C & F FINANCIAL CORP - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 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 October 29, 2021, the latest practicable date for determination, 3,538,713 shares of common stock, $1.00 par value, of the registrant were outstanding.

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TABLE OF CONTENTS


PART I - Financial Information		Page

Item 1.	Financial Statements	3

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

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

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

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

	Consolidated Statements of Cash Flows (Unaudited) – Nine months ended September 30, 2021 and 2020	8

	Notes to Consolidated Interim Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69

Item 4.	Controls and Procedures	69

PART II - Other Information

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 6.	Exhibits	71

	Signatures	72

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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,
	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

See notes to consolidated interim financial statements.

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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,
	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.

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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,
	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 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.

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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.

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C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE NINE 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 December 31, 2020	$	3,514	$	21,427	$	170,819	$	(1,955)	$	666	$	194,471
Comprehensive income:
Net income		—		—		22,743		—		339		23,082
Other comprehensive loss		—		—		—		(1,692)		—		(1,692)
Share-based compensation		—		1,206		—		—		—		1,206
Restricted stock vested		21		(21)		—		—		—		—
Common stock issued		3		131		—		—		—		134
Common stock purchased		(150)		(7,353)		—		—		—		(7,503)
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
							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		—		—		14,117		—		183		14,300
Other comprehensive income		—		—		—		1,519		—		1,519
Share-based compensation		—		1,012		—		—		—		1,012
Restricted stock vested		17		(17)		—		—		—		—
Acquisition of Peoples Bankshares, Incorporated		210		11,402		—		—		—		11,612
Common stock issued		2		107		—		—		—		109
Common stock purchased		(14)		(605)		—		—		—		(619)
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

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C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,
	2021		2020
Operating activities:
Net income	$	23,082	$	14,300
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		110		9,550
Accretion of certain acquisition-related discounts, net		(2,401)		(2,631)
Share-based compensation		1,206		1,012
Depreciation and amortization		3,578		3,028
Accretion of discounts and amortization of premiums on securities, net		2,629		1,564
Income from bank-owned life insurance		(312)		(320)
Pension expense		652		593
Proceeds from sales of loans held for sale		1,276,899		1,070,338
Origination of loans held for sale		(1,163,845)		(1,226,538)
Gains on sales of loans held for sale		(18,665)		(17,987)
Other (gains) losses, net		(519)		862
Change in other assets and liabilities:
Accrued interest receivable		978		(623)
Other assets		447		5,934
Accrued interest payable		(528)		(460)
Other liabilities		(3,544)		4,056
Net cash provided by (used in) operating activities		119,767		(137,322)
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		85,293		101,068
Purchases of securities available for sale		(168,040)		(164,094)
Maturities (purchases) of time deposits, net		4,692		(6,466)
Repayments on loans held for investment by non-bank affiliates		120,088		96,460
Purchases of loans held for investment by non-bank affiliates		(156,677)		(98,760)
Net decrease (increase) in community banking loans held for investment		3,330		(118,640)
Purchases of corporate premises and equipment		(4,377)		(7,655)
Proceeds from sales of other real estate owned		457		—
Changes in collateral posted with other financial institutions, net		3,960		(9,340)
Other investing activities, net		834		310
Net cash used in investing activities		(110,440)		(180,012)
Financing activities:
Net increase in demand and savings deposits		129,390		220,379
Net decrease in time deposits		(28,269)		(19,723)
Net increase in short-term borrowings		16,551		44,121
Proceeds from long-term borrowings		—		20,000
Repayments of long-term borrowings		—		(82,553)
Repurchases of common stock		(7,503)		(355)
Cash dividends paid		(4,261)		(4,160)
Other financing activities, net		(409)		(35)
Net cash provided by financing activities		105,499		177,674
Net increase (decrease) in cash and cash equivalents		114,826		(139,660)
Cash and cash equivalents at beginning of period		86,669		165,433
Cash and cash equivalents at end of period	$	201,495	$	25,773
Supplemental cash flow disclosures:
Interest paid	$	7,295	$	11,195
Income taxes paid		8,429		3,847
Supplemental disclosure of noncash investing and financing activities:
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.

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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 five wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. and CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, 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 September 30, 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

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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.

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 23.1 percent and 22.5 percent for the first nine months of 2021 and 2020, respectively. The Corporation recognized income tax benefits of $23,000 and $326,000 in the three and nine months ended September 30, 2020 arising from 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. The effects of changes in tax law are recognized in income tax expense in the period in which the changes are enacted.

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, 2021, there was $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 2021 and 2020 is presented below:


	2021
		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Unvested, December 31, 2020	155,945	$	48.52
Granted	20,462		44.13
Vested	(21,195)		44.18
Forfeited	(5,450)		45.89
Unvested, September 30, 2021	149,762		48.63

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	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 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.

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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.

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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 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 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 revenue and earnings amounts specific to Peoples 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 $1.40 million ($1.13 million after income taxes) for the nine months ended September 30, 2020. There were no merger related expenses during the three months ended September 30, 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.

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NOTE 3: Securities

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

September 30, 2021

Gross

Amortized

Unrealized

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

U.S. government agencies and corporations

63,271

(772)

62,572

Mortgage-backed securities

184,548

2,105

(533)

186,120

Obligations of states and political subdivisions

94,872

1,748

(315)

96,305

Corporate and other debt securities

18,290

190

(64)

18,416

360,981

4,116

(1,684)

363,413


	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 September 30, 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, 2021
	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	62,145	$	62,010
Due after one year through five years		200,714		203,445
Due after five years through ten years		89,131		89,136
Due after ten years		8,991		8,822
	$	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 no 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

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The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $157.62 million and an aggregate fair value of $159.86 million were pledged at September 30, 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 September 30, 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

46,809

724

1,451

48,260

772

Mortgage-backed securities

94,098

511

4,341

98,439

533

Obligations of states and political subdivisions

20,132

279

1,273

21,405

315

Corporate and other debt securities

9,077

—

9,077

Total temporarily impaired securities

170,116

1,578

7,065

106

177,181

1,684

There were 133 debt securities totaling $177.18 million of aggregate fair value considered temporarily impaired at September 30, 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, 2021, and no 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 no securities with unrealized losses that were significant relative to their carrying amounts, 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 September 30, 2021 and consisted of 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, 2021 and no impairment has been recognized.

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NOTE 4: Loans

Major classifications of loans are summarized as follows:


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Real estate – residential mortgage	$	215,166	$	218,298
Real estate – construction ¹		53,845		62,147
Commercial, financial and agricultural ²		721,824		700,215
Equity lines		42,881		48,466
Consumer		8,165		11,028
Consumer finance		349,130		312,252
		1,391,011		1,352,406
Less allowance for loan losses		(39,447)		(39,156)
Loans, net	$	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 Paycheck Protection Program).

Consumer loans included $232,000 and $284,000 of demand deposit overdrafts at September 30, 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 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.

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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.

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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

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 $2.86 million, 30-59 days past due of $115,000 and 90+ days past due of $433,000.

There were no loan modifications during the three months ended September 30, 2021 that were classified as a troubled debt restructuring (TDR). There were two 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 one 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 three 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 two 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 no 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

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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 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:


	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

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The following table presents, as of 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,
	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	$	68	$	—	$	349	$	—	$	—	$	—	$	417
Collectively evaluated for impairment		2,766		792		10,771		598		176		23,927		39,030
Acquired loans - PCI		—		—		—		—		—		—		—
Total allowance	$	2,834	$	792	$	11,120	$	598	$	176	$	23,927	$	39,447
Loans:
Individually evaluated for impairment	$	1,444	$	—	$	3,628	$	108	$	—	$	—	$	5,180
Collectively evaluated for impairment		212,868		53,845		713,686		42,738		8,124		349,130		1,380,391
Acquired loans - PCI		854		—		4,510		35		41		—		5,440
Total loans	$	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, 2021 were as follows:

Special

Substandard

(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total¹

Real estate – residential mortgage

213,523

873

453

317

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

477,246

15,484

7,595

—

500,325

Land acquisition and development lending

37,242

—

37,242

Builder line lending

29,748

—

29,748

Commercial business lending

150,974

1,300

—

2,235

154,509

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

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


			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	348,932	$	198	$	349,130

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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

1	At 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 September 30, 2021 and December 31, 2020. The following table presents the changes in goodwill during the nine months ended September 30, 2020. There were no changes in the recorded balance of goodwill during the three and nine months ended September 30, 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 $2.06 million and $2.29 million of other intangible assets as of September 30, 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:

September 30,

December 31,

2021

2020

Gross

Carrying

Accumulated

Carrying

Accumulated

(Dollars in thousands)

Amount

Amortization

Amount

Amortization

Amortizable intangible assets:

Core deposit intangibles

1,711

(287)

1,711

(171)

Other amortizable intangibles

1,405

(774)

1,405

(654)

Total

3,116

(1,061)

3,116

(825)

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

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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 program. The Corporation did not repurchase any of its common stock during the three months ended September 30, 2020.

Additionally during the nine months ended September 30, 2021 and 2020, the Corporation withheld 7,596 shares and 5,084 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 $1.02 million and $630,000 as of September 30, 2021 and December 31, 2020, respectively.


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Net unrealized gains on securities	$	1,921	$	4,397
Net unrecognized losses on cash flow hedges		(687)		(1,367)
Net unrecognized losses on defined benefit plan		(4,881)		(4,985)
Total accumulated other comprehensive loss, net	$	(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)	2021		2020
Net income attributable to C&F Financial Corporation	$	7,674	$	6,793
Weighted average shares outstanding—basic and diluted		3,550,001		3,648,515


	Nine Months Ended September 30,
(Dollars in thousands)	2021		2020
Net income attributable to C&F Financial Corporation	$	22,743	$	14,117
Weighted average shares outstanding—basic and diluted		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

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the Corporation’s common stock. Accordingly, the weighted average number of shares used in the calculation of basic and diluted EPS includes both vested and unvested shares outstanding.

NOTE 8: Employee Benefit Plans

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


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

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

Net periodic benefit cost	$	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).

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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, 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 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 $1.42 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 gains of $88,000 and $135,000 for the three and nine months ended September 30, 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.

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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, 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	$	—	$	62,572	$	—	$	62,572
Mortgage-backed securities		—		186,120		—		186,120
Obligations of states and political subdivisions		—		96,305		—		96,305
Corporate and other debt securities		—		18,416		—		18,416
Total securities available for sale		—		363,413		—		363,413
Loans held for sale		—		116,789		—		116,789
Derivatives
IRLC		—		2,875		—		2,875
Interest rate swaps on loans		—		4,961		—		4,961
Forward sales of TBA securities		—		45		—		45
Total assets	$	—	$	488,083	$	—	$	488,083

Liabilities:
Derivatives
Interest rate swaps on loans	$	—	$	4,961	$	—	$	4,961
Cash flow hedges		—		960		—		960
Total liabilities	$	—	$	5,921	$	—	$	5,921

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	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.

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

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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 no impaired loans that were measured at fair value.


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


	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

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 September 30, 2021 and December 31, 2020:


	Fair Value Measurements
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Inputs	Range (Weighted Average)¹
At September 30, 2021:
Other real estate owned, net	$	22	Appraisals	Discount to reflect current market conditions and estimated selling costs	75% (75%)
Total	$	22

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

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.

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

Carrying

Fair Value Measurements at September 30, 2021 Classified as

Total Fair

(Dollars in thousands)

Value

Level 1

Level 2

Level 3

Value

Financial assets:

Cash and short-term investments

204,475

201,495

2,479

—

203,974

Securities available for sale

363,413

—

363,413

—

363,413

Loans, net

1,351,564

—

1,368,093

Loans held for sale

116,789

—

116,789

—

116,789

Derivatives

IRLC

2,875

—

2,875

—

2,875

Interest rate swaps on loans

4,961

—

4,961

—

4,961

Forward sales of TBA securities

—

Bank-owned life insurance

20,382

—

20,382

—

20,382

Accrued interest receivable

7,125

—

7,125

Financial liabilities:

Demand and savings deposits

1,411,980

—

1,411,980

Time deposits

441,105

—

444,446

—

444,446

Borrowings

86,394

—

91,484

—

91,484

Derivatives

Cash flow hedges

960

—

960

—

960

Interest rate swaps on loans

4,961

—

4,961

—

4,961

Accrued interest payable

581

—

581


	Carrying		Fair Value Measurements at December 31, 2020 Classified as						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	94,342	$	86,669	$	7,710	$	—	$	94,379
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 three business segments: community banking, mortgage banking and consumer finance. Beginning with the first quarter of 2021, the community banking segment comprises C&F Bank

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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 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

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Nine Months Ended September 30, 2021

Community

Mortgage

Consumer

(Dollars in thousands)

Banking

Finance

Other

Eliminations

Consolidated

Interest income

47,035

3,011

28,058

—

(7,558)

70,546

Interest expense

4,481

925

6,926

1,759

(7,567)

6,524

Net interest income

42,554

2,086

21,132

(1,759)

64,022

Gain on sales of loans

—

18,753

—

(88)

18,665

Other noninterest income

12,022

7,298

231

1,341

(59)

20,833

Net revenue

54,576

28,137

21,363

(418)

(138)

103,520

Provision for loan losses

(200)

220

—

110

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)

2,261

2,588

2,836

(706)

(29)

6,950

Net income (loss)

10,884

6,621

7,596

(1,910)

(109)

23,082

Other data:

Capital expenditures

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 $998,000 of 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 and included in the “Other” column above. No merger related expenses were recorded during the three months ended September 30, 2020.

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The community banking segment extends two warehouse lines of credit to the mortgage banking segment, providing a portion of the funds needed to originate mortgage loans. The community banking segment charges the mortgage banking segment interest at the daily FHLB advance rate plus a spread ranging from 50 basis points to 175 basis points. The community banking segment also provides the consumer finance segment with a portion of the funds needed to purchase loan contracts by means of variable rate notes that carry interest at one-month LIBOR plus 200 basis points, with a floor of 3.5 percent, and fixed rate notes that carry interest at rates ranging from 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. In addition to unallocated expenses recorded by the holding company, certain overhead costs are incurred by the community banking segment and are not allocated to the mortgage banking and consumer finance segments.

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 $314.65 million at September 30, 2021 and $326.98 million at December 31, 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 $19.17 million at September 30, 2021 and $19.07 million at December 31, 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 estimate of potential losses is inherently subjective and is based on historical indemnification payments and management’s assessment of current conditions that may contribute to indemnified losses on mortgage loans that have been sold in the secondary market. For the three and nine months ended September 30, 2021, the Corporation recorded $20,000 and $52,000 of provision for indemnifications, respectively, compared to $9,000 and $172,000 provision for

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indemnifications for the three and nine months ended September 30, 2020, respectively. The allowance for indemnifications was $3.41 million at September 30, 2021 and $3.36 million at December 31, 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 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, 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 income and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties.

Mortgage banking. The mortgage banking segment enters into IRLCs with customers to originate loans for which the interest rates are determined (or “locked”) prior to funding. The mortgage banking segment is exposed to interest rate risk through fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans are sold in the secondary market. The mortgage banking segment mitigates this interest rate risk by 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.

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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 September 30, 2021, the mortgage banking segment had $12.13 million of IRLCs and $10.55 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of $16.50 million of TBA securities and mandatory-delivery forward sales contracts for $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, 2021 or December 31, 2020.


	September 30, 2021
	Notional
(Dollars in thousands)	Amount		Assets		Liabilities
Cash flow hedges:
Interest rate swap contracts	$	25,000	$	—	$	960
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower		83,819		4,794		167
Matched interest rate swaps with counterparty		83,819		167		4,794
Mortgage banking contracts:
IRLCs		148,144		2,875		—
Forward sales of TBA securities		16,500		45		—


	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 interest rate swap relationships in a loss position. At September 30, 2021 and at December 31, 2020, $5.96 million and $9.92 million, respectively, of cash collateral was maintained with dealer counterparties and was included in “Other assets” in the Consolidated Balance Sheets.

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NOTE 13: Other Noninterest Expenses

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Data processing fees	$	2,791	$	2,607	$	8,519	$	8,142
Mortgage banking loan processing expenses		697		916		2,458		2,180
Professional fees		675		706		2,159		2,424
Telecommunication expenses		390		311		1,151		1,092
Marketing and advertising expenses		374		369		1,178		1,207
Travel and educational expenses		263		430		620		974
Other real estate (gain)/loss and expenses, net		2		76		(400)		84
All other noninterest expenses		1,838		2,018		5,670		5,836
Total other noninterest expenses	$	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 no merger related expenses during the three or nine months ended September 30, 2021 or the three months ended September 30, 2020.

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

The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Corporation. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition or results of operations, see “Cautionary Statement About Forward-Looking Statements” at the end of this discussion and analysis.

OVERVIEW

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

Financial Performance 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. 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. 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. 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.

The Corporation uses adjusted net income, which is a non-GAAP measure of financial performance, to provide meaningful information about operating performance by excluding the effects of certain items that management does not expect to have an ongoing impact on consolidated net income. Adjusted net income for the third quarter and first nine months of 2021 and 2020 excludes the effects of merger related expenses incurred in connection with the acquisition of Peoples Bankshares, Incorporated (Peoples), branch consolidation activity and a change in income tax law related to the carryback of 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 2021, respectively, compared to $6.9 million, or $1.85 per share, and $15.3 million, or $4.15 per share, for the third quarter and first nine months of 2020, 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. 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, 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 increased 13.1 percent and 61.4 percent for the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020. Adjusted net income increased 12.0 percent and 49.9 percent for the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020. The increases in net income and adjusted net income for the third quarter and first nine months of 2021 compared to the same periods of 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.

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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 Corporation’s tier 1 capital and total capital ratios at September 30, 2021 were 12.7 percent and 15.5 percent, respectively, compared to 12.5 percent and 15.2 percent, respectively, at December 31, 2020. Capital growth resulted primarily from earnings for the first nine months of 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 2021. At September 30, 2021,

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the book value per share of the Corporation’s common stock was $57.78, and tangible book value per share, which is a non-GAAP financial measure, was $50.08, compared to $52.80 and $45.32, respectively, at December 31, 2020. For the third quarter of 2021, the Corporation’s cash dividend equated to a payout ratio of 18.5 percent of earnings per share. The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital levels and requirements and expected future earnings. In making its decision on the payment of dividends on the Corporation’s common stock, the Corporation’s Board of Directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors. The Corporation has a share repurchase program that was authorized by the Board of Directors in November 2020 to repurchase up to 365,000 shares of the Corporation’s common stock through November 30, 2021. During the third quarter and first nine months of 2021, the Corporation repurchased $2.7 million and $7.2 million, respectively, of its common stock under the Corporation’s share repurchase 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 2021, we released a portion of these added reserves through a reduction of provision for loan losses, but continue to maintain reserves for loan losses at September 30, 2021 related to the 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 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 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

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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 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

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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 2020, the Corporation concluded that no 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, 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, 2021 and 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 yields on community banking segment loans and total loans, respectively, and 12 basis points to both the yield on total earning assets and net interest margin, for the third quarter of 2020. The accretion contributed approximately 27 basis points and 20 basis points to the yields on community banking segment loans and total loans, respectively, and 14 basis points to both the yield on total earning assets and net interest margin for the first nine months of 2021, compared to approximately 32 basis points and 22 basis points to the yields on community banking segment loans and total loans, respectively, and 18 basis points to both the yield on total earning assets and net interest margin, for the first nine months of 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.

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


	Three Months Ended September 30,
	2021						2020
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	280,018	$	1,012	1.45	%	$	168,659	$	788	1.87	%
Tax-exempt		77,695		501	2.58			83,776		629	3.00
Total securities		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		1,486,010		22,145	5.91			1,544,389		22,537	5.81
Interest-bearing deposits in other banks		184,603		77	0.17			44,523		32	0.29
Total earning assets		2,028,326		23,735	4.64			1,841,347		23,986	5.18
Allowance for loan losses		(39,215)						(37,417)
Total non-earning assets		189,631						188,314
Total assets	$	2,178,742					$	1,992,244

Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	295,761		118	0.16		$	253,950		102	0.16
Money market deposit accounts		319,172		198	0.25			271,652		219	0.32
Savings accounts		214,881		30	0.06			170,296		25	0.06
Certificates of deposit, $100 or more		258,217		583	0.90			273,668		1,182	1.72
Other certificates of deposit		186,609		305	0.65			212,101		756	1.42
Interest-bearing deposits		1,274,640		1,234	0.38			1,181,667		2,284	0.77
Borrowings		85,412		752	3.52			99,097		693	2.80
Total interest-bearing liabilities		1,360,052		1,986	0.58			1,280,764		2,977	0.93
Noninterest-bearing demand deposits		568,275						478,232
Other liabilities		50,461						54,405
Total liabilities		1,978,788						1,813,401
Equity		199,954						178,843
Total liabilities and equity	$	2,178,742					$	1,992,244
Net interest income			$	21,749					$	21,009
Interest rate spread					4.06	%					4.25	%
Interest expense to average earning assets					0.39	%					0.64	%
Net interest margin					4.25	%					4.54	%

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	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.

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TABLE 2: Rate-Volume Recap


	Three Months Ended September 30, 2021 from 2020
	Increase (Decrease)				Total
	Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)
Interest income:
Loans:
Community banking segment	$	358	$	130	$	488
Mortgage banking segment		121		(760)		(639)
Consumer finance segment		(1,154)		913		(241)
Securities:
Taxable		(207)		431		224
Tax-exempt		(84)		(44)		(128)
Interest-bearing deposits in other banks		(18)		63		45
Total interest income		(984)		733		(251)
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		—		16		16
Money market deposit accounts		(54)		33		(21)
Savings accounts		—		5		5
Certificates of deposit, $100 or more		(536)		(63)		(599)
Other certificates of deposit		(369)		(82)		(451)
Total interest-bearing deposits		(959)		(91)		(1,050)
Borrowings		163		(104)		59
Total interest expense		(796)		(195)		(991)
Change in net interest income	$	(188)	$	928	$	740


	Nine Months Ended September 30, 2021 from 2020
	Increase (Decrease)				Total
	Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)
Interest income:
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		(1,014)		1,300		286
Tax-exempt		(314)		52		(262)
Interest-bearing deposits in other banks		(721)		210		(511)
Total interest income		(7,070)		5,353		(1,717)
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		(145)		71		(74)
Money market deposit accounts		(320)		155		(165)
Savings accounts		(16)		17		1
Certificates of deposit, $100 or more		(1,555)		(21)		(1,576)
Other certificates of deposit		(1,138)		(405)		(1,543)
Total interest-bearing deposits		(3,174)		(183)		(3,357)
Borrowings		725		(1,326)		(601)
Total interest expense		(2,449)		(1,509)		(3,958)
Change in net interest income	$	(4,621)	$	6,862	$	2,241

Net interest income, on a taxable-equivalent basis, for the third quarter of 2021 was $21.7 million, compared to $21.0 million for the third quarter of 2020. Net interest income, on a taxable-equivalent basis, for the first nine months of 2021 was $64.4 million, compared to $62.2 million for the first nine months of 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.

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Annualized net interest margin decreased 29 basis points to 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 37 basis points to 4.31 percent for the first nine months of 2021 compared to the first nine months of 2020, due primarily to lower average yields on loans, securities and cash reserves, and growth in lower yielding securities and cash reserves outpacing loan growth, partially offset by lower average cost of deposits (including growth in noninterest-bearing demand deposits) and using lower cost deposits to fund growth in loans and securities and repay borrowings. The yield on interest-earning assets and cost of interest-bearing liabilities decreased by 54 basis points and 35 basis points, respectively, for the third quarter of 2021 and decreased by 72 basis points and 44 basis points, respectively, for the first nine months of 2021 compared to the same periods in 2020.

Average loans, which includes both loans held for investment and loans held for sale, decreased $58.4 million to $1.49 billion for the third quarter of 2021 and increased $76.1 million to $1.51 billion for the first nine months of 2021, compared to the same periods in 2020. Average loans at the community banking segment increased $11.7 million, or 1.1 percent, for the third quarter of 2021, and increased $58.4 million, or 6.0 percent, for the first nine months of 2021 compared to the same periods in 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 $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

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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 2021, compared to the same periods in 2020, due primarily to higher 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. The average yield on the securities portfolio on a taxable-equivalent basis decreased 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 2021, compared to the same periods in 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, 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, increased $140.1 million for the third quarter of 2021 and increased $47.3 million for the first nine months of 2021, compared to the same periods in 2020 due primarily to excess liquidity resulting from deposit growth and decreases in loans held for sale exceeding growth in securities and loans at the consumer finance and community banking segments. The average yield on interest-bearing deposits in other banks decreased 12 basis points for the third quarter of 2021 and decreased 68 basis points for the first nine months of 2021, compared to the same periods in 2020. The Federal Reserve Bank decreased the interest rate on excess cash reserve balances from 1.55 percent at December 31, 2019 to 0.10 percent by the end of the first quarter of 2020 in response to the COVID-19 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 $133.9 million and $151.0 million for the third quarter and first nine months of 2021, respectively, and average time deposits decreased $40.9 million for both of the third quarter and first nine months of 2021, respectively, compared to the same periods in 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 $90.0 million for the third quarter of 2021 and increased $138.2 million for the first nine months of 2021, compared to the same periods in 2020. The average cost of interest-bearing deposits decreased 39 basis points for the third quarter of 2021 and decreased 43 basis points 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 composition toward non-time deposits. Offered rates on interest-bearing deposit accounts were reduced in response to changes in market interest rates beginning in March 2020. While changes in rates take effect immediately for interest checking, money market and 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 $13.7 million for the third quarter of 2021 and decreased $53.2 million for the first nine months of 2021, compared to the same periods in 2020 due primarily to the repayment of long-term borrowings in 2020, partially offset by the issuance of $20.0 million of subordinated notes by the Corporation in the third quarter of 2020. The average cost of borrowings increased 72 basis points for the third quarter of 2021 and increased 88 basis points for the first nine months of 2021, compared to the same periods in 2020 due primarily to the higher cost of the subordinated notes relative to borrowings that were repaid.

The Corporation believes that it may be challenging to maintain net interest margin 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 the current environment of low interest rates and competition for loans, (2) the temporary effect on loan yields of recognition of 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, (4) lower accretion of purchase discounts on loans related to acquisitions, which is included in yields on loans, (5) lower mortgage loan production, and therefore lower average

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loans held for sale, at the mortgage banking segment and (6) repricing of time deposits at lower rates upon maturity, which may lag or may not offset the effects of lower average loan yields.

Noninterest Income

TABLE 3: Noninterest Income


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
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

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.

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Noninterest Expense

TABLE 4: Noninterest Expense


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Salaries and employee benefits	$	13,915	$	15,767	$	45,242	$	40,938
Occupancy expense		2,231		2,131		6,781		6,331
Other expenses:
Data processing		2,791		2,607		8,519		8,142
Mortgage banking loan processing expenses		697		916		2,458		2,180
Professional fees		675		706		2,159		2,424
Other real estate loss/(gain) and expense, net		2		76		(400)		84
Other expenses		2,865		3,128		8,619		9,109
Total other expenses		7,030		7,433		21,355		21,939
Total noninterest expense	$	23,176	$	25,331	$	73,378	$	69,208

Total noninterest expenses decreased $2.2 million, or 8.5 percent, in the third quarter of 2021 compared to the 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 lower mortgage loan production volume.

Total noninterest expenses increased $4.2 million, or 6.0 percent, in the first nine months of 2021, compared to the same period in 2020, due primarily to (1) higher salaries and benefits expense, driven primarily by the mortgage banking segment, (2) higher mortgage banking loan processing expense as a result of increased sales of loans, (3) higher occupancy expense at the community banking segment related to the opening of two new financial centers in the third quarter of 2020, and (4) higher data processing expenses primarily at the community banking segment, 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 2021 related primarily to the sale of one property.

In addition to these factors, changes in deferred compensation liabilities decreased salaries and employee benefits expense by $161,000 and increased salaries and employee benefits expense by $1.3 million in the third quarter and first nine months of 2021, respectively, and increased salaries and employee benefits expense by $705,000 and $475,000 in the third quarter and first nine months of 2020, respectively, and are offset by unrealized gains and losses recorded in noninterest income.

There were no merger related expenses for the third quarter or first nine months of 2021 or the third quarter of 2020. Merger related expenses for the first nine months of 2020 were $1.4 million, of which $501,000 was data processing expense, $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.

Income Taxes

The Corporation’s consolidated effective income tax rate was 23.1 percent and 22.5 percent for the first nine months of 2021 and 2020, respectively. The Corporation recognized income tax benefits of $23,000 and $326,000 in the third quarter and first nine months of 2020 arising from 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. The effects of changes in tax law are recognized in income tax expense in the period in 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 C&F Bank, which is not subject to state income tax, and income tax benefits recorded in 2021 related to branch consolidation activities of $107,000.

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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.

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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.

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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.

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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.

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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.

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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 9 summarizes the allowance activity for the periods indicated:

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TABLE 9: Allowance for Loan Losses


	Three Months Ended September 30,
(Dollars in thousands)	2021			2020
Balance, beginning of period	$	38,951		$	36,094
Provision for loan losses:
Community Banking		—			1,500
Mortgage Banking		30			—
Consumer Finance		400			1,800
Total provision for loan losses		430			3,300
Loans charged off:
Real estate—residential mortgage		—			(5)
Consumer		(47)			(41)
Consumer finance		(1,001)			(1,583)
Total loans charged off¹		(1,048)			(1,629)
Recoveries of loans previously charged off:
Real estate—residential mortgage		6			15
Commercial, financial and agricultural²		1			1
Consumer		28			30
Consumer finance		1,079			1,045
Total recoveries¹		1,114			1,091
Net recoveries/(charge-offs)		66			(538)
Balance, end of period	$	39,447		$	38,856
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	%

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	Nine Months Ended September 30,
(Dollars in thousands)	2021			2020
Balance, beginning of period	$	39,156		$	32,873
Provision for loan losses:
Community Banking		(200)			3,900
Mortgage Banking		90			—
Consumer Finance		220			5,650
Total provision for loan losses		110			9,550
Loans charged off:
Real estate—residential mortgage		—			(9)
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		1			—
Consumer		93			135
Consumer finance		3,637			3,422
Total recoveries¹		3,752			3,639
Net recoveries/(charge-offs)		181			(3,567)
Balance, end of period	$	39,447		$	38,856
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.

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Table 10 presents the allocation of the allowance for loan losses as of the dates indicated.

TABLE 10: Allocation of Allowance for Loan Losses


	September 30,			December 31,
(Dollars in thousands)	2021			2020
Allocation of allowance for loan losses:
Real estate—residential mortgage	$	2,834		$	2,914
Real estate—construction ¹		792			975
Commercial, financial and agricultural ²		11,120			10,696
Equity lines		598			687
Consumer		176			371
Consumer finance		23,927			23,513
Total allowance for loan losses	$	39,447		$	39,156
Ratio of loans to total period-end loans:
Real estate—residential mortgage		15	%		16	%
Real estate—construction ¹		4			4
Commercial, financial and agricultural ²		52			52
Equity lines		3			4
Consumer		1			1
Consumer finance		25			23
		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 11 below. The characteristics of these loan ratings are as follows:

●

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

●

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

●

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

●

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

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●

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

●

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

TABLE 11: Credit Quality Indicators

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

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		Performing		Total
Consumer finance	$	348,932	$	198	$	349,130

1	At September 30, 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, 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 ²		62,147		—		—		—		62,147
Commercial, financial and agricultural ³		668,167		18,631		10,989		2,428		700,215
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


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

1	At December 31, 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.

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The decrease in substandard loans at September 30, 2021 compared to December 31, 2020 was due primarily to repayments. The decrease in special mention loans at September 30, 2021 compared to December 31, 2020 was due primarily to loans classified as commercial, financial and agricultural and residential mortgages that were rated special mention at December 31, 2020 and were rated pass at September 30, 2021.

Table 12 summarizes nonperforming assets as of the dates indicated.

TABLE 12: Nonperforming Assets

Community Banking Segment


	September 30,			December 31,
(Dollars in thousands)	2021			2020
Loans, excluding purchased loans and PPP loans	$	934,484		$	862,917
Purchased performing loans¹		60,911			87,096
Purchased credit impaired loans¹		5,440			6,359
PPP loans²		31,452			76,527
Total loans	$	1,032,287		$	1,032,899

Nonaccrual loans	$	2,555		$	2,971
OREO³		857			907
Total nonperforming assets	$	3,412		$	3,878

Accruing loans past due for 90 days or more	$	72		$	145
Troubled debt restructurings (TDRs)⁴	$	2,698		$	3,575
Allowance for loan losses (ALL)	$	14,822		$	15,035
Nonperforming assets to total loans and OREO		0.33	%		0.38	%
ALL to total loans, excluding purchased credit impaired loans⁵		1.44			1.46
ALL to total loans, excluding purchased loans and PPP loans		1.59			1.74
ALL to total nonaccrual loans		580.16			506.06
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 $1.2 million at September 30, 2021 and $1.8 million at December 31, 2020. The remaining discount for the purchased credit impaired loans was $5.1 million at September 30, 2021 and $6.4 million at December 31, 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, 2021 and December 31, 2020 related to the land and buildings of the Bellgrade branch, which was consolidated into a nearby branch in 2019.

4	Nonaccrual loans include nonaccrual TDRs of $194,000 at September 30, 2021 and $257,000 at December 31, 2020.

5	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,
(Dollars in thousands)	2021			2020
Nonaccrual loans	$	186		$	31
Total loans	$	9,594		$	7,255
ALL	$	698		$	608
Nonaccrual loans to total loans		1.94	%		0.43	%
ALL to total loans		7.28			8.38

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Consumer Finance Segment


	September 30,			December 31,
(Dollars in thousands)	2021			2020
Nonaccrual loans	$	198		$	402
Accruing loans past due for 90 days or more	$	—		$	—
Repossessed assets	$	196		$	291
Total loans	$	349,130		$	312,252
ALL	$	23,927		$	23,513
Nonaccrual consumer finance loans to total consumer finance loans		0.06	%		0.13	%
ALL to total consumer finance loans		6.85			7.53
Annualized net (recoveries) charge-offs to average total loans		(0.08)			1.54

Nonperforming assets of the community banking segment totaled $3.4 million at September 30, 2021 compared to $3.9 million at December 31, 2020. Nonperforming assets consisted of $2.6 million in nonaccrual loans and $857,000 in OREO at September 30, 2021 and consisted of $3.0 million in nonaccrual loans and $907,000 in OREO at December 31, 2020. Nonaccrual loans were comprised primarily of one commercial relationship at September 30, 2021 and December 31, 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, 2021 decreased to 1.44 percent, compared to 1.46 percent at December 31, 2020. The allowance for loan losses as a percentage of total loans excluding all purchased loans and loans originated under the PPP decreased to 1.59 percent at September 30, 2021, compared to 1.74 percent at December 31, 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 for the third quarter and first nine months of 2020, respectively, due primarily to qualitative adjustments to reserves established as a result of the COVID-19 pandemic and growth in certain segments of the loan portfolio. 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.

Nonaccrual loans at the consumer finance segment were $198,000 at September 30, 2021, compared to $402,000 at December 31, 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 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, 2021, repossessed vehicles available for sale totaled $196,000, compared to $291,000 at December 31, 2020.

The consumer finance segment’s allowance for loan losses increased $413,000 to $23.9 million at September 30, 2021 from $23.5 million at December 31, 2020. The allowance for loan losses as a percentage of loans decreased to 6.85 percent at September 30, 2021, compared to 7.53 percent at December 31, 2020 as credit deterioration since the onset of the COVID-19 pandemic has so far not been experienced to the extent previously anticipated and due to continuing improvement in the credit quality of purchased loan contracts and lower net charge-offs. Total delinquent loans as a

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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 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 third quarter of 2021 and 2020, respectively and were 1.13 percent and 3.38 percent for the first nine months of 2021 and 2020, respectively, as payment deferrals have fallen after temporarily increasing during the pandemic. The consumer finance 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 2021 compared to the first nine months of 2020 reflects a lower number of charge-offs during 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, 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 how present or future government policies or stimulus measures will affect our borrowers or that prices for used cars will remain elevated. The 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 additional reserves related to growth in the loan portfolio were partially offset by reserve releases related to qualitative adjustments arising from the COVID-19 pandemic, improvement in credit quality and lower net charge-offs. The consumer finance segment recorded provision for loan losses of $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 COVID-19 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 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.

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 13: Impaired Loans

Impaired loans, which included TDRs of $2.7 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

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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, 2021 and December 31, 2020 were as follows:

TABLE 14: Troubled Debt Restructurings


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Accruing TDRs	$	2,504	$	3,318
Nonaccrual TDRs¹		194		257
Total TDRs²	$	2,698	$	3,575

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

2	Included in impaired loans in Table 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. 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.

FINANCIAL CONDITION

At September 30, 2021, the Corporation had total assets of $2.2 billion, which was an increase of $123.1 million since December 31, 2020. The increase was attributable primarily to increases in cash reserves, available for sale securities and loans held for 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.

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Loan Portfolio

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

TABLE 15: Summary of Loans Held for Investment


	September 30, 2021				December 31, 2020
(Dollars in thousands)	Amount		Percent		Amount		Percent
Real estate—residential mortgage	$	215,166	15	%	$	218,298	16	%
Real estate—construction ¹		53,845	4			62,147	4
Commercial, financial, and agricultural ²		721,824	52			700,215	52
Equity lines		42,881	3			48,466	4
Consumer		8,165	1			11,028	1
Consumer finance		349,130	25			312,252	23
Total loans		1,391,011	100	%		1,352,406	100	%
Less allowance for loan losses		(39,447)				(39,156)
Total loans, net	$	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. 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 $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 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 2021 and 2022. As repayment of 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 16 presents information pertaining to loans originated under the PPP.

TABLE 16: Paycheck Protection Program Loans


	September 30,		December 31,
(Dollars in thousands)	2021		2020
Outstanding principal	$	32,824	$	78,684
Unrecognized deferred fees, net		(1,372)		(2,157)
	$	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 17 presents balances of loans to borrowers in these sensitive industries at September 30, 2021, excluding PPP loans, and the exposure of the community banking segment to those borrowers, which includes available credit.

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TABLE 17: Sensitive Industries and Exposure


	September 30, 2021
(Dollars in thousands)	Balance		Exposure
Apartments	$	86,693	$	95,215
Health care¹		64,608		66,348
Commercial real estate - retail²		41,396		45,242
Hospitality		14,382		31,721
Restaurants		14,023		14,497
Fitness centers and recreation		11,386		12,086
	$	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.

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, 2021 and December 31, 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 18: Securities Available for Sale


	September 30, 2021				December 31, 2020
(Dollars in thousands)	Amount		Percent		Amount		Percent
U.S. government agencies and corporations	$	62,572	17	%	$	48,282	17	%
Mortgage-backed securities		186,120	51			123,714	43
Obligations of states and political subdivisions		96,305	27			102,805	36
Corporate and other debt securities		18,416	5			11,588	4
Total available for sale securities at fair value	$	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, 2021 and December 31, 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.

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During the first nine months of 2021, deposits increased $100.9 million to $1.85 billion at September 30, 2021, compared to $1.75 billion at December 31, 2020. Demand and savings deposits increased $129.4 million and time deposits decreased $28.5 million during the same period. This increase in demand and savings deposits was due in part to opening new deposit accounts and higher balances in existing deposit accounts.

The Corporation had $4,000 in brokered money market and time deposits outstanding at September 30, 2021, compared to $6.1 million at December 31, 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 increased to $92.8 million at September 30, 2021 from $76.2 million at December 31, 2020 due primarily to a number of commercial deposit customers seeking to provide secured funding through purchases of securities under agreements to resell, and fluctuations in balances with these customers.

Off-Balance Sheet Arrangements

As of September 30, 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, 2020.

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

At December 31, 2020, the mortgage banking segment had $190.9 million of IRLCs and $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 $391.8 million in mortgage loans. Also at December 31, 2020, the mortgage banking segment had $7.7 million of IRLCs and $5.6 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of $8.0 million of TBA securities and mandatory-delivery forward sales contracts for $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, 2021, the cash flow hedges had a fair value of $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, 2021, the total notional amount of the interest rate swaps related to these loans was $167.6 million and the interest rate swaps had a

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net fair value of zero, with $5.0 million recognized in other assets and $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, 2021 and at December 31, 2020, $6.0 million and $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, 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 22: Contractual Obligations” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 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.

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

TABLE 19: Funding Sources


	September 30, 2021
(Dollars in thousands)	Capacity		Outstanding		Available
Unsecured federal funds agreements	$	95,000	$	—	$	95,000
Repurchase lines of credit		35,000		—		35,000
Borrowings from FHLB		228,349		—		228,349
Borrowings from Federal Reserve Bank		112,137		—		112,137
Revolving bank line of credit		50,000		—		50,000
Total	$	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, 2021, the Corporation pledged additional loans as collateral in order to increase available liquidity at the Federal Home Loan Bank of Atlanta (FHLB) that had been unpledged as of December 31, 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.

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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.

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 and intangible assets; (2) Tier 1 capital which consists principally of CET1 plus the Corporation’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for loan 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

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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 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 18: Regulatory Requirements and Restrictions” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 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 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 status of authorized and unissued shares of common stock. During the third quarter and first nine months of 2021, the Corporation repurchased $2.7 million and $7.2 million, respectively, of its common stock. As of September 30, 2021, the Corporation has made aggregate common stock repurchases of 150,333 shares for an aggregate amount repurchased cost of $7.5 million under the 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 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 prices. While interest rates are greatly influenced by changes in inflation 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 economies in our markets and on our customers, which may affect demand for our products and services.

USE OF CERTAIN NON-GAAP FINANCIAL MEASURES

The accounting and reporting policies of the Corporation conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Corporation’s performance. These include adjusted net income for the Corporation and for the community banking segment, adjusted earnings per share, adjusted ROE, adjusted ROA, 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 provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (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 GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures

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

TABLE 21: Reconciliation of Certain Non-GAAP Financial Measures


(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
Net income, as reported	$	7,827		$	6,918		$	23,082		$	14,300
Merger related expenses¹		-			-			-			1,132
Branch consolidation²		(107)			-			(107)			222
Change in tax law		-			(23)			-			(326)
Adjusted net income	$	7,720		$	6,895		$	22,975		$	15,328

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

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

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

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

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

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

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	$	22,120		$	22,506		$	66,399		$	67,607
FTE adjustment		25			31			70			92
FTE interest income on loans	$	22,145		$	22,537		$	66,469		$	67,699

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

Total interest income	$	23,604		$	23,822		$	70,546		$	72,184
FTE adjustment		131			164			416			495
FTE interest income	$	23,735		$	23,986		$	70,962		$	72,679

Net interest income	$	21,618		$	20,845		$	64,022		$	61,702
FTE adjustment		131			164			416			495
FTE net interest income	$	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.

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

3	Assuming a tax rate of 21%.

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(Dollars in thousands except for per share data)	September 30, 2021		December 31, 2020
Tangible Book Value Per Share
Equity attributable to C&F Financial Corporation	$	204,432	$	193,805
Less goodwill		25,191		25,191
Less other intangible assets		2,055		2,291
Tangible equity attributable to C&F Financial Corporation	$	177,186	$	166,323

Shares outstanding		3,537,894		3,670,301

Book value per share	$	57.78	$	52.80
Tangible book value per share	$	50.08	$	45.32

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This report contains statements concerning the Corporation’s expectations, plans, objectives or beliefs regarding future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws and may include, but are not limited to statements regarding expected future 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 results of operations, future dividend payments, charge-offs, net interest margin compression and items affecting net interest margin, including future repricing of time deposits at maturity and the impact of repaying certain long-term borrowings, strategic business initiatives and the anticipated effects thereof, including new or consolidated facilities, lending under the PPP loan program, 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 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:

●interest rates, such as volatility in short-term interest rates or yields on U.S. Treasury bonds and increases or volatility in mortgage interest rates

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

●general economic conditions, including unemployment levels and slowdowns in economic growth, 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, the availability and effectiveness of COVID-19 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 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, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB

●monetary and fiscal policies of the U.S. Government, including policies of the 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 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

●the level of indemnification losses related to mortgage loans sold

●deposit flows

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●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 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

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

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PART II – OTHER INFORMATION

ITEM 1A.RISK FACTORS

There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

Issuer Purchases of Equity Securities

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). 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 has made aggregate common stock repurchases of 150,333 shares for an aggregate cost of $7.5 million under the Repurchase Program.

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


					Maximum Number
					(or Approximate
				Total Number of	Dollar Value) of
				Shares Purchased as	Shares that May Yet
				Part of Publicly	Be Purchased
	Total Number of	Average Price Paid		Announced Plans or	Under the Plans or
	Shares Purchased¹	per Share		Programs	Programs
July 1, 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	52,904	$	51.78	52,619

1	During the three months ended September 30, 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.

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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 December 15, 2020 (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 17, 2020)

31.1	Certification of CEO pursuant to Rule 13a-14(a)

31.2	Certification of CFO pursuant to Rule 13a-14(a)

32	Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350

101	The following financial statements from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 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, 2021, formatted in Inline XBRL (included within Exhibit 101)

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SIGNATURES

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


		C&F FINANCIAL CORPORATION
			(Registrant)

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

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