Part I – FINANCIAL INFORMATION

~~ITEM 1.~~

ITEM 1.FINANCIAL ~~STATEMENTS~~STATEMENTS

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)


	September 30,		December 31,
	2020		2019
Assets		(unaudited)		*
Cash and due from banks	$	15,022	$	21,148
Interest-bearing deposits in other banks		10,751		144,285
Total cash and cash equivalents		25,773		165,433
Securities—available for sale at fair value, amortized cost of $266,401 and $187,759, respectively		272,091		189,733
Loans held for sale, at fair value		274,851		90,500
Loans, net of allowance for loan losses of $38,856 and $32,873, respectively		1,319,500		1,082,318
Restricted stock, at cost		3,209		3,257
Corporate premises and equipment, net		42,754		35,261
Other real estate owned, net of valuation allowance of $146 and $88, respectively		1,107		1,103
Accrued interest receivable		7,829		6,776
Goodwill		25,191		14,425
Other intangible assets, net		2,374		912
Bank-owned life insurance		19,984		16,044
Net deferred tax asset		12,449		11,219
Other assets		73,739		40,451
Total assets	$	2,080,851	$	1,657,432

Liabilities
Deposits
Noninterest-bearing demand deposits	$	484,280	$	296,985
Savings and interest-bearing demand deposits		700,091		572,209
Time deposits		479,142		422,056
Total deposits		1,663,513		1,291,250
Short-term borrowings		60,481		16,360
Long-term borrowings		67,486		119,529
Trust preferred capital notes		25,307		25,281
Accrued interest payable		1,091		1,291
Other liabilities		73,921		38,442
Total liabilities		1,891,799		1,492,153

Commitments and contingent liabilities (Note 11)

Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,647,898 and 3,438,126 shares issued and outstanding, respectively, includes 136,705 and 142,020 of unvested shares, respectively)		3,511		3,296
Additional paid-in capital		21,402		9,503
Retained earnings		164,205		154,248
Accumulated other comprehensive loss, net		(730)		(2,249)
Equity attributable to C&F Financial Corporation		188,388		164,798
Noncontrolling interest		664		481
Total equity		189,052		165,279
Total liabilities and equity	$	2,080,851	$	1,657,432

   March 31,

December 31,


2020

2019

Assets

(unaudited)

*

Cash and due from banks

$
37,006

$
21,148

Interest-bearing deposits in other banks

111,003

144,285

Total cash and cash equivalents

148,009

165,433

Securities—available for sale at fair value, amortized cost of
$230,245 and $187,759, respectively

234,424

189,733

Loans held for sale, at fair value

125,667

90,500

Loans, net of allowance for loan losses of $33,298 and $32,873, respectively

1,204,171

1,082,318

Restricted stock, at cost

3,209

3,257

Corporate premises and equipment, net

38,731

35,261

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

1,103

1,103

Accrued interest receivable

7,253

6,776

Goodwill

25,117

14,425

Other intangible assets, net

2,540

912

Bank-owned life insurance

19,749

16,044

Net deferred tax asset

12,737

11,219

Other assets

54,582

40,451

Total assets

$
1,877,292

$
1,657,432

Liabilities

Deposits

Noninterest-bearing demand deposits

$
334,648

$
296,985

Savings and interest-bearing demand deposits

641,976

572,209

Time deposits

507,750

422,056

Total deposits

1,484,374

1,291,250

Short-term borrowings

18,391

16,360

Long-term borrowings

116,254

119,529

Trust preferred capital notes

25,289

25,281

Accrued interest payable

1,508

1,291

Other liabilities

52,232

38,442

Total liabilities

1,698,048

1,492,153

Commitments and contingent liabilities (Note 11)

Equity

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,648,658 and 3,438,126 shares issued and outstanding, respectively, includes 139,820 and 142,020 of unvested shares, respectively)

3,509

3,296

Additional paid-in capital

20,710

9,503

Retained earnings

156,438

154,248

Accumulated other comprehensive loss, net

(1,955)

(2,249)

Equity attributable to C&F Financial Corporation

178,702

164,798

Noncontrolling interest

542

481

Total equity

179,244

165,279

Total liabilities and equity

$
1,877,292

$
1,657,432

* Derived from audited consolidated financial statements.

See notes to consolidated financial statements.

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)

Three Months Ended March 31,


2020

2019


Interest income

Interest and fees on loans

$
22,897

$
20,920

Interest on interest-bearing deposits and federal funds sold

598

589

Interest and dividends on securities

U.S. government agencies and corporations

126

101

Mortgage-backed securities

520

611

Tax-exempt obligations of states and political subdivisions

496

583

Taxable obligations of states and political subdivisions

92

93

Other

49

54

Total interest income

24,778

22,951

Interest expense

Savings and interest-bearing deposits

586

602

Time deposits

2,299

1,306

Borrowings

1,001

1,111

Trust preferred capital notes

289

285

Total interest expense

4,175

3,304

Net interest income

20,603

19,647

Provision for loan losses

2,650

2,395

Net interest income after provision for loan losses

17,953

17,252

Noninterest income

Gains on sales of loans

3,676

2,136

Mortgage banking fee income

1,305

769

Interchange income

1,089

958

Service charges on deposit accounts

1,002

918

Wealth management services income, net

585

449

Other service charges and fees

375

299

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

4

4

Other

993

1,570

Total noninterest income

9,029

7,103

Noninterest expenses

Salaries and employee benefits

10,817

11,907

Occupancy

2,327

2,190

Other

9,222

5,580

Total noninterest expenses

22,366

19,677

Income before income taxes

4,616

4,678

Income tax expense

977

907

Net income

3,639

3,771

Less net income attributable to noncontrolling interest

61

—

Net income attributable to C&F Financial Corporation

$
3,578

$
3,771

Net income per share - basic and diluted

$
0.98

$
1.08


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest income
Interest and fees on loans	$	22,506	$	22,254	$	67,607	$	65,497
Interest on interest-bearing deposits and federal funds sold		32		460		682		1,631
Interest and dividends on securities
U.S. government agencies and corporations		109		109		355		311
Mortgage-backed securities		533		528		1,596		1,706
Tax-exempt obligations of states and political subdivisions		498		504		1,507		1,643
Taxable obligations of states and political subdivisions		102		86		302		272
Other		42		51		135		159
Total interest income		23,822		23,992		72,184		71,219
Interest expense
Savings and interest-bearing deposits		346		538		1,287		1,737
Time deposits		1,938		1,868		6,368		4,798
Borrowings		404		1,091		1,962		3,322
Trust preferred capital notes		289		272		865		867
Total interest expense		2,977		3,769		10,482		10,724
Net interest income		20,845		20,223		61,702		60,495
Provision for loan losses		3,300		1,800		9,550		6,005
Net interest income after provision for loan losses		17,545		18,423		52,152		54,490
Noninterest income
Gains on sales of loans		9,706		3,205		17,987		8,296
Mortgage banking fee income		2,206		1,373		5,497		3,410
Interchange income		1,268		1,105		3,498		3,134
Service charges on deposit accounts		785		1,012		2,426		2,874
Wealth management services income, net		640		529		1,973		1,453
Other service charges and fees		390		396		1,159		1,111
Net gains on sales, maturities and calls of available for sale securities		4		3		11		8
Other		1,939		607		2,963		3,249
Total noninterest income		16,938		8,230		35,514		23,535
Noninterest expenses
Salaries and employee benefits		15,767		11,730		40,938		35,132
Occupancy		2,131		1,974		6,331		5,992
Other		7,433		6,598		21,939		18,404
Total noninterest expenses		25,331		20,302		69,208		59,528
Income before income taxes		9,152		6,351		18,458		18,497
Income tax expense		2,234		1,466		4,158		3,999
Net income		6,918		4,885		14,300		14,498
Less net income attributable to noncontrolling interest		125		5		183		4
Net income attributable to C&F Financial Corporation	$	6,793	$	4,880	$	14,117	$	14,494
Net income per share - basic and diluted	$	1.86	$	1.42	$	3.87	$	4.19

See notes to consolidated financial statements.

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	6,918	$	4,885	$	14,300	$	14,498
Other comprehensive income (loss):
Defined benefit plan:
Reclassification of recognized net actuarial losses into net income¹		49		47		148		141
Related income tax effects		(10)		(10)		(31)		(30)
Amortization of prior service credit into net income¹		(17)		(17)		(51)		(51)
Related income tax effects		4		4		11		11
Defined benefit plan, net of tax		26		24		77		71

Cash flow hedges:
Unrealized holding gains (losses) arising during the period		127		(563)		(2,001)		(773)
Related income tax effects		(32)		145		515		199
Amortization of hedging gains into net income²		(3)		(28)		(9)		(28)
Related income tax effects		—		7		2		7
Cash flow hedges, net of tax		92		(439)		(1,493)		(595)

Securities available for sale:
Unrealized holding (losses) gains arising during the period		(261)		368		3,727		3,741
Related income tax effects		54		(78)		(783)		(786)
Reclassification of net realized gains into net income³		(4)		(3)		(11)		(8)
Related income tax effects		1		1		2		2
Securities available for sale, net of tax		(210)		288		2,935		2,949
Other comprehensive (loss) income, net of tax		(92)		(127)		1,519		2,425
Comprehensive income		6,826		4,758		15,819		16,923
Less comprehensive income attributable to noncontrolling interest		125		5		183		4
Comprehensive income attributable to C&F Financial Corporation	$	6,701	$	4,753	$	15,636	$	16,919

Three Months Ended March 31,


2020

2019

Net income

$
3,639

$
3,771

Other comprehensive income:

Defined benefit plan:

Reclassification of recognized net actuarial losses into net income1

42

42

Related income tax effects

(9)

(9)

Amortization of prior service credit into net income1

(17)

(17)

Related income tax effects

4

4

Defined benefit plan, net of tax

20

20

Cash flow hedges:

Unrealized holding losses arising during the period

(1,974)

(108)

Related income tax effects

508

28

Amortization of hedging gains into net income2

(3)

—

Related income tax effects

1

—

Cash flow hedges, net of tax

(1,468)

(80)

Securities available for sale:

Unrealized holding gains arising during the period

2,209

1,826

Related income tax effects

(464)

(383)

Reclassification of net realized gains into net income3

(4)

(4)

Related income tax effects

1

1

Securities available for sale, net of tax

1,742

1,440

Other comprehensive income, net of tax

294

1,380

Comprehensive income

3,933

5,151

Less comprehensive income attributable to noncontrolling interest

61

—

Comprehensive income attributable to C&F Financial Corporation

$
3,872

$
5,151

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

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

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 financial statements.

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019

(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, 2019

$
3,296

$
9,503

$
154,248

$
(2,249)

$
481

$
165,279

Comprehensive income:

Net income

—

—

3,578

—

61

3,639

Other comprehensive income

—

—

—

294

—

294

Share-based compensation

—

389

—

—

—

389

Restricted stock vested

16

(16)

—

—

—

—

Acquisition of Peoples Bankshares, Incorporated

210

11,402

—

—

—

11,612

Common stock issued

1

36

—

—

—

37

Common stock purchased

(14)

(604)

—

—

—

(618)

Cash dividends declared ($0.38 per share)

—

—

(1,388)

—

—

(1,388)

Balance March 31, 2020

$
3,509

$
20,710

$
156,438

$
(1,955)

$
542

$
179,244


	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance June 30, 2020	$	3,510	$	21,055	$	158,799	$	(638)	$	539	$	183,265
Comprehensive income:
Net income		—		—		6,793		—		125		6,918
Other comprehensive loss		—		—		—		(92)		—		(92)
Share-based compensation		—		311		—		—		—		311
Restricted stock vested		1		(1)		—		—		—		—
Common stock issued		—		38		—		—		—		38
Common stock purchased		—		(1)		—		—		—		(1)
Cash dividends declared ($0.38 per share)		—		—		(1,387)		—		—		(1,387)
Balance September 30, 2020	$	3,511	$	21,402	$	164,205	$	(730)	$	664	$	189,052

Attributable to C&F Financial Corporation

Accumulated




Additional



Other


Common

Paid - In

Retained

Comprehensive

Noncontrolling

Total

Stock

Capital

Earnings

Loss, Net

Interest

Equity

Balance December 31, 2018

$
3,358

$
12,752

$
140,520

$
(4,672)

$
—

$
151,958

Comprehensive income:

Net income

—

—

3,771

—

—

3,771

Other comprehensive income

—

—

—

1,380

—

1,380

Issuance of noncontrolling interest

—

—

—

—

490

490

Share-based compensation

—

457

—

—

—

457

Restricted stock vested

15

(15)

—

—

—

—

Common stock issued

1

35

—

—

—

36

Common stock purchased

(37)

(1,867)

—

—

—

(1,904)

Cash dividends declared ($0.37 per share)

—

—

(1,288)

—

—

(1,288)

Balance March 31, 2019

$
3,337

$
11,362

$
143,003

$
(3,292)

$
490

$
154,900


	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance June 30, 2019	$	3,305	$	10,107	$	147,570	$	(2,120)	$	489	$	159,351
Comprehensive income:
Net income		—		—		4,880		—		5		4,885
Other comprehensive loss		—		—		—		(127)		—		(127)
Share-based compensation		—		306		—		—		—		306
Restricted stock vested		2		(2)		—		—		—		—
Common stock issued		1		36		—		—		—		37
Common stock purchased		(22)		(1,102)		—		—		—		(1,124)
Cash dividends declared ($0.37 per share)		—		—		(1,267)		—		—		(1,267)
Balance September 30, 2019	$	3,286	$	9,345	$	151,183	$	(2,247)	$	494	$	162,061

See notes to consolidated financial statements.

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

(Dollars in thousands, except per share amounts)

Attributable to C&F Financial Corporation

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)

—

Acquisition of Peoples Bankshares, Incorporated

210

11,402

—

11,612

Common stock issued

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


	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, 2018	$	3,358	$	12,752	$	140,520	$	(4,672)	$	—	$	151,958
Comprehensive income:
Net income		—		—		14,494		—		4		14,498
Other comprehensive income		—		—		—		2,425		—		2,425
Issuance of noncontrolling interest		—		—		—		—		490		490
Share-based compensation		—		1,073		—		—		—		1,073
Restricted stock vested		18		(18)		—		—		—		—
Common stock issued		2		105		—		—		—		107
Common stock purchased		(92)		(4,567)		—		—		—		(4,659)
Cash dividends declared ($1.11 per share)		—		—		(3,831)		—		—		(3,831)
Balance September 30, 2019	$	3,286	$	9,345	$	151,183	$	(2,247)	$	494	$	162,061

See notes to consolidated financial statements.

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

Three Months Ended March 31,


2020

2019

Operating activities:

Net income

$
3,639

$
3,771

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

Depreciation

885

916

Provision for loan losses

2,650

2,395

Share-based compensation

389

457

Pension expense

172

141

Accretion of certain acquisition-related discounts, net

(1,259)

(365)

Amortization of intangible assets

83

78

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

(4)

(4)

Accretion of discounts and amortization of premiums on securities, net

370

410

Income from bank-owned life insurance

(103)

(83)

Proceeds from sales of loans held for sale

227,422

146,701

Origination of loans held for sale

(253,868)

(138,705)

Gains on sales of loans held for sale

(3,676)

(2,136)

Other losses (gains), net

257

(10)

Change in other assets and liabilities:

Accrued interest receivable

(47)

169

Other assets

4,455

3,508

Accrued interest payable

(43)

246

Other liabilities

(3,100)

(3,322)

Net cash (used in) provided by operating activities

(21,778)

14,167

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

39,063

15,657

Purchases of securities available for sale

(64,746)

(8,338)

Repayments on loans held for investment by non-bank affiliates

32,448

30,599

Purchases of loans held for investment by non-bank affiliates

(29,305)

(36,854)

Net increase in retail banking loans held for investment

(4,911)

(9,250)

Proceeds from sales of other real estate owned

281

—

Purchases of corporate premises and equipment

(1,548)

(753)

Changes in collateral posted with other financial institutions, net

(8,270)

(2,370)

Other investing activities, net

199

3

Net cash used in investing activities

(9,684)

(11,306)

Financing activities:

Net increase (decrease) in demand and savings deposits

12,632

(11,057)

Net increase in time deposits

8,745

31,590

Net increase in short-term borrowings

2,030

2,107

Repayments of long-term borrowings

(7,519)

—

Repurchases of common stock

(355)

(1,667)

Cash dividends paid

(1,388)

(1,288)

Other financing activities, net

(107)

(108)

Net cash  provided by financing activities

14,038

19,577

Net (decrease) increase in cash and cash equivalents

(17,424)

22,438

Cash and cash equivalents at beginning of period

165,433

115,013

Cash and cash equivalents at end of period

$
148,009

$
137,451

Supplemental cash flow disclosures:

Interest paid

$
4,175

$
3,049

Income taxes paid

3

8

Supplemental disclosure of noncash investing and financing activities:

Value of shares withheld at vesting for employee taxes

$
246

$
237

Liabilities assumed to acquire right of use assets under operating leases

204

821

Issuance of noncontrolling interest

—

490


	Nine Months Ended September 30,
	2020		2019
Operating activities:
Net income	$	14,300	$	14,498
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		2,780		2,722
Provision for loan losses		9,550		6,005
Share-based compensation		1,012		1,073
Pension expense		593		487
Accretion of certain acquisition-related discounts, net		(2,631)		(2,179)
Amortization of intangible assets		248		190
Net realized gains on sales, maturities and calls of securities available for sale		(11)		(8)
Accretion of discounts and amortization of premiums on securities, net		1,564		1,177
Income from bank-owned life insurance		(320)		(250)
Proceeds from sales of loans held for sale		1,070,338		613,120
Origination of loans held for sale		(1,226,538)		(653,852)
Gains on sales of loans held for sale		(17,987)		(8,296)
Other losses (gains), net		873		(44)
Change in other assets and liabilities:
Accrued interest receivable		(623)		751
Other assets		5,934		2,432
Accrued interest payable		(460)		343
Other liabilities		4,056		1,090
Net cash used in operating activities		(137,322)		(20,741)
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		101,068		55,593
Purchases of securities available for sale		(164,094)		(28,988)
Purchases of time deposits, net		(6,466)		—
Repayments on loans held for investment by non-bank affiliates		96,460		93,028
Purchases of loans held for investment by non-bank affiliates		(98,760)		(117,261)
Net increase in community banking loans held for investment		(118,640)		(6,635)
Purchases of corporate premises and equipment		(7,655)		(2,001)
Changes in collateral posted with other financial institutions, net		(9,340)		(3,380)
Other investing activities, net		310		557
Net cash used in investing activities		(180,012)		(9,087)
Financing activities:
Net increase in demand and savings deposits		220,379		1,135
Net (decrease) increase in time deposits		(19,723)		65,784
Net increase in short-term borrowings		44,121		1,943
Proceeds from long-term borrowings		20,000		—
Repayments of long-term borrowings		(82,553)		—
Repurchases of common stock		(355)		(4,385)
Cash dividends paid		(4,160)		(3,831)
Other financing activities, net		(35)		(37)
Net cash provided by financing activities		177,674		60,609
Net (decrease) increase in cash and cash equivalents		(139,660)		30,781
Cash and cash equivalents at beginning of period		165,433		115,013
Cash and cash equivalents at end of period	$	25,773	$	145,794
Supplemental cash flow disclosures:
Interest paid	$	11,195	$	10,355
Income taxes paid		3,847		1,020
Supplemental disclosure of noncash investing and financing activities:
Value of shares withheld at vesting for employee taxes	$	264	$	274
Transfers from loans to other real estate owned		62		496
Transfers from corporate premises and equipment to other real estate owned		—		835
Issuance of noncontrolling interest		—		490

See notes to consolidated financial statements.

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C&F FINANCIAL CORPORATION AND SUBSIDIARIES

~~NOTES~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies

Principles of Consolidation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission (the SEC). They do not include all of the information and notes required by U.S. GAAP for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2019.

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

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

C&F Bank has ~~five~~5 wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. and CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, ~~was formed~~originates and sells residential mortgages, provides mortgage loan origination services to ~~originate and sell residential mortgages~~third-party lenders and, through its subsidiary Certified Appraisals LLC, provides ancillary mortgage loan production services for residential appraisals. C&F Mortgage owns a 51 percent interest in C&F Select LLC, which was organized in January 2019 and is also engaged in the business of originating and selling residential mortgages. C&F Finance, acquired in September 2002, is a finance company purchasing automobile, marine and recreational vehicle (RV) loans through indirect lending programs. C&F Wealth Management, organized in April 1995, is a full-service brokerage firm offering a comprehensive range of wealth management services and insurance products through third-party service providers. C&F Insurance Services, Inc., was organized in July 1999, for the primary purpose of owning an equity interest in an independent insurance agency that operates in Virginia and North Carolina. CVB Title Services, Inc. was organized for the primary purpose of owning an equity interest in a full service title and settlement agency. Business segment data is presented in Note 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 goodwill impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

The ~~outbreak of the novel coronavirus and the resulting~~ COVID-19 ~~illness~~pandemic has caused a significant disruption in economic activity worldwide, ~~and~~including in market areas served by the Corporation. Estimates for the allowance for loan losses at September 30, 2020 include losses related to the pandemic. The Corporation expects that itthe pandemic will continue to have ~~a significant impact on businesses and consumers in its market areas and~~an effect on its results of operations. If

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

~~Table~~Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. None of ~~Contents~~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.

~~Reclassification:~~ ~~Certain reclassifications have been made to~~Subordinated Notes: On September 29, 2020, the ~~prior period financial statements to conform to~~Corporation completed the ~~current period presentation. None~~issuance of ~~these reclassifications are considered material.~~$20.0 million in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction. The subordinated notes will initially bear interest at a fixed rate of 4.875 percent for five years and at the three month SOFR plus 475.5 basis points thereafter.

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

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


		September 30,		December 31,
(Dollars in thousands)		2020		2019
Operating leases:
Right of use assets	$	2,345	$	2,785
Lease liabilities		2,439		2,813

Finance leases:
Right of use assets	$	6,271	$	—
Lease liabilities		6,370		—

Income Taxes: The Corporation’s effective tax rate was 22.5 percent and 21.6 percent for the first nine months of 2020 and 2019, respectively. The higher effective tax rate for the first nine months of 2020 includes the effects of a higher apportionment for state income taxes and a limitation on the deductibility of executive compensation, which was partially offset by income tax benefits in 2020 related to prior tax years of Peoples arising from a change in tax law enacted in response to the COVID-19 pandemic.

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Share-Based Compensation: Share-based compensation expense, net of forfeitures, for the three and nine months ended ~~March 31,~~September 30, 2020 was ~~$389,000~~$311,000 ($~~217,000~~219,000 after tax) and $1.01 million ($654,000 after tax), respectively, for restricted stock granted during 2015 through 2020. As of ~~March 31,~~September 30, 2020, there was ~~$3.73~~$2.95 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 ~~three~~first nine months ~~ended March 31,~~of 2020 and 2019 is presented below:

2020

Weighted-

Average

Grant Date

Fair Value

2020

Weighted-

Average

Grant Date

Shares

Fair Value

Unvested, December 31, 2019

142,020

48.88

142,020

48.88

Granted

14,650

53.22

14,770

53.03

Vested

(16,230)

39.97

(16,555)

40.20

Forfeited

(620)

53.46

(3,530)

52.86

Unvested, March 31, 2020

139,820

50.39

Unvested, September 30, 2020

136,705

50.32


	2019
		Weighted-
		Average
		Grant Date
	Shares	Fair Value

				2019
					Weighted-
					Average
					Grant Date
				Shares	Fair Value
Unvested, December 31, 2018	139,455	$	45.75	139,455	$	45.75
Granted	16,100		51.73	16,670		51.79
Vested	(15,490)		41.31	(17,990)		41.55
Forfeited	(70)		60.95	(680)		50.44
Unvested, March 31, 2019	139,995		46.92
Unvested, September 30, 2019				137,455		47.01

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

Recently Adopted Accounting Pronouncements:

On January 1, 2020, the Corporation adopted Accounting Standards Update (ASU) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modified the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains

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and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. The applicable amendments of ASU 2018-13 were applied prospectively and did not have a material effect on the Corporation’s consolidated financial statements.

Recent Significant Accounting Pronouncements:

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments,” as part of its project on financial instruments. Subsequently, this ASU was amended when the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” 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—

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Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842)—Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ASU 2020-02, “Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)” and ASU 2020-03, “Codification Improvements to Financial Instruments” (collectively, ASC 326). ASC 326 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new standard will be effective for the Corporation beginning on January 1, 2023. Early adoption of the new standard is permitted.

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

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

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

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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.

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

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

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

(Dollars in thousands)

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

124,290

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

3,637

Total identifiable assets acquired

190,621

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 assumed

$
11,499

Goodwill resulting from acquisition

$
10,692


	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

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In connection with the acquisition, the Corporation recorded approximately ~~$10.69~~$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.

Loans acquired from Peoples had aggregate outstanding principal of $131.92 million and an estimated fair value of ~~$124.29~~$124.20 million. The discount between the outstanding principal balance and fair value represents expected credit losses and adjustments for market interest rates. Under the acquisition method, the allowance for loan losses recorded in the books of Peoples in the amount of $2.87 million was not carried over into the books of the Corporation. Loans that have evidence of deterioration in credit quality since origination are categorized as purchased credit impaired (PCI). PCI loans acquired from Peoples included medical student loans with an outstanding principal balance of $4.28 million and a fair value of $635,000 at January 1, 2020, which were purchased by Peoples and the performance of which was previously backed by surety bonds. The surety bonds were terminated in 2018 when the issuer of the bond was placed into liquidation by its insurance regulator, and replacement surety bond coverage has not been obtained.

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



(Dollars in thousands)	January 1, 2020		January 1, 2020
Contractual principal and interest due	$	20,239	$	20,310
Nonaccretable difference		(7,679)		(7,679)
Expected cash flows		12,560		12,631
Accretable yield		(3,366)		(3,372)
Purchase credit impaired loans - estimated fair value	$	9,194	$	9,259

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

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

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

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

The following table presents certain unaudited pro forma information as if the acquisition had taken place on January 1, 2019. These results combine the historical results of Peoples and the Corporation for the period prior to the merger. While certain adjustments were made for estimated effects resulting from the application of the acquisition method, including certain fair value adjustments, this pro forma information is not indicative of what would have occurred had the acquisition actually taken place on January 1, 2019. Pro forma adjustments for the three and nine months ended ~~March 31,~~September 30, 2019 include the net impact of accretion of loan discounts related to market interest rates, amortization of premiums on deposits and borrowings, amortization of intangible assets and related income taxes. Unaudited pro forma net income for the three and nine months ended September 30, 2019 includes after tax merger related expenses of $665,000 and $694,000, respectively, or $(0.18) and $(0.19) per share, respectively. These amounts include $276,000 and $304,000 recorded by Peoples, which was primarily related to legal costs. Additionally, the Corporation expects to achieve further

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operational cost savings and other efficiencies as a result of the acquisition which are not reflected in the unaudited pro forma amounts below.


	Unaudited Pro Forma
	Three Months Ended

			Unaudited Pro Forma		Unaudited Pro Forma
			Three Months Ended		Nine Months Ended
(Dollars in thousands, except per share amounts)	March 31, 2019		September 30, 2019		September 30, 2019
Total revenues (net interest income plus nonintererest income)	$	28,655	$	30,329	$	89,792
Net income	$	4,289	$	5,257	$	15,515
Net income per share, basic and diluted	$	1.16	$	1.44	$	4.23

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

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~~Merger~~

The Corporation recorded merger related expenses ~~associated~~in connection with the acquisition of Peoples ~~were $957,000~~of $1.40 million ($~~785,000~~1.13 million after income taxes) for the ~~three~~nine months ended ~~March 31, 2020 and $1.67 million ($1.44 million after income taxes) in the aggregate through March 31,~~September 30, 2020. There were no0 merger related expenses during the three months ended ~~March 31, 2019.~~September 30, 2020. Merger related expenses for the three and nine months ended September 30, 2019 were $409,000 ($389,000, after income taxes). As of September 30, 2020, the Corporation has recorded aggregate merger related expenses of $2.10 million ($1.78 million after income taxes). These costs included the integration of systems and operations and legal and consulting expenses, which have been expensed as incurred. ~~Additional~~The Corporation believes that any further merger related expenses ~~are expected~~incurred in future periods will not be significant to ~~be incurred during 2020 in connection with~~ the ~~systems conversion and ongoing integration.~~Corporation as a whole.

NOTE 3: Securities

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


	March 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized

									September 30, 2020
											Gross		Gross
									Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
U.S. government agencies and corporations	$	31,985	$	57	$	—	$	32,042	$	48,180	$	126	$	(14)	$	48,292
Mortgage-backed securities		101,424		2,941		—		104,365		112,587		3,304		(53)		115,838
Obligations of states and political subdivisions		96,836		1,225		(44)		98,017		98,672		2,403		(51)		101,024
	$	230,245	$	4,223	$	(44)	$	234,424
Corporate and other debt securities										6,962		1		(26)		6,937
									$	266,401	$	5,834	$	(144)	$	272,091


	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized

									December 31, 2019
											Gross		Gross
									Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
U.S. government agencies and corporations	$	21,454	$	3	$	(17)	$	21,440	$	21,454	$	3	$	(17)	$	21,440
Mortgage-backed securities		85,649		979		(43)		86,585		85,649		979		(43)		86,585
Obligations of states and political subdivisions		80,656		1,111		(59)		81,708		80,656		1,111		(59)		81,708
	$	187,759	$	2,093	$	(119)	$	189,733
									$	187,759	$	2,093	$	(119)	$	189,733

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The amortized cost and estimated fair value of securities at ~~March 31,~~September 30, 2020, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.


	September 30, 2020
	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	66,586	$	66,844
Due after one year through five years		143,712		148,133
Due after five years through ten years		53,135		54,051
Due after ten years		2,968		3,063
	$	266,401	$	272,091

March 31, 2020

Amortized

(Dollars in thousands)

Cost

Fair Value

Due in one year or less

$
50,438

$
50,564

Due after one year through five years

144,867

148,251

Due after five years through ten years

32,550

33,111

Due after ten years

2,390

2,498

$
230,245

$
234,424

Table of Contents

The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of securities. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, ~~$6.64~~$5.99 million in proceeds were related to sales of assets acquired in the acquisition of Peoples. There were no0 sales of securities during the three and nine months ended ~~March 31,~~September 30, 2019.


	Three Months Ended March 31,

					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019		2020		2019
Realized gains from sales, maturities and calls of securities:
Gross realized gains	$	4	$	4	$	4	$	3	$	11	$	8
Gross realized losses		—		—		—		—		—		—
Net realized gains	$	4	$	4	$	4	$	3	$	11	$	8
Proceeds from sales, maturities, calls and paydowns of securities	$	39,063	$	15,657	$	30,288	$	21,954	$	101,068	$	55,593

The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of ~~$119.52~~$113.06 million and an aggregate fair value of ~~$122.74~~$116.60 million were pledged at ~~March 31,~~September 30, 2020. Securities with an aggregate amortized cost of $126.22 million and an aggregate fair value of $127.47 million were pledged at December 31, 2019.

Securities in an unrealized loss position at ~~March 31,~~September 30, 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

													Less Than 12 Months				12 Months or More				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss
U.S. government agencies and corporations	$	—	$	—	$	—	$	—	$	—	$	—	$	15,345	$	14	$	—	$	—	$	15,345	$	14
Mortgage-backed securities		—		—		—		—		—		—		10,335		53		—		—		10,335		53
Obligations of states and political subdivisions		9,612		39		604		5		10,216		44		7,900		51		—		—		7,900		51
Corporate and other debt securities														1,684		26		—		—		1,684		26
Total temporarily impaired securities	$	9,612	$	39	$	604	$	5	$	10,216	$	44	$	35,264	$	144	$	—	$	—	$	35,264	$	144

There were 2529 debt securities totaling ~~$10.21~~$35.26 million of aggregate fair value considered temporarily impaired at ~~March 31,~~September 30, 2020. The primary cause of the temporary impairments in the Corporation’s investments in debt securities was fluctuations in interest rates. The Corporation concluded that no other-than-temporary impairment existed in its securities portfolio at September 30, 2020, and 0 other-than-temporary impairment loss has been recognized in net income, based primarily on the fact that changes in fair value were caused primarily by fluctuations in interest rates, there were 0 securities with unrealized losses that were significant relative to their carrying amounts, 0 securities have been in an unrealized loss position continuously for more than 12 months, securities with unrealized losses had generally high credit quality, the Corporation intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Corporation will not be required to sell these investments before a recovery of its investment, and issuers have continued to make timely payments of principal and interest. Additionally, the Corporation’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments. At March 31, 2020, all of the Corporation’s obligations of states and political subdivisions that were in a net unrealized loss position were rated “A” or better by Standard & Poor's or Moody's Investors Service. The Corporation considers these to meet regulatory credit quality standards, meaning that the securities have low risk of default by the obligor and the full and timely repayment of principal and interest is expected over the expected life of the investment. Because the Corporation intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Corporation will not be required to sell these

1416

Table of Contents

investments before a recovery of unrealized losses, the Corporation does not consider these investments to be other-than-temporarily impaired at March 31, 2020 and no other-than-temporary impairment loss has been recognized in net income.

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


	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized

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

The Corporation’s investment in restricted stock totaled $3.21 million at ~~March 31,~~September 30, 2020 and consisted of Federal Home Loan Bank (FHLB) stock. Restricted stock is generally viewed as a long-term investment, which is carried at cost because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value. The Corporation did not consider its investment in restricted stock to be other-than-temporarily impaired at ~~March 31,~~September 30, 2020 and no0 impairment has been recognized.

NOTE 4: Loans

Major classifications of loans are summarized as follows:


	September 30,		December 31,
(Dollars in thousands)	2020		2019
Real estate – residential mortgage	$	208,044	$	181,295
Real estate – construction ¹		66,187		54,246
Commercial, financial and agricultural ²		708,867		500,812
Equity lines		49,405		52,083
Consumer		13,907		13,756
Consumer finance		311,946		312,999
		1,358,356		1,115,191
Less allowance for loan losses		(38,856)		(32,873)
Loans, net	$	1,319,500	$	1,082,318

March 31,

December 31,

(Dollars in thousands)

2020

2019

Real estate – residential mortgage

$
202,767

$
181,295

Real estate – construction 1

65,937

54,246

Commercial, financial and agricultural 2

588,585

500,812

Equity lines

56,306

52,083

Consumer

16,283

13,756

Consumer finance

307,591

312,999

1,237,469

1,115,191

Less allowance for loan losses

(33,298)

(32,873)

Loans, net

$
1,204,171

$
1,082,318

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

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

lending (which includes loans originated under the PPP).

Consumer loans included ~~$227,000~~$216,000 and $449,000 of demand deposit overdrafts at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

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Table of Contents

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


	September 30, 2020						December 31, 2019
	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	$	18,319	$	103,982	$	122,301	$	6,262	$	27,839	$	34,101
Carrying amount
Real estate – residential mortgage	$	1,724	$	19,628	$	21,352	$	107	$	7,035	$	7,142
Real estate – construction		—		3,153		3,153		—		—		—
Commercial, financial and agricultural¹		5,398		66,384		71,782		563		11,338		11,901
Equity lines		81		10,387		10,468		35		8,046		8,081
Consumer		371		2,164		2,535		—		3		3
Total acquired loans	$	7,574	$	101,716	$	109,290	$	705	$	26,422	$	27,127

March 31, 2020

December 31, 2019

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

$
20,139

$
128,098

$
148,237

$
6,262

$
27,839

$
34,101

Carrying amount

Real estate – residential mortgage

$
3,195

$
25,269

$
28,464

$
107

$
7,035

$
7,142

Real estate – construction

103

7,139

7,242

—

—

—

Commercial, financial and agricultural1

5,234

78,272

83,506

563

11,338

11,901

Equity lines

50

12,379

12,429

35

8,046

8,081

Consumer

637

2,469

3,106

—

3

3

Total acquired loans

$
9,219

$
125,528

$
134,747

$
705

$
26,422

$
27,127

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

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


	Three Months Ended March 31,

					Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019
Accretable yield, balance at beginning of period	$	4,721	$	5,987	$	4,721	$	5,987
Acquisition of Peoples Bankshares, Incorporated		3,366		—
Additions						3,372		—
Accretion		(959)		(469)		(2,172)		(1,760)
Reclassification of nonaccretable difference due to improvement in expected cash flows		733		256		440		727
Other changes, net		57		162		(1,492)		349
Accretable yield, balance at end of period	$	7,918	$	5,936	$	4,869	$	5,303

Loans on nonaccrual status were as follows:

March 31,

December 31,

(Dollars in thousands)

2020

2019

Real estate – residential mortgage

$
931

$
1,526

Commercial, financial and agricultural:

Commercial business lending

—

11

Equity lines

278

229

Consumer

699

118

Consumer finance

377

611

Total loans on nonaccrual status

$
2,285

$
2,495


	September 30,		December 31,
(Dollars in thousands)	2020		2019
Real estate – residential mortgage	$	758	$	1,526
Commercial, financial and agricultural:
Commercial business lending		—		11
Equity lines		193		229
Consumer		419		118
Consumer finance		282		611
Total loans on nonaccrual status	$	1,652	$	2,495

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Table of Contents

The past due status of loans as of ~~March 31,~~September 30, 2020 was as follows:


															90+ Days
	30 - 59 Days		60 - 89 Days		90+ Days		Total								Past Due and
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		PCI		Current¹		Total Loans		Accruing
Real estate – residential mortgage	$	971	$	339	$	618	$	1,928	$	1,724	$	204,392	$	208,044	$	—
Real estate – construction:
Construction lending		—		—		—		—		—		50,971		50,971		—
Consumer lot lending		—		—		—		—		—		15,216		15,216		—
Commercial, financial and agricultural:
Commercial real estate lending		—		—		—		—		5,398		430,804		436,202		—
Land acquisition and development lending		—		—		—		—		—		43,169		43,169		—
Builder line lending		—		—		—		—		—		20,023		20,023		—
Commercial business lending		116		—		—		116		—		209,357		209,473		—
Equity lines		182		—		8		190		81		49,134		49,405		8
Consumer		267		—		—		267		371		13,269		13,907		—
Consumer finance		6,602		842		282		7,726		—		304,220		311,946		—
Total	$	8,138	$	1,181	$	908	$	10,227	$	7,574	$	1,340,555	$	1,358,356	$	8

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

$
1,251

$
179

$
556

$
1,986

$
3,195

$
197,586

$
202,767

$
—

Real estate – construction:

Construction lending

—

—

—

—

103

50,644

50,747

—

Consumer lot lending

—

—

—

—

—

15,190

15,190

—

Commercial, financial and agricultural:

Commercial real estate lending

—

677

—

677

5,234

397,312

403,223

—

Land acquisition and development lending

—

—

—

—

—

40,189

40,189

—

Builder line lending

—

—

—

—

—

25,026

25,026

—

Commercial business lending

11

—

—

11

—

120,136

120,147

—

Equity lines

304

—

88

392

50

55,864

56,306

9

Consumer

5

—

—

5

637

15,641

16,283

—

Consumer finance

8,825

1,187

377

10,389

—

297,202

307,591

—

Total

$
10,396

$
2,043

$
1,021

$
13,460

$
9,219

$
1,214,790

$
1,237,469

$
9

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 ~~$556,000, 30-59 days past due of $114,000, 60-89 days past due of $20,000~~$442,000 and 90+ days past due of ~~$1.01 million,~~$901,000 as well as nonaccrual loans that are PCI of ~~$538,000.~~$309,000.

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


															90+ Days
	30 - 59 Days		60 - 89 Days		90+ Days		Total								Past Due and
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		PCI		Current¹		Total Loans		Accruing
Real estate – residential mortgage	$	1,428	$	161	$	1,016	$	2,605	$	107	$	178,583	$	181,295	$	—
Real estate – construction:
Construction lending		—		—		—		—		—		40,943		40,943		—
Consumer lot lending		—		—		—		—		—		13,303		13,303		—
Commercial, financial and agricultural:
Commercial real estate lending		—		—		—		—		563		325,991		326,554		—
Land acquisition and development lending		—		—		—		—		—		42,891		42,891		—
Builder line lending		—		—		—		—		—		26,373		26,373		—
Commercial business lending		73		18		—		91		—		104,903		104,994		—
Equity lines		229		56		223		508		35		51,540		52,083		109
Consumer		20		10		—		30		—		13,726		13,756		—
Consumer finance		11,034		1,420		611		13,065		—		299,934		312,999		—
Total	$	12,784	$	1,665	$	1,850	$	16,299	$	705	$	1,098,187	$	1,115,191	$	109

90+ Days

30 - 59 Days

60 - 89 Days

90+ Days

Total

Past Due and

(Dollars in thousands)

Past Due

Past Due

Past Due

Past Due

PCI

Current1

Total Loans

Accruing

Real estate – residential mortgage

$
1,428

$
161

$
1,016

$
2,605

$
107

$
178,583

$
181,295

$
—

Real estate – construction:

Construction lending

—

—

—

—

—

40,943

40,943

—

Consumer lot lending

—

—

—

—

—

13,303

13,303

—

Commercial, financial and agricultural:

Commercial real estate lending

—

—

—

—

563

325,991

326,554

—

Land acquisition and development lending

—

—

—

—

—

42,891

42,891

—

Builder line lending

—

—

—

—

—

26,373

26,373

—

Commercial business lending

73

18

—

91

—

104,903

104,994

—

Equity lines

229

56

223

508

35

51,540

52,083

109

Consumer

20

10

—

30

—

13,726

13,756

—

Consumer finance

11,034

1,420

611

13,065

—

299,934

312,999

—

Total

$
12,784

$
1,665

$
1,850

$
16,299

$
705

$
1,098,187

$
1,115,191

$
109

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

The table above includes nonaccrual loans that are current of $547,000, 30-59 days past due of $197,000, ~~60‑89~~60-89 days past due of $10,000 and 90+ days past due of $1.74 million.

~~There was one loan~~Loan modifications that were classified as troubled debt restructurings (TDRs), and the recorded investment in those loans at the time of their modification, during the three and nine months ended ~~March 31,~~September 30, 2020 ~~that was classified~~and 2019 were as ~~a troubled debt restructuring (TDR). This TDR was an equity line with a recorded investment~~follows:


	Three Months Ended September 30,
	2020			2019
	Number of	Recorded		Number of	Recorded
(Dollars in thousands)	Loans	Investment		Loans	Investment
Real estate – residential mortgage	2	$	176	2	$	95
Total	2	$	176	2	$	95

Table of ~~$84,000 at~~Contents


	Nine Months Ended September 30,
	2020			2019
	Number of	Recorded		Number of	Recorded
(Dollars in thousands)	Loans	Investment		Loans	Investment
Real estate – residential mortgage	2	$	176	2	$	95
Equity lines	1		84	—		—
Consumer	—		—	1	$	121
Total	3	$	260	3	$	216

Each of the ~~time~~TDRs during the three and nine months ended September 30, 2020 and 2 of ~~its modification~~the TDRs during the three and nine months ended September 30, 2019 included modifications of the loan’s payment structure. ~~There were no loan modifications that were classified as TDRs~~NaN TDR during the ~~three~~nine months ended ~~March 31, 2019.~~September 30, 2019 included a modification of the loan’s interest rate.

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 no0 TDR payment defaults during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

~~Table of Contents~~

In response to the effects of the COVID-19 pandemic, including economic disruption and adverse impacts to commercial and consumer borrowers, the Bank has accommodated certain borrowers by granting short-term payment deferrals or periods of interest-only payments ~~including, as~~which generally were less than six months for each borrower. As of ~~April~~September 30, 2020, ~~over 130~~there were $28.30 million of loans ~~with outstanding principal of approximately $70 million.~~whose modification periods had not ended or had been extended. Generally, a short-term payment deferral does not result in a loan modification being classified as a TDR. ~~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.~~

Impaired loans, which included TDRs of ~~$4.17~~$3.95 million, and the related allowance at ~~March 31,~~September 30, 2020 were as follows:



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income


															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		Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	3,357	$	1,313	$	1,820	$	47	$	3,295	$	31	$	3,054	$	1,384	$	1,520	$	129	$	3,068	$	83
Commercial, financial and agricultural:
Commercial real estate lending		1,403		—		1,403		76		1,417		18		1,399		—		1,399		106		1,406		55
Equity lines		121		114		—		—		121		—		120		112		—		—		119		1
Consumer		130		—		119		108		119		—		123		—		110		105		113		—
Total	$	5,011	$	1,427	$	3,342	$	231	$	4,952	$	49	$	4,696	$	1,496	$	3,029	$	340	$	4,706	$	139

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



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income


															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		Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	3,891	$	2,192	$	1,479	$	72	$	3,506	$	155	$	3,891	$	2,192	$	1,479	$	72	$	3,506	$	155
Commercial, financial and agricultural:
Commercial real estate lending		1,459		4		1,447		77		1,581		82		1,459		4		1,447		77		1,581		82
Equity lines		31		31		—		—		32		2		31		31		—		—		32		2
Consumer		130		—		121		118		123		—		130		—		121		118		123		—
Total	$	5,511	$	2,227	$	3,047	$	267	$	5,242	$	239	$	5,511	$	2,227	$	3,047	$	267	$	5,242	$	239

Table of Contents

NOTE 5: Allowance for Loan Losses

The following table presents the changes in the allowance for loan losses by major classification during the ~~three~~nine months ended ~~March 31,~~September 30, 2020:


	Real Estate				Commercial,
	Residential		Real Estate		Financial &		Equity				Consumer

															Real Estate				Commercial,
															Residential		Real Estate		Financial &		Equity				Consumer
(Dollars in thousands)	Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total		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	$	2,080	$	681	$	7,121	$	733	$	465	$	21,793	$	32,873
Provision (credited) charged to operations		60		90		831		37		(18)		1,650		2,650
Provision charged (credited) to operations																337		232		3,446		(78)		(37)		5,650		9,550
Loans charged off		(4)		—		(18)		—		(93)		(3,426)		(3,541)		(9)		—		(18)		—		(174)		(7,005)		(7,206)
Recoveries of loans previously charged off		4		—		1		—		62		1,249		1,316		79		—		3		—		135		3,422		3,639
Balance at March 31, 2020	$	2,140	$	771	$	7,935	$	770	$	416	$	21,266	$	33,298
Balance at September 30, 2020															$	2,487	$	913	$	10,552	$	655	$	389	$	23,860	$	38,856

~~Table of Contents~~

The following table presents the changes in the allowance for loan losses by major classification during the ~~three~~nine months ended ~~March 31,~~September 30, 2019:


	Real Estate				Commercial,
	Residential		Real Estate		Financial &		Equity				Consumer

															Real Estate				Commercial,
															Residential		Real Estate		Financial &		Equity				Consumer
(Dollars in thousands)	Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total		Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total
Allowance for loan losses:
Balance at December 31, 2018	$	2,246	$	727	$	6,688	$	1,106	$	257	$	22,999	$	34,023	$	2,246	$	727	$	6,688	$	1,106	$	257	$	22,999	$	34,023
Provision (credited) charged to operations		(47)		114		(25)		(205)		163		2,395		2,395		(85)		77		103		(214)		229		5,895		6,005
Loans charged off		—		—		—		—		(76)		(3,890)		(3,966)		(46)		—		(29)		(19)		(261)		(10,092)		(10,447)
Recoveries of loans previously charged off		5		—		1		—		42		1,089		1,137		20		—		4		—		173		3,440		3,637
Balance at March 31, 2019	$	2,204	$	841	$	6,664	$	901	$	386	$	22,593	$	33,589
Balance at September 30, 2019															$	2,135	$	804	$	6,766	$	873	$	398	$	22,242	$	33,218

The following table presents, as of ~~March 31,~~September 30, 2020, the balance of the allowance for loan losses and the balance of loans by impairment methodology.

Real Estate

Commercial,

Residential

Real Estate

Financial &

Equity

Consumer

(Dollars in thousands)

Mortgage

Construction

Agricultural

Lines

Consumer

Finance

Total

Allowance balance attributable to loans:

Individually evaluated for impairment

129

—

106

—

105

—

340

Collectively evaluated for impairment

2,358

913

10,446

655

284

23,860

38,516

Acquired loans - PCI

—

Total allowance

2,487

913

10,552

655

389

23,860

38,856

Loans:

Individually evaluated for impairment

2,904

—

1,399

112

110

—

4,525

Collectively evaluated for impairment

203,416

66,187

702,070

49,212

13,426

311,946

1,346,257

Acquired loans - PCI

1,724

—

5,398

371

—

7,574

Total loans

208,044

66,187

708,867

49,405

13,907

311,946

1,358,356

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

$
47

$
—

$
76

$
—

$
108

$
—

$
231

Collectively evaluated for impairment

2,093

771

7,859

770

308

21,266

33,067

Acquired loans - PCI

—

—

—

—

—

—

—

Total allowance

$
2,140

$
771

$
7,935

$
770

$
416

$
21,266

$
33,298

Loans:

Individually evaluated for impairment

$
3,133

$
—

$
1,403

$
114

$
119

$
—

$
4,769

Collectively evaluated for impairment

196,439

65,834

581,948

56,142

15,527

307,591

1,223,481

Acquired loans - PCI

3,195

103

5,234

50

637

—

9,219

Total loans

$
202,767

$
65,937

$
588,585

$
56,306

$
16,283

$
307,591

$
1,237,469

Table of Contents

The following table presents, as of December 31, 2019, 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

															Real Estate				Commercial,
															Residential		Real Estate		Financial &		Equity				Consumer
(Dollars in thousands)	Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total		Mortgage		Construction		Agricultural		Lines		Consumer		Finance		Total
Allowance balance attributable to loans:
Individually evaluated for impairment	$	72	$	—	$	77	$	—	$	118	$	—	$	267	$	72	$	—	$	77	$	—	$	118	$	—	$	267
Collectively evaluated for impairment		2,008		681		7,044		733		347		21,793		32,606		2,008		681		7,044		733		347		21,793		32,606
Acquired loans - PCI		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total allowance	$	2,080	$	681	$	7,121	$	733	$	465	$	21,793	$	32,873	$	2,080	$	681	$	7,121	$	733	$	465	$	21,793	$	32,873
Loans:
Individually evaluated for impairment	$	3,671	$	—	$	1,451	$	31	$	121	$	—	$	5,274	$	3,671	$	—	$	1,451	$	31	$	121	$	—	$	5,274
Collectively evaluated for impairment		177,517		54,246		498,798		52,017		13,635		312,999		1,109,212		177,517		54,246		498,798		52,017		13,635		312,999		1,109,212
Acquired loans - PCI		107		—		563		35		—		—		705		107		—		563		35		—		—		705
Total loans	$	181,295	$	54,246	$	500,812	$	52,083	$	13,756	$	312,999	$	1,115,191	$	181,295	$	54,246	$	500,812	$	52,083	$	13,756	$	312,999	$	1,115,191

~~Table of Contents~~

Loans by credit quality indicators as of ~~March 31,~~September 30, 2020 were as follows:

Special

Substandard

(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total¹

Real estate – residential mortgage

205,126

1,245

915

758

208,044

Real estate – construction:

Construction lending

50,971

—

50,971

Consumer lot lending

15,216

—

15,216

Commercial, financial and agricultural:

Commercial real estate lending

408,667

16,840

10,695

—

436,202

Land acquisition and development lending

36,767

6,402

—

43,169

Builder line lending

20,023

—

20,023

Commercial business lending

203,669

5,704

100

—

209,473

Equity lines

49,039

165

193

49,405

Consumer

13,426

419

13,907

1,002,904

30,414

11,722

1,370

1,046,410

Special



Substandard


(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total1

Real estate – residential mortgage

$
199,087

$
1,396

$
1,353

$
931

$
202,767

Real estate – construction:

Construction lending

50,747

—

—

—

50,747

Consumer lot lending

15,190

—

—

—

15,190

Commercial, financial and agricultural:

Commercial real estate lending

374,717

25,886

2,620

—

403,223

Land acquisition and development lending

31,778

8,411

—

—

40,189

Builder line lending

24,749

277

—

—

25,026

Commercial business lending

116,594

3,553

—

—

120,147

Equity lines

55,907

97

24

278

56,306

Consumer

14,947

54

583

699

16,283

$
883,716

$
39,674

$
4,580

$
1,908

$
929,878

At ~~March 31,~~September 30, 2020, the Corporation did not have any loans classified as Doubtful or Loss.

Included in the table above are loans purchased in connection with the acquisition of Peoples of ~~$104.70~~$83.71 million pass rated, ~~$1.33~~$1.39 million special mention, ~~$3.11~~$2.70 million substandard and ~~$583,000~~$309,000 substandard nonaccrual.


			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	311,664	$	282	$	311,946

Non-

(Dollars in thousands)

Performing

Performing

Total

Consumer finance

$
307,214

$
377

$
307,591

Table of Contents

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


			Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total¹
Real estate – residential mortgage	$	177,049	$	1,839	$	881	$	1,526	$	181,295
Real estate – construction:
Construction lending		40,943		—		—		—		40,943
Consumer lot lending		13,303		—		—		—		13,303
Commercial, financial and agricultural:
Commercial real estate lending		323,218		3,266		70		—		326,554
Land acquisition and development lending		33,870		9,021		—		—		42,891
Builder line lending		25,995		378		—		—		26,373
Commercial business lending		104,291		692		—		11		104,994
Equity lines		51,662		181		11		229		52,083
Consumer		13,632		6		—		118		13,756
	$	783,963	$	15,383	$	962	$	1,884	$	802,192

Special



Substandard


(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total1

Real estate – residential mortgage

$
177,049

$
1,839

$
881

$
1,526

$
181,295

Real estate – construction:

Construction lending

40,943

—

—

—

40,943

Consumer lot lending

13,303

—

—

—

13,303

Commercial, financial and agricultural:

Commercial real estate lending

323,218

3,266

70

—

326,554

Land acquisition and development lending

33,870

9,021

—

—

42,891

Builder line lending

25,995

378

—

—

26,373

Commercial business lending

104,291

692

—

11

104,994

Equity lines

51,662

181

11

229

52,083

Consumer

13,632

6

—

118

13,756

$
783,963

$
15,383

$
962

$
1,884

$
802,192

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


			Non-

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

NOTE 6: Goodwill and Other Intangible Assets

The carrying amount of goodwill was ~~$25.12~~$25.19 million and $14.43 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. The following table presents the changes in goodwill during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. There were no0 changes in the recorded balance of goodwill during the three months ended ~~March 31, 2019.~~September 30, 2020.

~~Table of Contents~~


	Retail		Consumer

							Community		Consumer
(Dollars in thousands)	Banking		Finance		Total		Banking		Finance		Total
Balance as of January 1, 2020	$	3,702	$	10,723	$	14,425	$	3,702	$	10,723	$	14,425
Acquisition of Peoples Bankshares, Incorporated		10,692		—		10,692		10,766		—		10,766
Balance at March 31, 2020	$	14,394	$	10,723	$	25,117
Balance at September 30, 2020							$	14,468	$	10,723	$	25,191

The Corporation had ~~$2.54~~$2.37 million and $912,000 of other intangible assets as of ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. Other intangible assets were recognized in connection with the core deposits acquired from Peoples in 2020 and customer relationships acquired by C&F Wealth Management in 2016.

The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets:


		March 31,				December 31,
		2020				2019
		Gross				Gross
		Carrying	Accumulated			Carrying	Accumulated

										September 30,				December 31,
										2020				2019
										Gross				Gross
										Carrying	Accumulated			Carrying	Accumulated
(Dollars in thousands)		Amount	Amortization			Amount	Amortization			Amount	Amortization			Amount	Amortization
Amortized intangible assets:
Core deposit intangibles	$	1,711	$	(43)	$	—	$	—	$	1,711	$	(128)	$	—	$	—
Other intangibles		1,405		(533)		1,405		(493)		1,405		(614)		1,405		(493)
Total	$	3,116	$	(576)	$	1,405	$	(493)	$	3,116	$	(742)	$	1,405	$	(493)

Amortization expense was $83,000 and ~~$78,000~~$49,000 for the three months ended ~~March 31,~~September 30, 2020 and 2019, respectively and $248,000 and $190,000 for the nine months ended September 30, 2020 and 2019, respectively.

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

Equity and Noncontrolling Interest

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, ~~and 2019,~~ the Corporation repurchased 8,963 shares of its common stock for an aggregate cost of $355,000 under share repurchase programs authorized by its Board of Directors. During the three and ~~32,407~~nine months ended September 30, 2019, the Corporation repurchased 21,337 and 86,523 shares of its common stock, respectively, for an aggregate cost of ~~$355,000~~$1.10 million and ~~$1.67~~$4.39 million ~~respectively,~~ under the share repurchase ~~programs authorized by~~programs. The Corporation did 0t repurchase any of its ~~Board of Directors. Additionally~~common stock during the three months ended ~~March 31,~~September 30, 2020. Additionally during the nine months ended September 30, 2020 and 2019, the Corporation withheld ~~5,069~~5,084 shares and ~~4,641~~5,341 shares of its common stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock. The Corporation’s current share repurchase program expired on May 31, 2020 and has not been renewed or extended at this time.

~~During~~In the ~~three months ended March 31,~~first quarter of 2019, C&F Select LLC, a subsidiary of C&F Mortgage, issued a 49 percent ownership interest to an unrelated investor. In exchange for 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 ~~$644,000~~$320,000 and $604,000 as of ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.


	March 31,		December 31,

					September 30,		December 31,
(Dollars in thousands)	2020		2019		2020		2019
Net unrealized gains on securities	$	3,302	$	1,560	$	4,495	$	1,560
Net unrecognized losses on cash flow hedges		(1,537)		(69)		(1,562)		(69)
Net unrecognized losses on defined benefit plan		(3,720)		(3,740)		(3,663)		(3,740)
Total accumulated other comprehensive loss, net	$	(1,955)	$	(2,249)	$	(730)	$	(2,249)

~~Table of Contents~~

Earnings Per Share (EPS)

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


	Three Months Ended March 31,

					Three Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019
Net income attributable to C&F Financial Corporation	$	3,578	$	3,771	$	6,793	$	4,880
Weighted average shares outstanding—basic and diluted		3,644,614		3,484,592		3,648,515		3,430,298


	Nine Months Ended September 30,
(Dollars in thousands)	2020		2019
Net income attributable to C&F Financial Corporation	$	14,117	$	14,494
Weighted average shares outstanding—basic and diluted		3,646,951		3,459,191

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

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NOTE 8: Employee Benefit Plans

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


	Three Months Ended March 31,

					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019		2020		2019
Components of net periodic benefit cost:
Service cost, included in salaries and employee benefits	$	386	$	293	$	401	$	305	$	1,202	$	914


Other components of net periodic benefit cost:
Interest cost		135		153		138		152		413		456
Expected return on plan assets		(374)		(330)		(374)		(324)		(1,119)		(973)
Amortization of prior service credit		(17)		(17)		(17)		(17)		(51)		(51)
Amortization of net obligation at transition		—		—		—		—		—		—
Recognized net actuarial losses		42		42		49		47		148		141
Other components of net periodic benefit cost, included in other noninterest income		(214)		(152)		(204)		(142)		(609)		(427)


Net periodic benefit cost	$	172	$	141	$	197	$	163	$	593	$	487

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.

~~Table of Contents~~

●

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).

Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At ~~March 31,~~September 30, 2020 and December 31, 2019, 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 ~~mortgage-backed~~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 ~~companies.~~company funds. The Corporation holds an investment in a small business investment company fund, which is recorded at fair value and included in other assets in the Consolidated Balance Sheets. Changes in fair value are recognized in net income. At ~~March 31,~~September 30, 2020, the fair value of the Corporation’s investment in small business investment companies, based on net asset value, was ~~$1.56~~$1.43 million. Investments in small business investment ~~companies~~company funds measured at net asset value are not presented in the tables below related to fair value measurements. ~~There were no unrealized gains or losses on investments~~Changes in fair value of small business investment ~~companies recorded during~~company funds resulted in the ~~quarter~~recognition of unrealized losses of $124,000 for the three and nine months ended ~~March 31,~~September 30, 2020.

Loans held for sale. Fair value of the Corporation’s LHFS is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Corporation conducts business. The Corporation’s portfolio of LHFS is classified as Level 2.

Derivative asset - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the

~~Table of Contents~~

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.


	March 31, 2020
	Fair Value Measurements Using						Assets/Liabilities at

									September 30, 2020
									Fair Value Measurements Using						Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale
U.S. government agencies and corporations	$	—	$	32,042	$	—	$	32,042	$	—	$	48,292	$	—	$	48,292
Mortgage-backed securities		—		104,365		—		104,365		—		115,838		—		115,838
Obligations of states and political subdivisions		—		98,017		—		98,017		—		101,024		—		101,024
Corporate and other debt securities										—		6,937		—		6,937
Total securities available for sale		—		234,424		—		234,424		—		272,091		—		272,091
Loans held for sale		—		125,667		—		125,667		—		274,851		—		274,851
Derivatives
IRLC		—		3,208		—		3,208		—		5,942		—		5,942
Interest rate swaps on loans		—		8,842		—		8,842		—		9,355		—		9,355
Total assets	$	—	$	372,141	$	—	$	372,141	$	—	$	562,239	$	—	$	562,239


Liabilities:
Derivatives
Interest rate swaps on loans	$	—	$	8,842	$	—	$	8,842	$	—	$	9,355	$	—	$	9,355
Cash flow hedges		—		2,119		—		2,119		—		2,147		—		2,147
Forward sales of TBA securities		—		374		—		374		—		52		—		52
Total liabilities	$	—	$	11,335	$	—	$	11,335	$	—	$	11,554	$	—	$	11,554

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December 31, 2019

Fair Value Measurements Using

Assets/Liabilities at

(Dollars in thousands)

Level 1

Level 2

Level 3

Fair Value

Assets:

Securities available for sale

U.S. government agencies and corporations

$
—

$
21,440

$
—

$
21,440

Mortgage-backed securities

—

86,585

—

86,585

Obligations of states and political subdivisions

—

81,708

—

81,708

Total securities available for sale

—

189,733

—

189,733

Loans held for sale

—

90,500

—

90,500

Derivatives

IRLC

—

1,083

—

1,083

Interest rate swaps on loans

—

2,462

—

2,462

Total assets

$
—

$
283,778

$
—

$
283,778

Liabilities:

Derivatives

Interest rate swaps on loans

$
—

$
2,462

$
—

$
2,462

Cash flow hedges

—

145

—

145

Forward sales of TBA securities

—

25

—

25

Total liabilities

$
—

$
2,632

$
—

$
2,632


	December 31, 2019
	Fair Value Measurements Using						Assets/Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale
U.S. government agencies and corporations	$	—	$	21,440	$	—	$	21,440
Mortgage-backed securities		—		86,585		—		86,585
Obligations of states and political subdivisions		—		81,708		—		81,708
Total securities available for sale		—		189,733		—		189,733
Loans held for sale		—		90,500		—		90,500
Derivatives
IRLC		—		1,083		—		1,083
Interest rate swaps on loans		—		2,462		—		2,462
Total assets	$	—	$	283,778	$	—	$	283,778

Liabilities:
Derivatives
Interest rate swaps on loans	$	—	$	2,462	$	—	$	2,462
Cash flow hedges		—		145		—		145
Forward sales of TBA securities		—		25		—		25
Total liabilities	$	—	$	2,632	$	—	$	2,632

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

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

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

OREO. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Corporation obtains from independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intent with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations

2528

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indicate a further deterioration in market conditions. As such, the Corporation records OREO as a nonrecurring fair value measurement classified as Level 3.

The following table presents the balances of assets measured at fair value on a nonrecurring basis. ~~At March 31, 2020 there were no impaired loans that were measured at fair value.~~


	March 31, 2020
	Fair Value Measurements Using						Assets at Fair

									September 30, 2020
									Fair Value Measurements Using						Assets at Fair
(Dollars in thousands)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Impaired loans, net									$	—	$	—	$	82	$	82
Other real estate owned, net	$	—	$	—	$	268	$	268	$	—	$	—	$	272	$	272
Total	$	—	$	—	$	268	$	268	$	—	$	—	$	354	$	354


	December 31, 2019
	Fair Value Measurements Using						Assets at Fair

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

The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a nonrecurring basis:


	Fair Value Measurements at September 30, 2020
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Inputs	Range (Weighted Average)¹
Impaired loans, net	$	82	Appraisals	Discount to reflect current market conditions and estimated selling costs	25% (25%)
Other real estate owned, net	$	272	Appraisals	Discount to reflect current market conditions and estimated selling costs	33%-75% (53%)
Total	$	354

Fair Value Measurements at March 31, 2020

(Dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range (Weighted Average)1

Other real estate owned, net

$
268

Appraisals

Discount to reflect current market conditions and estimated selling costs

33%-75% (45%)

Total

$
268

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 March 31, 2020 Using						Total Fair

											Carrying		Fair Value Measurements at September 30, 2020 Using						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value		Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	148,009	$	148,009	$	—	$	—	$	148,009	$	25,773	$	25,773	$	—	$	—	$	25,773
Securities available for sale		234,424		—		234,424		—		234,424		272,091		—		272,091		—		272,091
Loans, net		1,204,171		—		—		1,199,524		1,199,524		1,319,500		—		—		1,321,885		1,321,885
Loans held for sale		125,667		—		125,667		—		125,667		274,851		—		274,851		—		274,851
Derivatives
IRLC		3,208		—		3,208		—		3,208		5,942		—		5,942		—		5,942
Interest rate swaps on loans		8,842		—		8,842		—		8,842		9,355		—		9,355		—		9,355
Bank-owned life insurance		19,749		—		19,749		—		19,749		19,984		—		19,984		—		19,984
Accrued interest receivable		7,253		7,253		—		—		7,253		7,829		7,829		—		—		7,829
Financial liabilities:
Demand deposits		976,624		976,624		—		—		976,624		1,184,371		1,184,371		—		—		1,184,371
Time deposits		507,750		—		514,744		—		514,744		479,142		—		487,735		—		487,735
Borrowings		159,934		—		162,855		—		162,855		153,274		—		155,759		—		155,759
Derivatives
Cash flow hedges		2,119		—		2,119		—		2,119		2,147		—		2,147		—		2,147
Interest rate swaps on loans		8,842		—		8,842		—		8,842		9,355		—		9,355		—		9,355
Forward sales of TBA securities		374		—		374		—		374		52		—		52		—		52
Accrued interest payable		1,508		1,508		—		—		1,508		1,091		1,091		—		—		1,091


	Carrying		Fair Value Measurements at December 31, 2019 Using						Total Fair

											Carrying		Fair Value Measurements at December 31, 2019 Using						Total Fair
(Dollars in thousands)	Value		Level 1		Level 2		Level 3		Value		Value		Level 1		Level 2		Level 3		Value
Financial assets:
Cash and short-term investments	$	165,433	$	165,433	$	—	$	—	$	165,433	$	165,433	$	165,433	$	—	$	—	$	165,433
Securities available for sale		189,733		—		189,733		—		189,733		189,733		—		189,733		—		189,733
Loans, net		1,082,318		—		—		1,082,783		1,082,783		1,082,318		—		—		1,082,783		1,082,783
Loans held for sale		90,500		—		90,500		—		90,500		90,500		—		90,500		—		90,500
Derivatives
IRLC		1,083		—		1,083		—		1,083		1,083		—		1,083		—		1,083
Interest rate swaps on loans		2,462		—		2,462		—		2,462		2,462		—		2,462		—		2,462
Bank-owned life insurance		16,044		—		16,044		—		16,044		16,044		—		16,044		—		16,044
Accrued interest receivable		6,776		6,776		—		—		6,776		6,776		6,776		—		—		6,776
Financial liabilities:
Demand deposits		869,194		869,194		—		—		869,194		869,194		869,194		—		—		869,194
Time deposits		422,056		—		423,605		—		423,605		422,056		—		423,605		—		423,605
Borrowings		161,170		—		154,964		—		154,964		161,170		—		154,964		—		154,964
Derivatives
Cash flow hedges		145		—		145		—		145		145		—		145		—		145
Interest rate swaps on loans		2,462		—		2,462		—		2,462		2,462		—		2,462		—		2,462
Forward sales of TBA securities		25		—		25				25		25		—		25				25
Accrued interest payable		1,291		1,291		—		—		1,291		1,291		1,291		—		—		1,291

NOTE 10: Business Segments

The Corporation operates in a decentralized fashion in ~~three~~3 principal business segments: ~~retail~~community banking, mortgage banking and consumer finance. Revenues from ~~retail~~community banking operations consist primarily of interest earned on loans and investment securities and fees earned on deposit accounts and debit card interchange activity. Previously, the community banking segment was referred to as the retail banking segment. Mortgage banking operating revenues consist

Table of Contents

principally of gains on sales of loans in the secondary market, mortgage banking fee income related to

~~Table of Contents~~

loan originations, and interest earned on mortgage loans held for sale. Revenues from consumer finance consist primarily of interest earned on purchased retail installment sales contracts.

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


	Three Months Ended March 31, 2020
	Retail		Mortgage		Consumer

													Three Months Ended September 30, 2020
													Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated		Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	15,915	$	661	$	10,101	$	—	$	(1,899)	$	24,778	$	15,242	$	1,503	$	9,628	$	—	$	(2,551)	$	23,822
Gains on sales of loans		—		3,676		—		—		—		3,676		—		9,755		—		—		(49)		9,706
Other noninterest income		2,962		1,611		117		663		—		5,353		2,831		2,915		93		1,396		(3)		7,232
Total operating income		18,877		5,948		10,218		663		(1,899)		33,807		18,073		14,173		9,721		1,396		(2,603)		40,760
Expenses:
Provision for loan losses		1,000		—		1,650		—		—		2,650		1,500		—		1,800		—		—		3,300
Interest expense		3,144		305		2,286		339		(1,899)		4,175		2,547		449		2,191		342		(2,552)		2,977
Salaries and employee benefits		8,060		1,845		2,243		(1,331)		—		10,817		7,442		4,872		2,190		1,263		—		15,767
Depreciation and amortization		807		72		46		43		—		968		916		71		42		43		—		1,072
Other noninterest expenses		5,329		1,651		1,341		2,260		—		10,581		4,435		2,691		1,298		68		—		8,492
Total operating expenses		18,340		3,873		7,566		1,311		(1,899)		29,191		16,840		8,083		7,521		1,716		(2,552)		31,608
Income (loss) before income taxes		537		2,075		2,652		(648)		—		4,616		1,233		6,090		2,200		(320)		(51)		9,152
Income tax expense (benefit)		(33)		532		722		(244)		—		977		90		1,640		599		(95)		—		2,234
Net income (loss)	$	570	$	1,543	$	1,930	$	(404)	$	—	$	3,639	$	1,143	$	4,450	$	1,601	$	(225)	$	(51)	$	6,918
Total assets	$	1,689,244	$	140,084	$	310,249	$	19,242	$	(281,527)	$	1,877,292	$	1,923,207	$	294,808	$	311,898	$	42,402	$	(491,464)	$	2,080,851
Capital expenditures	$	752	$	294	$	502	$	—	$	—	$	1,548	$	3,234	$	14	$	954	$	—	$	—	$	4,202


	Three Months Ended March 31, 2019
	Retail		Mortgage		Consumer

													Three Months Ended September 30, 2019
													Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated		Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	14,324	$	350	$	10,145	$	2	$	(1,870)	$	22,951	$	15,060	$	814	$	10,442	$	—	$	(2,324)	$	23,992
Gains on sales of loans		—		2,136		—		—		—		2,136		—		3,205		—		—		—		3,205
Other noninterest income		2,438		838		129		1,562		—		4,967		2,862		1,453		128		582		—		5,025
Total operating income		16,762		3,324		10,274		1,564		(1,870)		30,054		17,922		5,472		10,570		582		(2,324)		32,222
Expenses:
Provision for loan losses		—		—		2,395		—		—		2,395		—		—		1,800		—		—		1,800
Interest expense		2,175		163		2,551		285		(1,870)		3,304		2,684		541		2,596		272		(2,324)		3,769
Salaries and employee benefits		6,978		1,147		2,185		1,597		—		11,907		7,161		1,769		2,229		571		—		11,730
Depreciation and amortization		835		62		52		45		—		994		852		60		48		126		—		1,086
Other noninterest expenses		4,068		1,182		1,323		203		—		6,776		4,372		1,466		1,286		362		—		7,486
Total operating expenses		14,056		2,554		8,506		2,130		(1,870)		25,376		15,069		3,836		7,959		1,331		(2,324)		25,871
Income (loss) before income taxes		2,706		770		1,768		(566)		—		4,678		2,853		1,636		2,611		(749)		—		6,351
Income tax expense (benefit)		416		203		483		(195)		—		907		460		426		710		(130)		—		1,466
Net income (loss)	$	2,290	$	567	$	1,285	$	(371)	$	—	$	3,771	$	2,393	$	1,210	$	1,901	$	(619)	$	—	$	4,885
Total assets	$	1,380,790	$	53,642	$	301,579	$	6,836	$	(193,487)	$	1,549,360	$	1,430,083	$	110,452	$	315,278	$	18,878	$	(255,310)	$	1,619,381
Capital expenditures	$	721	$	24	$	8	$	—	$	—	$	753	$	453	$	60	$	17	$	—	$	—	$	530

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Nine Months Ended September 30, 2020

Community

Mortgage

Consumer

(Dollars in thousands)

Banking

Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

46,051

3,261

29,418

—

(6,546)

72,184

Gains on sales of loans

—

18,036

—

(49)

17,987

Other noninterest income

7,684

6,913

290

2,643

(3)

17,527

Total operating income

53,735

28,210

29,708

2,643

(6,598)

107,698

Expenses:

Provision for loan losses

3,900

—

5,650

—

9,550

Interest expense

8,409

1,034

6,567

1,019

(6,547)

10,482

Salaries and employee benefits

23,142

8,989

6,567

2,240

—

40,938

Depreciation and amortization

2,550

216

133

129

—

3,028

Other noninterest expenses

14,456

6,508

3,696

582

—

25,242

Total operating expenses

52,457

16,747

22,613

3,970

(6,547)

89,240

Income (loss) before income taxes

1,278

11,463

7,095

(1,327)

(51)

18,458

Income tax (benefit) expense

(503)

3,149

1,926

(414)

—

4,158

Net income (loss)

1,781

8,314

5,169

(913)

(51)

14,300

Total assets

1,923,207

294,808

311,898

42,402

(491,464)

2,080,851

Capital expenditures

5,554

340

1,761

—

7,655


	Nine Months Ended September 30, 2019
	Community		Mortgage		Consumer
(Dollars in thousands)	Banking		Banking		Finance		Other		Eliminations		Consolidated
Revenues:
Interest income	$	44,803	$	1,833	$	30,952	$	4	$	(6,373)	$	71,219
Gains on sales of loans		—		8,296		—		—		—		8,296
Other noninterest income		8,193		3,626		367		3,053		—		15,239
Total operating income		52,996		13,755		31,319		3,057		(6,373)		94,754
Expenses:
Provision for loan losses		110		—		5,895		—		—		6,005
Interest expense		7,352		1,113		7,765		867		(6,373)		10,724
Salaries and employee benefits		21,012		4,527		6,483		3,110		—		35,132
Depreciation and amortization		2,445		181		150		136		—		2,912
Other noninterest expenses		12,822		3,924		3,970		768		—		21,484
Total operating expenses		43,741		9,745		24,263		4,881		(6,373)		76,257
Income (loss) before income taxes		9,255		4,010		7,056		(1,824)		—		18,497
Income tax expense (benefit)		1,501		1,051		1,921		(474)		—		3,999
Net income (loss)	$	7,754	$	2,959	$	5,135	$	(1,350)	$	—	$	14,498
Total assets	$	1,430,083	$	110,452	$	315,278	$	18,878	$	(255,310)	$	1,619,381
Capital expenditures	$	1,741	$	136	$	57	$	67	$	—	$	2,001

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the Corporation recorded merger related expenses of ~~$957,000~~$1.40 million ($~~785,000~~1.13 million after income taxes), in connection with its acquisition of Peoples, of which ~~$857,000~~$1.30 million ($~~685,000~~1.03 million after income taxes) was allocated to the community banking segment and recorded as $119,000 of salaries and benefits expense, $879,000 of other noninterest expense and a loss on disposal of equipment of $298,000 included in other noninterest income. The remainder was recorded as other noninterest expense at the holding company. NaN merger related expenses were recorded during the three months ended September 30, 2020. In the third quarter and first nine months of 2019, the Corporation recorded merger related expenses of $409,000 ($389,000 after income taxes) in connection with its pending acquisition of Peoples, of which $104,000 ($89,000 after income taxes) was allocated to the retail banking segment and recorded as ~~$69,000 of salaries and benefits expense and $788,000 of~~ other noninterest expense. The remainder was recorded as other noninterest expense at the holding company.

The ~~retail~~community banking segment extends ~~two~~2 warehouse lines of credit to the mortgage banking segment, providing a portion of the funds needed to originate mortgage loans. The ~~retail~~community banking segment charges the mortgage banking

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segment interest at the daily FHLB advance rate plus a spread ranging from 50 basis points to 175 basis points. The ~~retail~~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 ~~3.0~~3.5 percent and fixed rate notes that carry interest at rates ranging from ~~2.0~~2.4 percent to 8.0 percent. The ~~retail~~community banking segment acquires certain residential real estate loans from the mortgage banking segment at prices similar to those paid by third-party investors. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the ~~retail~~community banking segment are not allocated to the mortgage banking, consumer finance and other segments.

NOTE 11: Commitments and Contingent Liabilities

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

Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of loan commitments at the Bank was ~~$257.50~~$311.06 million at ~~March 31,~~September 30, 2020 and $256.15 million at December 31, 2019, which does not include IRLCs at the mortgage banking segment, which are discussed in Note 12.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was ~~$17.61~~$17.86 million at ~~March 31,~~September 30, 2020 and $16.60 million at December 31, 2019.

The mortgage banking segment sells substantially all of the residential mortgage loans it originates to third-party investors. As is customary in the industry, the agreements with these investors require the mortgage banking segment to extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the agreements, the investors are entitled to make loss claims and repurchase requests of the mortgage banking segment for loans that contain covered deficiencies. The mortgage banking segment has obtained early payment default recourse waivers for a ~~significant~~ portion of its business. Recourse periods for early payment default for the remaining investors vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. The mortgage banking segment maintains an allowance for indemnifications that represents management’s estimate of losses that are probable of arising under these recourse provisions. As performance data for loans that have been sold is not made available to the mortgage banking segment by the investors, the evaluation of potential losses is inherently subjective. A schedule of expected losses on loans with claims or indemnifications is maintained to ensure the reserve is adequate to cover estimated losses. For the three and nine months ended ~~March 31,~~September 30, 2020, the Corporation recorded ~~$7,000~~$9,000 and $172,000 of provision for indemnifications, compared to no0 provision for

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

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

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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 ~~March 31,~~September 30, 2020, the Corporation has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2024 and June 2029.

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

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

Loan swaps. The Bank also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest expense and sum to ~~zero~~0 because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties.

Mortgage banking. The mortgage banking segment enters into IRLCs with customers to originate loans for which the interest rates are determined (or “locked”) prior to funding. The mortgage banking segment is exposed to interest rate risk through fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans are sold in the secondary market. The mortgage banking segment mitigates this interest rate risk by either (1) entering into forward sales contracts with investors at the time that interest rates are locked for mortgage loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for TBA securities until it can enter into forward sales contracts with investors for mortgage loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets. Changes in the fair value of mortgage banking derivatives are recorded as a component of gains on sales of loans.

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At ~~March 31,~~September 30, 2020, the mortgage banking segment had ~~$231.96~~$307.39 million of IRLCs and ~~$108.67~~$250.91 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for ~~$340.63~~$558.30 million in mortgage loans. Also at ~~March 31,~~September 30, 2020, the mortgage banking segment had ~~$13.25~~$10.40 million of IRLCs and ~~$13.40~~$14.79 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of ~~$14.50~~$15.25 million of TBA securities and mandatory-delivery forward sales contracts for ~~$9.08~~$7.89 million in mortgage loans.

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

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million in mortgage loans. Also at December 31, 2019, the mortgage banking segment had $11.72 million of IRLCs and $21.98 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of $24.0 million of TBA securities and mandatory-delivery forward sales contracts for $6.73 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 ~~March 31,~~September 30, 2020 or December 31, 2019.


	March 31, 2020
	Notional

							September 30, 2020
							Notional
(Dollars in thousands)	Amount		Assets		Liabilities		Amount		Assets		Liabilities
Cash flow hedges:
Interest rate swap contracts	$	25,000	$	—	$	2,119	$	25,000	$	—	$	2,147
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower		81,256		8,842		—		85,028		9,355		—
Matched interest rate swaps with counterparty		81,256		—		8,842		85,028		—		9,355
Mortgage banking contracts:
IRLCs		245,210		3,208		—		317,783		5,942		—
Forward sales of TBA securities		14,500		—		374		15,250		—		52


	December 31, 2019
	Notional

							December 31, 2019
							Notional
(Dollars in thousands)	Amount		Assets		Liabilities		Amount		Assets		Liabilities
Cash flow hedges:
Interest rate swap contracts	$	25,000	$	—	$	145	$	25,000	$	—	$	145
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower		74,266		2,454		8		74,266		2,454		8
Matched interest rate swaps with counterparty		74,266		8		2,454		74,266		8		2,454
Mortgage banking contracts:
IRLCs		75,073		1,083		—		75,073		1,083		—
Forward sales of TBA securities		24,000		—		25		24,000		—		25

The Corporation is required to maintain cash collateral with dealer counterparties for derivative instruments in a loss position, subject to certain thresholds and offsets. At ~~March 31,~~September 30, 2020 and at December 31, 2019, ~~$10.79~~$11.86 million and $2.52 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 March 31,

					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019		2020		2019
Data processing fees	$	2,156	$	1,921	$	2,607	$	2,345	$	8,142	$	6,561
Unrealized loss on nonqualified deferred compensation plan		1,983		—
Professional fees		666		564		706		1,061		2,424		2,414
Tax service and investor fees						554		359		1,335		797
Marketing and advertising expenses		490		373		369		485		1,207		1,293
Telecommunication expenses						311		337		1,092		985
Travel and educational expenses		444		403		430		290		974		996
Telecommunication expenses		372		317
All other noninterest expenses		3,111		2,002		2,456		1,721		6,765		5,358
Total other noninterest expenses	$	9,222	$	5,580	$	7,433	$	6,598	$	21,939	$	18,404

The table above includes merger related expenses for the nine months ended September 30, 2020 of $898,000, of which $501,000 was included in data processing fees, $336,000 was included in professional fees, and $61,000 was included in all other noninterest expenses. There were 0 merger related expenses recorded during the three months ended September 30, 2020. The table above includes merger related expenses for the three and nine months ended ~~March 31, 2020~~September 30, 2019 of ~~$888,000,~~$409,000, of which ~~$238,000 was included in data processing fees, $314,000~~$392,000 was included in professional fees, $1,000 was included in telecommunication expenses and ~~$336,000~~$16,000 was included in all other noninterest expenses. ~~There were no merger related expenses during the three months ended March 31, 2019.~~

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

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

OVERVIEW

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

Financial Performance Measures

Consolidated net income for the Corporation was ~~$3.6~~$6.9 million for the ~~first~~third quarter of 2020, or ~~$0.98~~$1.86 per share, compared with consolidated net income of ~~$3.8~~$4.9 million for the third quarter of 2019, or $1.42 per share. Consolidated net income for the Corporation was $14.3 million for the first ~~quarter~~nine months of 2020, or $3.87 per share, compared with consolidated net income of $14.5 million for the first nine months of 2019, or ~~$1.08~~$4.19 per share. The Corporation’s annualized ROE and ROA were ~~8.27~~15.47 percent and ~~0.79~~1.39 percent, respectively,for the ~~first~~third quarter of 2020, compared to ~~9.96~~12.28 percent and ~~1.00~~1.25 percent, respectively, for the third quarter of 2019. The Corporation’s annualized ROE and ROA were 10.73 percent and 0.99 percent, respectively, for the first ~~quarter~~nine months of 2020, compared to 12.45 percent and 1.25 percent, respectively, for the first nine months of 2019.

~~Net~~Consolidated net income for the third quarter and first ~~quarter~~nine months of 2020 ~~included~~and 2019 were affected by certain items that management does not expect to have an ongoing impact on consolidated net income, including merger related expenses incurred in connection with the Corporation’s acquisition of Peoples Bankshares, Incorporated (Peoples)., which was completed on January 1, 2020, impairment charges related to branch consolidation, and provisions of the Coronavirus Aid, Recovery, and Economic Security Act (the CARES Act), enacted in March 2020, which provided income tax benefits in 2020 related to prior tax years of Peoples. Excluding the effects of these ~~merger related expenses,~~items, adjusted net income for the ~~first~~third quarter of 2020 was ~~$4.4~~$6.9 million, or ~~$1.20~~$1.85 per ~~share. Net~~share, compared to $5.3 million, or $1.54 per share, for the third quarter of 2019. Adjusted net income for the first ~~quarter~~nine months of ~~2019 did not include any merger related expenses.~~2020 was $15.3 million, or $4.15 per share, compared to $14.9 million, or $4.30 per share, for the first nine months of 2019. Adjusted ROE and adjusted ROA, ~~which exclude merger related expenses,~~on an annualized basis were ~~10.06~~15.42 percent and ~~0.96~~1.38 percent, respectively, for the third quarter of 2020, compared to 13.26 percent and 1.35 percent, respectively, for the third quarter of 2019. Adjusted ROE and adjusted ROA, on an annualized basis, were 11.50 percent and 1.06 percent, respectively, for the first ~~quarter~~nine months of ~~2020.~~2020, compared to 12.78 percent and 1.29 percent, respectively, for the first nine months of 2019. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net income, adjusted earnings per share, adjusted ROE and adjusted ROA, which are non-GAAP financial measures, to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Consolidated net income and earnings per share increased 41.6 percent and 31.1 percent, respectively, for the third quarter of 2020, and decreased 1.4 percent and 7.6 percent, respectively, for the first ~~quarter~~nine months of 2020, ~~decreased 3.5 percent and 9.3 percent, respectively, and adjusted~~compared to the same periods in 2019. Adjusted net income and adjusted earnings per share increased ~~17.3~~30.7 percent and ~~11.1~~20.3 percent, respectively, for the third quarter of 2020, and increased 3.0 percent and decreased 3.5 percent, respectively, for the first nine months of 2020, compared to the ~~first quarter of~~same periods in 2019. The ~~primary factors having a favorable impact on net income and~~increase in adjusted earnings per share for the ~~first~~third quarter of 2020 compared to the ~~first~~third quarter of 2019 ~~include~~is due primarily to higher ~~net interest income at the retail banking segment, which includes the effects of the acquisition of Peoples, higher gains on sales of loans at the~~ mortgage banking segment ~~and lower provision for loan losses at the consumer finance segment. Factors having an unfavorable impact on~~ net income, ~~and earnings per share include higher operating expenses at the retail banking segment, which includes the effects~~

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partially offset by higher provision for loan losses at the ~~retail~~community banking segment, ~~and merger related expenses. Earnings per share is also affected by higher average shares outstanding during~~lower net interest income at the ~~first quarter of 2020 compared to the first quarter of 2019, due primarily to~~consumer finance segment and the issuance of 209,871 shares of common stock in connection with the acquisition of Peoples. The decrease in adjusted earnings per share for the first nine months of 2020 compared to the first nine months of 2019 is due primarily to higher provision for loan losses and higher operating expenses at the community banking segment and the issuance of common stock in connection with the acquisition of Peoples, partially offset by higher net income at the mortgage banking segment.

Impact of and Response to the COVID-19 Pandemic

The ~~outbreak of the novel coronavirus and the resulting~~ COVID-19 ~~illness~~pandemic has caused a significant disruption in economic activity worldwide, and ~~the Corporation expects that it will have~~has had a significant impact on businesses and consumers in our market areas and on our results of ~~operations.~~operations, which the Corporation expects to continue. Many businesses ~~have~~ temporarily closed or reduced their availability ~~state~~

~~Table~~at the beginning of ~~Contents~~the pandemic; and while many people have returned to work, the U.S. unemployment rate was 7.9 percent in September after reaching 14.7 percent in April. There remains substantial uncertainty about critical factors that may affect the economy and employment, including a rising trend in new cases of COVID-19 in the U.S.; the development, efficacy and availability of a vaccine against COVID-19, potential re-tightening of policies that had previously allowed businesses to open; any further government stimulus efforts, including the nature, timing and extent of such stimulus; and the timing of reopening of schools, many of which are currently being conducted virtually.

~~and local governments have instructed people to stay at home and U.S. initial unemployment claims have exceeded 33 million since March 15, 2020.~~ The COVID-19 pandemic presents significant risks and uncertainties into our businesses; however, at this time we cannot determine the ultimate impact of this pandemic on the results of operations of the Corporation. The federal government and state and local governments have responded to this crisis with unprecedented relief efforts and economic stimulus. We cannot predict the duration or severity of the pandemic, the extent of government intervention during and following the pandemic or the ~~effect it~~effects the pandemic will have on the Corporation. We believe that as a result of the COVID-19 pandemic, our results of operations may be impacted by elevated loan losses, net interest margin compression, falling demand for loans and potential impairments of securities available for sale and goodwill.

Risks to Results of Operations

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

In the third quarter and first ~~quarter~~nine months of 2020, the Corporation recorded additional provision for loan losses ~~at the retail banking segment and the consumer finance segment~~ of ~~$1.0~~approximately $2.5 million and ~~$700,000,~~$8.0 million, respectively, as a result of asset quality deterioration that is expected to arise as a result of the COVID-19 pandemic and related economic disruption. Management continues to monitor changes in economic conditions and asset quality resulting from the COVID-19 pandemic, and ~~believes that~~if conditions deteriorate further then additional provision for loan losses may be required in future periods.

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

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

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

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Our Response to the Crisis

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

●

We have adapted our technology and processes to allow a substantial portion of administrative personnel to work remotely beginning in mid-March 2020.

As of September 30, 2020, most employees have returned to our offices on a full-time or part-time basis, but a significant number continue to work remotely.

●

We have implemented safe and healthy practices of social distancing and enhanced cleaning to protect our employees and customers as we continue to operate and serve our ~~communities as an essential business. These practices include closing the~~communities.

●

Our Bank branch lobbies ~~of our Bank branches~~reopened in September 2020, after being temporarily closed except ~~for appointments.~~

by appointment. Bank customers ~~continue to~~ have had continuous access to our products and services during the pandemic through our online and mobile platforms, ATMs and drive-thru ~~facilities, as well as by appointment in our branch lobbies.~~

facilities.

●

We ~~quickly implemented lending processes under the Payroll Protection Program (PPP)~~originated 1,257 PPP loans, with an aggregate principal amount of ~~the Small Business Administration and beginning on April 3, 2020 have successfully processed and funded over 1,100 loans totaling $85 million under the initial appropriation for the program.~~

$89.8 million.

●

We are working proactively with borrowers affected by the crisis, including offering short-term loan modifications, such as payment deferrals or interest only periods, ~~of up to six months,~~ for borrowers who are temporarily unable to make loan payments. As of ~~April~~September 30, 2020, we have provided ~~payment deferrals or interest only~~such modifications, typically for periods of less than six months, on ~~over 130~~ loans with ~~outstanding principal~~aggregate balances of ~~$70 million.~~

$103.6 million, of which 73 percent have either resumed regular payments or have paid off.

Principal Business Segments

An overview of the financial results for each of the Corporation’s principal segments is presented below. A more detailed discussion is included in the section “Results of Operations.”

~~Retail~~Community Banking: The ~~retail~~community banking segment reported net income of ~~$570,000~~$1.1 million for the ~~first~~third quarter of 2020, compared to net income of ~~$2.3~~$2.4 million for the third quarter of 2019. For the first nine months of 2020, the community banking segment reported net income of $1.8 million, compared to $7.8 million for the first ~~quarter~~nine months of 2019. ~~Retail~~Previously, the community banking segment was referred to as the retail banking segment. There have been no changes to the composition of the community banking segment.

The decrease in community banking segment net income for the third quarter and first ~~quarter of 2020 included merger related expenses of $857,000 ($685,000 after income taxes).~~

~~For the first quarter~~nine months of 2020, compared to the same ~~period~~periods in 2019, ~~retail banking segment net income decreased~~was due primarily to (1) higher provision for loan losses, as the COVID-19 pandemic continues to have a ~~result of (1)~~disruptive economic impact in the markets that C&F Bank serves, even as many businesses have reopened; (2) higher operating expenses, including ~~(a)~~ assuming certain operating costs of Peoples ~~Community Bank, (b) expanding the retail banking segment’s commercial lending team in the Richmond~~ and ~~Charlottesville markets in 2019 and (c)~~ investing in technology infrastructure to support continued growth; ~~(2)~~(3) lower ~~average~~ yields on ~~loans; (3)~~loans, securities, and interest-earning deposits with other banks; (4) higher

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average balances ~~and higher average rates~~ on interest-bearing deposit accounts; ~~(4)~~(5) lower service charges on deposit accounts and (6) higher ~~provision~~expense associated with the FDIC insurance assessment, as credits available to banks with less than $10 billion in consolidated assets were used to offset assessment expense for ~~loan losses resulting from~~portions of 2019 and 2020 and were fully utilized by the ~~economic disruption beginning in March 2020 related to COVID-19 and (5) merger related expenses.~~end of the first quarter of 2020. These factors were partially offset by (1) higher average loans outstanding, which contributed to higher interest ~~income;~~income for the third quarter and first nine months of 2020 compared to the same periods in 2019, (2) ~~higher interest income on certain purchased loans, as discussed below; and (3)~~ higher non-interest income from debit card interchange fees and ~~interest rate swaps offered~~(3) income tax benefits in the third quarter and first nine months of 2020 of $23,000 and $326,000, respectively, related to ~~commercial loan customers.~~prior tax years of Peoples as a result of the CARES Act. For the third quarter of 2020, compared to the third quarter of 2019, these factors were partially offset by lower merger related expenses. For the first nine months of 2020, compared to the same period in 2019, the decrease in community banking segment net income was also due in part to (1) higher merger related expenses and (2) a write-down of assets ($281,000) in connection with the consolidation of the Bank’s former main office in West Point, VA into a nearby branch office and the donation of the building to the Town of West Point, which was completed in October 2020.

~~Anticipated cost savings associated with~~Average loans increased $243.7 million or 31.3 percent for the third quarter of 2020 and $206.5 million, or 26.7 percent, for the first nine months of 2020, compared to the same periods in 2019. These increases included $94.0 million and $105.1 million for the third quarter and first nine months of 2020, respectively, of average balances of loans acquired in the acquisition of Peoples, ~~are expected~~and $89.6 million and $52.5 million, respectively, of average balances of loans originated under the PPP. The increase in average loans outstanding for the third quarter and first nine months of 2020 compared to ~~be realized beginning~~the same periods in 2019 excluding the acquisition of Peoples and the PPP was due primarily to growth in the ~~second~~commercial real estate and commercial business lending segments of the loan portfolio. Average loan yields were lower for the third quarter and first nine months of 2020 ~~after~~compared to the ~~completion~~same periods in 2019 due to repricing of ~~the systems conversion~~variable rate loans, lower average yields on new lending, including PPP loans, and ~~integration.~~

~~The recognition of~~lower interest income on purchased credit impaired (PCI) loans. The recognition of interest income on PCI loans is based on management’s expectation of future payments of principal and interest. ~~The unexpected payoff~~Earlier than expected repayments of a certain PCI ~~loan~~loans resulted in the recognition of additional interest income in the first ~~quarter~~nine months of ~~2020.~~2020 and 2019. Interest income recognized on PCI loans was ~~$959,000~~$485,000 and ~~$469,000~~$2.2 million for the third quarter and first ~~quarter~~nine months of 2020, respectively, compared to $985,000 and $2.7 million for the third quarter and first nine months of 2019, respectively.

Average loans increased $146.8 million or 19.0 percent for the first quarter of 2020, compared to the same period in 2019, primarily due to the acquisition of Peoples and investment in commercial lending teams resulting in loan growth. The average balance of loans associated with the acquisition of Peoples for the first quarter of 2020 was $118.5 million.

~~The retail banking segment’s~~C&F Bank’s total nonperforming assets were ~~$3.0~~$2.4 million at ~~March 31,~~September 30, 2020, compared to $2.6 million at December 31, 2019. Nonperforming assets at ~~March 31,~~September 30, 2020 included ~~$1.9~~$1.3 million in nonaccrual loans, compared to $1.5 million at December 31, 2019 and included $1.1 million in other real estate owned at ~~March 31,~~both September 30, 2020 and at December

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31, 2019. Nonaccrual loans were comprised primarily of residential mortgages and equity lines at ~~March 31,~~September 30, 2020 and December 31, 2019. The ~~retail~~community banking segment recorded provision for loan losses of ~~$1.0~~$1.5 million and $3.9 million in the third quarter and first ~~quarter~~nine months of 2020, ~~due~~respectively, primarily to add to reserves based on qualitative adjustments as a result of the COVID-19 pandemic and ~~we anticipate~~due to loan growth, compared to zero and $110,000 for the same periods in 2019. As of September 30, 2020, compared to December 31, 2019, there have not been significant changes in the overall credit quality of the loan portfolio, although management believes the effects of PPP loans, payment deferrals and government stimulus may be delaying signs of credit deterioration. Management believes that ~~additional increases in~~the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there is further deterioration in economic conditions, additional provision may be required in future periods.

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

Mortgage Banking: The mortgage banking segment reported net income of ~~$1.5~~$4.5 million for the ~~first~~third quarter of 2020, compared to net income of ~~$567,000~~$1.2 million for the third quarter of 2019. For the first nine months of 2020, the mortgage banking segment reported net income of $8.3 million, compared to net income of $3.0 million for the first ~~quarter~~nine months of 2019.

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

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higher compensation expense, loan expense and data processing expense related to higher loan volume, lower average margins resulting from a higher mix of refinancings compared to home purchases and fair value adjustments on hedging activities due to disruption in the market caused by COVID-19.

volume. Mortgage loan originations for the mortgage banking segment were ~~$260.4~~$534.7 million and $1.24 billion for the third quarter and first nine months of 2020, respectively, compared to $286.9 million and $672.4 million for the third quarter and first ~~quarter~~nine months of ~~2020, compared to $138.7 million for the first quarter of 2019.~~2019, respectively. Loan production for the third quarter and first ~~quarter~~nine months of 2020 was the highest reported by the mortgage banking segment for any quarter and for the first ~~quarter~~nine months of any calendar year ~~since 2009, when home sales were supported by a federal income tax credit for first-time home buyers.~~in the Corporation’s history. Lower interest rates on mortgage loans have contributed to an increase in volume in the broader mortgage industry in the first ~~quarter~~nine months of 2020 compared to the ~~first~~same period in the prior year. Mortgage loan originations for the mortgage banking segment during the third quarter of 2020 for refinancings and home purchases were $285.3 million and $249.4 million, respectively, compared to $93.4 million and $193.5 million, respectively, during the third quarter of 2019. Mortgage loan originations for the mortgage banking segment during the first ~~quarter~~nine months of 2020 for refinancings and home purchases were ~~$95.4~~$625.4 million and ~~$165.0~~$618.0 million, respectively, compared to ~~$20.8~~$147.1 million and ~~$117.9~~$525.3 million, respectively, during the first ~~quarter~~nine months of 2019. At March 31, 2020, the mortgage banking segment had locked loan commitments to borrowers of $245.2 million. Due to conditions affecting borrowers related to the COVID-19 pandemic, the amount of these loan commitments that ultimately result in loan originations may be less than the proportion normally experienced by the mortgage banking segment, which may negatively affect gains on loans held for sale in the second quarter of 2020.

Consumer Finance: The consumer finance segment reported net income of ~~$1.9~~$1.6 million for the ~~first~~third quarter of 2020, compared to net income of ~~$1.3~~$1.9 million for the third quarter of 2019. For the first nine months of 2020, the consumer finance segment reported net income of $5.2 million, compared to net income of $5.1 million for the first ~~quarter~~nine months of 2019.

~~The increase in~~Favorable factors affecting net income of the consumer finance segment for the third quarter and first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~same periods in 2019 included a decrease in interest expense due to lower average cost of ~~2019 was due primarily to (1) a decline in the~~borrowings and lower net charge-offs, requiring less provision for loan losses ~~of $745,000 as charge-offs declined and~~to maintain the ~~overall credit quality~~level of the ~~portfolio continued~~allowance for loan losses. Unfavorable factors affecting net income of the consumer finance segment for the third quarter and first nine months of 2020 compared to ~~improve, which was partially offset by additional~~the same periods in 2019 included lower interest income from loans, due primarily to lower average yields, and provision for loan losses in the third quarter and first ~~quarter~~nine months of 2020, ~~related~~ to add to reserves based on qualitative adjustments as a result of the COVID-19 ~~pandemic, (2) lower cost of variable-rate borrowings and (3) growth in average loans outstanding of 4.7 percent, partially offset by lower loan yields.~~pandemic. The average yield on loans for the third quarter and first ~~quarter~~nine months of 2020 was lower compared to ~~first quarter~~the same periods of 2019 due to continued competition in the non-prime automobile loan business, including the effect of a lower interest rate environment, and the consumer finance segment’s pursuing growth in higher quality, lower yielding loans, which include prime marine and recreational vehicle (RV) loans.

The annualized net charge-off ratio for the first ~~quarter~~nine months of 2020 decreased to ~~2.81~~1.56 percent from ~~3.79~~2.91 percent for the first ~~quarter~~nine months of 2019. The decline reflects a lower number of charge-offs during 2020, due to improvement in loan performance, and lower losses per loan charged off as a result of a strong used car market. Improvement in loan performance has resulted from C&F Finance Company continuing to purchase higher quality loans as well as borrowers benefitting from the ~~consumer finance segment’s purchasing~~government’s stimulus measures in response to the pandemic during 2020. C&F Finance Company offers payment deferrals at times to non-prime automobile ~~loan contracts with~~borrowers as a management technique to achieve higher ~~credit metrics beginning~~ultimate cash collections. C&F Finance Company offered a higher number of payment deferrals during the first and second quarters of 2020 to borrowers impacted by the pandemic, and as of September 30, 2020, most borrowers who received a deferral had resumed making payments and were current. Monthly payment deferrals, as a percentage of non-prime automobile loans outstanding, rose to as high as 8.25 percent during the second quarter of 2020 and decreased to 1.57 percent by the end of the third quarter of 2020. The average amount deferred on a monthly basis during the third quarter and first nine months of 2020 was 2.04 percent and 3.38 percent, respectively, of non-prime automobile loans outstanding, compared to 1.90 percent and 1.91 percent, respectively, during the same periods in ~~2016.~~2019. At ~~March 31,~~September 30, 2020, total delinquent loans, which does not include loans that have been granted a payment deferral, as a percentage of total loans was ~~3.38~~2.48 percent, compared to 4.17 percent at December 31, 2019 and ~~2.66~~3.48 percent at ~~March 31,~~September 30, 2019. The allowance for loan losses was ~~$21.3~~$23.9 million, or ~~6.91~~7.65 percent of total loans at ~~March 31,~~September 30, 2020, compared to $21.8 million, or 6.96 percent of total loans at December 31, 2019. The ~~decrease~~increase in the level of the allowance for loan losses as a percentage of total loans ~~was primarily due to~~reflects losses that management believes are probable as a ~~higher composition~~result of ~~marine and RV loans as compared to non-prime automobile loans within~~ the ~~consumer finance loan portfolio, which was partially offset by an increase to the provision for loan losses~~economic impacts of ~~approximately $700,000 due to~~ the COVID-19 pandemic. ~~We anticipate~~Management believes that ~~additional increases in~~the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there is further deterioration in economic conditions, additional provision may be required in future periods.

Merger Related ~~Expenses:~~Expenses. In the third quarter of 2020, there were no merger related expenses recorded in connection with the acquisition of Peoples. For the first ~~quarter~~nine months of 2020, the Corporation recorded merger related expenses of ~~$957,000~~$1.4 million ($~~785,000~~1.1 million after income taxes), ~~in connection with its acquisition of Peoples,~~ of which ~~$857,000~~$1.3 million ($~~685,000~~1.0 million after income taxes) was allocated to the ~~retail~~community banking segment and $100,000 ($100,000 after income taxes) was recorded as a holding company expense.

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For the ~~remainder~~third quarter and first nine months of 2019, the Corporation recorded merger related expenses of $409,000 ($389,000 after income taxes), of which $104,000 ($89,000 after income taxes) was allocated to the community banking segment and $305,000 ($300,000 after income taxes) was recorded as a holding company expense. As of ~~March 31,~~September 30, 2020, the Corporation has recorded aggregate merger related expenses of ~~$1.7~~$2.1 million ($~~1.4~~1.8 million after income

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taxes) and expects ~~to incur additional after-tax~~that any further merger related expenses incurred in future periods will not be significant to the Corporation as a whole.

Issuance of ~~approximately $400,000~~Subordinated Notes. On September 29, 2020, the Corporation completed the issuance of $20.0 million in aggregate principal amount of subordinated notes due in 2030 in a private placement transaction. The subordinated notes will initially bear interest at a fixed rate of 4.875% for five years and at the three month SOFR plus 475.5 basis points thereafter. These notes are included in Tier 2 capital of the Corporation, and the proceeds will be used for general corporate purposes and to ~~be recorded in the second quarter of 2020.~~support future growth opportunities.

Capital Management. Total equity was ~~$179.2~~$189.1 million at ~~March 31,~~September 30, 2020, compared to $165.3 million at December 31, 2019. Capital growth resulted primarily from earnings for the first ~~quarter~~nine months of 2020 and the issuance of $11.6 million of common equity in connection with the acquisition of Peoples on January 1, 2020, which was partially offset ~~in part~~ by ~~share repurchases of $618,000, as further described below, and~~ cash dividends declared of ~~$0.38~~$1.14 per share during the first ~~quarter~~nine months of 2020. For the ~~first~~third quarter of 2020, the Corporation’s cash dividend equated to a payout ratio of ~~38.8~~20.4 percent of ~~first~~third quarter earnings per share. The Corporation cannot predict what impact the COVID-19 pandemic will ultimately have on its earnings and capital levels. At this time, the Corporation expects to continue paying a regular quarterly dividend. The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions (including the impact of COVID-19), current and future capital requirements and expected future earnings.

In May 2019, the Corporation’s Board of Directors authorized a program, effective June 1, 2019, to repurchase up to $5.0 million of the Corporation’s common stock (the Repurchase Program) through May 31, 2020. AsThe Corporation made no repurchases of ~~March 31,~~its common stock during the three months ended September 30, 2020. Repurchases under the Corporation’s share repurchase program for the first nine months of 2020 ~~the~~were $355,000. The Corporation ~~has~~had made aggregate common stock repurchases of $2.1 million under the Repurchase ~~Program. Currently,~~Program when the ~~Corporation does~~program expired on May 31, 2020. The Repurchase Program has not ~~expect to make additional repurchases during the remaining period of the Repurchase Program.~~been renewed or extended at this time. At ~~March 31,~~September 30, 2020, the book value per share of the Corporation’s common stock was ~~$48.98,~~$51.64, and tangible book value per share was ~~$41.40,~~$44.08, compared to ~~$47.93~~$48.07 and ~~$43.47,~~$43.61, respectively, at December 31, 2019.

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 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

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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 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

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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 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 ~~retail~~community banking segment and the consumer finance segment. The Corporation reviews the carrying value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Corporation may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Corporation elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill at the ~~retail~~community banking segment and the consumer finance segment, which was the annual evaluation in the fourth quarter of 2019, the Corporation concluded that no impairment existed based on an assessment of qualitative factors. As the COVID-19 pandemic and the related economic disruption has caused a recession and resulted in recognition of higher provisions for loan losses and a decrease in net income of the community banking segment and consumer finance segment, management considered the impact of the pandemic on goodwill and determined that a triggering event had not occurred as of September

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

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

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

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RESULTS OF OPERATIONS

NET INTEREST INCOME

The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019. 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 of fair value purchase adjustments related to business combinations are included in the computation of yields on loans and investments and on the ~~cost~~costs of deposits and borrowings. The accretion contributed approximately 3715 basis points to the yield on loans and 2812 basis points to both the yield on interest earning assets and the net interest margin for the third quarter of 2020, compared to approximately 34 basis points to the yield on loans and 27 basis points to both the yield on interest earning assets and the net interest margin for the third quarter of 2019. The accretion contributed approximately 22 basis points to the yield on loans and 18 basis points to both the yield on interest earning assets and the net interest margin for the first ~~quarter~~nine months of 2020, compared to approximately 1632 basis points to the yield on loans and 1325 basis points to both the yield on interest earning assets and the net interest margin for the first ~~quarter~~nine months of 2019. Fees collected on PPP loans are recognized net of direct origination costs over the life of the loans and contributed 12 basis points and 8 basis points to the yield on loans for the third quarter and first nine months of 2020, respectively, and contributed 10 and 6 basis points for the third quarter and first nine months of 2020, respectively, to both the yield on earning assets and net interest margin. 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,
	2020						2019
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	168,659	$	788	1.87	%	$	128,505	$	774	2.41	%
Tax-exempt		83,776		629	3.00			68,868		638	3.71
Total securities		252,435		1,417	2.25			197,373		1,412	2.86
Total loans		1,544,389		22,537	5.81			1,176,729		22,260	7.51
Interest-bearing deposits in other banks		44,523		32	0.29			94,625		460	1.93
Total earning assets		1,841,347		23,986	5.18			1,468,727		24,132	6.52
Allowance for loan losses		(37,417)						(33,730)
Total non-earning assets		188,314						131,305
Total assets	$	1,992,244					$	1,566,302

Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	253,950		102	0.16		$	209,128		275	0.52
Money market deposit accounts		271,652		219	0.32			192,354		236	0.49
Savings accounts		170,296		25	0.06			120,170		27	0.09
Certificates of deposit, $100 or more		273,668		1,182	1.72			215,655		1,070	1.97
Other certificates of deposit		212,101		756	1.42			188,114		798	1.68
Interest-bearing deposits		1,181,667		2,284	0.77			925,421		2,406	1.03
Borrowings		99,097		693	2.80			160,340		1,363	3.40
Total interest-bearing liabilities		1,280,764		2,977	0.93			1,085,761		3,769	1.38
Noninterest-bearing demand deposits		478,232						286,211
Other liabilities		54,405						35,224
Total liabilities		1,813,401						1,407,196
Equity		178,843						159,106
Total liabilities and equity	$	1,992,244					$	1,566,302
Net interest income			$	21,009					$	20,363
Interest rate spread					4.25	%					5.14	%
Interest expense to average earning assets (annualized)					0.64	%					1.02	%
Net interest margin (annualized)					4.54	%					5.50	%

Three Months Ended March 31,


2020

2019


Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Assets

Securities:

Taxable

$
131,837

$
787

2.39
%
$
139,895

$
859

2.46
%
Tax-exempt

72,162

628

3.48

76,314

738

3.87

Total securities

203,999

1,415

2.77

216,209

1,597

2.95

Total loans

1,303,309

22,927

7.08

1,099,638

20,926

7.72

Interest-bearing deposits in other banks

189,467

598

1.28

103,807

589

2.30

Total earning assets

1,696,775

24,940

5.91

1,419,654

23,112

6.60

Allowance for loan losses

(32,866)

(34,116)

Total non-earning assets

183,627

127,959

Total assets

$
1,847,536

$
1,513,497

Liabilities and Equity

Interest-bearing deposits:

Interest-bearing demand deposits

$
261,221

230

0.35

$
225,072

312

0.56

Money market deposit accounts

237,579

328

0.56

205,461

260

0.51

Savings accounts

141,689

28

0.08

120,531

30

0.10

Certificates of deposit, $100 or more

249,407

1,233

1.99

182,015

717

1.60

Other certificates of deposit

255,313

1,066

1.68

176,650

589

1.35

Interest-bearing deposits

1,145,209

2,885

1.01

909,729

1,908

0.85

Borrowings

165,261

1,290

3.12

159,986

1,396

3.49

Total interest-bearing liabilities

1,310,470

4,175

1.28

1,069,715

3,304

1.25

Noninterest-bearing demand deposits

321,838

263,000

Other liabilities

39,303

29,264

Total liabilities

1,671,611

1,361,979

Equity

175,925

151,518

Total liabilities and equity

$
1,847,536

$
1,513,497

Net interest income

$
20,765

$
19,808

Interest rate spread

4.63
%

5.35
%
Interest expense to average earning assets (annualized)

0.99
%

0.94
%
Net interest margin (annualized)

4.92
%

5.66
%

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	Nine Months Ended September 30,
	2020						2019
	Average		Income/		Yield/		Average		Income/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets
Securities:
Taxable	$	150,598	$	2,390	2.12	%	$	134,125	$	2,448	2.43	%
Tax-exempt		80,328		1,908	3.17			73,169		2,080	3.79
Total securities		230,926		4,298	2.48			207,294		4,528	2.91
Total loans		1,431,280		67,699	6.32			1,138,532		65,514	7.69
Interest-bearing deposits in other banks		111,329		682	0.82			100,495		1,631	2.17
Total earning assets		1,773,535		72,679	5.47			1,446,321		71,673	6.62
Allowance for loan losses		(34,937)						(33,887)
Total non-earning assets		193,370						129,621
Total assets	$	1,931,968					$	1,542,055

Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits	$	256,143		443	0.23		$	217,080		894	0.55
Money market deposit accounts		252,598		759	0.40			198,355		757	0.51
Savings accounts		158,755		85	0.07			120,515		86	0.10
Certificates of deposit, $100 or more		264,642		3,669	1.85			201,022		2,716	1.81
Other certificates of deposit		230,411		2,699	1.56			182,793		2,082	1.52
Total interest-bearing deposits		1,162,549		7,655	0.88			919,765		6,535	0.95
Borrowings		133,477		2,827	2.82			159,963		4,189	3.49
Total interest-bearing liabilities		1,296,026		10,482	1.08			1,079,728		10,724	1.33
Noninterest-bearing demand deposits		408,876						275,269
Other liabilities		49,436						31,804
Total liabilities		1,754,338						1,386,801
Equity		177,630						155,254
Total liabilities and equity	$	1,931,968					$	1,542,055
Net interest income			$	62,197					$	60,949
Interest rate spread					4.39	%					5.29	%
Interest expense to average earning assets					0.79	%					0.99	%
Net interest margin					4.68	%					5.63	%

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

~~Table of Contents~~

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

Table of Contents

TABLE 2: Rate-Volume Recap


	Three Months Ended March 31, 2020 from 2019
	Increase (Decrease)				Total
	Due to				Increase

							Three Months Ended September 30, 2020 from 2019
							Increase (Decrease)				Total
							Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)		Rate		Volume		(Decrease)
Interest income:
Loans	$	(1,799)	$	3,800	$	2,001	$	(5,715)	$	5,992	$	277
Securities:
Taxable		(23)		(49)		(72)		(196)		210		14
Tax-exempt		(71)		(39)		(110)		(134)		125		(9)
Interest-bearing deposits in other banks		(342)		351		9		(264)		(164)		(428)
Total interest income		(2,235)		4,063		1,828		(6,309)		6,163		(146)
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		(128)		46		(82)		(222)		49		(173)
Money market deposit accounts		26		42		68		(97)		80		(17)
Savings accounts		(7)		5		(2)		(11)		9		(2)
Certificates of deposit, $100 or more		205		311		516		(149)		261		112
Other certificates of deposit		169		308		477		(134)		92		(42)
Total interest-bearing deposits		265		712		977		(613)		491		(122)
Borrowings		(151)		45		(106)		(212)		(458)		(670)
Total interest expense		114		757		871		(825)		33		(792)
Change in net interest income	$	(2,349)	$	3,306	$	957	$	(5,484)	$	6,130	$	646


	Nine Months Ended September 30, 2020 from 2019
	Increase (Decrease)				Total
	Due to				Increase
(Dollars in thousands)	Rate		Volume		(Decrease)
Interest income:
Loans	$	(12,901)	$	15,086	$	2,185
Securities:
Taxable		(335)		277		(58)
Tax-exempt		(362)		190		(172)
Interest-bearing deposits in other banks		(1,109)		160		(949)
Total interest income		(14,707)		15,713		1,006
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits		(596)		145		(451)
Money market deposit accounts		(182)		184		2
Savings accounts		(28)		27		(1)
Certificates of deposit, $100 or more		62		891		953
Other certificates of deposit		57		560		617
Total interest-bearing deposits		(687)		1,807		1,120
Borrowings		(731)		(631)		(1,362)
Total interest expense		(1,418)		1,176		(242)
Change in net interest income	$	(13,289)	$	14,537	$	1,248

Net interest income, on a taxable-equivalent basis, for the three months ended ~~March 31,~~September 30, 2020 was ~~$20.8~~$21.0 million, compared to ~~$19.8~~$20.4 million for the three months ended ~~March 31,~~September 30, 2019. Net interest income, on a taxable-equivalent basis, for the first nine months of 2020 was $62.2 million, compared to $60.9 million for the first nine months of 2019. Annualized net interest margin decreased 7496 basis points to ~~4.92~~4.54 percent for the third quarter of 2020 and decreased 95 basis points to 4.68 percent for the first ~~quarter~~nine months of 2020, relative to the same ~~period~~periods in 2019, as yields on interest-earning assets decreased for the first quarter of 2020 as compared to the first quarter of 2019, while costs of interest-bearing liabilities increased. For the first quarter of 2020, the yield on interest-earning assets decreased by 69 basis points compared to the first quarter of 2019 due primarily to lower average yields on ~~securities,~~ loans and ~~interest-bearing deposits in~~ other ~~banks. Average~~ earning assets, ~~grew~~partially offset by ~~$277.1 million~~(1) using lower-yielding excess cash to fund growth in loans and securities and repay borrowings and (2) growth in low cost deposits, including noninterest-bearing demand deposits. The yield on interest-earning assets and cost of interest-bearing liabilities decreased by 134 basis points and 45 basis points, respectively, for the third quarter of 2020 and decreased by 115 basis points and 25 basis points, respectively for the first ~~quarter~~nine months of 2020, compared to the same ~~period~~periods in 2019. Average earning assets grew by $372.6 million and $327.2 million for the third quarter and first nine months of 2020, compared to the same periods in 2019, primarily due to growth in loans (including PPP loans) and securities funded by deposit growth as well as the acquisition of Peoples on January 1, 2020. ~~The cost~~

Table of ~~interest-bearing liabilities increased by three basis points for the first quarter of 2020 compared to the same period in 2019, resulting primarily from higher average costs of deposits.~~ Contents

Average loans, which includes both loans held for investment and loans held for sale, increased ~~$203.7~~$367.7 million to ~~$1.3~~$1.5 billion for the third quarter of 2020, compared to the same period in 2019, and increased $292.7 million to $1.4 billion for the first ~~quarter~~nine months of 2020, compared to the same period in 2019. Average loans held for investment at the ~~retail~~community banking segment increased ~~$146.8~~$243.7 million, or ~~19.0~~31.3 percent, for the third quarter of 2020, and increased $206.5 million, or 26.7 percent for the first ~~quarter~~nine months of 2020 compared to the same ~~period~~periods in ~~2019, due primarily to $118.5~~2019. These increases included $94.0 million and $105.1 million for the third quarter and first nine months of 2020, respectively, of average balances of loans ~~for the first quarter 2020 arising from~~acquired in the acquisition of Peoples, and $89.6 million and $52.5 million, respectively, of average balances of loans originated under the PPP. The remaining increase in average loans outstanding at the community banking segment for the third quarter and first nine months of 2020 compared to the same periods in 2019 was due primarily to growth in the commercial real estate and commercial business lending ~~segment~~segments of the loan portfolio. Average loans held for investment at the consumer finance segment ~~increased $14.0~~decreased $4.6 million, or ~~4.7~~1.5 percent, for the third quarter of 2020, and increased $2.3 million, or 0.8 percent, for the first ~~quarter~~nine months of 2020, compared to the ~~first quarter~~same periods of 2019 as ~~a result of~~average marine and RV loans increased due to the continued expansion of the consumer finance segment’s purchases of ~~marine and RV~~those loan contracts and ~~growth in~~average automobile loans ~~outstanding.~~decreased due to continuing competition for loan contracts. Average loans held for sale at the mortgage banking segment increased ~~$41.9~~$127.0 million, or ~~153~~154.6 percent, for the third quarter of 2020, and increased $82.6 million, or 147.0 percent, for the first ~~quarter~~nine months of 2020, compared to the same ~~period~~periods in 2019, due to higher loan production.

The overall yield on average loans decreased 64170 basis points to ~~7.08~~5.81 percent for the third quarter of 2020 and decreased 137 basis points to 6.32 percent for the first ~~quarter~~nine months of 2020, compared to the ~~first quarter~~same periods of 2019 due primarily to changes in the composition of the loan ~~portfolio. Average~~portfolio, lower market interest rates, and loans atoriginated under the ~~retail banking and mortgage banking segments increased faster than loans~~PPP, which have lower yields relative to other loans. In addition, yields at the consumer finance segment which has higher average yields. Growth at the retail banking segment resulted from the acquisition of Peoples and investments in the commercial lending teams added during 2019, while growth at the mortgage banking segment resulted from thewere lower ~~rate environment which has contributed to an increase in volume in the broader mortgage industry. In addition, yields on all segments of the portfolio declined~~ due to ~~the lower rate environment and~~ continued competition ~~specifically~~ in the non-prime automobile loan business, asincluding the effect of a lower interest rate environment, and the consumer finance segment ~~has continued~~continuing to pursue growth in higher quality, lower yielding loans,

~~Table of Contents~~

~~including~~ which includes prime marine and RV loans. ~~These effects were partially offset by higher~~Lower interest income on PCI loans at the ~~retail~~community banking ~~segment.~~segment for the third quarter and first nine months of 2020 as compared to the same periods of 2019 also contributed to the decrease in yield. While yields on loans originated under the PPP were lower than the average yield of other loans at the community banking segment during the third quarter and first nine months of 2020, unrecognized net deferred fees of $2.9 million at September 30, 2020 may result in higher yields in future periods as they are recognized over the remaining life of those loans, a portion of which are expected to be repaid by the SBA prior to maturity in accordance with the forgiveness provisions of the PPP.

Average securities available for sale ~~decreased $12.2~~increased $55.1 million and $23.6 million for the third quarter and first ~~quarter~~nine months of 2020, respectively, compared to the same ~~period~~periods in 2019, ~~as net declines during 2019 from sales, maturities~~due primarily to higher purchases of securities and ~~calls were partially offset by securities added as a result of~~ the acquisition of Peoples. The average yield on the securities portfolio on a taxable-equivalent basis decreased 1761 and 43 basis points for the third quarter and first ~~quarter~~nine months of 2020, respectively, compared to the same ~~period~~periods in ~~2019.~~ 2019, due to purchases of securities in 2020 at lower average yields relative to the average yield of the portfolio as a whole.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $50.1 million and increased ~~$85.7~~$10.8 million ~~during~~for the third quarter and first ~~quarter~~nine months of 2020, respectively, compared to the same ~~period~~periods in ~~2019. The increase during~~2019, as the ~~first quarter of 2020 resulted primarily from deposit~~Corporation utilized excess cash to fund growth ~~outpacing loan growth.~~in loans and securities and repay borrowings. The average yield on ~~these overnight funds~~interest-bearing deposits in other banks decreased ~~102~~164 and 135 basis points for the third quarter and first ~~quarter~~nine months of 2020, respectively, compared to the same ~~period~~periods in 2019, ~~as the~~due to lower average rates on excess cash reserves, partially offset by an increase in purchased time deposits. The Federal Reserve Bank decreased the interest rate on excess cash reserve balances from 2.40 percent at ~~March 31,~~September 30, 2019 to 1.55 percent by the end of 2019, and then further decreased the interest rate to 0.10 percent by the end of the ~~first~~third quarter of 2020 in response to the COVID-19 pandemic.

Average money market, savings and interest-bearing demand deposits increased ~~$89.4~~$174.2 million and $131.5 million for the third quarter and first ~~quarter~~nine months of 2020, and average time deposits increased ~~$146.1~~$82.0 million and $111.2 million for the third quarter and first ~~quarter~~nine months of 2020, compared to the same ~~period~~periods in 2019. ~~$77.0~~Average noninterest-bearing demand deposits increased $192.0 million and $133.6 million for the third quarter and first nine months of 2020, compared to the ~~increase~~same periods in 2019. Higher average deposit balances are due primarily to deposit growth during 2020 and the acquisition of Peoples. The increases in average money market, savings and interest bearing-demand deposits included $49.1 million for the third quarter of 2020 and $61.3 million for the first nine months of 2020, and the increases in average time deposits

Table of Contents

included $77.4 million for the third quarter of 2020 and $77.8 million for the first nine months of 2020, related to the acquisition of Peoples. Deposit growth was also impacted by the effect of PPP loans and direct government payments received by depositors. The average cost of interest-bearing deposits decreased 26 basis points and 7 basis points for the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, due primarily to lower rates on money market, savings and interest-bearing demand deposits, ~~and $77.8 million of the increase~~which take effect immediately upon a change in ~~average~~offered rates. Offered rates on time deposits ~~was attributable to the acquisition of Peoples~~were also lower during the third quarter and first ~~quarter of 2020. The average cost of interest-bearing deposits increased 16 basis points for the first quarter~~nine months of 2020, compared to the same ~~period in 2019, due to increases in interest rates on time deposits~~periods in 2019. ~~By the end of the first quarter of 2020, offered rates on deposit products have decreased, but changes~~Changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity.

Average borrowings ~~increased $5.3~~decreased $61.2 million and $26.5 million for the third quarter and first ~~quarter~~nine months of 2020, compared to the same ~~period~~periods in 2019 due primarily to the repayment of long-term borrowings partially offset by the assumption of $4.0 million of subordinated debt upon the acquisition of Peoples. Repayment of long-term borrowings included paying off a revolving bank line of credit in the second quarter of 2020 using excess cash. The average cost of borrowings decreased 3760 and 67 basis points during the third quarter and first ~~quarter~~nine months of 2020, compared to the same ~~period~~periods in 2019, ~~because~~due primarily to the payoff of ~~decreases in~~the revolving bank line of credit and lower short-term interest ~~rates, to which variable-rate borrowings at the consumer finance segment are indexed.~~rates.

The Corporation believes that ~~it may be challenging to maintain~~its net interest margin ~~at its current level based on the effects of~~may be affected in future periods by several factors that are difficult to predict, including (1) ~~the current interest rate environment, including historically low interest rates and recent decreases~~changes in interest rates, which may depend on ~~all classes~~the severity of ~~earning assets,~~adverse economic conditions, the ~~effect~~timing and extent of any economic recovery, and the extent of government stimulus measures, which ~~is not fully reflected in net interest margin for the first quarter of 2020,~~are inherently uncertain, (2) possible changes in the composition of ~~earnings~~earning assets which may result from decreased loan demand as a result of the current economic environment ~~and~~ (3) ~~lower~~ accretion of purchase discounts on ~~PCI~~ loans ~~from~~related to acquisitions, which is included in yields on ~~loans. These effects are expected to be offset in part by~~loans and may fluctuate based on the timing of repayment, (4) the repricing of higher-rate time deposits and borrowings as they mature to lower rates, which may occur at a slower rate than the repricing of interest bearing ~~assets.~~ assets and (5) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or forgiveness.

~~Table of Contents~~

Noninterest Income

TABLE 3: Noninterest Income


	Three Months Ended March 31, 2020
	Retail		Mortgage		Consumer		Other and

											Three Months Ended September 30, 2020
											Community		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total		Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	3,676	$	—	$	—	$	3,676	$	—	$	9,755	$	—	$	(49)	$	9,706
Mortgage banking fee income		—		1,305		—		—		1,305		—		2,209		—		(3)		2,206
Interchange income												1,268		—		—		—		1,268
Service charges on deposit accounts		1,002		—		—		—		1,002		785		—		—		—		785
Wealth management services income, net												—		—		—		640		640
Other service charges and fees		374		—		1		—		375		390		—		—		—		390
Net gains on calls of available for sale securities		4		—		—		—		4
Wealth management services income, net		—		—		—		585		585
Income from bank-owned life insurance		103		—		—		—		103
Interchange income		1,089		—		—		—		1,089
Other income		390		306		116		78		890
Net gains on sales, maturities and calls of available for sale securities												4		—		—		—		4
Other income (loss), net												384		706		93		756		1,939
Total noninterest income	$	2,962	$	5,287	$	117	$	663	$	9,029	$	2,831	$	12,670	$	93	$	1,344	$	16,938


	Three Months Ended September 30, 2019
	Community		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	3,205	$	—	$	—	$	3,205
Mortgage banking fee income		—		1,373		—		—		1,373
Interchange income		1,105		—		—		—		1,105
Service charges on deposit accounts		1,012		—		—		—		1,012
Wealth management services income, net		—		—		—		529		529
Other service charges and fees		395		—		1		—		396
Net gains on sales, maturities and calls of available for sale securities		3		—		—		—		3
Other income (loss), net		347		80		127		53		607
Total noninterest income	$	2,862	$	4,658	$	128	$	582	$	8,230

Table of Contents

Three Months Ended March 31, 2019


Retail

Mortgage

Consumer

Other and


(Dollars in thousands)

Banking

Banking

Finance

Eliminations

Total

Gains on sales of loans

$
—

$
2,136

$
—

$
—

$
2,136

Mortgage banking fee income

—

769

—

—

769

Service charges on deposit accounts

918

—

—

—

918

Other service charges and fees

298

—

1

—

299

Net gains on calls of available for sale securities

4

—

—

—

4

Wealth management services income, net

—

—

—

449

449

Income from bank-owned life insurance

83

—

—

—

83

Interchange income

958

—

—

—

958

Other income

177

69

128

1,113

1,487

Total noninterest income

$
2,438

$
2,974

$
129

$
1,562

$
7,103


	Nine Months Ended September 30, 2020
	Community		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	18,036	$	—	$	(49)	$	17,987
Mortgage banking fee income		—		5,500		—		(3)		5,497
Interchange income		3,498		—		—		—		3,498
Service charges on deposit accounts		2,426		—		—		—		2,426
Wealth management services income, net		1		—		—		1,972		1,973
Other service charges and fees		1,158		—		1		—		1,159
Net gains on sales, maturities and calls of available for sale securities		11		—		—		—		11
Other income (loss), net		590		1,413		289		671		2,963
Total noninterest income	$	7,684	$	24,949	$	290	$	2,591	$	35,514


	Nine Months Ended September 30, 2019
	Community		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Gains on sales of loans	$	—	$	8,296	$	—	$	—	$	8,296
Mortgage banking fee income		—		3,410		—		—		3,410
Interchange income		3,134		—		—		—		3,134
Service charges on deposit accounts		2,874		—		—		—		2,874
Wealth management services income, net		—		—		—		1,453		1,453
Other service charges and fees		1,108		—		3		—		1,111
Net gains on sales, maturities and calls of available for sale securities		8		—		—		—		8
Other income (loss), net		1,069		216		364		1,600		3,249
Total noninterest income	$	8,193	$	11,922	$	367	$	3,053	$	23,535

Total noninterest income increased ~~$1.9~~$8.7 million, or ~~27.1~~105.8 percent, in the ~~first~~third quarter of 2020, compared to the ~~first~~third quarter of 2019, and increased $12.0 million, or 50.9 percent, in the first nine months of 2020, compared to the first nine months of 2019. ~~This increase~~These increases in noninterest income ~~was~~were due primarily to (1) ~~an increase in~~higher gains on sales of loans and mortgage banking fee income at the mortgage banking segment, ~~as a result of~~which resulted from higher ~~mortgage~~ loan production, ~~for the first quarter of 2020 compared to the same period in 2019,~~ as lower mortgage loan interest rates made mortgage products more attractive to consumers and contributed to an increase in volume in the mortgage industry, and higher margins, (2) ~~an increase~~higher fee income at the mortgage banking segment, included in ~~wealth management services~~“Other income (loss), net,” for providing mortgage origination functions to third parties, as a result of higher mortgage industry volume and serving a growing number of third-party lenders (3) an increase in debit card interchange income at the ~~retail~~community banking segment and (4) an increase in ~~“Other~~wealth management services income,~~” related to interest rate swaps offered to commercial loan customers at the retail banking segment. These increases were~~ partially offset by ~~no unrealized gain recorded~~asset write-downs at the community banking segment of $579,000 in the first nine months of 2020 and lower service charges on deposit accounts at the community banking segment due to fewer overdraft fees charged. Asset write-downs, included in “Other income (loss), net,” at the community banking segment included $298,000 of merger related costs recognized in connection with disposition of assets acquired from Peoples and $281,000 related to branch consolidation. Noninterest income was also affected by an increase of $716,000 for the third quarter of 2020 atand a decrease of $935,000 for the ~~Corporation~~first nine months of 2020, compared to the same periods in 2019, related to ~~its~~unrealized gains and losses in the Corporation’s nonqualified deferred compensation plan, ~~compared to $1.0 million recorded in the first quarter of 2019 and~~which are included in “Other ~~income.”~~income, net” in the “Other and Eliminations” column in the tables above. Unrealized gains and losses on the Corporation’s nonqualified deferred compensation plan are ~~reflected in “Other and Eliminations” above and are~~ offset by expenses, as discussed below.

4250

Table of Contents

Noninterest Expense

TABLE 4: Noninterest Expense


	Three Months Ended March 31, 2020
	Retail		Mortgage		Consumer		Other and

											Three Months Ended September 30, 2020
											Community		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total		Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	8,060	$	1,845	$	2,243	$	(1,331)	$	10,817	$	7,442	$	4,872	$	2,190	$	1,263	$	15,767
Occupancy expense		1,484		663		164		16		2,327		1,541		417		161		12		2,131
Other expenses:
Data processing		1,807		16		314		19		2,156		1,770		508		310		19		2,607
Professional fees		372		72		125		98		667		355		163		220		(32)		706
Mortgage banking loan processing expenses												—		916		—		—		916
Other expenses		2,473		972		784		2,170		6,399		1,685		758		649		112		3,204
Total other expenses		4,652		1,060		1,223		2,287		9,222		3,810		2,345		1,179		99		7,433
Total noninterest expense	$	14,196	$	3,568	$	3,630	$	972	$	22,366	$	12,793	$	7,634	$	3,530	$	1,374	$	25,331


	Three Months Ended September 30, 2019
	Community		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	7,161	$	1,769	$	2,229	$	571	$	11,730
Occupancy expense		1,438		355		158		23		1,974
Other expenses:
Data processing		1,726		266		333		20		2,345
Professional fees		543		57		140		321		1,061
Mortgage banking loan processing expenses		—		506		—		—		506
Other expenses		1,517		342		703		124		2,686
Total other expenses		3,786		1,171		1,176		465		6,598
Total noninterest expense	$	12,385	$	3,295	$	3,563	$	1,059	$	20,302

Nine Months Ended September 30, 2020

Community

Mortgage

Consumer

Other and

(Dollars in thousands)

Banking

Finance

Eliminations

Total

Salaries and employee benefits

23,142

8,989

6,567

2,240

40,938

Occupancy expense

4,614

1,186

486

6,331

Other expenses:

Data processing

5,933

1,235

918

8,142

Professional fees

1,405

345

422

252

2,424

Mortgage banking loan processing expenses

—

2,180

—

2,180

Other expenses

5,054

1,778

2,003

358

9,193

Total other expenses

12,392

5,538

3,343

666

21,939

Total noninterest expense

40,148

15,713

10,396

2,951

69,208


	Nine Months Ended September 30, 2019
	Community		Mortgage		Consumer		Other and
(Dollars in thousands)	Banking		Banking		Finance		Eliminations		Total
Salaries and employee benefits	$	21,012	$	4,527	$	6,483	$	3,110	$	35,132
Occupancy expense		4,359		1,051		528		54		5,992
Other expenses:
Data processing		4,909		610		982		60		6,561
Professional fees		1,449		114		425		426		2,414
Mortgage banking loan processing expenses		—		1,189		—		—		1,189
Other expenses		4,550		1,141		2,185		364		8,240
Total other expenses		10,908		3,054		3,592		850		18,404
Total noninterest expense	$	36,279	$	8,632	$	10,603	$	4,014	$	59,528

Three Months Ended March 31, 2019

Retail

Mortgage

Consumer

Other and

(Dollars in thousands)

Banking

Banking

Finance

Eliminations

Total

Salaries and employee benefits

$
6,978

$
1,147

$
2,185

$
1,597

$
11,907

Occupancy expense

1,486

479

203

22

2,190

Other expenses:

Data processing

1,584

10

309

18

1,921

Professional fees

325

16

136

87

564

Other expenses

1,508

739

727

121

3,095

Total other expenses

3,417

765

1,172

226

5,580

Total noninterest expense

$
11,881

$
2,391

$
3,560

$
1,845

$
19,677

Table of Contents

Total noninterest expenses increased ~~$2.7~~$5.0 million, or ~~13.7~~24.8 percent, in the ~~first~~third quarter of 2020, compared to the ~~same period~~third quarter of 2019, and increased $9.7 million, or 16.3 percent, in ~~2019. The increase in noninterest expenses for~~ the first ~~quarter~~nine months of 2020, compared to the first ~~quarter~~nine months of ~~2019,~~2019. This increase in noninterest expenses was due primarily to (1) higher mortgage loan production volume at the mortgage banking segment, resulting in higher expenses related to volume included in salaries and employee benefits, data processing, professional fees and mortgage banking loan processing expenses, (2) increased merger related expenses associated with the acquisition of Peoples ~~(2)~~for the first nine months of 2020 compared to the first nine months of 2019, (3) the assumption of certain operating costs of Peoples Community Bank at the ~~retail~~community banking segment, ~~(3) increases~~included primarily in salaries and employee benefits ~~expense associated with (a) C&F Bank adding new talent to its commercial lending team in the Richmond~~ and ~~Charlottesville markets at the retail banking segment during 2019 and (b) higher mortgage loan production at the mortgage banking segment,~~data processing expenses, (4) higher data processing expenses associated with investing in technology infrastructure to support continued growth, ~~and~~ (5) higher expense associated with the FDIC insurance assessment at the community banking segment, included in “Other expenses,” as credits available to banks with less than $10 billion in consolidated assets were used to offset assessment expense for ~~loan processing~~portions of 2019 and 2020 and were fully utilized by the end of the first quarter of 2020 and (6) provision for indemnifications at the mortgage banking segment, asincluded in “Other expenses,” of $9,000 and $172,000 for the third quarter and first nine months of 2020, compared to no provision for indemnifications in 2019. Noninterest expense was also affected by an increase of $716,000 for the third quarter of 2020 and a ~~result~~decrease of ~~higher mortgage loan production. Partially offsetting these increases was lower net expenses at~~$935,000 for the ~~Corporation~~first nine months of 2020, compared to the same periods in 2019, in salaries and employee benefits expense related to ~~its~~unrealized gains and losses in the Corporation’s nonqualified deferred compensation ~~plan.~~ plan, which are shown in the “Other and Eliminations” column in the tables above.

Merger related expenses infor the first ~~quarter~~nine months of 2020 ~~included $857,000~~were $1.4 million, including $1.3 million at the ~~retail~~community banking segment, of which ~~$69,000~~$501,000 was data processing expense, $236,000 was professional fees expense, $119,000 was salaries and employee benefits expense, ~~$238,000~~$81,000 was ~~data processing~~occupancy expense, $61,000 was included in all other noninterest expenses, and ~~$214,000~~$298,000 was ~~professional fees expense;~~a loss on disposition of assets and was recorded in noninterest income. Merger related expenses for the first nine months of 2020 also included $100,000 at the holding company, shown in the ~~“Other” segment,~~“Other and Eliminations” column in the tables above, which was professional fees expense.

~~Compensation~~ There were no merger related expenses recorded during the third quarter of 2020. Merger related expenses in the third quarter and first nine months of 2019 included $104,000 at the retail banking segment, of which $102,000 was professional fees expense ~~related to~~and $2,000 was included in all other noninterest expenses, and $305,000 at the ~~Corporation’s nonqualified deferred compensation plan is recorded~~holding company, shown in the “Other and Eliminations” ~~above and is based in part on changes~~column in the ~~fair value~~tables above, of ~~assets held~~which $290,000 was professional fees expense and $15,000 was included in ~~trust~~all other noninterest expenses.

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

Income Taxes

The Corporation’s consolidated effective income tax rate was 22.5 percent and 21.6 percent for the ~~plan, which are allocated to participants. As a result of unrealized gains and losses related to the nonqualified plan, a reduction of compensation expense of $2.0 million was recorded in the~~ first quarter of 2020 compared to compensation expense of $1.0 million in the first quarter of 2019. These amounts were offset by unrealized losses recorded in “Other expenses” and unrealized gains recorded in “Other income” in the first quarternine months of 2020 and 2019, respectively.

~~Income Taxes~~

~~Income~~ The higher effective income tax ~~expense~~rate for the first quarter of 2020 was $977,000 resulting in an effective tax rate of 21.2 percent, compared with $907,000, or an effective tax rate of 19.4 percent, for the first quarter of 2019. The higher effective tax rate in the first

~~Table of Contents~~

~~quarter~~nine months of 2020 compared to the same period ofin 2019 resulted primarily from higher ~~pre-tax~~state income taxes, as a greater share of income before taxes was earned at the mortgage banking ~~and consumer finance segments,~~segment, which ~~are~~is subject to state income tax, and ~~certain merger related expenses in 2020 which were non-deductible,~~a limitation on the deductibility of executive compensation, partially offset by ~~higher~~income tax benefits of ~~share based compensation.~~$326,000 in 2020 arising from a change in income tax law enacted in response to the COVID-19 pandemic which provided income tax benefits in the current year related to prior tax years of Peoples.

Table of Contents

ASSET QUALITY

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. Table 5 summarizes the allowance activity for the periods indicated:

TABLE 5: Allowance for Loan Losses


	Three Months Ended March 31,

							Three Months Ended September 30,
(Dollars in thousands)	2020			2019			2020			2019
Balance, beginning of period	$	32,873		$	34,023		$	36,094		$	33,401
Provision for loan losses:
Retail Banking		1,000			—
Mortgage Banking		—			—
Community Banking								1,500			—
Consumer Finance		1,650			2,395			1,800			1,800
Total provision for loan losses		2,650			2,395			3,300			1,800
Loans charged off:
Real estate—residential mortgage		(4)			—			(5)			(1)
Commercial, financial and agricultural1		(18)			—			—			—
Equity lines								—			(19)
Consumer		(93)			(76)			(41)			(99)
Consumer finance		(3,426)			(3,890)			(1,583)			(3,126)
Total loans charged off		(3,541)			(3,966)			(1,629)			(3,245)
Recoveries of loans previously charged off:
Real estate—residential mortgage		4			5			15			11
Commercial, financial and agricultural1		1			1			1			1
Consumer		62			42			30			58
Consumer finance		1,249			1,089			1,045			1,192
Total recoveries		1,316			1,137			1,091			1,262
Net loans charged off		(2,225)			(2,829)			(538)			(1,983)
Balance, end of period	$	33,298		$	33,589		$	38,856		$	33,218
Ratio of annualized net charge-offs to average total loans outstanding during period for Retail Banking		0.01	%		0.01	%
Ratio of annualized net (recoveries) charge-offs to average total loans outstanding during period for Community Banking								(0.01)	%		0.03	%
Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance		2.81	%		3.79	%		0.70	%		2.47	%

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

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

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

~~TABLE 6: Allocation of Allowance for Loan Losses~~

March 31,

December 31,

(Dollars in thousands)

2020


2019

Allocation of allowance for loan losses:

Real estate—residential mortgage

$
2,140

$
2,080

Real estate—construction 1

771

681

Commercial, financial and agricultural 2

7,935

7,121

Equity lines

770

733

Consumer

416

465

Consumer finance

21,266

21,793

Total allowance for loan losses

$
33,298

$
32,873

Ratio of loans to total period-end loans:

Real estate—residential mortgage

16
%

16
%
Real estate—construction 1

5

5

Commercial, financial and agricultural 2

48

45

Equity lines

5

5

Consumer

1

1

Consumer finance

25

28

100
%

100
%

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

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

Table of Contents

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

TABLE 6: Allocation of Allowance for Loan Losses


	September 30,			December 31,
(Dollars in thousands)	2020			2019
Allocation of allowance for loan losses:
Real estate—residential mortgage	$	2,487		$	2,080
Real estate—construction ¹		913			681
Commercial, financial and agricultural ²		10,552			7,121
Equity lines		655			733
Consumer		389			465
Consumer finance		23,860			21,793
Total allowance for loan losses	$	38,856		$	32,873
Ratio of loans to total period-end loans:
Real estate—residential mortgage		15	%		16	%
Real estate—construction ¹		5			5
Commercial, financial and agricultural ²		52			45
Equity lines		4			5
Consumer		1			1
Consumer finance		23			28
		100	%		100	%

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

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

Loans by credit quality indicators are presented in Table 7 below. The characteristics of these loan ratings are as follows:

●

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

●

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

●

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

●

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

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●

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

●

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

TABLE 7: Credit Quality Indicators

Loans by credit quality indicators as of ~~March 31,~~September 30, 2020 were as follows:


			Special				Substandard

													Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1		Pass		Mention		Substandard		Nonaccrual		Total¹
Real estate – residential mortgage	$	199,087	$	1,396	$	1,353	$	931	$	202,767	$	205,126	$	1,245	$	915	$	758	$	208,044
Real estate – construction 2		65,937		—		—		—		65,937		66,187		—		—		—		66,187
Commercial, financial and agricultural 3		547,838		38,127		2,620		—		588,585		669,126		28,946		10,795		—		708,867
Equity lines		55,907		97		24		278		56,306		49,039		165		8		193		49,405
Consumer		14,947		54		583		699		16,283		13,426		58		4		419		13,907
	$	883,716	$	39,674	$	4,580	$	1,908	$	929,878
											$	1,002,904	$	30,414	$	11,722	$	1,370	$	1,046,410

Included in the table above are loans purchased in connection with the acquisition of Peoples of ~~$104.7~~$83.7 million pass rated, ~~$1.3~~$1.4 million special mention, ~~$3.1~~$2.7 million substandard and ~~$583,000~~$309,000 substandard nonaccrual.


			Non-
(Dollars in thousands)	Performing		Performing		Total
Consumer finance	$	311,664	$	282	$	311,946

Non-

(Dollars in thousands)

Performing

Performing

Total

Consumer finance

$
307,214

$
377

$
307,591

At ~~March 31,~~September 30, 2020, the Corporation did not have any loans classified as Doubtful or Loss.

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

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

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


			Special				Substandard

													Special				Substandard
(Dollars in thousands)	Pass		Mention		Substandard		Nonaccrual		Total1		Pass		Mention		Substandard		Nonaccrual		Total¹
Real estate – residential mortgage	$	177,049	$	1,839	$	881	$	1,526	$	181,295	$	177,049	$	1,839	$	881	$	1,526	$	181,295
Real estate – construction 2		54,246		—		—		—		54,246		54,246		—		—		—		54,246
Commercial, financial and agricultural 3		487,374		13,357		70		11		500,812		487,374		13,357		70		11		500,812
Equity lines		51,662		181		11		229		52,083		51,662		181		11		229		52,083
Consumer		13,632		6		—		118		13,756		13,632		6		—		118		13,756
	$	783,963	$	15,383	$	962	$	1,884	$	802,192
											$	783,963	$	15,383	$	962	$	1,884	$	802,192


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

Non-

(Dollars in thousands)

Performing

Performing

Total

Consumer finance

$
312,388

$
611

$
312,999

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

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

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 increase in loans rated Special Mention and Substandard at ~~March 31,~~September 30, 2020 compared to December 31, 2019 is related primarily to ~~two~~three commercial real estate loans which were rated Pass at December 31, ~~2019. Each loan was~~2019, of which two were classified as Special Mention and one was classified as Substandard at ~~March 31,~~September 30, 2020 partially as a result of effects on the borrowers of the COVID-19 ~~pandemic.~~pandemic, as well as loans that were acquired from Peoples and were classified as Substandard.

Table 8 summarizes nonperforming assets as of the dates indicated.

TABLE 8: Nonperforming Assets

~~Retail~~Community Banking Segment


	September 30,			December 31,
(Dollars in thousands)	2020			2019
Loans, excluding purchased loans	$	930,560		$	770,423
Purchased performing loans¹		101,716			26,422
Purchased credit impaired loans¹		7,574			705
Total loans	$	1,039,850		$	797,550

Nonaccrual loans	$	1,338		$	1,512
OREO²		1,107			1,103
Total nonperforming assets	$	2,445		$	2,615

Accruing loans past due for 90 days or more	$	8		$	109
Troubled debt restructurings (TDRs)³	$	3,946		$	4,353
Allowance for loan losses (ALL)	$	14,398		$	10,482
Nonperforming assets to total loans and OREO		0.23	%		0.33	%
ALL to total loans, excluding purchased credit impaired loans⁴		1.39			1.32
ALL to total loans, excluding purchased loans and PPP loans		1.71			1.36
ALL to total nonaccrual loans		1,076.08			693.25
Annualized net (recoveries) charge-offs to average total loans		(0.01)			0.04

March 31,

December 31,

(Dollars in thousands)

2020

2019

Loans, excluding purchased loans

$
790,852

$
770,423

Purchased performing loans1

125,528

26,422

Purchased credit impaired loans1

9,219

705

Total loans

$
925,599

$
797,550

Nonaccrual loans

$
1,875

$
1,512

OREO2

1,103

1,103

Total nonperforming assets

$
2,978

$
2,615

Accruing loans past due for 90 days or more

$
9

$
109

Troubled debt restructurings (TDRs)3

$
4,173

$
4,353

Allowance for loan losses (ALL)

$
11,434

$
10,482

Nonperforming assets to total loans and OREO

0.32
%

0.33
%
ALL to total loans, excluding purchased credit impaired loans4

1.25

1.32

ALL to total nonaccrual loans

609.81

693.25

Annualized net charge-offs to average total loans

0.01

0.04

Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The remaining discount for the purchased performing loans was ~~$2.6~~$2.1 million at ~~March 31,~~September 30, 2020 and $1.4 million at December 31, 2019. The remaining discount for the purchased credit impaired loans was ~~$10.9~~$10.3 million at ~~March 31,~~September 30, 2020 and $5.6 million at December 31, 2019. The increase in remaining discount on purchased performing loans and purchased credit impaired loans from December 31, 2019 to ~~March 31,~~September 30, 2020 is due primarily to loans acquired in the acquisition of Peoples.

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

Nonaccrual loans include nonaccrual TDRs of ~~$335,000~~$521,000 at ~~March 31,~~September 30, 2020 and $254,000 at December 31, 2019.

⁴

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. ~~The ratio of ALL to total loans excluding all purchased loans was 1.45 percent at March 31, 2020 and 1.36 percent at December 31, 2019.~~

Mortgage Banking Segment


	March 31,			December 31,

							September 30,			December 31,
(Dollars in thousands)	2020			2019			2020			2019
Nonaccrual loans	$	33		$	372		$	32		$	372
Total loans	$	4,279		$	4,642		$	6,560		$	4,642
ALL	$	598		$	598		$	598		$	598
Nonaccrual loans to total loans		0.77	%		8.01	%		0.49	%		8.01	%
ALL to total loans		13.98			12.88			9.12			12.88

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Consumer Finance Segment


	March 31,			December 31,

							September 30,			December 31,
(Dollars in thousands)	2020			2019			2020			2019
Nonaccrual loans	$	377		$	611		$	282		$	611
Accruing loans past due for 90 days or more	$	—		$	—		$	—		$	—
Repossessed assets	$	496		$	410		$	178		$	410
Total loans	$	307,591		$	312,999		$	311,946		$	312,999
ALL	$	21,266		$	21,793		$	23,860		$	21,793
Nonaccrual consumer finance loans to total consumer finance loans		0.12	%		0.20	%		0.09	%		0.20	%
ALL to total consumer finance loans		6.91			6.96			7.65			6.96
Annualized net charge-offs to average total loans		2.81			3.05			1.56			3.05

Nonperforming assets of the ~~retail~~community banking segment totaled ~~$3.0~~$2.4 million at ~~March 31,~~September 30, 2020, compared to $2.6 million at December 31, 2019. Nonperforming assets at ~~both March 31,~~September 30, 2020 ~~and December 31, 2019~~ consisted of $1.1 million in OREO at both September 30, 2020 and December 31, 2019, and consisted of ~~$1.9~~$1.3 million in nonaccrual loans at ~~March 31,~~September 30, 2020, compared to $1.5 million in nonaccrual loans at December 31, 2019. Nonaccrual loans were comprised primarily of residential mortgages and equity lines at ~~March 31,~~September 30, 2020 and December 31, 2019.

The allowance for loan losses as a percentage of total loans at the ~~retail~~community banking segment, excluding PCI loans, at ~~March 31,~~September 30, 2020 ~~decreased~~increased to ~~1.25~~1.39 percent, compared to 1.32 percent at December 31, 2019, primarily as a result of recording loans at fair value in connection with the acquisition of Peoples, resulting in no allowance for loan losses being required for those loans as of March 31, 2020. Excluding purchased loans, the2019. The allowance for loan losses as a percentage of total loans ~~increased to 1.45~~excluding all purchased loans and loans originated under the PPP was 1.71 percent at ~~March 31,~~September 30, 2020, compared to 1.36 percent at December 31, 2019. The ~~retail~~community banking segment recorded provision for loan losses of ~~$1.0~~$1.5 million and $3.9 million in the third quarter and first ~~quarter~~nine months of 2020, ~~due~~respectively, primarily to ~~asset quality issues expected~~add to reserves based on qualitative adjustments as a result ~~from~~of the COVID-19 pandemic and ~~related economic disruption. We anticipate~~due to loan growth, compared to zero and $110,000 for the same periods in 2019. As of September 30, 2020, compared to December 31, 2019, there have not been significant changes in the overall credit quality of the loan portfolio, although management believes the effects of PPP loans, payment deferrals and government stimulus may be delaying signs of credit deterioration. Management believes that ~~additional increases in~~the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there is further deterioration in economic conditions, additional provision may be required in future ~~periods as more information becomes available about the economic impacts of this crisis.~~ periods.

Nonaccrual loans at the consumer finance segment were ~~$377,000~~$282,000 at ~~March 31,~~September 30, 2020, compared to $611,000 at December 31, 2019. Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent. Repossessed vehicles of the consumer finance segment are classified as other assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the deficiency) is charged against the allowance for loan losses. At ~~March 31,~~September 30, 2020, repossessed vehicles available for sale totaled ~~$496,000,~~$178,000, compared to $410,000 at December 31, 2019.

The consumer finance segment’s allowance for loan losses ~~decreased $527,000~~increased $2.1 million to ~~$21.3~~$23.9 million at ~~March 31,~~September 30, 2020 from $21.8 million at December 31, 2019, and its provision for loan losses remained unchanged at $1.8 million for the third quarter of 2020 and decreased ~~$745,000~~$245,000 for the first ~~quarter~~nine months of 2020, compared to the same ~~period~~periods in 2019. ~~The decrease in the allowance and the lower provision resulted from lower charge-offs as~~Total delinquent loans, which does not include loans that have been granted a result of the consumer finance segment purchasing automobile loan contracts with higher credit metrics beginning in 2016, partially offset by additional provision for loan losses of $700,000 related to the COVID-19 pandemic. Delinquent loanspayment deferral, as a percentage of total loans decreased to ~~3.38~~2.48 percent at ~~March 31,~~September 30, 2020 compared to 4.17 percent at December 31, ~~2019 and increased from 2.66 percent at March 31,~~ 2019. The annualized net charge-off ratio for the first quarter of 2020 decreased to 2.81 percent from 3.79 percent for the first quarter of 2019 because of the lower number of charge-offs during the first quarter of 2020. The allowance for loan losses as a percentage of loans decreased to 6.91 percent at March 31, 2020, compared to 6.96 percent at December 31, 2019. The decrease in the level of the allowance for loan losses as a percentage of total loans was primarily due to a higher composition of marine and RV loans as compared to non-prime automobile loans within the consumer finance loan portfolio, which was partially offset by an increase to the provision for loan losses of approximately $700,000 due to the COVID-19 pandemic. We anticipate that additional increases in the allowance for loan losses may be required in future periods as more information becomes available about the economic impacts of this crisis.

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The consumer finance segment, at times, offers payment deferrals to non-prime automobile borrowers as a management technique to achieve higher ultimate cash collections on select loan accounts. Payment deferrals may affect the ultimate timing of when an account is charged off. A significant reliance on deferrals as a means of managing collections may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio. ~~Payment~~Monthly payment deferrals, as a percentage of non-prime automobile loans outstanding, ~~was 4.27~~rose to as high as 8.25 percent ~~at March 31,~~during the second quarter of 2020 ~~compared~~and decreased to ~~1.84~~1.57 percent ~~at March 31, 2019.~~by the end of the third quarter of 2020. The average amounts deferred on a monthly basis ~~as a percentage~~during the third quarter and first nine months of 2020 were 2.04 percent and 3.38 percent of non-prime automobile loans outstanding, ~~was~~compared to 1.90 percent and 1.91 percent during the same periods in 2019. Payment

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deferrals increased for the three and nine months ended September 30, 2020 compared to the same periods in 2019 as the COVID-19 pandemic affected the ability of some borrowers to make timely payments.

The consumer finance segment’s annualized net charge-off ratio for the first nine months of 2020 decreased to 1.56 percent from 2.91 percent for the ~~year ended~~first nine months of 2019 due to a lower number of charge-offs during the first nine months of 2020, as a result of improvement in loan performance and lower losses per loan charged off as a result of a strong used car market. Improvement in loan performance has resulted from the consumer finance segment continuing to purchase higher quality loans, including marine and RV loans, as well as borrowers benefitting from the government’s stimulus measures in response to the pandemic. The Corporation can give no assurance as to the continuation of government stimulus measures or the extent to which they will be effective. The allowance for loan losses as a percentage of loans increased to 7.65 percent at September 30, 2020, compared to 6.96 percent at December 31, 2019. ~~Payment deferrals~~The increase in the level of the allowance for loan losses as a percentage of total loans reflects losses that are ~~expected to increase~~probable as a result of the economic impacts of the COVID-19 ~~pandemic as borrowers~~pandemic. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there is further deterioration in economic conditions, additional provision may be ~~unable to make timely loan payments.~~required in future periods.

Impaired Loans

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

TABLE 9: Impaired Loans

Impaired loans, which included TDRs of ~~$4.2~~$3.9 million, and the related allowance at ~~March 31,~~September 30, 2020, were as follows:



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income


															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		Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	3,357	$	1,313	$	1,820	$	47	$	3,295	$	31	$	3,054	$	1,384	$	1,520	$	129	$	3,068	$	83
Commercial, financial and agricultural:
Commercial real estate lending		1,403		—		1,403		76		1,417		18		1,399		—		1,399		106		1,406		55
Equity lines		121		114		—		—		121		—		120		112		—		—		119		1
Consumer		130		—		119		108		119		—		123		—		110		105		113		—
Total	$	5,011	$	1,427	$	3,342	$	231	$	4,952	$	49	$	4,696	$	1,496	$	3,029	$	340	$	4,706	$	139

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



			Recorded		Recorded
			Investment		Investment				Average
	Unpaid		in Loans		in Loans				Balance-		Interest
	Principal		without		with		Related		Impaired		Income


															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		Balance		Specific Reserve		Specific Reserve		Allowance		Loans		Recognized
Real estate – residential mortgage	$	3,891	$	2,192	$	1,479	$	72	$	3,506	$	155	$	3,891	$	2,192	$	1,479	$	72	$	3,506	$	155
Commercial, financial and agricultural:
Commercial real estate lending		1,459		4		1,447		77		1,581		82		1,459		4		1,447		77		1,581		82
Equity lines		31		31		—		—		32		2		31		31		—		—		32		2
Consumer		130		—		121		118		123		—		130		—		121		118		123		—
Total	$	5,511	$	2,227	$	3,047	$	267	$	5,242	$	239	$	5,511	$	2,227	$	3,047	$	267	$	5,242	$	239

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

TABLE 10: Troubled Debt Restructurings


	September 30,		December 31,
(Dollars in thousands)	2020		2019
Accruing TDRs	$	3,425	$	4,099
Nonaccrual TDRs¹		521		254
Total TDRs²	$	3,946	$	4,353

March 31,

December 31,

(Dollars in thousands)

2020

2019

Accruing TDRs

$
3,838

$
4,099

Nonaccrual TDRs1

335

254

Total TDRs2

$
4,173

$
4,353

Included in nonaccrual loans in Table 8: Nonperforming Assets.

Included in impaired loans in Table 9: Impaired Loans.

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

The Corporation has accommodated certain borrowers affected by the COVID-19 pandemic by granting short-term payment deferrals or periods of interest-only payments, including loans that remain in deferral as of ~~April~~September 30, 2020, ~~over 130 loans~~ with ~~outstanding principal~~an aggregate balance of ~~approximately $70~~$28.3 million. Generally, a short-term payment deferral does not result in a loan modification being classified as a TDR. Management cannot predict the overall impact of the COVID-19 pandemic on its loan portfolio or the extent of payment deferrals or other modifications that may be granted. Depending on the severity and duration of the economic disruption caused by the COVID-19 pandemic, the Corporation may experience an increase in delinquencies that may lead to further loan modifications, including loan modifications that may be classified as TDRs. For further information concerning loan modifications in response to the COVID-19 pandemic, refer to Table 14 below.

FINANCIAL CONDITION

At ~~March 31,~~September 30, 2020, the Corporation had total assets of ~~$1.9~~$2.1 billion, which was an increase of ~~$219.9~~$423.4 million since December 31, 2019. The increase resulted primarily from deposit growth and the acquisition of Peoples on January 1, 2020, which added total assets of $190.6 million.

Loan Portfolio

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

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TABLE 11: Summary of Loans Held for Investment


	September 30, 2020				December 31, 2019
(Dollars in thousands)	Amount		Percent		Amount		Percent
Real estate—residential mortgage	$	208,044	15	%	$	181,295	16	%
Real estate—construction ¹		66,187	5			54,246	5
Commercial, financial, and agricultural ²		708,867	52			500,812	45
Equity lines		49,405	4			52,083	5
Consumer		13,907	1			13,756	1
Consumer finance		311,946	23			312,999	28
Total loans		1,358,356	100	%		1,115,191	100	%
Less allowance for loan losses		(38,856)				(32,873)
Total loans, net	$	1,319,500			$	1,082,318

March 31, 2020

December 31, 2019

(Dollars in thousands)

Amount

Percent


Amount
Percent

Real estate—residential mortgage

$
202,767

16
%

$
181,295
16
%

Real estate—construction 1

65,937

5

54,246
5

Commercial, financial, and agricultural 2

588,585

48

500,812
45

Equity lines

56,306

5

52,083
5

Consumer

16,283

1

13,756
1

Consumer finance

307,591

25

312,999
28

Total loans

1,237,469

100
%

1,115,191
100
%

Less allowance for loan losses

(33,298)

(32,873)

Total loans, net

$
1,204,171

$
1,082,318

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

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

lending (which includes loans originated under the PPP).

Beginning in April 2020, the community banking segment originated loans under the PPP which are guaranteed by the SBA, and in some cases borrowers may be eligible to obtain forgiveness of the loans, in which case loans would be repaid by the SBA. Aggregate fees from the SBA of $3.7 million, net of direct costs, will be recognized in interest income over the life of the loans, of which $2.9 million remains unrecognized as of September 30, 2020. As repayment of the 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 12 presents information pertaining to loans originated under the PPP.

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



(Dollars in thousands)	Number of Loans	Outstanding
Below $50	847	$	16,478
At least $50 and below $250	338		36,033
At least $250 and below $500	49		16,697
$500 and greater	23		20,613
	1,257	$	89,821

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 13 presents balances of loans to borrowers in these sensitive industries at September 30, 2020, and the exposure of the community banking segment to those borrowers, which includes available credit.

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TABLE 13: Sensitive Industries and Exposure


	September 30, 2020
(Dollars in thousands)	Balance		Exposure
Apartments	$	83,234	$	102,220
Health care¹		77,829		80,707
Commercial real estate - retail²		55,341		60,686
Restaurants		12,362		16,708
Fitness centers and recreation		11,563		12,217
Hospitality		4,094		17,820
	$	244,423	$	290,358

________________________

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

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

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

TABLE 14: Loan Modifications in Response to COVID-19


	September 30, 2020
(Dollars in thousands)	Number of Loans	Balance
Apartments	1	$	1,037
Commercial real estate - retail¹	5		5,467
Fitness centers and recreation	3		8,478
Hospitality	2		3,398
Loans in COVID-19 sensitive industries	11		18,380
Other commercial	14		8,843
Consumer	11		1,073
Total loans	36	$	28,296

________________________

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

Investment Securities

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

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

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TABLE ~~12:~~15: Securities Available for Sale


	March 31, 2020				December 31, 2019

									September 30, 2020				December 31, 2019
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
U.S. government agencies and corporations	$	32,042	13	%	$	21,440	11	%	$	48,292	18	%	$	21,440	11	%
Mortgage-backed securities		104,365	45			86,585	46			115,838	42			86,585	46
Obligations of states and political subdivisions		98,017	42			81,708	43			101,024	37			81,708	43
Corporate and other debt securities										6,937	3			—	—
Total available for sale securities at fair value	$	234,424	100	%	$	189,733	100	%	$	272,091	100	%	$	189,733	100	%

For more information about the Corporation's securities available for sale, including information about securities in an unrealized loss position at ~~March 31,~~September 30, 2020 and December 31, 2019, 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.

During the first ~~quarter~~nine months of 2020, deposits increased ~~$193.1~~$372.3 million to ~~$1.48~~$1.66 billion at ~~March 31,~~September 30, 2020, compared to $1.29 billion at December 31, 2019. This increase resulted ~~primarily~~ from deposit growth, including the effect of PPP loans and direct government payments received by depositors, and the addition of $171.8 million of deposits in connection with the acquisition of Peoples.

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

Borrowings

Borrowings decreased to ~~$159.9~~$153.3 million at ~~March 31,~~September 30, 2020 from $161.2 million at December 31, 2019 due primarily to ~~fluctuations in repurchase agreements with commercial deposit customers~~C&F Finance Company amending and repaying its revolving bank line of credit, which had an outstanding balance of $75.0 million at December 31, 2019, and paydowns on FHLB advances, partially offset by higher short-term borrowings, primarily overnight funds borrowed from the Federal Reserve discount window to meet short-term liquidity needs, as loans held for sale and loans held for investment have increased $427.5 million since December 31, 2019; an increase in subordinated debt of $24.1 million resulting from the issuance $20.0 million of subordinated notes in the third quarter and the assumption of $4.0 million of subordinated debt in connection with the acquisition of ~~Peoples.~~Peoples; and finance leases entered in 2020.

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

Off-Balance Sheet Arrangements

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

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At ~~March 31,~~September 30, 2020, the mortgage banking segment had ~~$232.0~~$307.4 million of interest rate lock commitments (IRLCs) and ~~$108.6~~$250.9 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for ~~$340.6~~$558.3 million in mortgage loans. Also at ~~March 31,~~September 30, 2020, the mortgage banking segment had ~~$13.3~~$10.4 million of IRLCs and ~~$13.4~~$14.8 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of ~~$14.5~~$15.3 million of TBA securities and mandatory-delivery forward sales contracts for ~~$9.1~~$7.9 million in mortgage loans.

At December 31, 2019, the mortgage banking segment had $63.4 million of IRLCs and $65.8 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $129.1 million in mortgage loans. Also at December 31, 2019, the mortgage banking segment had $11.7 million of IRLCs and $22.0 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of $24.0 million of TBA securities and mandatory-delivery forward sales contracts for $6.7 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 ~~March 31,~~September 30, 2020, the cash flow hedges had a fair value of $2.1 million, 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 ~~March 31,~~September 30, 2020, the total notional amount of the interest rate swaps related to these loans was ~~$162.5~~$170.1 million and the interest rate swaps had a net fair value of zero, with ~~$8.8~~$9.4 million recognized in other assets and ~~$8.8~~$9.4 million recognized in other liabilities. These swaps are not designated as hedging instruments; therefore, changes in fair value are recorded in other noninterest expense.

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

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~~March 31,~~ September 30, 2020 and at December 31, 2019, ~~$10.8~~$11.9 million and $2.5 million, respectively, of cash collateral was maintained with dealer counterparties and was included in “Other assets” in the Consolidated Balance ~~Sheets~~Sheets.

Contractual Obligations

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

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.

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Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled ~~$259.7~~$181.26 million at ~~March 31,~~September 30, 2020, compared to $227.7 million at December 31, 2019. The Corporation’s funding sources, including capacity, amount outstanding and amount available at ~~March 31,~~September 30, 2020 are presented in Table ~~13.~~16.

TABLE ~~13:~~16: Funding Sources


	March 31, 2020

							September 30, 2020
(Dollars in thousands)	Capacity		Outstanding		Available		Capacity		Outstanding		Available
Unsecured federal funds agreements	$	95,000	$	—	$	95,000	$	95,000	$	—	$	95,000
Repurchase lines of credit		50,000		—		50,000		50,000		—		50,000
Borrowings from FHLB		191,759		37,000		154,759		257,598		37,000		220,598
Borrowings from Federal Reserve Bank		107,802		—		107,802		92,593		40,313		52,280
Revolving bank line of credit		120,000		75,029		44,971		50,000		—		50,000
Total	$	564,561	$	112,029	$	452,532	$	545,191	$	77,313	$	467,878

We have no reason to believe these arrangements will not be renewed at maturity. During the ~~quarter ending March 31,~~nine months ended September 30, 2020, the Corporation pledged additional loans as collateral in order to increase available liquidity at the Federal Reserve Bank that had been unpledged as of December 31, 2019. 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.


									Minimum To Be
									Well Capitalized
									Under Prompt
					Minimum Capital				Corrective Action
	Actual				Requirements				Provisions

																					Minimum To Be
																					Well Capitalized
																					Under Prompt
																	Minimum Capital				Corrective Action
													Actual				Requirements				Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
As of March 31, 2020:
As of September 30, 2020:
Total Capital (to Risk-Weighted Assets)
Corporation	$	203,043	14.0	%	$	115,892	8.0	%		N/A	N/A		$	233,408	14.7	%	$	127,189	8.0	%		N/A	N/A
C&F Bank		197,858	13.8			114,578	8.0		$	143,222	10.0	%		207,999	13.2			125,664	8.0		$	157,080	10.0	%
Tier 1 Capital (to Risk-Weighted Assets)
Corporation		180,747	12.5			86,919	6.0			N/A	N/A			189,300	11.9			95,391	6.0			N/A	N/A
C&F Bank		179,765	12.6			85,933	6.0			114,578	8.0			188,127	12.0			94,248	6.0			125,664	8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Corporation		155,747	10.8			65,190	4.5			N/A	N/A			164,300	10.3			71,544	4.5			N/A	N/A
C&F Bank		179,765	12.6			64,450	4.5			93,094	6.5			188,127	12.0			70,686	4.5			102,102	6.5
Tier 1 Capital (to Average Assets)
Corporation		180,747	9.9			72,849	4.0			N/A	N/A			189,300	9.7			78,301	4.0			N/A	N/A
C&F Bank		179,765	10.0			72,171	4.0			90,214	5.0			188,127	9.7			77,503	4.0			96,879	5.0


As of December 31, 2019:
Total Capital (to Risk-Weighted Assets)
Corporation	$	195,927	14.9	%	$	105,544	8.0	%		N/A	N/A		$	195,927	14.9	%	$	105,544	8.0	%		N/A	N/A
C&F Bank		181,369	14.0			103,307	8.0		$	129,134	10.0	%		181,369	14.0			103,307	8.0		$	129,134	10.0	%
Tier 1 Capital (to Risk-Weighted Assets)
Corporation		179,233	13.6			79,158	6.0			N/A	N/A			179,233	13.6			79,158	6.0			N/A	N/A
C&F Bank		165,021	12.8			77,480	6.0			103,307	8.0			165,021	12.8			77,480	6.0			103,307	8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Corporation		154,233	11.7			59,369	4.5			N/A	N/A			154,233	11.7			59,369	4.5			N/A	N/A
C&F Bank		165,021	12.8			58,110	4.5			83,937	6.5			165,021	12.8			58,110	4.5			83,937	6.5
Tier 1 Capital (to Average Tangible Assets)
Corporation		179,233	11.1			64,863	4.0			N/A	N/A			179,233	11.1			64,863	4.0			N/A	N/A
C&F Bank		165,021	10.3			64,201	4.0			80,251	5.0			165,021	10.3			64,201	4.0			80,251	5.0

The regulatory risk-based capital amounts presented above include: (1) common equity tier 1 capital (CET1) which consists principally of common stock (including surplus) and retained earnings with adjustments for goodwill, intangible assets and deferred tax assets; (2) Tier 1 capital which consists principally of CET1 plus the Corporation’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for loan losses. In addition, the Corporation has made the one-time irrevocable election to continue treating accumulated other comprehensive income (AOCI) under regulatory standards that were in place prior to the Basel III Final Rule in order to eliminate volatility of regulatory capital that can result from fluctuations in AOCI and the inclusion of AOCI in regulatory capital, as would otherwise be required under the Basel III Capital Rule. For additional information

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

In addition to the regulatory risk-based capital amounts presented above, the Bank must maintain a capital conservation buffer of additional capital of 2.5 percent of risk-weighted assets as required by the Basel III Final Rule. At ~~March 31,~~September 30, 2020, the Bank exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by ~~331~~274 basis points and ~~405~~348 basis points, respectively. At December 31, 2019, the Bank exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by 355 and 428 basis points, respectively. The increase in regulatory capital of C&F Bank during the first ~~quarter~~nine months of 2020 is due primarily to the acquisition of Peoples and current period earnings.

The ~~Corporation's~~increase in regulatory capital ~~resources may be affected by~~of the ~~Corporation's Repurchase Program, which was authorized by the Corporation's Board of Directors~~Corporation during the ~~second~~first nine months of 2020 is due primarily to the issuance of subordinated notes in third quarter of ~~2019. Under~~2020, the ~~Repurchase Program~~acquisition of Peoples and current period earnings. The increase in risk-weighted assets of C&F Bank and the Corporation during the first nine months of 2020 is authorized to purchase up to $5.0 million of its common stock. Repurchases under the program may be made through privately-negotiated transactions or open-market transactions, and shares repurchased will be returneddue primarily to the ~~status~~acquisition of ~~authorized~~Peoples and ~~unissued shares of common stock. The timing, number~~growth in loans held for sale and purchase price of shares repurchased under the program will be determined by management and the Board of Directors in their discretion and will depend on a number of factors, including the market price of the shares, general market and economic conditions, applicable legal requirements and other conditions. The Repurchase Program is authorized through May 31, 2020. As of March 31, 2020, $2.9 million of the Corporation's common stock may be purchased under the Corporation's Repurchase Program. Currently, the Corporation does not expect to make additional repurchases during the remaining period of the Repurchase Program. loans held for investment.

Effects of Inflation and Changing Prices

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

USE OF CERTAIN NON-GAAP FINANCIAL MEASURES

The accounting and reporting policies of the Corporation conform to U.S. GAAP 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; adjusted earnings per share; adjusted annualized ROE; and adjusted annualized ROA ~~all~~(all of which are adjusted to exclude the one-time effect of merger related expenses in connection with the acquisition of Peoples, impairment charges related to branch consolidation, and a change in income tax law that provided income tax benefits in 2020 related to prior tax years), tangible book value per ~~share.~~share and the following fully-taxable equivalent (FTE) measures: interest income on loans-FTE, interest income on securities-FTE, total interest income-FTE and net interest income-FTE.

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

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	For The						For The
	Quarter Ended						Nine Months Ended
(Dollars in thousands except for per share amounts)	9/30/2020			9/30/2019			9/30/2020			9/30/2019

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

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

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

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

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

Adjusted Return on Average Assets (ROA)
Average assets, as reported	$	1,992,244		$	1,566,302		$	1,931,968		$	1,542,055

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

Fully Taxable Equivalent Net Interest Income²
Interest income on loans	$	22,506		$	22,254		$	67,607		$	65,497
FTE adjustment		31			6			92			17
FTE interest income on loans	$	22,537		$	22,260		$	67,699		$	65,514

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

Total interest income	$	23,822		$	23,992		$	72,184		$	71,219
FTE adjustment		164			140			495			454
FTE interest income	$	23,986		$	24,132		$	72,679		$	71,673

Net interest income	$	20,845		$	20,223		$	61,702		$	60,495
FTE adjustment		164			140			495			454
FTE net interest income	$	21,009		$	20,363		$	62,197		$	60,949

________________________

Merger related expenses are net of related income taxes of $264,000 for the nine months ended September 30, 2020 and $20,000 for both the three and nine months ended September 30, 2019. Branch consolidation charges are net of related income taxes of $59,000 for the nine months ended September 30, 2020.

2	Assuming a tax rate of 21%.

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For The

Quarter Ended

(Dollars in thousands except for per share data)

3/31/2020

3/31/2019

Adjusted Net Income and Earnings Per Share

(unaudited)

Net income, as reported

$
3,639

$
3,771

Merger related expenses

957

-

Related income taxes

(172)

-

Adjusted net income

$
4,424

$
3,771

Weighted average shares - basic and diluted

3,644,614

3,484,592

Earnings per share - basic and diluted

Earnings per share - basic and diluted, as reported

$
0.98

$
1.08

Merger related expenses

0.22

-

Adjusted earnings per share - basic and diluted

$
1.20

$
1.08

Adjusted Return on Average Equity (ROE)

Average total equity, as reported

$
175,925

$
151,518

Annualized ROE, as reported

8.27
%

9.96
%
Adjusted annualized ROE

10.06
%

9.96
%

Adjusted Return on Average Assets (ROA)

Average assets, as reported

$
1,847,536

$
1,513,497

Annualized ROA, as reported

0.79
%

1.00
%
Adjusted annualized ROA

0.96
%

1.00
%


	9/30/2020		12/31/2019
Tangible Book Value Per Share	(unaudited)		*
Equity attributable to C&F Financial Corporation	$	188,388	$	164,798
Less goodwill		25,191		14,425
Less other intangible assets		2,374		912
Tangible equity attributable to C&F Financial Corporation	$	160,823	$	149,461

Shares outstanding		3,647,898		3,438,126

Book value per share	$	51.64	$	48.07
Tangible book value per share	$	44.08	$	43.61

________________________

^*	Derived from audited consolidated financial statements.

3/31/2020

12/31/2019
Tangible Book Value Per Share

(unaudited)

*
Equity attributable to C&F Financial Corporation

$
178,702

$
164,798
Less goodwill

25,117

14,425
Less other intangible assets

2,540

912
Tangible equity attributable to C&F Financial Corporation

$
151,045

$
149,461

Shares outstanding

3,648,658

3,438,126

Book value per share

$
48.98

$
47.93
Tangible book value per share

$
41.40

$
43.47

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, including statements concerning the Corporation’s expectations, plans, objectives or beliefs regarding future financial performance; actions and initiatives taken in response to the COVID-19 pandemic; potential effects of the COVID-19 pandemic, including on asset quality, the allowance for loan losses, provision for loan losses, ~~and~~ interest rates and bank customers, expected benefits of branch consolidation, impairment of securities and goodwill, future dividend payments, expected impacts of the Corporation’s acquisition ~~and integration~~ of Peoples, strategic business initiatives and the anticipated effects thereof, including new facilities, lending under the PPP loan program, competition among financial institutions and the expected effects thereof, margin compression, technology initiatives, asset quality, adequacy of allowances for loan losses and the level of future charge-offs, capital levels, the effect of future market industry trends and interest rate environments and the effects of future interest rate fluctuations. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Corporation, including, but not limited to, changes in:

the ability of the Corporation and the Bank to realize the anticipated benefits of the Merger, including the ability to successfully integrate Peoples’ systems and processes into the Corporation’s systems and processes

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

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

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

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

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

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

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

●general economic conditions, including the strength of the Corporation’s counterparties, unemployment levels and slowdowns in economic growth, especially related to further and sustained economic impacts of the COVID-19 pandemic, the severity and duration of the pandemic, including whether there is a resurgence of COVID-19 infections, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein

●the Corporation’s ability to manage the impact of the COVID-19 pandemic, including the steps the Corporation takes in response to COVID-19

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

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

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●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

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

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

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

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

~~customer and employee relationships and business operations as a result of disruptions caused by the Merger~~

●the commercial and residential real estate markets

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

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

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

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

~~general economic conditions, including unemployment levels and slowdowns in economic growth, especially related to further and sustained economic impacts of the COVID-19 pandemic~~

●deposit flows

~~the Corporation’s ability to manage the impact of the COVID-19 pandemic~~

●demand in the secondary residential mortgage loan markets

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

●the level of indemnification losses related to mortgage loans sold

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

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

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

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

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

●the Corporation's technology initiatives and other strategic initiatives

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

●the Corporation’s branch expansions and consolidations

~~the commercial and residential real estate markets~~

●cyber threats, attacks or events

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

●reliance on third parties for key services

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

●expansion of C&F Bank’s product offerings

~~deposit flows~~

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

~~the level of indemnification losses related to mortgage loans sold~~

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

~~demand for financial services in the Corporation’s market area, including demand for loans~~

~~the Corporation's branch and market expansions, technology initiatives and other strategic initiatives~~

~~cyber threats, attacks or events~~

~~reliance on third parties for key services~~

~~expansion of C&F Bank’s product offerings~~

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

These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of Part I of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2019, and in Item 1A. “Risk Factors,” of Part II of this Quarterly Report on Form 10-Q, 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.

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ITEM ~~3.QUANTITATIVE~~3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM ~~4.CONTROLS~~4.CONTROLS AND PROCEDURES

The Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of ~~March 31,~~September 30, 2020 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

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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.

The Corporation completed the acquisition of Peoples on January 1, 2020, and is in the process of completing its consolidation and integration of Peoples’ legacy systems and processes. The conversion of Peoples’ loan and deposit systems was completed on April 25, 2020. The integration of Peoples’ legacy systems and processes does not have a material effect on our internal control over financial reporting.

As a result of the COVID-19 pandemic, a substantial portion of our administrative personnel began working remotely in mid March 2020. In order to facilitate this change, which occurred with little advance notice, the Corporation adapted certain technologies and processes. While our internal controls were not designed specifically to operate in a remote working environment, we believe that our internal control over financial reporting was not materially affected by this change in processes and continues to be effective in a remote working environment.

There were no changes in the Corporation’s internal control over financial reporting during the three months ended ~~March 31,~~September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II – OTHER ~~INFORMATION~~INFORMATION

ITEM 1A.RISK FACTORS

~~ITEM 1A.RISK FACTORS~~

The following risk factor should be considered in addition to the risk factors disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.

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

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

Although the scope, duration and full effects of the ~~COVID-19~~ pandemic are ~~rapidly~~ evolving and cannot be fully known at this time, consequences of the ~~COVID-19~~ pandemic and efforts to contain the spread of

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

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

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

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

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

Issuer Purchases of Equity Securities

~~The Corporation’s~~In May 2019, the Board of Directors authorized ~~programs~~a program, effective June 1, 2019, to repurchase ~~the Corporation’s common stock in May 2014 (which was subsequently reauthorized, most recently in April 2018), for repurchases of~~ up to $5.0 million of the Corporation’s common stock through May 31, ~~2019, and in May 2019 for repurchases of up to $5.0 million of the Corporation’s common stock from June 1, 2019 through May 31,~~ 2020. Repurchases under either program could be made through privately-negotiated transactions, or open-market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 of the Exchange Act and/or Rule 10b-18 of the Exchange Act. Under the repurchase program last reauthorized in April 2018, theThe Corporation ~~made aggregate common stock repurchases of $3.8 million between November 2018 and May 2019. As of March 31, 2020, the Corporation has~~had made aggregate common stock repurchases of $2.1 million under the share repurchase program ~~authorized in~~when the program expired on May ~~2019. Currently, the Corporation does~~31, 2020. The share repurchase program has not ~~expect to make additional repurchases during the remaining period of the repurchase program.~~been renewed or extended at this time.

~~Table of Contents~~

The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended ~~March 31,~~September 30, 2020.


					Maximum Number
					(or Approximate
				Total Number of	Dollar Value) of
				Shares Purchased as	Shares that May Yet
				Part of Publicly	Be Purchased
	Total Number of	Average Price Paid		Announced Plans or	Under the Plans or
(Dollars in thousands, except for per share amounts)	Shares Purchased¹	per Share		Programs	Programs
July 1, 2020 - July 31, 2020	15	$	34.99	—	$	—
August 1, 2020 - August 31, 2020	—		—	—	$	—
September 1, 2020 - September 30, 2020	—		—	—	$	—
Total	15	$	34.99	—

Maximum Number

(or Approximate

Total Number of

Dollar Value) of

Shares Purchased as

Shares that May Yet

Part of Publicly

Be Purchased

Total Number of

Average Price Paid

Announced Plans or

Under the Plans or

(Dollars in thousands, except for per share amounts)

Shares Purchased1

per Share

Programs

Programs

January 1, 2020 - January 31, 2020

5,006

$
52.15

—

$
3,299

February 1, 2020 - February 29, 2020

1,063

46.28

1,000

3,253

March 1, 2020 - March 31, 2020

7,963

38.74

7,963

2,944

Total

14,032

$
44.09

8,963

During the three months ended ~~March 31,~~September 30, 2020, ~~5,069~~15 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

~~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 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed January 14, 2009)

3.2	Amended and Restated Bylaws of C&F Financial Corporation, as adopted February 23, 2016 (incorporated by reference to Exhibit 3.1 to Form 8-K filed February 29, 2016)

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

10.1	Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 30, 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.INS~~101	The following financial statements from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL, ~~Instance Document~~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)

~~101.SCH~~104	The cover page from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL ~~Taxonomy Extension Schema Document~~

~~101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase Document~~

~~101.DEF~~	~~XBRL Taxonomy Extension Definition Linkbase Document~~

~~101.LAB~~	~~XBRL Taxonomy Extension Label Linkbase Document~~

~~101.PRE~~	~~XBRL Taxonomy Presentation Linkbase Document~~(included with Exhibit 101)

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SIGNATURES

~~SIGNATURES~~

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


		C&F FINANCIAL CORPORATION
			(Registrant)

Date:	~~May 8,~~November 4, 2020	By:	/s/ Thomas F. Cherry
			Thomas F. Cherry
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	~~May 8,~~November 4, 2020		/s/ Jason E. Long
			Jason E. Long
			Senior Vice President, Chief Financial Officer and Secretary
			(Principal Financial and Accounting Officer)

6274


Virginia	54-1680165
(State or other jurisdiction ofincorporation or organization)	(I.R.S. EmployerIdentification No.)

~~802 Main Street West Point,~~ 3600 La Grange ParkwayToano, VA	~~23181~~23168
(Address of principal executive offices)	(Zip Code)


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


PART I - Financial Information		Page

Item 1.	Financial Statements	3

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

	Consolidated Statements of Income (unaudited) – Three and nine months ended ~~March 31,~~September 30, 2020 and 2019	4

	Consolidated Statements of Comprehensive Income (unaudited) – Three and nine months ended ~~March 31,~~September 30, 2020 and 2019	5

	Consolidated Statements of Equity (unaudited) – Three months ended ~~March 31,~~September 30, 2020 and 2019	6


	Consolidated Statements of Equity (unaudited) – Nine months ended September 30, 2020 and 2019	7

	Consolidated Statements of Cash Flows (unaudited) – ~~Three~~Nine months ended ~~March 31,~~September 30, 2020 and 2019	7
		8

	Notes to Consolidated Financial Statements (unaudited)	8 9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3337

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5870

Item 4.	Controls and Procedures		70
~~Item 4.~~
~~Controls and Procedures~~PART II - Other Information		58

Item 1A.	Risk Factors		71
~~PART II - Other Information~~

Item ~~1A.~~2.	~~Risk Factors~~	58

~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds	5972

Item 6.	Exhibits		73
~~Item 6.~~	~~Exhibits~~	61

	Signatures	6274


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


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


	Attributable to C&F Financial Corporation
							Accumulated
			Additional				Other
	Common		Paid - In		Retained		Comprehensive		Noncontrolling		Total
	Stock		Capital		Earnings		Loss, Net		Interest		Equity
Balance December 31, 2019	$	3,296	$	9,503	$	154,248	$	(2,249)	$	481	$	165,279
Comprehensive income:
Net income		—		—		3,578		—		61		3,639
Other comprehensive income		—		—		—		294		—		294
Share-based compensation		—		389		—		—		—		389
Restricted stock vested		16		(16)		—		—		—		—
Acquisition of Peoples Bankshares, Incorporated		210		11,402		—		—		—		11,612
Common stock issued		1		36		—		—		—		37
Common stock purchased		(14)		(604)		—		—		—		(618)
Cash dividends declared ($0.38 per share)		—		—		(1,388)		—		—		(1,388)
Balance March 31, 2020	$	3,509	$	20,710	$	156,438	$	(1,955)	$	542	$	179,244


	March 31, 2020						December 31, 2019
	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	$	20,139	$	128,098	$	148,237	$	6,262	$	27,839	$	34,101
Carrying amount
Real estate – residential mortgage	$	3,195	$	25,269	$	28,464	$	107	$	7,035	$	7,142
Real estate – construction		103		7,139		7,242		—		—		—
Commercial, financial and agricultural1		5,234		78,272		83,506		563		11,338		11,901
Equity lines		50		12,379		12,429		35		8,046		8,081
Consumer		637		2,469		3,106		—		3		3
Total acquired loans	$	9,219	$	125,528	$	134,747	$	705	$	26,422	$	27,127


															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	$	1,251	$	179	$	556	$	1,986	$	3,195	$	197,586	$	202,767	$	—
Real estate – construction:
Construction lending		—		—		—		—		103		50,644		50,747		—
Consumer lot lending		—		—		—		—		—		15,190		15,190		—
Commercial, financial and agricultural:
Commercial real estate lending		—		677		—		677		5,234		397,312		403,223		—
Land acquisition and development lending		—		—		—		—		—		40,189		40,189		—
Builder line lending		—		—		—		—		—		25,026		25,026		—
Commercial business lending		11		—		—		11		—		120,136		120,147		—
Equity lines		304		—		88		392		50		55,864		56,306		9
Consumer		5		—		—		5		637		15,641		16,283		—
Consumer finance		8,825		1,187		377		10,389		—		297,202		307,591		—
Total	$	10,396	$	2,043	$	1,021	$	13,460	$	9,219	$	1,214,790	$	1,237,469	$	9


	For The
	Quarter Ended
(Dollars in thousands except for per share data)	3/31/2020			3/31/2019
Adjusted Net Income and Earnings Per Share	(unaudited)
Net income, as reported	$	3,639		$	3,771
Merger related expenses		957			-
Related income taxes		(172)			-
Adjusted net income	$	4,424		$	3,771

Weighted average shares - basic and diluted		3,644,614			3,484,592

Earnings per share - basic and diluted
Earnings per share - basic and diluted, as reported	$	0.98		$	1.08
Merger related expenses		0.22			-
Adjusted earnings per share - basic and diluted	$	1.20		$	1.08

Adjusted Return on Average Equity (ROE)
Average total equity, as reported	$	175,925		$	151,518

Annualized ROE, as reported		8.27	%		9.96	%
Adjusted annualized ROE		10.06	%		9.96	%

Adjusted Return on Average Assets (ROA)
Average assets, as reported	$	1,847,536		$	1,513,497

Annualized ROA, as reported		0.79	%		1.00	%
Adjusted annualized ROA		0.96	%		1.00	%


	3/31/2020		12/31/2019
Tangible Book Value Per Share	(unaudited)		*
Equity attributable to C&F Financial Corporation	$	178,702	$	164,798
Less goodwill		25,117		14,425
Less other intangible assets		2,540		912
Tangible equity attributable to C&F Financial Corporation	$	151,045	$	149,461

Shares outstanding		3,648,658		3,438,126

Book value per share	$	48.98	$	47.93
Tangible book value per share	$	41.40	$	43.47


					Maximum Number
					(or Approximate
				Total Number of	Dollar Value) of
				Shares Purchased as	Shares that May Yet
				Part of Publicly	Be Purchased
	Total Number of	Average Price Paid		Announced Plans or	Under the Plans or
(Dollars in thousands, except for per share amounts)	Shares Purchased1	per Share		Programs	Programs
January 1, 2020 - January 31, 2020	5,006	$	52.15	—	$	3,299
February 1, 2020 - February 29, 2020	1,063		46.28	1,000		3,253
March 1, 2020 - March 31, 2020	7,963		38.74	7,963		2,944
Total	14,032	$	44.09	8,963