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CFFI C & F Financial

Filed: 4 May 21, 1:08pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

or

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

For the transition period from _________ to _________

Commission File Number 000-23423

C&F FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Virginia

54-1680165

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

3600 La Grange Parkway Toano, VA

23168

(Address of principal executive offices)

(Zip Code)

(804) 843-2360

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value per share

CFFI

The NASDAQ Stock Market LLC

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

At May 3, 2021, the latest practicable date for determination, 3,683,251 shares of common stock, $1.00 par value, of the registrant were outstanding.

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)

   March 31,    

December 31, 

    

2021

    

2020

  

Assets

Cash and due from banks

$

13,845

$

17,742

Interest-bearing deposits in other banks

 

133,593

 

68,927

Total cash and cash equivalents

 

147,438

 

86,669

Securities—available for sale at fair value, amortized cost of
$318,723 and $280,824, respectively

 

321,285

 

286,389

Loans held for sale, at fair value

 

177,350

 

214,266

Loans, net of allowance for loan losses of $39,033 and $39,156, respectively

 

1,346,003

 

1,313,250

Restricted stock, at cost

 

1,027

 

1,636

Corporate premises and equipment, net

 

45,223

 

44,132

Other real estate owned, net of valuation allowance of $207 and $207, respectively

 

907

 

907

Accrued interest receivable

 

7,723

 

8,103

Goodwill

 

25,191

 

25,191

Other intangible assets, net

 

2,213

 

2,291

Bank-owned life insurance

20,332

20,205

Net deferred tax asset

13,931

13,555

Other assets

 

60,015

 

69,716

Total assets

$

2,168,638

$

2,086,310

Liabilities

Deposits

Noninterest-bearing demand deposits

$

548,755

$

501,945

Savings and interest-bearing demand deposits

 

825,127

 

780,645

Time deposits

 

458,100

 

469,583

Total deposits

 

1,831,982

 

1,752,173

Short-term borrowings

 

23,926

 

20,455

Long-term borrowings

 

30,484

 

30,398

Trust preferred capital notes

 

25,325

 

25,316

Accrued interest payable

 

734

 

1,109

Other liabilities

 

57,495

 

62,388

Total liabilities

 

1,969,946

 

1,891,839

Commitments and contingent liabilities (Note 11)

 

 

Equity

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,683,015 and 3,670,301 shares issued and outstanding, respectively, includes 157,065 and 155,945 of unvested shares, respectively)

 

3,526

 

3,514

Additional paid-in capital

 

21,622

 

21,427

Retained earnings

 

176,481

 

170,819

Accumulated other comprehensive loss, net

 

(3,560)

 

(1,955)

Equity attributable to C&F Financial Corporation

198,069

193,805

Noncontrolling interest

623

666

Total equity

 

198,692

 

194,471

Total liabilities and equity

$

2,168,638

$

2,086,310

See notes to consolidated interim financial statements.

3

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)

Three Months Ended March 31, 

 

    

2021

    

2020

  

 

Interest income

Interest and fees on loans

$

21,813

$

22,897

Interest on interest-bearing deposits and federal funds sold

 

46

 

598

Interest and dividends on securities

U.S. government agencies and corporations

 

125

 

126

Mortgage-backed securities

409

520

Tax-exempt obligations of states and political subdivisions

469

496

Taxable obligations of states and political subdivisions

 

90

 

92

Other

 

124

 

49

Total interest income

 

23,076

 

24,778

Interest expense

Savings and interest-bearing deposits

 

359

 

586

Time deposits

 

1,308

 

2,299

Borrowings

 

449

 

1,001

Trust preferred capital notes

 

284

 

289

Total interest expense

 

2,400

 

4,175

Net interest income

 

20,676

 

20,603

Provision for loan losses

 

280

 

2,650

Net interest income after provision for loan losses

 

20,396

 

17,953

Noninterest income

Gains on sales of loans

 

7,058

 

3,676

Mortgage banking fee income

 

1,856

 

1,305

Interchange income

1,318

1,089

Service charges on deposit accounts

 

819

 

1,002

Wealth management services income, net

 

702

 

585

Mortgage lender services income

778

242

Other service charges and fees

 

389

 

375

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

 

32

 

4

Other income (loss), net

 

1,404

 

(1,530)

Total noninterest income

 

14,356

 

6,748

Noninterest expenses

Salaries and employee benefits

 

15,613

 

10,817

Occupancy

 

2,360

 

2,047

Other

 

7,327

 

7,221

Total noninterest expenses

 

25,300

 

20,085

Income before income taxes

 

9,452

 

4,616

Income tax expense

 

2,287

 

977

Net income

7,165

3,639

Less net income attributable to noncontrolling interest

 

104

 

61

Net income attributable to C&F Financial Corporation

$

7,061

$

3,578

Net income per share - basic and diluted

$

1.92

$

0.98

See notes to consolidated interim financial statements.

4

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

Three Months Ended March 31, 

 

    

2021

    

2020

  

Net income

$

7,165

$

3,639

Other comprehensive income (loss):

Defined benefit plan:

Reclassification of recognized net actuarial losses into net income1

60

42

Related income tax effects

(13)

(9)

Amortization of prior service credit into net income1

(17)

(17)

Related income tax effects

4

4

Defined benefit plan, net of tax

34

20

Cash flow hedges:

Unrealized holding gains (losses) arising during the period

990

(1,974)

Related income tax effects

(255)

508

Amortization of hedging gains into net income2

(2)

(3)

Related income tax effects

1

1

Cash flow hedges, net of tax

734

(1,468)

Securities available for sale:

Unrealized holding (losses) gains arising during the period

(2,971)

2,209

Related income tax effects

623

(464)

Reclassification of net realized gains into net income3

(32)

(4)

Related income tax effects

7

1

Securities available for sale, net of tax

(2,373)

1,742

Other comprehensive (loss) income, net of tax

(1,605)

294

Comprehensive income

5,560

3,933

Less comprehensive income attributable to noncontrolling interest

104

61

Comprehensive income attributable to C&F Financial Corporation

$

5,456

$

3,872

1These items are included in the computation of net periodic benefit cost and are included in “Noninterest income – Other” on the Consolidated Statements of Income. See “Note 8: Employee Benefit Plans,” for additional information.
2These items are included in “Interest expense – Trust preferred capital notes” on the Consolidated Statements of Income.
3These 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.

5

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 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 December 31, 2020

$

3,514

 

$

21,427

 

$

170,819

 

$

(1,955)

 

$

666

$

194,471

Comprehensive income:

Net income

 

 

 

7,061

 

 

104

 

7,165

Other comprehensive loss

 

 

 

 

(1,605)

 

 

(1,605)

Share-based compensation

 

 

392

 

 

 

 

392

Restricted stock vested

 

16

(16)

 

 

 

 

Common stock issued

 

2

 

42

 

 

 

 

44

Common stock purchased

(6)

(223)

(229)

Cash dividends declared ($0.38 per share)

(1,399)

(1,399)

Distributions to noncontrolling interest

(147)

(147)

Balance March 31, 2021

$

3,526

$

21,622

$

176,481

$

(3,560)

 

$

623

$

198,692

Attributable to C&F Financial Corporation

Accumulated

   

   

Additional

   

   

Other

   

 

Common

Paid - In

Retained

Comprehensive

Noncontrolling

Total

 

Stock

Capital

Earnings

Loss, Net

Interest

Equity

 

Balance December 31, 2019

$

3,296

 

$

9,503

 

$

154,248

 

$

(2,249)

 

$

481

$

165,279

Comprehensive income:

Net income

 

 

 

3,578

 

 

61

 

3,639

Other comprehensive income

 

 

 

 

294

 

 

294

Share-based compensation

 

 

389

 

 

 

 

389

Restricted stock vested

 

16

(16)

 

 

 

 

Acquisition of Peoples Bankshares, Incorporated

210

11,402

11,612

Common stock issued

 

1

36

 

 

 

 

37

Common stock purchased

(14)

(604)

(618)

Cash dividends declared ($0.38 per share)

 

 

 

(1,388)

 

 

 

(1,388)

Balance March 31, 2020

$

3,509

$

20,710

$

156,438

$

(1,955)

 

$

542

$

179,244

See notes to consolidated interim financial statements.

6

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

Three Months Ended March 31, 

 

    

2021

    

2020

  

Operating activities:

Net income

$

7,165

$

3,639

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Provision for loan losses

 

280

 

2,650

Accretion of certain acquisition-related discounts, net

 

(743)

 

(1,259)

Share-based compensation

 

392

 

389

Depreciation and amortization

 

1,189

 

968

Accretion of discounts and amortization of premiums on securities, net

 

833

 

370

Income from bank-owned life insurance

(112)

(103)

Pension expense

206

172

Proceeds from sales of loans held for sale

 

462,469

 

227,422

Origination of loans held for sale

 

(424,082)

 

(253,868)

Gains on sales of loans held for sale

(7,058)

(3,676)

Other (gains) losses, net

(59)

253

Change in other assets and liabilities:

Accrued interest receivable

 

380

 

(47)

Other assets

 

198

 

4,455

Accrued interest payable

 

(375)

 

(43)

Other liabilities

 

451

 

(3,100)

Net cash provided by (used in) operating activities

 

41,134

 

(21,778)

Investing activities:

Acquisition of Peoples Bankshares, Incorporated

19,101

Disposition of assets related to business combination

8,004

Proceeds from sales, maturities and calls of securities available for sale and payments on mortgage-backed securities

 

33,712

 

39,063

Purchases of securities available for sale

 

(72,413)

 

(64,746)

Maturities of time deposits, net

1,976

251

Repayments on loans held for investment by non-bank affiliates

35,907

32,448

Purchases of loans held for investment by non-bank affiliates

(41,064)

(29,305)

Net increase in community banking loans held for investment

(22,770)

(4,911)

Purchases of corporate premises and equipment

 

(2,123)

 

(1,548)

Changes in collateral posted with other financial institutions, net

4,300

(8,270)

Other investing activities, net

 

683

 

229

Net cash used in investing activities

 

(61,792)

 

(9,684)

Financing activities:

Net increase in demand and savings deposits

 

91,293

 

12,632

Net (decrease) increase in time deposits

 

(11,414)

 

8,745

Net increase in short-term borrowings

 

3,471

 

2,030

Repayments of long-term borrowings

(7,519)

Repurchases of common stock

(229)

(355)

Cash dividends paid

(1,399)

(1,388)

Other financing activities, net

 

(295)

 

(107)

Net cash provided by financing activities

 

81,427

 

14,038

Net increase (decrease) in cash and cash equivalents

 

60,769

 

(17,424)

Cash and cash equivalents at beginning of period

 

86,669

 

165,433

Cash and cash equivalents at end of period

$

147,438

$

148,009

Supplemental cash flow disclosures:

Interest paid

$

2,856

$

4,175

Income taxes paid

 

 

3

Supplemental disclosure of noncash investing and financing activities:

Liabilities assumed to acquire right of use assets under operating leases

 

118

 

204

See notes to consolidated interim financial statements.

7

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, 2020.

The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation), its direct wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or C&F Bank) and indirect subsidiaries that are wholly-owned or controlled. Subsidiaries that are less than wholly owned are fully consolidated if they are controlled by the Corporation or one of its subsidiaries, and the portion of any subsidiary not owned by the Corporation is reported as noncontrolling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Corporation owns all of the common stock of C&F Financial Statutory Trust I, C&F Financial Statutory Trust II and Central Virginia Bankshares Statutory Trust I, all of which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as liabilities of the Corporation.  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. and CVB Title Services, Inc. were organized for the primary purpose of owning equity interests in an independent insurance agency and a full service title and settlement agency, respectively. Business segment data is presented in Note 10.

Basis of Presentation: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for 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 March 31, 2021 include probable losses related to the pandemic.  While there have been signals of economic recovery and a resumption of many types of business activity, there remains significant uncertainty involved in the measurement of these losses.  If economic conditions deteriorate

8

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.

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.

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. The Corporation’s derivative financial instruments are described more fully in Note 12.

Income Taxes: The Corporation’s effective tax rate was 24.2 percent and 21.2 percent for the first three months of 2021 and 2020, respectively. The effective tax rate for the first three months of 2021 was higher than the first three months of 2020 as income before income taxes grew while certain tax benefits, including benefits related to tax-exempt income and share-based compensation, did not.

Share-Based Compensation: Share-based compensation expense, net of forfeitures, for the three months ended March 31, 2021 was $392,000 ($287,000 after tax) for restricted stock granted during 2016 through 2021. Share-based compensation expense, net of forfeitures, for the three months ended March 31, 2020 was $389,000 ($217,000 after tax) for restricted stock granted during 2015 through 2020. As of March 31, 2021, there was $4.09 million of total unrecognized compensation expense related to unvested restricted stock that will be recognized over the remaining requisite service periods.

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

2021

 

    

    

Weighted-

 

Average

 

Grant Date

 

Shares

Fair Value

 

Unvested, December 31, 2020

 

155,945

$

48.52

Granted

18,975

 

43.70

Vested

 

(16,105)

 

43.05

Forfeited

 

(1,750)

 

45.50

Unvested, March 31, 2021

 

157,065

48.53

9

2020

    

    

Weighted-

Average

Grant Date

Shares

Fair Value

Unvested, December 31, 2019

 

142,020

$

48.88

Granted

 

14,650

 

53.22

Vested

 

(16,230)

 

39.97

Forfeited

 

(620)

 

53.46

Unvested, March 31, 2020

 

139,820

50.39

Recent Significant Accounting Pronouncements:

In June 2016, the Financial Accounting Standards Board (FASB) issued 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—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.

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.  

10

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.    

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.

11

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 was not obtained.  The Bank subsequently sold these medical student loans during the year ending December 31, 2020.

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

(Dollars in thousands)

    

January 1, 2020

 

Contractual principal and interest due

$

20,310

Nonaccretable difference

 

(7,679)

Expected cash flows

 

12,631

Accretable yield

 

(3,372)

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 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. 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 revenue and earnings amounts specific to Peoples since the first quarter of 2020 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.

The Corporation recorded merger related expenses in connection with the acquisition of Peoples of $957,000 ($785,000 after income taxes) for the three months ended March 31, 2020.  The Corporation recorded aggregate merger related expenses of $2.10 million ($1.78 million after income taxes) during 2019 and 2020, including the integration of systems and operations and legal and consulting expenses, which were expensed as incurred.

12

NOTE 3: Securities

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

March 31, 2021

 

    

    

Gross

    

Gross

    

 

Amortized

Unrealized

Unrealized

 

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

 

U.S. government agencies and corporations

$

54,900

$

105

$

(1,324)

$

53,681

Mortgage-backed securities

 

148,307

 

2,769

 

(558)

 

150,518

Obligations of states and political subdivisions

 

101,601

 

1,923

 

(370)

 

103,154

Corporate and other debt securities

13,915

79

(62)

13,932

$

318,723

$

4,876

$

(2,314)

$

321,285

December 31, 2020

 

    

    

Gross

    

Gross

    

 

Amortized

Unrealized

Unrealized

 

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

 

U.S. government agencies and corporations

$

48,171

$

121

$

(10)

$

48,282

Mortgage-backed securities

 

120,664

 

3,165

 

(115)

 

123,714

Obligations of states and political subdivisions

 

100,405

 

2,436

 

(36)

 

102,805

Corporate and other debt securities

 

11,584

 

47

 

(43)

 

11,588

$

280,824

$

5,769

$

(204)

$

286,389

The amortized cost and estimated fair value of securities at March 31, 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.

March 31, 2021

 

    

Amortized

    

 

(Dollars in thousands)

Cost

Fair Value

 

Due in one year or less

$

63,112

$

62,695

Due after one year through five years

 

171,500

 

175,068

Due after five years through ten years

 

75,592

 

75,334

Due after ten years

 

8,519

 

8,188

$

318,723

$

321,285

The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of securities. During the three months ended March 31, 2021 and 2020, $2.30 million and $5.99 million of proceeds, respectively, were related to sales of securities.

Three Months Ended March 31, 

(Dollars in thousands)

    

2021

    

2020

Realized gains from sales, maturities and calls of securities:

Gross realized gains

$

32

$

4

Gross realized losses

 

 

Net realized gains

$

32

$

4

Proceeds from sales, maturities, calls and paydowns of securities

$

33,712

$

39,063

13

The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $135.46 million and an aggregate fair value of $138.11 million were pledged at March 31, 2021. Securities with an aggregate amortized cost of $146.66 million and an aggregate fair value of $150.13 million were pledged at December 31, 2020.

Securities in an unrealized loss position at March 31, 2021, by duration of the period of the unrealized loss, are shown below.

Less Than 12 Months

12 Months or More

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(Dollars in thousands)

Value

Loss

Value

Loss

   Value   

Loss

 

U.S. government agencies and corporations

$

42,067

$

1,324

$

$

$

42,067

$

1,324

Mortgage-backed securities

 

48,067

558

 

 

 

48,067

 

558

Obligations of states and political subdivisions

 

21,881

 

370

 

 

 

21,881

 

370

Corporate and other debt securities

6,258

62

6,258

62

Total temporarily impaired securities

$

118,273

$

2,314

$

$

$

118,273

$

2,314

There were 106 debt securities totaling $118.27 million of aggregate fair value considered temporarily impaired at March 31, 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 March 31, 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. 

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

Less Than 12 Months

12 Months or More

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(Dollars in thousands)

Value

Loss

Value

Loss

   Value   

Loss

 

U.S. government agencies and corporations

$

12,719

$

10

$

$

$

12,719

$

10

Mortgage-backed securities

15,691

 

115

 

 

 

15,691

 

115

Obligations of states and political subdivisions

5,110

36

5,110

36

Corporate and other debt securities

 

4,271

 

43

 

 

 

4,271

 

43

Total temporarily impaired securities

$

37,791

$

204

$

$

$

37,791

$

204

The Corporation’s investment in restricted stock totaled $1.03 million at March 31, 2021 and consisted of Federal Home Loan Bank (FHLB) stock.  Restricted stock is generally viewed as a long-term investment, which is carried at cost because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value. The Corporation did not consider its investment in restricted stock to be other-than-temporarily impaired at March 31, 2021 and 0 impairment has been recognized.

14

NOTE 4: Loans

Major classifications of loans are summarized as follows:

March 31, 

December 31, 

 

(Dollars in thousands)

    

2021

    

2020

 

Real estate – residential mortgage

$

216,920

$

218,298

Real estate – construction 1

 

52,884

 

62,147

Commercial, financial and agricultural 2

 

741,980

 

700,215

Equity lines

 

46,976

 

48,466

Consumer

 

9,132

 

11,028

Consumer finance

 

317,144

 

312,252

 

1,385,036

 

1,352,406

Less allowance for loan losses

 

(39,033)

 

(39,156)

Loans, net

$

1,346,003

$

1,313,250

1Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
2Includes 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).

Consumer loans included $125,000 and $284,000 of demand deposit overdrafts at March 31, 2021 and December 31, 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 March 31, 2021 and December 31, 2020 of loans acquired in business combinations were as follows:

 

March 31, 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

$

11,931

$

79,015

$

90,946

$

12,760

$

89,043

$

101,803

Carrying amount

Real estate – residential mortgage

$

914

$

14,007

$

14,921

$

1,473

$

15,117

$

16,590

Real estate – construction

1,077

1,077

1,077

1,077

Commercial, financial and agricultural1

 

4,872

 

51,880

 

56,752

 

4,758

 

58,796

 

63,554

Equity lines

 

50

 

8,861

 

8,911

 

80

 

10,182

 

10,262

Consumer

 

42

 

1,666

 

1,708

 

48

 

1,924

 

1,972

Total acquired loans

$

5,878

$

77,491

$

83,369

$

6,359

$

87,096

$

93,455

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

15

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

Three Months Ended March 31, 

(Dollars in thousands)

    

2021

 

2020

 

Accretable yield, balance at beginning of period

$

4,048

$

4,721

Acquisition of Peoples

 

 

3,366

Accretion

 

(517)

 

(959)

Reclassification of nonaccretable difference due to improvement in expected cash flows

 

456

 

733

Other changes, net

 

(69)

 

57

Accretable yield, balance at end of period

$

3,918

$

7,918

Loans on nonaccrual status were as follows:

March 31, 

December 31, 

 

(Dollars in thousands)

    

2021

    

2020

 

Real estate – residential mortgage

$

278

$

276

Commercial, financial and agricultural:

Commercial business lending

 

2,409

 

2,428

Equity lines

 

189

 

191

Consumer

 

110

 

107

Consumer finance

 

182

 

402

Total loans on nonaccrual status

$

3,168

$

3,404

The past due status of loans as of March 31, 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

$

982

$

449

$

291

$

1,722

$

914

$

214,284

$

216,920

$

145

Real estate – construction:

Construction lending

 

 

 

 

 

39,525

 

39,525

 

Consumer lot lending

 

 

 

 

 

13,359

 

13,359

 

Commercial, financial and agricultural:

Commercial real estate lending

 

219

 

 

 

219

4,872

 

449,211

 

454,302

 

Land acquisition and development lending

 

 

 

 

 

33,615

 

33,615

 

Builder line lending

 

 

 

 

 

22,388

 

22,388

 

Commercial business lending

 

 

 

 

 

231,675

 

231,675

 

Equity lines

 

51

 

64

 

 

115

50

 

46,811

 

46,976

 

Consumer

 

26

 

 

 

26

42

 

9,064

 

9,132

 

Consumer finance

 

4,242

 

518

 

182

 

4,942

 

312,202

 

317,144

 

Total

$

5,520

$

1,031

$

473

$

7,024

$

5,878

$

1,372,134

$

1,385,036

$

145

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

The table above includes nonaccrual loans that are current of $2.83 million, 30-59 days past due of $5,000 and 90+ days past due of $328,000.

16

The past due status of loans as of December 31, 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

$

1,100

$

154

$

176

$

1,430

$

1,473

$

215,395

$

218,298

$

145

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

 

52

 

 

 

52

80

 

48,334

 

48,466

 

Consumer

 

2

 

 

 

2

48

 

10,978

 

11,028

 

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

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

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

There was 1 loan modification during the three months ended March 31, 2021 that was classified as a troubled debt restructuring (TDR). This TDR was a residential mortgage with a recorded investment of $4,000 at the time of modification and included modifications of the loan’s payment structure. There was 1 loan modification during the three months ended March 31, 2020 that was classified as a TDR.  This TDR was an equity line with a recorded investment of $84,000 at the time of its modification and included modifications of the loan’s payment structure.

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 months ended March 31, 2021 and 2020.

Impaired loans, which included TDRs of $3.00 million, and the related allowance at March 31, 2021 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

$

1,753

$

446

$

1,194

$

69

$

1,758

$

17

Commercial, financial and agricultural:

Commercial real estate lending

 

1,395

 

 

1,395

 

95

 

1,396

 

18

Commercial business lending

 

2,430

 

 

2,408

 

625

 

2,410

 

Equity lines

 

120

 

110

 

 

 

117

 

Consumer

 

286

 

 

105

 

102

 

106

 

Total

$

5,984

$

556

$

5,102

$

891

$

5,787

$

35

17

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 the changes in the allowance for loan losses by major classification during the three months ended March 31, 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 charged (credited) to operations

(28)

(153)

311

(16)

(84)

250

280

Loans charged off

(45)

(1,651)

(1,696)

Recoveries of loans previously charged off

7

35

1,251

1,293

Balance at March 31, 2021

$

2,893

$

822

$

11,007

$

671

$

277

$

23,363

$

39,033

The following table presents the changes in the allowance for loan losses by major classification during the three months ended March 31, 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

60

90

831

37

(18)

1,650

2,650

Loans charged off

(4)

(18)

(93)

(3,426)

(3,541)

Recoveries of loans previously charged off

4

1

62

1,249

1,316

Balance at March 31, 2020

$

2,140

$

771

$

7,935

$

770

$

416

$

21,266

$

33,298

18

The following table presents, as of March 31, 2021, 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

$

69

$

$

720

$

$

102

$

$

891

Collectively evaluated for impairment

2,824

822

10,287

671

175

23,363

38,142

Acquired loans - PCI

Total allowance

$

2,893

$

822

$

11,007

$

671

$

277

$

23,363

$

39,033

Loans:

Individually evaluated for impairment

$

1,640

$

$

3,803

$

110

$

105

$

$

5,658

Collectively evaluated for impairment

214,366

52,884

733,305

46,816

8,985

317,144

1,373,500

Acquired loans - PCI

914

4,872

50

42

5,878

Total loans

$

216,920

$

52,884

$

741,980

$

46,976

$

9,132

$

317,144

$

1,385,036

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 March 31, 2021 were as follows:

 

   

Special

   

   

Substandard

   

 

(Dollars in thousands)

Pass

 Mention 

Substandard

Nonaccrual

Total1

 

Real estate – residential mortgage

$

215,312

$

699

$

631

$

278

$

216,920

Real estate – construction:

Construction lending

 

39,525

 

 

 

 

39,525

Consumer lot lending

 

13,359

 

 

 

 

13,359

Commercial, financial and agricultural:

Commercial real estate lending

 

430,671

 

15,507

 

8,124

 

 

454,302

Land acquisition and development lending

 

33,615

 

 

 

 

33,615

Builder line lending

 

22,388

 

 

 

 

22,388

Commercial business lending

 

226,063

 

3,104

 

99

 

2,409

 

231,675

Equity lines

 

46,658

 

126

 

3

 

189

 

46,976

Consumer

 

8,964

 

42

 

16

 

110

 

9,132

$

1,036,555

$

19,478

$

8,873

$

2,986

$

1,067,892

1At March 31, 2021, the Corporation did not have any loans classified as Doubtful or Loss.

Non-

(Dollars in thousands)

   

Performing

   

Performing

   

Total

 

Consumer finance

$

316,962

$

182

$

317,144

19

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

  

   

Special

   

   

Substandard

   

 

(Dollars in thousands)

Pass

 Mention 

Substandard

Nonaccrual

Total1

 

Real estate – residential mortgage

$

215,712

$

1,715

$

595

$

276

$

218,298

Real estate – construction:

Construction lending

 

49,659

 

 

 

 

49,659

Consumer lot lending

 

12,488

 

 

 

 

12,488

Commercial, financial and agricultural:

Commercial real estate lending

 

415,506

 

15,507

 

10,890

 

 

441,903

Land acquisition and development lending

 

37,724

 

 

 

 

37,724

Builder line lending

 

18,194

 

 

 

 

18,194

Commercial business lending

 

196,743

 

3,124

 

99

 

2,428

 

202,394

Equity lines

 

48,140

 

132

 

3

 

191

 

48,466

Consumer

 

10,832

 

48

 

41

 

107

 

11,028

$

1,004,998

$

20,526

$

11,628

$

3,002

$

1,040,154

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

Non-

(Dollars in thousands)

   

Performing

   

Performing

   

Total

 

Consumer finance

$

311,850

$

402

$

312,252

NOTE 6: Goodwill and Other Intangible Assets

The carrying amount of goodwill was $25.19 million at both March 31, 2021 and December 31, 2020. The following table presents the changes in goodwill during the three months ended March 31, 2020.  There were 0 changes in the recorded balance of goodwill during the three months ended March 31, 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 March 31, 2020

$

14,468

$

10,723

$

25,191

The Corporation had $2.21 million and $2.29 million of other intangible assets as of March 31, 2021 and December 31, 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:

March 31, 

December 31, 

2021

2020

Gross

Gross

Carrying

Accumulated

Carrying

Accumulated

(Dollars in thousands)

Amount

Amortization

Amount

Amortization

Amortizable intangible assets:

Core deposit intangibles

$

1,711

$

(209)

$

1,711

$

(171)

Other amortizable intangibles

 

1,405

(694)

1,405

(654)

Total

$

3,116

$

(903)

$

3,116

$

(825)

Amortization expense was $78,000 and $83,000 for the three months ended March 31, 2021 and 2020, respectively.

20

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 March 31, 2021, the Corporation has made aggregate common stock repurchases of 7,459 shares for an aggregate cost of $275,000 under the Repurchase Program. There were 0 share repurchases under the Repurchase Program during the three months ended March 31, 2021.

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 three months ended March 31, 2020, the Corporation repurchased 8,963 shares of its common stock for an aggregate cost of $355,000, under its previous share repurchase program.

Additionally during the three months ended March 31, 2021 and 2020, the Corporation withheld 5,633 shares and 5,069 shares of its common stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock.

Noncontrolling interest represents an ownership interest in C&F Select LLC, a subsidiary of C&F Mortgage, held by an unrelated investor. 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 $997,000 and $630,000 as of March 31, 2021 and December 31, 2020, respectively.

March 31, 

December 31, 

(Dollars in thousands)

    

2021

    

2020

Net unrealized gains on securities

$

2,024

$

4,397

Net unrecognized losses on cash flow hedges

 

(633)

 

(1,367)

Net unrecognized losses on defined benefit plan

 

(4,951)

 

(4,985)

Total accumulated other comprehensive loss, net

$

(3,560)

$

(1,955)

Earnings Per Share (EPS)

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

Three Months Ended March 31, 

 

(Dollars in thousands)

    

2021

    

2020

 

Net income attributable to C&F Financial Corporation

$

7,061

$

3,578

Weighted average shares outstandingbasic and diluted

 

3,676,067

 

3,644,614

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

21

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 March 31, 

(Dollars in thousands)

    

2021

    

2020

    

Components of net periodic benefit cost:

Service cost, included in salaries and employee benefits

$

487

$

386

Other components of net periodic benefit cost:

Interest cost

 

116

 

135

Expected return on plan assets

 

(440)

 

(374)

Amortization of prior service credit

 

(17)

 

(17)

Amortization of net obligation at transition

 

 

Recognized net actuarial losses

 

60

 

42

Other components of net periodic benefit cost, included in other noninterest income

(281)

(214)

Net periodic benefit cost

$

206

$

172

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).

 

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

22

March 31, 2021 and December 31, 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 March 31, 2021 and December 31, 2020, the fair value of the Corporation’s investment in small business investment companies, based on net asset value, was $1.44 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 gains of $45,000 for the three months ended March 31, 2021.  There were 0 unrealized gains or losses on investments in small business investment company funds recorded during the three months ended March 31, 2020.

  

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.

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

23

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.

March 31, 2021

 

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

$

$

53,681

$

$

53,681

Mortgage-backed securities

 

 

150,518

 

 

150,518

Obligations of states and political subdivisions

 

 

103,154

 

 

103,154

Corporate and other debt securities

13,932

13,932

Total securities available for sale

 

 

321,285

 

 

321,285

Loans held for sale

 

 

177,350

 

 

177,350

Derivatives

IRLC

 

 

4,026

 

 

4,026

Interest rate swaps on loans

4,841

4,841

Forward sales of TBA securities

 

 

75

 

 

75

Total assets

$

$

507,577

$

$

507,577

Liabilities:

Derivatives

Interest rate swaps on loans

$

$

4,841

$

$

4,841

Cash flow hedges

891

891

Total liabilities

$

$

5,732

$

$

5,732

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

24

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.

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

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

March 31, 2021

 

Fair Value Measurements Classified as

Assets at Fair

 

(Dollars in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Value

 

Other real estate owned, net

$

$

$

72

$

72

Total

$

$

$

72

$

72

    

December 31, 2020

 

Fair Value Measurements Classified as

Assets at Fair

 

(Dollars in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Value

 

Other real estate owned, net

$

$

$

72

$

72

Total

$

$

$

72

$

72

25

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

Fair Value Measurements

 

(Dollars in thousands)

    

Fair Value

    

Valuation Technique(s)

    

Unobservable Inputs

    

Range (Weighted Average)1

 

At March 31, 2021:

Other real estate owned, net

$

72

 

Appraisals

 

Discount to reflect current market conditions and estimated selling costs

 

75%-80% (79%)

Total

$

72

At December 31, 2020:

Other real estate owned, net

$

72

 

Appraisals

 

Discount to reflect current market conditions and estimated selling costs

 

75% - 80% (79%)

Total

$

72

1The 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.

26

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

  

Carrying

  

   Fair Value Measurements at March 31, 2021 Classifed as   

  

 Total Fair 

 

(Dollars in thousands)

      Value      

Level 1

Level 2

Level 3

      Value      

 

Financial assets:

Cash and short-term investments

$

147,438

$

147,438

$

$

$

147,438

Securities available for sale

 

321,285

 

321,285

 

321,285

Loans, net

 

1,346,003

 

 

 

1,331,249

 

1,331,249

Loans held for sale

 

177,350

 

 

177,350

 

 

177,350

Derivatives

IRLC

4,026

4,026

4,026

Interest rate swaps on loans

4,841

4,841

4,841

Forward sales of TBA securities

75

75

75

Bank-owned life insurance

20,332

20,332

20,332

Accrued interest receivable

 

7,723

 

7,723

 

 

 

7,723

Financial liabilities:

Demand and savings deposits

1,373,882

1,373,882

1,373,882

Time deposits

 

458,100

 

 

461,981

 

 

461,981

Borrowings

 

73,328

 

 

72,267

 

 

72,267

Derivatives

Cash flow hedges

 

891

 

891

 

891

Interest rate swaps on loans

4,841

4,841

4,841

Accrued interest payable

 

734

 

734

 

 

 

734

  

 Carrying 

  

Fair Value Measurements at December 31, 2020 Classifed as

  

 Total Fair 

 

(Dollars in thousands)

      Value      

Level 1

Level 2

Level 3

      Value      

 

Financial assets:

Cash and short-term investments

$

86,669

$

86,669

$

$

$

86,669

Securities available for sale

 

286,389

 

286,389

 

286,389

Loans, net

 

1,313,250

 

 

 

1,308,569

 

1,308,569

Loans held for sale

 

214,266

 

 

214,266

 

 

214,266

Derivatives

IRLC

4,582

4,582

4,582

Interest rate swaps on loans

8,185

8,185

8,185

Bank-owned life insurance

20,205

20,205

20,205

Accrued interest receivable

 

8,103

 

8,103

 

 

 

8,103

Financial liabilities:

Demand and savings deposits

1,282,590

1,282,590

1,282,590

Time deposits

 

469,583

 

 

474,154

 

 

474,154

Borrowings

 

69,864

 

 

71,119

 

 

71,119

Derivatives

Cash flow hedges

 

1,882

 

1,882

 

1,882

Interest rate swaps on loans

8,185

8,185

8,185

Forward sales of TBA securities

47

47

47

Accrued interest payable

 

1,109

 

1,109

 

 

 

1,109

 

NOTE 10: Business Segments

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

27

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 income related to investments in loans and securities and outstanding deposits and borrowings, fees earned on deposit accounts and debit card interchange activity, and net revenues from offering wealth management services and insurance products through third-party service providers.  Mortgage banking revenues consist principally of gains on sales of loans in the secondary market, mortgage banking fee income related to loan originations, fees earned by providing mortgage loan origination functions to third-party lenders, and net interest income 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 March 31, 2021

 

    

Community

    

Mortgage

    

Consumer

    

    

    

 

(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

 

Interest income

$

15,176

$

1,127

$

9,249

$

$

(2,476)

$

23,076

Interest expense

 

1,724

373

 

2,200

 

582

 

(2,479)

 

2,400

Net interest income

 

13,452

 

754

 

7,049

 

(582)

 

3

 

20,676

Gain on sales of loans

7,105

(47)

7,058

Other noninterest income

3,968

2,724

112

511

(17)

7,298

Net revenue

 

17,420

 

10,583

 

7,161

 

(71)

 

(61)

 

35,032

Provision for loan losses

 

 

30

250

 

280

Noninterest expense

 

14,052

 

6,987

3,448

813

 

25,300

Income (loss) before taxes

 

3,368

 

3,566

 

3,463

 

(884)

 

(61)

 

9,452

Income tax expense (benefit)

 

575

 

1,021

936

(232)

 

(13)

 

2,287

Net income (loss)

$

2,793

$

2,5