of 2020 due primarily to lower average yields on loans, partially offset by higher average balances of non-prime auto loans and prime marine and RV loans. Average yields decreased as a result of purchases of loan contracts at lower yields than the portfolio average yield, partially due to lower interest rates for non-prime auto loans and the consumer finance segment continuing to pursue loan contracts of higher credit quality, including prime marine and RV loans. Provision for loan losses decreased $1.4 million and $5.4 million for the third quarter and first nine months of 2021, respectively, as compared to the same periods of 2020 as a result of reserves recognized in 2020 related to the COVID-19 pandemic, a portion of which were released in the first nine months of 2021, and lower net charge-offs, partially offset by loan growth in 2021. Charge-offs at the consumer finance segment have continued to decrease as a result of continued improvement in the credit quality of purchased loan contracts as well as the temporary effects of government stimulus programs and a strong used car market, which results in lower charge-offs upon sale of repossessed autos. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or challenges related to continuing supply chain disruption and lower overall employment, additional provision for loan losses may be required in future periods.

ASSET QUALITY

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. Table 59 summarizes the allowance activity for the periods indicated:

Table of Contents

TABLE 5:9: Allowance for Loan Losses


	Three Months Ended September 30,						Three Months Ended September 30,
(Dollars in thousands)	2020			2019			2021			2020
Balance, beginning of period	$	36,094		$	33,401		$	38,951		$	36,094
Provision for loan losses:
Community Banking		1,500			—			—			1,500
Mortgage Banking								30			—
Consumer Finance		1,800			1,800			400			1,800
Total provision for loan losses		3,300			1,800			430			3,300
Loans charged off:
Real estate—residential mortgage		(5)			(1)			—			(5)
Commercial, financial and agricultural¹		—			—
Equity lines		—			(19)
Consumer		(41)			(99)			(47)			(41)
Consumer finance		(1,583)			(3,126)			(1,001)			(1,583)
Total loans charged off		(1,629)			(3,245)
Total loans charged off¹								(1,048)			(1,629)
Recoveries of loans previously charged off:
Real estate—residential mortgage		15			11			6			15
Commercial, financial and agricultural¹		1			1
Commercial, financial and agricultural²								1			1
Consumer		30			58			28			30
Consumer finance		1,045			1,192			1,079			1,045
Total recoveries		1,091			1,262
Net loans charged off		(538)			(1,983)
Total recoveries¹								1,114			1,091
Net recoveries/(charge-offs)								66			(538)
Balance, end of period	$	38,856		$	33,218		$	39,447		$	38,856
Ratio of annualized net (recoveries) charge-offs to average total loans outstanding during period for Community Banking		(0.01)	%		0.03	%
Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance		0.70	%		2.47	%
Ratio of annualized net charge-offs (recoveries) to average total loans outstanding during period for Community Banking								0.01	%		(0.01)	%
Ratio of annualized net (recoveries) charge-offs to average total loans outstanding during period for Consumer Finance								(0.09)	%		0.70	%

Table of Contents


	Nine Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2020			2019			2021			2020
Balance, beginning of period	$	32,873		$	34,023		$	39,156		$	32,873
Provision for loan losses:
Community Banking		3,900			110			(200)			3,900
Mortgage Banking								90			—
Consumer Finance		5,650			5,895			220			5,650
Total provision for loan losses		9,550			6,005			110			9,550
Loans charged off:
Real estate—residential mortgage		(9)			(46)			—			(9)
Commercial, financial and agricultural¹		(18)			(29)
Commercial, financial and agricultural²								—			(18)
Consumer								(128)			(174)
Consumer finance								(3,443)			(7,005)
Total loans charged off¹								(3,571)			(7,206)
Recoveries of loans previously charged off:
Real estate—residential mortgage								19			79
Commercial, financial and agricultural²								2			3
Equity lines		—			(19)			1			—
Consumer		(174)			(261)			93			135
Consumer finance		(7,005)			(10,092)			3,637			3,422
Total loans charged off		(7,206)			(10,447)
Recoveries of loans previously charged off:
Real estate—residential mortgage		79			20
Commercial, financial and agricultural¹		3			4
Consumer		135			173
Consumer finance		3,422			3,440
Total recoveries		3,639			3,637
Net loans charged off		(3,567)			(6,810)
Total recoveries¹								3,752			3,639
Net recoveries/(charge-offs)								181			(3,567)
Balance, end of period	$	38,856		$	33,218		$	39,447		$	38,856
Ratio of annualized net (recoveries) charge-offs to average total loans outstanding during period for Community Banking		(0.01)	%		0.03	%
Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance		1.56	%		2.91	%
Ratio of annualized net charge-offs (recoveries) to average total loans outstanding during period for Community Banking								0.01	%		(0.01)	%
Ratio of annualized net (recoveries) charge-offs to average total loans outstanding during period for Consumer Finance								(0.08)	%		1.56	%

Charge-offs and recoveries for real estate residential mortgages; commercial, financial and agricultural loans; equity lines and consumer loans were recorded at the community banking segment. Charge-offs and recoveries for consumer finance loans were recorded at the consumer finance segment. The mortgage banking segment had no charge-offs or recoveries for the three or nine months ended September 30, 2021 and 2020.

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

Table of Contents

Table 610 presents the allocation of the allowance for loan losses as of the dates indicated.

TABLE 6:10: Allocation of Allowance for Loan Losses


	September 30,			December 31,			September 30,			December 31,
(Dollars in thousands)	2020			2019			2021			2020
Allocation of allowance for loan losses:
Real estate—residential mortgage	$	2,487		$	2,080		$	2,834		$	2,914
Real estate—construction ¹		913			681			792			975
Commercial, financial and agricultural ²		10,552			7,121			11,120			10,696
Equity lines		655			733			598			687
Consumer		389			465			176			371
Consumer finance		23,860			21,793			23,927			23,513
Total allowance for loan losses	$	38,856		$	32,873		$	39,447		$	39,156
Ratio of loans to total period-end loans:
Real estate—residential mortgage		15	%		16	%		15	%		16	%
Real estate—construction ¹		5			5			4			4
Commercial, financial and agricultural ²		52			45			52			52
Equity lines		4			5			3			4
Consumer		1			1			1			1
Consumer finance		23			28			25			23
		100	%		100	%		100	%		100	%

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

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

Loans by credit quality indicators are presented in Table 711 below. The characteristics of these loan ratings are as follows:

●

Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

●

Special mention loans have a specific identified weakness in the borrower’s operations and in the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Corporation’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

●

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

●

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

Table of Contents

●

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

●

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

TABLE 7:11: Credit Quality Indicators

Loans by credit quality indicators as of September 30, ~~2020~~2021 were as follows:

Special



Substandard


(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total¹

Real estate – residential mortgage

$
205,126

$
1,245

$
915

$
758

$
208,044

Real estate – construction ²

66,187

—

—

—

66,187

Commercial, financial and agricultural ³

669,126

28,946

10,795

—

708,867

Equity lines

49,039

165

8

193

49,405

Consumer

13,426

58

4

419

13,907

$
1,002,904

$
30,414

$
11,722

$
1,370

$
1,046,410

Included in the table above are loans purchased in connection with the acquisition of Peoples of $83.7 million pass rated, $1.4 million special mention, $2.7 million substandard and $309,000 substandard nonaccrual.

Special

Substandard

(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total¹

Real estate – residential mortgage

213,523

873

453

317

215,166

Real estate – construction ²

53,845

—

53,845

Commercial, financial and agricultural ³

695,210

16,784

7,595

2,235

721,824

Equity lines

42,475

137

185

42,881

Consumer

8,161

—

8,165

1,013,214

17,794

8,132

2,741

1,041,881

Non-

(Dollars in thousands)

Performing

Total

Performing

Total

Consumer finance

311,664

282

311,946

348,932

198

349,130

1	At September 30, ~~2020,~~2021, the Corporation did not have any loans classified as Doubtful or Loss.

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

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

Loans by credit quality indicators as of December 31, ~~2019~~2020 were as follows:


			Special				Substandard						Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total¹		Pass		Mention		Substandard		Nonaccrual		Total¹
Real estate – residential mortgage	$	177,049	$	1,839	$	881	$	1,526	$	181,295	$	215,712	$	1,715	$	595	$	276	$	218,298
Real estate – construction ²		54,246		—		—		—		54,246		62,147		—		—		—		62,147
Commercial, financial and agricultural ³		487,374		13,357		70		11		500,812		668,167		18,631		10,989		2,428		700,215
Equity lines		51,662		181		11		229		52,083		48,140		132		3		191		48,466
Consumer		13,632		6		—		118		13,756		10,832		48		41		107		11,028
	$	783,963	$	15,383	$	962	$	1,884	$	802,192	$	1,004,998	$	20,526	$	11,628	$	3,002	$	1,040,154


			Non-						Non-
(Dollars in thousands)	Performing		Performing		Total		Performing		Performing		Total
Consumer finance	$	312,388	$	611	$	312,999	$	311,850	$	402	$	312,252

1	At December 31, ~~2019,~~2020, 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.

Table of Contents

The ~~increase~~decrease in substandard loans ~~rated Special Mention and Substandard~~ at September 30, ~~2020~~2021 compared to December 31, ~~2019 is related~~2020 was due primarily to ~~three~~repayments. The decrease in special mention loans at September 30, 2021 compared to December 31, 2020 was due primarily to loans classified as commercial, ~~real estate loans which~~financial and agricultural and residential mortgages that were rated ~~Pass~~special mention at December 31, ~~2019, of which two~~2020 and were ~~classified as Special Mention and one was classified as Substandard~~rated pass at September 30, ~~2020 partially as a result of effects on the borrowers of the COVID-19 pandemic, as well as loans that were acquired from Peoples and were classified as Substandard.~~2021.

Table 812 summarizes nonperforming assets as of the dates indicated.

TABLE 8:12: Nonperforming Assets

Community Banking Segment


	September 30,			December 31,			September 30,			December 31,
(Dollars in thousands)	2020			2019			2021			2020
Loans, excluding purchased loans	$	930,560		$	770,423
Loans, excluding purchased loans and PPP loans							$	934,484		$	862,917
Purchased performing loans¹		101,716			26,422			60,911			87,096
Purchased credit impaired loans¹		7,574			705			5,440			6,359
PPP loans²								31,452			76,527
Total loans	$	1,039,850		$	797,550		$	1,032,287		$	1,032,899

Nonaccrual loans	$	1,338		$	1,512		$	2,555		$	2,971
OREO²		1,107			1,103
OREO³								857			907
Total nonperforming assets	$	2,445		$	2,615		$	3,412		$	3,878

Accruing loans past due for 90 days or more	$	8		$	109		$	72		$	145
Troubled debt restructurings (TDRs)³	$	3,946		$	4,353
Troubled debt restructurings (TDRs)⁴							$	2,698		$	3,575
Allowance for loan losses (ALL)	$	14,398		$	10,482		$	14,822		$	15,035
Nonperforming assets to total loans and OREO		0.23	%		0.33	%		0.33	%		0.38	%
ALL to total loans, excluding purchased credit impaired loans⁴		1.39			1.32
ALL to total loans, excluding purchased credit impaired loans⁵								1.44			1.46
ALL to total loans, excluding purchased loans and PPP loans		1.71			1.36			1.59			1.74
ALL to total nonaccrual loans		1,076.08			693.25			580.16			506.06
Annualized net (recoveries) charge-offs to average total loans		(0.01)			0.04
Annualized net charge-offs to average total loans								0.01			0.01

Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The remaining discount for the purchased performing loans was ~~$2.1~~$1.2 million at September 30, ~~2020~~2021 and ~~$1.4~~$1.8 million at December 31, ~~2019.~~2020. The remaining discount for the purchased credit impaired loans was ~~$10.3~~$5.1 million at September 30, ~~2020~~2021 and ~~$5.6~~$6.4 million at December 31, 2019. The increase in remaining discount on purchased performing loans and purchased credit impaired loans from December 31, 2019 to September 30, 2020 is due primarily to loans acquired in the acquisition of Peoples.2020.

2	The principal amount of outstanding PPP loans was $32.8 million at September 30, 2021 and $78.7 million at December 31, 2020.

3	OREO includes $835,000 at both September 30, ~~2020~~2021 and December 31, ~~2019~~2020 related to the land and buildings of the Bellgrade branch, which was consolidated into a nearby branch in 2019.

34	Nonaccrual loans include nonaccrual TDRs of ~~$521,000~~$194,000 at September 30, ~~2020~~2021 and ~~$254,000~~$257,000 at December 31, ~~2019.~~2020.

45	The ratio of ALL to total loans, excluding purchased credit impaired loans, includes purchased performing loans and loans originated under the PPP for which no allowance for loan losses is required.

Mortgage Banking Segment


	September 30,			December 31,			September 30,			December 31,
(Dollars in thousands)	2020			2019			2021			2020
Nonaccrual loans	$	32		$	372		$	186		$	31
Total loans	$	6,560		$	4,642		$	9,594		$	7,255
ALL	$	598		$	598		$	698		$	608
Nonaccrual loans to total loans		0.49	%		8.01	%		1.94	%		0.43	%
ALL to total loans		9.12			12.88			7.28			8.38

Table of Contents

Consumer Finance Segment


	September 30,			December 31,			September 30,			December 31,
(Dollars in thousands)	2020			2019			2021			2020
Nonaccrual loans	$	282		$	611		$	198		$	402
Accruing loans past due for 90 days or more	$	—		$	—		$	—		$	—
Repossessed assets	$	178		$	410		$	196		$	291
Total loans	$	311,946		$	312,999		$	349,130		$	312,252
ALL	$	23,860		$	21,793		$	23,927		$	23,513
Nonaccrual consumer finance loans to total consumer finance loans		0.09	%		0.20	%		0.06	%		0.13	%
ALL to total consumer finance loans		7.65			6.96			6.85			7.53
Annualized net charge-offs to average total loans		1.56			3.05
Annualized net (recoveries) charge-offs to average total loans								(0.08)			1.54

Nonperforming assets of the community banking segment totaled ~~$2.4~~$3.4 million at September 30, ~~2020,~~2021 compared to ~~$2.6~~$3.9 million at December 31, ~~2019.~~2020. Nonperforming assets ~~at September 30, 2020~~ consisted of ~~$1.1 million in OREO at both September 30, 2020 and December 31, 2019, and consisted of $1.3~~$2.6 million in nonaccrual loans and $857,000 in OREO at September 30, ~~2020, compared to $1.5~~2021 and consisted of $3.0 million in nonaccrual loans and $907,000 in OREO at December 31, ~~2019.~~2020. Nonaccrual loans were comprised primarily of ~~residential mortgages and equity lines~~one commercial relationship at September 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

At September 30, 2021, the allowance for loan losses at the community banking segment decreased to $14.8 million, compared to $15.0 million at December 31, 2020. The allowance for loan losses as a percentage of total loans at the community banking segment, excluding PCI loans, at September 30, ~~2020 increased~~2021 decreased to ~~1.39~~1.44 percent, compared to ~~1.32~~1.46 percent at December 31, ~~2019.~~2020. The allowance for loan losses as a percentage of total loans excluding all purchased loans and loans originated under the PPP ~~was 1.71~~decreased to 1.59 percent at September 30, ~~2020,~~2021, compared to ~~1.36~~1.74 percent at December 31, ~~2019.~~2020, as credit deterioration since the onset of the pandemic has so far not been experienced to the extent previously anticipated and as certain impaired loans have improved since December 31, 2020. As of September 30, 2021, compared to December 31, 2020, there have not been significant changes in the overall credit quality of the loan portfolio. We believe that PPP loans and other forms of government stimulus may have delayed and partially mitigated credit deterioration during the COVID-19 pandemic. The community banking segment recorded no provision for loan losses for the third quarter of 2021 and recorded a net reversal of provision for loan losses of $200,000 for the first nine months of 2021, as a partial release of qualitative adjustments to reserves related to the COVID-19 pandemic and improvement in impaired loans were partially offset by additional reserves related to growth in the loan portfolio. The community banking segment recorded provision for loan losses of $1.5 million and $3.9 million infor the third quarter and first nine months of 2020, respectively, due primarily to ~~add~~qualitative adjustments to reserves ~~based on qualitative adjustments~~established as a result of the COVID-19 pandemic and ~~due to loan~~ growth ~~compared to zero and $110,000 for the same periods~~ in ~~2019. As of September 30, 2020, compared to December 31, 2019, there have not been significant changes in the overall credit quality~~certain segments of the loan ~~portfolio, although management believes the effects of PPP loans, payment deferrals and government stimulus may be delaying signs of credit deterioration.~~portfolio. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there isare further ~~deterioration~~challenges to the economic recovery, including a resurgence in ~~economic conditions,~~COVID-19 cases or challenges related to continuing supply chain disruption and lower overall employment, additional provision for loan losses may be required in future periods.

Nonaccrual loans at the consumer finance segment were ~~$282,000~~$198,000 at September 30, ~~2020,~~2021, compared to ~~$611,000~~$402,000 at December 31, ~~2019.~~2020. Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days ~~delinquent.~~delinquent and due to improvement in loan performance. Repossessed vehicles of the consumer finance segment are classified as other assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the deficiency) is charged against the allowance for loan losses. At September 30, ~~2020,~~2021, repossessed vehicles available for sale totaled ~~$178,000,~~$196,000, compared to ~~$410,000~~$291,000 at December 31, ~~2019.~~2020.

The consumer finance segment’s allowance for loan losses increased ~~$2.1 million~~$413,000 to $23.9 million at September 30, ~~2020~~2021 from ~~$21.8~~$23.5 million at December 31, ~~2019, and its provision~~2020. The allowance for loan losses remained unchanged at $1.8 million for the third quarter of 2020 and decreased $245,000 for the first nine months of 2020, compared to the same periods in 2019. Total delinquent loans, which does not include loans that have been granted a payment deferral, as a percentage of ~~total~~ loans decreased to ~~2.48~~6.85 percent at September 30, ~~2020~~2021, compared to ~~4.17~~7.53 percent at December 31, ~~2019. The consumer finance segment, at times, offers payment deferrals to non-prime automobile borrowers~~2020 as ~~a management technique to achieve higher ultimate cash collections on select loan accounts. Payment deferrals may affect~~credit deterioration since the ~~ultimate timing of when an account is charged off. A significant reliance on deferrals as a means of managing collections may result in a lengthening~~onset of the ~~loss confirmation period, which would increase expectations of credit losses inherent~~COVID-19 pandemic has so far not been experienced to the extent previously anticipated and due to continuing improvement in the ~~portfolio. Monthly payment deferrals,~~credit quality of purchased loan contracts and lower net charge-offs. Total delinquent loans as a percentage of non-prime automobile loans outstanding, rose to as high as 8.25 percent during the second quarter of 2020 and decreased to 1.57 percent by the end of the third quarter of 2020. The average amounts deferred on a monthly basis during the third quarter and first nine months of 2020 were 2.04 percent and 3.38 percent of non-prime automobile loans outstanding, compared to 1.90 percent and 1.91 percent during the same periods in 2019. Payment

Table of Contents

percentage of total loans decreased to 1.92 percent at September 30, 2021 compared to 3.08 percent at December 31, 2020 and 2.48 percent at September 30, 2020. Average amounts of payment deferrals ~~increased~~on a monthly basis, which are not included in delinquent loans, were 1.21 percent and 2.04 percent as a percentage of average non-prime automobile loans outstanding for the ~~three~~third quarter of 2021 and 2020, respectively and were 1.13 percent and 3.38 percent for the first nine months ~~ended September 30,~~of 2021 and 2020, ~~compared to~~respectively, as payment deferrals have fallen after temporarily increasing during the ~~same periods in 2019 as the COVID-19 pandemic affected the ability of some borrowers to make timely payments.~~

pandemic. The consumer finance ~~segment’s~~segment at times offers payment deferrals to borrowers as a portfolio management technique. The consumer finance segment experienced annualized net recoveries for the first nine months of 2021 of 0.08 percent of average total loans, compared to net charge-offs of 1.56 percent for the first nine months of 2020. The decline in the net charge-off ratio for the first nine months of ~~2020 decreased~~2021 compared to ~~1.56 percent from 2.91 percent for~~ the first nine months of ~~2019 due to~~2020 reflects a lower number of charge-offs during ~~the first nine months of 2020,~~2021 as a result of improvement in loan performance and lower losses per loan charged off as a result of a strong used car ~~market.~~market, which results in lower charge-offs upon sale of repossessed autos. Improvement in loan performance has resulted from the consumer finance segment continuing to purchase higher quality loans, including marine and RV loans, as well as borrowers benefitting from the government’s stimulus measures in response to the pandemic. The Corporation can give no assurance as to the ~~continuation of~~how present or future government policies or stimulus measures will affect our borrowers or ~~the extent to which they~~that prices for used cars will ~~be effective.~~remain elevated. The ~~allowance~~consumer finance segment recorded provision for loan losses of $400,000 and $220,000 for the third quarter and first nine months of 2021, respectively, as ~~a percentage of loans increased~~additional reserves related to ~~7.65 percent at September 30, 2020, compared to 6.96 percent at December 31, 2019. The increase~~growth in the ~~level of~~loan portfolio were partially offset by reserve releases related to qualitative adjustments arising from the ~~allowance~~COVID-19 pandemic, improvement in credit quality and lower net charge-offs. The consumer finance segment recorded provision for loan losses ~~as a percentage~~ of ~~total loans reflects losses that are probable~~$1.8 million and $5.7 million for the third quarter and first nine months of 2020, respectively, due primarily to qualitative adjustments to reserves established as a result of the ~~economic impacts of the~~ COVID-19 ~~pandemic.~~pandemic and net charge-offs, partially offset by a reserve release due to improvement in credit quality. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there isare further ~~deterioration~~challenges to the economic recovery, including a resurgence in ~~economic conditions,~~COVID-19 cases or challenges related to continuing supply chain disruption and lower overall employment, additional provision for loan losses may be required in future periods.

Impaired Loans

We measure impaired loans either based on fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment in the loan. TDRs occur when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions typically are made for loss mitigation purposes and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired loans.

TABLE 9:13: Impaired Loans

Impaired loans, which included TDRs of ~~$3.9~~$2.7 million, and the related allowance at September 30, ~~2020,~~2021, were as follows:

Recorded

Investment

Average

Investment

Average

Unpaid

in Loans

Balance-

Interest

Unpaid

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

Principal

without

with

Related

Impaired

Income

(Dollars in thousands)

Balance

Specific Reserve

Allowance

Loans

Recognized

Balance

Specific Reserve

Allowance

Loans

Recognized

Real estate – residential mortgage

3,054

1,384

1,520

129

3,068

1,550

402

1,042

1,566

Commercial, financial and agricultural:

Commercial real estate lending

1,399

—

1,399

106

1,406

1,391

—

1,393

1,394

Commercial business lending

2,318

—

2,235

263

2,320

—

Equity lines

120

112

—

119

118

108

—

115

Consumer

123

—

110

105

113

—

Total

4,696

1,496

3,029

340

4,706

139

5,377

510

4,670

417

5,395

102

~~Impaired loans, which included TDRs of $4.4 million, and the related allowance at December 31, 2019, were as follows:~~

Recorded

Recorded

Investment

Investment

Average

Unpaid

in Loans

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

(Dollars in thousands)

Balance

Specific Reserve

Specific Reserve

Allowance

Loans

Recognized

Real estate – residential mortgage

$
3,891

$
2,192

$
1,479

$
72

$
3,506

$
155

Commercial, financial and agricultural:

Commercial real estate lending

1,459

4

1,447

77

1,581

82

Equity lines

31

31

—

—

32

2

Consumer

130

—

121

118

123

—

Total

$
5,511

$
2,227

$
3,047

$
267

$
5,242

$
239

Table of Contents

Impaired loans, which included TDRs of $3.6 million, and the related allowance at December 31, 2020, were as follows:



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income
(Dollars in thousands)	Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	2,326	$	931	$	1,279	$	77	$	2,353	$	105
Commercial, financial and agricultural:
Commercial real estate lending		1,397		—		1,397		89		1,404		73
Commercial business lending		2,430		—		2,428		585		2,573		—
Equity lines		120		111		—		—		119		2
Consumer		147		—		132		128		154		3
Total	$	6,420	$	1,042	$	5,236	$	879	$	6,603	$	183

TDRs at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:

TABLE ~~10:~~14: Troubled Debt Restructurings


	September 30,		December 31,		September 30,		December 31,
(Dollars in thousands)	2020		2019		2021		2020
Accruing TDRs	$	3,425	$	4,099	$	2,504	$	3,318
Nonaccrual TDRs¹		521		254		194		257
Total TDRs²	$	3,946	$	4,353	$	2,698	$	3,575

1	Included in nonaccrual loans in Table 8:12: Nonperforming Assets.

2	Included in impaired loans in Table 9:13: Impaired Loans.

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

The Corporation has accommodated certain borrowers affected by the COVID-19 pandemic by granting short-term payment deferrals or periods of interest-only ~~payments, including loans that remain in deferral as of September 30, 2020, with an aggregate balance of $28.3 million.~~payments. Generally, a short-term payment deferral does not result in a loan modification being classified as a TDR. Furthermore, certain modifications are not required to be evaluated for classification as a TDR under statutory and regulatory relief related to the COVID-19 pandemic. There were no modifications offered during the first nine months of 2021 which were not evaluated for classification as a TDR. The Corporation has granted loan modifications related to COVID-19 on aggregate balances of $103.6 million since the beginning of the pandemic. At September 30, 2021, loans whose modification periods had not ended had aggregate balances of $23.5 million and all such loans are performing in accordance with their modified terms, which includes payments of interest. Management monitors the credit risk related to these loans and has adjusted risk ratings as applicable as of September 30, 2021. Management cannot predict the overall impact of the COVID-19 pandemic on its loan portfolio or the extent of payment deferrals or other modifications that may be granted. Depending on the severity and duration of the economic disruption caused by the COVID-19 pandemic, the Corporation may experience an increase in delinquencies that may lead to further loan modifications, including loan modifications that may be classified as TDRs. ~~For further information concerning loan modifications in response to the COVID-19 pandemic, refer to Table 14 below.~~

FINANCIAL CONDITION

At September 30, ~~2020,~~2021, the Corporation had total assets of ~~$2.1~~$2.2 billion, which was an increase of ~~$423.4~~$123.1 million since December 31, ~~2019.~~2020. The increase ~~resulted~~was attributable primarily ~~from deposit growth~~to increases in cash reserves, available for sale securities and ~~the acquisition of Peoples on January 1, 2020, which added total assets of $190.6 million.~~

~~Loan Portfolio~~

~~Table 11 presents information pertaining to the composition of~~ loans held for ~~investment.~~investment, partially offset by a decrease in loans held for sale, and was funded by growth in demand and savings deposits and short-term borrowings.

Table of Contents

Loan Portfolio

Table 15 presents information pertaining to the composition of loans held for investment.

TABLE ~~11:~~15: Summary of Loans Held for Investment


	September 30, 2020				December 31, 2019				September 30, 2021				December 31, 2020
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Real estate—residential mortgage	$	208,044	15	%	$	181,295	16	%	$	215,166	15	%	$	218,298	16	%
Real estate—construction ¹		66,187	5			54,246	5			53,845	4			62,147	4
Commercial, financial, and agricultural ²		708,867	52			500,812	45			721,824	52			700,215	52
Equity lines		49,405	4			52,083	5			42,881	3			48,466	4
Consumer		13,907	1			13,756	1			8,165	1			11,028	1
Consumer finance		311,946	23			312,999	28			349,130	25			312,252	23
Total loans		1,358,356	100	%		1,115,191	100	%		1,391,011	100	%		1,352,406	100	%
Less allowance for loan losses		(38,856)				(32,873)				(39,447)				(39,156)
Total loans, net	$	1,319,500			$	1,082,318			$	1,351,564			$	1,313,250

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

2	Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending (which includes loans originated under the PPP).

The increase in total loans from December 31, 2020 to September 30, 2021 was due primarily to commercial loan growth at the community banking segment and growth in the consumer finance segment.

Beginning in April 2020, the community banking segment originated loans under the PPP which are guaranteed by the SBA, and in some cases borrowers may be eligible to obtain forgiveness of the loans, in which case loans would be repaid by the SBA. ~~Aggregate~~Net PPP origination fees ~~from~~recognized in the ~~SBA~~third quarter and first nine months of ~~$3.7~~2021 were $1.3 million and $3.4 million, respectively, compared to $455,000 and $832,000, respectively, in the same periods in 2020. Since the second quarter of 2020, the community banking segment has recognized $4.9 million of net ~~of direct costs, will~~fees under the PPP, and deferred net PPP origination fees that remained unrecognized at September 30, 2021 were $1.4 million, which are expected to be recognized in ~~interest income over the life of the loans, of which $2.9 million remains unrecognized as of September 30, 2020.~~2021 and 2022. As repayment of ~~the~~PPP loans is guaranteed by the SBA, the community banking segment does not recognize a reserve for PPP loans in its allowance for loan losses. Table 1216 presents information pertaining to loans originated under the PPP.

TABLE ~~12:~~16: Paycheck Protection Program Loans ~~as of September 30, 2020~~

September 30,

December 31,

(Dollars in thousands)

Number of Loans

Outstanding

2021

2020

Below $50

847

16,478

At least $50 and below $250

338

36,033

At least $250 and below $500

16,697

$500 and greater

20,613

Outstanding principal

32,824

78,684

Unrecognized deferred fees, net

(1,372)

(2,157)

1,257

89,821

31,452

76,527

In evaluating the allowance for loan losses, the community banking segment considered its exposure to segments of the economy that it believes have been or will be most sensitive to the impacts of the COVID-19 pandemic. Table 1317 presents balances of loans to borrowers in these sensitive industries at September 30, ~~2020,~~2021, excluding PPP loans, and the exposure of the community banking segment to those borrowers, which includes available credit.

Table of Contents

TABLE ~~13:~~17: Sensitive Industries and Exposure

September 30, 2020

September 30, 2021

(Dollars in thousands)

Balance

Exposure

Balance

Exposure

Apartments

83,234

102,220

86,693

95,215

Health care¹

77,829

80,707

64,608

66,348

Commercial real estate - retail²

55,341

60,686

41,396

45,242

Hospitality

14,382

31,721

Restaurants

12,362

16,708

14,023

14,497

Fitness centers and recreation

11,563

12,217

11,386

12,086

Hospitality

4,094

17,820

244,423

290,358

232,488

265,109

________________________

1	Includes primarily loans secured by medical office buildings and assisted living facilities.

2	~~Includes loans secured by commercial real estate used or being constructed for use in a retail business, a majority of which are leased to unrelated retail tenants.~~

Loan modifications offered to assist customers during the pandemic were offered on loans with aggregate balances of $103.6 million during the second and third quarters of 2020. These modifications included periods of interest-only payments and periods of complete payment deferral, and typically were offered for up to six months. As of September 30, 2020, loans comprising approximately 73 percent of the balance of loans modified have either resumed regular payments or have paid off. Loans whose modification periods had not ended or had been extended as of September 30, 2020, had aggregate balances of $28.3 million, including $1.9 million of loans in a period of complete payment deferral. These loans, including loans to borrowers in the industries most sensitive to the impacts of the pandemic, are presented in Table 14.

~~TABLE 14: Loan Modifications in Response to COVID-19~~

September 30, 2020
(Dollars in thousands)

Number of Loans

Balance
Apartments

1

$
1,037
Commercial real estate - retail¹

5

5,467
Fitness centers and recreation

3

8,478
Hospitality

2

3,398
Loans in COVID-19 sensitive industries

11

18,380
Other commercial

14

8,843
Consumer

11

1,073
Total loans

36

$
28,296

~~________________________~~

1	Includes loans secured by commercial real estate used or being constructed for use in a retail business, a majority of which are leased to unrelated retail tenants.

Investment Securities

The investment portfolio plays a primary role in the management of the Corporation’s interest rate sensitivity. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The investment portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, all securities in the Corporation’s investment portfolio were classified as available for sale.

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

~~Table of Contents~~

TABLE ~~15:~~18: Securities Available for Sale


	September 30, 2020				December 31, 2019				September 30, 2021				December 31, 2020
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
U.S. government agencies and corporations	$	48,292	18	%	$	21,440	11	%	$	62,572	17	%	$	48,282	17	%
Mortgage-backed securities		115,838	42			86,585	46			186,120	51			123,714	43
Obligations of states and political subdivisions		101,024	37			81,708	43			96,305	27			102,805	36
Corporate and other debt securities		6,937	3			—	—			18,416	5			11,588	4
Total available for sale securities at fair value	$	272,091	100	%	$	189,733	100	%	$	363,413	100	%	$	286,389	100	%

Securities available for sale increased by $77.0 million to $363.4 million at September 30, 2021, compared to $286.4 million at December 31, 2020, due primarily to purchases of mortgage-backed securities and U.S. government agency debt securities with short maturities, in order to utilize excess liquidity by investing in debt securities rather than holding lower-yielding cash reserves.

For more information about the Corporation's securities available for sale, including information about securities in an unrealized loss position at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, see Part I, Item 1, “Financial Statements” under the heading “Note 3: Securities” in this Quarterly Report on Form 10-Q.

Deposits

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

Table of Contents

During the first nine months of ~~2020,~~2021, deposits increased ~~$372.3~~$100.9 million to ~~$1.66~~$1.85 billion at September 30, ~~2020,~~2021, compared to ~~$1.29~~$1.75 billion at December 31, ~~2019.~~2020. Demand and savings deposits increased $129.4 million and time deposits decreased $28.5 million during the same period. This increase ~~resulted from~~in demand and savings deposits was due in part to opening new deposit ~~growth, including the effect of PPP loans~~accounts and ~~direct government payments received by depositors, and the addition of $171.8 million of deposits~~higher balances in ~~connection with the acquisition of Peoples.~~existing deposit accounts.

The Corporation had ~~$4.0 million~~$4,000 in brokered money market and time deposits outstanding at September 30, ~~2020,~~2021, compared to ~~$2.0~~$6.1 million at December 31, ~~2019.~~2020. The source of these brokered deposits is primarily uninvested cash balances held in third-party brokerage sweep accounts. The Corporation uses brokered deposits as a means of diversifying liquidity sources, as opposed to a long-term deposit gathering strategy.

Borrowings

Borrowings ~~decreased~~increased to ~~$153.3~~$92.8 million at September 30, ~~2020~~2021 from ~~$161.2~~$76.2 million at December 31, ~~2019~~2020 due primarily to ~~C&F Finance Company amending~~a number of commercial deposit customers seeking to provide secured funding through purchases of securities under agreements to resell, and repaying its revolving bank line of credit, which had an outstanding balance of $75.0 million at December 31, 2019, and paydowns on FHLB advances, partially offset by higher short-term borrowings, primarily overnight funds borrowed from the Federal Reserve discount window to meet short-term liquidity needs, as loans held for sale and loans held for investment have increased $427.5 million since December 31, 2019; an increasefluctuations in ~~subordinated debt of $24.1 million resulting from the issuance $20.0 million of subordinated notes in the third quarter and the assumption of $4.0 million of subordinated debt in connection~~balances with ~~the acquisition of Peoples; and finance leases entered in 2020.~~these customers.

On September 29, 2020, the Corporation completed the issuance of $20.0 million in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction. The subordinated notes will initially bear interest at a fixed rate of 4.875% for five years and at the three month SOFR plus 475.5 basis points thereafter. These notes are included in Tier 2 capital of the Corporation, and the proceeds will be used for general corporate purposes and to support future growth opportunities.

Off-Balance Sheet Arrangements

As of September 30, ~~2020,~~2021, there have been no material changes to the off-balance sheet arrangements disclosed in Part II, Item 7, "Management's Discussion and Analysis," under the heading "Off-Balance-Sheet Arrangements" in the Corporation's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

~~Table of Contents~~

At September 30, ~~2020,~~2021, the mortgage banking segment had ~~$307.4~~$136.0 million of interest rate lock commitments (IRLCs) and ~~$250.9~~$102.1 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for ~~$558.3~~$238.1 million in mortgage loans. Also at September 30, ~~2020,~~2021, the mortgage banking segment had ~~$10.4~~$12.1 million of IRLCs and ~~$14.8~~$10.6 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of ~~$15.3~~$16.5 million of TBA securities and mandatory-delivery forward sales contracts for ~~$7.9~~$5.3 million in mortgage loans.

At December 31, ~~2019,~~2020, the mortgage banking segment had ~~$63.4~~$190.9 million of IRLCs and ~~$65.8~~$200.9 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for ~~$129.1~~$391.8 million in mortgage loans. Also at December 31, ~~2019,~~2020, the mortgage banking segment had ~~$11.7~~$7.7 million of IRLCs and ~~$22.0~~$5.6 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of ~~$24.0~~$8.0 million of TBA securities and mandatory-delivery forward sales contracts for ~~$6.7~~$3.9 million in mortgage loans.

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

The Corporation has interest rate swaps that qualify and are designated as cash flow hedges. The Corporation’s cash flow hedges effectively modify the Corporation’s exposure to interest rate risk by converting variable rates of interest on $25.0 million of the Corporation’s trust preferred capital notes to fixed rates of interest for periods that end between June 2024 and June 2029. The cash flow hedges’ total notional amount is $25.0 million. At September 30, ~~2020,~~2021, the cash flow hedges had a fair value of ~~$2.1 million,~~$960,000, which is recorded in other liabilities. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings.

The Corporation also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Corporation simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net effect of these interest rate swaps and the related loans is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. At September 30, ~~2020,~~2021, the total notional amount of the interest rate swaps related to these loans was ~~$170.1~~$167.6 million and the interest rate swaps had a

Table of Contents

net fair value of zero, with ~~$9.4~~$5.0 million recognized in other assets and ~~$9.4~~$5.0 million recognized in other liabilities. These swaps are not designated as hedging instruments; therefore, changes in fair value are recorded in other noninterest expense.

The Corporation’s contracts with dealer counterparties for interest rate swaps and forward sales of TBA securities require the Corporation to post collateral for derivative instruments in a loss position, subject to certain thresholds and offsets. At September 30, ~~2020~~2021 and at December 31, ~~2019, $11.9~~2020, $6.0 million and ~~$2.5~~$9.9 million, respectively, of cash collateral was maintained with dealer counterparties and was included in “Other assets” in the Consolidated Balance Sheets.

Contractual Obligations

As of September 30, ~~2020,~~2021, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading “Table ~~20:~~22: Contractual Obligations” in the Corporation's Annual Report on Form 10-K for the year ended December 31, ~~2019, except as described above under the heading “Borrowings.”~~2020.

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.

~~Table of Contents~~

Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled ~~$181.26~~$405.0 million at September 30, ~~2020,~~2021, compared to ~~$227.7~~$227.9 million at December 31, ~~2019.~~2020. The Corporation’s funding sources, including capacity, amount outstanding and amount available at September 30, ~~2020~~2021 are presented in Table ~~16.~~19.

TABLE ~~16:~~19: Funding Sources

September 30, 2020

September 30, 2021

(Dollars in thousands)

Capacity

Outstanding

Available

Capacity

Outstanding

Available

Unsecured federal funds agreements

95,000

—

95,000

—

95,000

Repurchase lines of credit

50,000

—

50,000

35,000

—

35,000

Borrowings from FHLB

257,598

37,000

220,598

228,349

—

228,349

Borrowings from Federal Reserve Bank

92,593

40,313

52,280

112,137

—

112,137

Revolving bank line of credit

50,000

—

50,000

—

50,000

Total

545,191

77,313

467,878

520,486

—

520,486

We have no reason to believe these arrangements will not be renewed at maturity. During the three and nine months ended September 30, ~~2020,~~2021, the Corporation pledged additional loans as collateral in order to increase available liquidity at the Federal ~~Reserve~~Home Loan Bank of Atlanta (FHLB) that had been unpledged as of December 31, ~~2019.~~2020. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Reserve Bank or the FHLB above the current lendable collateral value. Our ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets. Depending on our liquidity levels, our capital position, conditions in the capital markets, our business operations and initiatives, and other factors, we may from time to time consider the issuance of debt, equity or other securities or other possible capital market transactions, the proceeds of which could provide additional liquidity for our operations.

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

6564

Table of Contents

Capital Resources

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

Minimum To Be

Well Capitalized

Under Prompt

Minimum Capital

Corrective Action

Actual

Requirements

Provisions

(Dollars in thousands)

   Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2020:

Total Capital (to Risk-Weighted Assets)

Corporation

$
233,408

14.7
%
$
127,189

8.0
%

N/A

N/A

C&F Bank

207,999

13.2

125,664

8.0

$
157,080

10.0
%
Tier 1 Capital (to Risk-Weighted Assets)

Corporation

189,300

11.9

95,391

6.0

N/A

N/A

C&F Bank

188,127

12.0

94,248

6.0

125,664

8.0

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

Corporation

164,300

10.3

71,544

4.5

N/A

N/A

C&F Bank

188,127

12.0

70,686

4.5

102,102

6.5

Tier 1 Capital (to Average Assets)

Corporation

189,300

9.7

78,301

4.0

N/A

N/A

C&F Bank

188,127

9.7

77,503

4.0

96,879

5.0

As of December 31, 2019:

Total Capital (to Risk-Weighted Assets)

Corporation

$
195,927

14.9
%
$
105,544

8.0
%

N/A

N/A

C&F Bank

181,369

14.0

103,307

8.0

$
129,134

10.0
%
Tier 1 Capital (to Risk-Weighted Assets)

Corporation

179,233

13.6

79,158

6.0

N/A

N/A

C&F Bank

165,021

12.8

77,480

6.0

103,307

8.0

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

Corporation

154,233

11.7

59,369

4.5

N/A

N/A

C&F Bank

165,021

12.8

58,110

4.5

83,937

6.5

Tier 1 Capital (to Average Tangible Assets)

Corporation

179,233

11.1

64,863

4.0

N/A

N/A

C&F Bank

165,021

10.3

64,201

4.0

80,251

5.0

TABLE 20: Regulatory Capital

September 30, 2021

Minimum Capital

Well Capitalized

Actual

Requirements

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

The Corporation

Total risk-based capital ratio

253,408

15.5

131,064

8.0

N/A

Tier 1 risk-based capital ratio

208,695

12.7

98,298

6.0

N/A

Common Equity Tier 1 capital ratio

183,695

11.2

73,723

4.5

N/A

Tier 1 leverage ratio

208,695

9.7

86,119

4.0

N/A

The Bank

Total risk-based capital ratio

231,261

14.4

128,928

8.0

161,160

10.0

Tier 1 risk-based capital ratio

210,878

13.1

96,696

6.0

128,928

8.0

Common Equity Tier 1 capital ratio

210,878

13.1

72,522

4.5

104,754

6.5

Tier 1 leverage ratio

210,878

9.9

85,212

4.0

106,515

5.0


	December 31, 2020
					Minimum Capital				Well Capitalized
	Actual				Requirements				Requirements
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
The Corporation
Total risk-based capital ratio	$	240,060	15.2	%	$	125,947	8.0	%	$	N/A	N/A	%
Tier 1 risk-based capital ratio		196,140	12.5			94,460	6.0			N/A	N/A
Common Equity Tier 1 capital ratio		171,140	10.9			70,845	4.5			N/A	N/A
Tier 1 leverage ratio		196,140	9.6			81,414	4.0			N/A	N/A

The Bank
Total risk-based capital ratio	$	214,151	13.8	%	$	124,291	8.0	%	$	155,364	10.0	%
Tier 1 risk-based capital ratio		194,487	12.5			93,219	6.0			124,291	8.0
Common Equity Tier 1 capital ratio		194,487	12.5			69,914	4.5			100,987	6.5
Tier 1 leverage ratio		194,487	9.6			80,640	4.0			100,800	5.0

The regulatory risk-based capital amounts presented above include: (1) common equity tier 1 capital (CET1) which consists principally of common stock (including surplus) and retained earnings with adjustments for goodwill ~~intangible assets~~ and ~~deferred tax~~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 loan ~~losses.~~losses and the Corporation’s subordinated notes, as discussed further below. 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

Table of Contents

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. For additional information

~~Table of Contents~~

about the Basel III Final Rules, see “Item 1. Business” under the heading “Regulation and Supervision” and “Item 8. Financial Statements and Supplementary Data,” under the heading “Note ~~16:~~18: Regulatory Requirements and Restrictions” in the Corporation's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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, 2021 and December 31, 2020.

Total capital of the Corporation includes subordinated notes of $24.0 million, of which $20.0 million was issued in the third quarter of 2020 to support general corporate purposes and future growth opportunities.

In ~~addition~~November 2020, the Board of Directors of the Corporation authorized a program, effective November 17, 2020, to repurchase up to 365,000 shares of the Corporation’s common stock (the Repurchase Program) through November 30, 2021. Repurchases under the 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 ~~regulatory risk-based capital amounts presented above,~~status of authorized and unissued shares of common stock. During the Bank must maintain a capital conservation buffer of additional capital of 2.5 percent of risk-weighted assets as required by the Basel III Final Rule. At September 30, 2020, the Bank exceeded the total capital conservation bufferthird quarter and the tier 1 capital conservation buffer by 274 basis points and 348 basis points, respectively. At December 31, 2019, the Bank exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by 355 and 428 basis points, respectively. The increase in regulatory capital of C&F Bank during the first nine months of ~~2020 is due primarily to the acquisition of Peoples and current period earnings. The increase in regulatory capital of~~2021, the Corporation ~~during the first nine months~~repurchased $2.7 million and $7.2 million, respectively, of ~~2020 is due primarily to the issuance~~its common stock. As of ~~subordinated notes in third quarter of 2020, the acquisition of Peoples and current period earnings. The increase in risk-weighted assets of C&F Bank and~~September 30, 2021, the Corporation ~~during~~has made aggregate common stock repurchases of 150,333 shares for an aggregate amount repurchased cost of $7.5 million under the ~~first nine months of 2020 is due primarily to the acquisition of Peoples and growth in loans held for sale and loans held for investment.~~Repurchase Program.

Effects of Inflation and Changing Prices

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

USE OF CERTAIN NON-GAAP FINANCIAL MEASURES

The accounting and reporting policies of the Corporation conform to ~~U.S.~~ 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 adjusted net ~~income;~~income for the Corporation and for the community banking segment, adjusted earnings per ~~share;~~share, adjusted ~~annualized ROE; and~~ROE, adjusted ~~annualized~~ ROA, (all of which are adjusted to exclude the one-time effect of merger related expenses in connection with the acquisition of Peoples, impairment charges related to branch consolidation, and a change in income tax law that provided income tax benefits in 2020 related to prior tax years), 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.

Management believes that the use of these non-GAAP measures ~~provide~~provides meaningful information about operating performance by enhancing comparability with other financial periods, ~~and~~ other financial ~~institutions.~~institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, including non-recurring gains or charges, (2) balances of intangible assets, including goodwill, that vary significantly between institutions, and (3) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to ~~U.S.~~ GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures

Table of Contents

differently. A reconciliation of the non-GAAP financial measures used by the Corporation to evaluate and measure the Corporation’s performance to the most directly comparable ~~U.S.~~ GAAP financial measures is presented below.

~~Table~~TABLE 21: Reconciliation of ~~Contents~~Certain Non-GAAP Financial Measures


	For The						For The
	Quarter Ended						Nine Months Ended
(Dollars in thousands except for per share amounts)	9/30/2020			9/30/2019			9/30/2020			9/30/2019
(Dollars in thousands except for per share data)													Three Months Ended September 30,						Nine Months Ended September 30,
Reconciliation of Certain Non-GAAP Financial Measures													2021			2020			2021			2020

Adjusted Net Income and Earnings Per Share	(unaudited)						(unaudited)
Net income, as reported	$	6,918		$	4,885		$	14,300		$	14,498		$	7,827		$	6,918		$	23,082		$	14,300
Merger related expenses¹		-			389			1,132			389			-			-			-			1,132
Branch consolidation¹		-			-			222			-
Branch consolidation²														(107)			-			(107)			222
Change in tax law		(23)			-			(326)			-			-			(23)			-			(326)
Adjusted net income	$	6,895		$	5,274		$	15,328		$	14,887		$	7,720		$	6,895		$	22,975		$	15,328

Weighted average shares - basic and diluted		3,648,515			3,430,298			3,646,951			3,459,191			3,550,001			3,648,515			3,626,083			3,646,951

Earnings per share - basic and diluted, as reported	$	1.86		$	1.42		$	3.87		$	4.19		$	2.16		$	1.86		$	6.27		$	3.87
Merger related expenses		-			0.12			0.31			0.11			-			-			-			0.31
Branch consolidation		-			-			0.06			-			(0.03)			-			(0.03)			0.06
Change in tax law		(0.01)			-			(0.09)			-			-			(0.01)			-			(0.09)
Adjusted earnings per share - basic and diluted	$	1.85		$	1.54		$	4.15		$	4.30		$	2.13		$	1.85		$	6.24		$	4.15

Adjusted Return on Average Equity (ROE)
Average total equity, as reported	$	178,843		$	159,106		$	177,630		$	155,254		$	199,954		$	178,843		$	195,156		$	177,630

Annualized ROE, as reported		15.47	%		12.28	%		10.73	%		12.45	%		15.66	%		15.47	%		15.77	%		10.73	%
Adjusted annualized ROE		15.42	%		13.26	%		11.50	%		12.78	%		15.44	%		15.42	%		15.69	%		11.50	%

Adjusted Return on Average Assets (ROA)
Average assets, as reported	$	1,992,244		$	1,566,302		$	1,931,968		$	1,542,055
Average total assets, as reported													$	2,178,742		$	1,992,244		$	2,146,550		$	1,931,968

Annualized ROA, as reported		1.39	%		1.25	%		0.99	%		1.25	%		1.44	%		1.39	%		1.43	%		0.99	%
Adjusted annualized ROA		1.38	%		1.35	%		1.06	%		1.29	%		1.42	%		1.38	%		1.43	%		1.06	%

Fully Taxable Equivalent Net Interest Income²
Adjusted Net Income, Community Banking Segment
Net income, community banking segment, as reported													$	4,166		$	1,312		$	10,884		$	2,263
Merger related expenses¹														-			-			-			1,032
Branch consolidation²														(107)			-			(107)			222
Change in tax law														-			(23)			-			(326)
Adjusted net income, community banking segment													$	4,059		$	1,289		$	10,777		$	3,191

Fully Taxable Equivalent Net Interest Income³
Interest income on loans	$	22,506		$	22,254		$	67,607		$	65,497		$	22,120		$	22,506		$	66,399		$	67,607
FTE adjustment		31			6			92			17			25			31			70			92
FTE interest income on loans	$	22,537		$	22,260		$	67,699		$	65,514		$	22,145		$	22,537		$	66,469		$	67,699

Interest income on securities	$	1,284		$	1,278		$	3,895		$	4,091		$	1,407		$	1,284		$	3,976		$	3,895
FTE adjustment		133			134			403			437			106			133			346			403
FTE interest income on securities	$	1,417		$	1,412		$	4,298		$	4,528		$	1,513		$	1,417		$	4,322		$	4,298

Total interest income	$	23,822		$	23,992		$	72,184		$	71,219		$	23,604		$	23,822		$	70,546		$	72,184
FTE adjustment		164			140			495			454			131			164			416			495
FTE interest income	$	23,986		$	24,132		$	72,679		$	71,673		$	23,735		$	23,986		$	70,962		$	72,679

Net interest income	$	20,845		$	20,223		$	61,702		$	60,495		$	21,618		$	20,845		$	64,022		$	61,702
FTE adjustment		164			140			495			454			131			164			416			495
FTE net interest income	$	21,009		$	20,363		$	62,197		$	60,949		$	21,749		$	21,009		$	64,438		$	62,197

~~________________________~~_____________________

1	Merger related expenses are net of related income taxes of $264,000 for the nine months ended September 30, ~~2020 and $20,000~~2020.

2	Branch consolidation charges consist of income tax benefits of $107,000 for both the ~~three~~third quarter and first nine months ~~ended September 30, 2019.~~of 2021. Branch consolidation charges are net of related income taxes of $59,000 for the nine months ended September 30, 2020.

23	Assuming a tax rate of 21%.

6867

Table of Contents


	9/30/2020		12/31/2019
(Dollars in thousands except for per share data)					September 30, 2021		December 31, 2020
Tangible Book Value Per Share	(unaudited)		*
Equity attributable to C&F Financial Corporation	$	188,388	$	164,798	$	204,432	$	193,805
Less goodwill		25,191		14,425		25,191		25,191
Less other intangible assets		2,374		912		2,055		2,291
Tangible equity attributable to C&F Financial Corporation	$	160,823	$	149,461	$	177,186	$	166,323

Shares outstanding		3,647,898		3,438,126		3,537,894		3,670,301

Book value per share	$	51.64	$	48.07	$	57.78	$	52.80
Tangible book value per share	$	44.08	$	43.61	$	50.08	$	45.32

~~________________________~~

^*	~~Derived from audited consolidated financial statements.~~

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This report contains ~~forward-looking statements, including~~ statements concerning the Corporation’s expectations, plans, objectives or beliefs regarding future financial ~~performance; actions~~performance and ~~initiatives taken in response~~other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws and may include, but are not limited to ~~the COVID-19 pandemic;~~statements regarding expected future operations and financial performance; potential effects of the COVID-19 pandemic or the emergence of variants of COVID-19, including on asset quality, the allowance for loan losses, provision for loan losses, interest rates and ~~bank customers, expected benefits~~results of ~~branch consolidation, impairment of securities and goodwill,~~operations, future dividend payments, ~~expected impacts~~charge-offs, net interest margin compression and items affecting net interest margin, including future repricing of time deposits at maturity and the ~~Corporation’s acquisition~~impact of ~~Peoples,~~repaying certain long-term borrowings, strategic business initiatives and the anticipated effects thereof, including new or consolidated facilities, lending under the PPP loan program, ~~competition among financial institutions and the expected effects thereof,~~future recognition of PPP origination fees, margin compression, mortgage loan originations, technology initiatives, our diversified business strategy, asset quality, credit quality, including the effect of PPP loans and government stimulus related to COVID-19 on credit quality, adequacy of allowances for loan losses and the level of future charge-offs, liquidity and capital levels, the effect of future market and industry trends ~~and interest rate environments~~ and the effects of future interest rate levels and fluctuations. 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:

●~~the ability of the Corporation and the Bank to realize the anticipated benefits of the acquisition of Peoples~~

●~~expected revenue synergies and cost savings from the acquisition of Peoples that may not be fully realized or realized within the expected time frame~~

●~~revenues following the acquisition of Peoples that may be lower than expected~~

●~~customer and employee relationships and business operations as a result of disruptions caused by the acquisition of Peoples~~

●~~the ability of the Corporation and the Bank to realize the anticipated benefits of the branch consolidation~~

●interest rates, such as ~~changes or~~ volatility in ~~the Federal Funds rate,~~short-term interest rates or yields on U.S. Treasury ~~securities~~bonds and increases or volatility in mortgage interest rates

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

●general economic conditions, including ~~the strength of the Corporation’s counterparties,~~ unemployment levels and slowdowns in economic growth, ~~especially~~and particularly related to further and sustained economic impacts of the COVID-19 pandemic or variants thereof

●the effectiveness of the Corporation’s efforts to respond to COVID-19 or variants thereof, the severity and duration of the COVID-19 pandemic, ~~including whether there is a resurgence~~the availability and effectiveness of COVID-19 ~~infections,~~vaccinations and treatments, the pace of economic recovery when the COVID-19 pandemic subsides and the heightened impact it has on many of the risks described herein

● and in other reports we file with the ~~Corporation’s ability to manage the impact of the COVID-19 pandemic, including the steps the Corporation takes in response to COVID-19~~SEC

●potential claims, damages and fines related to litigation or government actions, including litigation or actions arising from the Corporation’s participation in and administration of programs related to COVID-19, including, among other things, the PPP under the CARES Act

●the legislative and regulatory climate, ~~including~~ regulatory initiatives with respect to financial institutions, ~~including~~products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB the application of the Basel III capital standards to C&F Bank, the effect of the Economic Growth Regulatory Relief and Consumer Protection Act of 2018 (the Act) and changes in the effect of the Act due to issuance of interpretive regulatory guidance or enactment of corrective or supplemental legislation

~~Table of Contents~~

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

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

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

●the ~~commercial and residential real estate markets~~

●~~the~~ inventory level and pricing of used automobiles, including sales prices of repossessed vehicles

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

●~~deposit flows~~

●~~demand in the secondary residential mortgage loan markets~~

●the level of indemnification losses related to mortgage loans sold

●deposit flows

Table of Contents

●the strength of the Corporation’s counterparties

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

●demand for financial services in the Corporation’s market area, including demand for loan products

●reliance on third parties for key services

●the ~~Corporation's~~commercial and residential real estate markets

●the demand 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

●~~reliance on third parties for key services~~

●expansion of C&F Bank’s product offerings

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

These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of Part I of the Corporation's Annual Report on Form 10-K for the year ended December 31, ~~2019, and in Item 1A. “Risk Factors,” of Part II of this Quarterly Report on Form 10-Q,~~2020 should be considered in evaluating the forward-looking statements contained herein.

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. 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

There have been no ~~significant~~material changes from the quantitative and qualitative disclosures about market risk made in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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, ~~2020~~2021 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

~~Table of Contents~~

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, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

ITEM 1A.RISK FACTORS

~~The following risk factor should be considered~~There have been no material changes in ~~addition to~~ 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, ~~2019.~~2020.

The Corporation’s results of operations and financial condition have been, and will likely continue to be, adversely affected by the COVID-19 pandemic and, depending on future developments, may be materially adversely impacted by the COVID-19 pandemic.

The outbreak of the novel coronavirus and the resulting COVID-19 pandemic, the widespread government response and the impact on consumers and businesses in our market area have caused significant disruption in the United States and international economies and financial markets and have had and will likely continue to have a significant impact on the operations and financial performance of the Corporation. Governments, businesses and the public have taken unprecedented actions to contain the spread of COVID-19 and to mitigate its effects including quarantines, shelter-in-place orders, state of emergency declarations, travel bans, closures of businesses and schools, fiscal stimulus and legislative initiatives to deliver monetary aid and other relief. Many of these actions have adversely impacted the economy and forced temporary closures of nonessential business, and as a result the businesses of many of our customers have been adversely impacted, which could materially affect our business, financial condition and results of operations.

Although the scope, duration and full effects of the pandemic are evolving and cannot be fully known at this time, consequences of the pandemic and efforts to contain the spread of COVID-19 and mitigate the pandemic’s effects have included and may include further market volatility, lower interest rates, disrupted trade and supply chains, increased unemployment and reduced economic activity. The National Bureau of Economic Research has determined that the U.S. economy has entered a recession as a result of the effects of the COVID-19 pandemic. The period of recovery from the economic recession cannot be predicted and may be protracted. If these effects continue for a prolonged period of time, the Corporation may experience significant delinquencies and credit losses due to the inability of borrowers to make timely payments on loans, net interest margin compression, lower demand for our products and services, decreased capital, which may affect the Corporation’s ability to originate new loans, disruption of operational processes arising from practices of social distancing and telecommuting and potential impairment of assets, including securities available for sale and goodwill. The COVID-19 pandemic may also exacerbate many of the risk factors identified in the Corporation’s Annual Report on Form 10-K, including risk related to our credit quality, collateral, capital, liquidity, operations, interest rate risk, strategic risk and technology.

Although banks have generally been permitted to continue operating during the COVID-19 outbreak, the outbreak has caused the Corporation to change its business operations, including updating branch operations to comply with governmental recommendations and increasing work from home options for our employees. These changes may have adverse impacts on the Corporation’s business due to reduced effectiveness of operations, unavailability of personnel, and increased cybersecurity risks related to use of remote technology. Additionally, our business operations may be disrupted if key personnel or significant portions of our employees are unable to work effectively, including because of illness. The changes in business operations could also have a detrimental effect on the Corporation’s relationships with its customers and could reduce demand for the Corporation’s products and services.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity and impact of the COVID-19 pandemic, and the actions required to contain and mitigate it, the

~~Table of Contents~~

effects of the pandemic on our customers and vendors, the remedial actions and stimulus measures adopted by local, state and federal governments, the timing and availability of government support for the economy and financial markets including indirect governmental support for various financial assets including mortgage loans, the short- and long-term health impacts of the pandemic, and how quickly and to what extent normal economic and operating conditions can resume. If the severity of the COVID-19 pandemic worsens, additional actions may be taken by federal, state, and local governments to contain COVID-19 or treat its impact, including additional shelter-in-place orders. There can be no assurance that any efforts by the Corporation to address the adverse impacts of the COVID-19 pandemic will be effective. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future, or as a result of changes in the behavior of customers, businesses and their employees. Furthermore, the financial condition of our customers and vendors may be adversely impacted, which may result in an elevated level of loan losses, a decrease in demand for our products and services, or reduced availability of services provided by third parties on which we rely. Any of these events may, in turn, have a material adverse impact our business, results of operations and financial condition.

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

Issuer Purchases of Equity Securities

~~In May 2019, the~~The Corporation’s Board of Directors authorized a program, effective ~~June 1, 2019,~~November 17, 2020, to repurchase up to ~~$5.0 million~~365,000 shares of the Corporation’s common stock through ~~May 31, 2020. The~~November 30, 2021 (the Repurchase Program). Repurchases under the Repurchase Program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 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 52,619 shares repurchased under the Repurchase Program during the third quarter of 2021. As of September 30, 2021, the Corporation ~~had~~has made aggregate common stock repurchases of ~~$2.1~~150,333 shares for an aggregate cost of $7.5 million under the ~~share repurchase program when the program expired on May 31, 2020. The share repurchase program has not been renewed or extended at this time.~~Repurchase Program.

The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended September 30, ~~2020.~~2021.

Maximum Number

(or Approximate

Total Number of

Dollar Value) of

Total Number of

Dollar Value) of

Shares Purchased as

Shares that May Yet

Shares Purchased as

Shares that May Yet

Part of Publicly

Be Purchased

Part of Publicly

Be Purchased

Total Number of

Average Price Paid

Announced Plans or

Under the Plans or

Total Number of

Average Price Paid

Announced Plans or

Under the Plans or

(Dollars in thousands, except for per share amounts)

Shares Purchased¹

per Share

Programs

July 1, 2020 - July 31, 2020

34.99

—

August 1, 2020 - August 31, 2020

—

September 1, 2020 - September 30, 2020

—

Shares Purchased¹

per Share

Programs

July 1, 2021 - July 31, 2021

41,854

51.39

41,854

225,432

August 1, 2021 - August 31, 2021

10,765

53.32

10,765

214,667

September 1, 2021 - September 30, 2021

285

50.18

—

214,667

Total

34.99

—

52,904

51.78

52,619

1	During the three months ended September 30, ~~2020, 15~~2021, 285 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.

7270

Table of Contents

ITEM 6.EXHIBITS


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

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

3.1.1	Amendment to Articles of Incorporation of C&F Financial Corporation, 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 ~~February 23, 2016~~December 15, 2020 (incorporated by reference to Exhibit 3.1 to Form 8-K filed ~~February 29, 2016)~~

~~4.1~~	~~Form of Subordinated Note (incorporated by reference to Exhibit 4.1 to Form 8-K filed September 30, 2020)~~

~~10.1~~	~~Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 30,~~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, ~~2020,~~2021, 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 (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, ~~2020,~~2021, formatted in Inline XBRL (included ~~with~~within Exhibit 101)

7371

Table of Contents

SIGNATURES

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


		C&F FINANCIAL CORPORATION
			(Registrant)

Date:	November ~~4, 2020~~2, 2021	By:	/s/ Thomas F. Cherry
			Thomas F. Cherry
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	November ~~4, 2020~~2, 2021		/s/ Jason E. Long
			Jason E. Long
			~~Senior~~Executive Vice President, Chief Financial Officer and Secretary
			(Principal Financial and Accounting Officer)

7472


	Unaudited Pro Forma		Unaudited Pro Forma
	Three Months Ended		Nine Months Ended
(Dollars in thousands, except per share amounts)	September 30, 2019		September 30, 2019
Total revenues (net interest income plus nonintererest income)	$	30,329	$	89,792
Net income	$	5,257	$	15,515
Net income per share, basic and diluted	$	1.44	$	4.23