Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31,June 30, 2021

or

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

For the transition period from _________ to _________

Commission File Number 000-23423

C&F FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Virginia

54-1680165

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

3600 La Grange Parkway Toano, VA

23168

(Address of principal executive offices)

(Zip Code)

(804) 843-2360

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value per share

CFFI

The NASDAQ Stock Market LLC

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

At May 3,July 31, 2021, the latest practicable date for determination, 3,683,2513,592,477 shares of common stock, $1.00 par value, of the registrant were outstanding.

Table of Contents

TABLE OF CONTENTS

PART I - Financial Information

    

Page

 

Item 1.

Financial Statements

 

3

 

Consolidated Balance Sheets (Unaudited) – March 31,June 30, 2021 and December 31, 2020

 

3

 

Consolidated Statements of Income (Unaudited) – Three and six months ended March 31,June 30, 2021 and 20202020

 

4

 

Consolidated Statements of Comprehensive Income (Unaudited) – Three and six months ended March 31,June 30, 2021 and 2020

 

5

 

Consolidated Statements of Equity (Unaudited) – Three and six months ended March 31,June 30, 2021 and 2020

 

6

 

Consolidated Statements of Cash Flows (Unaudited) – ThreeSix months ended March 31,June 30, 2021 and 2020

 

78

 

Notes to Consolidated Interim Financial Statements (Unaudited)

89

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

3335

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

6068

 

Item 4.

Controls and Procedures

 

6068

 

PART II - Other Information

 

 

Item 1A.

Risk Factors

 

6069

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

6069

 

Item 6.

Exhibits

 

6270

 

Signatures

 

6371

 

2

Table of Contents

Part I – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

   March 31,    

December 31, 

    

2021

    

2020

  

Assets

Cash and due from banks

$

13,845

$

17,742

Interest-bearing deposits in other banks

 

133,593

 

68,927

Total cash and cash equivalents

 

147,438

 

86,669

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

 

321,285

 

286,389

Loans held for sale, at fair value

 

177,350

 

214,266

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

 

1,346,003

 

1,313,250

Restricted stock, at cost

 

1,027

 

1,636

Corporate premises and equipment, net

 

45,223

 

44,132

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

 

907

 

907

Accrued interest receivable

 

7,723

 

8,103

Goodwill

 

25,191

 

25,191

Other intangible assets, net

 

2,213

 

2,291

Bank-owned life insurance

20,332

20,205

Net deferred tax asset

13,931

13,555

Other assets

 

60,015

 

69,716

Total assets

$

2,168,638

$

2,086,310

Liabilities

Deposits

Noninterest-bearing demand deposits

$

548,755

$

501,945

Savings and interest-bearing demand deposits

 

825,127

 

780,645

Time deposits

 

458,100

 

469,583

Total deposits

 

1,831,982

 

1,752,173

Short-term borrowings

 

23,926

 

20,455

Long-term borrowings

 

30,484

 

30,398

Trust preferred capital notes

 

25,325

 

25,316

Accrued interest payable

 

734

 

1,109

Other liabilities

 

57,495

 

62,388

Total liabilities

 

1,969,946

 

1,891,839

Commitments and contingent liabilities (Note 11)

 

 

Equity

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

 

3,526

 

3,514

Additional paid-in capital

 

21,622

 

21,427

Retained earnings

 

176,481

 

170,819

Accumulated other comprehensive loss, net

 

(3,560)

 

(1,955)

Equity attributable to C&F Financial Corporation

198,069

193,805

Noncontrolling interest

623

666

Total equity

 

198,692

 

194,471

Total liabilities and equity

$

2,168,638

$

2,086,310

   June 30,    

December 31, 

    

2021

    

2020

  

Assets

Cash and due from banks

$

18,724

$

17,742

Interest-bearing deposits in other banks

 

150,741

 

68,927

Total cash and cash equivalents

 

169,465

 

86,669

Securities—available for sale at fair value, amortized cost of
$353,341 and $280,824, respectively

 

356,886

 

286,389

Loans held for sale, at fair value

 

119,038

 

214,266

Loans, net of allowance for loan losses of $38,951 and $39,156, respectively

 

1,348,293

 

1,313,250

Restricted stock, at cost

 

1,027

 

1,636

Corporate premises and equipment, net

 

45,495

 

44,132

Other real estate owned, net of valuation allowance of $32 and $207, respectively

 

857

 

907

Accrued interest receivable

 

7,382

 

8,103

Goodwill

 

25,191

 

25,191

Other intangible assets, net

 

2,134

 

2,291

Bank-owned life insurance

20,440

20,205

Net deferred tax asset

13,786

13,555

Other assets

 

58,650

 

69,716

Total assets

$

2,168,644

$

2,086,310

Liabilities

Deposits

Noninterest-bearing demand deposits

$

551,382

$

501,945

Savings and interest-bearing demand deposits

 

830,195

 

780,645

Time deposits

 

449,985

 

469,583

Total deposits

 

1,831,562

 

1,752,173

Short-term borrowings

 

23,570

 

20,455

Long-term borrowings

 

30,506

 

30,398

Trust preferred capital notes

 

25,334

 

25,316

Accrued interest payable

 

851

 

1,109

Other liabilities

 

55,023

 

62,388

Total liabilities

 

1,966,846

 

1,891,839

Commitments and contingent liabilities (Note 11)

 

 

Equity

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,591,902 and 3,670,301 shares issued and outstanding, respectively, includes 152,622 and 155,945 of unvested shares, respectively)

 

3,439

 

3,514

Additional paid-in capital

 

17,643

 

21,427

Retained earnings

 

183,043

 

170,819

Accumulated other comprehensive loss, net

 

(2,924)

 

(1,955)

Equity attributable to C&F Financial Corporation

201,201

193,805

Noncontrolling interest

597

666

Total equity

 

201,798

 

194,471

Total liabilities and equity

$

2,168,644

$

2,086,310

See notes to consolidated interim financial statements.

3

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, 

 

    

2021

    

2020

  

 

Interest income

Interest and fees on loans

$

21,813

$

22,897

Interest on interest-bearing deposits and federal funds sold

 

46

 

598

Interest and dividends on securities

U.S. government agencies and corporations

 

125

 

126

Mortgage-backed securities

409

520

Tax-exempt obligations of states and political subdivisions

469

496

Taxable obligations of states and political subdivisions

 

90

 

92

Other

 

124

 

49

Total interest income

 

23,076

 

24,778

Interest expense

Savings and interest-bearing deposits

 

359

 

586

Time deposits

 

1,308

 

2,299

Borrowings

 

449

 

1,001

Trust preferred capital notes

 

284

 

289

Total interest expense

 

2,400

 

4,175

Net interest income

 

20,676

 

20,603

Provision for loan losses

 

280

 

2,650

Net interest income after provision for loan losses

 

20,396

 

17,953

Noninterest income

Gains on sales of loans

 

7,058

 

3,676

Mortgage banking fee income

 

1,856

 

1,305

Interchange income

1,318

1,089

Service charges on deposit accounts

 

819

 

1,002

Wealth management services income, net

 

702

 

585

Mortgage lender services income

778

242

Other service charges and fees

 

389

 

375

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

 

32

 

4

Other income (loss), net

 

1,404

 

(1,530)

Total noninterest income

 

14,356

 

6,748

Noninterest expenses

Salaries and employee benefits

 

15,613

 

10,817

Occupancy

 

2,360

 

2,047

Other

 

7,327

 

7,221

Total noninterest expenses

 

25,300

 

20,085

Income before income taxes

 

9,452

 

4,616

Income tax expense

 

2,287

 

977

Net income

7,165

3,639

Less net income attributable to noncontrolling interest

 

104

 

61

Net income attributable to C&F Financial Corporation

$

7,061

$

3,578

Net income per share - basic and diluted

$

1.92

$

0.98

Three Months Ended June 30, 

Six Months Ended June 30, 

 

    

2021

    

2020

  

2021

    

2020

 

Interest income

Interest and fees on loans

$

22,466

$

22,204

$

44,279

$

45,101

Interest on interest-bearing deposits and federal funds sold

 

48

 

52

 

94

 

650

Interest and dividends on securities

U.S. government agencies and corporations

 

175

 

120

 

300

 

246

Mortgage-backed securities

506

543

915

1,063

Tax-exempt obligations of states and political subdivisions

436

513

905

1,009

Taxable obligations of states and political subdivisions

 

94

 

108

 

184

 

200

Other

 

141

 

44

 

265

 

93

Total interest income

 

23,866

 

23,584

 

46,942

 

48,362

Interest expense

Savings and interest-bearing deposits

 

344

 

355

 

703

 

941

Time deposits

 

1,053

 

2,131

 

2,361

 

4,430

Borrowings

 

454

 

557

 

903

 

1,558

Trust preferred capital notes

 

287

 

287

 

571

 

576

Total interest expense

 

2,138

 

3,330

 

4,538

 

7,505

Net interest income

 

21,728

 

20,254

 

42,404

 

40,857

Provision for loan losses

 

(600)

 

3,600

 

(320)

 

6,250

Net interest income after provision for loan losses

 

22,328

 

16,654

 

42,724

 

34,607

Noninterest income

Gains on sales of loans

 

5,947

 

4,605

 

13,005

 

8,281

Mortgage banking fee income

 

1,648

 

1,986

 

3,504

 

3,291

Interchange income

1,471

1,141

2,789

2,230

Service charges on deposit accounts

 

828

 

639

 

1,647

 

1,641

Wealth management services income, net

 

685

 

748

 

1,387

 

1,333

Mortgage lender services income

615

400

1,393

642

Other service charges and fees

 

413

 

394

 

802

 

769

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

 

6

 

3

 

38

 

7

Other income, net

 

1,487

 

1,912

 

2,891

 

382

Total noninterest income

 

13,100

 

11,828

 

27,456

 

18,576

Noninterest expenses

Salaries and employee benefits

 

15,714

 

14,354

 

31,327

 

25,171

Occupancy

 

2,190

 

2,154

 

4,550

 

4,201

Other

 

6,998

 

7,284

 

14,325

 

14,505

Total noninterest expenses

 

24,902

 

23,792

 

50,202

 

43,877

Income before income taxes

 

10,526

 

4,690

 

19,978

 

9,306

Income tax expense

 

2,436

 

947

 

4,723

 

1,924

Net income

8,090

3,743

15,255

7,382

Less net income (loss) attributable to noncontrolling interest

 

82

 

(3)

 

186

 

58

Net income attributable to C&F Financial Corporation

$

8,008

$

3,746

$

15,069

$

7,324

Net income per share - basic and diluted

$

2.19

$

1.03

$

4.11

$

2.01

See notes to consolidated interim financial statements.

4

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

Three Months Ended March 31, 

 

    

2021

    

2020

  

Net income

$

7,165

$

3,639

Other comprehensive income (loss):

Defined benefit plan:

Reclassification of recognized net actuarial losses into net income1

60

42

Related income tax effects

(13)

(9)

Amortization of prior service credit into net income1

(17)

(17)

Related income tax effects

4

4

Defined benefit plan, net of tax

34

20

Cash flow hedges:

Unrealized holding gains (losses) arising during the period

990

(1,974)

Related income tax effects

(255)

508

Amortization of hedging gains into net income2

(2)

(3)

Related income tax effects

1

1

Cash flow hedges, net of tax

734

(1,468)

Securities available for sale:

Unrealized holding (losses) gains arising during the period

(2,971)

2,209

Related income tax effects

623

(464)

Reclassification of net realized gains into net income3

(32)

(4)

Related income tax effects

7

1

Securities available for sale, net of tax

(2,373)

1,742

Other comprehensive (loss) income, net of tax

(1,605)

294

Comprehensive income

5,560

3,933

Less comprehensive income attributable to noncontrolling interest

104

61

Comprehensive income attributable to C&F Financial Corporation

$

5,456

$

3,872

Three Months Ended June 30, 

Six Months Ended June 30, 

 

    

2021

    

2020

    

2021

    

2020

  

Net income

$

8,090

$

3,743

$

15,255

$

7,382

Other comprehensive income (loss):

Defined benefit plan:

Reclassification of recognized net actuarial losses into net income1

61

57

121

99

Related income tax effects

(12)

(12)

(25)

(21)

Amortization of prior service credit into net income1

(17)

(17)

(34)

(34)

Related income tax effects

3

3

7

7

Defined benefit plan, net of tax

35

31

69

51

Cash flow hedges:

Unrealized holding (losses) gains arising during the period

(235)

(154)

755

(2,128)

Related income tax effects

61

39

(194)

547

Amortization of hedging gains into net income2

(2)

(3)

(4)

(6)

Related income tax effects

1

1

2

Cash flow hedges, net of tax

(176)

(117)

558

(1,585)

Securities available for sale:

Unrealized holding gains (losses) arising during the period

989

1,779

(1,982)

3,988

Related income tax effects

(207)

(373)

416

(837)

Reclassification of net realized gains into net income3

(6)

(3)

(38)

(7)

Related income tax effects

1

8

1

Securities available for sale, net of tax

777

1,403

(1,596)

3,145

Other comprehensive income (loss), net of tax

636

1,317

(969)

1,611

Comprehensive income

8,726

5,060

14,286

8,993

Less comprehensive income (loss) attributable to noncontrolling interest

82

(3)

186

58

Comprehensive income attributable to C&F Financial Corporation

$

8,644

$

5,063

$

14,100

$

8,935

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

See notes to consolidated interim financial statements.

5

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED MARCH 31,JUNE 30, 2021 AND 2020

(Unaudited)

(Dollars in thousands, except per share amounts)

Attributable to C&F Financial Corporation

Attributable to C&F Financial Corporation

Accumulated

Accumulated

   

   

Additional

   

   

Other

   

 

   

   

Additional

   

   

Other

   

 

Common

Paid - In

Retained

Comprehensive

Noncontrolling

Total

 

Common

Paid - In

Retained

Comprehensive

Noncontrolling

Total

 

Stock

Capital

Earnings

Loss, Net

Interest

Equity

 

Stock

Capital

Earnings

Loss, Net

Interest

Equity

 

Balance December 31, 2020

$

3,514

 

$

21,427

 

$

170,819

 

$

(1,955)

 

$

666

$

194,471

Balance March 31, 2021

$

3,526

 

$

21,622

 

$

176,481

 

$

(3,560)

 

$

623

$

198,692

Comprehensive income:

Net income

 

 

 

7,061

 

 

104

 

7,165

 

 

 

8,008

 

 

82

 

8,090

Other comprehensive loss

 

 

 

 

(1,605)

 

 

(1,605)

Other comprehensive income

 

 

 

 

636

 

 

636

Share-based compensation

 

 

392

 

 

 

 

392

 

 

428

 

 

 

 

428

Restricted stock vested

 

16

(16)

 

 

 

 

 

4

(4)

 

 

 

 

Common stock issued

 

2

 

42

 

 

 

 

44

 

1

 

41

 

 

 

 

42

Common stock purchased

(6)

(223)

(229)

(92)

(4,444)

(4,536)

Cash dividends declared ($0.38 per share)

(1,399)

(1,399)

Cash dividends declared ($0.40 per share)

(1,446)

(1,446)

Distributions to noncontrolling interest

(147)

(147)

(108)

(108)

Balance March 31, 2021

$

3,526

$

21,622

$

176,481

$

(3,560)

 

$

623

$

198,692

Balance June 30, 2021

$

3,439

$

17,643

$

183,043

$

(2,924)

 

$

597

$

201,798

Attributable to C&F Financial Corporation

Accumulated

   

   

Additional

   

   

Other

   

 

Common

Paid - In

Retained

Comprehensive

Noncontrolling

Total

 

Stock

Capital

Earnings

Loss, Net

Interest

Equity

 

Balance March 31, 2020

$

3,509

 

$

20,710

 

$

156,438

 

$

(1,955)

 

$

542

$

179,244

Comprehensive income:

Net income

 

 

 

3,746

 

 

(3)

 

3,743

Other comprehensive income

 

 

 

 

1,317

 

 

1,317

Share-based compensation

 

 

312

 

 

 

 

312

Common stock issued

 

1

33

 

 

 

 

34

Cash dividends declared ($0.38 per share)

 

 

 

(1,385)

 

 

 

(1,385)

Balance June 30, 2020

$

3,510

$

21,055

$

158,799

$

(638)

 

$

539

$

183,265

See notes to consolidated interim financial statements.

6

Table of Contents

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

(Dollars in thousands, except per share amounts)

Attributable to C&F Financial Corporation

   

   

   

   

Accumulated

   

 

Additional

Other

Common

Paid - In

Retained

Comprehensive

Noncontrolling

Total

 

Stock

Capital

Earnings

Loss, Net

Interest

Equity

 

Balance December 31, 2020

3,514

21,427

170,819

(1,955)

 

666

194,471

Comprehensive income:

Net income

 

 

 

15,069

 

 

186

 

15,255

Other comprehensive loss

 

 

 

 

(969)

 

 

(969)

Share-based compensation

 

820

 

 

 

 

820

Restricted stock vested

 

20

(20)

 

 

 

 

Common stock issued

 

3

83

 

 

 

86

Common stock purchased

(98)

(4,667)

(4,765)

Cash dividends declared ($0.78 per share)

(2,845)

(2,845)

Distributions to noncontrolling interest

(255)

(255)

Balance June 30, 2021

$

3,439

$

17,643

$

183,043

$

(2,924)

 

$

597

$

201,798

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 December 31, 2019

$

3,296

 

$

9,503

 

$

154,248

 

$

(2,249)

 

$

481

$

165,279

Comprehensive income:

Net income

 

 

 

7,324

 

 

58

 

7,382

Other comprehensive income

 

 

 

 

1,611

 

 

1,611

Share-based compensation

 

 

701

 

 

 

 

701

Restricted stock vested

 

16

(16)

 

 

 

 

Acquisition of Peoples Bankshares, Incorporated

210

11,402

11,612

Common stock issued

 

2

 

69

 

 

 

 

71

Common stock purchased

(14)

(604)

(618)

Cash dividends declared ($0.76 per share)

 

 

 

(2,773)

 

 

 

(2,773)

Balance June 30, 2020

$

3,510

$

21,055

$

158,799

$

(638)

 

$

539

$

183,265

See notes to consolidated interim financial statements.statements

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C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

Three Months Ended March 31, 

 

    

2021

    

2020

  

Operating activities:

Net income

$

7,165

$

3,639

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

Provision for loan losses

 

280

 

2,650

Accretion of certain acquisition-related discounts, net

 

(743)

 

(1,259)

Share-based compensation

 

392

 

389

Depreciation and amortization

 

1,189

 

968

Accretion of discounts and amortization of premiums on securities, net

 

833

 

370

Income from bank-owned life insurance

(112)

(103)

Pension expense

206

172

Proceeds from sales of loans held for sale

 

462,469

 

227,422

Origination of loans held for sale

 

(424,082)

 

(253,868)

Gains on sales of loans held for sale

(7,058)

(3,676)

Other (gains) losses, net

(59)

253

Change in other assets and liabilities:

Accrued interest receivable

 

380

 

(47)

Other assets

 

198

 

4,455

Accrued interest payable

 

(375)

 

(43)

Other liabilities

 

451

 

(3,100)

Net cash provided by (used in) operating activities

 

41,134

 

(21,778)

Investing activities:

Acquisition of Peoples Bankshares, Incorporated

19,101

Disposition of assets related to business combination

8,004

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

 

33,712

 

39,063

Purchases of securities available for sale

 

(72,413)

 

(64,746)

Maturities of time deposits, net

1,976

251

Repayments on loans held for investment by non-bank affiliates

35,907

32,448

Purchases of loans held for investment by non-bank affiliates

(41,064)

(29,305)

Net increase in community banking loans held for investment

(22,770)

(4,911)

Purchases of corporate premises and equipment

 

(2,123)

 

(1,548)

Changes in collateral posted with other financial institutions, net

4,300

(8,270)

Other investing activities, net

 

683

 

229

Net cash used in investing activities

 

(61,792)

 

(9,684)

Financing activities:

Net increase in demand and savings deposits

 

91,293

 

12,632

Net (decrease) increase in time deposits

 

(11,414)

 

8,745

Net increase in short-term borrowings

 

3,471

 

2,030

Repayments of long-term borrowings

(7,519)

Repurchases of common stock

(229)

(355)

Cash dividends paid

(1,399)

(1,388)

Other financing activities, net

 

(295)

 

(107)

Net cash provided by financing activities

 

81,427

 

14,038

Net increase (decrease) in cash and cash equivalents

 

60,769

 

(17,424)

Cash and cash equivalents at beginning of period

 

86,669

 

165,433

Cash and cash equivalents at end of period

$

147,438

$

148,009

Supplemental cash flow disclosures:

Interest paid

$

2,856

$

4,175

Income taxes paid

 

 

3

Supplemental disclosure of noncash investing and financing activities:

Liabilities assumed to acquire right of use assets under operating leases

 

118

 

204

Six Months Ended June 30, 

 

    

2021

    

2020

  

Operating activities:

Net income

$

15,255

$

7,382

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

Provision for loan losses

 

(320)

 

6,250

Accretion of certain acquisition-related discounts, net

 

(1,891)

 

(1,972)

Share-based compensation

 

820

 

701

Depreciation and amortization

 

2,390

 

1,957

Accretion of discounts and amortization of premiums on securities, net

 

1,731

 

941

Income from bank-owned life insurance

(209)

(206)

Pension expense

434

396

Proceeds from sales of loans held for sale

 

909,516

 

624,112

Origination of loans held for sale

 

(806,866)

 

(698,740)

Gains on sales of loans held for sale

(13,005)

(8,281)

Other (gains) losses, net

(451)

807

Change in other assets and liabilities:

Accrued interest receivable

 

721

 

(898)

Other assets

 

1,189

 

929

Accrued interest payable

 

(258)

 

(341)

Other liabilities

 

(3,395)

 

471

Net cash provided by (used in) operating activities

 

105,661

 

(66,492)

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

 

55,496

 

70,780

Purchases of securities available for sale

 

(129,706)

 

(107,964)

Maturities (purchases) of time deposits, net

4,693

(6,464)

Repayments on loans held for investment by non-bank affiliates

77,605

62,462

Purchases of loans held for investment by non-bank affiliates

(97,971)

(53,013)

Net increase in community banking loans held for investment

(8,770)

(102,276)

Purchases of corporate premises and equipment

 

(3,444)

 

(3,453)

Proceeds from sales of other real estate owned

457

Changes in collateral posted with other financial institutions, net

3,480

(9,270)

Other investing activities, net

 

671

 

319

Net cash used in investing activities

 

(97,489)

 

(121,774)

Financing activities:

Net increase in demand and savings deposits

 

98,987

 

189,256

Net decrease in time deposits

 

(19,459)

 

(6,394)

Net increase in short-term borrowings

 

3,115

 

6,288

Repayments of long-term borrowings

(82,553)

Repurchases of common stock

(4,765)

(618)

Cash dividends paid

(2,845)

(2,773)

Other financing activities, net

 

(409)

 

(73)

Net cash provided by financing activities

 

74,624

 

103,133

Net increase (decrease) in cash and cash equivalents

 

82,796

 

(85,133)

Cash and cash equivalents at beginning of period

 

86,669

 

165,433

Cash and cash equivalents at end of period

$

169,465

$

80,300

Supplemental cash flow disclosures:

Interest paid

$

4,957

$

8,010

Income taxes paid

 

5,632

 

2,130

Supplemental disclosure of noncash investing and financing activities:

Liabilities assumed to acquire right of use assets under operating leases

881

597

Liabilities assumed to acquire right of use assets under finance leases

 

 

2,181

Transfers from loans held for sale to loans held for investment

3,717

621

See notes to consolidated interim financial statements.

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C&F FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies

Principles of Consolidation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission (the SEC). They do not include all of the information and notes required by U.S. GAAP for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2020.

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

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

C&F Bank has 5 wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. and CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, originates and sells residential mortgages, provides mortgage loan origination services to third-party lenders and, through its subsidiary Certified Appraisals LLC, provides ancillary mortgage loan production services for residential appraisals. C&F Mortgage owns a 51 percent interest in C&F Select LLC, which was organized in January 2019 and is also engaged in the business of originating and selling residential mortgages. C&F Finance, acquired in September 2002, is a finance company purchasing automobile, marine and recreational vehicle (RV) loans through indirect lending programs. C&F Wealth Management, organized in April 1995, is a full-service brokerage firm offering a comprehensive range of wealth management services and insurance products through third-party service providers. C&F Insurance Services, Inc. and CVB Title Services, Inc. were organized for the primary purpose of owning equity interests in an independent insurance agency and a full service title and settlement agency, respectively. Business segment data is presented in Note 10.

Basis of Presentation: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of loans and evaluation of goodwill for impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

The COVID-19 pandemic has caused a significant disruption in economic activity worldwide, including in market areas served by the Corporation. Estimates for the allowance for loan losses at March 31,June 30, 2021 include probable losses related to the pandemic.  While there have been signals of economic recovery and a resumption of many types of business activity, there remains significant uncertainty involved in the measurement of these losses.  If economic conditions deteriorate

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further, then additional provision for loan losses may be required in future periods.  It is unknown how long these conditions will last and what the ultimate financial impact will be to the Corporation.

Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.  None of these reclassifications are considered material.

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

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

Income Taxes: The Corporation’s effective tax rate was 24.223.6 percent and 21.220.7 percent for the first threesix months of 2021 and 2020, respectively. The effectiveCorporation recognized income tax benefits of $303,000 in the three and six months ended June 30, 2020 arising from a change in tax law enacted in response to the COVID-19 pandemic which changed the tax rate for the first three months of 2021 was higher than the first three months of 2020 as income before income taxes grew whileapplied to certain tax benefits, including benefitsnet operating losses related to tax-exemptprior tax years of Peoples. The effects of changes in tax law are recognized in income and share-based compensation, did not.tax expense in the period in which the changes are enacted.

Share-Based Compensation: Share-based compensation expense, net of forfeitures, for the three and six months ended March 31,June 30, 2021 was $392,000$428,000 ($287,000304,000 after tax) and $820,000 ($592,000 after tax), respectively, for restricted stock granted during 2016 through 2021. Share-based compensation expense, net of forfeitures, for the three and six months ended March 31,June 30, 2020 was $389,000$312,000 ($217,000 after tax) and $701,000 ($435,000 after tax), respectively, for restricted stock granted during 2015 through 2020. As of March 31,June 30, 2021, there was $4.09$3.66 million of total unrecognized compensation expense related to unvested restricted stock that will be recognized over the remaining requisite service periods.

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

2021

 

2021

 

    

    

Weighted-

 

    

    

Weighted-

 

Average

 

Average

 

Grant Date

 

Grant Date

 

Shares

Fair Value

 

Shares

Fair Value

 

Unvested, December 31, 2020

 

155,945

$

48.52

 

155,945

$

48.52

Granted

18,975

 

43.70

20,262

 

44.03

Vested

 

(16,105)

 

43.05

 

(20,395)

 

43.89

Forfeited

 

(1,750)

 

45.50

 

(3,190)

 

45.44

Unvested, March 31, 2021

 

157,065

48.53

Unvested, June 30, 2021

 

152,622

48.60

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2020

2020

    

    

Weighted-

    

    

Weighted-

Average

Average

Grant Date

Grant Date

Shares

Fair Value

Shares

Fair Value

Unvested, December 31, 2019

 

142,020

$

48.88

 

142,020

$

48.88

Granted

 

14,650

 

53.22

 

14,650

 

53.22

Vested

 

(16,230)

 

39.97

 

(16,230)

 

39.97

Forfeited

 

(620)

 

53.46

 

(2,735)

 

5.89

Unvested, March 31, 2020

 

139,820

50.39

Unvested, June 30, 2020

 

137,705

50.33

Recent Significant Accounting Pronouncements:

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as part of its project on financial instruments. Subsequently, this ASU was amended when the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial Instruments—Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842)—Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ASU 2020-02, “Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)” and ASU 2020-03, “Codification Improvements to Financial Instruments” (collectively, ASC 326).  ASC 326 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.  The new standard will be effective for the Corporation beginning on January 1, 2023.  Early adoption of the new standard is permitted.

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

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

NOTE 2:  Business Combination

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

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The Corporation accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the acquisition and the common stock of the Corporation issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value.    

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

    

Amounts

Recognized as of

(Dollars in thousands)

January 1, 2020

Purchase price:

Cash paid

$

10,579

Common stock issued

 

11,612

Total purchase price

$

22,191

Identifiable assets acquired:

Cash and cash equivalents

$

29,680

Securities available for sale

 

17,169

Loans

 

124,195

Accrued interest receivable

430

Corporate premises and equipment

 

3,105

Other real estate owned

 

281

Core deposit intangible asset

 

1,711

Bank-owned life insurance

3,591

Investment in small business investment company

1,493

Other receivables

5,234

Other assets

 

3,658

Total identifiable assets acquired

 

190,547

Identifiable liabilities assumed:

Demand and savings deposits

 

94,798

Time deposits

77,018

Borrowings

 

4,245

Accrued interest payable

 

260

Salaries, benefits and deferred compensation

2,054

Other liabilities

 

747

Total identifiable liabilities assumed

 

179,122

Net identifiable assets acquired

$

11,425

Goodwill resulting from acquisition

$

10,766

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

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

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

(Dollars in thousands)

    

January 1, 2020

 

Contractual principal and interest due

$

20,310

Nonaccretable difference

 

(7,679)

Expected cash flows

 

12,631

Accretable yield

 

(3,372)

Purchased credit impaired loans - estimated fair value

$

9,259

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

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

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

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

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

The Corporation recorded merger related expenses in connection with the acquisition of Peoples of $957,000$439,000 ($785,000347,000 after income taxes) for the three months ended March 31,June 30, 2020 and $1.40 million ($1.13 million after income taxes) for the six months ended June 30, 2020.  The Corporation recorded aggregate merger related expenses of $2.10 million ($1.78 million after income taxes) during 2019 and 2020, including the integration of systems and operations and legal and consulting expenses, which were expensed as incurred.

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NOTE 3: Securities

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

March 31, 2021

 

June 30, 2021

 

    

    

Gross

    

Gross

    

 

    

    

Gross

    

Gross

    

 

Amortized

Unrealized

Unrealized

 

Amortized

Unrealized

Unrealized

 

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

 

Cost

Gains

Losses

Fair Value

 

U.S. government agencies and corporations

$

54,900

$

105

$

(1,324)

$

53,681

$

61,401

$

92

$

(595)

$

60,898

Mortgage-backed securities

 

148,307

 

2,769

 

(558)

 

150,518

 

178,174

 

2,415

 

(367)

 

180,222

Obligations of states and political subdivisions

 

101,601

 

1,923

 

(370)

 

103,154

 

98,385

 

2,078

 

(179)

 

100,284

Corporate and other debt securities

13,915

79

(62)

13,932

15,381

140

(39)

15,482

$

318,723

$

4,876

$

(2,314)

$

321,285

$

353,341

$

4,725

$

(1,180)

$

356,886

December 31, 2020

 

    

    

Gross

    

Gross

    

 

Amortized

Unrealized

Unrealized

 

(Dollars in thousands)

Cost

Gains

Losses

Fair Value

 

U.S. government agencies and corporations

$

48,171

$

121

$

(10)

$

48,282

Mortgage-backed securities

 

120,664

 

3,165

 

(115)

 

123,714

Obligations of states and political subdivisions

 

100,405

 

2,436

 

(36)

 

102,805

Corporate and other debt securities

 

11,584

 

47

 

(43)

 

11,588

$

280,824

$

5,769

$

(204)

$

286,389

The amortized cost and estimated fair value of securities at March 31,June 30, 2021, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

March 31, 2021

 

June 30, 2021

 

    

Amortized

    

 

    

Amortized

    

 

(Dollars in thousands)

Cost

Fair Value

 

Cost

Fair Value

 

Due in one year or less

$

63,112

$

62,695

$

63,814

$

63,773

Due after one year through five years

 

171,500

 

175,068

 

184,816

 

188,212

Due after five years through ten years

 

75,592

 

75,334

 

95,707

 

96,001

Due after ten years

 

8,519

 

8,188

 

9,004

 

8,900

$

318,723

$

321,285

$

353,341

$

356,886

The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of securities. DuringThere were 0 sales of securities during the three months ended March 31,June 30, 2021 or 2020. During the six months ended June 30, 2021 and 2020, $2.30 million and $5.99 million of proceeds, respectively, were related to sales of securities.

Three Months Ended March 31, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

Realized gains from sales, maturities and calls of securities:

Gross realized gains

$

32

$

4

$

6

$

3

$

38

$

7

Gross realized losses

 

 

 

 

 

 

Net realized gains

$

32

$

4

$

6

$

3

$

38

$

7

Proceeds from sales, maturities, calls and paydowns of securities

$

33,712

$

39,063

$

21,784

$

31,717

$

55,496

$

70,780

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The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $135.46$150.52 million and an aggregate fair value of $138.11$153.39 million were pledged at March 31,June 30, 2021. Securities with an aggregate amortized cost of $146.66 million and an aggregate fair value of $150.13 million were pledged at December 31, 2020.

Securities in an unrealized loss position at March 31,June 30, 2021, by duration of the period of the unrealized loss, are shown below.

Less Than 12 Months

12 Months or More

Total

 

Less Than 12 Months

12 Months or More

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(Dollars in thousands)

Value

Loss

Value

Loss

   Value   

Loss

 

Value

Loss

Value

Loss

   Value   

Loss

 

U.S. government agencies and corporations

$

42,067

$

1,324

$

$

$

42,067

$

1,324

$

41,265

$

551

$

1,455

$

44

$

42,720

$

595

Mortgage-backed securities

 

48,067

558

 

 

 

48,067

 

558

 

78,791

367

 

 

 

78,791

 

367

Obligations of states and political subdivisions

 

21,881

 

370

 

 

 

21,881

 

370

 

14,139

 

179

 

 

 

14,139

 

179

Corporate and other debt securities

6,258

62

6,258

62

7,766

39

7,766

39

Total temporarily impaired securities

$

118,273

$

2,314

$

$

$

118,273

$

2,314

$

141,961

$

1,136

$

1,455

$

44

$

143,416

$

1,180

There were 106104 debt securities totaling $118.27$143.42 million of aggregate fair value considered temporarily impaired at March 31,June 30, 2021. The primary cause of the temporary impairments in the Corporation’s investments in debt securities was fluctuations in interest rates. The Corporation concluded that no other-than-temporary impairment existed in its securities portfolio at March 31,June 30, 2021, and 0 other-than-temporary impairment loss has been recognized in net income, based primarily on the fact that changes in fair value were caused primarily by fluctuations in interest rates, there were 0 securities with unrealized losses that were significant relative to their carrying amounts, 0 securities have been in an unrealized loss position continuously for more than 12 months, securities with unrealized losses had generally high credit quality, the Corporation intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Corporation will not be required to sell these investments before a recovery of its investment, and issuers have continued to make timely payments of principal and interest. Additionally, the Corporation’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises.  Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments. 

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

Less Than 12 Months

12 Months or More

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(Dollars in thousands)

Value

Loss

Value

Loss

   Value   

Loss

 

U.S. government agencies and corporations

$

12,719

$

10

$

$

$

12,719

$

10

Mortgage-backed securities

15,691

 

115

 

 

 

15,691

 

115

Obligations of states and political subdivisions

5,110

36

5,110

36

Corporate and other debt securities

 

4,271

 

43

 

 

 

4,271

 

43

Total temporarily impaired securities

$

37,791

$

204

$

$

$

37,791

$

204

The Corporation’s investment in restricted stock totaled $1.03 million at March 31,June 30, 2021 and consisted of Federal Home Loan Bank (FHLB)FHLB stock.  Restricted stock is generally viewed as a long-term investment, which is carried at cost because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value. The Corporation did not consider its investment in restricted stock to be other-than-temporarily impaired at March 31,June 30, 2021 and 0 impairment has been recognized.

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NOTE 4: Loans

Major classifications of loans are summarized as follows:

March 31, 

December 31, 

 

June 30, 

December 31, 

 

(Dollars in thousands)

    

2021

    

2020

 

    

2021

    

2020

 

Real estate – residential mortgage

$

216,920

$

218,298

$

218,189

$

218,298

Real estate – construction 1

 

52,884

 

62,147

 

53,921

 

62,147

Commercial, financial and agricultural 2

 

741,980

 

700,215

 

730,177

 

700,215

Equity lines

 

46,976

 

48,466

 

43,782

 

48,466

Consumer

 

9,132

 

11,028

 

8,302

 

11,028

Consumer finance

 

317,144

 

312,252

 

332,873

 

312,252

 

1,385,036

 

1,352,406

 

1,387,244

 

1,352,406

Less allowance for loan losses

 

(39,033)

 

(39,156)

 

(38,951)

 

(39,156)

Loans, net

$

1,346,003

$

1,313,250

$

1,348,293

$

1,313,250

1Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
2Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending (which includes loans originated under the PPP)Paycheck Protection Program).

Consumer loans included $125,000$198,000 and $284,000 of demand deposit overdrafts at March 31,June 30, 2021 and December 31, 2020, respectively.

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting.  The outstanding principal balance and the carrying amount at March 31,June 30, 2021 and December 31, 2020 of loans acquired in business combinations were as follows:

 

March 31, 2021

  

December 31, 2020

 

 

June 30, 2021

  

December 31, 2020

 

 

Acquired Loans -

  

Acquired Loans -

  

  

Acquired Loans -

  

Acquired Loans -

  

 

 

Acquired Loans -

  

Acquired Loans -

  

  

Acquired Loans -

  

Acquired Loans -

  

 

Purchased

Purchased

Acquired Loans -

Purchased

Purchased

Acquired Loans -

 

Purchased

Purchased

Acquired Loans -

Purchased

Purchased

Acquired Loans -

 

(Dollars in thousands)

Credit Impaired

Performing

Total

Credit Impaired

Performing

Total

 

Credit Impaired

Performing

Total

Credit Impaired

Performing

Total

 

Outstanding principal balance

$

11,931

$

79,015

$

90,946

$

12,760

$

89,043

$

101,803

$

10,632

$

68,873

$

79,505

$

12,760

$

89,043

$

101,803

Carrying amount

Real estate – residential mortgage

$

914

$

14,007

$

14,921

$

1,473

$

15,117

$

16,590

$

804

$

12,432

$

13,236

$

1,473

$

15,117

$

16,590

Real estate – construction

1,077

1,077

1,077

1,077

1,078

1,078

1,077

1,077

Commercial, financial and agricultural1

 

4,872

 

51,880

 

56,752

 

4,758

 

58,796

 

63,554

 

4,490

 

44,589

 

49,079

 

4,758

 

58,796

 

63,554

Equity lines

 

50

 

8,861

 

8,911

 

80

 

10,182

 

10,262

 

35

 

7,965

 

8,000

 

80

 

10,182

 

10,262

Consumer

 

42

 

1,666

 

1,708

 

48

 

1,924

 

1,972

 

41

 

1,465

 

1,506

 

48

 

1,924

 

1,972

Total acquired loans

$

5,878

$

77,491

$

83,369

$

6,359

$

87,096

$

93,455

$

5,370

$

67,529

$

72,899

$

6,359

$

87,096

$

93,455

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

1516

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

Three Months Ended March 31, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

 

2020

 

    

2021

 

2020

 

Accretable yield, balance at beginning of period

$

4,048

$

4,721

$

4,048

$

4,721

Acquisition of Peoples

 

 

3,366

 

 

3,372

Accretion

 

(517)

 

(959)

 

(1,537)

 

(1,687)

Reclassification of nonaccretable difference due to improvement in expected cash flows

 

456

 

733

 

743

 

923

Other changes, net

 

(69)

 

57

 

84

 

115

Accretable yield, balance at end of period

$

3,918

$

7,918

$

3,338

$

7,444

Loans on nonaccrual status were as follows:

March 31, 

December 31, 

 

June 30, 

December 31, 

 

(Dollars in thousands)

    

2021

    

2020

 

    

2021

    

2020

 

Real estate – residential mortgage

$

278

$

276

$

271

$

276

Commercial, financial and agricultural:

Commercial business lending

 

2,409

 

2,428

 

2,349

 

2,428

Equity lines

 

189

 

191

 

187

 

191

Consumer

 

110

 

107

 

106

 

107

Consumer finance

 

182

 

402

 

138

 

402

Total loans on nonaccrual status

$

3,168

$

3,404

$

3,051

$

3,404

The past due status of loans as of March 31,June 30, 2021 was as follows:

  

  

  

  

  

  

  

90+ Days

 

  

  

  

  

  

  

  

90+ Days

 

30 - 59 Days

60 - 89 Days

90+ Days

Total

Past Due and

 

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

 

Past Due

Past Due

Past Due

Past Due

PCI

Current1

Total Loans

Accruing

 

Real estate – residential mortgage

$

982

$

449

$

291

$

1,722

$

914

$

214,284

$

216,920

$

145

$

560

$

307

$

145

$

1,012

$

804

$

216,373

$

218,189

$

Real estate – construction:

Construction lending

 

 

 

 

 

39,525

 

39,525

 

 

 

 

 

 

38,729

 

38,729

 

Consumer lot lending

 

 

 

 

 

13,359

 

13,359

 

 

 

 

 

 

15,192

 

15,192

 

Commercial, financial and agricultural:

Commercial real estate lending

 

219

 

 

 

219

4,872

 

449,211

 

454,302

 

 

48

 

 

 

48

4,490

 

477,676

 

482,214

 

Land acquisition and development lending

 

 

 

 

 

33,615

 

33,615

 

 

 

 

 

 

31,671

 

31,671

 

Builder line lending

 

 

 

 

 

22,388

 

22,388

 

 

 

 

 

 

28,233

 

28,233

 

Commercial business lending

 

 

 

 

 

231,675

 

231,675

 

 

 

 

 

 

188,059

 

188,059

 

Equity lines

 

51

 

64

 

 

115

50

 

46,811

 

46,976

 

 

 

72

 

 

72

35

 

43,675

 

43,782

 

Consumer

 

26

 

 

 

26

42

 

9,064

 

9,132

 

 

 

 

 

41

 

8,261

 

8,302

 

Consumer finance

 

4,242

 

518

 

182

 

4,942

 

312,202

 

317,144

 

 

5,064

 

694

 

138

 

5,896

 

326,977

 

332,873

 

Total

$

5,520

$

1,031

$

473

$

7,024

$

5,878

$

1,372,134

$

1,385,036

$

145

$

5,672

$

1,073

$

283

$

7,028

$

5,370

$

1,374,846

$

1,387,244

$

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

The table above includes nonaccrual loans that are current of $2.83$2.77 million 30-59 days past due of $5,000 and 90+ days past due of $328,000.$283,000.

1617

Table of Contents

The past due status of loans as of December 31, 2020 was as follows:

  

  

  

  

  

  

  

90+ Days

 

30 - 59 Days

60 - 89 Days

90+ Days

Total

Past Due and

 

(Dollars in thousands)

Past Due

Past Due

Past Due

Past Due

PCI

Current1

Total Loans

Accruing

 

Real estate – residential mortgage

$

1,100

$

154

$

176

$

1,430

$

1,473

$

215,395

$

218,298

$

145

Real estate – construction:

Construction lending

 

 

 

 

 

49,659

 

49,659

 

Consumer lot lending

 

 

 

 

 

12,488

 

12,488

 

Commercial, financial and agricultural:

Commercial real estate lending

 

 

 

 

4,758

 

437,145

 

441,903

 

Land acquisition and development lending

 

 

 

 

 

37,724

 

37,724

 

Builder line lending

 

 

 

 

 

18,194

 

18,194

 

Commercial business lending

 

24

 

 

 

24

 

202,370

 

202,394

 

Equity lines

 

52

 

 

 

52

80

 

48,334

 

48,466

 

Consumer

 

2

 

 

 

2

48

 

10,978

 

11,028

 

Consumer finance

 

8,249

 

967

 

402

 

9,618

 

302,634

 

312,252

 

Total

$

9,427

$

1,121

$

578

$

11,126

$

6,359

$

1,334,921

$

1,352,406

$

145

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

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

There was 1were 0 loan modificationmodifications during the three months ended March 31,June 30, 2021 and 2020 that waswere classified as a troubled debt restructuring (TDR). There was 1 loan modification during the six months ended June 30, 2021 that was classified as a TDR.  This TDR was a modification of the payment structure of a residential mortgage loan with a recorded investment of $4,000 at the time of modification and included modifications of the loan’s payment structure.modification.  There was 1 loan modification during the threesix months ended March 31,June 30, 2020 that was classified as a TDR.  This TDR was a modification of the payment structure of an equity line with a recorded investment of $84,000 at the time of its modification and included modifications of the loan’s payment structure.modification.

All TDRs are considered impaired loans and are individually evaluated in the determination of the allowance for loan losses. A TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 days or more past due. The specific reserve associated with a TDR is reevaluated when a TDR payment default occurs. There were 0 TDR payment defaults during the three and six months ended March 31,June 30, 2021 and 2020.

Impaired loans, which included TDRs of $3.00$2.90 million, and the related allowance at March 31,June 30, 2021 were as follows:

    

    

    

    

 

    

    

    

    

 

Recorded

Recorded

 

Recorded

Recorded

 

Investment

Investment

Average

 

Investment

Investment

Average

 

Unpaid

in Loans

in Loans

Balance-

Interest

Unpaid

in Loans

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

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

$

1,753

$

446

$

1,194

$

69

$

1,758

$

17

$

1,651

$

558

$

982

$

62

$

1,661

$

35

Commercial, financial and agricultural:

Commercial real estate lending

 

1,395

 

 

1,395

 

95

 

1,396

 

18

 

1,393

 

 

1,395

 

92

 

1,395

 

35

Commercial business lending

 

2,430

 

 

2,408

 

625

 

2,410

 

 

2,402

 

 

2,349

 

572

 

2,375

 

Equity lines

 

120

 

110

 

 

 

117

 

 

119

 

109

 

 

 

116

 

1

Consumer

 

286

 

 

105

 

102

 

106

 

 

119

 

 

102

 

101

 

104

 

Total

$

5,984

$

556

$

5,102

$

891

$

5,787

$

35

$

5,684

$

667

$

4,828

$

827

$

5,651

$

71

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Table of Contents

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

    

    

    

    

 

Recorded

Recorded

 

Investment

Investment

Average

 

Unpaid

in Loans

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

(Dollars in thousands)

Balance

Specific Reserve

Specific Reserve

Allowance

Loans

Recognized

 

Real estate – residential mortgage

$

2,326

$

931

$

1,279

$

77

$

2,353

$

105

Commercial, financial and agricultural:

Commercial real estate lending

 

1,397

 

 

1,397

 

89

 

1,404

 

73

Commercial business lending

 

2,430

 

 

2,428

 

585

 

2,573

 

Equity lines

 

120

 

111

 

 

 

119

 

2

Consumer

 

147

 

 

132

 

128

 

154

 

3

Total

$

6,420

$

1,042

$

5,236

$

879

$

6,603

$

183

NOTE 5: Allowance for Loan Losses

The following table presents the changes in the allowance for loan losses by major classification during the threesix months ended March 31,June 30, 2021:

  

Real Estate

  

  

Commercial,

  

  

  

  

 

  

Real Estate

  

  

Commercial,

  

  

  

  

 

Residential

Real Estate

Financial &

Equity

Consumer

 

Residential

Real Estate

Financial &

Equity

Consumer

 

(Dollars in thousands)

Mortgage

Construction

Agricultural

  Lines  

Consumer

   Finance   

   Total   

 

Mortgage

Construction

Agricultural

  Lines  

Consumer

   Finance   

   Total   

 

Allowance for loan losses:

Balance at December 31, 2020

$

2,914

$

975

$

10,696

$

687

$

371

$

23,513

$

39,156

$

2,914

$

975

$

10,696

$

687

$

371

$

23,513

$

39,156

Provision charged (credited) to operations

(28)

(153)

311

(16)

(84)

250

280

Provision (credited) charged to operations

(113)

(182)

331

(88)

(88)

(180)

(320)

Loans charged off

(45)

(1,651)

(1,696)

(81)

(2,442)

(2,523)

Recoveries of loans previously charged off

7

35

1,251

1,293

13

1

1

65

2,558

2,638

Balance at March 31, 2021

$

2,893

$

822

$

11,007

$

671

$

277

$

23,363

$

39,033

Balance at June 30, 2021

$

2,814

$

793

$

11,028

$

600

$

267

$

23,449

$

38,951

The following table presents the changes in the allowance for loan losses by major classification during the threesix months ended March 31,June 30, 2020:

  

Real Estate

  

  

Commercial,

  

  

  

  

 

  

Real Estate

  

  

Commercial,

  

  

  

  

 

Residential

Real Estate

Financial &

Equity

Consumer

 

Residential

Real Estate

Financial &

Equity

Consumer

 

(Dollars in thousands)

Mortgage

Construction

Agricultural

  Lines  

Consumer

   Finance   

   Total   

 

Mortgage

Construction

Agricultural

  Lines  

Consumer

   Finance   

   Total   

 

Allowance 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 charged (credited) to operations

60

90

831

37

(18)

1,650

2,650

Provision charged to operations

285

302

1,724

56

33

3,850

6,250

Loans charged off

(4)

(18)

(93)

(3,426)

(3,541)

(4)

(18)

(133)

(5,422)

(5,577)

Recoveries of loans previously charged off

4

1

62

1,249

1,316

64

2

105

2,377

2,548

Balance at March 31, 2020

$

2,140

$

771

$

7,935

$

770

$

416

$

21,266

$

33,298

Balance at June 30, 2020

$

2,425

$

983

$

8,829

$

789

$

470

$

22,598

$

36,094

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The following table presents, as of March 31,June 30, 2021, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology.

  

Real Estate

  

  

Commercial,

  

  

  

  

 

  

Real Estate

  

  

Commercial,

  

  

  

  

 

Residential

Real Estate

Financial &

Equity

Consumer

 

Residential

Real Estate

Financial &

Equity

Consumer

 

(Dollars in thousands)

Mortgage

Construction

Agricultural

Lines

Consumer

Finance

Total

 

Mortgage

Construction

Agricultural

Lines

Consumer

Finance

Total

 

Allowance balance attributable to loans:

Individually evaluated for impairment

$

69

$

$

720

$

$

102

$

$

891

$

62

$

$

664

$

$

101

$

$

827

Collectively evaluated for impairment

2,824

822

10,287

671

175

23,363

38,142

2,752

793

10,364

600

166

23,449

38,124

Acquired loans - PCI

Total allowance

$

2,893

$

822

$

11,007

$

671

$

277

$

23,363

$

39,033

$

2,814

$

793

$

11,028

$

600

$

267

$

23,449

$

38,951

Loans:

Individually evaluated for impairment

$

1,640

$

$

3,803

$

110

$

105

$

$

5,658

$

1,540

$

$

3,744

$

109

$

102

$

$

5,495

Collectively evaluated for impairment

214,366

52,884

733,305

46,816

8,985

317,144

1,373,500

215,845

53,921

721,943

43,638

8,159

332,873

1,376,379

Acquired loans - PCI

914

4,872

50

42

5,878

804

4,490

35

41

5,370

Total loans

$

216,920

$

52,884

$

741,980

$

46,976

$

9,132

$

317,144

$

1,385,036

$

218,189

$

53,921

$

730,177

$

43,782

$

8,302

$

332,873

$

1,387,244

The following table presents, as of December 31, 2020, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology.

  

Real Estate

  

  

Commercial,

  

  

  

  

 

Residential

Real Estate

Financial &

Equity

Consumer

 

(Dollars in thousands)

Mortgage

Construction

Agricultural

Lines

Consumer

Finance

Total

 

Allowance balance attributable to loans:

Individually evaluated for impairment

$

77

$

$

674

$

$

128

$

$

879

Collectively evaluated for impairment

2,837

975

10,022

687

243

23,513

38,277

Acquired loans - PCI

Total allowance

$

2,914

$

975

$

10,696

$

687

$

371

$

23,513

$

39,156

Loans:

Individually evaluated for impairment

$

2,210

$

$

3,825

$

111

$

132

$

$

6,278

Collectively evaluated for impairment

214,615

62,147

691,632

48,275

10,848

312,252

1,339,769

Acquired loans - PCI

1,473

4,758

80

48

6,359

Total loans

$

218,298

$

62,147

$

700,215

$

48,466

$

11,028

$

312,252

$

1,352,406

Loans by credit quality indicators as of March 31,June 30, 2021 were as follows:

 

   

Special

   

   

Substandard

   

 

 

   

Special

   

   

Substandard

   

 

(Dollars in thousands)

Pass

 Mention 

Substandard

Nonaccrual

Total1

 

Pass

 Mention 

Substandard

Nonaccrual

Total1

 

Real estate – residential mortgage

$

215,312

$

699

$

631

$

278

$

216,920

$

216,599

$

864

$

455

$

271

$

218,189

Real estate – construction:

Construction lending

 

39,525

 

 

 

 

39,525

 

38,729

 

 

 

 

38,729

Consumer lot lending

 

13,359

 

 

 

 

13,359

 

15,192

 

 

 

 

15,192

Commercial, financial and agricultural:

Commercial real estate lending

 

430,671

 

15,507

 

8,124

 

 

454,302

 

459,231

 

15,487

 

7,496

 

 

482,214

Land acquisition and development lending

 

33,615

 

 

 

 

33,615

 

31,671

 

 

 

 

31,671

Builder line lending

 

22,388

 

 

 

 

22,388

 

28,233

 

 

 

 

28,233

Commercial business lending

 

226,063

 

3,104

 

99

 

2,409

 

231,675

 

184,404

 

1,306

 

 

2,349

 

188,059

Equity lines

 

46,658

 

126

 

3

 

189

 

46,976

 

43,418

 

176

 

1

 

187

 

43,782

Consumer

 

8,964

 

42

 

16

 

110

 

9,132

 

8,155

 

41

 

 

106

 

8,302

$

1,036,555

$

19,478

$

8,873

$

2,986

$

1,067,892

$

1,025,632

$

17,874

$

7,952

$

2,913

$

1,054,371

1At March 31,June 30, 2021, 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

$

316,962

$

182

$

317,144

$

332,735

$

138

$

332,873

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

  

   

Special

   

   

Substandard

   

 

(Dollars in thousands)

Pass

 Mention 

Substandard

Nonaccrual

Total1

 

Real estate – residential mortgage

$

215,712

$

1,715

$

595

$

276

$

218,298

Real estate – construction:

Construction lending

 

49,659

 

 

 

 

49,659

Consumer lot lending

 

12,488

 

 

 

 

12,488

Commercial, financial and agricultural:

Commercial real estate lending

 

415,506

 

15,507

 

10,890

 

 

441,903

Land acquisition and development lending

 

37,724

 

 

 

 

37,724

Builder line lending

 

18,194

 

 

 

 

18,194

Commercial business lending

 

196,743

 

3,124

 

99

 

2,428

 

202,394

Equity lines

 

48,140

 

132

 

3

 

191

 

48,466

Consumer

 

10,832

 

48

 

41

 

107

 

11,028

$

1,004,998

$

20,526

$

11,628

$

3,002

$

1,040,154

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

Non-

(Dollars in thousands)

   

Performing

   

Performing

   

Total

 

Consumer finance

$

311,850

$

402

$

312,252

NOTE 6: Goodwill and Other Intangible Assets

The carrying amount of goodwill was $25.19 million at both March 31,June 30, 2021 and December 31, 2020. The following table presents the changes in goodwill during the threesix months ended March 31,June 30, 2020.  There were 0 changes in the recorded balance of goodwill during the three and six months ended March 31,June 30, 2021.

Community

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

10,766

10,766

10,766

10,766

Balance at March 31, 2020

$

14,468

$

10,723

$

25,191

Balance at June 30, 2020

$

14,468

$

10,723

$

25,191

The Corporation had $2.21$2.13 million and $2.29 million of other intangible assets as of March 31,June 30, 2021 and December 31, 2020, respectively.  Other intangible assets were recognized in connection with the core deposits acquired from Peoples in 2020 and customer relationships acquired by C&F Wealth Management in 2016. The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets:

March 31, 

December 31, 

June 30, 

December 31, 

2021

2020

2021

2020

Gross

Gross

Gross

Gross

Carrying

Accumulated

Carrying

Accumulated

Carrying

Accumulated

Carrying

Accumulated

(Dollars in thousands)

Amount

Amortization

Amount

Amortization

Amount

Amortization

Amount

Amortization

Amortizable intangible assets:

Core deposit intangibles

$

1,711

$

(209)

$

1,711

$

(171)

$

1,711

$

(248)

$

1,711

$

(171)

Other amortizable intangibles

 

1,405

(694)

1,405

(654)

 

1,405

(734)

1,405

(654)

Total

$

3,116

$

(903)

$

3,116

$

(825)

$

3,116

$

(982)

$

3,116

$

(825)

Amortization expense was $78,000$79,000 and $83,000 for the three months ended March 31,June 30, 2021 and 2020, respectively and $157,000 and $166,000 for the six months ended June 30, 2021 and 2020, respectively.

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

Equity and Noncontrolling Interest

The Corporation’s Board of Directors authorized a program, effective November 17, 2020 to repurchase up to 365,000 shares of the Corporation’s common stock through November 30, 2021 (the Repurchase Program). As of March 31,June 30, 2021, the Corporation has made aggregate common stock repurchases of 7,45997,714 shares for an aggregate cost of $275,000$4.74 million under the Repurchase Program. There were 0 share repurchases90,255 shares repurchased under the Repurchase Program during the three and six months ended March 31, 2021.June 30, 2021 for an aggregate cost of $4.46 million.

The Corporation’s previous share repurchase program, which was authorized by the Board of Directors in May 2019, expired on May 31, 2020. During the threesix months ended March 31,June 30, 2020, the Corporation repurchased 8,963 shares of its common stock for an aggregate cost of $355,000, under its previous share repurchase program. The Corporation did 0t repurchase any of its common stock during the three months ended June 30, 2020.

Additionally during the threesix months ended March 31,June 30, 2021 and 2020, the Corporation withheld 5,6337,311 shares and 5,069 shares of its common stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock.

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

Accumulated Other Comprehensive Loss, Net

The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of deferred taxes of $997,000$842,000 and $630,000 as of March 31,June 30, 2021 and December 31, 2020, respectively.

March 31, 

December 31, 

June 30, 

December 31, 

(Dollars in thousands)

    

2021

    

2020

    

2021

    

2020

Net unrealized gains on securities

$

2,024

$

4,397

$

2,801

$

4,397

Net unrecognized losses on cash flow hedges

 

(633)

 

(1,367)

 

(809)

 

(1,367)

Net unrecognized losses on defined benefit plan

 

(4,951)

 

(4,985)

 

(4,916)

 

(4,985)

Total accumulated other comprehensive loss, net

$

(3,560)

$

(1,955)

$

(2,924)

$

(1,955)

Earnings Per Share (EPS)

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

Three Months Ended March 31, 

 

Three Months Ended June 30, 

 

(Dollars in thousands)

    

2021

    

2020

 

    

2021

    

2020

 

Net income attributable to C&F Financial Corporation

$

7,061

$

3,578

$

8,008

$

3,746

Weighted average shares outstandingbasic and diluted

 

3,676,067

 

3,644,614

 

3,653,568

 

3,647,707

Six Months Ended June 30, 

 

(Dollars in thousands)

  

2021

    

2020

 

Net income attributable to C&F Financial Corporation

$

15,069

$

7,324

Weighted average shares outstandingbasic and diluted

 

3,664,752

 

3,646,161

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 June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

    

2021

    

2020

    

2021

    

2020

    

Components of net periodic benefit cost:

Service cost, included in salaries and employee benefits

$

487

$

386

$

498

$

415

$

985

$

801

Other components of net periodic benefit cost:

Interest cost

 

116

 

135

 

113

 

140

 

229

 

275

Expected return on plan assets

 

(440)

 

(374)

 

(427)

 

(371)

 

(867)

 

(745)

Amortization of prior service credit

 

(17)

 

(17)

 

(17)

 

(17)

 

(34)

 

(34)

Amortization of net obligation at transition

 

 

 

 

 

 

Recognized net actuarial losses

 

60

 

42

 

61

 

57

 

121

 

99

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

(281)

(214)

(270)

(191)

(551)

(405)

Net periodic benefit cost

$

206

$

172

$

228

$

224

$

434

$

396

NOTE 9: Fair Value of Assets and Liabilities

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

 

Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt securities traded in an active exchange market, as well as U.S. Treasury securities.

 

Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3—Valuation is determined using model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Corporation’s estimates of assumptions that market participants would use in pricing the respective asset or liability. Valuation techniques may include the use of pricing models, discounted cash flow models and similar techniques.

 

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.  The Corporation has elected to use fair value accounting for its entire portfolio of loans held for sale (LHFS).

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

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Table of Contents

Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At

22

Table of Contents

March 31, June 30, 2021 and December 31, 2020, the Corporation’s entire investment securities portfolio was comprised of securities available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security valuation are ICE Data Services (ICE) and Thomson Reuters Pricing Service (TRPS).  Each source provides opinions, known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are partially based on available market data, including prices for similar instruments in active markets and prices for identical assets in markets that are not active. ICE provides evaluated prices for the Corporation’s obligations of states and political subdivisions category of securities.  ICE uses proprietary pricing models and pricing systems, mathematical tools and judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that security or securities with similar characteristics.  TRPS provides evaluated prices for the Corporation’s U.S. government agencies and corporations, mortgage-backed, and corporate categories of securities.  Fixed-rate callable securities of the U.S. government agencies and corporations category are individually evaluated on an option adjusted spread basis for callable issues or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark curve for non-callable issues.  Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity.  Each aggregate is benchmarked to relative to-be-announced mortgage-backed securities (TBA securities) or other benchmark prices. TBA securities prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.  Each evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables. Fixed-rate securities issued by the Small Business Association in the mortgage backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.

Investments in small business investment company funds. The Corporation holds an investment in a small business investment company fund, which is recorded at fair value and included in other assets in the Consolidated Balance Sheets.  Changes in fair value are recognized in net income.  At March 31,June 30, 2021 and December 31, 2020, the fair value of the Corporation’s investment in small business investment companies, based on net asset value, was $1.44$1.37 million and $1.48 million, respectively.  Investments in small business investment company funds measured at net asset value are not presented in the tables below related to fair value measurements. Changes in fair value of small business investment company funds resulted in the recognition of unrealized gains of $45,000$2,000 and $47,000 for the three and six months ended March 31, 2021.  There were 0June 30, 2021, respectively, and unrealized gains or losses on investments in small business investment company funds recorded duringof $124,000 for the three and six months ended March 31,June 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 observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Corporation’s IRLCs are classified as Level 2.

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

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

Derivative asset/liability – forward sales of TBA securities. The Corporation recognizes forward sales of TBA securities at fair value. The fair value of forward sales of TBA securities is based on prices obtained from market makers and live

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trading systems for TBA securities of similar issuer programs, coupons and maturities. All of the Corporation’s forward sales of TBA securities are classified as Level 2.

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

March 31, 2021

 

June 30, 2021

 

Fair Value Measurements Classified as

Assets/Liabilities at

 

Fair Value Measurements Classified as

Assets/Liabilities at

 

(Dollars in thousands)

  

Level 1

    

Level 2

    

Level 3

    

 Fair Value 

 

  

Level 1

    

Level 2

    

Level 3

    

 Fair Value 

 

Assets:

Securities available for sale

U.S. government agencies and corporations

$

$

53,681

$

$

53,681

$

$

60,898

$

$

60,898

Mortgage-backed securities

 

 

150,518

 

 

150,518

 

 

180,222

 

 

180,222

Obligations of states and political subdivisions

 

 

103,154

 

 

103,154

 

 

100,284

 

 

100,284

Corporate and other debt securities

13,932

13,932

15,482

15,482

Total securities available for sale

 

 

321,285

 

 

321,285

 

 

356,886

 

 

356,886

Loans held for sale

 

 

177,350

 

 

177,350

 

 

119,038

 

 

119,038

Derivatives

IRLC

 

 

4,026

 

 

4,026

 

 

3,382

 

 

3,382

Interest rate swaps on loans

4,841

4,841

5,547

5,547

Forward sales of TBA securities

 

 

75

 

 

75

Total assets

$

$

507,577

$

$

507,577

$

$

484,853

$

$

484,853

Liabilities:

Derivatives

Interest rate swaps on loans

$

$

4,841

$

$

4,841

$

$

5,547

$

$

5,547

Cash flow hedges

891

891

1,127

1,127

Forward sales of TBA securities

43

43

Total liabilities

$

$

5,732

$

$

5,732

$

$

6,717

$

$

6,717

December 31, 2020

 

Fair Value Measurements Classified as

Assets/Liabilities at

 

(Dollars in thousands)

  

Level 1

    

Level 2

    

Level 3

    

 Fair Value 

 

Assets:

Securities available for sale

U.S. government agencies and corporations

$

$

48,282

$

$

48,282

Mortgage-backed securities

 

 

123,714

 

 

123,714

Obligations of states and political subdivisions

 

 

102,805

 

 

102,805

Corporate and other debt securities

 

 

11,588

 

 

11,588

Total securities available for sale

 

 

286,389

 

 

286,389

Loans held for sale

 

 

214,266

 

 

214,266

Derivatives

IRLC

 

 

4,582

 

 

4,582

Interest rate swaps on loans

 

 

8,185

 

 

8,185

Total assets

$

$

513,422

$

$

513,422

Liabilities:

Derivatives

Interest rate swaps on loans

$

$

8,185

$

$

8,185

Cash flow hedges

1,882

1,882

Forward sales of TBA securities

47

47

Total liabilities

$

$

10,114

$

$

10,114

2425

Table of Contents

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

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

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

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

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

March 31, 2021

 

June 30, 2021

 

Fair Value Measurements Classified as

Assets at Fair

 

Fair Value Measurements Classified as

Assets at Fair

 

(Dollars in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Value

 

    

Level 1

    

Level 2

    

Level 3

    

Value

 

Other real estate owned, net

$

$

$

72

$

72

$

$

$

22

$

22

Total

$

$

$

72

$

72

$

$

$

22

$

22

    

December 31, 2020

 

Fair Value Measurements Classified as

Assets at Fair

 

(Dollars in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Value

 

Other real estate owned, net

$

$

$

72

$

72

Total

$

$

$

72

$

72

2526

Table of Contents

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

Fair Value Measurements

 

Fair Value Measurements

 

(Dollars in thousands)

    

Fair Value

    

Valuation Technique(s)

    

Unobservable Inputs

    

Range (Weighted Average)1

 

    

Fair Value

    

Valuation Technique(s)

    

Unobservable Inputs

    

Range (Weighted Average)1

 

At March 31, 2021:

At June 30, 2021:

Other real estate owned, net

$

72

 

Appraisals

 

Discount to reflect current market conditions and estimated selling costs

 

75%-80% (79%)

$

22

 

Appraisals

 

Discount to reflect current market conditions and estimated selling costs

 

75% (75%)

Total

$

72

$

22

At December 31, 2020:

Other real estate owned, net

$

72

 

Appraisals

 

Discount to reflect current market conditions and estimated selling costs

 

75% - 80% (79%)

$

72

 

Appraisals

 

Discount to reflect current market conditions and estimated selling costs

 

75% - 80% (79%)

Total

$

72

$

72

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

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation. The Corporation uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

2627

Table of Contents

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

  

Carrying

  

   Fair Value Measurements at March 31, 2021 Classifed as   

  

 Total Fair 

 

  

Carrying

  

   Fair Value Measurements at June 30, 2021 Classified as   

  

 Total Fair 

 

(Dollars in thousands)

      Value      

Level 1

Level 2

Level 3

      Value      

 

      Value      

Level 1

Level 2

Level 3

      Value      

 

Financial assets:

Cash and short-term investments

$

147,438

$

147,438

$

$

$

147,438

$

172,445

$

169,465

$

2,993

$

$

172,458

Securities available for sale

 

321,285

 

321,285

 

321,285

 

356,886

 

356,886

 

356,886

Loans, net

 

1,346,003

 

 

 

1,331,249

 

1,331,249

 

1,348,293

 

 

 

1,334,567

 

1,334,567

Loans held for sale

 

177,350

 

 

177,350

 

 

177,350

 

119,038

 

 

119,038

 

 

119,038

Derivatives

IRLC

4,026

4,026

4,026

3,382

3,382

3,382

Interest rate swaps on loans

4,841

4,841

4,841

5,547

5,547

5,547

Forward sales of TBA securities

75

75

75

Bank-owned life insurance

20,332

20,332

20,332

20,440

20,440

20,440

Accrued interest receivable

 

7,723

 

7,723

 

 

 

7,723

 

7,382

 

7,382

 

 

 

7,382

Financial liabilities:

Demand and savings deposits

1,373,882

1,373,882

1,373,882

1,381,577

1,381,577

1,381,577

Time deposits

 

458,100

 

 

461,981

 

 

461,981

 

449,985

 

 

453,308

 

 

453,308

Borrowings

 

73,328

 

 

72,267

 

 

72,267

 

72,965

 

 

76,937

 

 

76,937

Derivatives

Cash flow hedges

 

891

 

891

 

891

 

1,127

 

1,127

 

1,127

Interest rate swaps on loans

4,841

4,841

4,841

5,547

5,547

5,547

Forward sales of TBA securities

43

43

43

Accrued interest payable

 

734

 

734

 

 

 

734

 

851

 

851

 

 

 

851

  

 Carrying 

  

Fair Value Measurements at December 31, 2020 Classifed as

  

 Total Fair 

 

  

 Carrying 

  

Fair Value Measurements at December 31, 2020 Classified as

  

 Total Fair 

 

(Dollars in thousands)

      Value      

Level 1

Level 2

Level 3

      Value      

 

      Value      

Level 1

Level 2

Level 3

      Value      

 

Financial assets:

Cash and short-term investments

$

86,669

$

86,669

$

$

$

86,669

$

94,342

$

86,669

$

7,710

$

$

94,379

Securities available for sale

 

286,389

 

286,389

 

286,389

 

286,389

 

286,389

 

286,389

Loans, net

 

1,313,250

 

 

 

1,308,569

 

1,308,569

 

1,313,250

 

 

 

1,308,569

 

1,308,569

Loans held for sale

 

214,266

 

 

214,266

 

 

214,266

 

214,266

 

 

214,266

 

 

214,266

Derivatives

IRLC

4,582

4,582

4,582

4,582

4,582

4,582

Interest rate swaps on loans

8,185

8,185

8,185

8,185

8,185

8,185

Bank-owned life insurance

20,205

20,205

20,205

20,205

20,205

20,205

Accrued interest receivable

 

8,103

 

8,103

 

 

 

8,103

 

8,103

 

8,103

 

 

 

8,103

Financial liabilities:

Demand and savings deposits

1,282,590

1,282,590

1,282,590

1,282,590

1,282,590

1,282,590

Time deposits

 

469,583

 

 

474,154

 

 

474,154

 

469,583

 

 

474,154

 

 

474,154

Borrowings

 

69,864

 

 

71,119

 

 

71,119

 

69,864

 

 

71,119

 

 

71,119

Derivatives

Cash flow hedges

 

1,882

 

1,882

 

1,882

 

1,882

 

1,882

 

1,882

Interest rate swaps on loans

8,185

8,185

8,185

8,185

8,185

8,185

Forward sales of TBA securities

47

47

47

47

47

47

Accrued interest payable

 

1,109

 

1,109

 

 

 

1,109

 

1,109

 

1,109

 

 

 

1,109

 

NOTE 10: Business Segments

The Corporation operates in a decentralized fashion in 3 business segments: community banking, mortgage banking and consumer finance. Beginning with the first quarter of 2021, the community banking segment comprises C&F Bank and C&F Wealth Management. Prior to 2021, the segment comprised only C&F Bank, and prior periods have been restated

2728

Table of Contents

to conform to the current period presentation.  Revenues from community banking operations consist primarily of net interest income related to investments in loans and securities and outstanding deposits and borrowings, fees earned on deposit accounts and debit card interchange activity, and net revenues from offering wealth management services and insurance products through third-party service providers.  Mortgage banking revenues consist primarily of gains on sales of loans in the secondary market, mortgage banking fee income related to loan originations, fees earned by providing mortgage loan origination functions to third-party lenders, and net interest income earned on mortgage loans held for sale. Revenues from consumer finance consist primarily of net interest income earned on purchased retail installment sales contracts.

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

Three Months Ended June 30, 2021

 

    

Community

    

Mortgage

    

Consumer

    

    

    

 

(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

 

Interest income

$

15,935

$

1,021

$

9,421

$

$

(2,511)

$

23,866

Interest expense

 

1,456

312

 

2,302

 

588

 

(2,520)

 

2,138

Net interest income

 

14,479

 

709

 

7,119

 

(588)

 

9

 

21,728

Gain on sales of loans

5,957

(10)

5,947

Other noninterest income

3,852

2,308

74

945

(26)

7,153

Net revenue

 

18,331

 

8,974

 

7,193

 

357

 

(27)

 

34,828

Provision for loan losses

 

(200)

 

30

(430)

 

(600)

Noninterest expense

 

13,752

 

6,208

3,683

1,259

 

24,902

Income (loss) before taxes

 

4,779

 

2,736

 

3,940

 

(902)

 

(27)

 

10,526

Income tax expense (benefit)

 

854

 

768

1,065

(245)

 

(6)

 

2,436

Net income (loss)

$

3,925

$

1,968

$

2,875

$

(657)

$

(21)

$

8,090

Other data:

Capital expenditures

$

211

$

3

$

1,107

$

$

$

1,321

Depreciation and amortization

$

1,034

$

64

$

103

$

$

$

1,201

Three Months Ended June 30, 2020

 

    

Community

    

Mortgage

    

Consumer

    

    

    

 

(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

 

Interest income

$

14,894

$

1,097

$

9,689

$

$

(2,096)

$

23,584

Interest expense

 

2,718

280

 

2,090

 

338

 

(2,096)

 

3,330

Net interest income

 

12,176

 

817

 

7,599

 

(338)

 

 

20,254

Gain on sales of loans

4,605

4,605

Other noninterest income

3,018

2,387

80

1,738

7,223

Net revenue

 

15,194

 

7,809

 

7,679

 

1,400

 

 

32,082

Provision for loan losses

 

1,400

 

2,200

 

3,600

Noninterest expense

 

13,982

 

4,511

3,236

2,063

 

23,792

Income (loss) before taxes

 

(188)

 

3,298

 

2,243

 

(663)

 

 

4,690

Income tax expense (benefit)

 

(482)

 

977

605

(153)

 

 

947

Net income (loss)

$

294

$

2,321

$

1,638

$

(510)

$

$

3,743

Other data:

Capital expenditures

$

1,568

$

32

$

305

$

$

$

1,905

Depreciation and amortization

$

871

$

73

$

45

$

$

$

989

29

Table of Contents

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

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

Three Months Ended March 31, 2021

 

    

Community

    

Mortgage

    

Consumer

    

    

    

 

(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

 

Interest income

$

15,176

$

1,127

$

9,249

$

$

(2,476)

$

23,076

Interest expense

 

1,724

373

 

2,200

 

582

 

(2,479)

 

2,400

Net interest income

 

13,452

 

754

 

7,049

 

(582)

 

3

 

20,676

Gain on sales of loans

7,105

(47)

7,058

Other noninterest income

3,968

2,724

112

511

(17)

7,298

Net revenue

 

17,420

 

10,583

 

7,161

 

(71)

 

(61)

 

35,032

Provision for loan losses

 

 

30

250

 

280

Noninterest expense

 

14,052

 

6,987

3,448

813

 

25,300

Income (loss) before taxes

 

3,368

 

3,566

 

3,463

 

(884)

 

(61)

 

9,452

Income tax expense (benefit)

 

575

 

1,021

936

(232)

 

(13)

 

2,287

Net income (loss)

$

2,793

$

2,545

$

2,527

$

(652)

$

(48)

$

7,165

Other data:

Capital expenditures

$

139

$

60

$

1,924

$

$

$

2,123

Depreciation and amortization

$

1,066

$

68

$

55

$

$

$

1,189

Three Months Ended March 31, 2020

 

    

Community

    

Mortgage

    

Consumer

    

    

    

 

(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

 

Interest income

$

15,915

$

661

$

10,101

$

$

(1,899)

$

24,778

Interest expense

 

3,144

305

 

2,286

 

339

 

(1,899)

 

4,175

Net interest income

 

12,771

 

356

 

7,815

 

(339)

 

 

20,603

Gain on sales of loans

3,676

3,676

Other noninterest income

3,285

1,611

117

(1,941)

3,072

Net revenue

 

16,056

 

5,643

 

7,932

 

(2,280)

 

 

27,351

Provision for loan losses

 

1,000

 

1,650

 

2,650

Noninterest expense

 

14,402

 

3,568

3,630

(1,515)

 

20,085

Income (loss) before taxes

 

654

 

2,075

 

2,652

 

(765)

 

 

4,616

Income tax expense (benefit)

 

(3)

 

532

722

(274)

 

 

977

Net income (loss)

$

657

$

1,543

$

1,930

$

(491)

$

$

3,639

Other data:

Capital expenditures

$

752

$

294

$

502

$

$

$

1,548

Depreciation and amortization

$

850

$

72

$

46

$

$

$

968

28

Table of Contents

Six Months Ended June 30, 2021

 

    

Community

    

Mortgage

    

Consumer

    

    

    

 

(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

 

Interest income

$

31,111

$

2,148

$

18,670

$

$

(4,987)

$

46,942

Interest expense

 

3,180

685

 

4,502

 

1,170

 

(4,999)

 

4,538

Net interest income

 

27,931

 

1,463

 

14,168

 

(1,170)

 

12

 

42,404

Gain on sales of loans

13,062

(57)

13,005

Other noninterest income

7,820

5,032

186

1,456

(43)

14,451

Net revenue

 

35,751

 

19,557

 

14,354

 

286

 

(88)

 

69,860

Provision for loan losses

 

(200)

 

60

(180)

 

(320)

Noninterest expense

 

27,804

 

13,195

7,131

2,072

 

50,202

Income (loss) before taxes

 

8,147

 

6,302

 

7,403

 

(1,786)

 

(88)

 

19,978

Income tax expense (benefit)

 

1,429

 

1,789

2,001

(477)

 

(19)

 

4,723

Net income (loss)

$

6,718

$

4,513

$

5,402

$

(1,309)

$

(69)

$

15,255

Other data:

Capital expenditures

$

350

$

63

$

3,031

$

$

$

3,444

Depreciation and amortization

$

2,100

$

132

$

158

$

$

$

2,390

Six Months Ended June 30, 2020

 

Community

    

Mortgage

    

Consumer

    

    

    

    

Community

    

Mortgage

    

Consumer

    

    

    

 

(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

Banking

Banking

Finance

Other

Eliminations

Consolidated

 

Total assets at March 31, 2021

$

2,023,480

$

205,074

$

320,891

$

44,924

$

(425,731)

$

2,168,638

Total assets at December 31, 2020

$

1,951,622

$

239,417

$

314,746

$

43,826

$

(463,301)

$

2,086,310

Interest income

$

30,809

$

1,758

$

19,790

$

$

(3,995)

$

48,362

Interest expense

 

5,862

585

 

4,376

 

677

 

(3,995)

 

7,505

Net interest income

 

24,947

 

1,173

 

15,414

 

(677)

 

 

40,857

Gain on sales of loans

8,281

8,281

Other noninterest income

6,303

3,998

197

(203)

10,295

Net revenue

 

31,250

 

13,452

 

15,611

 

(880)

 

 

59,433

Provision for loan losses

 

2,400

 

3,850

 

6,250

Noninterest expense

 

28,384

 

8,079

6,866

548

 

43,877

Income (loss) before taxes

 

466

 

5,373

 

4,895

 

(1,428)

 

 

9,306

Income tax expense (benefit)

 

(485)

 

1,509

1,327

(427)

 

 

1,924

Net income (loss)

$

951

$

3,864

$

3,568

$

(1,001)

$

$

7,382

Other data:

Capital expenditures

$

2,320

$

326

$

807

$

$

$

3,453

Depreciation and amortization

$

1,721

$

145

$

91

$

$

$

1,957

Community

    

Mortgage

    

Consumer

    

    

    

(Dollars in thousands)

Banking

Banking

Finance

Other

Eliminations

Consolidated

Total assets at June 30, 2021

$

2,023,814

$

143,854

$

337,774

$

41,991

$

(378,789)

$

2,168,644

Total assets at December 31, 2020

$

1,951,622

$

239,417

$

314,746

$

43,826

$

(463,301)

$

2,086,310

During the three months ended March 31,June 30, 2020, the Corporation recorded merger related expenses of $957,000$439,000 ($785,000347,000 after income taxes), in connection with its acquisition of Peoples, all of which was recorded as noninterest expense at the community banking segment.  During the six months ended June 30, 2020, the Corporation recorded merger related expenses of $1.40 million ($1.13 million after income taxes), in connection with its acquisition of Peoples, of which $857,000$1.30 million ($685,0001.03 million after income taxes) was allocated to the community banking segment and recorded as $559,000$998,000 of noninterest expense and $298,000 of a loss on disposal of assets withinequipment of $298,000 included in other noninterest income.  The remainder was recorded as other noninterest expense at the holding company.  company and included in the “Other” column above.

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The community banking segment extends 2 warehouse lines of credit to the mortgage banking segment, providing a portion of the funds needed to originate mortgage loans. The community banking segment charges the mortgage banking segment interest at the daily FHLB advance rate plus a spread ranging from 50 basis points to 175 basis points. The community banking segment also provides the consumer finance segment with a portion of the funds needed to purchase loan contracts by means of variable rate notes that carry interest at one-month LIBOR plus 200 basis points, with a floor of 3.5 percent, and fixed rate notes that carry interest at rates ranging from 2.22.3 percent to 8.0 percent. The community banking segment acquires certain residential real estate loans from the mortgage banking segment at prices similar to those paid by third-party investors. These transactions are eliminated to reach consolidated totals. In addition to unallocated expenses recorded by the holding company, certain overhead costs are incurred by the community banking segment and are not allocated to the mortgage banking and consumer finance segments.

 

NOTE 11: Commitments and Contingent Liabilities

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

Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of loan commitments at the Bank was $318.95$321.72 million at March 31,June 30, 2021 and $326.98 million at December 31, 2020, which does not include IRLCs at the mortgage banking segment, which are discussed in Note 12.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $15.55$17.61 million at March 31,June 30, 2021 and $19.07 million at December 31, 2020.

The mortgage banking segment sells substantially all of the residential mortgage loans it originates to third-party investors. As is customary in the industry, the agreements with these investors require the mortgage banking segment to extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the agreements, the investors are entitled to make loss claims and repurchase requests of the mortgage banking segment for loans that contain covered deficiencies. The mortgage banking segment has obtained early payment default recourse waivers for a significant portion of its business. Recourse periods for early payment default for the

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remaining investors vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. The mortgage banking segment maintains an allowance for indemnifications that represents management’s estimate of losses that are probable of arising under these recourse provisions. As performance data for loans that have been sold is not made available to the mortgage banking segment by the investors, the estimate of potential losses is inherently subjective and is based on historical indemnification payments and management’s assessment of current conditions that may contribute to indemnified losses on mortgage loans that have been sold in the secondary market.  For the three and six months ended March 31,June 30, 2021, and 2020, the Corporation recorded $17,000$15,000 and $7,000$32,000 of provision for indemnifications, respectively, compared to $156,000 and $163,000 provision for

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indemnifications for the three and six months ended June 30, 2020, respectively. The allowance for indemnifications was $3.37$3.39 million at March 31,June 30, 2021 and $3.36 million at December 31, 2020.

 

NOTE 12: Derivative Financial Instruments

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

Cash flow hedges.  The Corporation designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Corporation’s borrowings for fixed-rate interest payments.  Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Corporation assesses the effectiveness of each hedging relationship quarterly. If the Corporation determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of March 31,June 30, 2021, the Corporation has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2024 and June 2029.

 

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

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

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

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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,June 30, 2021, the mortgage banking segment had $181.07$143.92 million of IRLCs and $161.85$104.41 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $342.92$248.33 million in mortgage loans.  Also at March 31,June 30, 2021, the mortgage banking segment had $11.39$10.82 million of IRLCs and $8.97$10.16 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of $11.25$15.25 million of TBA securities and mandatory-delivery forward sales contracts for $7.62$4.64 million in mortgage loans.  

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

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

March 31, 2021

 

June 30, 2021

 

    

Notional

    

    

    

 

    

Notional

    

    

    

 

(Dollars in thousands)

Amount

Assets

Liabilities

 

Amount

Assets

Liabilities

 

Cash flow hedges:

Interest rate swap contracts

$

25,000

$

$

891

$

25,000

$

$

1,127

Not designated as hedges:

 

 

 

 

 

 

Customer-related interest rate swap contracts:

 

 

 

 

 

 

Matched interest rate swaps with borrower

 

84,444

 

4,547

 

294

 

84,134

 

5,423

 

124

Matched interest rate swaps with counterparty

84,444

294

4,547

84,134

124

5,423

Mortgage banking contracts:

IRLCs

192,458

4,026

154,744

3,382

Forward sales of TBA securities

 

11,250

 

75

 

 

15,250

 

 

43

December 31, 2020

    

Notional

    

    

    

(Dollars in thousands)

Amount

Assets

Liabilities

Cash flow hedges:

Interest rate swap contracts

$

25,000

$

$

1,882

Not designated as hedges:

 

 

Customer-related interest rate swap contracts:

 

 

 

Matched interest rate swaps with borrower

 

84,753

 

8,185

 

Matched interest rate swaps with counterparty

84,753

8,185

Mortgage banking contracts:

IRLCs

198,632

4,582

Forward sales of TBA securities

8,000

 

 

47

The Corporation is required to maintain cash collateral with dealer counterparties for interest rate swap relationships in a loss position. At March 31,June 30, 2021 and at December 31, 2020, $5.62$6.44 million and $9.92 million, respectively, of cash collateral was maintained with dealer counterparties and was included in “Other assets” in the Consolidated Balance Sheets.

  

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NOTE 13: Other Noninterest Expenses

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

Three Months Ended March 31, 

 

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

 

    

2021

    

2020

    

2021

    

2020

    

Data processing fees

$

2,903

$

2,674

$

2,825

$

2,861

$

5,728

$

5,535

Mortgage banking loan processing expenses

894

484

867

780

1,761

1,264

Professional fees

747

980

737

738

1,484

1,718

Marketing and advertising expenses

345

490

459

348

804

838

Telecommunication expenses

374

372

387

409

761

781

Travel and educational expenses

 

154

 

444

 

203

 

100

357

544

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

(395)

5

(402)

8

All other noninterest expenses

 

1,910

 

1,777

 

1,915

 

2,043

 

3,832

 

3,817

Total other noninterest expenses

$

7,327

$

7,221

$

6,998

$

7,284

$

14,325

$

14,505

 

The table above includes merger related expenses for the three months ended March 31,June 30, 2020 of $590,000,$308,000, of which $238,000$263,000 was included in data processing fees, $314,000$22,000 was included in professional fees, and $38,000$23,000 was included in all other noninterest expenses and includes merger related expenses for the six months ended June 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 during the three and six months ended March 31,June 30, 2021.

 

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

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

OVERVIEW

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

Financial Performance Highlights

Consolidated net income for the Corporation was $7.2$8.1 million for the firstsecond quarter of 2021, or $1.92$2.19 per share, compared with consolidated net income of $3.6$3.7 million for the second quarter of 2020, or $1.03 per share.  Consolidated net income for the Corporation was $15.3 million for the first quarterhalf of 2021, or $4.11 per share, compared with consolidated net income of $7.4 million for the first half of 2020, or $0.98$2.01 per share. The Corporation’s annualized ROE and ROA were 15.1616.49 percent and 1.361.50 percent, respectively, for the second quarter of 2021, compared to 8.41 percent and 0.77 percent, respectively, for the second quarter of 2020. The Corporation’s annualized ROE and ROA were 15.83 percent and 1.43 percent, respectively, for the first quarterhalf of 2021, compared to 8.278.34 percent and 0.790.78 percent, respectively, for the first quarterhalf of 2020.

The Corporation uses adjusted net income, which is a non-GAAP measure of financial performance, to provide meaningful information about operating performance by excluding the effects of certain items that management does not expect to have an ongoing impact on consolidated net income.  Adjusted net income for the second quarter and first quarterhalf of 2020 excludes the effects of merger related expenses incurred in connection with the acquisition of Peoples.Peoples Bankshares, Incorporated (Peoples), impairment charges related to branch consolidation and a change in income tax law related to the carryback of net operating losses.  Excluding the effects of these items, adjusted net income was $7.2$8.1 million, for the first quarter of 2021, or $1.922.19 per share compared to $4.4and $15.3 million, or $1.204.11 per share for the second quarter and first half of 2021, respectively, compared to $4.0 million, or $1.11 per share and $8.4 million, or $2.30 per share for the second quarter and first half of 2020, respectively.  Adjusted ROE and adjusted ROA, on an annualized basis were 16.49 percent and 1.50 percent, respectively, for the second quarter of 2021, compared to 9.00 percent and 0.82 percent, respectively, for the second quarter of 2020.  Adjusted ROE and adjusted ROA, on an annualized basis were 15.1615.83 percent and 1.361.43 percent, respectively, for the first quarterhalf of 2021, compared to 10.069.53 percent and 0.960.89 percent, respectively, for the first quarterhalf of 2020.2020, respectively. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net income, adjusted earnings per share, adjusted ROE and adjusted ROA, which are non-GAAP financial measures, to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

Consolidated net income and earnings per share increased 97116 percent and 96107 percent respectively, for the second quarter and first half of 2021, respectively, compared to the same periods in 2020. Adjusted net income increased 102 percent and 81 percent for the second quarter and first half of 2021, respectively, compared to the same periods in 2020.  The increases in net income and adjusted net income for the second quarter of 2021 compared to the firstsecond quarter of 2020.  Adjusted2020 were due primarily to higher net income of the community banking segment and consumer finance segment, partially offset by lower net income of the mortgage

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banking segment.  The increases in net income and adjusted earnings per share increased 62 percent and 60 percent, respectively,net income for the first quartersix months of 2021 compared to the first quartersix months of 2020.  These increases2020 were due primarily to lower provision for loan losses, higher net income from mortgage banking activities and higher income from debit card interchange and wealth management services, partially offset by lower overdraft fee income and higher expenses related toat each of the opening of two financial centers in the third quarter of 2020.  Corporation’s business segments.

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

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Key highlights for the three and six months ended March 31,June 30, 2021 are as follows.

ConsolidatedThe Corporation recorded a net reversal of provision for loan losses was $280,000 inof $600,000 on a consolidated basis for the firstsecond quarter of 2021 compared to $2.7 million in the first quarterand a net reversal of 2020, as qualitative adjustments to reserves related to the COVID-19 pandemic increased provision for loan losses of $320,000 for the first six months of 2021 as a result of recoveries exceeding charge-offs at the consumer finance segment and decreases to the allowance for loan losses at the community banking segment and consumer finance segment as a result of strong asset quality, partially offset by loan growth. This represents a decrease in the provision for loan losses of $4.2 million and $6.6 million for the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. During the second quarter of 2021, the consumer finance segment and community banking segment released a portion of the reserves recognized during 2020, and net charge-offs were lower in 2021;as credit deterioration since the onset of the COVID-19 pandemic has so far not been experienced to the extent previously anticipated;
Consolidated annualizedThe community banking segment recognized net interest marginorigination fees related to Paycheck Protection Program (PPP) loans of $1.2 million and $2.1 million for the second quarter and first six months of 2021, respectively, primarily as a result of PPP loans that were forgiven or repaid;
Interest expense decreased $1.2 million for the second quarter of 2021 and $3.0 million for the first quartersix months of 2021 decreased to 4.33 percent, compared to 4.92 percent for the first quarter ofsame periods in 2020 due primarily to lower average yieldsrates on loans, securitiestime deposits and cash reserves, partially offset bya shift in funding to lower average costs of deposits, loan growth and repayment of borrowings using excess cash during 2020. Net interest income for the first quarter of 2021 was essentially unchanged compared to the first quarter of 2020 as average balances of loans and securities were higher;cost deposits;
Average loans held for investmentoutstanding at the community banking segment, grew $126.4 million, or 14excluding PPP loans, increased 2.8 percent for the second quarter of 2021 and 3.4 percent for the first quartersix months of 2021 compared to the first quarter of 2020.  Excluding average Paycheck Protection Program (PPP) loans of $93.1 million, average loans at the community banking segment increased $33.3 million, or 4 percent, compared to the first quarter ofsame periods in 2020;
Mortgage banking segment net income decreased 15 percent for the second quarter of 2021 and increased 6517 percent for the first six months of 2021, respectively, compared to the same periods of 2020 as both periods were affected by higher margins on sales of mortgage loans, while mortgage loan originations decreased 15 percent for the second quarter of 2021 and increased 13 percent for the first six months of 2021, as compared to the first quartersame periods of 2020, primarily as a result of higher margins on mortgage loans originated for resale. Mortgage loan originations increased from $260.4 million to $422.5 million;2020;
The consumer finance segment’ssegment experienced net charge-off ratio fellrecoveries at an annualized rate of 0.07 percent of average total loans for the first six months of 2021, compared to 0.51net charge-offs of 1.99 percent for the first quarter of 2021 from 2.81 percent for the first quartersix months of 2020, asdue to borrowers generally benefittedbenefitting from government stimulus measures related to the COVID-19 pandemic;pandemic, continued improvement in the credit quality of purchased loans and elevated values for used autos, which result in lower charge-offs upon sale of repossessed autos;
Consumer finance loans at June 30, 2021 increased $20.6 million, or an annualized rate of 13.2 percent, compared to December 31, 2020 due to growth in non-prime auto loans and prime marine and recreational vehicle (RV) loans.  Consumer finance loans declined at an annualized rate of  7.9 percent during the first six months of 2020;
The consumer finance segment’s average loan yield declined for the second quarter and first six months of 2021 compared to the same periods in 2020 due to purchases of loan contracts at lower yields than the portfolio average yield, partially as a result of lower interest rates for non-prime auto loans and the consumer finance segment continuing to pursue loan contracts of higher credit quality, including prime marine and RV loans; and
Consolidated annualized net interest margin was 4.37 percent for the second quarter of 2021, compared to 4.61 percent and 4.33 percent for the second quarter of 2020 and first quarter of 2021, declinedrespectively, and was 4.35 percent for the first six months of 2021, compared to 4.76 percent for the first six months of 2020.  The increase in the second quarter of 2021 compared to the first quarter of 20202021 was due primarily to continued competition for non-prime autohigher average yields on loans (including higher net origination fees recognized on PPP loans) and growth in higher quality, lower-yielding loans, including marine and recreational vehicle loans.lower cost of deposits.

Capital Management

Total equity was $198.7$201.8 million at March 31,June 30, 2021, compared to $194.5 million at December 31, 2020. Under regulatory capital standards, the Corporation’s tier 1 capital and total capital ratios at March 31,June 30, 2021 were 12.913.0 percent and 15.715.8 percent, respectively, compared to 12.5 percent and 15.2 percent, respectively, at December 31, 2020. Capital growth

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resulted primarily from earnings for the first quarterhalf of 2021, which was partially offset by share repurchases of $4.8 million and cash dividends declared of $0.38$0.78 per share during the first quarterhalf of 2021. At March 31,June 30, 2021, the book value per share of the Corporation’s common stock was $53.78,$56.02, and tangible book value per share, which is a non-GAAP financial measure, was $46.34,$48.41, compared to $52.80 and $45.32, respectively, at December 31, 2020.  For the firstsecond quarter of 2021, the Corporation’s cash dividend equated to a payout ratio of 19.818.3 percent of earnings per share. The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital levels and requirements and expected future earnings. In making its decision on the payment of dividends on the Corporation’s common stock, the Corporation’s Board of Directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors. The Corporation has a share repurchase program that was authorized by the Board of Directors in November 2020 to repurchase up to 365,000 shares of the Corporation’s common stock through November 30, 2021.  There were no repurchasesDuring the second quarter and first six months of 2021, the Corporation repurchased $4.5 million of its common stock under the Corporation’s share repurchase program for the first quarter of 2021.program.  

COVID-19 Pandemic

New infections of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in our market areas.  While over 140 millionhalf of people in the U.S. adultsand in Virginia ages 12 years and over are fully vaccinated against COVID-19, the pace of vaccinations appears to have received at least one dosepeaked during the second quarter of an authorized COVID-19 vaccine2021, and the Delta variant has shown that there remains a threat of a resurgence of cases or even the emergence of a more dangerous variant.  There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring needed employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains substantial uncertainty about the path of this economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have begun to resume activities that had been suspendedsupported during the pandemic the strength of the economic recovery remains uncertain. Governmentby government stimulus measures such as economic impact payments, PPP loans and enhanced unemployment benefits, may not continue orreturn to employment and may not be effective at supportingable to repay debts as agreed following the economy. The U.S.expiration of government stimulus programs, including expanded unemployment rate remained elevated at 6.0 percent in March 2021, and many workers who decided to leave the labor force during the pandemic have not returned. The Corporation has continued to serve our customers and communities throughout the pandemic, and with enhanced health and safety measures in place our branch lobbies have been fully open to the public since September 2020 and a majority of our employees are at work in our offices. As of March 31, 2021, we have originated over 1,800 PPP loans totaling nearly $135.0 million, and have provided modified payment terms on loans with aggregate balances of over $100.0

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million, of which over three quarters have either resumed payments or have been paid off. During the year ended December 31, 2020, we increased our allowance for loan losses by adding reserves of approximately $8.0 million based on qualitative adjustments related to the pandemic.benefits. We continue to carefully monitor the pandemic and its impact on our market areas, our customers and our employees, and we believe that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans; however, at this time we cannot determine the ultimate impact of the pandemic on the results of operations of the Corporation.  As of MarchDuring the year ended December 31, 2021,2020, we have maintained the qualitative adjustments to theincreased our allowance for loan losses recorded during 2020by adding reserves of approximately $8.0 million based on qualitative adjustments related to the pandemic.  As of June 30, 2021, credit deterioration since the onset of the COVID-19 pandemic has so far not been experienced to the extent previously anticipated. During the second quarter of 2021, we released a portion of these added reserves through a reversal of provision for loan losses, but continue to maintain reserves for loan losses at June 30, 2021 related to the pandemic and believe that our allowance for loan losses will be adequate to absorb probable losses that are inherent in our loan portfolio. If loan losses ultimately are not realized to the extent of the reserves provided for during the pandemic, our allowance for loan losses may be reduced in future periods through negative provisionsfurther reversals of provision for loan losses, which could benefit our results of operations for any such future period.  However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases weaker than expected consumer spending or a reduction in government stimulus priorthe emergence of variants of the COVID-19 virus that threaten to a recovery in employment could adversely impact ourdisrupt economic activity, additional provision for loan loss experience and therefore our results of operationslosses may be required in future periods.

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan

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

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

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

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

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

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

Goodwill: The Corporation's goodwill was recognized in connection with past business combinations and is reported at the community banking segment and the consumer finance segment. The Corporation reviews the carrying value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Corporation may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after

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assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Corporation elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill at the community banking segment and the consumer finance segment, which was the annual evaluation in the fourth quarter of 2020, the Corporation concluded that no impairment existed. Depending on the severity and duration of the economic consequences of the COVID-19 pandemic and their impact on the Corporation, management may conclude in a future period that goodwill has become impaired.

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

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

RESULTS OF OPERATIONS

NET INTEREST INCOME

The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three and six months ended March 31,June 30, 2021 and 2020.  

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Loans include loans held for sale. Loans placed on a nonaccrual status are included in the balances and are included in the computation of yields, but had no material effect. Accretion and amortization of fair value purchase adjustments related to business combinations are included in the computation of yields on loans and investments and on the costs of deposits and borrowings. The accretion contributed approximately 2641 basis points and 28 basis points to the yields on community banking segment loans and total loans, respectively, and 21 basis points to both the yield on total earning assets and net interest margin for the second quarter of 2021, compared to approximately 25 basis points and 18 basis points to the yields on community banking segment loans and total loans, respectively, and 14 basis points to both the yield on total earning assets and net interest margin, for the firstsecond quarter of 2021, compared to2020.  The accretion contributed approximately 5233 basis points and 3723 basis points to the yields on community banking segment loans and total loans, respectively, and 2817 basis points to both the yield on total earning assets and the net interest margin for the first quarterhalf of 2021, compared to approximately 38 basis points and 26 basis points to the yields on community banking segment loans and total loans, respectively, and 21 basis points to both the yield on total earning assets and net interest margin, for the first half of 2020. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

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

Three Months Ended March 31, 

Three Months Ended June 30, 

   

2021

    

2020

    

   

2021

    

2020

    

Average

    

Income/

    

Yield/

Average

    

Income/

    

Yield/

Average

    

Income/

    

Yield/

Average

    

Income/

    

Yield/

(Dollars in thousands)

Balance

   

Expense

   

Rate

Balance

   

Expense

   

Rate

Balance

   

Expense

   

Rate

Balance

   

Expense

   

Rate

Assets

Securities:

Taxable

$

202,537

$

748

 

1.48

%  

$

131,837

$

787

 

2.39

%  

$

255,767

$

916

 

1.43

%  

$

152,185

$

815

 

2.14

%  

Tax-exempt

 

86,159

 

593

 

2.76

 

72,162

 

628

 

3.48

 

83,893

 

552

 

2.63

 

83,923

 

651

 

3.10

Total securities

 

288,696

 

1,341

 

1.86

 

203,999

 

1,415

 

2.77

 

339,660

 

1,468

 

1.73

 

236,108

 

1,466

 

2.48

Loans:

Community banking segment

1,045,876

11,454

4.44

919,466

12,165

5.32

1,038,699

12,048

4.65

1,001,035

11,448

4.60

Mortgage banking segment

174,415

1,127

2.62

73,726

661

3.61

138,329

1,021

2.96

142,309

1,097

3.10

Consumer finance segment

314,223

9,249

11.94

310,117

10,101

13.10

325,218

9,422

11.62

301,555

9,690

12.92

Total loans

 

1,534,514

 

21,830

 

5.77

 

1,303,309

 

22,927

 

7.08

 

1,502,246

 

22,491

 

6.00

 

1,444,899

 

22,235

 

6.19

Interest-bearing deposits in other banks

 

125,439

 

46

 

0.15

 

189,467

 

598

 

1.28

 

165,211

 

48

 

0.12

 

100,728

 

52

 

0.21

Total earning assets

 

1,948,649

 

23,217

 

4.83

 

1,696,775

 

24,940

 

5.91

 

2,007,117

 

24,007

 

4.80

 

1,781,735

 

23,753

 

5.36

Allowance for loan losses

 

(39,530)

 

(32,866)

 

(39,553)

 

(34,512)

Total non-earning assets

 

192,112

 

183,627

 

191,262

 

208,238

Total assets

$

2,101,231

$

1,847,536

$

2,158,826

$

1,955,461

Liabilities and Equity

Interest-bearing deposits:

Interest-bearing demand deposits

$

300,728

130

0.18

$

261,221

230

 

0.35

$

307,686

121

0.16

$

253,282

111

 

0.18

Money market deposit accounts

 

305,647

 

202

0.27

 

237,579

 

328

0.56

 

311,825

 

194

0.25

 

248,352

 

212

0.34

Savings accounts

 

191,851

 

27

0.06

 

141,689

 

28

 

0.08

 

207,506

 

29

0.06

 

161,153

 

32

 

0.08

Certificates of deposit, $100 or more

 

267,891

 

827

1.25

 

249,407

 

1,233

 

1.99

 

263,456

 

683

1.04

 

271,504

 

1,254

 

1.86

Other certificates of deposit

 

196,816

 

481

0.99

 

255,313

 

1,066

 

1.68

 

189,744

 

370

0.78

 

226,270

 

877

 

1.56

Interest-bearing deposits

 

1,262,933

 

1,667

 

0.54

 

1,145,209

 

2,885

 

1.01

 

1,280,217

 

1,397

 

0.44

 

1,160,561

 

2,486

 

0.86

Borrowings

 

76,940

 

733

 

3.81

 

165,261

 

1,290

 

3.12

 

78,239

 

741

 

3.79

 

136,450

 

847

 

2.48

Total interest-bearing liabilities

 

1,339,873

 

2,400

 

0.72

 

1,310,470

 

4,175

 

1.28

 

1,358,456

 

2,138

 

0.63

 

1,297,011

 

3,333

 

1.03

Noninterest-bearing demand deposits

 

515,782

 

321,838

 

556,719

 

425,796

Other liabilities

 

56,471

 

39,303

 

47,359

 

54,544

Total liabilities

 

1,912,126

 

1,671,611

 

1,962,534

 

1,777,351

Equity

 

189,105

 

175,925

 

196,292

 

178,110

Total liabilities and equity

$

2,101,231

$

1,847,536

$

2,158,826

$

1,955,461

Net interest income

$

20,817

$

20,765

$

21,869

$

20,420

Interest rate spread

 

4.11

%  

 

4.63

%  

 

4.17

%  

 

4.33

%  

Interest expense to average earning assets

 

0.50

%  

 

0.99

%  

 

0.43

%  

 

0.75

%  

Net interest margin

 

4.33

%  

 

4.92

%  

 

4.37

%  

 

4.61

%  

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Six Months Ended June 30, 

   

2021

    

2020

    

Average

    

Income/

    

Yield/

Average

    

Income/

    

Yield/

(Dollars in thousands)

Balance

   

Expense

   

Rate

Balance

   

Expense

   

Rate

Assets

Securities:

Taxable

$

229,299

$

1,664

1.45

%  

$

141,468

$

1,602

 

2.26

%  

Tax-exempt

 

85,020

 

1,145

 

2.69

 

78,585

 

1,279

 

3.26

Total securities

 

314,319

 

2,809

 

1.79

 

220,053

 

2,881

 

2.62

Loans:

Community banking segment

1,042,268

23,505

4.55

960,251

23,613

4.95

Mortgage banking segment

156,272

2,148

2.77

108,017

1,758

3.27

Consumer finance segment

 

319,751

 

18,671

 

11.78

 

305,836

 

19,791

 

13.01

Total loans

1,518,291

44,324

5.89

1,374,104

45,162

6.61

Interest-bearing deposits in other banks

 

145,435

 

94

 

0.13

 

145,098

 

650

 

0.90

Total earning assets

 

1,978,045

 

47,227

 

4.81

 

1,739,255

 

48,693

 

5.63

Allowance for loan losses

 

(39,542)

 

(33,689)

Total non-earning assets

 

191,685

 

195,932

Total assets

$

2,130,188

$

1,901,498

Liabilities and Equity

Interest-bearing deposits:

Interest-bearing demand deposits

$

304,226

251

 

0.17

$

257,251

341

 

0.27

Money market deposit accounts

 

308,753

 

396

 

0.26

 

242,966

 

540

 

0.45

Savings accounts

 

199,722

 

56

 

0.06

 

152,921

 

60

 

0.08

Certificates of deposit, $100 or more

 

265,661

 

1,510

 

1.15

 

260,080

 

2,487

 

1.92

Other certificates of deposit

 

193,262

 

851

 

0.89

 

239,667

 

1,943

 

1.63

Total interest-bearing deposits

 

1,271,624

 

3,064

 

0.49

 

1,152,885

 

5,371

 

0.94

Borrowings

 

77,593

 

1,474

 

3.80

 

150,855

 

2,137

 

2.83

Total interest-bearing liabilities

 

1,349,217

 

4,538

 

0.68

 

1,303,740

 

7,508

 

1.16

Noninterest-bearing demand deposits

 

536,364

 

373,817

Other liabilities

 

51,889

 

46,924

Total liabilities

 

1,937,470

 

1,724,481

Equity

 

192,718

 

177,017

Total liabilities and equity

$

2,130,188

$

1,901,498

Net interest income

$

42,689

$

41,185

Interest rate spread

 

4.13

%  

 

4.47

%  

Interest expense to average earning assets

 

0.46

%  

 

0.87

%  

Net interest margin

 

4.35

%  

 

4.76

%  

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

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TABLE 2: Rate-Volume Recap

Three Months Ended March 31, 2021 from 2020

Three Months Ended June 30, 2021 from 2020

Increase (Decrease)

Total

Increase (Decrease)

Total

Due to

Increase

Due to

Increase

(Dollars in thousands)

    

Rate

    

Volume

    

(Decrease)

    

Rate

    

Volume

    

(Decrease)

Interest income:

Loans:

Community banking segment

$

(2,199)

$

1,488

$

(711)

$

135

$

465

$

600

Mortgage banking segment

(222)

688

466

(47)

(29)

(76)

Consumer finance segment

(972)

120

(852)

(1,007)

739

(268)

Securities:

Taxable

 

(366)

 

327

 

(39)

 

(330)

 

431

 

101

Tax-exempt

 

(144)

 

109

 

(35)

 

(99)

 

 

(99)

Interest-bearing deposits in other banks

 

(399)

 

(153)

 

(552)

 

(29)

 

25

 

(4)

Total interest income

 

(4,302)

 

2,579

 

(1,723)

 

(1,377)

 

1,631

 

254

Interest expense:

Interest-bearing deposits:

Interest-bearing demand deposits

 

(128)

28

 

(100)

 

(13)

23

 

10

Money market deposit accounts

 

(202)

76

 

(126)

 

(64)

46

 

(18)

Savings accounts

 

(9)

8

 

(1)

 

(10)

7

 

(3)

Certificates of deposit, $100 or more

 

(490)

84

 

(406)

 

(535)

(36)

 

(571)

Other certificates of deposit

 

(376)

(209)

 

(585)

 

(383)

(124)

 

(507)

Total interest-bearing deposits

 

(1,205)

 

(13)

 

(1,218)

 

(1,005)

 

(84)

 

(1,089)

Borrowings

 

240

(797)

 

(557)

 

341

(447)

 

(106)

Total interest expense

 

(965)

 

(810)

 

(1,775)

 

(664)

 

(531)

 

(1,195)

Change in net interest income

$

(3,337)

$

3,389

$

52

$

(713)

$

2,162

$

1,449

Six Months Ended June 30, 2021 from 2020

Increase (Decrease)

Total

 

Due to

Increase

 

(Dollars in thousands)

    

Rate

    

Volume

    

(Decrease)

 

Interest income:

Loans:

Community banking segment

$

(2,010)

$

1,902

$

(108)

Mortgage banking segment

(300)

690

390

Consumer finance segment

(1,968)

848

(1,120)

Securities:

Taxable

 

(704)

 

766

 

62

Tax-exempt

 

(234)

 

100

 

(134)

Interest-bearing deposits in other banks

 

(558)

 

2

 

(556)

Total interest income

 

(5,774)

 

4,308

 

(1,466)

Interest expense:

Interest-bearing deposits:

Interest-bearing demand deposits

 

(145)

55

 

(90)

Money market deposit accounts

 

(267)

123

 

(144)

Savings accounts

 

(19)

15

 

(4)

Certificates of deposit, $100 or more

 

(1,028)

51

 

(977)

Other certificates of deposit

 

(765)

(327)

 

(1,092)

Total interest-bearing deposits

 

(2,224)

 

(83)

 

(2,307)

Borrowings

 

584

(1,247)

 

(663)

Total interest expense

 

(1,640)

 

(1,330)

 

(2,970)

Change in net interest income

$

(4,134)

$

5,638

$

1,504

Net interest income, on a taxable-equivalent basis, for the three months ended March 31,second quarter of 2021 was $20.8$21.9 million, essentially unchangedcompared to $20.4 million for the second quarter of 2020. Net interest income, on a taxable-equivalent basis, for the first six months of 2021 was $42.7 million, compared to $41.2 million for the first six months of 2020. The increase in net interest income for the second quarter and first six months of 2021 compared to the threesame periods in 2020 was due primarily to higher average balances of interest-earning assets, partially offset by lower annualized net interest margin. Average interest-earning assets grew by $225.4 million and $238.8 million for the second quarter and first six months ended March 31, 2020.of 2021, respectively, compared to the same periods in 2020, primarily due to growth in loans (including PPP loans) and securities, funded by deposit growth. Annualized net interest margin decreased 5924 basis points to 4.334.37 percent for the second quarter of 2021 and decreased 41 basis points to 4.35 percent for the first quartersix months of 2021, relative to the same periodperiods in 2020, due primarily to lower

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average yields on loans, securities and cash reserves, partially offset by lower average costs of deposits (including growth in noninterest-bearing demand deposits) and using lower-yielding excess cash to fund growth in loans and securities and repay borrowings.  The yield on interest-earning assets and cost of interest-bearing liabilities decreased by 10856 basis points and 5640 basis points, respectively, for the second quarter of 2021 and decreased by 82 basis points and 48 basis points, respectively, for the first quartersix months of 2021 compared to the same periodperiods in 2020.  Average earning assets grew by $251.9 million for the first quarter of 2021, compared to the same period in 2020, primarily due to growth in loans (including PPP loans) and securities, funded by deposit growth.

Average loans, which includes both loans held for investment and loans held for sale, increased $231.2$57.3 million to $1.5 billion for the second quarter of 2021 and increased $144.2 million to $1.5 billion for the first quartersix months of 2021, compared to the same periodperiods in 2020. Average loans held for investment at the community banking segment increased $126.4$37.7 million, or 143.8 percent, for the second quarter of 2021, and increased $82.0 million, or 8.5 percent, for the first quartersix months of 2021 compared to the same periodperiods in 2020.  This increase included $93.1 million of average balancesExcluding the impact of PPP loans.loans, average loans at the community banking segment increased $26.0 million, or 2.8 percent, for the second quarter of 2021 and $31.3 million, or 3.4 percent, for the first six months of 2021, compared to the same periods in 2020.  In addition to the increase resulting from the PPP loans, the increase in average loans outstandingat the community banking segment for the second quarter and first quartersix months of 2021 compared to the same periodperiods in 2020 resulted primarily from growth in the commercial real estate and commercial business lending segmentssegment of the loan portfolio. Average loans held for investment at the consumer finance segment increased $4.1$23.7 million, or 1.37.8 percent, for the second quarter of 2021, and increased $13.9 million, or 4.6 percent, for the first quartersix months of 2021, compared to the same periodperiods in 2020 asdue primarily to higher average balances of marine and RV loans increased due toas a result of the continued expansion of the consumer finance segment’s purchases of those loan contracts and average automobile loans decreased due to continuing competition for loan contracts. Average loans at the mortgage banking segment, which consist primarily of loans held for sale, increased $100.7decreased $4.0 million, or 1372.8 percent, for the second quarter of 2021 and increased $48.3 million, or 44.7 percent, for the first quartersix months of 2021, compared to the same periodperiods in 2020,2020. Changes in average loans at the mortgage banking segment were due primarily to higherchanges in mortgage loan production.production volume and longer average holding periods for loans held for sale in the first six months of 2021 compared to the first six months of 2020.

The overall yield on average loans decreased 13119 basis points to 5.776.00 percent for the firstsecond quarter of 2021 compared to the same period insecond quarter of 2020 due primarily to lower average yields at the consumer finance segment, and decreased 72 basis points to 5.89 percent for the first six months of 2021 compared to the first six months of 2020 due primarily to lower average yields across the loan portfolio and changes in the composition of the portfolio. The community banking segment average loan yield decreased 88increased 5 basis points to 4.444.65 percent for the second quarter of 2021 and decreased 40 basis points to 4.55 percent for the first quartersix months of 2021, compared to the same periods in 2020. Comparisons of average loan yields for the community banking segment were significantly impacted by recognition of net PPP origination fees and interest income on PCI loans, as described in more detail below.  Excluding the effects of these items, average yields on loans at the community banking segment decreased for the second quarter and first quartersix months of 2021 compared to the same periods in 2020, due primarily to changes in interest rates in 2020, resulting in repricing of variable rate loans and lower average yields on new lending, as well as lower interest income on PCI loans.  The recognition of interest income on PCI loans is based on management’s expectation of future payments of principal and interest, which

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is inherently uncertain. Earlier than expected repayments of certain PCI loans resulted in the recognition of additional interest income during the first quarters of 2021 and 2020. Interest income recognized on PCI loans was $517,000 and $959,000 for the first quarters of 2021 and 2020, respectively.lending. PPP loans earn interest at a note rate of one percent as well as net origination fees that are amortized over the contractual term of the related loan or accelerated into interest income upon repayment of the loan.  Net PPP origination fees recognized in  the second quarter and first quartersix months of 2021 were $864,000.$1.2 million and $2.1 million, respectively, compared to net PPP origination fees recognized in the second quarter and first six months of 2020 of $377,000.  Unrecognized net deferred PPP fees at March 31,June 30, 2021 were $3.7$2.6 million, which are expected to be recognized primarily in 2021 and 2022. The recognition of interest income on PCI loans, which were acquired in connection with past mergers and acquisitions, is based on management’s expectation of future payments of principal and interest, which are inherently uncertain. Earlier than expected repayments of certain PCI loans resulted in the recognition of additional interest income during the second quarters and first six months of 2021 and 2020. Interest income recognized on PCI loans was $1.0 million and $729,000 for the second quarters of 2021 and 2020, respectively, and $1.5 million and $1.7 million for the first six months of 2021 and 2020, respectively. The consumer finance segment average loan yield decreased 116130 basis points to 11.9411.62 percent and decreased 123 basis points to 11.78 percent for the second quarter and first quartersix months of 2021, respectively, compared to the first quarter ofsame periods in 2020, due to continued competition inpurchases of loan contracts at lower yields than the non-prime automobile loan business, including the effectportfolio average yield, partially as a result of a lower interest rate environment,rates for non-prime auto loans and the consumer finance segment continuing to pursue growth inloan contracts of higher credit quality, lower yielding loans, which includesincluding prime marine and RV loans. The mortgage banking segment average loan yield decreased 9914 basis points to 2.622.96 percent for the second quarter of 2021 and decreased 50 basis points to 2.77 percent for the first six months of 2021, compared to the same periods in 2020, due to lower market interest rates for mortgage loans.

 

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Average securities available for sale increased $84.7$103.6 million and $94.3 million for the second quarter and first quartersix months of 2021, compared to the same periodperiods in 2020, due primarily to higher purchases of securities.mortgage-backed securities and U.S. government agency debt securities with short maturities, in order to utilize excess liquidity by investing in debt securities rather than holding lower-yielding cash reserves. The average yield on the securities portfolio on a taxable-equivalent basis decreased 9175 basis points to 1.73 percent for the second quarter of 2021 and decreased 83 basis points to 1.79 percent for the first quartersix months of 2021, compared to the same periodperiods in 2020, due to purchases of securities in 2020 and 2021 at lower average yields relative to the average yield of the portfolio as a whole, increased calls of securities that were issued during periods of higher market interest rates, and accelerated amortization of premiums on mortgage-backed securities as a result of increased prepayment activity.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $64.0increased $64.5 million for the second quarter of 2021 and increased $337,000 for the first quartersix months of 2021, compared to the same periodperiods in 2020 as the Corporation utilizeddue primarily to excess cash to fundliquidity resulting from deposit growth exceeding growth in loans and securities and repay borrowings.securities. The average yield on interest-bearing deposits in other banks decreased 1139 basis points for the second quarter of 2021 and decreased 77 basis points for the first quartersix months of 2021, compared to the same periodperiods in 2020, due to lower average rates on excess cash reserves.  The Federal Reserve Bank decreased the interest rate on excess cash reserve balances from 1.55 percent at December 31, 2019 to 0.10 percent by March 31,the end of the first quarter of 2020 in response to the COVID-19 pandemic, and increased the interest rate has remained unchanged sinceto 0.15 during the end of the firstsecond quarter of 2020.2021.

Average money market, savings and interest-bearing demand deposits increased $157.7$164.2 million and $159.6 million for the second quarter and first quartersix months of 2021, respectively, and average time deposits decreased $40.0$44.6 million and $40.8 million for the second quarter and first six months of 2021, respectively, compared to the same periods in 2020, due to growth in consumer and business deposits primarily as a result of new accounts and liquidity from government stimulus programs as well as a shift to non-time deposits as a result of lower interest rates.  Average noninterest-bearing demand deposits increased $130.9 million for the second quarter of 2021 and increased $162.5 million for the first quartersix months of 2021, compared to the same period in 2020.  Average noninterest-bearing demand deposits increased $193.9 million for the first quarter of 2021, compared to the same periodperiods in 2020.  The average cost of interest-bearing deposits decreased 4742 basis points for the second quarter of 2021 and decreased 45 basis points for the first quartersix months of 2021, compared to the same periodperiods in 2020, due primarily to lower rates on time deposits and a shift in composition toward non-time deposits. Offered rates on interest-bearing deposit accounts were reduced in response to changes in market interest rates beginning in March 2020.  While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity.  Rates on outstanding time deposits continued to decrease during the first quartersix months of 2021 as accounts at higher rates matured.

Average borrowings decreased $88.3$58.2 million for the second quarter of 2021 and decreased $73.3 million for the first quartersix months of 2021, compared to the same periodperiods in 2020 due primarily to the repayment of long-term borrowings in 2020, partially offset by the issuance of $20.0 million of subordinated notes by the Corporation in the third quarter of 2020 and finance leases commenced in 2020.  The average cost of borrowings increased 69131 basis points during the second quarter of 2021 and increased 97 basis points during the first quartersix months of 2021, compared to the same periodperiods in 2020 due primarily to the higher cost of the subordinated notes relative to borrowings that were repaid.

The Corporation believes that itsit may be challenging to maintain net interest margin may be affected in future periods by several factors that are difficultat its current level based on the effects of (1) continued pressure on loan yields at the community banking segment and consumer finance segment related to predict, including (1) changes inthe current environment of low interest rates which may dependand competition for loans, (2) the temporary effect on the severityloan yields of adverse economic conditions, the timing and extentrecognition of any economic recovery, and the extent of government stimulus measures, which are inherently uncertain, (2)net PPP origination fees, (3) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment, (3)(4) lower accretion of purchase discounts on loans related to acquisitions, which is included in yields on loans, (5) lower mortgage loan production, and therefore lower average loans held for sale, at the mortgage banking segment and (6) repricing of time deposits at lower rates upon maturity, which may fluctuate based onlag or may not offset the timingeffects of repayment and (4) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or forgiveness.lower average loan yields.

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Noninterest Income

TABLE 3: Noninterest Income

Three Months Ended March 31, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

Gains on sales of loans

$

7,058

$

3,676

$

5,947

$

4,605

$

13,005

$

8,281

Mortgage banking fee income

1,856

1,305

1,648

1,986

3,504

3,291

Interchange income

1,318

1,089

1,471

1,141

2,789

2,230

Service charges on deposit accounts

819

1,002

828

639

1,647

1,641

Wealth management services income, net

702

585

685

748

1,387

1,333

Mortgage lender services income

778

242

615

400

1,393

642

Other service charges and fees

389

375

413

394

802

769

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

 

32

 

4

 

6

 

3

 

38

 

7

Other income (loss), net

1,404

(1,530)

Other income, net

1,487

1,912

2,891

382

Total noninterest income

$

14,356

$

6,748

$

13,100

$

11,828

$

27,456

$

18,576

Total noninterest income increased $7.6$1.3 million, or 11310.8 percent, in the firstsecond quarter of 2021 compared to the firstsecond quarter of 2020.  The increase in noninterest income was2020 due primarily to (1) higher gains on sales of loans as a result of higher margins on loans originated for resale, (2) higherpartially offset by lower mortgage banking fee income, which resulted from higher loan production (3) higher mortgage lender services income for providing mortgage origination functions to third parties, as a result of higher volume, (4) losses of $298,000 in the first quarter of 2020, included in other income (loss), net, resulting from the disposition of assets in connection with the acquisition of Peoples, (5)(2) an increase in debit card interchange activity, (3) higher mortgage lender services income, as a result of higher volume and (6)(4) asset write-downs of $281,000 in the second quarter of 2020 related to branch consolidation that did not recur during 2021, partially offset by (1) lower unrealized gains in the Corporation’s nonqualified deferred compensation plan, included in other income, (loss), net and (2) lower mortgage banking fee income of $506,000$338,000 as a result of lower mortgage loan originations. Total noninterest income increased $8.9 million, or 47.8 percent, in the first quartersix months of 2021 compared to the first six months of 2020 due primarily to (1) higher gains on sales of loans primarily as a result of higher margins on loans originated for resale, (2) higher fee income from mortgage lender services and mortgage banking as a result of higher volume, (3) an increase in debit card interchange activity, (4) asset write-downs of $579,000 in the first six months of 2020 related to branch consolidation and merger related costs recognized upon disposition of assets acquired from Peoples and (5) higher unrealized gains in the Corporation’s nonqualified deferred compensation plan, included in other income, net. The Corporation recognized unrealized gains related to its nonqualified deferred compensation plan of $947,000 and $1.5 million for the second quarter and first six months of 2021, respectively, compared to unrealized gains of $1.8 million and unrealized losses of $2.0 million$230,000 for the same periods in the first quarter of 2020, partially offset by lower overdraft fee income, included in service charges on deposit accounts.respectively. Unrealized gains and losses in the Corporation’s nonqualified deferred compensation plan are offset by changes in deferred compensation, recorded in salaries and employee benefits expense.

Noninterest Expense

TABLE 4: Noninterest Expense

Three Months Ended March 31, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

    

2021

    

2020

    

2021

    

2020

Salaries and employee benefits

$

15,613

$

10,817

$

15,714

$

14,354

$

31,327

$

25,171

Occupancy expense

2,360

2,047

2,190

2,154

4,550

4,201

Other expenses:

Data processing

2,903

2,674

2,825

2,861

5,728

5,535

Mortgage banking loan processing expenses

 

867

 

780

 

1,761

 

1,264

Professional fees

747

980

737

738

1,484

1,718

Mortgage banking loan processing expenses

 

894

 

484

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

(395)

5

(402)

8

Other expenses

 

2,783

 

3,083

 

2,964

 

2,900

 

5,754

 

5,980

Total other expenses

7,327

7,221

6,998

7,284

14,325

14,505

Total noninterest expense

$

25,300

$

20,085

$

24,902

$

23,792

$

50,202

$

43,877

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Total noninterest expenses increased $5.2$1.1 million, or 264.7 percent, in the second quarter of 2021 and increased $6.3 million, or 14.4 percent, in the first quartersix months of 2021, compared to the first quarter of 2020.  The increasesame periods in noninterest expenses was2020, due primarily to (1) higher expenses related to higher mortgage loan production volume included in salaries and employee benefits data processing andexpense at the mortgage banking segment, (2) higher mortgage banking loan processing expenses,expense as a result of increased sales of loans and (3) higher occupancy expense at the community banking segment related to the opening of two new financial centers in the third quarter of 2020, and changes in deferred compensation liabilities under the Corporation’s nonqualified deferred compensation plan, partially offset by (1) lower merger related expenses and cost savings related to the integration of Peoples.  ChangesPeoples and (2) net gains on other real estate in 2021 related primarily to the sale of one property in the second quarter of 2021. In addition to these factors, changes in deferred compensation liabilities increased salaries and employee benefits expense by $506,000$947,000 and $1.5 million in the second quarter and first quartersix months of 2021, respectively, and

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increased salaries and employee benefits expense by $1.8 million and decreased salaries and employee benefits expense by $2.0 million$230,000 in the second quarter and first quartersix months of 2020, respectively, and are offset by unrealized gains and losses recorded in noninterest income.

There were no merger related expenses for the first six months of 2021.  Merger related expenses of $957,000 were recorded infor the firstsecond quarter of 2020 were $439,000, of which $69,000$50,000 was salaries and employee benefits expense, $238,000$263,000 was data processing expense, $314,000$81,000 was occupancy expense, $22,000 was professional fees expense $38,000and $23,000 was included in other noninterest expenses.  Merger related expenses for the first six months of 2020 were $1.4 million, of which $501,000 was data processing expense, $336,000 was professional fees expense, $119,000 was salaries and employee benefits expense, $81,000 was occupancy expense, $61,000 was included in all other noninterest expenses, and $298,000 was includeda loss on disposition of assets and was recorded in other income (loss), net within noninterest income.  There were no merger related expenses in the first quarter of 2021.

Income Taxes

The Corporation’s consolidated effective income tax rate was 24.223.6 percent and 21.220.7 percent for the first quartersix months of 2021 and 2020, respectively. The effectiveCorporation recognized income tax rate forbenefits of $303,000 in the second quarter and first quartersix months of 2021 was higher compared2020 arising from a change in tax law enacted in response to the sameCOVID-19 pandemic which changed the tax rate applied to certain net operating losses related to prior tax years of Peoples. The effects of changes in tax law are recognized in income tax expense in the period in 2020 as income before income taxes grew while certain tax benefits, including benefits related to tax-exempt income and share-based compensation, did not.which the changes are enacted.

Business Segments

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

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

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TABLE 5: Community Banking Segment Operating Results

���

Three Months Ended March 31, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

    

2021

    

2020

    

2021

    

2020

    

Interest income

$

15,176

$

15,915

$

15,935

$

14,894

$

31,111

$

30,809

Interest expense

1,724

3,144

1,456

2,718

3,180

5,862

Net interest income

13,452

12,771

14,479

12,176

27,931

24,947

Provision for loan losses

1,000

(200)

1,400

(200)

2,400

Net interest income after provision for loan losses

13,452

11,771

14,679

10,776

28,131

22,547

Noninterest income:

Interchange income

1,318

1,089

1,471

1,141

2,789

2,230

Service charges on deposit accounts

819

1,002

828

639

1,647

1,641

Investment services income

702

585

685

748

1,387

1,333

Other income, net

1,129

609

868

490

1,997

1,099

Total noninterest income

3,968

3,285

3,852

3,018

7,820

6,303

Noninterest expense:

Salaries and employee benefits

8,248

8,508

8,309

8,047

16,557

16,555

Occupancy expense

 

1,772

 

1,502

 

1,644

 

1,523

 

3,416

 

3,025

Data processing

1,991

2,052

2,020

1,627

4,011

3,679

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

(395)

5

(402)

8

Other expenses

2,041

2,340

2,174

2,780

4,222

5,117

Total noninterest expenses

14,052

14,402

13,752

13,982

27,804

28,384

Income before income taxes

3,368

654

Income (loss) before income taxes

4,779

(188)

8,147

466

Income tax expense (benefit)

 

575

 

(3)

 

854

 

(482)

 

1,429

 

(485)

Net income

$

2,793

$

657

$

3,925

$

294

$

6,718

$

951

The community banking segment reported net income of $2.8$3.9 million and $6.7 million for the second quarter and first quartersix months of 2021, respectively, compared to net income of $657,000$294,000 and $951,000, respectively, for the first quarter ofsame periods in 2020. The increase in community banking segment quarterlynet income for the second quarter and first six months of 2021 compared to the same periods in 2020 was due primarily to higher adjusted net income, as described below, and merger related expenses and branch consolidation charges recognized in 2020, partially offset by benefits of a change in tax law recognized in 2020. There were no merger related expenses, branch consolidation charges or one-time tax effects in the first six months of 2021.

Adjusted net income of $2.1the community banking segment, which excludes the effects of merger related expenses, branch consolidation charges and one-time income tax benefits, was $3.9 million and $6.7 million for the second quarter and first six months of 2021, respectively, compared to $560,000 and $1.9 million, respectively, for the same periods in 2020. The increase in adjusted net income of the community banking segment for the second quarter and first six months of 2021 compared to the same periods in 2020 was due primarily to higher net interest income, lower provision for loan losses, lower mergerhigher income from debit card interchange, net gains on other real estate in 2021 related expenses, higher net interest income,primarily to the sale of one property in the second quarter of 2021 and cost savings related to the integration of Peoples, and higher income from debit card interchange and wealth management services, partially offset by lower overdraft fee income and higher expenses related to occupancy as a result of two new financial centers opened during the third quarter of 2020 and FDIC deposit insurance.lower fee income from interest rate swaps for commercial borrowers.

Net interest income for the community banking segment increased $681,000$2.3 million for the second quarter of 2021 and increased $3.0 million for the first quartersix months of 2021, compared to the first quarter ofsame periods in 2020. This increase resultedwas due primarily to (1) lower average costs of deposits, resulting from lower rates and a decreaseshift in composition toward non-time deposits and (2) higher interest income on loans. Comparisons of $1.4 millioninterest income on loans were significantly impacted by recognition of net PPP origination fees, which was higher in the second quarter and first six months of 2021 than in the same periods in 2020, and interest expense, partially offset by a decreaseincome on PCI loans, which was higher for the second quarter of $739,0002021 and lower for

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the first six months of 2021 compared to the same periods in 2020. In addition to the effects of these items, higher average advances to fund loans at subsidiaries and loan growth contributed to the increases in interest income which were due primarily to growth in average balances ofon loans, and securities, funded by deposit growth, and lower average cost of deposits, partially offset by lower average yields on loans.  Interest income forother loans as a result of changes in interest rates. Higher average advances to subsidiaries resulted primarily from the firstrepayment of a third-party bank line of credit at the consumer finance segment in the second quarter of 2020 that was previously used to fund loans. Net PPP origination fees recognized in the second quarter and first six months of 2021 includedwere $1.2 million and $2.1 million, respectively, compared to net PPP origination fees recognized in the second quarter and first six months of $864,000.2020 of $377,000.  Unrecognized net deferred PPP fees at March 31,June 30, 2021 were $3.7$2.6 million, which are expected to be recognized primarily in 2021 and 2022. Interest income recognized on PCI loans was $1.0 million and $729,000 for the second quarters of 2021 and 2020, respectively, and $1.5 million and $1.7 million for the first six months of 2021 and 2020, respectively.

Provision for loan losses for the community banking segment decreased $1.0$1.6 million for the second quarter of 2021 and decreased $2.6 million for the first quartersix months of 2021, compared to the first quarter ofsame periods in 2020, due primarily to qualitative adjustments to reserves recognized in 2020 related to the COVID-19 pandemic, and loan growth that resulted in increased provision for loan lossesa portion of which were released in the firstsecond quarter of 2020.2021 as credit deterioration since the onset of the pandemic has so far not been experienced to the extent previously anticipated, partially offset by loan growth.  Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or weaker than expected consumer spending,the emergence of variants of the COVID-19 virus that threaten to disrupt economic activity, additional provision for loan losses may be required in future periods.

There were no merger related expenses in the first six months of 2021.   Merger related expenses at the community banking segment of $857,000$439,000 ($658,000347,000 after income taxes) were recorded in the second quarter of 2020, of which $50,000 was salaries and employee benefits expense, $263,000 was data processing expense, $22,000 was professional fees expense, $81,000 was occupancy expense and $23,000 was other expenses.  Merger related expenses at the community banking segment of $1.3 million ($1.0 million after income taxes) were recorded in the first quartersix months of 2020, 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 processingoccupancy expense, $214,000$61,000 was professional fees expense, $38,000 wasincluded in all other noninterest expenses, and $298,000 was includeda loss on disposition of assets and was recorded in other income (loss), net.  There were no merger related expenses in the first quarter of 2021.noninterest income.  Cost savings related to the integration of Peoples were realized primarily in salaries and employee benefits expense. Occupancy expense was higher

Branch consolidation charges of $281,000 ($222,000 after income taxes) were recorded in the second quarter and first six months of 2020 in other noninterest income. Income tax benefits of $303,000 were recorded in the second quarter and first six months of 2021 compared2020 related to a change in tax law enacted in response to the first quarterCOVID-19 pandemic which changed the tax rate applied to certain net operating losses related to prior tax years of 2020 due primarily to the opening of two new financial centers in the thirdPeoples.

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quarter of 2020.  FDIC insurance assessment expense, included in other expenses, was higher in the first quarter of 2021 compared to the first quarter of 2020 as credits available to banks with less than $10 billion in consolidated assets were used to offset assessment expense for the first quarter of 2020.

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

TABLE 6: Mortgage Banking Segment Operating Results

Three Months Ended March 31, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

    

2021

    

2020

    

2021

    

2020

    

Interest income

$

1,127

$

661

$

1,021

$

1,097

$

2,148

$

1,758

Interest expense

373

305

312

280

685

585

Net interest income

754

356

709

817

1,463

1,173

Provision for loan losses

30

30

60

Net interest income after provision for loan losses

724

356

679

817

1,403

1,173

Noninterest income:

Gains of sales of loans

7,105

3,676

5,957

4,605

13,062

8,281

Mortgage banking fee income

1,873

1,305

1,674

1,986

3,547

3,291

Mortgage lender services fee income

778

242

615

400

1,393

642

Other income

73

64

19

1

92

65

Total noninterest income

9,829

5,287

8,265

6,992

18,094

12,279

Noninterest expense:

Salaries and employee benefits

4,467

1,845

4,072

2,272

8,539

4,117

Occupancy expense

 

419

 

384

 

357

 

386

776

770

Data processing

616

296

455

431

1,071

727

Other expenses

1,485

1,043

1,324

1,422

2,809

2,465

Total noninterest expenses

6,987

3,568

6,208

4,511

13,195

8,079

Income before income taxes

3,566

2,075

2,736

3,298

6,302

5,373

Income tax expense

 

1,021

 

532

 

768

 

977

 

1,789

 

1,509

Net income

$

2,545

$

1,543

$

1,968

$

2,321

$

4,513

$

3,864

The mortgage banking segment reported net income of $2.5$2.0 million and $4.5 million for the second quarter and first six months of 2021, respectively, compared to $2.3 million and $3.9 million, respectively, for the same periods in 2020. The decrease in mortgage banking segment net income of $353,000 for the second quarter of 2021 compared to net income of $1.5 million for the firstsecond quarter of 2020.2020 was due primarily to (1) higher salaries and benefits expense and (2) lower volume of mortgage loan originations, partially offset by (1) higher gains on sales of loans resulting primarily from higher margins on loans originated for resale and (2) higher lender services volume.  The increase in mortgage banking segment quarterly net income for the first six months of $1.0 million2021 compared to the first six months of 2020 was due primarily to (1) higher gains on sales of loans as a result ofresulting primarily from higher margins on loans originated for resale and (2) higher fee income as a result of higher volume of mortgage loan originations and higher lender services volume, and higher net interest income due to higher average balances of loans held for sale.  Partially offsetting these factors werepartially offset by higher expenses, primarily tied to loan production, including salariesproduction. Salaries and employee benefits expense was higher for the second quarter and first six months of 2021, compared to the same periods of 2020, primarily as a result of higher average rates of loan processing expense, which is includedofficer commissions and the addition of operations staff to meet the demands of higher mortgage loan production volume.  Additionally, higher mortgage loan origination volume contributed to higher commissions for the first six months of 2021, and lower mortgage loan originations partially offset the effect of higher commission rates for the second quarter of 2021, compared to the same periods in other expenses,2020.

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

TABLE 7: Mortgage Loan Originations & Mortgage Loans Sold

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

2021

    

2020

Mortgage loan originations:

Purchases

$

273,113

$

248,732

$

460,368

$

373,262

Refinancings

108,195

199,549

343,443

335,369

Total mortgage loan originations1

$

381,308

$

448,281

$

803,811

$

708,631

Mortgage loans sold

$

437,554

$

395,494

$

895,737

$

621,532

1

Total mortgage loan originations does not include mortgage lender services.

Mortgage loan originations for the mortgage banking segment were $422.5 milliondecreased 14.9 percent for the second quarter of 2021 and $260.4 millionincreased 13.4 percent for the first quarterssix months of 2021 and 2020, respectively. Sustainedcompared to the same periods in 2020. We believe sustained historically low interest rates on mortgage loans and higher demand in the housing market have contributed to continued higher volume in the broader mortgage industry during the first quartersix months of 2021. Mortgage loan originations forProduction of the mortgage banking segment has begun to moderate during the firstsecond quarter of 2021, for refinancings and home purchases were $235.2 million and $187.3 million, respectively,but remains elevated relative to historical levels. Refinancings, which increased as a share of mortgage loan originations during 2020 compared to $95.4 million and $165.0 million, respectively, during the first quarterhistorical levels, declined as a share of 2020. While mortgage loan origination volume increased 62 percentoriginations during 2021, which contributed to higher average margins on sales of loans for the second quarter and first six months of 2021 compared to the first quarter of 2020, gainssame periods in 2020. Gains on sales of loans, while driven in part by mortgage loan originations, also includes the effects of changes in locked loan commitments, which reflectsreflect the volume of mortgage loan applications that are in process and have not closed.  Locked loan commitments decreased by $6.2$37.7 million in the firstsecond quarter of 2021 and grew by $170.1$2.7 million in the firstsecond quarter of 2020.  Locked loan commitments decreased by $43.9 million in the first six months of 2021 and grew by $172.8 million in the first six months of 2020.  Locked loan commitments were $192.5$154.7 million at March 31,June 30, 2021, compared to $198.7$198.6 million at December 31, 2020 and $245.2$247.9 million at March 31,June 30, 2020.

Mortgage lender services fee income is derived from providing mortgage origination functions to third-party mortgage lenders. Mortgage lender services volume increased for the second quarter and first six months of 2021 compared to the same periods in 2020 as a result of business with new customers as well as higher volume with existing customers.

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

TABLE 7:8: Consumer Finance Segment Operating Results

Three Months Ended March 31, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

    

2021

    

2020

    

2021

    

2020

    

Interest income

$

9,249

$

10,101

$

9,421

$

9,689

$

18,670

$

19,790

Interest expense

2,200

2,286

2,302

2,090

4,502

4,376

Net interest income

7,049

7,815

7,119

7,599

14,168

15,414

Provision for loan losses

250

1,650

(430)

2,200

(180)

3,850

Net interest income after provision for loan losses

6,799

6,165

7,549

5,399

14,348

11,564

Noninterest income

112

117

74

80

186

197

Noninterest expense:

Salaries and employee benefits

2,240

2,243

2,206

2,134

4,446

4,377

Occupancy expense

 

169

 

164

 

188

 

161

357

325

Data processing

292

314

343

294

635

608

Other expenses

747

909

946

647

1,693

1,556

Total noninterest expenses

3,448

3,630

3,683

3,236

7,131

6,866

Income before income taxes

3,463

2,652

3,940

2,243

7,403

4,895

Income tax expense

 

936

 

722

 

1,065

 

605

2,001

1,327

Net income

$

2,527

$

1,930

$

2,875

$

1,638

$

5,402

$

3,568

The consumer finance segment reported net income of $2.5$2.9 million for the firstsecond quarter of 2021, compared to net income of $1.9$1.6 million for the second quarter of 2020.  The consumer finance segment reported net income of $5.4 million for the first quartersix months of 2021, compared to net income of $3.6 million for the first six months of 2020.  The increase in consumer finance segment quarterly net income of $597,000 was due primarily to lower provision for loan losses, partially offset by lower net interest income.

Interest income decreased $852,000$268,000 and $1.1 million for the second quarter and first quartersix months of 2021, respectively, compared to the first quartersame periods of 2020 due primarily to lower average yields on loans, resulting from continued competition inpurchases of loan contracts at lower yields than the non-prime automobile loan business, including the effectportfolio average yield, partially as a result of a lower interest rate environment,rates for non-prime auto loans and the consumer finance segment’s pursuing growth insegment continuing to pursue loan contracts of higher credit quality, lower yielding loans, which includeincluding prime marine and RV loans.  The effect of lower average yields on loans was partially offset by higher average balances of loans outstanding. Provision for loan losses decreased $2.6 million and $4.0 million for the second quarter and first quartersix months of 2021, respectively, as compared to the same periods of 2020 due primarily to lower net charge-offs and due to qualitative adjustments toas well as reserves recognized in 2020 related to the COVID-19 pandemic, that increased provision for loan lossesa portion of which was released in the firstsecond quarter of 2020.2021 as credit deterioration since the onset of the pandemic has so far not been experienced to the extent previously anticipated. Charge-offs at the consumer finance segment have continued to decrease as a result of continued improvement in the credit quality of purchased loan contracts as well as the temporary effects of government stimulus programs and a strong used car market. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio.  However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases weaker than expected consumer spending or a reduction in government stimulus priorthe emergence of variants of the COVID-19 virus that threaten to a recovery in employment,disrupt economic activity, additional provision for loan losses may be required in future periods.

In April 2021, the consumer finance segment relocated its headquarters to a newly constructed office that it owns, and exited its prior leased office space.  Beginning with the second quarter of 2021, the consumer finance segment expects to realize cost savings in occupancy expense related to the headquarters relocation.

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 89 summarizes the allowance activity for the periods indicated:

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TABLE 8:9: Allowance for Loan Losses

Three Months Ended March 31, 

 

Three Months Ended June 30, 

 

(Dollars in thousands)

    

2021

    

2020

 

    

2021

    

2020

 

Balance, beginning of period

$

39,156

$

32,873

$

39,033

$

33,298

Provision for loan losses:

Community Banking

 

 

1,000

 

(200)

 

1,400

Mortgage Banking

 

30

 

 

30

 

Consumer Finance

 

250

 

1,650

 

(430)

 

2,200

Total provision for loan losses

 

280

 

2,650

 

(600)

 

3,600

Loans charged off:

Real estate—residential mortgage

 

 

(4)

Commercial, financial and agricultural1

 

 

(18)

Consumer

 

(45)

 

(93)

 

(36)

 

(40)

Consumer finance

 

(1,651)

 

(3,426)

 

(791)

 

(1,996)

Total loans charged off

 

(1,696)

 

(3,541)

Total loans charged off1

 

(827)

 

(2,036)

Recoveries of loans previously charged off:

Real estate—residential mortgage

 

7

 

4

 

6

 

60

Commercial, financial and agricultural1

 

 

1

Commercial, financial and agricultural2

 

1

 

1

Equity lines

 

1

 

Consumer

 

35

 

62

 

30

 

43

Consumer finance

 

1,251

 

1,249

 

1,307

 

1,128

Total recoveries

 

1,293

 

1,316

Total recoveries1

 

1,345

 

1,232

Net loans charged off

 

(403)

 

(2,225)

 

518

 

(804)

Balance, end of period

$

39,033

$

33,298

$

38,951

$

36,094

Ratio of annualized net charge-offs to average total loans outstanding during period for Community Banking

 

0.01

%  

 

0.01

Ratio of annualized net charge-offs to average total loans outstanding during period for Consumer Finance

 

0.51

%  

 

2.81

Ratio of annualized net recoveries to average total loans outstanding during period for Community Banking

 

(0.01)

%  

 

(0.03)

Ratio of annualized net (recoveries) charge-offs to average total loans outstanding during period for Consumer Finance

 

(0.63)

%  

 

1.15

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Six Months Ended June 30, 

 

(Dollars in thousands)

  

2021

   

2020

   

Balance, beginning of period

$

39,156

$

32,873

Provision for loan losses:

Community Banking

 

(200)

 

2,400

Mortgage Banking

 

60

 

Consumer Finance

 

(180)

 

3,850

Total provision for loan losses

 

(320)

 

6,250

Loans charged off:

Real estate—residential mortgage

 

 

(4)

Commercial, financial and agricultural2

 

 

(18)

Consumer

 

(81)

 

(133)

Consumer finance

 

(2,442)

 

(5,422)

Total loans charged off1

 

(2,523)

 

(5,577)

Recoveries of loans previously charged off:

Real estate—residential mortgage

 

13

 

64

Commercial, financial and agricultural2

 

1

 

2

Equity lines

 

1

 

Consumer

 

65

 

105

Consumer finance

 

2,558

 

2,377

Total recoveries1

 

2,638

 

2,548

Net loans charged off

 

115

 

(3,029)

Balance, end of period

$

38,951

$

36,094

Ratio of annualized net charge-offs (recoveries) to average total loans outstanding during period for Community Banking

 

0.01

 

(0.01)

Ratio of annualized net (recoveries) charge-offs to average total loans outstanding during period for Consumer Finance

 

(0.07)

 

1.99

1

1

Charge-offs and recoveries for real estate residential mortgages; commercial, financial and agricultural loans; equity lines and consumer loans were recorded at the community banking segment. Charge-offs and recoveries for consumer finance loans were recorded at the consumer finance segment.  The mortgage banking segment had no charge-offs or recoveries for the three or six months ended June 30, 2021 and 2020.
2Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

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Table 910 presents the allocation of the allowance for loan losses as of the dates indicated.

TABLE 9:10: Allocation of Allowance for Loan Losses

 

March 31, 

December 31, 

 

June 30, 

December 31, 

 

(Dollars in thousands)

    

2021

    

    

2020

 

    

2021

    

    

2020

 

Allocation of allowance for loan losses:

Real estate—residential mortgage

$

2,893

$

2,914

$

2,814

$

2,914

Real estate—construction 1

 

822

 

975

 

793

 

975

Commercial, financial and agricultural 2

 

11,007

 

10,696

 

11,028

 

10,696

Equity lines

 

671

 

687

 

600

 

687

Consumer

 

277

 

371

 

267

 

371

Consumer finance

 

23,363

 

23,513

 

23,449

 

23,513

Total allowance for loan losses

$

39,033

$

39,156

$

38,951

$

39,156

Ratio of loans to total period-end loans:

Real estate—residential mortgage

 

16

%  

 

16

 

16

%  

 

16

Real estate—construction 1

 

4

 

4

 

4

 

4

Commercial, financial and agricultural 2

 

53

 

52

 

52

 

52

Equity lines

 

3

 

4

 

3

 

4

Consumer

 

1

 

1

 

1

 

1

Consumer finance

 

23

 

23

 

24

 

23

 

100

%  

 

100

 

100

%  

 

100

1Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
2Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

Loans by credit quality indicators are presented in Table 1011 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 10:11: Credit Quality Indicators

 

Loans by credit quality indicators as of March 31,June 30, 2021 were as follows:

   

   

Special

   

   

Substandard

   

 

   

   

Special

   

   

Substandard

   

 

(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total1

 

Pass

Mention

Substandard

Nonaccrual

Total1

 

Real estate – residential mortgage

$

215,312

$

699

$

631

$

278

$

216,920

$

216,599

$

864

$

455

$

271

$

218,189

Real estate – construction 2

 

52,884

 

 

 

 

52,884

 

53,921

 

 

 

 

53,921

Commercial, financial and agricultural 3

 

712,737

 

18,611

 

8,223

 

2,409

 

741,980

 

703,539

 

16,793

 

7,496

 

2,349

 

730,177

Equity lines

 

46,658

 

126

 

3

 

189

 

46,976

 

43,418

 

176

 

1

 

187

 

43,782

Consumer

 

8,964

 

42

 

16

 

110

 

9,132

 

8,155

 

41

 

 

106

 

8,302

$

1,036,555

$

19,478

$

8,873

$

2,986

$

1,067,892

$

1,025,632

$

17,874

$

7,952

$

2,913

$

1,054,371

Non-

Non-

(Dollars in thousands)

   

Performing

   

Performing

   

Total

 

   

Performing

   

Performing

   

Total

 

Consumer finance

$

316,962

$

182

$

317,144

$

332,735

$

138

$

332,873

1At March 31,June 30, 2021, the Corporation did not have any loans classified as Doubtful or Loss.
2Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
3Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

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

   

   

Special

   

   

Substandard

   

 

(Dollars in thousands)

Pass

Mention

Substandard

Nonaccrual

Total1

 

Real estate – residential mortgage

$

215,712

$

1,715

$

595

$

276

$

218,298

Real estate – construction 2

 

62,147

 

 

 

 

62,147

Commercial, financial and agricultural 3

 

668,167

 

18,631

 

10,989

 

2,428

 

700,215

Equity lines

 

48,140

 

132

 

3

 

191

 

48,466

Consumer

 

10,832

 

48

 

41

 

107

 

11,028

$

1,004,998

$

20,526

$

11,628

$

3,002

$

1,040,154

Non-

(Dollars in thousands)

   

Performing

   

Performing

   

Total

 

Consumer finance

$

311,850

$

402

$

312,252

1At December 31, 2020, the Corporation did not have any loans classified as Doubtful or Loss.
2Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
3Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending.

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

Table 1112 summarizes nonperforming assets as of the dates indicated.

TABLE 11:12: Nonperforming Assets

Community Banking Segment

March 31, 

December 31, 

June 30, 

December 31, 

(Dollars in thousands)

    

2021

    

2020

    

    

2021

    

2020

    

Loans, excluding purchased loans and PPP loans

$

870,811

$

862,917

$

908,974

$

862,917

Purchased performing loans1

77,491

87,096

67,529

87,096

Purchased credit impaired loans1

5,878

6,359

5,370

6,359

PPP loans2

102,573

76,527

62,029

76,527

Total loans

$

1,056,753

$

1,032,899

$

1,043,902

$

1,032,899

Nonaccrual loans

$

2,956

$

2,971

$

2,883

$

2,971

OREO3

 

907

 

907

 

857

 

907

Total nonperforming assets

$

3,863

$

3,878

$

3,740

$

3,878

Accruing loans past due for 90 days or more

$

145

$

145

$

$

145

Troubled debt restructurings (TDRs)4

$

3,000

$

3,575

$

2,898

$

3,575

Allowance for loan losses (ALL)

$

15,032

$

15,035

$

14,834

$

15,035

Nonperforming assets to total loans and OREO

 

0.37

%  

 

0.38

%  

 

0.36

%  

 

0.38

%  

ALL to total loans, excluding purchased credit impaired loans5

 

1.43

 

1.46

 

1.43

 

1.46

ALL to total loans, excluding purchased loans and PPP loans

1.73

1.74

1.63

1.74

ALL to total nonaccrual loans

 

508.53

 

506.06

 

514.53

 

506.06

Annualized net charge-offs to average total loans

0.01

0.01

0.01

0.01

1Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The remaining discount for the purchased performing loans was $1.5$1.3 million at March 31,June 30, 2021 and $1.8 million at December 31, 2020. The remaining discount for the purchased credit impaired loans was $6.1$5.3 million at March 31,June 30, 2021 and $6.4 million at December 31, 2020.  
2The principal amount of outstanding PPP loans was $106.3$64.7 million at March 31,June 30, 2021 and $78.7 million at December 31, 2020.
3OREO includes $835,000 at both March 31, 2020June 30, 2021 and December 31, 2020 related to the land and buildings of the Bellgrade branch, which was consolidated into a nearby branch in 2019.
4Nonaccrual loans include nonaccrual TDRs of $301,000$297,000 at March 31,June 30, 2021 and $257,000 at December 31, 2020.
5The ratio of ALL to total loans, excluding purchased credit impaired loans, includes purchased performing loans and loans originated under the PPP for which no allowance for loan losses is required.  

Mortgage Banking Segment

March 31, 

December 31, 

June 30, 

December 31, 

(Dollars in thousands)

    

2021

    

2020

    

    

2021

    

2020

    

Nonaccrual loans

$

30

$

31

$

30

$

31

Total loans

$

11,139

$

7,255

$

10,469

$

7,255

ALL

$

638

$

608

$

668

$

608

Nonaccrual loans to total loans

 

0.27

%

0.43

%

 

0.29

%

0.43

%

ALL to total loans

 

5.73

8.38

 

6.38

8.38

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Consumer Finance Segment

March 31, 

December 31, 

June 30, 

December 31, 

(Dollars in thousands)

    

2021

    

2020

    

    

2021

    

2020

    

Nonaccrual loans

$

182

$

402

$

138

$

402

Accruing loans past due for 90 days or more

$

$

$

$

Repossessed assets

$

156

$

291

$

151

$

291

Total loans

$

317,144

$

312,252

$

332,873

$

312,252

ALL

$

23,363

$

23,513

$

23,449

$

23,513

Nonaccrual consumer finance loans to total consumer finance loans

 

0.06

%  

 

0.13

%  

 

0.04

%  

 

0.13

%  

ALL to total consumer finance loans

 

7.37

 

7.53

 

7.04

 

7.53

Annualized net charge-offs to average total loans

0.51

1.54

Annualized net (recoveries) charge-offs to average total loans

(0.07)

1.54

Nonperforming assets of the community banking segment totaled $3.7 million at June 30, 2021 compared to $3.9 million at March 31, 2021 and December 31, 2020. Nonperforming assets consisted of $2.9 million in nonaccrual loans and $857,000 in OREO at March 31,June 30, 2021 and December 31, 2020 consisted of $3.0 million in nonaccrual loans and $907,000 in OREO.OREO at December 31, 2020.  Nonaccrual loans were comprised primarily of one commercial relationship at March 31,June 30, 2021 and December 31, 2020.  

The allowance for loan losses as a percentage of total loans at the community banking segment, excluding PCI loans, at March 31,June 30, 2021 decreased to 1.43 percent, compared to 1.46 percent at December 31, 2020.  The allowance for loan losses as a percentage of total loans excluding all purchased loans and loans originated under the PPP was 1.73decreased to 1.63 percent at March 31,June 30, 2021, compared to 1.74 percent at December 31, 2020, as credit deterioration since the onset of the pandemic has so far not been experienced to the extent previously anticipated.  The community banking segment recorded a net reversal of provision for loan losses of $200,000 for the second quarter and first six months of 2021, as release of reserves was partially offset by provision related to loan growth, compared to provision for loan losses of $1.4 million and $2.4 million, respectively, for the same periods in 2020.  As of March 31, 2021, the community banking segment maintained reserves that were added during 2020 based on qualitative adjustments related to the COVID-19 pandemic. As of March 31,June 30, 2021, compared to December 31, 2020, there have not been significant changes in the overall credit quality of the loan portfolio, although management believes that the effects of PPP loans and government stimulus may be delaying signs of credit deterioration.  At March 31,June 30, 2021, compared to December 31, 2020, the allowance for loan losses remained unchangeddecreased to $14.8 million, compared to $15.0 million at $15.0 million.December 31, 2020.  Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio.  However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or weaker than expected consumer spending,the emergence of variants of the COVID-19 virus that threaten to disrupt economic activity, additional provision for loan losses may be required in future periods.

Nonaccrual loans at the consumer finance segment were $182,000$138,000 at March 31,June 30, 2021, compared to $402,000 at December 31, 2020. Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent.delinquent and due to improvement in loan performance.  Repossessed vehicles of the consumer finance segment are classified as other assets and consist only of vehicles the Corporation has the legal right to sell.  Prior to the reclassification from loans to repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the deficiency) is charged against the allowance for loan losses. At March 31,June 30, 2021, repossessed vehicles available for sale totaled $156,000,$151,000, compared to $291,000 at December 31, 2020.

The consumer finance segment’s allowance for loan losses decreased $150,000$64,000 to $23.4 million at March 31,June 30, 2021 from $23.5 million at December 31, 2020. The consumer finance segment recorded a net reversal of provision for loan losses of $430,000 and $180,000 for the second quarter and first six months of 2021, respectively, as release of reserves was partially offset by provision related to loan growth, compared to provision for loan losses of $2.2 million and $3.9 million, respectively, for the same periods in 2020.  Total delinquent loans as a percentage of total loans decreased to 1.561.77 percent at March 31,June 30, 2021 compared to 3.08 percent at December 31, 2020 and 3.382.05 percent at March 31,June 30, 2020.  Average amounts of payment deferrals on a monthly basis, which are not included in delinquent loans, were 1.161.02 percent and 2.525.58 percent as a percentage of average non-prime automobile loans outstanding for the second quarter of 2021 and 2020, respectively and were 1.09 percent and 4.05 percent for the first quartersix months of 2021 and 2020, respectively.  The consumer finance segment at times offers payment deferrals to borrowers as a portfolio management technique. The consumer finance segment’ssegment experienced annualized net recoveries for the first six months of 2021 of 0.07 percent of average total loans, compared to

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net charge-offs of 1.99 percent for the first six months of 2020.  The decline in the net charge-off ratio for the first quartersix months of 2021 decreasedcompared to 0.51 percent from 2.81 percent for the first quartersix months of 2020 due toreflects a lower number of charge-offs during the first quarter of 2021 as a result of improvement in loan performance and lower losses per loan charged off as a result of a strong used car market.market, which results in lower charge-offs upon sale of repossessed autos. Improvement in loan performance has resulted from the consumer finance segment continuing to purchase higher quality loans, including marine and RV loans, as well as borrowers benefitting from the government’s stimulus measures in response to the pandemic. The Corporation can give no assurance as to the continuation of government stimulus measures, or the extent to which they will be effective.effective, or that prices for used cars will remain elevated. The allowance for loan losses as a percentage of loans decreased to 7.377.04 percent at March 31,June 30, 2021, compared to 7.53 percent at December 31, 2020. The decrease in2020 as credit deterioration since the levelonset of the allowance for

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loan losses as a percentage of total loans is primarily a result ofCOVID-19 pandemic has so far not been experienced to the extent previously anticipated and due to lower net charge-offs.  Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio.  However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases weaker than expected consumer spending or a reduction in government stimulus priorthe emergence of variants of the COVID-19 virus that threaten to a recovery in employment,disrupt economic activity, additional provision for loan losses may be required in future periods.

Impaired Loans

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

TABLE 12:13: Impaired Loans

Impaired loans, which included TDRs of $3.0$2.9 million, and the related allowance at March 31,June 30, 2021, were as follows:

    

    

    

    

 

    

    

    

    

 

Recorded

Recorded

 

Recorded

Recorded

 

Investment

Investment

Average

 

Investment

Investment

Average

 

Unpaid

in Loans

in Loans

Balance-

Interest

Unpaid

in Loans

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

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

$

1,753

$

446

$

1,194

$

69

$

1,758

$

17

$

1,651

$

558

$

982

$

62

$

1,661

$

35

Commercial, financial and agricultural:

Commercial real estate lending

 

1,395

 

 

1,395

 

95

 

1,396

 

18

 

1,393

 

 

1,395

 

92

 

1,395

 

35

Commercial business lending

 

2,430

 

 

2,408

 

625

 

2,410

 

 

2,402

 

 

2,349

 

572

 

2,375

 

Equity lines

 

120

 

110

 

 

 

117

 

 

119

 

109

 

 

 

116

 

1

Consumer

 

286

 

 

105

 

102

 

106

 

 

119

 

 

102

 

101

 

104

 

Total

$

5,984

$

556

$

5,102

$

891

$

5,787

$

35

$

5,684

$

667

$

4,828

$

827

$

5,651

$

71

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

    

    

    

    

 

Recorded

Recorded

 

Investment

Investment

Average

 

Unpaid

in Loans

in Loans

Balance-

Interest

Principal

without

with

Related

Impaired

Income

(Dollars in thousands)

Balance

Specific Reserve

Specific Reserve

Allowance

Loans

Recognized

 

Real estate – residential mortgage

$

2,326

$

931

$

1,279

$

77

$

2,353

$

105

Commercial, financial and agricultural:

Commercial real estate lending

 

1,397

 

 

1,397

 

89

 

1,404

 

73

Commercial business lending

 

2,430

 

 

2,428

 

585

 

2,573

 

Equity lines

 

120

 

111

 

 

 

119

 

2

Consumer

 

147

 

 

132

 

128

 

154

 

3

Total

$

6,420

$

1,042

$

5,236

$

879

$

6,603

$

183

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TDRs at March 31,June 30, 2021 and December 31, 2020 were as follows:

TABLE 13:14: Troubled Debt Restructurings

March 31, 

December 31,

June 30, 

December 31,

(Dollars in thousands)

    

2021

    

2020

 

    

2021

    

2020

 

Accruing TDRs

$

2,699

$

3,318

$

2,601

$

3,318

Nonaccrual TDRs1

 

301

 

257

 

297

 

257

Total TDRs2

$

3,000

$

3,575

$

2,898

$

3,575

1Included in nonaccrual loans in Table 11:12: Nonperforming Assets.
2Included in impaired loans in Table 12:13: Impaired Loans.

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

The Corporation has accommodated certain borrowers affected by the COVID-19 pandemic by granting short-term payment deferrals or periods of interest-only payments.  Generally, a short-term payment deferral does not result in a loan modification being classified as a TDR. Furthermore, certain modifications are not required to be evaluated for classification as a TDR under statutory and regulatory relief related to the COVID-19 pandemic. There were no modifications offered during the first quartersix months of 2021 which were not evaluated for classification as a TDR. The Corporation has granted loan modifications related to COVID-19 on aggregate balances of $103.6 million since the beginning of the pandemic. At March 31,June 30, 2021, loans whose modification periods had not ended had aggregate balances of $23.5$23.6 million and all such loans are performing in accordance with their modified terms, which includes payments of interest. Management monitors the credit risk related to these loans and has adjusted risk ratings as applicable as of March 31,June 30, 2021. Management cannot predict the overall impact of the COVID-19 pandemic on its loan portfolio or the extent of payment deferrals or other modifications that may be granted.  Depending on the severity and duration of the economic disruption caused by the COVID-19 pandemic, the Corporation may experience an increase in delinquencies that may lead to further loan modifications, including loan modifications that may be classified as TDRs.

FINANCIAL CONDITION

At March 31,June 30, 2021, the Corporation had total assets of $2.2 billion, which was an increase of $82.3 million since December 31, 2020. The increase resulted primarily from loanincreases in cash reserves, available for sale securities and loans held for investment, funded by deposit growth.growth, partially offset by a decrease in loans held for sale.

Loan Portfolio

Table 1415 presents information pertaining to the composition of loans held for investment.

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TABLE 14:15: Summary of Loans Held for Investment

March 31, 2021

December 31, 2020

June 30, 2021

December 31, 2020

(Dollars in thousands)

    

Amount

Percent

  

    

Amount

    

Percent

 

    

Amount

Percent

  

    

Amount

    

Percent

 

Real estate—residential mortgage

$

216,920

16

$

218,298

16

$

218,189

16

$

218,298

16

Real estate—construction 1

 

52,884

 

4

 

62,147

4

 

53,921

 

4

 

62,147

4

Commercial, financial, and agricultural 2

 

741,980

 

53

 

700,215

52

 

730,177

 

52

 

700,215

52

Equity lines

 

46,976

 

3

 

48,466

4

 

43,782

 

3

 

48,466

4

Consumer

 

9,132

 

1

 

11,028

1

 

8,302

 

1

 

11,028

1

Consumer finance

 

317,144

 

23

 

312,252

23

 

332,873

 

24

 

312,252

23

Total loans

 

1,385,036

 

100

 

1,352,406

100

 

1,387,244

 

100

 

1,352,406

100

Less allowance for loan losses

 

(39,033)

 

 

(39,156)

 

(38,951)

 

 

(39,156)

Total loans, net

$

1,346,003

 

$

1,313,250

$

1,348,293

 

$

1,313,250

1Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
2Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending (which includes loans originated under the PPP).

Beginning in April 2020, the community banking segment originated loans under the PPP which are guaranteed by the SBA, and in some cases borrowers may be eligible to obtain forgiveness of the loans, in which case loans would be repaid by the SBA.  Net PPP origination fees recognized in the second quarter and first quartersix months of 2021 were $864,000.$1.2 million and $2.1 million, respectively, compared to net PPP origination fees recognized in the second quarter and first six months of 2020 of $377,000.  Since the second quarter of 2020, the community banking segment has recognized $2.4$3.7 million of net fees under the PPP, and there were unrecognized net deferred PPP fees at March 31,June 30, 2021 of $3.7$2.6 million, which are expected to be recognized primarily in 2021 and 2022. 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 1516 presents information pertaining to loans originated under the PPP.

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

TABLE 15:16: Paycheck Protection Program Loans

March 31, 

December 31,

June 30, 

December 31,

(Dollars in thousands)

    

2021

    

2020

 

    

2021

    

2020

 

Outstanding principal

$

106,288

$

78,684

$

64,666

$

78,684

Unrecognized deferred fees, net

 

(3,715)

 

(2,157)

 

(2,637)

 

(2,157)

$

102,573

$

76,527

$

62,029

$

76,527

In evaluating the allowance for loan losses, the community banking segment considered its exposure to segments of the economy that it believes have been or will be most sensitive to the impacts of the COVID-19 pandemic.  Table 1617 presents balances of loans to borrowers in these sensitive industries at March 31,June 30, 2021, excluding PPP loans, and the exposure of the community banking segment to those borrowers, which includes available credit.

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TABLE 16:17: Sensitive Industries and Exposure

March 31, 2021

June 30, 2021

(Dollars in thousands)

Balance

Exposure

Balance

Exposure

Apartments

$

82,074

$

94,398

$

86,046

$

96,281

Health care1

65,974

66,863

64,859

65,702

Commercial real estate - retail2

51,073

56,009

43,987

47,770

Restaurants

14,444

14,918

14,125

14,600

Fitness centers and recreation

11,208

11,927

11,402

12,102

Hospitality

8,154

31,782

11,061

31,741

$

232,927

$

275,897

$

231,480

$

268,196

________________________

1Includes primarily loans secured by medical office buildings and assisted living facilities.
2Includes 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.

The increase in total loans from December 31, 2020 to March 31, 2021 was due primarily to commercial loan growth at the community banking segment, which included a $26.0 million increase in loans originated under the PPP.

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,June 30, 2021 and December 31, 2020, all securities in the Corporation’s investment portfolio were classified as available for sale.

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

TABLE 17:18: Securities Available for Sale

March 31, 2021

December 31, 2020

 

June 30, 2021

December 31, 2020

 

(Dollars in thousands)

    

Amount

    

Percent

    

Amount

    

Percent

 

    

Amount

    

Percent

    

Amount

    

Percent

 

U.S. government agencies and corporations

$

53,681

17

%  

$

48,282

17

%

$

60,898

17

%  

$

48,282

17

%

Mortgage-backed securities

 

150,518

47

 

123,714

43

 

180,222

51

 

123,714

43

Obligations of states and political subdivisions

 

103,154

32

 

102,805

36

 

100,284

28

 

102,805

36

Corporate and other debt securities

 

13,932

4

 

11,588

4

 

15,482

4

 

11,588

4

Total available for sale securities at fair value

$

321,285

100

%  

$

286,389

100

%

$

356,886

100

%  

$

286,389

100

%

Securities available for sale increased by $70.5 million to $356.9 million at June 30, 2021, compared to $286.4 million at December 31, 2020, due primarily to purchases of mortgage-backed securities and U.S. government agency debt securities with short maturities, in order to utilize excess liquidity by investing in debt securities rather than holding lower-yielding cash reserves.

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

Deposits

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

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During the first quartersix months of 2021, deposits increased $79.8$79.4 million to $1.83 billion at March 31,June 30, 2021, compared to $1.75 billion at December 31, 2020. Non-time deposits increased $99.0 million and time deposits decreased $19.6 million during the same period. This increase in non-time deposits included the effect of PPP loans and direct government payments received by depositors.

The Corporation had $5.6 million$4,000 in brokered money market and time deposits outstanding at March 31,June 30, 2021, compared to $6.1 million at December 31, 2020. The source of these brokered deposits is primarily uninvested cash balances held in third-party brokerage sweep accounts. The Corporation uses brokered deposits as a means of diversifying liquidity sources, as opposed to a long-term deposit gathering strategy.

Borrowings

Borrowings increased to $79.7$79.4 million at March 31,June 30, 2021 from $76.2 million at December 31, 2020 due primarily due to fluctuations in short-term borrowings with commercial customers.

Off-Balance Sheet Arrangements

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

At March 31,June 30, 2021, the mortgage banking segment had $181.1$143.9 million of interest rate lock commitments (IRLCs) and $161.8$104.4 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $342.9$248.3 million in mortgage loans.  Also at March 31,June 30, 2021, the mortgage banking segment had $11.4$10.8 million of IRLCs and $9.0$10.2 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward sales of $11.3$15.3 million of TBA securities and mandatory-delivery forward sales contracts for $7.6$4.6 million in mortgage loans.  

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

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

The Corporation has interest rate swaps that qualify and are designated as cash flow hedges. The Corporation’s cash flow hedges effectively modify the Corporation’s exposure to interest rate risk by converting variable rates of interest on $25.0 million of the Corporation’s trust preferred capital notes to fixed rates of interest for periods that end between June 2024 and June 2029. The cash flow hedges’ total notional amount is $25.0 million. At March 31,June 30, 2021, the cash flow hedges had a fair value of $891,000,$1.1 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,June 30, 2021, the total notional amount of the interest rate swaps related to these loans was $168.9$168.3 million and the interest rate swaps had a net fair value of zero, with $4.5$5.5 million recognized in other assets and $4.5$5.5 million recognized in other liabilities.  These swaps are not designated as hedging instruments; therefore, changes in fair value are recorded in other noninterest expense.

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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 March 31,June 30, 2021 and at December 31, 2020, $5.6$6.4 million and $9.9 million, respectively, of cash collateral was maintained with dealer counterparties and was included in “Other assets” in the Consolidated Balance Sheets.

Contractual Obligations

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

Liquidity

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

Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled $330.62$373.0 million at March 31,June 30, 2021, compared to $227.9 million at December 31, 2020. The Corporation’s funding sources, including capacity, amount outstanding and amount available at March 31,June 30, 2021 are presented in Table 18.19.

TABLE 18:19: Funding Sources

March 31, 2021

 

June 30, 2021

 

(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

 

35,000

 

 

35,000

 

35,000

 

 

35,000

Borrowings from FHLB

 

239,057

 

 

239,057

 

187,380

 

 

187,380

Borrowings from Federal Reserve Bank

 

124,923

 

 

124,923

 

115,851

 

 

115,851

Revolving bank line of credit

 

50,000

 

 

50,000

 

50,000

 

 

50,000

Total

$

543,980

$

$

543,980

$

483,231

$

$

483,231

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

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

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Capital Resources

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

TABLE 19:20: Regulatory Capital

Minimum To Be

Well Capitalized

Under Prompt

Minimum Capital

Corrective Action

Actual

Requirements

Provisions

(Dollars in thousands)

 

   Amount   

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

As of March 31, 2021:

Total Capital (to Risk-Weighted Assets)

Corporation

$

245,860

15.7

%

$

125,005

 

8.0

%

N/A

 

N/A

C&F Bank

 

219,286

14.2

 

123,284

 

8.0

$

154,105

 

10.0

%

Tier 1 Capital (to Risk-Weighted Assets)

Corporation

 

202,087

12.9

 

93,754

 

6.0

 

N/A

 

N/A

C&F Bank

 

199,779

13.0

 

92,463

 

6.0

 

123,284

 

8.0

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

Corporation

177,087

11.3

70,315

4.5

N/A

N/A

C&F Bank

199,779

13.0

69,347

4.5

100,168

6.5

Tier 1 Capital (to Average Tangible Assets)

Corporation

 

202,087

9.8

 

82,709

 

4.0

 

N/A

 

N/A

C&F Bank

 

199,779

9.8

 

81,845

 

4.0

 

102,306

 

5.0

As of December 31, 2020:

Total Capital (to Risk-Weighted Assets)

Corporation

$

240,060

15.2

%

$

125,947

 

8.0

%

N/A

 

N/A

C&F Bank

 

214,151

13.8

 

124,291

 

8.0

$

155,364

 

10.0

%

Tier 1 Capital (to Risk-Weighted Assets)

Corporation

 

196,140

12.5

 

94,460

 

6.0

 

N/A

 

N/A

C&F Bank

 

194,487

12.5

 

93,219

 

6.0

 

124,291

 

8.0

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

Corporation

171,140

10.9

70,845

4.5

N/A

N/A

C&F Bank

194,487

12.5

69,914

4.5

100,987

6.5

Tier 1 Capital (to Average Tangible Assets)

Corporation

 

196,140

9.6

 

81,414

 

4.0

 

N/A

 

N/A

C&F Bank

 

194,487

9.6

 

80,640

 

4.0

 

100,800

 

5.0

June 30, 2021

Minimum Capital

Well Capitalized

Actual

Requirements

Requirements

(Dollars in thousands)

 

   Amount   

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

The Corporation

Total risk-based capital ratio

$

248,558

15.8

%

$

125,810

8.0

%

$

N/A

N/A

%

Tier 1 risk-based capital ratio

204,662

13.0

94,357

6.0

N/A

N/A

Common Equity Tier 1 capital ratio

179,662

11.4

70,768

4.5

N/A

N/A

Tier 1 leverage ratio

204,662

9.6

85,257

4.0

N/A

N/A

The Bank

Total risk-based capital ratio

$

226,139

14.6

%

$

123,998

8.0

%

$

154,997

10.0

%

Tier 1 risk-based capital ratio

206,523

13.3

92,998

6.0

123,998

8.0

Common Equity Tier 1 capital ratio

206,523

13.3

69,749

4.5

100,748

6.5

Tier 1 leverage ratio

206,523

9.8

84,420

4.0

105,525

5.0

December 31, 2020

Minimum Capital

Well Capitalized

Actual

Requirements

Requirements

(Dollars in thousands)

   Amount   

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

The Corporation

Total risk-based capital ratio

$

240,060

15.2

%

$

125,947

8.0

%

$

N/A

N/A

%

Tier 1 risk-based capital ratio

196,140

12.5

94,460

6.0

N/A

N/A

Common Equity Tier 1 capital ratio

171,140

10.9

70,845

4.5

N/A

N/A

Tier 1 leverage ratio

196,140

9.6

81,414

4.0

N/A

N/A

The Bank

Total risk-based capital ratio

$

214,151

13.8

%

$

124,291

8.0

%

$

155,364

10.0

%

Tier 1 risk-based capital ratio

194,487

12.5

93,219

6.0

124,291

8.0

Common Equity Tier 1 capital ratio

194,487

12.5

69,914

4.5

100,987

6.5

Tier 1 leverage ratio

194,487

9.6

80,640

4.0

100,800

5.0

The regulatory risk-based capital amounts presented above include:  (1) common equity tier 1 capital (CET1) which consists principally of common stock (including surplus) and retained earnings with adjustments for goodwill, intangible assets and deferred tax assets; (2) Tier 1 capital which consists principally of CET1 plus the Corporation’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for loan losses and the Corporation’s subordinated notes, as discussed further below.  The Total Capital ratio, Tier 1 Capital ratio and CET1 ratio are calculated as a percentage of risk-weighted assets. The Tier 1 Leverage ratio is calculated as a percentage of average tangible assets. In addition, the Corporation has made the one-time irrevocable election to continue treating accumulated other comprehensive income

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election to continue treating accumulated other comprehensive income (AOCI) under regulatory standards that were in place prior to the Basel III Final Rule in order to eliminate volatility of regulatory capital that can result from fluctuations in AOCI and the inclusion of AOCI in regulatory capital, as would otherwise be required under the Basel III Capital Rule.  For additional information about the Basel III Final Rules, see “Item 1. Business” under the heading “Regulation and Supervision” and “Item 8. Financial Statements and Supplementary Data,” under the heading “Note 18: Regulatory Requirements and Restrictions” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020.

In addition toThe Basel III rules established a “capital conservation buffer” of 2.5 percent above the regulatory minimum risk-based capital amounts presented above,ratios and are not included in the Bank must maintain atable above.  Including the capital conservation buffer, the minimum ratios are a common equity Tier I risk-based capital ratio of additional7.0 percent, a Tier I risk-based capital ratio of 2.58.5 percent, and a total risk-based capital ratio of risk-weighted assets as required by the Basel III Final Rule.  At March 31, 2021,10.5 percent.  The Corporation and the Bank exceeded the total capital conservation bufferthese ratios at June 30, 2021 and the tier 1 capital conservation buffer by 373 basis points and 446 basis points, respectively.  At December 31, 2020, the Bank exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by 328 basis points and 402 basis points, respectively.2020.

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

In November 2020, the Board of Directors of the Corporation authorized a program, effective November 17, 2020, to repurchase up to 365,000 shares of the Corporation’s common stock (the Repurchase Program) through November 30, 2021.  Repurchases under the program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. There were no repurchases underDuring the Corporation’s share repurchase program forsecond quarter and first six months of 2021, the first quarterCorporation repurchased $4.5 million of 2021.its common stock. As of March 31,June 30, 2021, the Corporation has made aggregate common stock repurchases of 7,45997,714 shares for an aggregate amount repurchased cost of $275,000$4.7 million under the Repurchase Program.  

Effects of Inflation and Changing Prices

The Corporation’s financial statements included herein have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP).  U.S. GAAP presently requires the Corporation to measure financial position and operating results primarily in terms of 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 GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Corporation’s performance. These include adjusted net income for the Corporation and for the community banking segment, adjusted earnings per share, adjusted ROE, adjusted ROA, tangible book value per share, and the following fully-taxable equivalent (FTE) measures: interest income on loans-FTE, interest income on securities-FTE, total interest income-FTE and net interest income-FTE.

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

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

TABLE 20:21: Reconciliation of Certain Non-GAAP Financial Measures

For The

Quarter Ended

For The

For The

(Dollars in thousands except for per share data)

3/31/2021

  

    

3/31/2020

  

Quarter Ended

Six Months Ended

Reconciliation of Certain Non-GAAP Financial Measures

6/30/2021

  

    

6/30/2020

  

    

6/30/2021

    

6/30/2020

 

Adjusted Net Income and Earnings Per Share

Net income, as reported

$

7,165

$

3,639

$

8,090

$

3,743

$

15,255

$

7,382

Merger related expenses1

-

785

-

347

-

1,132

Branch consolidation2

-

222

-

222

Change in tax law

-

(303)

-

(303)

Adjusted net income

$

7,165

$

4,424

$

8,090

$

4,009

$

15,255

$

8,433

Weighted average shares - basic and diluted

3,676,067

3,644,614

3,653,568

3,647,707

3,664,752

3,646,161

Earnings per share - basic and diluted, as reported

$

1.92

$

0.98

$

2.19

$

1.03

$

4.11

$

2.01

Merger related expenses

-

0.22

-

0.10

-

0.31

Branch consolidation

-

0.06

-

0.06

Change in tax law

-

(0.08)

-

(0.08)

Adjusted earnings per share - basic and diluted

$

1.92

$

1.20

$

2.19

$

1.11

$

4.11

$

2.30

Adjusted Return on Average Equity (ROE)

Average total equity, as reported

$

189,105

$

175,925

$

196,292

$

178,110

$

192,718

$

177,017

Annualized ROE, as reported

15.16

%

8.27

%

16.49

%

8.41

%

15.83

%

8.34

%

Adjusted annualized ROE

15.16

%

10.06

%

16.49

%

9.00

%

15.83

%

9.53

%

Adjusted Return on Average Assets (ROA)

Average total assets, as reported

$

2,101,231

$

1,847,536

$

2,158,826

$

1,955,461

$

2,130,188

$

1,901,498

Annualized ROA, as reported

1.36

%

0.79

%

1.50

%

0.77

%

1.43

%

0.78

%

Adjusted annualized ROA

1.36

%

0.96

%

1.50

%

0.82

%

1.43

%

0.89

%

Fully Taxable Equivalent Net Interest Income2

Adjusted Net Income, Community Banking Segment

Net income, community banking segment, as reported

$

3,925

$

294

$

6,718

$

951

Merger related expenses1

-

347

-

1,032

Branch consolidation2

-

222

-

222

Change in tax law

-

(303)

-

(303)

Adjusted net income, community banking segment

$

3,925

$

560

$

6,718

$

1,902

Fully Taxable Equivalent Net Interest Income3

Interest income on loans

$

21,813

$

22,897

$

22,466

$

22,204

$

44,279

$

45,101

FTE adjustment

17

30

25

31

45

61

FTE interest income on loans

$

21,830

$

22,927

$

22,491

$

22,235

$

44,324

$

45,162

Interest income on securities

$

1,217

$

1,283

$

1,352

$

1,328

$

2,569

$

2,611

FTE adjustment

124

132

116

138

240

270

FTE interest income on securities

$

1,341

$

1,415

$

1,468

$

1,466

$

2,809

$

2,881

Total interest income

$

23,076

$

24,778

$

23,866

$

23,584

$

46,942

$

48,362

FTE adjustment

141

162

141

169

285

331

FTE interest income

$

23,217

$

24,940

$

24,007

$

23,753

$

47,227

$

48,693

Net interest income

$

20,676

$

20,603

$

21,728

$

20,254

$

42,404

$

40,857

FTE adjustment

141

162

141

169

285

331

FTE net interest income

$

20,817

$

20,765

$

21,869

$

20,423

$

42,689

$

41,188

          

_____________________

1Merger related expenses are net of related income taxes of $172,000$92,000 and $264,000 for the quarterthree and six months ended March 31,June 30, 2020, respectively. Branch consolidation charges are net of related income taxes of $59,000 for both the three and six months ended June 30, 2020.
2Assuming a tax rate of 21%.

(Dollars in thousands except for per share data)

3/31/2021

12/31/2020

Tangible Book Value Per Share

Equity attributable to C&F Financial Corporation

$

198,069

$

193,805

Less goodwill

25,191

25,191

Less other intangible assets

2,213

2,291

Tangible equity attributable to C&F Financial Corporation

$

170,665

$

166,323

Shares outstanding

3,683,015

3,670,301

Book value per share

$

53.78

$

52.80

Tangible book value per share

$

46.34

$

45.32

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(Dollars in thousands except for per share data)

6/30/2021

12/31/2020

Tangible Book Value Per Share

Equity attributable to C&F Financial Corporation

$

201,201

$

193,805

Less goodwill

25,191

25,191

Less other intangible assets

2,134

2,291

Tangible equity attributable to C&F Financial Corporation

$

173,876

$

166,323

Shares outstanding

3,591,902

3,670,301

Book value per share

$

56.02

$

52.80

Tangible book value per share

$

48.41

$

45.32

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

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

 

interest rates, such as volatility in short-term interest rates or yields on U.S. Treasury bonds and increases or volatility in mortgage interest rates
general business conditions, as well as conditions within the financial markets
general economic conditions, including unemployment levels and slowdowns in economic growth, and particularly related to further and sustained economic impacts of the COVID-19 pandemic or variants thereof
the effectiveness of the Corporation’s efforts to respond to COVID-19 or variants thereof, the severity and duration of the COVID-19 pandemic, the pace and availability of COVID-19 vaccinations, the pace of economic recovery when the COVID-19 pandemic subsides and the heightened impact it has on many of the risks described herein
potential claims, damages and fines related to litigation or government actions, including litigation or actions arising from the Corporation’s participation in and administration of programs related to COVID-19, including, among other things, the PPP under the CARES Act
the legislative and regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve Board, and the effect of these policies on interest rates and business in our markets
the value of securities held in the Corporation’s investment portfolios
the quality or composition of the loan portfolios and the value of the collateral securing those loans
the inventory level and pricing of used automobiles, including sales prices of repossessed vehicles
the level of net charge-offs on loans and the adequacy of our allowance for loan losses
the level of indemnification losses related to mortgage loans sold
deposit flows

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the strength of the Corporation’s counterparties
competition from both banks and non-banks, including competition in the non-prime automobile finance markets
demand for financial services in the Corporation’s market area, including demand for loan products
reliance on third parties for key services
the commercial and residential real estate markets
the demand in the secondary residential mortgage loan markets
the Corporation’s technology initiatives and other strategic initiatives
the Corporation’s branch expansions and consolidations
cyber threats, attacks or events
expansion of C&F Bank’s product offerings
accounting principles, policies and guidelines, and elections made by the Corporation thereunder.

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Table of Contents

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

Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions, are not statements of historical fact, and are based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available.  Readers should not place undue reliance on any forward-looking statement. There can be no assurance that actual results will not differ materially from historical results or those expressed in or implied by such forward-looking statements, or that the beliefs, assumptions and expectations underlying such forward-looking statements will be proven to be accurate. Forward-looking statements are made as of the date of this report and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which the statement was made, except as otherwise required by law.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.CONTROLS AND PROCEDURES

The Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of March 31,June 30, 2021 to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation or its subsidiary to disclose material information required to be set forth in the Corporation’s periodic reports.

There were no changes in the Corporation’s internal control over financial reporting during the three months ended March 31,June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II – OTHER INFORMATION

 

ITEM 1A.RISK FACTORS

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

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

Issuer Purchases of Equity Securities

The Corporation’s Board of Directors authorized a program, effective November 17, 2020, to repurchase up to 365,000 shares of the Corporation’s common stock through November 30, 2021 (the Repurchase Program). Repurchases under

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Table of Contents

the Repurchase Program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act and shares repurchased will be returned to the status of authorized and unissued shares of common stock. There were no repurchases90,255 shares repurchased under the Repurchase Program during the firstsecond quarter of 2021. As of March 31,June 30, 2021, the Corporation has made aggregate common stock repurchases of 7,45997,714 shares for an aggregate cost of $275,000$4.7 million under the Repurchase Program.

The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended March 31,June 30, 2021.

    

    

    

    

Maximum Number

 

    

    

    

    

Maximum Number

 

(or Approximate

 

(or Approximate

 

Total Number of

Dollar Value) of

 

Total Number of

Dollar Value) of

 

Shares Purchased as

Shares that May Yet

 

Shares Purchased as

Shares that May Yet

 

Part of Publicly

Be Purchased

 

Part of Publicly

Be Purchased

 

Total Number of

Average Price Paid

Announced Plans or

Under the Plans or

 

Total Number of

Average Price Paid

Announced Plans or

Under the Plans or

 

Shares Purchased1 

per Share

Programs

Programs

 

Shares Purchased1 

per Share

Programs

Programs

 

January 1, 2021 - January 31, 2021

 

4,957

$

40.03

 

357,541

February 1, 2021 - February 28, 2021

 

266

 

43.82

 

 

357,541

March 1, 2021 - March 31, 2021

 

410

 

44.29

 

 

357,541

April 1, 2021 - April 30, 2021

525

$

43.60

357,541

May 1, 2021 - May 31, 2021

52,641

47.85

51,699

305,842

June 1, 2021 - June 30, 2021

38,767

51.40

38,556

267,286

Total

 

5,633

$

40.52

 

 

91,933

$

49.34

 

90,255

 

1During the three months ended March 31,June 30, 2021, 5,6331,678 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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Table of Contents

ITEM 6.EXHIBITS

2.1

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

3.1

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

 

 

3.1.1

Amendment to Articles of Incorporation of C&F Financial Corporation, effective January 8, 2009 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed January 14, 2009)

 

 

3.2

Amended and Restated Bylaws of C&F Financial Corporation, as adopted December 15, 2020 (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 17, 2020)

31.1

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

 

 

31.2

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

 

 

32

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

 

 

101

The following financial statements from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31,June 30, 2021, formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited)

104

The cover page from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31,June 30, 2021, formatted in Inline XBRL (included withwithin Exhibit 101)

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Table of Contents

SIGNATURES

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

C&F FINANCIAL CORPORATION

(Registrant)

Date:

May 4,August 3, 2021

By:

/s/ Thomas F. Cherry

Thomas F. Cherry

President and Chief Executive Officer

(Principal Executive Officer)

Date:

May 4,August 3, 2021

/s/ Jason E. Long

Jason E. Long

Executive Vice President, Chief Financial Officer and Secretary

(Principal Financial and Accounting Officer)

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