cffc.com
757.741.2201
3600 La Grange Parkway
Toano, Virginia 23168
O p p o r t u n i t y l E x p a n s i o n l G r o w t h
2020
Annual Report
C&F Financial Corporation is a one-bank holding company providing a
full range of banking services to individuals and businesses through
its subsidiaries.
C&F Bank (Citizens and Farmers Bank) offers quality banking services
to individuals and businesses through 31 retail banking locations
in Virginia.
C&F Mortgage Corporation originates and sells residential mortgages
throughout Virginia, West Virginia, Maryland, North Carolina and
South Carolina. Through its subsidiary, C&F Mortgage also provides
residential appraisal services.
C&F Finance Company specializes in new and used indirect auto,
marine and recreational vehicle lending in select areas of the following
states: Alabama, Colorado, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, North
Carolina, Ohio, Pennsylvania, Tennessee, South Carolina, Texas,
Virginia and West Virginia.
C&F Wealth Management Corporation provides a full range of
securities brokerage, life and health insurance, and investment
services to individuals and businesses through C&F Bank’s 31 retail
banking locations in Virginia.
Visit cffc.com for full listing of locations.
Investor Relations &
Financial Statements
C&F Financial Corporation’s Annual Report on Form 10-K and
quarterly reports on Form 10-Q, as filed with the Securities and
Exchange Commission, may be obtained without charge by visiting
the Corporation’s website at cffc.com.
Copies of these documents can also be obtained without charge
upon written request. Requests for this or other financial information
about C&F Financial Corporation should be directed to:
Jason E. Long
Chief Financial Officer, C&F Financial Corporation
P.O. Box 391, West Point, VA 23181
Stock Listing
Current market quotations for the common stock of C&F Financial
Corporation are available under the symbol CFFI.
Stock Transfer Agent
American Stock Transfer & Trust Company, LLC
serves as transfer agent for the Corporation.
You may write them at:
6201 15th Avenue, Brooklyn, NY 11219
telephone them toll-free at: 800.937.5449
or visit their website at: astfinancial.com
Financial Performance
Return on average assets (%)
Consolidated net income
($ in thousands)
*
0
9
0
.
5
4
0
.
6
9
0
.
9
1
1
.
0
2
1
.
4
1
1
.
*
5
1
2
3
1
,
2
7
5
6
,
9
5
4
3
1
,
0
2
0
8
1
,
0
5
8
8
1
,
4
2
4
2
2
,
2016 2017 2018 2019 2020
2016 2017 2018 2019 2020
Return on average equity (%)
Earnings per share — diluted ($)
*
0
2
9
.
8
5
4
.
0
9
9
.
0
4
2
1
.
2
0
2
1
.
4
5
2
1
.
*
9
7
3
.
8
8
1
.
9
8
3
.
5
1
5
.
7
4
5
.
6
0
6
.
2016 2017 2018 2019 2020
2016 2017 2018 2019 2020
2020
43.61
2.09 billion
2019
1.66 billion
39.00
2018
1.52 billion
35.95
2017
1.51 billion
35.28
2016
1.45 billion
2020
52.80
2019
48.07
2018
43.45
2017
40.53
2016
40.09
Total assets ($)
Book value per share ($)
*The figures presented above include non-U.S. GAAP financial measures that reflect certain adjustments to performance measures for the year
ended December 31, 2017. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the
heading “Use of Certain Non-U.S. GAAP Financial Measures” included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2019, filed with the SEC on March 3, 2020, for additional information regarding the derivation of these measures.
01
Thomas F. CherryPresident & Chief Executive Officer042020 may have been the most challenging year in the modern history of the United States. Yet great challenges can be the source of great performances, and we believe that’s true for your Company. Clearly, our primary focus has been to ensure we are doing all we can to address the effects of COVID-19 on our three constituencies – our employees, our customers and our shareholders. The impacts of the pandemic on families and businesses, essential workers like teachers and first responders, and of course our own employees have been, and continue to be, profound; however, the dedication all have shown is truly inspiring. We are starting our letter by sharing with you some of our actions related to the pandemic and then explaining why we believe the adversity of 2020 is contributing to a stronger Company for all C&F stakeholders and a greater source for good in the communities we serve. For our employees. Our most important concern has always been the health and wellbeing of our employees. We have taken steps both from a physical and financial standpoint to ensure they are safe and able to care for their families. We have maintained the continuity of employee pay and benefits. We have diligently followed guidance provided by our health officials and partnered with Care Team Health, the provider of the onsite clinic at our Stonehouse Operations Center, to develop and implement practices to keep our employees safe. We also worked with all employees who have health concerns related to compromised immune systems and those with underlying chronic conditions to customize alternative or remote work arrangements for them. For our customers and communities. We continue to provide crucial financial services to families and businesses while maintaining safe and healthy practices for those who visit any of our locations. Bank lobbies were initially closed during the early months of the pandemic; however, we continued to see customers by appointment and kept our drive-thru services open. Our bank lobbies are now open, and we are confident the safety protocols we have put in place protect both our employees and visitors.Many businesses have been severely impacted by COVID-19. To address the situation, Congress created the Paycheck Protection Program, or PPP, to encourage business owners to retain employees during the crisis by offering forgivable loans to cover two months of payroll and certain other operating costs. We are very proud of how our bank stepped up to make sure our business customers had reliable and convenient access to this program. To date, our team has processed over 1,600 PPP loan applications and distributed nearly $124 million to local businesses, likely preserving hundreds, if not thousands, of 02Letter to Our Shareholders 03jobs for families in the markets we serve. Even as we write this letter, we are engaged in another round of the PPP which is allowing first time applicants to participate in the program, as well as a second forgivable loan to current PPP customers whose revenue was severely impacted by the pandemic. Our team’s performance with this program has brought about an unprecedented sense of purpose in what we do at C&F.In addition to PPP, we have also worked hard to accommodate as many customers as we could, both businesses and individuals, who needed deferrals or modifications of loan payments. Our actions affected total loan balances of over $104 million throughout 2020, including periods of interest-only payments and intervals of complete payment deferrals. As of December 31, 2020, $74 million of these loan balances have either resumed regular payments or been paid off, thus validating that our assistance was beneficial.For our shareholders. We have taken steps to secure the Company’s financial condition and position it to withstand the long-term economic repercussions of this pandemic. Most importantly, our capital has grown significantly because of our record earnings in 2020. We bolstered this performance by completing the issuance of $20 million in subordinated notes structured to qualify as additional Tier 2 capital of the Company. While we believe our capital levels are more than adequate to cover any potential losses, we deemed it prudent at the time to supplement our position given the uncertainty of the circumstances and to support future initiatives.While our asset quality remains strong, the ultimate adverse effects of the pandemic are not known and we anticipate deterioration in asset quality. Therefore, we increased our loan loss reserves throughout 2020. While this reduced net income, it effectively protects us into the future.Finally, we understand that the dividends we pay are a very important source of income to our shareholders. We have sustained our dividends throughout the pandemic and, at this time, plan to continue paying a regular quarterly dividend. Again, we cannot predict the final impact this pandemic will have on our earnings and capital levels, but rest assured our dividend remains a very important part of our strategic and capital plans. In summary, we are committed to serving our employees, customers and shareholders throughout these unprecedented times and beyond. We are confident the actions we have taken thus far are in the best interest of your Company. Despite the pandemic’s global impacts, we delivered record-breaking earnings and accomplished many of our strategic goals this past year. 2020 net income of $22.4 million eclipsed our 2019 record of $18.9 million. This represented $6.06 per share for 2020, compared to $5.47 per share in 2019. For 2020, return on average equity was 12.54 percent and return on average assets was 1.14 percent. Total assets now exceed $2.0 billion, loans increased to $1.3 billion and deposits grew to $1.8 billion at the end of 2020. Capital increased to $194.5 million, which is critical to the Company’s safety and soundness and ability to invest in the future. We say this often, but it bears repeating: our diversified business strategy continues to serve us well! Each of our primary business segments continued to deliver on their respective priorities to increase profitability, including growing loans and deposits at C&F Bank, increasing loan production at C&F Mortgage, continuing to improve asset quality while also growing loans at C&F Finance, and growing assets under management at C&F Wealth Management. C&F Bank reported net income of $5.4 million for the year ended December 31, 2020, compared to net income of $9.9 million in 2019. Included in earnings for 2020 was a $2.8 million gain (net) on the sale of an impaired loan portfolio offset by an early repayment charge of $1.7 million (net) for the payoff of FHLB advances and $1.1 million (net) of Peoples Community Bank (Peoples) merger-related expenses. The decline in bank earnings is largely a result of decreased margins resulting from the historic decline in interest rates coupled with an increase in the provision for loan losses relating to the pandemic. Despite these issues, our continued focus on commercial lending produced meaningful growth of 7.4 percent in average loans outstanding (excluding the PPP loans and the loans acquired as part of the Peoples acquisition). Additionally, branch teams, commercial relationship managers and treasury solutions representatives worked together in 2020 to increase total average deposits by 17.6 percent (excluding the deposits acquired as part of the Peoples acquisition). Our strong asset quality metrics reflect a continued commitment to risk management. 04However, as we mentioned earlier, we do expect some deterioration in loan quality as a result of the pandemic; therefore, we recorded additional provisions for loan losses during the year.The closing of the Peoples acquisition and the conversion of its systems, services and products was another positive story in 2020. As a result, we now offer five additional retail branches serving the communities of Dahlgren, Fredericksburg, King George, Montross and Warsaw on the Northern Neck of Virginia. Despite the pandemic, these branches were successfully transitioned to C&F Bank products, systems and signage in the second quarter of 2020, bringing our combined footprint to 31 locations across Eastern and Central Virginia and giving us access to the high-growth markets in Fredericksburg, as well as Stafford and King George counties. We will continue to explore expansion opportunities in markets such as Hampton Roads, Charlottesville, Fredericksburg and Richmond because we see a promising future for a digital and local community bank with strong commercial banking capabilities like ours in these regions of the Commonwealth. C&F Mortgage reported record net income of $10.7 million for the year, compared to net income of $3.8 million in 2019. A favorable interest rate environment and an extremely active housing market led to record loan production and subsequent gains on loan sales and ancillary fee income for this segment. Loan originations were $1.8 billion for the year, compared to $944 million in 2019. As we have mentioned in the past, success in the mortgage business is largely driven by the retention of long-term quality loan officers. We have consistently placed a high degree of focus on this objective with positive results and will continue to do so in 2021. We also actively recruit quality, experienced loan officers and continually develop new loan officers through our loan officer school. C&F Mortgage introduced Lender Solutions in 2017, a service that generates fee income by providing certain mortgage origination functions to smaller financial institutions at a more cost-effective price than if these companies performed the functions themselves. We continued to grow this service in 2020 by assisting these institutions in closing over 2,000 loans compared with only 400 in 2019. We believe we can continue to grow this service in the future.C&F Finance reported net income of $7.6 million for the year, compared to net income of $6.9 million in 2019. Credit quality has consistently improved since we strengthened our underwriting standards in 2016. As a result, we have experienced a sustained decline in annual charge-offs (as a percentage of average loans), decreasing to 1.54 percent for 2020, the lowest level of annual charge-offs since we acquired the business in 2002. However, like C&F Bank, we anticipate deterioration in asset quality resulting from the pandemic and therefore added to the provision for loan losses throughout 2020.C&F Finance also continued to grow its marine and recreational vehicle loan portfolio in 2020. It is important to note that we remain committed to the highest credit quality by only purchasing prime contracts in this segment. While pricing for these loans is lower than contracts for non-prime automotive business, lower loan losses are anticipated due to the higher credit quality of these borrowers.Finally, we are excited about the upcoming relocation of C&F Finance’s corporate headquarters to a new facility near the Richmond International Airport, replacing our current leased space which we have outgrown. Our long-term commitment to C&F Finance made building a new corporate headquarters key to our strategic initiatives for the future. Construction is underway and we plan to move into the new building in April of this year.C&F Wealth Management produced a record year in 2020. We attribute this strong performance to several factors: an increase in assets under management, the successful transition to a recurring revenue stream business model and the addition of a new investment advisor in Richmond. We also recently added a new advisor in the Charlottesville market and are currently considering additional advisors for the Fredericksburg and Hampton Roads markets, which will give us coverage over our entire banking footprint. Further, our C&F Financial Center concept has greatly increased the joint appointments our advisors are holding with bank and mortgage teammates, helping us provide additional convenience to our customers while generating more business for each subsidiary. 05C&F shareholders understand that the Company is more than just a bank. We are four companies in one that are effectively integrated in terms of what we can do for a customer and how we perform as a company. However, most of the markets we serve don’t have this same awareness. That’s why we’ve concentrated our efforts on creating a common brand message and appearance across our websites, signage and facilities. While we are very pleased with our progress, we see additional opportunity in initiatives that address products, advertising and shared target marketing strategies. We can also create better brand awareness by leveraging all subsidiaries with our community events and volunteerism. Operating models for all retail businesses were already evolving heading into 2020 due to changes in customer preferences, and the pace of change accelerated as COVID-19 severely disrupted the business landscape with financial services being no exception. For example, transaction volume in our branches declined approximately 6 percent in each of the last three years leading up to 2020. Once the effects of the pandemic began to materialize, this decline accelerated to 25 percent as customers flocked to our digital options. The pace of this trend alone highlights the urgent need for reconfiguration of the traditional bank branch model. Fortunately for us, we have been developing and implementing our plan for the last few years. As we mentioned in last year’s “pre-COVID” letter, we developed a five-year strategic “refresh” plan for our branch network that is now the framework for a more aggressive reengineering of the C&F retail branch model as we know it. During 2020, we updated the look and feel of several branches, including our new ones on the Northern Neck from the Peoples acquisition, which gave them a fresher and more contemporary design and appeal. We were very excited to share in last year’s letter that we were in the process of building two new C&F Financial Centers, one in Charlottesville on Route 29 at Stonefield Commons and the other in downtown Richmond at the corner of 10th and Byrd Street. Both locations are open for business and doing well. A formal ribbon cutting ceremony for each was far from normal given the pandemic; however, both are impressive and provide a comprehensive customer experience. You will notice many differences in a C&F Financial Center from our traditional branches, including dynamic video content and open layouts that make meeting with our financial professionals to achieve your financial goals convenient and comfortable. However, the most important difference customers will experience is the diversified expertise available under one roof from our bank, mortgage company and wealth management advisors. We firmly believe the convenience of being able to access any of these professionals and having them work together as a team for the benefit of our customers is a competitive advantage and we look forward to replicating it across our Company.We made the determination several years ago that it was critical for our company to significantly expand the digital services we offer customers based on trends in the market. Little did we know this investment would pay such high returns when a pandemic set in. Mobile banking features, such as check deposit, mobile wallet, bill pay, Zelle person-to-person payments and debit card control have now become indispensable to customers given current circumstances. In fact, mobile deposit volume now makes this service our busiest “branch,” logging more transactions than any of our traditional bank locations. Customers of all ages, particularly pandemic-anxious senior citizens, are adopting our services at a very high rate. Similarly, online lending and deposit account opening volumes grew considerably in 2020. We are also very pleased with the number of customers that are converting to monthly electronic statements. Not only does this protect their identity and safety, it’s also better for the environment and reduces printing expense. Additionally, C&F Mortgage offers a fully digital application and document collection process and is currently in a pilot program to offer an electronic closing process where most borrowers’ closing documents can be executed from the comfort and safety of their own homes. These examples and many others now affirm the foresight of our investment in the C&F digital platform. Adding to these digital services remains a top priority for 2021 and the years to come for obvious reasons. For example, we are leveraging our strong treasury solutions team, service-minded branch network and commercial relationship managers to make business owners even more aware of how mobile business services can make their day more convenient and productive. Contactless debit cards will also be introduced to customers this year, making it possible to pay for purchases without touching a 06terminal. Lastly, we’ve experienced a strong increase in the number of customers who “visit” us virtually through video meetings as they find this a safer and more convenient option while still receiving the personal touch for which we’ve always been known. This is a great example of how we seek to be both digital and personal in how we serve customers and prospects.We’ve always believed that continually strengthening the local community positively benefits both citizens and local businesses and is now more important than ever before. C&F Gives Back is our program to make sure we play a leading role for this purpose in our communities. In 2020, C&F Gives Back supported groups like Junior Achievement, Richmond Animal League, Rise Against Hunger, CARITAS, Natasha House and many more. This is now a corporate-wide initiative where our subsidiaries come together for events and volunteerism to make an even bigger “C&F” difference for our communities. We are also proud to say that we kept our promise to local children with our traditional Santa Tree program, despite the pandemic, and continued to support other local groups who saw their biggest fundraising events canceled this year. Promoting locally owned businesses is another big objective of C&F Gives Back; our monthly “C&F Cash Mobs” held one Saturday each month bring publicity as well as a great sales day to local businesses. C&F Cash Mobs continue to grow in popularity, and we’re excited to do more in 2021. Succession planning for our Board of Directors is critical to the overall strategic planning for our Company. Accordingly, the Board appointed Dr. Jeffery O. Smith to serve as a director of the Company this past September. Dr. Smith has served for over 30 years in public education as an educator and administrator, including work in eight public school divisions and serving as the current superintendent of Hampton City Schools. He has also been a leader in many business, community and civic organizations, including serving on the Boards of Directors of Sentara Healthcare, Smart Beginnings of the Virginia Peninsula, the Virginia Air and Space Center and on the Board of Trustees for the Williamsburg Health Foundation. His knowledge of organizations, business practices and the communities we serve will be of great value to C&F. We would be remiss if we did not mention the political and social events that occurred in early January and throughout 2020. They are alarming to us, given our long-standing values of showing respect for others and always conducting ourselves morally and ethically in all relationships. While we may not be able to solve problems on a national level, we know that our company is devoted to strengthening the communities we serve. That is why we steadfastly resolve to follow our values and invest in all individuals and businesses so they can achieve their goals and dreams. We strongly believe that the best is yet to come for our country as others join in this mission.In closing, our overall outlook for 2021 and beyond remains very positive. Challenges including the pandemic and vaccine distribution, cyber security and fraud prevention, the low interest rate environment and the impacts of the changing political landscape create uncertainties that could potentially lead to a continued economic downturn, fraud losses, margin compression, asset deterioration and regulatory expansion. Our optimism, however, is driven by the investments we have made in your Company over the last several years and will continue to make in the future, along with the customers, shareholders and employees who make C&F a strong, stable, strategic and growing financial institution.Thank you once again for your loyal support of our Company. Thomas F. Cherry, President & CEO Larry G. Dillon, Executive Chairman 07* C&F Financial Corporation Board Member + C&F Bank Board MemberFinancial Corporation andBank Board of DirectorsThomas F. Cherry*+ President & Chief Executive OfficerC&F Financial Corporation, C&F BankLarry G. Dillon*+Executive Chairman C&F Financial Corporation, C&F BankDr. Julie R. Agnew*+Richard C. Kraemer Term Professor of FinanceRaymond A. Mason School of Business William & MaryJ.P. Causey Jr.*+Attorney-at-LawJ.P. Causey Jr., Attorney-at-LawAudrey D. Holmes*+Attorney-at-LawAudrey D. Holmes, Attorney-at-LawJames H. Hudson III*+Attorney-at-LawHudson Law, PLCElizabeth R. Kelley*+Managing Director Blue Heron Management, LLCBryan E. McKernon+President & Chief Executive OfficerC&F Mortgage CorporationJames T. Napier*+PresidentNapier Realtors, ERAC. Elis Olsson*+Director of OperationsMartinair, Inc.D. Anthony Peay*+Retired, Executive Bank OfficerPaul C. Robinson*+Owner & PresidentFrancisco, Robinson & Associates, RealtorsGeorge R. Sisson III*+Former ChairmanPeoples Bankshares, IncorporatedDr. Jeffery O. Smith, Ed.D.*+Superintendent Hampton City Schools Officers and Advisory Board
Corporate Counsel
Hudson Law, PLC
West Point, Virginia
Independent Public Accountants
Yount, Hyde & Barbour, PC
Richmond, Virginia
C&F Bank Richmond
Advisory Board
David H. Downs
Director of The Kornblau Institute
Virginia Commonwealth University
S. Craig Lane
President
Lane & Hamner, PC
Michael A. O’Malley
Financial Advisor
Hallberg & O’Malley Financial Group
Meade A. Spotts
President
Spotts Fain, PC
Scott E. Strickler
Treasurer
Robins Insurance Agency, Inc.
Adrienne P. Whitaker
Business Development Executive
Greater Richmond ARC
C&F Bank
Administrative Offices
3600 La Grange Parkway
Toano, Virginia 23168
757.741.2201
Full list of locations at cffc.com
Thomas F. Cherry*
President & Chief Executive Officer
Larry G. Dillon*
Executive Chairman
Jason E. Long*
Executive Vice President,
Chief Financial Officer
Rodney W. Overby*
Executive Vice President &
Chief Information Officer
John A. Seaman III
Executive Vice President,
Chief Credit Officer
Matthew H. Steilberg
Executive Vice President,
Director of Retail Banking
Mark J. Eggleston
Regional President, Southeast Virginia
William V. Krebs Jr.
Regional President, Central Virginia
Deborah H. Hall
Senior Vice President,
Director of Credit Administration
Herbert E. Marth Jr.
Senior Banking Executive
Christopher A. Spillare
Senior Vice President, Treasurer
Maria R. Sullivan
Senior Vice President,
Chief Human Resources Officer
*Officers of C&F Financial Corporation
C&F Wealth Management
5208 Monticello Avenue, Suite 150
Williamsburg, Virginia 23188
757.941.2156 or 800.583.3863
William C. Morrison, ChFC
President, Investment Officer
C&F Mortgage Corporation
Administrative Office
C&F Center
1400 Alverser Drive
Midlothian, Virginia 23113
804.858.8300
Bryan E. McKernon
President & Chief Executive Officer
Mark A. Fox
Executive Vice President,
Chief Operating Officer
Donna G. Jarratt
Senior Vice President,
Chief of Branch Administration
Kevin A. McCann
Senior Vice President,
Chief Financial Officer
Michael J. Mazzola
Senior Vice President, Branch &
Loan Officer Training Manager
C&F Finance Company
Administrative Office
1313 East Main Street, Suite 400
Richmond, Virginia 23219
804.236.9601
S. Dustin Crone
President & Chief Executive Officer
Michael K. Wilson
Executive Vice President,
Chief Operating Officer
C. Shawn Moore
Executive Vice President,
Chief Credit Officer
Thomas W. Young
Senior Vice President, Operations
08
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2020
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
(State or other jurisdiction of incorporation or organization)
54-1680165
(I.R.S. Employer Identification No.)
3600 La Grange Parkway
Toano, VA 23168
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (804) 843-2360
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1.00 par value per share
Trading Symbol(s)
CFFI
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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
Non-accelerated filer
☐
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2020, the last business day of the registrant’s second fiscal
quarter, was $114,205,770.
There were 3,684,221 shares of common stock, $1.00 par value per share, outstanding as of February 28, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 20, 2021 are
incorporated by reference in Part III of this report.
PART I
Page
TABLE OF CONTENTS
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . .
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . .
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16. FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
20
29
29
29
29
30
32
33
75
78
131
131
134
134
134
134
135
135
136
138
139
2
Cautionary Statement Regarding 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, including on asset
quality, the allowance for loan losses, provision for loan losses, interest rates, and results of operations, the anticipated
benefits of the early repayment of certain borrowings, certain items that management does not expect to have an ongoing
impact on consolidated net income, including a gain upon the sale of a pool of purchased credit impaired loans, impairment
charges related to a branch consolidation, and certain tax benefits provided by the Coroanvirus Aid, Recovery, and
Economic Security Act (the CARES Act), future dividend payments, net interest margin compression and items affecting
net interest margin, including future repricing of time deposits at maturity, expected impacts of the Corporation’s
acquisition of Peoples Bankshares, Inc. (Peoples), strategic business initiatives and the anticipated effects thereof,
including new or consolidated facilities, lending under the Paycheck Protection Program (PPP) of the Small Business
Administration (SBA), margin compression, technology initiatives, asset 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
•
the effectiveness of the Corporation’s efforts to respond to COVID-19, the severity and duration of the
pandemic, the pace of vaccinations, the pace of recovery when the 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, as subsequently extended
•
the legislative/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 Board of Governors of the Federal Reserve System (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
• demand for loan products and the impact of changes in demand on loan growth
•
the quality or composition of the loan portfolios and the value of the collateral securing those loans
3
•
•
•
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
•
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
• reliance on third parties for key services
•
•
•
•
the commercial and residential real estate markets
the demand in the secondary residential mortgage loan markets
the Corporation's technology initiatives and other strategic initiatives
the Corporation’s branch expansions and consolidations
• cyber threats, attacks or events
• expansion of C&F Bank’s product offerings
• accounting principles, policies and guidelines and elections made by the Corporation thereunder
These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” 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.
4
ITEM 1.
BUSINESS
General
PART I
C&F Financial Corporation (the Corporation) is a bank holding company that was incorporated in March 1994
under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of Citizens and Farmers Bank
(the Bank or C&F Bank), which is an independent commercial bank chartered under the laws of the Commonwealth of
Virginia. C&F Bank originally opened for business under the name Farmers and Mechanics Bank on January 22, 1927.
C&F Bank has the following five wholly-owned subsidiaries, all incorporated under the laws of the Commonwealth of
Virginia:
• C&F Mortgage Corporation
• C&F Finance Company
• C&F Wealth Management Corporation
• C&F Insurance Services, Inc.
• CVB Title Services, Inc.
The Corporation operates in a decentralized manner in three principal business segments: (1) community banking
through C&F Bank, (2) mortgage banking through C&F Mortgage Corporation (C&F Mortgage) and (3) consumer finance
through C&F Finance Company (C&F Finance). For detailed information about the financial condition and results of
operations of these segments, see “Note 21: Business Segments” in Item 8. “Financial Statements and Supplementary
Data” in this report. C&F Wealth Management Corporation, organized in April 1995, is a full-service brokerage firm
offering a comprehensive range of wealth management services and insurance products through third-party service
providers. C&F Insurance Services, Inc. was organized in July 1999 for the primary purpose of owning an equity interest
in an independent insurance agency that operates in Virginia and North Carolina. CVB Title Services, Inc. was organized
for the primary purpose of owning an equity interest in a full service title and settlement agency. The financial position
and operating results of C&F Wealth Management Corporation, C&F Insurance Services, Inc. and CVB Title Services,
Inc. are not significant to the Corporation as a whole.
The Corporation also owns three non-operating subsidiaries, C&F Financial Statutory Trust II (Trust II) formed in
December 2007, C&F Financial Statutory Trust I (Trust I) formed in July 2005, and Central Virginia Bankshares Statutory
Trust I (CVBK Trust I) formed in December 2003. These trusts were formed for the purpose of issuing $10.0 million each
for Trust II and Trust I and $5.0 million for CVBK Trust I of trust preferred capital securities in private placements to
institutional investors. All three trusts are unconsolidated subsidiaries of the Corporation. The principal assets of these
trusts are $10.3 million each for Trust II and Trust I and $5.2 million for CVBK Trust I of the Corporation’s junior
subordinated debt securities (such securities of the Corporation referred to herein as “trust preferred capital notes”) that
are reported as liabilities in the consolidated balance sheet of the Corporation.
Community Banking
We provide community banking services through C&F Bank. C&F Bank provides community banking services at
its main office in West Point, Virginia, and 30 Virginia branches located one each in the counties of Albermarle,
Goochland, Hanover, Middlesex, Powhatan, Stafford and York and the towns and cities of Charlottesville, Hampton,
Montross, Newport News, Richmond, Warsaw and Williamsburg, two each in the counties of Cumberland, James City,
King George, and New Kent, and four each in the counties of Chesterfield and Henrico. These branches provide a wide
range of banking services to individuals and businesses. These services include various types of checking and savings
deposit accounts, as well as business, real estate, development, mortgage, home equity and installment loans. The Bank
5
also offers ATMs, internet and mobile banking, peer-to-peer payment capabilities and debit and credit cards, as well as
safe deposit box rentals, notary public, electronic transfer and other customary bank services to its customers. C&F Bank
manages its commercial lending portfolio primarily through commercial lending offices located in Charlottesville,
Chesapeake, Richmond and Williamsburg, Virginia. Revenues from community banking operations consist primarily of
interest earned on loans and investment securities and fees earned on deposit accounts and debit card interchange.
Community banking revenues and operations are not materially affected by seasonal factors; however, public deposits
tend to increase with tax collections primarily in the fourth quarter of each year and decline with spending thereafter. The
community banking segment was previously referred to as the retail banking segment. At December 31, 2020, assets of
the community banking segment totaled $2.0 billion. For the year ended December 31, 2020, net income for this segment
totaled $5.4 million.
Mortgage Banking
We conduct mortgage banking activities through C&F Mortgage, which was organized in September 1995, and its
51%-owned subsidiary, C&F Select LLC, which was organized in January 2019. C&F Mortgage provides mortgage loan
origination services through 14 locations in Virginia, one in Maryland, two in North Carolina, one in South Carolina, and
one in West Virginia. The Virginia offices are located one each in Charlottesville, Chesapeake, Fishersville,
Fredericksburg, Glen Allen, Harrisonburg, Lynchburg, Newport News, Richmond, Waynesboro, and Williamsburg and
three in Midlothian. The Maryland office is located in Waldorf. The North Carolina offices are located in Gastonia and
Moyock. The South Carolina office is located in Fort Mill. The West Virginia office is located in Keyser. C&F Select
LLC provides mortgage loan origination services through two locations in Richmond, Virginia. The mortgage banking
segment offers a wide variety of residential mortgage loans, which are originated for sale generally to the following
investors: Wells Fargo Home Mortgage; PennyMac Corporation; SunTrust Mortgage, Inc.; AmeriHome Mortgage
Company, LLC; Freedom Mortgage Corporation and Planet Home Lending, LLC. The mortgage banking segment does
not securitize loans. C&F Bank may also purchase mortgage loans from the mortgage banking segment. The mortgage
banking segment originates conventional mortgage loans, mortgage loans insured by the Federal Housing Administration
(the FHA), and mortgage loans guaranteed by the United States Department of Agriculture (the USDA) and the Veterans
Administration (the VA). A majority of the conventional loans are conforming loans that qualify for purchase by the
Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).
The remainder of the conventional loans are non-conforming in that they do not meet Fannie Mae or Freddie Mac
guidelines, but are eligible for sale to various other investors. The mortgage banking segment also has a division, Lender
Solutions, that provides certain mortgage loan origination functions as a service to third party mortgage lenders and a
subsidiary, Certified Appraisals LLC, which provides ancillary mortgage loan production services to third parties for
residential appraisals. Revenues from mortgage banking operations consist principally of gains on sales of loans to
investors in the secondary mortgage market, loan origination fee income and interest earned on mortgage loans held for
sale. Revenues and income from mortgage banking, which are driven primarily by the origination and sale of mortage
loans, are subject to seasonal factors, including the volume of home sales in the residential real estate market, which
typically rises during spring and summer months and declines during fall and winter months. However, seasonal trends
may be disrupted by cyclical and other economic factors that affect the residential real estate market. At December 31,
2020, assets of the mortgage banking segment totaled $239.4 million. For the year ended December 31, 2020, net income
for this segment totaled $10.7 million.
Consumer Finance
We conduct consumer finance activities through C&F Finance. C&F Finance is a regional finance company
purchasing automobile, marine and recreational vehicle (RV) loans throughout Virginia and in portions of Alabama,
Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, North
Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas and West Virginia through its offices in Richmond and
Hampton, Virginia. C&F Finance is an indirect lender that primarily provides automobile financing through lending
programs that are designed to serve customers in the “non-prime” market who have limited access to traditional automobile
financing. C&F Finance generally purchases automobile retail installment sales contracts from manufacturer-franchised
dealerships with used-car operations and through selected independent dealerships. C&F Finance selects these dealers
based on the types of vehicles sold. Specifically, C&F Finance prefers to finance later model, low mileage used vehicles
6
because the initial depreciation on new vehicles is extremely high. The typical borrowers on the automobile retail
installment sales contracts purchased have experienced prior credit difficulties. Because C&F Finance serves customers
who are unable to meet the credit standards imposed by most traditional automobile financing sources, C&F Finance
typically charges interest at higher rates than those charged by traditional financing sources. In addition, because C&F
Finance provides financing in a relatively high-risk market, it expects to experience a higher level of credit losses than
traditional automobile financing sources. In addition to non-prime automobile financing, beginning in the first quarter of
2018, C&F Finance expanded its lending portfolio to include marine and RV loan contracts in the prime sector. These
contracts are also purchased on an indirect basis through a referral program administered by a third party. Because these
contracts are for prime loans made to individuals with higher credit scores, they are priced at rates substantially lower than
the non-prime automobile portfolio. Revenues from consumer finance operations consist principally of interest earned on
automobile, marine and RV loans. While the consumer finance segment’s loans outstanding and interest income are not
materially affected by seasonal factors, delinquencies on automobile loans are generally highest in the period from
November through January, related in part to seasonal trends affecting borrowers, including consumer spending. At
December 31, 2020, assets of the consumer finance segment totaled $314.7 million. For the year ended December 31,
2020, net income for this segment totaled $7.6 million.
Human Capital Resources
The Corporation and its subsidiaries foster a culture of respect, teamwork, ownership, responsibility, initiative,
integrity, and service. We believe that our officers and employees are our most important assets. Our people are critical to
the Corporation’s performance and the achievement of our strategic goals, and they represent a key element of how the
Corporation’s businesses compete and succeed.
Acquiring and retaining strong talent is a top strategic priority for each of the Corporation’s businesses. We provide
a competitive compensation and benefits program to help meet the needs of our employees, including benefits that
incentivize retention and reward longevity. We support the health and well-being of our employees through a
comprehensive program designed to increase employee focus on wellness and prevention, including the benefit plans we
offer, health incentives and dedicated healthcare resources for employees and their families provided through an onsite
health center located at our corporate office and virtually. We encourage and support the growth and development of our
employees and, wherever possible, seek to fill positions by promotion and transfer from within our organization. We have
created career paths for specific positions that are designed to encourage an employee’s advancement and growth within
our organization, and we aim to provide employees with the skills and opportunities they need to achieve their career goals
and become leaders in our businesses.
At December 31, 2020, we employed 697 full-time equivalent employees. We consider relations with our employees
to be excellent. We strive for our workforce to reflect the diversity of the customers and communities we serve. Our
selection and promotion processes are without bias and include the active recruitment of minorities and women. At
December 31, 2020, women represented 67 percent of our employees, and racial and ethnic minorities represented 29
percent of our employees. We also aim for our employees to develop their careers in our businesses. At December 31,
2020, 21 percent of our employees have been employed by the Corporation or its subsidiaries for at least 15 years.
Competition
Community Banking
In the Bank’s market area, we compete with large national and regional financial institutions, savings associations
and other independent community banks, as well as credit unions, mutual funds, brokerage firms, insurance companies
and other lending and deposit platforms offered by non-bank financial technology firms, including those that only operate
digitally. Increased competition has come from out-of-state banks through their acquisition of Virginia-based banks and
interstate branching, and expansion of community and regional banks into our service areas.
The banking business in Virginia, and specifically in the Bank’s primary service areas between Hampton Roads
and Charlottesville, and in the Northern Neck region of Virginia, is highly competitive for both loans and deposits, and is
7
dominated by a relatively small number of large banks with many offices operating over a wide geographic area. Among
the advantages such large banks have are their ability to finance wide-ranging advertising campaigns, to maximize
efficiencies through economies of scale and, by virtue of their greater total capitalization, to have substantially higher
lending limits than the Bank.
Factors such as interest rates offered, the number and location of branches and the types of products offered, as well
as the reputation of the institution, affect competition for deposits and loans. We compete by emphasizing customer
service, establishing long-term customer relationships, building customer loyalty and providing traditional and digital
products and services to address the specific needs of our customers. Our relationships with customers depend on, among
other things, our ability to attract and retain talented community bankers. We target individual customers, small-to-medium
size business customers and acquisition, development and construction loan customers in our markets.
No material part of the Bank’s business is dependent upon a single or a few customers, and the loss of any single
customer would not have a materially adverse effect upon the Bank’s business.
Mortgage Banking
C&F Mortgage competes with large national and regional banks, credit unions, smaller regional mortgage lenders,
small local broker operations and internet lending platforms. Due to the increased regulatory and compliance burden, the
industry has seen a consolidation in the number of competitors in the marketplace. The agency guidelines for sales of
mortgages in the secondary market business continue to be stringent.
The competitive factors faced by C&F Mortgage continue to evolve because of regulatory reforms and initiatives,
including expansion in recent years of consumer protections and related regulation of mortgage lending. While C&F
Mortgage has kept pace with changes in such regulations to date, potential future legislative and regulatory initiatives have
the potential to affect the operations of C&F Mortgage. Given the far-reaching effect of these regulations on mortgage
finance, compliance has required and may continue to require substantial changes to mortgage lending systems and
processes and other implementation efforts.
To operate profitably in this competitive and regulatory environment, mortgage companies must have a high level
of operational and risk management skills and be able to attract and retain top mortgage origination talent. C&F Mortgage
competes by attracting the top people in sales and operations in the industry, expanding into new markets that offer strategic
growth opportunities, providing an infrastructure that manages regulatory changes efficiently and effectively, utilizing
technology to improve efficiency and consistency in its operations and to mitigate compliance risk, offering products that
are competitive in both loan parameters and pricing, and providing consistently high quality customer service.
No material part of C&F Mortgage’s business is dependent upon a single customer and the loss of any single
customer would not have a materially adverse effect upon C&F Mortgage’s business. C&F Mortgage, like all residential
mortgage lenders, would be affected by the inability of Fannie Mae, Freddie Mac, the FHA or the VA to purchase or
guarantee loans. Although C&F Mortgage sells loans to various third-party investors, the ability of these aggregators to
purchase or guarantee loans would be limited if these government-sponsored entities cease to exist or materially limit their
purchases or guarantees of mortgage loans or suffer deteriorations in their financial condition.
Consumer Finance
The non-prime automobile finance business is highly competitive. The automobile finance market is highly
fragmented and is served by a variety of financial entities, including the captive finance affiliates of major automotive
manufacturers, banks, savings associations, credit unions and independent finance companies. Many of these competitors
have substantially greater financial resources and lower costs of funds than our finance subsidiary. In addition, competitors
often provide financing on terms that are more favorable to automobile purchasers or dealers than the terms C&F Finance
offers. Many of these competitors also have long-standing relationships with automobile dealerships and may offer
dealerships or their customers other forms of financing, including dealer floor plan financing and leasing, which we do
not.
8
Over the past several years, a number of financial institutions and other lenders have increased focus on operations
in the non-prime automobile finance markets resulting in intensified competition for loans and qualified personnel. In
addition, certain competitors in the industry have (i) relaxed underwriting standards resulting in higher delinquencies and
charge-offs for the industry and (ii) used loan pricing strategies resulting in lower loan yields. To continue to operate
profitably, lenders must have a high level of operational and risk management skills and access to competitive costs of
funds.
Providers of automobile financing traditionally have competed on the basis of interest rates charged, the quality of
credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and customers. To
establish C&F Finance as one of the principal financing sources for the dealers it serves, we compete predominantly by
providing a high level of dealer service, building strong dealer relationships, offering flexible loan terms and quickly
funding loans purchased from dealers.
No material part of C&F Finance’s business is dependent upon any single dealer relationship, and the loss of any
single dealer relationship would not have a materially adverse effect upon C&F Finance’s business.
Response to the COVID-19 Pandemic
Following the outbreak of the COVID-19 pandemic in early 2020, the business environment in which the
Corporation and its subsidiaries operate has been subject to numerous changes as a result of public health measures,
economic disruption, government intervention and changes in regulation. These changes have affected our businesses
operationally, including how we serve our customers, as well as financially. In our workplaces, we have implemented
safe and healthy practices of social distancing and enhanced cleaning to protect our employees and customers as we
continue to operate and serve our communities. We also adapted our technology and processes in March 2020 to allow a
substantial portion of our administrative personnel to work remotely. As of December 31, 2020, many employees have
returned to our offices on a full-time or part-time basis, but a significant number continue to work remotely. Retail branch
lobbies of our community banking segment were temporarily closed for several months, except by appointment, while
customers were continuously able to access our products and services through our online and mobile platforms, ATMs
and drive-thru facilities. Branch lobbies generally reopened in September 2020. We are making paid leave available to
employees who are affected by the coronavirus and unable to work remotely. We are working proactively with borrowers
affected by the pandemic through our community banking and consumer finance segments, including by offering short-
term modifications, such as payment deferrals or interest only periods, to borrowers who are temporarily unable to make
loan payments.
The federal government and federal regulatory agencies introduced numerous initiatives in response to the
pandemic. For example, the Families First Coronavirus Relief Act, enacted on March 18, 2020, made it possible to provide
emergency and extended paid leave during 2020 for employees affected by the coronavirus, including employees who
became ill or who needed to care for a family member that became ill. The Coronavirus Aid, Relief, and Economic
Security Act (CARES Act), enacted on March 27, 2020, included provisions that, among other things, (i) established the
Paycheck Protection Program (PPP) to provide loans guaranteed by the Small Business Administration (SBA) to
businesses affected by the pandemic, (ii) established the Paycheck Protection Program Lending Facility (PPPLF) to
provide funding to eligible financial institutions through the Federal Reserve Board system to facilitate lending under the
PPP, (iii) provided certain forms of economic stimulus, including direct payments to certain U.S. households, enhanced
unemployment benefits, certain income tax benefits intended to assist businesses in surviving the economic crisis, and
delayed the required implementation of certain new accounting standards for some entities, and (iv) provided limited
regulatory relief to banking institutions. The federal banking agencies have eased certain bank capital requirements and
reporting requirements in response to the pandemic, and have encouraged banking institutions to work prudently with
borrowers affected by the pandemic by offering loan modifications that can improve borrowers’ capacity to service debt,
increase the potential for financially stressed residential borrowers to keep their homes, and facilitate financial institutions’
ability to collect on their loans. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, expanded
on some of the benefits made available under the CARES Act, including the PPP program, and provided further economic
stimulus.
9
The Corporation and its subsidiaries continue to adapt to the changing business environment and are committed to
providing necessary support to our customers and employees to meet the challenges of these uncertain times.
Regulation and Supervision
General
Bank holding companies, banks and their affiliates are extensively regulated under both federal and state law.
Consequently, the growth and earnings performance of the Corporation and the Bank can be affected not only by
management’s decisions and general economic conditions, but also by the statutes administered by, and the regulations
and policies of, various governmental regulatory authorities including, but not limited to, the Virginia State Corporation
Commission Bureau of Financial Institutions (VBFI), the Federal Deposit Insurance Corporation (the FDIC), the Board
of Governors of the Federal Reserve System (the Federal Reserve Board), the Internal Revenue Service, federal and state
taxing authorities, and the Securities and Exchange Commission (the SEC).
The following summary briefly describes significant provisions of currently applicable federal and state laws and
certain regulations and the potential impact of such provisions. This summary is not complete, and we refer you to the
particular statutory or regulatory provisions or proposals for more information. Because regulation of financial institutions
changes regularly and is the subject of constant legislative and regulatory debate, we cannot forecast how federal and state
regulation and supervision of financial institutions may change in the future and affect the Corporation’s and the Bank’s
operations. See “Risks Related to the Regulation of the Corporation” below in Item 1A of Part I of Annual Report on Form
10-K for further discussion.
Regulatory Reform
The financial crisis of 2008, including the downturn of global economic, financial and money markets and the threat
of collapse of numerous financial institutions, and other events led to the adoption of numerous laws and regulations that
apply to, and focus on, financial institutions. The most significant of these laws is the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act), which was enacted on July 21, 2010 and, in part, was intended to
implement significant structural reforms to the financial services industry.
The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape, including
changes that have significantly affected the business of all bank holding companies and banks, including the Corporation
and the Bank. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank
Act's mandates are discussed further below. In May 2018, the Economic Growth, Regulatory Relief and Consumer
Protection Act (the EGRRCPA) was enacted to reduce the regulatory burden on certain banking organizations, including
community banks, by modifying or eliminating certain federal regulatory requirements. While the EGRRCPA maintains
most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework
for small depository institutions with assets of less than $10 billion as well as for larger banks with assets above $50
billion. In addition, the EGRRCPA included regulatory relief for community banks regarding regulatory examination
cycles, call reports, application of the Volcker Rule (proprietary trading prohibitions), mortgage disclosures, qualified
mortgages, and risk weights for certain high-risk commercial real estate loans. However, federal banking agencies retain
broad discretion to impose additional regulatory requirements on banking organizations based on safety and soundness
and U.S. financial system stability considerations.
The Corporation continues to experience ongoing regulatory reform. These regulatory changes could have a
significant effect on how we conduct business. The specific implications of the Dodd-Frank Act, the EGRRCPA, and other
potential regulatory reforms cannot yet be fully predicted and will depend to a large extent on the specific regulations that
are to be adopted in the future. Certain aspects of the Dodd-Frank Act and the EGRRCPA are discussed in more detail
below.
10
Regulation of the Corporation
As a bank holding company, the Corporation is subject to the Bank Holding Company Act of 1956 (the BHCA)
and regulation and supervision by the Federal Reserve Board. Pursuant to the BHCA the Federal Reserve Board has the
power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or
control of any subsidiary when the Federal Reserve Board has reasonable grounds to believe that continuation of such
activity or ownership constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the
bank holding company. The Federal Reserve Board and the FDIC have adopted guidelines and released interpretative
materials that establish operational and managerial standards to promote the safe and sound operation of banks and bank
holding companies. These standards relate to the institution’s key operating functions, including but not limited to capital
management, internal controls, internal audit systems, information systems, data and cybersecurity, loan documentation,
credit underwriting, interest rate exposure and risk management, vendor management, executive management and its
compensation, corporate governance, asset growth, asset quality, earnings, liquidity and risk management.
The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking,
managing or controlling banks, or any other activity that is closely related to banking or to managing or controlling banks,
and permits interstate banking acquisitions subject to certain conditions, including national and state concentration limits.
The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger or
consolidation proposed by a bank holding company. A bank holding company must be “well capitalized” and “well
managed” to engage in an interstate bank acquisition or merger, and banks may branch across state lines provided that the
law of the state in which the branch is to be located would permit establishment of the branch if the bank were a state bank
chartered by such state. Bank holding companies and their subsidiaries are also subject to restrictions on transactions with
insiders and affiliates, as further discussed below.
Each of the Bank’s depository accounts is insured by the FDIC against loss to the depositor to the maximum extent
permitted by applicable law, and federal law and regulatory policy impose a number of obligations and restrictions on the
Corporation and the Bank to reduce potential loss exposure to depositors and to the FDIC Deposit Insurance Fund (DIF).
For example, pursuant to the Dodd-Frank Act and Federal Reserve Board policy, a bank holding company must commit
resources to support its subsidiary depository institutions, which is referred to as serving as a “source of strength.” In
addition, insured depository institutions under common control must reimburse the FDIC for any loss suffered or
reasonably anticipated by the DIF as a result of the default of a commonly controlled insured depository institution. The
FDIC may decline to enforce the provisions if it determines that a waiver is in the best interest of the DIF. An FDIC claim
for damages is superior to claims of stockholders of an insured depository institution or its holding company but is
subordinate to claims of depositors, secured creditors and holders of subordinated debt, other than affiliates, of the
commonly controlled insured depository institution.
The Federal Deposit Insurance Act (the FDIA) provides that amounts received from the liquidation or other
resolution of any insured depository institution must be distributed, after payment of secured claims, to pay the deposit
liabilities of the institution before payment of any other general creditor or stockholder of that institution – including that
institution’s parent holding company. This provision would give depositors a preference over general and subordinated
creditors and stockholders if a receiver is appointed to distribute the assets of a bank.
The Corporation also is subject to regulation and supervision by the Virginia State Corporation Commission. The
Corporation also must file annual, quarterly and other periodic reports with, and comply with other regulations of, the
SEC.
Capital Requirements
Regulatory Capital Requirements. All financial institutions are required to maintain minimum levels of regulatory
capital. The FDIC establishes risk-based and leveraged capital standards for the financial institutions they regulate. The
FDIC also may impose capital requirements in excess of these standards on a case-by-case basis for various reasons,
including financial condition or actual or anticipated growth.
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Basel III Capital Framework. The Federal Reserve Board and the FDIC have adopted rules to implement the Basel
III capital framework as outlined by the Basel Committee on Banking Supervision and standards for calculating risk-
weighted assets and risk-based capital measurements (collectively, the Basel III Final Rules) that apply to banking
institutions they supervise. For the purposes of these capital rules, (i) common equity tier 1 capital (CET1) consists
principally of common stock (including surplus) and retained earnings; (ii) Tier 1 capital consists principally of CET1 plus
non-cumulative preferred stock and related surplus, and certain grandfathered cumulative preferred stocks and trust
preferred securities; and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt
and preferred stock, and limited amounts of an institution’s allowance for loan losses. Each regulatory capital classification
is subject to certain adjustments and limitations, as implemented by the Basel III Final Rules. The Basel III Final Rules
also establish risk weightings that are applied to many classes of assets held by community banks, importantly including
applying higher risk weightings to certain commercial real estate loans.
The Basel III Final Rules and minimum capital ratios required to be maintained by banks were effective January 1,
2015. The Basel III Final Rules also include a requirement that banks maintain additional capital (the capital conservation
buffer), which was phased in beginning January 1, 2016 and was fully phased in effective January 1, 2019. The Basel III
Final Rules and fully phased in capital conservation buffer require banks to maintain:
(i)
(ii)
(iii)
a minimum ratio of CET1 to risk-weighted assets of at least 4.5 percent, plus a 2.5 percent capital
conservation buffer (which is added to the minimum CET1 ratio, effectively resulting in a required ratio
of CET1 to risk-weighted assets of at least 7 percent),
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0 percent, plus the capital
conservation buffer (effectively resulting in a required Tier 1 capital ratio of 8.5 percent),
a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0 percent,
plus the capital conservation buffer (effectively resulting in a required total capital ratio of 10.5 percent)
and
(iv)
a minimum leverage ratio of 4 percent, calculated as the ratio of Tier 1 capital to average total assets,
subject to certain adjustments and limitations.
The Basel III Final Rules provide deductions from and adjustments to regulatory capital measures, primarily to
CET1, including deductions and adjustments that were not applied to reduce CET1 under historical regulatory capital
rules. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income, and significant
investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category
exceeds 10 percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1.
The Basel III Final Rules permanently include in Tier 1 capital trust preferred securities issued prior to May 19,
2010 by bank holding companies with less than $15 billion in total assets, subject to a limit of 25 percent of Tier 1 capital.
The Corporation expects that its trust preferred securities will be included in the Corporation’s regulatory capital as Tier
1 capital instruments until their maturity.
As of December 31, 2020, the Bank met all capital adequacy requirements under the Basel III Final Rules, including
the capital conservation buffer on a fully phased-in basis.
Community Bank Leverage Ratio. As a result of the EGRRCPA, the federal banking agencies were required to
develop a Community Bank Leverage Ratio (the ratio of a bank’s tangible equity capital to average total consolidated
assets) for banking organizations with assets of less than $10 billion, such as the Bank. On October 29, 2019, the federal
banking agencies issued a final rule that implements the Community Bank Leverage Ratio Framework (the CBLRF). To
qualify for the CBLRF, a bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance
sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent. A bank that elects the CBLRF
and has a leverage ratio greater than 9 percent will be considered to be in compliance with Basel III capital requirements
and exempt from the complex Basel III calculations and will also be deemed “well capitalized” under Prompt Corrective
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Action regulations, discussed below. A bank that falls out of compliance with the CBLRF will have a two-quarter grace
period to come back into full compliance, provided its leverage ratio remains above 8 percent (a bank will be deemed
“well capitalized” during the grace period). The CBLRF became available beginning March 31, 2020, with the flexibility
for banking organizations to subsequently opt into or out of the CBLRF, as applicable. The federal banking agencies
issued an interim final rule in April 2020 to implement certain provisions of the CARES Act that temporarily modified the
minimum leverage ratio requirements of the CBLRF. The minimum leverage ratio requirement was reduced from 9
percent to 8 percent for the second through fourth quarters of 2020 and 8.5 percent through 2021. A bank that falls out of
compliance with the CBLRF will have a two-quarter grace period to come back into full compliance, provided its leverage
ratio remains no more than 100 basis points below the applicable minimum leverage ratio requirement. The Bank has not
elected to opt into the CBLRF.
Small Bank Holding Company. The EGRRCPA also expanded the category of bank holding companies that may
rely on the Federal Reserve Board’s Small Bank Holding Company Policy Statement by raising the maximum amount of
assets a qualifying bank holding company may have from $1 billion to $3 billion. In addition to meeting the asset threshold,
a bank holding company must not engage in significant nonbanking activities, not conduct significant off-balance sheet
activities, and not have a material amount of debt or equity securities outstanding and registered with the SEC (subject to
certain exceptions). The Federal Reserve Board may, in its discretion, exclude any bank holding company from the
application of the Small Bank Holding Company Policy Statement if such action is warranted for supervisory purposes.
In August 2018, the Federal Reserve Board issued an interim final rule to apply the Small Bank Holding Company
Policy Statement to bank holding companies with consolidated total assets of less than $3 billion. The policy statement,
which, among other things, exempts certain bank holding companies from minimum consolidated regulatory capital ratios
that apply to other bank holding companies. As a result of the interim final rule, which was effective August 30, 2018, the
Corporation expects that it will be treated as a small bank holding company and will not be subject to regulatory capital
requirements. The comment period on the interim final rule closed on October 29, 2018 and, to date, the Federal Reserve
Board has not issued a final rule to replace the interim final rule. The Bank remains subject to the regulatory capital
requirements described above.
Limits on Dividends
The Corporation is a legal entity that is separate and distinct from the Bank. A significant portion of the revenues
of the Corporation result from dividends paid to it by the Bank. Both the Corporation and C&F Bank are subject to laws
and regulations that limit the payment of dividends, including limits on the sources of dividends and requirements to
maintain capital at or above regulatory minimums. Banking regulators have indicated that Virginia banking organizations
should generally pay dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses,
interest and taxes accrued or due by the bank and (2) if the prospective rate of earnings retention appears consistent with
the organization’s capital needs, asset quality and overall financial condition. In addition, Federal Reserve Board
supervisory guidance indicates that the Federal Reserve Board may have safety and soundness concerns if a bank holding
company pays dividends that exceed earnings for the period in which the dividend is being paid. Further, the FDIA
prohibits insured depository institutions such as C&F Bank from making capital distributions, including paying dividends,
if, after making such distribution, the institution would become undercapitalized as defined in the statute. We do not expect
that any of these laws, regulations or policies will materially affect the ability of the Corporation or C&F Bank to pay
dividends.
Insurance of Accounts, Assessments and Regulation by the FDIC
The Bank’s deposits are insured by the DIF of the FDIC up to the standard maximum insurance amount for each
deposit insurance ownership category. The basic limit on FDIC deposit insurance coverage is $250,000 per depositor.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations as an insured institution, or has violated
any applicable law, regulation, rule, order or condition imposed by the FDIC, subject to administrative and potential
judicial hearing and review processes. The FDIC may also suspend deposit insurance temporarily during the hearing process
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for the permanent termination of insurance if the institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period
from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could
result in termination of the Bank’s deposit insurance.
Deposit Insurance Assessments. The DIF is funded by assessments on banks and other depository institutions
calculated based on average consolidated total assets minus average tangible equity (defined as Tier 1 capital). As required
by the Dodd-Frank Act, the FDIC has adopted a large-bank pricing assessment scheme, set a target “designated reserve
ratio” (described in more detail below) of 2 percent for the DIF and, in lieu of dividends, provides for a lower assessment
rate schedule when the reserve ratio reaches 2 percent and 2.5 percent. An institution's assessment rate is based on a
statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the
institution’s weighted average CAMELS component rating, and is subject to further adjustments including those related
to levels of unsecured debt and brokered deposits (not applicable to banks with less than $10 billion in assets). At
December 31, 2020, total base assessment rates for institutions that have been insured for at least five years range from
1.5 to 30 basis points applying to banks with less than $10 billion in assets.
The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of
reserves for the DIF, or the “designated reserve ratio.” The FDIA requires that the FDIC consider the appropriate level for
the designated reserve ratio on at least an annual basis. As of December 31, 2020, the designated reserve ratio was 2.00
percent and the minimum designated reserve ratio was 1.35 percent.
At September 30, 2019, the reserve ratio was 1.41 percent. Banks with less than $10 billion in total consolidated
assets were eligible for credits to offset the portion of their assessments that helped to raise the reserve ratio to 1.35 percent.
The FDIC automatically applied these credits to reduce an eligible bank’s regular DIF assessment up to the entire amount
of the assessment. The Bank was awarded credits of $365,000, of which $207,000 was used to offset its DIF assessment
in the third and fourth quarters of 2019 and $158,000 was used to offset its DIF assessment in the first and second quarters
of 2020.
In June 2020, the FDIC adopted a final rule that generally removes the effect of PPP lending when calculating a
bank’s deposit insurance assessment by providing an offset to the bank’s total assessment amount for the increase in the
assessment base attributable to the bank’s participation in the PPP. This final rule began applying to FDIC deposit
insurance assessments during the second quarter of 2020.
Regulation of the Bank and Other Subsidiaries
The Bank is subject to supervision, regulation and examination by the VBFI and its primary federal regulator, the
FDIC. The various laws and regulations issued and administered by the regulatory agencies (including the CFPB) affect
corporate practices, such as the payment of dividends, the incurrence of debt and the acquisition of financial institutions
and other companies, and affect business practices and operations, such as the payment of interest on deposits, the charging
of interest on loans, the types of business conducted, the products and terms offered to customers and the location of
offices. Prior approval of the applicable primary federal regulator and the VBFI is required for a Virginia chartered bank
or bank holding company to merge with another bank or bank holding company, or purchase the assets or assume the
deposits of another bank or bank holding company, or acquire control of another bank or bank holding company. In
reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory agencies will consider,
among other things, the competitive effect and public benefits of the transactions, the financial condition, managerial
resources, capital position and any asset concentrations (including commercial real estate loan concentrations) of the
constituent organizations and the combined organization, the risks to the stability of the U.S. banking or financial system,
the applicant's performance record under the Community Reinvestment Act (CRA) and fair housing initiatives, the data
security and cybersecurity infrastructure of the constituent organizations and the combined organization, the applicant’s
risk management programs and processes, and the applicant’s compliance with and the effectiveness of the subject
organizations in combating money laundering activities and complying with Bank Secrecy Act requirements.
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Certain Transactions by Insured Banks with their Affiliates. There are statutory restrictions related to the extent
bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in “covered
transactions” with their insured depository institution (i.e., banking) subsidiaries. In general, an “affiliate” of a bank
includes the bank’s parent holding company and any subsidiary thereof. However, an “affiliate” does not generally include
the bank’s operating subsidiaries. A bank (and its subsidiaries) may not lend money to, or engage in other covered
transactions with, its non-bank affiliates if the aggregate amount of covered transactions outstanding involving the bank,
plus the proposed transaction, exceeds the following limits: (a) in the case of any one such affiliate, the aggregate amount
of covered transactions of the bank and its subsidiaries cannot exceed 10 percent of the bank’s capital stock and surplus;
and (b) in the case of all affiliates, the aggregate amount of covered transactions of the bank and its subsidiaries cannot
exceed 20 percent of the bank’s capital stock and surplus. “Covered transactions” are defined to include a loan or extension
of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate,
the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company,
the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, securities borrowing or lending
transactions with an affiliate that creates a credit exposure to such affiliate, or a derivatives transaction with an affiliate
that creates a credit exposure to such affiliate. Certain covered transactions are also subject to collateral security
requirements.
Covered transactions as well as other types of transactions between a bank and a bank holding company must be on
market terms, which means that the transaction must be conducted on terms and under circumstances that are substantially
the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with or involving
nonaffiliates or, in the absence of comparable transactions, that in good faith would be offered to or would apply to
nonaffiliates. Moreover, certain amendments to the BHCA provide that, to further competition, a bank holding company
and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit,
lease or sale of property of any kind, or furnishing of any service.
Community Reinvestment Act. The CRA imposes on financial institutions an affirmative and ongoing obligation to
meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the
safe and sound operation of those institutions. A financial institution’s efforts in meeting community credit needs are
assessed based on specified factors. These factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility. In 2020, the Bank received a “Satisfactory” CRA rating.
Federal Home Loan Bank of Atlanta. The Bank is a member of the Federal Home Loan Bank (FHLB) of Atlanta,
which is one of 11 regional FHLBs that provide funding to their members for making housing loans as well as for
affordable housing and community development loans. Each FHLB serves as a reserve, or central bank, for the members
within its assigned region. Each FHLB makes loans to members in accordance with policies and procedures established
by the Board of Directors of the FHLB. As a member, the Bank must purchase and maintain stock in the FHLB. At
December 31, 2020, the Bank owned $1.6 million of FHLB stock.
Consumer Protection. The CFPB is the federal regulatory agency that is responsible for implementing, examining
and enforcing compliance with federal consumer financial laws for institutions with more than $10 billion of assets and,
to a lesser extent, smaller institutions. The CFPB supervises and regulates providers of consumer financial products and
services, and has rulemaking authority in connection with numerous federal consumer financial protection laws (for
example, but not limited to, the Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA)).
Because the Corporation and the Bank are smaller institutions (i.e., with assets of $10 billion or less), most consumer
protection aspects of the Dodd-Frank Act will continue to be applied to the Corporation by the Federal Reserve Board and
to the Bank by the FDIC. However, the CFPB may include its own examiners in regulatory examinations by a smaller
institution’s principal regulators and may require smaller institutions to comply with certain CFPB reporting requirements.
In addition, regulatory positions taken by the CFPB and administrative and legal precedents established by CFPB
enforcement activities, including in connection with supervision of larger bank holding companies and banks, could
influence how the Federal Reserve Board and FDIC apply consumer protection laws and regulations to financial
institutions that are not directly supervised by the CFPB. The precise effect of the CFPB’s consumer protection activities
on the Corporation and the Bank cannot be determined with certainty.
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Mortgage Banking Regulation. In connection with making mortgage loans, the Bank and C&F Mortgage are subject
to rules and regulations that, among other things, establish standards for loan origination, prohibit discrimination, provide
for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain
loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors
concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services
rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications
based on race, gender, geographical distribution and income level. The Bank’s mortgage origination activities are subject
to the Equal Credit Opportunity Act (ECOA), TILA, Home Mortgage Disclosure Act, RESPA, and Home Ownership
Equity Protection Act, and the regulations promulgated under these acts, among other additional state and federal laws,
regulations and rules.
The Bank’s mortgage origination activities are also subject to Regulation Z, which implements TILA. Certain
provisions of Regulation Z require mortgage lenders to make a reasonable and good faith determination, based on verified
and documented information, that a consumer applying for a mortgage loan has a reasonable ability to repay the loan
according to its terms. Alternatively, a mortgage lender can originate “qualified mortgages”, which are generally defined
as mortgage loans without negative amortization, interest-only payments, balloon payments, terms exceeding 30 years,
and points and fees paid by a consumer equal to or less than 3 percent of the total loan amount. Under the EGRRCPA,
most residential mortgage loans originated and held in portfolio by a bank with less than $10 billion in assets will be
designated as “qualified mortgages.” Higher-priced qualified mortgages (e.g., sub-prime loans) receive a rebuttable
presumption of compliance with ability-to-repay rules, and other qualified mortgages (e.g., prime loans) are deemed to
comply with the ability-to-repay rules. The Corporation’s mortgage banking segment predominately originates mortgage
loans that comply with Regulation Z’s “qualified mortgage” rules.
In addition to certain regulations applicable to the Bank’s mortgage origination activities, C&F Mortgage is subject
to the rules and regulations of, and examination by, the Department of Housing and Urban Development (HUD), the FHA,
the USDA, the VA and state regulatory authorities with respect to originating, processing and selling mortgage loans.
Those rules and regulations, among other things, establish standards for loan origination, prohibit discrimination, provide
for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, restrict
certain loan features and fix maximum interest rates and fees.
Consumer Financing Regulation. C&F Finance also is regulated by the VBFI and the states and jurisdictions in
which it operates, and its lending operations are subject to numerous federal regulations over which the CFPB has
rulemaking authority and regarding which enforcement authority is shared by the Federal Reserve Board, the FDIC, the
Department of Justice and the Federal Trade Commission. The VBFI regulates and enforces laws relating to consumer
lenders and sales finance agencies such as C&F Finance. Such rules and regulations generally provide for licensing of
sales finance agencies; limitations on amounts, duration and charges, including interest rates, for various categories of
loans; requirements as to the form and content of finance contracts and other documentation; and restrictions on collection
practices and creditors’ rights.
Certain federal regulatory agencies, and in particular, the CFPB, the Federal Trade Commission, and the Federal
Reserve Board, have recently become more active in investigating the products, services and operations of banks and other
finance companies engaged in auto finance activities. These investigations have extended to banks that engage in indirect
automobile lending. As of January 1, 2021, the Corporation and C&F Finance were not subject to supervision by the
CFPB.
Brokered Deposits. Section 29 of the FDIA and FDIC regulations generally limit the ability of any bank to accept,
renew or roll over any brokered deposit unless it is “well capitalized” or, with the FDIC’s approval, “adequately
capitalized.” However, as a result of the EGRRCPA, the FDIC undertook a comprehensive review of its regulatory
approach to brokered deposits, including reciprocal deposits, and interest rate caps applicable to banks that are less than
“well capitalized.” On December 15, 2020, the FDIC issued final rules that amend the FDIC’s methodology for calculating
interest rate caps, provide a new process for banks that seek FDIC approval to offer a competitive rate on deposits when
the prevailing rate in the bank’s local market exceeds the national rate cap, and provides specific exemptions and
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streamlined application and notice procedures for certain deposit-placement arrangements that are not subject to brokered
deposit restrictions. These final rules are effective on April 1, 2021.
Other Regulations
Prompt Corrective Action. The federal banking agencies have broad powers under current federal law to take
prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon
whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” These terms are defined under uniform regulations issued by each of
the federal banking agencies regulating these institutions. An insured depository institution which is less than adequately
capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight and is increasingly
restricted in the scope of its permissible activities. As of December 31, 2020, the Bank was considered “well capitalized.”
Incentive Compensation. Federal banking agencies have issued regulatory guidance (the Incentive Compensation
Guidance) intended to ensure that the incentive compensation policies of banking organizations do not undermine the
safety and soundness of such organizations by encouraging excessive risk-taking. The FDIC will review, as part of the
regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the
Bank, that are not “large, complex banking organizations.” The findings will be included in reports of examination, and
deficiencies will be incorporated into the organization’s supervisory ratings. Enforcement actions may be taken against a
banking organization if its incentive compensation arrangements, or related risk-management control or governance
processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective
measures to correct the deficiencies.
In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions
(including bank holding companies and banks) from establishing or maintaining incentive-based compensation
arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive
officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead
to material financial loss to the financial institution. The proposed rules outline factors to be considered when analyzing
whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate
risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that
incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to
appropriately balance risk and reward. The proposed rules also impose additional corporate governance requirements on
the boards of directors of covered financial institutions and impose additional record-keeping requirements. The comment
period for these proposed rules has closed and a final rule has not yet been published.
Confidentiality and Required Disclosures of Customer Information. The Corporation is subject to various laws and
regulations that address the privacy of nonpublic personal financial information of consumers. The Gramm-Leach-Bliley
Act and certain regulations issued thereunder protect against the transfer and use by financial institutions of consumer
nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer
relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’
nonpublic personal financial information. These privacy provisions generally prohibit a financial institution from
providing a customer’s personal financial information to unaffiliated third parties unless the institution discloses to the
customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.
Certain exceptions may apply to the requirement to deliver an annual privacy notice based on how a financial institution
limits sharing of nonpublic personal information and whether the institution’s disclosure practices or policies have changed
in certain ways since the last privacy notice that was delivered.
The Corporation is also subject to various laws and regulations that attempt to combat money laundering and
terrorist financing. The Bank Secrecy Act (the BSA) requires all financial institutions to, among other things, create a
system of controls designed to prevent money laundering and the financing of terrorism, and imposes recordkeeping and
reporting requirements. The USA PATRIOT Act added regulations to facilitate information sharing among governmental
entities and financial institutions for the purpose of combating terrorism and money laundering, and requires financial
institutions to establish anti-money laundering programs. Regulations adopted under the BSA impose on financial
17
institutions customer due diligence requirements, and the federal banking agencies expect that customer due diligence
programs will be integrated within a financial institution’s broader BSA and anti-money laundering compliance program.
The Office of Foreign Assets Control (OFAC), which is a division of the U. S. Department of the Treasury, is responsible
for helping to ensure that United States entities do not engage in transactions with “enemies” of the United States, as
defined by various Executive Orders and Acts of Congress. If the Bank finds the name of an “enemy” of the United States
on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account or place transferred funds
into a blocked account, and report it to OFAC.
Although these laws and programs impose compliance costs and create privacy obligations and, in some cases,
reporting obligations, and compliance with all of the laws, programs, and privacy and reporting obligations may require
significant resources of the Corporation and the Bank, these laws and programs do not materially affect the Bank’s
products, services or other business activities.
Corporate Transparency Act. On January 1, 2021, as part of the 2021 National Defense Authorization Act, Congress
enacted the Corporate Transparency Act (CTA), which requires The U.S. Department of the Treasury’s Financial Crimes
Enforcement Network (FinCEN) to issue regulations implementing reporting requirements for “reporting companies” (as
defined in the CTA) to disclose beneficial ownership interests of certain U.S. and foreign entities by January 1, 2022. The
CTA imposes additional reporting requirements on entities not previously subject to such beneficial ownership disclosure
regulations and also contains exemptions for several different types of entities, including among others: (i) certain banks,
bank holding companies, and credit unions; (ii) money transmitting businesses registered with FinCEN; and (iii) certain
insurance companies. Reporting companies subject to the CTA will be required to provide specific information with
respect to beneficial owner(s) (as defined in the CTA) as well as satisfy initial filing obligations (for newly-formed
reporting companies) and submit on-going periodic reports. Non-compliance with FinCEN regulations promulgated under
the CTA may result in civil fines as well as criminal penalties. At this time, FinCEN has yet to issue any proposed rules
to implement the CTA. Accordingly, the Corporation is unable to determine what impact (if any) the CTA and related
regulations will have on the Corporation and its subsidiaries, including the Bank. The Corporation will continue to monitor
regulatory developments related to the CTA.
Cybersecurity. The federal banking agencies have adopted guidelines for establishing information security
standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board
of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and
processes related to information technology and the use of third parties in the provision of financial products and services.
The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk
management processes also address the risk posed by compromised customer credentials, and also expect financial
institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and
maintenance of the institution’s operations after a cyber-attack. If the Corporation or the Bank fails to meet the expectations
set forth in this regulatory guidance, the Corporation or the Bank could be subject to various regulatory actions and any
remediation efforts may require significant resources of the Corporation or the Bank. In addition, all federal and state
banking agencies continue to increase focus on cybersecurity programs and risks as part of regular supervisory exams.
In October 2016, the federal banking agencies issued proposed rules on enhanced cybersecurity risk-management
and resilience standards that would apply to very large financial institutions and to services provided by third parties to
these institutions. The comment period for these proposed rules has closed and a final rule has not been published.
Although the proposed rules would apply only to bank holding companies and banks with $50 billion or more in total
consolidated assets, these rules could influence the federal banking agencies’ expectations and supervisory requirements
for information security standards and cybersecurity programs of smaller financial institutions, such as the Corporation
and the Bank.
Stress Testing. The federal banking agencies have implemented stress testing requirements for certain large or risky
financial institutions, including bank holding companies and state-chartered banks. Although these requirements do not
apply to the Corporation and the Bank, the federal banking agencies emphasize that all banking organizations, regardless
of size, should have the capacity to analyze the potential effect of adverse market conditions or outcomes on the
organization’s financial condition. Based on existing regulatory guidance, the Corporation and the Bank will be expected
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to consider the institution’s interest rate risk management, commercial real estate loan concentrations and other credit-
related information, and funding and liquidity management during this analysis of adverse market conditions or outcomes.
Volcker Rule. The Dodd-Frank Act prohibits bank holding companies and their subsidiary banks from engaging in
proprietary trading except in limited circumstances, and places limits on ownership of equity investments in private equity
and hedge funds (the Volcker Rule). The EGRRCPA, and final rules adopted to implement the EGRRCPA, exempt all
banks with less than $10 billion in assets (including their holding companies and affiliates) from the Volcker Rule,
provided that the institution has total trading assets and liabilities of 5 percent or less of total assets, subject to certain
limited exceptions. The Corporation believes that its financial condition and its operations are not affected by the Volcker
Rule, amendments thereto, or its implementing regulations.
Call Reports and Examination Cycle. All institutions, regardless of size, submit a quarterly call report that includes
data used by federal banking agencies to monitor the condition, performance, and risk profile of individual institutions and
the industry as a whole. The EGRRCPA contained provisions expanding the number of regulated institutions eligible to
use streamlined call report forms. In June 2019, consistent with the provisions of the EGRRCPA, the federal banking
agencies issued a final rule to permit insured depository institutions with total assets of less than $5 billion that do not
engage in certain complex or international activities to file the most streamlined version of the quarterly call report, and to
reduce data reportable on certain streamlined call report submissions.
In December 2018, consistent with the provisions of the EGRRCPA, the federal banking agencies jointly adopted
final rules that permit banks with up to $3 billion in total assets, that received a composite CAMELS rating of “1” or “2,”
and that meet certain other criteria (including not having undergone any change in control during the previous 12-month
period, and not being subject to a formal enforcement proceeding or order), to qualify for an 18-month on-site examination
cycle.
COVID-19 Related Regulatory Relief. In response to the COVID-19 pandemic, federal banking agencies issued a
joint statement on March 22, 2020 encouraging banking institutions to work with borrowers affected by the COVID-19
pandemic, including offering short-term loan modifications to borrowers unable to meet their contractual payment
obligations. Under this interagency guidance, certain loans that have been modified are exempt from being reported as
past due or as troubled debt restructurings (TDRs). Further, the CARES Act provided additional exemptions from TDR
reporting for certain loans that have been modified for reasons related to the COVID-19 pandemic. Regulatory agencies
also issued an interim final rule on April 7, 2020 which provides relief in bank regulatory capital requirements that allow
loans originated under the PPP to be excluded from risk-weighted assets, and to be excluded from total assets for purposes
of bank leverage ratio requirements if they are pledged as collateral to the PPPLF.
Congress also enacted the Consolidated Appropriations Act, 2021, on December 27, 2020, which included (i) the
Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act, (ii) the COVID-Related Tax Relief Act of
2020, and (iii) the Taxpayer Certainty and Disability Relief Act of 2020. These laws include significant clarifications and
modifications to PPP, which had terminated on August 8, 2020. In particular, Congress revived the PPP and allocated an
additional $284.45 billion in PPP funds for 2021. As a result, the SBA has modified prior guidance and promulgated new
regulations and guidance to conform with and implement the new provisions during the first quarter of 2021. As a
participating PPP lender, the Bank continues to monitor legislative, regulatory, and supervisory developments related
thereto.
Effect of Governmental Monetary Policies. As with other financial institutions, the earnings of the Corporation and
the Bank are affected by general economic conditions as well as by the monetary policies of the Federal Reserve Board.
Such policies, which include regulating the national supply of bank reserves and bank credit, can have a major effect upon
the source and cost of funds and the rates of return earned on loans and investments. The Federal Reserve Board exerts a
substantial influence on interest rates and credit conditions, primarily through establishing target rates for federal funds,
open market operations in U.S. Government securities, varying the discount rate on member bank borrowings and setting
cash reserve requirements against deposits. Changes in monetary policy, including changes in interest rates, will influence
the origination of loans, the purchase of investments, the generation of deposits, and rates received on loans and investment
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securities and paid on deposits. Fluctuations in the Federal Reserve Board’s monetary policies have had a significant
impact on the operating results of the Corporation and the Bank and are expected to continue to do so in the future.
In response to the COVID-19 pandemic, the Federal Reserve Board’s Federal Open Market Committee (the FOMC)
set the federal funds target rate – i.e., the interest rate at which depository institutions such as the Bank lend reserve balances
to other depository institutions overnight on an uncollateralized basis – to an historic low. On March 16, 2020, the FOMC
set the federal funds target rate at zero to 0.25 percent. Consistent with Federal Reserve Board policy, the Federal Reserve
Board has committed to the use of overnight reverse repurchase agreements as a supplementary policy tool, as necessary,
to help control the federal funds rate and keep it in the target range set by the FOMC.
Future Regulation
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures,
as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding
companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such
legislation could change banking statutes and the operating environment of the Corporation in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other
financial institutions. The Corporation cannot predict whether any such legislation will be enacted, and, if enacted, the
effect that it, or any implementing regulations, would have on the financial condition or results of operations of the
Corporation. A change in statutes, regulations or regulatory policies applicable to the Corporation or any of its subsidiaries
could have a material effect on the business of the Corporation.
Available Information
The Corporation’s SEC filings are filed electronically and are available to the public over the Internet at the SEC’s
website at http://www.sec.gov. The Corporation’s SEC filings also are available
through our website at
http://www.cffc.com under “Investor Relations/Financial Documents/SEC Filings” as of the day they are filed with the
SEC. Copies of documents also can be obtained free of charge by writing to the Corporation’s secretary at 3600 La Grange
Parkway, Toano, VA 23168 or by calling 804-843-2360.
ITEM 1A.
RISK FACTORS
Risk Factors Related to the COVID-19 Pandemic
The Corporation’s results of operations and financial condition have been, and will likely continue to be, adversely
affected by the COVID-19 pandemic and, depending on future developments, may be materially adversely impacted by
the COVID-19 pandemic.
The outbreak of the novel coronavirus and the resulting COVID-19 pandemic, the widespread government response
and the impact on consumers and businesses have caused significant disruption in the United States and international
economies and financial markets and have had and will likely continue to have a significant impact on consumers and
businesses in our market area and the operations and financial performance of the Corporation. Governments, businesses
and the public have taken unprecedented actions to try and contain the spread of COVID-19 and to mitigate its effects
including quarantines, shelter-in-place orders, state of emergency declarations, travel bans, closures of businesses and
schools, fiscal stimulus and legislative initiatives to deliver monetary aid and other relief. Many of these actions have
adversely impacted the economy and forced temporary closures of nonessential business, and as a result, the businesses of
many of our customers have been adversely impacted, which could materially affect our business, financial condition and
results of operations.
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Although the scope, duration and full effects of the pandemic are evolving and cannot be fully known at this time,
consequences of the pandemic and efforts to contain the spread of COVID-19 and mitigate the pandemic’s effects have
included and may include further market volatility, lower interest rates, disrupted trade and supply chains, increased
unemployment and reduced economic activity. The period of recovery from the negative economic effects of the pandemic
cannot be predicted and may be protracted. If these effects continue for a prolonged period of time, the Corporation may
experience significant delinquencies and credit losses due to the inability of borrowers to make timely payments on loans,
net interest margin compression, lower demand for our products and services, decreased capital, which may affect the
Corporation’s ability to originate new loans, disruption of operational processes arising from practices of social distancing
and telecommuting and potential impairment of assets, including securities available for sale and goodwill. Credit
deterioration in the Corporation’s loan portfolio due to the pandemic may be masked or obscured by loan payment deferral
programs or government stimulus or relief efforts, such as the PPP. The COVID-19 pandemic may also exacerbate many
of the risk factors identified in this Annual Report on Form 10-K, including risk related to our credit quality, collateral,
capital, liquidity, operations, interest rate risk, strategic risk and technology.
Although banks have generally been permitted to continue operating during the COVID-19 outbreak, the outbreak
has caused the Corporation to change its business operations, including updating branch operations to comply with
governmental recommendations and increasing work from home options for our employees. These changes may have
adverse impacts on the Corporation’s business due to reduced effectiveness of operations, unavailability of personnel,
increased cybersecurity risks related to use of remote technology, and increased costs related to these operational changes.
Additionally, our business operations may be disrupted if key personnel or significant portions of our employees are unable
to work effectively, including because of illness. The changes in business operations could also have a detrimental effect
on the Corporation’s relationships with its customers and could reduce demand for the Corporation’s products and services.
Unfavorable economic conditions and elevated unemployment due to the pandemic may make it difficult for the
Corporation to maintain deposit levels and loan origination volume. Such unfavorable conditions may cause the value of
our investment portfolio and of the collateral securing the Corporation’s loans to decline. The Federal Reserve has lowered
the federal funds rate to a range of zero to 0.25 percent in part as a result of the pandemic. A prolonged period of very
low interest rates could reduce the Corporation’s net income and have a material adverse effect on the Corporation’s cash
flows.
The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition
will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the
duration, spread, severity and impact of the COVID-19 pandemic, and the actions required to contain and mitigate it, the
effectiveness of vaccines and vaccine distribution efforts, the effects of the pandemic on our customers and vendors, the
remedial actions and stimulus measures adopted by local, state and federal governments, the timing and availability of
government support for the economy and financial markets including indirect governmental support for various financial
assets including mortgage loans, the short- and long-term health impacts of the pandemic, and how quickly and to what
extent normal economic and operating conditions can resume, if at all. If the severity of the COVID-19 pandemic worsens,
additional actions may be taken by federal, state, and local governments to contain COVID-19 or treat its impact, including
additional shelter-in-place orders. There can be no assurance that any efforts by the Corporation to address the adverse
impacts of the COVID-19 pandemic will be effective. Even after the COVID-19 pandemic has subsided, we may continue
to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may
occur in the future, or as a result of changes in the behavior of customers, businesses and their employees. Furthermore,
the financial condition of our customers and vendors may be adversely impacted, which may result in an elevated level of
loan losses, a decrease in demand for our products and services, or reduced availability of services provided by third parties
on which we rely. Any of these events may, in turn, have a material adverse impact our business, results of operations and
financial condition.
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Risk Factors Related to our Lending Activities and Economic Conditions
Our business is subject to various lending and other economic risks that could adversely affect our results of operations
and financial condition.
Deterioration in economic conditions could adversely affect our business. Our business is directly affected by
general economic and market conditions; broad trends in industry and finance; legislative and regulatory changes; changes
in governmental monetary and fiscal policies; and inflation, all of which are beyond our control. A deterioration in
economic conditions, in particular a prolonged economic slowdown within our geographic region or a broader disruption
in the economy, possibly as a result of a pandemic or other widespread public health emergency, could result in the
following consequences, any of which could hurt our business materially: an increase in loan delinquencies; an increase
in problem assets and foreclosures; a decline in demand for our products and services; and a deterioration in the value of
collateral for loans made by our various business segments.
Adverse changes in economic conditions in our market areas or adverse conditions in an industry on which a local
market in which we do business is dependent could adversely affect our results of operations and financial condition.
We provide full service banking and other financial services between Hampton Roads and Charlottesville, and in
the Northern Neck region of Virginia. Our loan and deposit activities are directly affected by, and our financial success
depends on, economic conditions within these markets, as well as conditions in the industries on which those markets are
economically dependent. A deterioration in local economic conditions or in the condition of an industry on which a local
market depends, such as the U.S. military and related defense contractors and industries, could adversely affect such factors
as unemployment rates, business formations and expansions and housing market conditions. Adverse developments in any
of these factors could result in among other things, a decline in loan demand, a reduction in the number of creditworthy
borrowers seeking loans, an increase in delinquencies, defaults and foreclosures, an increase in classified and nonaccrual
loans, a decrease in the value of loan collateral, and a decline in the financial condition of borrowers and guarantors, any
of which could adversely affect our financial condition or business.
Weakness in the secondary residential mortgage loan markets or demand for mortgage loans may adversely affect
income from C&F Mortgage.
Our mortgage banking segment provides a significant portion of our noninterest income. We generate gains on
sales of mortgage loans primarily from sales of mortgage loans that we originate. Interest rates, housing inventory, housing
demand, cash buyers, new mortgage lending regulations and other market conditions have a direct effect on loan
originations across the industry. In particular, in a rising or higher interest rate environment, our originations of mortgage
loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in
noninterest income. In addition, our results of operations are affected by the amount of noninterest expenses (including
for personnel and systems infrastructure) associated with mortgage banking activities. During periods of reduced loan
demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses
commensurate with the decline in mortgage loan origination activity.
If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.
Making loans is an essential element of our business. The risk of nonpayment is affected by a number of factors,
including but not limited to: the duration of the credit; credit risks of a particular customer; changes in economic and
industry conditions; and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the
collateral. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans
may not be repaid. We attempt to maintain an appropriate allowance for loan losses to provide for losses in our loan
portfolio. Because any estimate of loan losses is necessarily subjective and the accuracy of any estimate depends on the
outcome of future events that are not within our control, we face the risk that charge-offs in future periods will exceed our
allowance for loan losses and that additional provision for loan losses will be required, which would have an adverse effect
on the Corporation’s net income. Although we believe our allowance for loan losses is adequate to absorb losses that are
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inherent in our loan portfolio, we cannot predict the timing or severity of such losses nor give any assurance that our allowance
will be adequate in the future.
The Financial Accounting Standards Board (FASB) has issued a new accounting standard that will be effective for the
Corporation for the fiscal year beginning January 1, 2023. This standard, Accounting Standards Codification (ASC) Topic
326, “Financial Instruments—Credit Losses” (ASC 326) will require the Corporation to record an allowance for credit losses
that represents expected credit losses over the lifetime of all loans in its portfolio. This represents a change from the current
method of providing for an allowance for loan losses that have been incurred. We have not yet determined the impact that
ASC 326 will have on our consolidated financial statements and regulatory capital. While the adoption of ASC 326 will not
affect ultimate loan performance or cash flows of the Corporation from making loans, the period in which expected credit
losses affect net income of the Corporation may not be similar to the recognition of loan losses under current accounting
guidance. If recognition of the allowance for credit losses results in a reduction of the regulatory capital of C&F Bank, the
initial reduction in regulatory capital will be phased in over three years under regulatory guidance. If the reduction in
regulatory capital of C&F Bank is significant, it may adversely impact the future ability of the Corporation to pay dividends
to shareholders.
An increase in mortgage loan defaults or prepayments may result in losses related to loans sold by C&F Mortgage.
Deterioration in economic conditions may cause borrowers to default on their mortgages. This may result in
potential repurchase or indemnification obligations for C&F Mortgage on residential mortgage loans originated and sold
into the secondary market. Such obligations may arise in the event of claims by investors of borrower misrepresentation,
fraud, early-payment default, or underwriting error, as investors attempt to minimize their losses. We cannot be assured
that a prolonged period of payment defaults and foreclosures will not result in an increase in requests for repurchases or
indemnifications. Alternatively, during periods of low or falling interest rates, our customers may find opportunities to
refinance shortly after obtaining a mortgage loan from C&F Mortgage, which may result in unexpected prepayments on
loans that have been sold into the secondary market. This may result in obligations of C&F Mortgage to return a portion
of the sales proceeds from such loans to investors pursuant to the terms of the sale. We attempt to maintain an appropriate
reserve for indemnification losses and for prepayment obligations. Although we believe our reserves for indemnification
losses and prepayment obligations are adequate, these estimates are inherently subjective and actual indemnification losses
and prepayment obligations will depend on future events that are often not within our control. Therefore, we can give no
assurance that established reserves will be adequate. Additional provision for indemnification losses or additional
obligations arising from prepayments would have an adverse effect on the Corporation’s net income.
Our level of credit risk is higher due to the concentration of our loan portfolio in commercial loans and in consumer
finance loans.
At December 31, 2020, 51.8 percent of our loan portfolio consisted of commercial, financial and agricultural loans,
which include loans secured by real estate for builder lines, acquisition and development and commercial development, as
well as commercial loans secured by personal property. These loans generally carry larger loan balances and involve a
greater degree of financial and credit risk than home equity and residential loans. The increased financial and credit risk
associated with these types of loans is a result of several factors, including the concentration of principal in a limited
number of loans and to borrowers in similar lines of business, the size of loan balances, the effects of general economic
conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.
At December 31, 2020, 23.1 percent of our loan portfolio consisted of consumer finance loans that provide
automobile financing for customers in the non-prime market. During periods of economic slowdown or recession,
delinquencies, defaults, repossessions and losses may increase in this portfolio. Significant increases in the inventory of
used automobiles during periods of economic recession may also depress the prices at which we may sell repossessed
vehicles or delay the timing of these sales. Because we focus on non-prime borrowers, the actual rates of delinquencies,
defaults, repossessions and losses on these loans are higher than those experienced in the general automobile finance
industry and could be dramatically affected by a general economic downturn. In addition, our servicing costs may increase
without a corresponding increase in our finance charge income. While we manage the higher risk inherent in loans made
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to non-prime borrowers through our underwriting criteria for installment sales contracts we purchase and collection
methods, we cannot guarantee that these criteria or methods will ultimately provide adequate protection against these risks.
Risk Factors Related to our Industry
We are subject to interest rate risk and fluctuations in interest rates may negatively affect our financial performance.
Our profitability depends in substantial part on our net interest margin, which is the difference between the interest
earned on loans, securities and other interest-earning assets, and interest paid on deposits and borrowings divided by total
interest-earning assets. Changes in interest rates will affect our net interest margin in diverse ways, including the pricing
of loans and deposits, the levels of prepayments and asset quality. We are unable to predict actual fluctuations of market
interest rates because many factors influencing interest rates, including changes in economic conditions, are beyond our
control. We believe that our current interest rate exposure is manageable and does not indicate any significant exposure to
interest rate changes. In March 2020, the FOMC announced emergency rate cuts for the federal funds rate, which is the
interest rate at which depository institutions lend reserve balances to other depository institutions overnight, in response
to the outbreak of COVID-19. Since March 2020, the FOMC has kept the federal funds rate near zero, and financial
markets expect interest rates to remain historically low for a prolonged period as the economy recovers from the recession
caused by the COVID-19 pandemic. Longer-term market interest rates, including yields on U.S. treasury bonds, have also
remained low. Therefore, we are expecting continued pressure on our net interest margin due to intense competition for
loans and deposits from both local and national financial institutions and the continued effect of lower interest rates on
interest income. In addition, the Corporation could experience further net interest margin compression if it is unable to
maintain its current level of loans outstanding by continuing to originate new loans or if it experiences a decrease in deposit
balances, which would require the Corporation to seek funding from other sources at higher rates of interest.
We rely substantially on deposits obtained from customers in our target markets to provide liquidity and support growth.
Our business strategies are based on access to funding from local customer deposits. Deposit levels may be affected
by a number of factors, including interest rates paid by competitors, general interest rate levels, returns available to
customers on alternative investments and general economic conditions that affect savings levels and the amount of liquidity
in the economy, including government stimulus efforts in response to economic crises. If our deposit levels fall, we could
lose a relatively low cost source of funding and our interest expense would likely increase as we obtain alternative funding
to replace lost deposits. If local customer deposits are not sufficient to fund our normal operations and growth, we will
look to outside sources, such as borrowings from the FHLB, which is a secured funding source. Our ability to access
borrowings from the FHLB will be dependent upon whether and the extent to which we can provide collateral to secure
FHLB borrowings. We may also look to federal funds purchased and brokered deposits, although the use of brokered
deposits may be limited or discouraged by our banking regulators. We may also seek to raise funds through the issuance
of shares of our common stock, or other equity or equity-related securities, or debt securities including subordinated notes
as additional sources of liquidity. If we are unable to access funding sufficient to support our business operations and
growth strategies or are unable to access such funding on attractive terms, we may not be able to implement our business
strategies which may negatively affect our financial performance.
Consumers may increasingly decide not to use banks to complete their financial transactions, which could have a
material adverse impact on our financial condition and operations.
Technology and other changes are allowing parties to complete financial transactions through alternative methods
that historically have involved banks. For example, consumers can now maintain funds that would have historically been
held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can
also complete transactions such as paying bills or transferring funds directly without the assistance of banks. The process
of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the
loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the
loss of deposits as a lower cost source of funds could have a material adverse effect on our financial condition and results
of operations.
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Competition from other financial institutions and financial intermediaries may adversely affect our profitability.
We face substantial competition in originating loans and in attracting deposits. Our competition in originating loans
and attracting deposits comes principally from other banks, mortgage banking companies, consumer finance companies,
savings associations, credit unions, brokerage firms, insurance companies and other institutional lenders and purchasers
of loans. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not
subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger
clients. These institutions may be able to offer the same loan products and services that we offer at more competitive rates
and prices. Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on
loans, which could adversely affect our profitability.
Accounting for past business combinations may expose us to intangible asset risk, which could affect our results of
operations.
In connection with accounting for prior acquisitions, we recorded assets acquired and liabilities assumed at their
fair value, which resulted in the recognition of certain intangible assets, including goodwill. Adverse conditions in our
business climate, including a significant decline in future operating cash flows, changes in interest rates that may lead to
net interest margin compression, changes in demand for loans or our ability to originate and hold loans, a sustained period
of elevated loan losses, a significant decrease in valuations or stock prices of the Corporation or other bank holding
companies, or a deviation from our expected growth rate and performance, may significantly affect the fair value of the
Corporation’s reporting units and may trigger impairment losses on intangible assets, which could be materially adverse
to our results of operations.
Risk Factors Related to our Operations and Technology
Our risk management framework may not be effective in mitigating risk and loss.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report and
control the risks we face. These risks include, but are not limited to, interest rate, credit, liquidity, operational, reputation,
legal, compliance, economic and litigation risk. Although we assess our risk management program on an ongoing basis
and make identified improvements to it, we can give no assurance that this approach and risk management framework
(including related controls) will effectively mitigate the risks listed above or limit losses that we may incur. If our risk
management program has flaws or gaps, or if our risk management controls do not function effectively, our results of
operations, financial condition or business may be adversely affected.
We are subject to security and operational risks, including cybersecurity risks and cyber attacks, relating to our use of
technology that could damage our reputation and our business.
In the ordinary course of business, the Corporation collects and stores sensitive data, including proprietary business
information and personally identifiable information of our customers and employees, in systems and on networks. The
secure processing, maintenance and use of this information is critical to operations and the Corporation’s business strategy.
The Corporation has invested in information security technologies and continually reviews processes and practices that
are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security
measures, the Corporation’s computer systems and infrastructure may be vulnerable to attacks by hackers or may be
breached due to employee error, malfeasance or other disruptions. Security breaches, including cyber incidents, identity
theft and hacking events, have been experienced by several of the world’s largest financial institutions that utilize
sophisticated security tools to prevent such breaches, incidents and events. Any security breach that we experience could
result in legal claims, regulatory penalties, disruption in operation, remediation expenses, costs associated with customer
notification and credit monitoring services, increased insurance premiums, loss of customers and business partners and
damage to the Corporation’s reputation. We rely on customary security systems and procedures to provide the security
and authentication necessary to effect secure collection, transmission and storage of sensitive data. These systems and
procedures include but are not limited to (i) regular penetration testing of our network, (ii) regular employee training
25
programs on sound security practices and awareness of security threats, (iii) deployment of tools to monitor our network
including intrusion prevention and detection systems, electronic mail spam filters, anti-virus, anti-malware, anti-
ransomware, resource logging and patch management, (iv) multifactor authentication for customers using treasury
management tools and employees who access our network from outside of our premises, and (v) enforcement of security
policies and procedures for the additions and maintenance of user access and rights to resources. However, because the
techniques used to obtain unauthorized access, or to disable or degrade systems change frequently and are often not
recognized until launched against a target, the Corporation may be unable to anticipate these techniques or to implement
adequate protective measures.
While most of our core data processing is conducted internally, certain key applications are outsourced to third
party providers. If our third party providers encounter difficulties or if we have difficulty in communicating with such
third parties, it will significantly affect our ability to adequately process and account for customer transactions, which
would significantly affect our business operations and reputation. Additionally, in recent years banking regulators have
focused on the responsibilities of financial institutions to supervise vendors and other third-party service providers. We
may have to dedicate significant resources to manage risks and regulatory burdens presented by our relationship with
vendors and third-party service providers, including our data processing and cybersecurity service providers.
We rely on other companies to provide key components of our business infrastructure.
Third parties provide key components of our businesses’ operations such as data processing, recording and
monitoring transactions, online banking interfaces and services, internet connections, and network access. While we have
selected these third-party vendors carefully, we do not control their actions. Any problem caused by these third parties,
such as poor performance of services, failure to provide services, disruptions in communication services provided by a
vendor, or failure to handle current or higher volumes could adversely affect the Corporation’s ability to deliver products
and services to its customers and otherwise conduct its business, and may harm its reputation. Financial or operational
difficulties of a third-party vendor could also hurt the Corporation’s operations if those difficulties affect the vendor’s
ability to serve the Corporation. Replacing these third-party vendors could also create significant delay and expense.
Accordingly, use of such third parties creates an unavoidable inherent risk to our businesses’ operations.
Our business is technology dependent, and an inability to successfully implement technological improvements may
adversely affect our ability to be competitive and our results of operations and financial condition.
The financial services industry is undergoing rapid technological changes with frequent introductions of new
technology-driven products, systems and services, which may require substantial initial investment to be implemented,
including the cost of modifying or adapting existing products, systems and services. The Corporation invests in new
technology to enhance customer service, and to increase efficiency and reduce operating costs. Our future success will
depend in part upon our ability to create synergies in our operations through the use of technology and to facilitate the
ability of customers to engage in financial transactions in a manner that enhances the customer experience. We cannot
give any assurance that technological improvements will increase operational efficiency or that we will be able to
effectively implement new technology-driven products, systems and services or be successful in marketing new products
and services to our customers. A failure to maintain or enhance a competitive position with respect to technology, whether
because of a failure to anticipate customer expectations, substantially fewer resources to invest in technological
improvements than larger competitors, or because our technological developments fail to perform as desired or are not
implemented in a timely manner, could result in higher operating costs, decreased customer satisfaction, and lower market
share. An inability to effectively implement new technology and realize operational efficiencies could result in the loss of
initial investments in such projects and higher operating costs. Either of these outcomes could have a material adverse
impact on our financial condition and results of operations.
We rely heavily on our management team and the unexpected loss of key officers may adversely affect our operations.
We believe that our growth and future success will depend in large part on the skills of our executive officers. We
also depend upon the experience of the officers of our subsidiaries and on their relationships with the communities they
26
serve. The loss of the services of one or more of these officers could disrupt our operations and impair our ability to
implement our business strategy, which could adversely affect our business, financial condition and results of operations.
The success of our business strategies depends on our ability to identify and recruit individuals with experience and
relationships in our primary markets.
The successful implementation of our business strategy will require us to continue to attract, hire, motivate and
retain skilled personnel to develop new customer relationships as well as new financial products and services. The market
for qualified management personnel is competitive, which has contributed to salary and employee benefit costs that have
risen and are expected to continue to rise, which may have an adverse effect on the Corporation’s net income. In addition,
the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our
strategy is often lengthy, and we may not be able to effectively integrate these individuals into our operations. Our inability
to identify, recruit and retain talented personnel to manage our operations effectively and in a timely manner could limit
our growth, which could materially adversely affect our business.
Risks Related to the Regulation of the Corporation
Compliance with laws, regulations and supervisory guidance, both new and existing, may adversely affect our business,
financial condition and results of operations.
We are subject to numerous laws, regulations and supervision from both federal and state agencies. Failure to
comply with these laws and regulations could result in financial, structural and operational penalties, including
receivership. In addition, establishing systems and processes to achieve compliance with these laws and regulations may
increase our costs and/or limit our ability to pursue certain business opportunities.
Laws and regulations, and any interpretations and applications with respect thereto, generally are intended to benefit
consumers, borrowers and depositors, but not stockholders. The legislative and regulatory environment is beyond our
control, may change rapidly and unpredictably and may negatively influence our revenues, costs, earnings, and capital
levels. Our success depends on our ability to maintain compliance with both existing and new laws and regulations.
Future legislation, regulation and government policy, particularly following changes in political leadership and
policymakers in the federal government, could affect the banking industry as a whole, including the Corporation’s business
and results of operations, in ways that are difficult to predict. In addition, the Corporation’s results of operations could be
adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts
and government agencies.
The CFPB may increase our regulatory compliance burden and could affect the consumer financial products and
services that we offer.
The CFPB significantly influences consumer financial laws, regulation and policy through rulemaking related to
enforcement of the Dodd-Frank Act’s prohibitions against unfair, deceptive and abusive consumer finance products or
practices, which are directly affecting the business operations of financial institutions offering consumer financial products
or services, including the Corporation. This agency’s broad rulemaking authority includes identifying practices or acts
that are unfair, deceptive or abusive in connection with any consumer financial transaction, financial product or
service. Although the CFPB has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies
issued by the CFPB may also apply to the Corporation or its subsidiaries by virtue of the adoption of such policies and
practices by the Federal Reserve and the FDIC. Further, the CFPB may include its own examiners in regulatory
examinations by the Corporation’s primary regulators. The total costs, limitations and restrictions related to the CFPB may
produce significant, material effects on our business, financial condition and results of operations.
27
Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.
The policies of the Federal Reserve affect us significantly. The Federal Reserve regulates the supply of money and
credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on
borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies
determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our
control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk
that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could reduce
the demand for a borrower's products and services. This could adversely affect the borrower’s earnings and ability to repay
a loan, which could have an adverse effect on our financial condition and results of operations. Alternatively, an expansion
of the money supply could make it easier for a borrower to obtain a loan from another financial institution at a lower
interest rate, resulting in a payoff of that borrower’s higher rate loan with us, and which could have an adverse effect on
our financial condition and results of operations.
General Risk Factors
Our common stock price may be volatile, which could result in losses to our investors.
Our common stock price has been volatile in the past, and several factors could cause the price to fluctuate in the
future. These factors include, but are not limited to, actual or anticipated variations in earnings, changes in analysts’
recommendations or projections with regard to our common stock or the markets and businesses in which we operate,
operations and stock performance of other companies deemed to be our peers, and reports of trends and concerns and other
issues related to the financial services industry. Fluctuations in our common stock price may be unrelated to our
performance. General market declines or market volatility in the future, especially in the financial institutions sector, could
adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Future sales of our common stock by shareholders or the perception that those sales could occur may cause our
common stock price to decline.
Although our common stock is listed for trading on NASDAQ Global Select Market, the trading volume in our
common stock may be lower than that of other larger financial institutions. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers
of the common stock at any given time. This presence depends on the individual decisions of investors and general
economic and market conditions over which we have no control. Given the potential for lower relative trading volume in
our common stock, significant sales of the common stock in the public market, or the perception that those sales may
occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence
of these sales or perceptions.
Future issuances of our common stock could adversely affect the market price of our common stock and could be
dilutive.
We may issue additional shares of common stock or securities that are convertible into or exchangeable for, or that
represent the right to receive, shares of our common stock. Issuances of a substantial number of shares of our common
stock, or the expectation that such issuances might occur, including in connection with acquisitions, could materially
adversely affect the market price of the shares of our common stock and could be dilutive to shareholders. Any decision
we make to issue common stock in the future will depend on market conditions and other factors, and we cannot predict
or estimate the amount, timing, or nature of possible future issuances of our common stock. Accordingly, our shareholders
bear the risk that future issuances of our securities will reduce the market price of the common stock and dilute their stock
holdings in the Corporation.
28
The Corporation’s dividends may not be sustained.
Although the Corporation has historically paid cash dividends to holders of its common stock, holders of common
stock are not entitled to receive dividends. Financial, regulatory or economic factors may cause the Corporation’s Board
of Directors to consider, among other actions, the suspension or reduction of dividends paid on the Corporation’s common
stock. Furthermore, the Corporation is a bank holding company that conducts substantially all of its operations through
its subsidiaries, including the Bank. As a result, the Corporation relies on dividends from the Bank for substantially all of
its revenues. There are various regulatory restrictions on the ability of the Bank to pay dividends or make other payments
to the Corporation, and the Corporation’s right to participate in a distribution of assets upon the Bank’s liquidation or
reorganization is subject to the prior claims of the Bank’s creditors. If the Bank is unable to pay dividends to the
Corporation, the Corporation may not be able to service its outstanding borrowings and other debt, pay its other obligations
or pay a cash dividend to the holders of the Corporation’s common stock, and the Corporation’s business, financial
condition and results of operations may be materially adversely affected.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
The Corporation has no unresolved comments from the SEC staff.
ITEM 2.
PROPERTIES
The following describes the location and general character of the principal offices and other materially important
physical properties of the Corporation.
The main office of C&F Bank is located in West Point, VA. The operations center of C&F Bank, which includes
the offices of the community banking segment’s loan, deposit and administrative functions, is located in Toano, Virginia.
Additionally, the community banking segment operates 30 branch offices. The community banking segment also operates
four regional commercial lending offices in Virginia, two of which are situated at bank branch locations. Of the 32
locations used as bank branches or commercial lending offices, 26 are owned by the community banking segment, 5 are
leased from nonaffiliates and one is located in a loan production office of the mortgage banking segment.
The mortgage banking segment’s main administrative office and a loan production office are located in Midlothian,
Virginia, in a building owned by C&F Bank that also houses a branch of C&F Bank. In addition, the mortgage banking
segment has 20 loan production offices, of which 3 in Virginia are located in C&F Bank branches and 17 are leased from
nonaffiliates, including: 12 in Virginia, 1 in Maryland, 2 in North Carolina, 1 in South Carolina and 1 in West Virginia.
The consumer finance segment’s headquarters and its loan and administrative functions and staff are located in
Richmond, Virginia, in offices that are leased. The consumer finance segment expects to relocate its loan and
administrative functions and staff into a building that it owns in Richmond, Virginia, upon completion of the building
project in 2021.
All of the Corporation’s properties are in good operating condition and are adequate for the Corporation’s present
and anticipated future needs.
ITEM 3.
LEGAL PROCEEDINGS
The Corporation and its subsidiaries may be involved in certain litigation matters arising in the ordinary course of
business. Although the ultimate outcome of these matters cannot be ascertained at this time, and the results of legal
proceedings cannot be predicted with certainty, we believe, based on current knowledge, that the resolution of any such
matters arising in the ordinary course of business will not have a material adverse effect on the Corporation.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
29
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Name (Age)
Present Position
Business Experience
During Past Five Years
Thomas F. Cherry (52)
President and Chief Executive Officer
Larry G. Dillon (68)
Executive Chairman
Jason E. Long (41)
Executive Vice President, Chief Financial Officer
and Secretary
Bryan E. McKernon (64)
President and Chief Executive Officer,
C&F Mortgage
S. Dustin Crone (52)
President and Chief Executive Officer, C&F
Finance
Chief Executive Officer of the Corporation and C&F Bank since
2019; President of the Corporation and C&F Bank since 2014;
Director of the Corporation and C&F Bank since 2015; Secretary
of the Corporation and C&F Bank from 2002 to 2018; Chief
Financial Officer of the Corporation and C&F Bank from 2004 to
2016
Chairman of the Board of Directors of the Corporation and C&F
Bank since 1989; Chief Executive Officer of the Corporation and
C&F Bank from 1989 to 2018; President of the Corporation and
C&F Bank from 1989 to 2014
Executive Vice President and Chief Financial Officer of the
Corporation and C&F Bank since 2020; Senior Vice President and
Chief Financial Officer of the Corporation and C&F Bank from
2016 to 2020; Secretary of the Corporation and C&F Bank since
2019; First Vice President of C&F Bank from 2014 to 2016;
Various positions, most recently Principal from April 2013
through September 2014, at the accounting firm of Yount, Hyde &
Barbour, P.C. since 2002, focusing on the financial services
industry
President and Chief Executive Officer of C&F Mortgage since
1995; Director of C&F Bank since 1998
Chief Executive Officer of C&F Finance since 2020; President of
C&F Finance since 2010
John A. Seaman, III (63)
Executive Vice President and Chief Credit Officer,
C&F Bank
Executive Vice President and Chief Credit Officer of C&F Bank
since 2011
PART II
ITEM 5.
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
The Corporation’s common stock is listed for trading on the NASDAQ Global Select Market of the NASDAQ
Stock Market under the symbol “CFFI.” As of March 2, 2021, there were approximately 3,000 shareholders of our
common stock. As of that date, the closing price of our common stock on the NASDAQ Global Select Stock Market was
$42.66.
Payment of dividends is at the discretion of the Corporation’s Board of Directors and is subject to various federal
and state regulatory limitations. For further information regarding payment of dividends refer to Item 1. “Business,” under
the heading “Limits on Dividends.” In making its decision on the payment of dividends on the Corporation’s common
30
stock, the Corporation’s Board of Directors considers operating results, financial condition, capital adequacy, regulatory
requirements, shareholder returns, and other factors.
Issuer Purchases of Equity Securities
The Corporation’s Board of Directors authorized a program, effective November 17, 2020, to repurchase up to
365,000 shares of the Corporation’s common stock through November 30, 2021 (the Repurchase Program). Repurchases
under the Repurchase Program may be made through privately negotiated transactions or open market transactions,
including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, and shares repurchased will be returned to the status of authorized and unissued shares of
common stock. As of December 31, 2020, the Corporation has made aggregate common stock repurchases of 7,459 shares
for an aggregate cost of $275,000 under the Repurchase Program. The Corporation’s previous share repurchase program
expired on May 31, 2020.
The following table summarizes repurchases of the Corporation’s common stock that occurred during the three
months ended December 31, 2020.
Maximum Number
Total Number of
Shares Purchased as Shares that May Yet
(or Approximate
Dollar Value) of
Total Number of
Shares Purchased1
Part of Publicly
Average Price Paid Announced Plans or Under the Plans or
Programs
Be Purchased
Programs
per Share
October 1, 2020 - October 31, 2020 . . . . . . .
November 1, 2020 - November 30, 2020 . .
December 1, 2020 - December 31, 2020 . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
228 $
— $
11,817 $
12,045 $
30.30
—
36.89
36.76
—
—
7,459
7,459
—
365,000
357,541
1 During the three months ended December 31, 2020, 4,586 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.
31
ITEM 6.
SELECTED FINANCIAL DATA
Five Year Financial Summary
(Dollars in thousands, except per share amounts)
Financial Condition:
Total assets1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities, available for sale . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans (net of allowance for loan losses) . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense2 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Share Data:
Earnings per share—basic2 . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share—assuming dilution2 . . . . . . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares—basic . . . . . . . . . . .
Weighted average number of shares—assuming
dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Significant Ratios:
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets2 . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity2 . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio2 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . . . . . . . . . . . . .
Asset Quality:
Allowance for loan losses (ALL)
2020
2019
2018
2017
2016
2,086,310
286,389
214,266
1,313,250
1,752,173
76,169
194,471
96,913
13,382
83,531
11,080
72,451
55,418
98,650
29,219
6,795
22,424
6.06
6.06
1.52
3,648,696
$
$
$
$
$
$
$
$
1,657,432
189,733
90,500
1,082,318
1,291,250
161,170
165,279
95,010
14,556
80,454
8,515
71,939
32,012
80,019
23,932
5,082
18,850
5.47
5.47
1.49
3,450,745
1,521,411
214,910
41,895
1,028,097
1,181,661
159,691
151,958
$
1,509,056 $
218,976
55,384
992,062
1,171,429
167,860
141,702
1,451,992
210,026
52,027
962,674
1,119,921
164,567
139,214
92,548
11,027
81,521
11,006
70,515
26,368
74,342
22,541
4,521
18,020
5.15
5.15
1.41
3,501,221
$
89,593 $
9,601
79,992
16,435
63,557
27,232
72,823
17,966
11,394
6,572 $
89,439
8,968
80,471
18,040
62,431
26,047
70,560
17,918
4,459
13,459
1.89 $
1.88
1.33
3,486,510
3.90
3.89
1.29
3,454,282
$
$
3,648,696
3,450,745
3,501,221
3,486,589
3,455,883
4.65 %
1.14
12.54
25.08
9.10
5.52 %
1.20
12.02
27.24
10.02
5.80 %
1.19
12.40
27.38
9.63
5.99 %
0.45
4.58
70.37
9.82
6.30 %
0.96
9.90
33.08
9.65
Community banking . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mortgage banking . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
15,035
608
23,513
$
10,482
598
21,793
$
10,426
598
22,999
$
10,775
598
24,353
11,115
598
25,353
Ratio of ALL to total loans
Community banking . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of ALL to total loans, excluding purchased
loans and Paycheck Protection Program loans
1.46 %
8.38
7.53
1.31 %
1.37 %
1.47 %
12.88
6.96
17.19
7.77
18.22
8.34
1.61 %
18.26
8.33
Community banking . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.74 %
1.36 %
1.37 %
1.48 %
1.63 %
1 On January 1, 2019, the Corporation adopted Accounting Standards Update 2016-02, “Leases (Topic 842)” on a modified
restrospective basis, which resulted in recognition of a lease liability of approximately $3.14 million and a corresponding
right-of-use asset. Periods prior to January 1, 2019 have not been restated.
In connection with the reduction in the federal corporate income tax rate as a result of the enactment of the Tax Cuts and
Jobs Act of 2017, the Corporation recognized a one-time remeasurement of its federal net deferred tax asset in 2017, which
resulted in additional income tax expense and a decrease in net income of $6.6 million.
2
On January 1, 2020, the Corporation completed the acquisition of Peoples and its banking subsidiary, Peoples
Community Bank for an aggregate purchase price of $22.19 million of cash and stock, which added total assets of
$190.6 million.
32
ITEM 7.
RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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 Regarding Forward-Looking Statements” prior to Item 1. “Business.”
OVERVIEW
Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth
initiatives that will enhance long-term shareholder value. We track three primary financial performance measures in order
to assess the level of success in achieving these goals: (1) return on average assets (ROA), (2) return on average equity
(ROE), and (3) growth in earnings. In addition to these financial performance measures, we track the performance of the
Corporation’s three principal business segments: community banking, mortgage banking, and consumer finance. We also
actively manage our capital through growth, dividends and share repurchases, while considering the need to maintain a
strong capital position.
Financial Performance Measures
Consolidated net income for the Corporation was $22.4 million in 2020, or $6.06 per share assuming dilution,
compared to $18.9 million in 2019, or $5.47 per share assuming dilution, and $18.0 million in 2018, or $5.15 per share
assuming dilution. The Corporation’s ROE and ROA were 12.54 percent and 1.14 percent, respectively, for 2020,
compared to 12.02 percent and 1.20 percent, respectively, for 2019 and 12.40 percent and 1.19 percent, respectively, for
2018.
Consolidated net income for 2020 and 2019 were affected by certain items that management does not expect to
have an ongoing impact on consolidated net income, including a gain upon sale of a pool of purchased credit impaired
(PCI) loans in 2020, charges related to early repayment of borrowings in 2020, merger related expenses incurred in
connection with the Corporation’s acquisition of Peoples Bankshares, Incorporated (Peoples) recorded in 2020 and 2019,
impairment charges related to branch consolidation in 2020, and provisions of the CARES Act, which provided income
tax benefits related to prior tax years. Excluding the effects of these items, adjusted net income for 2020 was $22.4 million,
or $6.06 per share, compared to $19.5 million, or $5.66 per share, for 2019 and $18.0 million, or $5.15 per share, for 2018.
Adjusted ROE and adjusted ROA were 12.54 percent and 1.14 percent, respectively, for 2020, compared to 12.44 percent
and 1.25 percent, respectively, for 2019 and 12.40 percent and 1.19 percent, respectively, for 2018. 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 19.0 percent and 10.8 percent, respectively, for 2020,
compared to 2019. Adjusted net income and adjusted earnings per share increased 15.0 percent and 7.1 percent,
respectively, for 2020, compared to 2019. The increase in adjusted earnings per share for 2020 compared to 2019 is due
primarily to higher mortgage banking segment net income, partially offset by higher provision for loan losses at the
community banking segment, and the issuance of 209,871 shares of common stock in connection with the acquisition of
Peoples.
33
Impact of and Response to the COVID-19 Pandemic
The COVID-19 pandemic has caused a significant disruption in economic activity worldwide, and has had a
significant impact on businesses and consumers in our market areas and on our results of operations, which the Corporation
expects to continue. Many businesses temporarily closed or reduced their availability at the beginning of the pandemic;
and while many people have returned to work, the U.S. unemployment rate remained elevated at 6.7 percent in December
2020, after having reached 14.7 percent in April 2020. Additional unemployment issues may be obscured given the
government relief programs that have been made available during late 2020 and early 2021 to assist those in need. There
remains substantial uncertainty about critical factors that may affect the economy and employment, including the severity
and duration of the pandemic; the availability and pace of vaccinations, the pace of economic recovery when the pandemic
subsides, potential re-tightening of policies that had previously allowed businesses to open; any further government
stimulus efforts, including the nature, timing and extent of such stimulus; and the timing of reopening of schools, many of
which are currently being conducted virtually.
The COVID-19 pandemic presents significant risks and uncertainties to our businesses; however, at this time we
cannot determine the ultimate impact of the pandemic on the results of operations of the Corporation. The federal
government and state and local governments have responded to this crisis with unprecedented relief efforts and economic
stimulus. We cannot predict the duration or severity of the pandemic, the extent of government intervention during and
following the pandemic or the effects the pandemic will have on the Corporation. We believe that as a result of the
COVID-19 pandemic, our results of operations may be impacted by elevated loan losses, net interest margin compression
and falling demand for loans.
Risks to Results of Operations
Elevated loan losses. The COVID-19 pandemic has had a significant impact on businesses and consumers in our
market areas. Many businesses temporarily or permanently closed or have faced declines in revenue since the beginning
of the pandemic as consumers were instructed to stay at home. Even as many businesses have reopened, restrictions
remain, including limited gathering sizes. This disruption has caused employers to lay off or reduce compensation of
certain employees, and has caused some people not to receive steady incomes because they are not able to work due to
illness or having to care for children or family members, resulting in many households facing reduced income. Commercial
and consumer borrowers affected by the pandemic may not be able to make timely payments on loans, which may lead to
an increase in delinquencies or defaults and may ultimately result in increases in net charge-offs and provision for loan
losses. Furthermore, collateral values may decline as a result of decreased economic activity and increased uncertainty
during the crisis, which may contribute to an increase in loan losses during and after the pandemic.
In 2020, the Corporation recorded additional provision for loan losses of approximately $8.0 million as a result of
asset quality deterioration that is expected to arise as a result of the COVID-19 pandemic and related economic disruption.
Management continues to monitor changes in economic conditions and asset quality resulting from the COVID-19
pandemic. If conditions deteriorate further, then additional provision for loan losses may be required in future periods.
Net interest margin compression. Since December 31, 2019, the FOMC has reduced its benchmark interest rate
target to near zero by announcing rate cuts of 50 basis points on March 3, 2020 and 100 basis points on March 15, 2020.
Treasury yields for all maturities are also lower since the outbreak of the COVID-19 pandemic. Lower market interest
rates have resulted in lower average yields on all classes of earning assets. While average costs of deposits and borrowings
have also decreased, and we expect the average cost of time deposits to continue to decrease due to the repricing of time
deposits at maturity, those factors may not offset the effect on net interest margin of lower yields on earning assets.
Falling demand for loans. As businesses and consumers have been affected by the pandemic, new investment and
consumer spending may decline, resulting in lower demand for loans. Our recent performance and strategic planning have
depended, in part, on growth in lending at the community banking segment, and we have invested in expanding our
commercial lending team. While loans outstanding at the community banking segment grew during 2020 (which included
loans originated under the PPP), there can be no assurance that loan growth will continue during or after the pandemic.
34
Lower demand for loans in our markets as a result of the COVID-19 pandemic, combined with lower interest rates on new
loans, may negatively impact interest income from loans.
Impairment of securities and goodwill. A broad decrease in economic activity as a result of the COVID-19
pandemic is expected to affect tax revenues of states and political subdivisions, the pandemic has required increased health
and safety expenditures by states and political subdivisions, and increased uncertainty has resulted in volatility in the
market price of investments. The Corporation holds securities issued by states and political subdivisions that may
experience shortfalls in general revenues or an inability to repay obligations when due as a result of the crisis. Additionally,
the Corporation holds debt securities of corporate issuers whose financial condition may be adversely impacted by the
economic impacts of the COVID-19 pandemic. There is a risk that these securities may become impaired, which would
have a negative impact on the Corporation’s results of operations. Additionally, depending on the severity and duration
of the economic consequences of the COVID-19 pandemic, the Corporation’s goodwill allocated to the community
banking segment may become impaired, which would have a negative impact on the Corporation’s results of operations.
2021 Outlook
Management’s overall outlook for 2021 is relatively positive given our diversified business strategy; however, we
will be affected by many challenges in 2021, including the COVID-19 pandemic and limited availability and distribution
of vaccines, cyber security and fraud prevention, the low interest rate environment and the impacts of the changing social
and political landscapes. These uncertainties could potentially lead to a continued economic downturn, fraud losses, further
margin compression, asset quality deterioration and regulatory actions. The following additional factors could influence
our financial performance in 2021:
• Community Banking: Growth in higher-yielding earning assets, specifically loans, will continue to be our
primary focus at the Bank during 2021. Despite the issues faced during 2020, our growing lending team
continued focus on commercial lending and our completion of the acquisition of Peoples contributed to growth
in our loan portfolio during 2020. Growth in loans also included PPP loans, many of which may be repaid or
forgiven by the SBA during 2021. While our asset quality remains strong, we do expect some deterioration in
asset quality as a result of the COVID-19 pandemic. In 2021, we will continue to explore expansion
opportunities and we will continue to add to our digital services platform by leveraging our treasury solutions
team, branch network, and commercial relationship managers to communicate the benefits of our mobile
business services to our existing and potential customers. We also intend to introduce contactless debit cards
to customers during 2021, further enhancing our customers’ experience.
• Mortgage Banking: C&F Mortgage generates significant noninterest income from the origination and sale of
residential loan products into the secondary market. In 2020, a favorable interest rate environment and an
extremely active housing market contributed to record loan production, subsequent gains on sales of loans and
ancillary fee income at the mortgage banking segment. Revenue from mortgage lender services offered through
C&F Mortgage’s Lender Solutions division also reached record levels due to new customers and higher loan
production volume. Loan production and revenue in 2021 are highly uncertain and will depend on economic
conditions and market factors beyond our control, including the COVID-19 pandemic, interest rates, housing
inventory and loan demand. In addition, during 2021, C&F Mortgage anticipates it will continue to (1) compete
to retain and attract qualified loan officers, (2) invest in technology to further enhance our fully digital
application and document collection process and (3) grow our Lender Solutions division.
• Consumer Finance: C&F Finance provides automobile financing through programs that are designed to serve
customers in the non-prime sector and marine and RV financing for borrowers in the prime sector. As has been
the case for the last several years, competition in the non-prime automobile loan business remains aggressive,
resulting in lower interest rates and in many cases, less restrictive underwriting standards by several of our
competitors. We expect organic loan growth to continue to be challenging in 2021. Credit quality has
consistently improved since we strengthened our underwriting standards in 2016, and as a result we have
experienced a sustained decline in annual charge offs as a percentage of average loans that continued in 2020.
However, we do anticipate some deterioration in asset quality in 2021 as a result of the COVID-19 pandemic,
35
and particularly the potential impacts of the pandemic on nonprime automobile borrowers. We continued to
grow our marine and RV loan portfolio in 2020 and remain committed to only purchasing prime contracts in
this segment, which should result in lower loan losses for these higher credit quality borrowers. During the
second quarter of 2021, we plan to relocate our C&F Finance corporate headquarters to a new, larger facility
in Richmond, Virginia.
Principal Business Segments
An overview of the financial results for each of the Corporation’s principal segments is presented below. A more
detailed discussion is included in the section “Results of Operations.”
Community Banking: The community banking segment reported net income of $5.4 million for the year ended
December 31, 2020, compared to net income of $9.9 million for the year ended December 31, 2019. Previously, the
community banking segment was referred to as the retail banking segment. There have been no changes to the composition
of the community banking segment.
The decrease in community banking segment net income for the year ended December 31, 2020 compared to the
year ended December 31, 2019 was due primarily to (1) lower average yields on loans; (2) higher provision for loan losses
resulting from the COVID-19 pandemic and related economic disruption; (3) higher operating expenses, including the
effects of (a) assuming certain operating costs of Peoples, which was acquired by the Corporation on January 1, 2020,
including costs that have been eliminated following the integration of its operations into the Bank’s, (b) opening two new
financial centers in the third quarter of 2020 and (c) investing in technology infrastructure to support continued growth;
(4) early debt repayment charges of $2.2 million incurred in connection with the payoff of borrowings of $44.5 million;
(5) lower interest income on excess cash reserves; (6) higher merger related expenses in connection with the acquisition
of Peoples; (7) higher interest expense on deposits as a result of higher average deposit balances; and (8) a $281,000 write-
down of assets in connection with the consolidation of the Bank’s former main office in West Point, VA into a nearby
branch office and the donation of the building to the Town of West Point; partially offset by (1) a gain of $3.5 million on
the sale of a pool of PCI loans; (2) higher average loans outstanding, which contributed to higher interest income on loans;
(3) higher interchange income; and (4) income tax benefits of $326,000 related to prior tax years of Peoples as a result of
favorable net operating loss carryback treatment under the CARES Act.
Average loans increased $216.5 million, or 27.8 percent, for the year ended December 31, 2020, compared to the
year ended December 31, 2019. These increases included $99.1 million for the year ended December 31, 2020 of average
balances of loans acquired in the acquisition of Peoples, and $59.7 million of average balances of loans originated under
the PPP. In addition to increases resulting from the acquisition of Peoples and the PPP, the increase in average loans
outstanding for the year ended December 31, 2020 compared to the year ended December 31, 2019 resulted from growth
in the commercial real estate and commercial business lending segments of the loan portfolio. Average loan yields were
lower for 2020 compared to 2019 due to repricing of variable rate loans and lower average yields on new lending, including
PPP loans. The recognition of interest income on PCI loans is based on management’s expectation of future payments of
principal and interest, which is inherently uncertain. Earlier than expected repayments of certain PCI loans resulted in the
recognition of additional interest income during 2020 and 2019. Interest income recognized on PCI loans was $3.0 million
and $3.4 million for the years ended December 31, 2020 and 2019, respectively.
C&F Bank’s total nonperforming assets were $3.9 million at December 31, 2020, compared to $2.6 million at
December 31, 2019. Nonperforming assets at December 31, 2020 included $3.0 million in nonaccrual loans, compared to
$1.5 million at December 31, 2019 and included $907,000 in other real estate owned, compared to $1.1 million at
December 31, 2019. The increase in nonaccrual loans compared to December 31, 2019 is due primarily to the downgrading
of one commercial relationship in the fourth quarter of 2020, partially offset by payoffs. Nonaccrual loans were comprised
primarily of one commercial relationship at December 31, 2020 and were comprised primarily of residential mortgages
and equity lines at December 31, 2019. The community banking segment recorded provision for loan losses of $4.6 million
for the year ended December 31, 2020, compared to $360,000, for the year ended December 31, 2019. During the year
ended December 31, 2020, the allowance for loan losses increased primarily as a result of reserves based on qualitative
adjustments related to the COVID-19 pandemic and due to loan growth. As of December 31, 2020, compared to December
36
31, 2019, there have not been significant changes in the overall credit quality of the loan portfolio, although management
believes the effects of PPP loans, payment deferrals and government stimulus may be delaying signs of credit deterioration.
Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio.
However, if there is further deterioration in economic conditions, additional provision may be required in future periods.
Mortgage Banking: The mortgage banking segment reported net income of $10.7 million for the year ended
December 31, 2020, compared to net income of $3.8 million for the year ended December 31, 2019.
The increase in net income of the mortgage banking segment for the year ended December 31, 2020 compared to
the year ended December 31, 2019 was due primarily to higher gains on sales of loans and mortgage banking fee income,
resulting from higher margins and record loan production, higher mortgage lender services income for providing mortgage
origination functions to third parties, and higher net interest income due to higher balances of loans held for sale. Partially
offsetting these factors were higher expenses tied to loan production, including compensation expense, loan processing
expense and data processing expense. Mortgage loan originations for the mortgage banking segment were $1.8 billion and
$944.1 million for the years ended December 31, 2020 and 2019, respectively. Loan production for the year ended
December 31, 2020 was the highest reported by the mortgage banking segment for any calendar year in the Corporation’s
history. Lower interest rates on mortgage loans have contributed to an increase in volume in the broader mortgage industry
in the year ended December 31, 2020 compared to the same period in the prior year. Mortgage loan originations for the
mortgage banking segment during the year ended December 31, 2020 for refinancings and home purchases were $917.5
million and $854.5 million, respectively, compared to $224.9 million and $719.2 million, respectively, during the year
ended December 31, 2019.
Consumer Finance: The consumer finance segment reported net income of $7.6 million for the year ended
December 31, 2020, compared to net income of $6.9 million for the year ended December 31, 2019.
The increase in net income of the consumer finance segment for the year ended December 31, 2020 compared to
the year ended December 31, 2019 was due primarily to lower provision for loan losses as a result of lower net charge-
offs and a decrease in interest expense due to lower average cost of borrowings, partially offset by lower interest income
due to lower average yields on loans. The average yield on loans for the year ended December 31, 2020 was lower
compared to the year ended December 31, 2019 due to continued competition in the non-prime automobile loan business,
including the effect of a lower interest rate environment, and the consumer finance segment’s pursuing growth in higher
quality, lower yielding loans, which include prime marine and recreational vehicle (RV) loans.
The net charge-off ratio for 2020 decreased to 1.54 percent from 3.05 percent for 2019. The decline reflects a lower
number of charge-offs during 2020, due to improvement in loan performance, and lower losses per loan charged off as a
result of a strong used car market. Improvement in loan performance has resulted from C&F Finance Company continuing
to purchase higher quality loans as well as borrowers benefitting from the government’s stimulus measures in response to
the COVID-19 pandemic during 2020. C&F Finance Company offers payment deferrals at times to non-prime automobile
borrowers as a management technique to achieve higher ultimate cash collections. C&F Finance Company offered a
higher number of payment deferrals during the first and second quarters of 2020 to borrowers impacted by the COVID-19
pandemic, and as of December 31, 2020, most borrowers who received a deferral had resumed making payments and were
current. The average amount deferred on a monthly basis during the fourth quarter of 2020 and the year ended December
31, 2020 was 1.56 percent and 2.93 percent of non-prime automobile loans outstanding, compared to 1.87 percent and
1.90 percent during the same periods in 2019. At December 31, 2020, total delinquent loans, which does not include loans
that have been granted a payment deferral, as a percentage of total loans was 3.08 percent, compared to 2.48 percent at
September 30, 2020 and 4.17 percent at December 31, 2019. The allowance for loan losses was $23.5 million, or 7.53
percent of total loans at December 31, 2020, compared to $21.8 million, or 6.96 percent of total loans at December 31,
2019. The increase in the level of the allowance for loan losses as a percentage of total loans is a result of reserves based
on qualitative adjustments to reflect losses that management believes are probable as a result of the economic impacts of
the COVID-19 pandemic. Management believes that the level of the allowance for loan losses is sufficient to absorb losses
inherent in the portfolio. However, if there is further deterioration in economic conditions, additional provision may be
required in future periods.
37
Other: The remaining components included in the consolidated results of operations of the Corporation are
comprised primarily of net losses associated with holding company expenses of the Corporation, partially offset by the net
income of C&F Wealth Management. These components reported aggregate net losses of $1.4 million and $1.7 million
for the years ended December 31, 2020 and 2019, respectively. The lower net loss during 2020, compared to 2019, was
primarily due to higher net wealth management services income and lower merger related expenses recorded at the holding
company during 2020.
Acquisition of Peoples Bankshares, Incorporated: On January 1, 2020, the Corporation completed the
acquisition of Peoples and its banking subsidiary, Peoples Community Bank for an aggregate purchase price of $22.2
million of cash and stock. For the year ended December 31, 2020, the Corporation recorded merger related expenses of
$1.4 million ($1.1 million after income taxes), of which $1.3 million (1.0 million after income taxes) was allocated to the
community banking segment and $100,000 ($100,000 after income taxes) was recorded as a holding company expense.
For the year ended December 31, 2019, the Corporation recorded merger related expenses of $709,000 ($653,000 after
income taxes), of which $236,000 ($196,000 after income taxes) was allocated to the community banking segment and
the remainder was recorded as a holding company expense. In the aggregate, in connection with the acquisition of Peoples,
the Corporation recorded merger related expenses of $2.1 million ($1.8 million after income taxes).
Capital Management and Dividends
Total equity was $194.5 million at December 31, 2020, compared to $165.3 million at December 31, 2019. Capital
growth resulted primarily from earnings for the year ended December 31, 2020 and the issuance of $11.6 million of
common equity in connection with the acquisition of Peoples on January 1, 2020, which was partially offset by cash
dividends during 2020. On September 29, 2020, the Corporation completed the issuance of $20.0 million in aggregate
principal amount of subordinated notes due in 2030, which are included in Tier 2 capital of the Corporation for regulatory
purposes. The subordinated notes will initially bear interest at a fixed rate of 4.875% for five years and at the three month
SOFR plus 475.5 basis points thereafter. The Corporation assumed $4.0 million in outstanding principal of subordinated
notes in connection with the acquisition of Peoples, which are also included in Tier 2 capital of the Corporation for
regulatory purposes.
The Corporation’s Board of Directors continued its historical practice of paying dividends in 2020. For the year
ended December 31, 2020, the Corporation declared dividends of $1.52 per share. Annual dividends per share increased
2.0 percent over dividends of $1.49 per share declared in 2019. 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.
On November 17, 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. The Corporation’s previous share repurchase program expired on May 31, 2020 and the Corporation
had made aggregate common stock repurchases of $2.1 million under the previous repurchase program. As of December
31, 2020, the Corporation has made aggregate common stock repurchases of 7,459 shares for an aggregate cost of $275,000
under the Repurchase Program. At December 31, 2020, the book value per share of the Corporation’s common stock was
$52.80, and tangible book value per share was $45.32, compared to $48.07 and $43.61, respectively, at December 31,
2019.
38
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies
with the greatest uncertainty and that require management’s most difficult, subjective or complex judgments affecting the
application of these policies, and the greatest likelihood that materially different amounts would be reported under different
conditions, or using different assumptions, are described below.
Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of
a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the
principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the
allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb probable losses inherent
in the loan portfolio. Our judgment in determining the level of the allowance is based on evaluations of the collectibility
of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of
time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s
ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation
is inherently subjective because it requires estimates that are susceptible to significant revision as more information
becomes available.
Impairment of Loans: We consider a loan impaired when it is probable that the Corporation will be unable to
collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during
a period of delay in payment if we expect the ultimate collection of all amounts due. We measure impairment on a loan-
by-loan basis based on either the present value of expected future cash flows discounted at the loan’s effective interest
rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups
of smaller balance homogeneous loans are collectively evaluated for impairment. We maintain a valuation allowance to
the extent that the measure of the impaired loan is less than the recorded investment in the loan. All troubled debt
restructurings (TDRs) are also considered impaired loans and are evaluated individually. A TDR occurs when we agree to
significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition
of the borrower. For more information see the section titled “Asset Quality” within Item 7.
Loans Acquired in a Business Combination: Acquired loans are classified as either (i) PCI loans or (ii) purchased
performing loans and are recorded at fair value on the date of acquisition.
PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable
at the date of acquisition that the Corporation will not collect all contractually required principal and interest payments.
When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the
date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk
grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the
cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows
expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest
income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such
cash flows.
On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans. Estimates of
cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally
result in a provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent significant
increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable
difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans.
Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower
or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.
PCI loans are not classified as nonperforming 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
39
the pools of loans.
The Corporation accounts for purchased performing loans using the contractual cash flows method of recognizing
discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair
value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of
the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A
provision for loan losses may be required for any deterioration in these loans in future periods.
Goodwill: The Corporation's goodwill was recognized in connection with past business combinations and is
reported at the community banking segment and the consumer finance segment. The Corporation reviews the carrying
value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for
impairment, the Corporation may first consider qualitative factors to determine whether the existence of events or
circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill
of the reporting unit is 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 fourth quarter of 2020, the Corporation elected to bypass the qualitative assessment and performed a test of
goodwill for impairment at the community banking segment and the consumer finance segment by measuring the fair
value of each reporting unit at the testing date and comparing to their respective carrying values. Management concluded
that no impairment existed as of December 31, 2020 and that the fair value of the consumer finance segment substantially
exceeded its carrying value. The fair value of the community banking segment exceeded its carrying value by $8.8 million
or approximately 6 percent. Management measured the fair value of the community banking segment based on correlated
indications of value using an income approach (discounted cash flows) and market approach (capitalized forward earnings,
capitalized tangible book value and observed transaction multiples of tangible book value). The measurement of fair value
was dependent upon management’s expectation of future earnings of the community banking segment, which have been
impacted by the COVID-19 pandemic and related economic disruption, as well as management’s understanding and
expectations regarding pricing of bank mergers and acquisitions during and after the pandemic. The impacts on the
earnings of the community banking segment of the pandemic include recognition of higher provisions for loan losses and
a decrease in net interest margin. Management’s estimate of the fair value of the community banking segment may be
negatively impacted if adverse effects of the pandemic on loan losses and net interest margin are greater than management
expects them to be in future periods.
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.”
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 each of the years ended December 31,
40
2020, 2019 and 2018. 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 34 basis points and 23 basis points to the
yields on community banking segment loans and total loans, respectively, and 18 basis points to both the yield on interest
earning assets and net interest margin for the year ended December 31, 2020, compared to approximately 44 basis points
and 29 basis points to the yields on community banking segment loans and total loans, respectively, and 23 basis points to
both the yield on interest earning assets and net interest margin for the year ended December 31, 2019, and approximately
41 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 interest earning assets and the net interest margin for the year ended December 31,
2018. 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.
TABLE 1: Average Balances, Income and Expense, Yields and Rates
Average
Balance
2020
Income/ Yield/
Expense Rate
Average
Balance
2019
Income/ Yield/
Expense Rate
Average
Balance
2018
Income/ Yield/
Expense Rate
(Dollars in thousands)
Assets
Securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . $ 160,974 $ 3,224
2,511
Tax-exempt . . . . . . . . . . . . . . . . . . . .
5,735
Total securities . . . . . . . . . . . . . . . . . .
81,154
242,128
2.00 % $ 131,778 $ 3,202
2,671
71,531
3.09
5,873
203,309
2.37
2.43 % $ 138,053 $ 3,197
3,451
3.73
86,436
6,648
224,489
2.89
2.32 %
3.99
2.96
Loans:
Community banking segment . . . . . . .
Mortgage banking segment . . . . . . . . .
Consumer finance segment . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . .
995,726
171,017
307,991
1,474,734
47,251
4,954
4.75
2.90
38,949 12.65
6.18
91,154
779,207
68,297
307,141
1,154,645
43,472
2,699
5.58
3.95
41,390 13.48
7.58
87,561
734,661
43,946
296,227
1,074,834
39,747
2,018
5.41
4.59
42,789 14.44
7.87
84,554
Interest-bearing deposits in
92,973
other banks . . . . . . . . . . . . . . . . . . . . . .
1,809,835
Total earning assets . . . . . . . . . . . . . .
(35,983)
Allowance for loan losses . . . . . . . . . . .
Total non-earning assets . . . . . . . . . . . .
192,447
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 1,966,299
713
97,602
0.77
5.39
2,179
95,613
1.97
6.51
110,638
1,468,592
(33,733)
130,569
$ 1,565,428
118,176
1,417,499
(35,409)
126,814
$ 1,508,904
2,097
93,299
1.77
6.58
Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits . . . . $ 260,478
Money market deposit accounts . . . . .
Savings accounts . . . . . . . . . . . . . . . .
Certificates of deposit, $100 or more . .
Other certificates of deposit . . . . . . . .
Total interest-bearing deposits . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . . . . .
260,342
163,763
266,236
224,065
1,174,884
129,358
1,304,242
551
952
111
4,692
3,328
9,634
3,748
13,382
0.21
0.37
0.07
1.76
1.49
0.82
2.90
1.03
$ 218,394
199,840
120,644
207,931
184,613
931,422
160,327
1,091,749
1,168
1,020
110
3,876
2,920
9,094
5,462
14,556
0.53
0.51
0.09
1.86
1.58
0.98
3.41
1.33
$ 221,750
215,662
116,896
172,616
177,279
904,203
165,290
1,069,493
799
699
103
2,206
1,879
5,686
5,341
11,027
0.36
0.32
0.09
1.28
1.06
0.63
3.23
1.03
Noninterest-bearing demand
deposits . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . .
431,789
51,406
1,787,437
178,862
Total liabilities and equity . . . . . . . . . $ 1,966,299
283,505
33,364
1,408,618
156,810
$ 1,565,428
266,415
27,678
1,363,586
145,318
$ 1,508,904
Net interest income . . . . . . . . . . . . . . . .
Interest rate spread . . . . . . . . . . . . . . . .
Interest expense to average
earning assets . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . .
$ 84,220
$ 81,057
$ 82,272
5.18 %
0.99 %
5.52 %
5.55 %
0.78 %
5.80 %
4.36 %
0.74 %
4.65 %
41
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 year-to-year 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.
TABLE 2: Rate-Volume Recap
2020 from 2019
2019 from 2018
Increase (Decrease)
Due to
Total
Increase
Increase (Decrease)
Due to
Total
Increase
Rate
Volume
(Decrease) Rate
Volume (Decrease)
(Dollars in thousands)
Interest income:
Loans:
Community banking segment . . . . . . . . . . . . . . . . . . . . . . $
Mortgage banking segment . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance segment . . . . . . . . . . . . . . . . . . . . . . . .
(7,107) $
(880)
(2,556)
10,886 $
3,135
115
3,779 $
2,255
(2,441)
1,272 $
(312)
(2,928)
2,453 $
993
1,529
3,725
681
(1,399)
Securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits in other banks . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(620)
(492)
(1,162)
(12,817)
642
332
(304)
14,806
22
(160)
(1,466)
1,989
151
(214)
223
(1,808)
(146)
(566)
(141)
4,122
5
(780)
82
2,314
Interest expense:
Interest-bearing deposits:
Interest-bearing demand deposits . . . . . . . . . . . . . . . . . . .
Money market deposit accounts . . . . . . . . . . . . . . . . . . . .
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit, $100 or more . . . . . . . . . . . . . . . . .
Other certificates of deposit . . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(806)
(326)
(29)
(218)
(176)
(1,555)
(748)
(2,303)
189
258
30
1,034
584
2,095
(966)
1,129
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . $ (10,514) $
13,677 $
(617)
(68)
1
816
408
540
(1,714)
(1,174)
3,163 $ (4,962) $
381
376
—
1,150
960
2,867
287
3,154
(12)
(55)
7
520
81
541
(166)
375
3,747 $
369
321
7
1,670
1,041
3,408
121
3,529
(1,215)
Net interest income, on a taxable-equivalent basis, for 2020 increased to $84.2 million, compared to $81.1 million
for 2019, primarily as a result of the growth in average earning assets, partially offset by lower net interest margin. Average
earning assets grew $341.2 million, or 23.2 percent, in 2020 compared to 2019, and net interest margin decreased 87 basis
points to 4.65 percent in 2020, compared to 5.52 percent in 2019. The net interest margin decline for 2020 as compared to
2019 was due primarily to lower average yields on loans and other earning assets, partially offset by (1) using lower-
yielding excess cash to fund growth in loans and securities and repay borrowings and (2) growth in low cost deposits,
including noninterest-bearing demand deposits. The yield on interest-earning assets and cost of interest-bearing liabilities
decreased by 112 basis points and 30 basis points, respectively, for 2020, compared to 2019. Average earning assets grew
by $341.2 million for 2020, compared to 2019, primarily due to growth in loans (including PPP loans) and securities
funded by deposit growth as well as the acquisition of Peoples on January 1, 2020.
Average loans, which includes both loans held for investment and loans held for sale, increased $320.1 million to
$1.5 billion for the year ended December 31, 2020, compared to 2019. Average loans held for investment at the community
banking segment increased $216.5 million, or 27.8 percent, for 2020, compared to 2019. This increase included during
2020 $99.1 million of average balances of loans acquired in the acquisition of Peoples, and $59.7 million of average
balances of loans originated under the PPP. The remaining increase in average loans outstanding at the community banking
segment for 2020 compared to 2019 was due primarily to growth in the commercial real estate and commercial business
lending segments of the loan portfolio. Average loans held for investment at the consumer finance segment increased
$850,000, or 0.2 percent, for 2020, compared to 2019 as average marine and RV loans increased due to the continued
expansion of the consumer finance segment’s purchases of those loan contracts, which was partially offset by a decrease
in average automobile loans due to continuing competition for loan contracts. Average loans held at the mortgage banking
segment, which consist primarily of loans held for sale, increased $102.7 million, or 150.4 percent, for 2020, compared to
2019, as a result of higher loan production and a longer average holding period between origination and the time that loans
42
were sold in the secondary market, which were due in part to higher mortgage industry volume during a time of historically
low interest rates.
The overall yield on loans decreased 140 basis points to 6.18 percent for 2020, compared to 2019, due to changes
in the composition of the loan portfolio and lower average yields at each operating segment. The community banking
segment average loan yield decreased 83 basis points to 4.75 percent for 2020, compared to 2019, due primarily to lower
market interest rates and lower interest income on PCI loans. The average loan yield for the community banking segment
includes, with respect to PPP loans, interest at a note rate of one percent as well as net deferred fees that were amortized
based on the contractual maturity of the related loan or accelerated into interest income upon repayment of the loan. Net
PPP loan fees recognized in 2020 were $1.6 million, and there were unrecognized net deferred PPP fees at December 31,
2020 of $2.2 million, which are expected to be recognized primarily in 2021. The consumer finance segment average loan
yield decreased 83 basis points to 12.65 percent for 2020, compared to 2019, due to continued competition in the non-
prime automobile loan business, including the effect of a lower interest rate environment, and the consumer finance
segment continuing to pursue growth in higher quality, lower yielding loans, which includes prime marine and RV loans.
The mortgage banking segment average loan yield decreased 105 basis points to 2.90 percent due to lower market interest
rates for mortgage loans.
Average securities available for sale increased $38.8 million for 2020, compared to 2019, due primarily to higher
purchases of securities and the acquisition of Peoples. The average yield on the securities portfolio on a taxable-equivalent
basis decreased 52 basis points for 2020, compared to 2019, due to purchases of securities in 2020 at lower average yields
relative to the average yield of the portfolio as a whole and increased calls of securities that were issued during periods of
higher market interest rates.
Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the
Federal Reserve Bank, decreased $17.7 million during 2020, compared to 2019, as the Corporation utilized excess cash to
fund growth in loans and securities and repay borrowings. The average yield on these overnight funds decreased 120 basis
points for 2020, compared to 2019, due to lower average rates on excess cash reserves, partially offset by an increase in
purchased time deposits, which had higher yields during 2020. The Federal Reserve Bank decreased the interest rate on
excess cash reserve balances from 1.55 percent at the end of 2019 to 0.10 percent by the end of 2020 in response to the
COVID-19 pandemic.
Average money market, savings and interest-bearing demand deposits increased $145.7 million for 2020, compared
to 2019, and average time deposits increased $97.8 million for 2020, compared to 2019. The increase in average money
market, savings and interest bearing-demand deposits included $58.7 million for 2020, and the increase in average time
deposits included $76.8 million for 2020 related to the acquisition of Peoples. Average noninterest-bearing demand
deposits increased $148.3 million for 2020, compared to 2019, including $42.9 million related to the acquisition of Peoples.
Higher average deposit balances are due primarily to deposit growth during 2020 and the acquisition of Peoples. Deposit
growth was also impacted by the effect of PPP loans and direct government payments received by depositors. The average
cost of interest-bearing deposits decreased 16 basis points for 2020, compared to 2019, due primarily to lower rates on
money market, savings and interest-bearing demand deposits, which take effect immediately upon a change in offered
rates. Offered rates on time deposits were also lower during 2020, compared to 2019. Changes in the average cost of time
deposits lag changes in pricing based on the repricing of time deposits at maturity.
Average borrowings decreased $31.0 million for 2020, compared to 2019, 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,
subordinated notes that were assumed during the acquisition of Peoples and new finance leases. Repayment of long-term
borrowings included paying off a revolving bank line of credit balance of $75.0 million and paying off aggregate
convertible FHLB advances of $44.5 million using excess cash. The average cost of borrowings decreased 51 basis points
during 2020 compared to 2019, due primarily to the payoff of the revolving bank line of credit and lower short-term interest
rates. Aggregate repayments in December 2020 of convertible FHLB advances of $37.0 million are expected to result in
annualized interest cost savings of $783,000, and such savings are expected to benefit net interest margin in 2021,
compared to 2020.
43
The Corporation believes that its net interest margin may be affected in future periods by several factors that are
difficult to predict, including: (1) changes in interest rates, which may depend on the severity of adverse economic
conditions, the timing and extent of any economic recovery, and the extent of government stimulus measures, which are
inherently uncertain, (2) possible changes in the composition of earning assets which may result from decreased loan
demand as a result of the current economic environment (3) accretion of purchase discounts on loans related to acquisitions,
which is included in yields on loans and may fluctuate based on the timing of repayment, (4) the repricing of higher-rate
time deposits and borrowings as they mature to lower rates, which may occur at a slower rate than the repricing of interest
earning assets and (5) the recognition of net deferred fees on PPP loans, which is subject to the timing of repayment or
forgiveness.
Discussion of net interest income for the year ended December 31, 2018 has been omitted as such discussion was
provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Net Interest Income” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on
March 3, 2020.
NONINTEREST INCOME
TABLE 3: Noninterest Income
Year Ended December 31, 2020
Community Mortgage Consumer Other and
Banking
Eliminations
Finance
Total
Banking
(Dollars in thousands)
Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,489 $ 25,792 $
Mortgage banking fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth management services income, net . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage lender services income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other service charges and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on sales, maturities and calls of available for sale securities . . . .
Other income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,332 $ 35,777 $
7,743
—
—
—
2,176
—
—
66
—
4,768
3,357
1
—
1,549
38
1,130
— $
—
—
—
—
—
2
—
490
492 $
(57) $ 29,224
7,713
(30)
4,768
—
3,357
—
2,618
2,617
2,176
—
1,551
—
38
—
2,287
3,973
4,817 $ 55,418
Year Ended December 31, 2019
Community Mortgage Consumer Other and
Banking
Eliminations
Finance
Total
(Dollars in thousands)
Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mortgage banking fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth management services income, net . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage lender services income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other service charges and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on sales, maturities and calls of available for sale securities . . . .
Other income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,392 $ 15,706 $
Banking
— $ 10,603 $
—
4,203
3,923
—
—
1,492
10
1,764
4,700
—
—
—
390
—
—
13
— $
—
—
—
—
—
4
—
561
565 $
— $ 10,603
4,700
—
4,203
—
3,923
—
2,029
2,029
390
—
1,496
—
10
—
2,320
4,658
4,349 $ 32,012
44
Community Mortgage Consumer Other and
Year Ended December 31, 2018
Finance
Eliminations
Total
Banking
(Dollars in thousands)
Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mortgage banking fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth management services income, net . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage lender services income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other service charges and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on calls of available for sale securities . . . . . . . . . . . . . . . . . . .
Other income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,029 $ 11,856 $
Banking
— $ 7,841 $
—
3,882
4,213
—
—
1,379
10
1,545
3,686
—
—
—
329
—
—
—
— $
—
—
—
—
—
7
—
731
738 $
— $ 7,841
3,686
—
3,882
—
4,213
—
1,860
1,860
329
—
1,386
—
10
—
3,161
885
2,745 $ 26,368
Total noninterest income increased $23.4 million, or 73.1 percent, for the year ended December 31, 2020, compared
to the year ended December 31, 2019. The increase in noninterest income was due primarily to (1) an increase in gains
on sales of loans and mortgage banking fee income, which consists of fees related to loan originations, at the mortgage
banking segment as a result of higher margins and record loan production, (2) an increase in gains on sales of loans at the
community banking segment related to the sale of a pool of PCI loans in 2020, (3) an increase in mortgage lender services
income at the mortgage banking segment for providing mortgage origination functions to third parties, as a result of the
Lender Solutions division of C&F Mortgage adding new customers and higher mortgage industry volume, (4) an increase
in wealth management services income, and (5) an increase in debit card interchange income at the community banking
segment. These increases were partially offset by decreased service charges on deposit accounts at the community banking
segment resulting from fewer overdraft fees charged and asset write-downs at the community banking segment of $579,000
in 2020. Asset write-downs, included in “Other income (loss), net,” at the community banking segment included $298,000
of merger related costs recognized in connection with disposition of assets acquired from Peoples and $281,000 related to
branch consolidation.
Discussion of noninterest income for the year ended December 31, 2018 has been omitted as such discussion was
provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Noninterest Income” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on
March 3, 2020.
NONINTEREST EXPENSE
TABLE 4: Noninterest Expense
Community Mortgage Consumer Other and
Year Ended December 31, 2020
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,774 $ 13,908 $ 8,716 $
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early debt repayment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses:
1,607
—
6,329
2,197
646
—
Banking
Banking
Finance
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking loan processing expenses . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,791
1,775
—
6,827
16,393
1,828
465
3,235
2,971
8,499
1,220
546
—
2,700
4,466
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,693 $ 24,014 $ 13,828 $
45
Eliminations
Total
4,270 $ 57,668
8,639
2,197
57
—
77
260
—
451
788
10,916
3,046
3,235
12,949
30,146
5,115 $ 98,650
Community Mortgage
Consumer Other and
Year Ended December 31, 2019
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,231 $ 5,965 $ 8,668 $
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses:
Banking Finance
Banking
1,415
5,739
685
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking loan processing expenses . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,694
1,904
—
5,996
14,594
885
175
1,666
1,572
4,298
1,303
583
—
2,963
4,849
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,564 $ 11,678 $ 14,202 $
4,337 $ 47,201
7,912
73
8,958
76
3,265
603
1,666
—
11,017
486
1,165
24,906
5,575 $ 80,019
Eliminations Total
Community Mortgage
Consumer Other and
Year Ended December 31, 2018
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,632 $ 5,298 $ 8,542 $
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses:
Banking Finance
Banking
1,391
5,483
782
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking loan processing expenses . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,097
2,138
—
6,165
14,400
643
122
1,444
1,472
3,681
1,263
643
—
2,826
4,732
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,515 $ 10,370 $ 14,056 $
1,531 $ 42,003
7,719
63
38
8,041
141
3,044
—
1,444
1,628
12,091
24,620
1,807
3,401 $ 74,342
Eliminations Total
Total noninterest expense increased $18.6 million, or 23.3 percent, for the year ended December 31, 2020, compared
to the year ended December 31, 2019. The increase in noninterest expenses was due primarily to (1) higher mortgage loan
production volume at the mortgage banking segment, resulting in higher expenses related to production volume, included
in salaries and employee benefits, data processing and mortgage banking loan processing expenses (2) higher operating
expenses at the community banking segment, including the effects of (a) assuming certain salaries and employee benefits
expense and data processing expense of Peoples, including some costs that have since been eliminated following the
integration of its operations into the Bank’s, (b) occupancy expense related to opening two new financial centers in 2020
and (c) investing in technology infrastructure to support continued growth, (3) early debt repayment charges incurred in
connection with the aggregate payoff of $44.5 million of convertible FHLB advances in 2020, (4) provision for
indemnifications at the mortgage banking segment, included in “Other expenses,” of $881,000 for 2020 compared to no
provision for indemnifications in 2019, (5) higher merger related expenses in connection with the acquisition of Peoples,
and (6) higher expense associated with the FDIC insurance assessment at the community banking segment, included in
“Other expenses,” as credits available to banks with less than $10 billion in consolidated assets were used to offset
assessment expense for portions of 2019 and 2020 and were fully utilized by the end of the first quarter of 2020.
Merger related expenses for the year ended December 31, 2020 included $1.3 million at the community banking
segment, of which $501,000 was data processing expense, $236,000 was professional fees expense, $119,000 was salaries
and employee benefits expense, $81,000 was occupancy expense, and $61,000 was included in all other noninterest
expenses, while $298,000 was a loss on disposition of assets and was recorded in noninterest income. Merger related
expenses for the year ended December 31, 2020 also included $100,000 of professional fees expense recorded as a holding
company expense and shown in the “Other and Eliminations” column in the tables above. Merger related expenses for
the year ended December 31, 2019 included $236,000 at the community banking segment, of which $173,000 was
professional fees expense, $50,000 was data processing expense and $13,000 was included in all other noninterest
expenses, and $473,000 at the Corporation, of which $441,000 was professional fees expense and $32,000 was included
in all other noninterest expenses.
46
As of December 31, 2020, the community banking segment has realized substantially all of the cost savings
associated with the integration of Peoples. Additionally, C&F Bank expects to realize annualized cost savings of
approximately $220,000 in connection with the consolidation of its main office in West Point, VA by the end of the second
quarter of 2021.
Discussion of noninterest expense for the year ended December 31, 2018 has been omitted as such discussion was
provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Noninterest Expense” in the
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on
March 3, 2020.
INCOME TAXES
Income tax expense on 2020 earnings was $6.8 million, resulting in an effective tax rate of 23.3 percent, compared
with $5.1 million, or 21.2 percent, in 2019 and $4.5 million, or 20.1 percent, in 2018. The higher effective income tax rate
for 2020 compared to 2019 resulted primarily from higher state income taxes, as a greater share of income before taxes
was earned at the mortgage banking segment, which is subject to state income tax, and a limitation on the deductibility of
certain executive compensation, partially offset by income tax benefits of $326,000 in 2020 arising from a change in
income tax law included in the provisions of the CARES Act, which provided income tax benefits in the current year
related to prior tax years of Peoples.
Discussion of income taxes for the year ended December 31, 2018 has been omitted as such discussion was provided
in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Income Taxes” in the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 3, 2020.
ASSET QUALITY
Allowance and Provision for Loan Losses
Allowance for Loan Losses Methodology – Community Banking and Mortgage Banking. We conduct an analysis of
the collectibility of the loan portfolio on a regular basis. This analysis does not apply to PCI loans, loans carried at fair
value, loans held for sale or off-balance sheet credit exposure (e.g., unfunded loan commitments and standby letters of
credit). We use this analysis to assess the sufficiency of the allowance for loan losses and to determine the necessary
provision for loan losses.
The analysis, at a minimum, considers the following factors:
• Changes in lending policies and procedures, including underwriting, collection, charge-off and recovery;
• Changes in international, national, regional and local economic and business conditions and developments that
affect the collectability of the portfolio, including the condition of various market segments;
• Changes in the nature and volume of the portfolio and in the terms of loans;
• Changes in the experience, ability and depth of lending management and other relevant staff;
• Changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and
severity of adversely classified or graded loans;
• Changes in the quality of our loan review system;
• Changes in the value of the underlying collateral for collateral-dependent loans;
• The existence and effect of any concentrations of credit and changes in the level of such concentrations;
• The effect of other external factors, such as competition;
• Historical trends of actual loan losses based on volume and types of loans; and
• Significant one-time transactions affecting the allowance for loan losses.
47
In conjunction with the factors described above, we consider the following risk elements that are inherent in the
loan portfolio as part of the analysis:
• Real estate residential mortgage loans carry risks associated with the continued credit-worthiness of the
borrower and changes in the value of the collateral.
• Real estate construction loans carry risks that the project will not be finished according to schedule, the project
will not be finished according to budget and the value of the collateral may, at any point in time, be less than
the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or
may not be a loan customer, may be unable to finish the construction project as planned because of financial
pressure unrelated to the project.
• Commercial, financial and agricultural loans carry risks associated with the successful operation of a business
or a real estate project, in addition to other risks associated with the ownership of real estate, because the
repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In
addition, there is risk associated with the value of collateral other than real estate which may depreciate over
time and cannot be appraised with as much precision.
• Equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes
in the value of the collateral.
• Consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value of
the collateral (e.g., rapidly-depreciating assets such as automobiles), or lack thereof. Consumer loans are more
likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal
bankruptcy.
The review process generally begins with loan officers or management identifying problem loans to be reviewed
on an individual basis for impairment. This review of individual loans is limited to those loans that have indications of
probable loss or that may result in significant losses to the Corporation, while all other loans, which may include delinquent
loans and loans classified as special mention or substandard, are evaluated as a group, as discussed below. In addition, all
TDRs are considered impaired loans and are individually evaluated. We consider a loan impaired when it is probable that
we will be unable to collect all interest and principal payments as scheduled in the loan agreement. A loan is not considered
impaired during a period of delay in payment if the ultimate collectibility of all amounts due is expected. If a loan is
considered impaired, impairment is measured by 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. A valuation allowance is established for an impaired loan to the extent that this measure of the impaired loan
is less than the recorded investment in the loan. When a loan is determined to be impaired, we follow a consistent process
to measure that impairment in our loan portfolio. For collateral dependent loans we obtain an updated appraisal if we do
not have a current one on file. Appraisals are performed by independent third party appraisers with relevant industry
experience. We may make adjustments to the appraised value based on recent sales of similar properties or general market
conditions when appropriate. We also estimate costs to sell collateral in the measurement of impairment if those costs are
expected to reduce the cash flows available to repay or otherwise satisfy the loan.
The remaining non-impaired loans are grouped by loan type (e.g., commercial real estate, commercial, residential
mortgage, consumer). We assign each loan type an allowance factor based on the historical loss rate for that type of loan
and an evaluation of the qualitative factors mentioned above to determine a general allowance. We assign classified loans
(i.e., special mention, substandard, doubtful, loss) a higher allowance factor than non-classified loans within a particular
loan type based on our concerns regarding collectibility. Our allowance factors increase with the severity of classification.
Allowance factors used for unclassified loans are based on our analysis of charge-off history for relevant periods of time
which can vary depending on economic conditions, and our judgment based on the overall analysis of the lending
environment including the general economic conditions. Our analysis of charge-off history also considers economic
cycles and the trends during those cycles. We may occasionally determine that certain groups of loans require no
allowance for losses based on characteristics of those loans as a group, such as purchased loans that are initially recorded
48
at fair value or loans that are guaranteed by U.S. government agencies. Purchased loans other than PCI loans are evaluated
in the manner described above, and an allowance is recorded to the extent that the recorded investment in such loans
exceeds their outstanding principal net of the required allowance for loan losses. PPP loans require no allowance based on
the explicit guarantee of the SBA. The allowance for loan losses is the aggregate of specific allowances and the general
allowance for each portfolio type.
As discussed above we segregate loans meeting the criteria for special mention, substandard, doubtful and loss from
non-classified, or pass rated, loans. We review the characteristics of each rating at least annually, generally during the first
quarter. 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.
• 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.
Allowance for Loan Losses Methodology - PCI Loans - As previously described, on a quarterly basis we evaluate
our estimate of cash flows expected to be collected on PCI loans. These evaluations require the continued assessment of
key assumptions and estimates similar to the initial estimate of fair value, such as the effect of collateral value changes,
changing loss severities, estimated and experienced prepayment speeds and other relevant factors. Subsequent decreases
to the expected cash flows to be collected on a PCI loan will generally result in a provision for loan losses resulting in an
increase to the allowance for loan losses. For a more detailed description, see “Critical Accounting Policies” in this Item
7.
Allowance for Loan Losses Methodology – Consumer Finance. The consumer finance segment’s loans consist of
non-prime automobile loans and prime marine and RV loans. These loans carry risks associated with (1) the continued
credit-worthiness of borrowers and (2) the value of rapidly-depreciating collateral. These loans do not lend themselves to
a classification process because of the short duration of time between default, repossession and charge-off. Therefore, the
49
loan loss allowance review process generally focuses on an analysis of charge-off history for relevant periods of time,
which can vary depending on economic conditions. Further consideration is given to the following factors:
• Changes in lending policies and procedures, including underwriting, collection, charge-off and recovery;
• Changes in international, national, regional and local economic and business conditions and developments that
affect the collectability of the portfolio, including the condition of various market segments;
• Changes in the volume and severity of past due loans;
• Changes in the value of the underlying collateral;
• The existence and effect of any concentrations of credit and changes in the level of such concentrations;
• The effect of other external factors, such as competition;
• An overall analysis of the lending environment;
• Historical trends of actual loan losses based on volume and types of loans; and
• Significant one-time transactions affecting the allowance for loan losses.
Loans are grouped by loan type (e.g., non-prime automobile loans and prime marine and RV loans). We assign each
loan type an allowance factor based on the historical loss rate for that type of loan and an evaluation of the qualitative
factors mentioned above to determine a general allowance. Loans are further segregated between performing and
nonperforming loans. Performing loans are those that have made timely payments in accordance with the terms of the
loan agreement and that are not past due 90 days or more. Nonperforming loans are those that do not accrue interest and
are greater than 90 days past due.
In accordance with its policies and guidelines and consistent with industry practices, C&F Finance, at times, offers
payment deferrals to non-prime automobile borrowers, whereby the borrower is allowed to move up to two payments
within a twelve-month rolling period to the end of the loan. A fee will be collected for extensions only in states that permit
it. An account for which all delinquent payments are deferred is classified as current at the time the deferment is granted
and therefore is not included as a delinquent account. Thereafter, such an account is aged based on the timely payment of
future installments in the same manner as any other account. We evaluate the results of this deferment strategy based upon
the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the
collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, we
believe that payment deferrals granted according to our policies and guidelines are an effective portfolio management
technique and result in higher ultimate cash collections. Payment deferrals may affect the ultimate timing of when an
account is charged off. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would
increase expectations of credit losses inherent in the portfolio and therefore increase the allowance for loan losses and
related provision for loan losses. The average amounts deferred on a monthly basis, as a percentage of average non-prime
automobile loans outstanding, during the fourth quarter of 2020 and the year ended December 31, 2020 was 1.56 percent
and 2.93 percent, respectively, compared to 1.87 percent and 1.90 percent in the fourth quarter of 2019 and the year ended
December 31, 2019, respectively, and 2.53 percent and 2.30 percent in the fourth quarter of 2018 and the year ended
December 31, 2018, respectively. Payment deferrals increased for 2020 as the COVID-19 pandemic affected the ability
of some borrowers to make timely payments.
50
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. The following table presents the Corporation’s loan loss experience for the periods
indicated:
TABLE 5: Allowance for Loan Losses
(Dollars in thousands)
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . $ 32,873 $ 34,023 $ 35,726 $ 37,066 $ 35,569
Provision for loan losses:
2020
2016
Year Ended December 31,
2018
2019
2017
Community Banking . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for loan losses . . . . . . . . . . . . . . . . . . . .
4,600
10
6,470
11,080
360
—
8,155
8,515
100
—
10,906
11,006
200
—
16,235
16,435
—
—
18,040
18,040
Loans charged off:
Real estate—residential mortgage . . . . . . . . . . . . . . . . .
Commercial, financial and agricultural1 . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans charged off . . . . . . . . . . . . . . . . . . . . . . . . .
(62)
(18)
—
(231)
(9,331)
(9,642)
(46)
(29)
(138)
(349)
(13,991)
(14,553)
(42)
(409)
—
(344)
(16,477)
(17,272)
(179)
(349)
(42)
(301)
(21,525)
(22,396)
(82)
(87)
(57)
(281)
(20,663)
(21,170)
Recoveries of loans previously charged off:
163
88
Real estate—residential mortgage . . . . . . . . . . . . . . . . .
206
4
Commercial, financial and agricultural1 . . . . . . . . . . . . .
—
1
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
236
171
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,022
4,581
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,627
4,845
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16,543)
(4,797)
Net loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,156 $ 32,873 $ 34,023 $ 35,726 $ 37,066
Ratio of net charge-offs (recoveries) to average total loans
outstanding during period for Community Banking . . . . . . .
Ratio of net charge-offs to average total loans outstanding
during period for Consumer Finance . . . . . . . . . . . . . . . . . .
118
21
2
189
4,291
4,621
(17,775)
57
59
—
230
4,217
4,563
(12,709)
26
4
—
228
4,630
4,888
(9,665)
0.01 %
0.08 %
0.06 %
0.04 %
1.54 %
5.82 %
4.14 %
3.05 %
(0.02)%
5.55 %
1
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line
lending and commercial business lending.
For further information regarding the adequacy of our allowance for loan losses, refer to “Nonperforming Assets”
within this Item 7.
51
The allocation of the allowance for loan losses at December 31 for the years indicated and the ratio of corresponding
outstanding loan balances to total loans are as follows:
TABLE 6: Allocation of Allowance for Loan Losses
(Dollars in thousands)
Allocation of allowance for loan losses:
2020
2019
December 31,
2018
2017
2016
Real estate—residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,914 $ 2,080 $ 2,246 $ 2,371 $ 2,559
816
Real estate—construction 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,393
Commercial, financial and agricultural 2 . . . . . . . . . . . . . . . . . . . . . .
685
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
261
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,352
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,156 $ 32,873 $ 34,023 $ 35,726 $ 37,066
975
10,696
687
371
23,513
727
6,688
1,106
257
22,999
605
7,478
688
231
24,353
681
7,121
733
465
21,793
Ratio of loans to total period-end loans:
Real estate—residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate—construction 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial, financial and agricultural 2 . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16 %
4
52
4
1
23
100 %
16 %
5
45
5
1
28
100 %
17 %
5
43
5
2
28
100 %
19 %
4
43
5
1
28
100 %
19 %
6
39
5
1
30
100 %
1
2
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line
lending and commercial business lending.
Loans by credit quality indicators as of December 31, 2020 were as follows:
TABLE 7A: Credit Quality Indicators
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . $ 215,712
Real estate – construction 2 . . . . . . . . . . . . . . . . . . . . . .
62,147
Commercial, financial and agricultural 3 . . . . . . . . . . . .
668,167
48,140
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,832
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pass
$ 1,004,998 $
Substandard
Special
Mention
1,715
$
—
18,631
132
48
20,526 $
$
Substandard Nonaccrual
276
$
—
2,428
191
107
595
—
10,989
3
41
11,628 $
Total1
$ 218,298
62,147
700,215
48,466
11,028
3,002 $ 1,040,154
Included in the table above are loans purchased in connection with the acquisition of Peoples of $53.0 million pass rated,
$695,000 special mention and $3.0 million substandard.
Non-
(Dollars in thousands)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Performing Performing
311,850 $
402 $
Total
312,252
1 At December 31, 2020, the Corporation did not have any loans classified as Doubtful or Loss.
2
3
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line
lending and commercial business lending.
52
Loans by credit quality indicators as of December 31, 2019 were as follows:
TABLE 7B: Credit Quality Indicators
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . $ 177,049 $
Real estate – construction 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial, financial and agricultural 3 . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,246
487,374
51,662
13,632
Pass
$ 783,963 $
Special
Mention
Substandard
Total1
1,839 $
—
13,357
181
6
15,383 $
Substandard Nonaccrual
881 $
—
70
11
—
962 $
1,526 $ 181,295
54,246
500,812
52,083
13,756
1,884 $ 802,192
—
11
229
118
(Dollars in thousands)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Performing Performing
312,388 $
611 $
Total
312,999
Non-
1 At December 31, 2019, the Corporation did not have any loans classified as Doubtful or Loss.
2
3
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line
lending and commercial business lending.
The increase in loans rated Special Mention and Substandard at December 31, 2020 compared to December 31,
2019 is related primarily to three commercial relationships which were rated Pass at December 31, 2019, as well as loans
that were acquired from Peoples, partially offset by one commercial relationship that was classified as Special Mention at
December 31, 2019 and rated Pass at December 31, 2020. Of the three loan relationships that were rated Pass at December
31, 2019 and were subsequently downgraded, one was classified as Special Mention, one was classified as Substandard
and one was classified as Substandard Nonaccrual at December 31, 2020 partially as a result of effects on these borrowers
of the COVID-19 pandemic.
The allowance for loan losses as a percentage of total loans at the community banking segment, excluding PCI
loans, increased to 1.46 percent at December 31, 2020, compared to 1.32 percent at December 31, 2019. The allowance
for loan losses as a percentage of total loans excluding all purchased loans and loans originated under the PPP was 1.74
percent at December 31, 2020, compared to 1.36 percent at December 31, 2019. The community banking segment
recorded provision for loan losses of $4.6 million in 2020, primarily to add to reserves based on qualitative adjustments
as a result of the COVID-19 pandemic and due to loan growth, compared to provision for loan losses of $360,000 for
2019. As of December 31, 2020, there have not been significant changes in the overall credit quality of the loan portfolio
compared to December 31, 2019, although management believes the effects of PPP loans, payment deferrals and
government stimulus may be delaying signs of credit deterioration. Management believes that the level of the allowance
for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there is further deterioration in economic
conditions, additional provision may be required in future periods.
The consumer finance segment’s allowance for loan losses increased by $1.7 million to $23.5 million at December
31, 2020 from $21.8 million at December 31, 2019, and its provision for loan losses decreased $1.7 million for the year
ended December 31, 2020, as compared to 2019. Total delinquent loans, which does not include loans that have been
granted a payment deferral, as a percentage of total loans decreased to 3.08 percent at December 31, 2020 compared to
4.17 percent at December 31, 2019. The consumer finance segment’s net charge-off ratio for 2020 decreased to 1.54
percent from 3.05 percent for 2019 due to a lower number of charge-offs during 2020, as a result of improvement in loan
performance and lower losses per loan charged off as a result of a strong used car market. Improvement in loan
performance has resulted from the consumer finance segment continuing to purchase higher quality loans, including
marine and RV loans, as well as borrowers benefitting from the government’s stimulus measures in response to the
pandemic. The Corporation can give no assurance as to the continuation of government stimulus measures or the extent to
which they will result in supporting borrowers’ ability to continue making their contractual loan payments. The allowance
at December 31, 2020,
for
percentage
increased
percent
losses
loans
7.53
loan
as
of
to
a
53
compared to 6.96 percent at December 31, 2019. The increase in the level of the allowance for loan losses as a percentage
of total loans reflects losses that are probable as a result of the economic impacts of the COVID-19 pandemic. Management
believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if
there is further deterioration in economic conditions, additional provision may be required in future periods.
As previously described, the consumer finance segment, at times, offers payment deferrals to non-prime automobile
borrowers as a management technique to achieve higher ultimate cash collections on select loan accounts. Payment
deferrals may affect the ultimate timing of when an account is charged off. A significant reliance on deferrals as a means
of managing collections may result in a lengthening of the loss confirmation period, which would increase expectations of
credit losses inherent in the portfolio. Monthly payment deferrals, as a percentage of non-prime automobile loans
outstanding, rose to as high as 8.25 percent during the second quarter of 2020 and returned to normal levels by the end of
2020; the average amount deferred on a monthly basis during the fourth quarter of 2020 as a percentage of non-prime
automobile loans was 1.56 percent. The average amounts deferred on a monthly basis during 2020 were 2.93 percent of
non-prime automobile loans outstanding, compared to 1.90 percent during 2019 and 2.30 percent during 2018. Payment
deferrals increased for 2020 compared to 2019 as the COVID-19 pandemic affected the ability of some borrowers to make
timely payments.
Because C&F Finance primarily focuses on non-prime borrowers, the anticipated rates of delinquencies, defaults,
repossessions and losses on the consumer finance loans are higher than those experienced in the general automobile finance
industry and could be more dramatically affected by changes in general economic conditions. Changes in economic
conditions may also affect consumer demand for used automobiles and values of automobiles securing outstanding loans,
due to changes in demand or changes in levels of inventory of used automobiles, which may directly affect the amount of
a loss incurred by C&F Finance in the event of default. While we manage the higher risk inherent in loans made to non-
prime borrowers through the underwriting criteria, portfolio management and collection methods employed by C&F
Finance, we cannot guarantee that these criteria or methods will afford adequate protection against these risks. Beginning
in 2016 with C&F Finance’s implementation of a scorecard model for purchasing loan contracts, the credit worthiness of
borrowers at origination has improved for automobile loans purchased by C&F Finance and the level of credit losses
experienced has decreased. We cannot provide any assurance that C&F Finance’s net charge-off ratio will not increase in
future periods. However, we believe that the current allowance for loan losses is adequate to absorb probable losses that
have been incurred on existing consumer finance segment loans that may become uncollectible. If factors influencing the
consumer finance segment result in higher net charge-off ratios in future periods, the consumer finance segment may need
to increase the level of its allowance for loan losses through additional provisions for loan losses, which could negatively
affect future earnings of the consumer finance segment.
Nonperforming Assets
A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are
generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if
collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the
borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate
collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied
to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of
repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower
will continue to make payments as agreed. These policies are applied consistently across our loan portfolio.
Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less
estimated costs to sell at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations
of the foreclosed assets based on updated appraisals, general market conditions, recent sales of like properties, length of
time the properties have been held, and our ability and intention with regard to continued ownership of the properties. We
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. Revenue and expenses from operations and changes in the property valuations
are included in net expenses from foreclosed assets and improvements are capitalized.
54
At the consumer finance segment, the repossession process is generally initiated after a loan becomes more than 60
days delinquent. Borrowers have an opportunity to redeem their repossessed vehicles by paying all outstanding balances,
including finance charges and fees. Vehicles that are not redeemed within the prescribed waiting period before C&F
Finance has the legal right to sell the repossessed vehicle then become available-for-sale at the end of that period and are
reclassified from loans to other assets and are recorded initially at fair value less estimated costs to sell. The difference
between the carrying amount of each loan and the fair value of the vehicle (i.e. the deficiency) is charged against the
allowance for loan losses. Accounts still in process of collection or for which the Corporation does not have the legal right
to sell continue to be classified as loans until such legal authority is obtained. After the vehicles have been sold in third-
party auctions, we credit the proceeds from the sale of the vehicles, and any other recoveries, to the carrying value of the
repossessed vehicles. C&F Finance pursues collection of deficiencies, as allowed by state law, when it deems such action
to be appropriate.
Table 8 summarizes nonperforming assets at December 31 of each of the past five years.
TABLE 8: Nonperforming Assets
Community Banking Segment
2020
(Dollars in thousands)
939,444
Loans, excluding purchased loans . . . . . . . . . . . . . . . . . . . $
Purchased performing loans1 . . . . . . . . . . . . . . . . . . . . . . .
87,096
Purchased credit impaired loans1 . . . . . . . . . . . . . . . . . . . .
6,359
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,032,899
2019
$ 770,423
26,422
705
$ 797,550
2018
$ 723,778
36,874
1,835
$ 762,487
2017
$ 686,605
42,793
3,103
$ 732,501
2016
$ 629,523
53,329
9,256
$ 692,108
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
OREO2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . $
2,971
907
3,878
$
$
1,512
1,103
2,615
$
$
1,464
246
1,710
$
$
5,272
168
5,440
$
$
4,235
195
4,430
Accruing loans past due for 90 days or more . . . . . . . . . . . $
Troubled debt-restructurings (TDRs)3 . . . . . . . . . . . . . . . . $
Allowance for loan losses (ALL) . . . . . . . . . . . . . . . . . . . . $
Nonperforming assets to total loans and OREO . . . . . . . .
ALL to total loans, excluding purchased credit
impaired loans4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ALL to total loans, excluding purchased loans and
PPP loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ALL to total nonaccrual loans . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs (recoveries) to average total loans . . . . . .
145
3,575
15,035
109
$
$
4,353
$ 10,482
324
$
$
5,451
$ 10,426
$
306
$ 10,896
$ 10,775
6
$
$
5,825
$ 11,115
0.38 %
0.33 %
0.22 %
0.74 %
0.64 %
1.46
1.32
1.37
1.48
1.63
1.74
506.06
0.01
1.36
693.25
0.04
1.37
712.16
0.06
1.48
204.38
0.08
1.63
262.46
(0.02)
1 Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The
remaining discount for the purchased performing loans was $1.8 million at December 31, 2020, $1.4 million at
December 31, 2019, $1.9 million at December 31, 2018, $2.3 million at December 31, 2017 and $2.9 million at
December 31, 2016. The remaining discount for the purchased credit impaired loans was $5.9 million at December
31, 2020, $5.6 million at December 31, 2019, $7.9 million at December 31, 2018, $9.8 million at December 31, 2017
and $10.5 million at December 31, 2016. The increase in remaining discount on purchased performing loans and
purchased credit impaired loans from December 31, 2019 to December 31, 2020 is due primarily to loans acquired in
the acquisition of Peoples.
2 OREO includes $835,000 at both December 31, 2020 and 2019 related to the land and buildings of the Bellgrade
branch, which was consolidated into a nearby branch in 2019.
3 Nonaccrual loans include nonaccrual TDRs of $257,000 at December 31, 2020, $254,000 at December 31, 2019,
4
$166,000 at December 31, 2018, $3.9 million at December 31, 2017 and $2.0 million at December 31, 2016.
The ratio of ALL to total loans, excluding purchased credit impaired loans, includes purchased performing loans and
loans originated under the PPP for which no allowance for loan losses is required.
55
Mortgage Banking Segment
(Dollars in thousands)
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonaccrual loans to total loans . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to total loans . . . . . . . . . . . . . .
2020
2019
2018
2017
2016
$
31
$
7,255
608
$
0.43 %
8.38
$
372
$
4,642
598
$
8.01 %
12.88
$
37
$
3,479
598
$
1.06 %
17.19
$
39
$
3,283
598
$
1.19 %
18.22
41
3,275
598
1.25 %
18.26
Consumer Finance Segment
2020
(Dollars in thousands)
402
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
Accruing loans past due for 90 days or more . . . . . . . . . . . $
Repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
291
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,252
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,513
Nonaccrual loans to total loans . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to total loans . . . . . . . . . . . . . .
Net charge-offs to average total loans . . . . . . . . . . . . . . . .
0.13 %
7.53
1.54
2019
611
$
—
$
$
410
$ 312,999
$ 21,793
2018
712
$
—
$
$
371
$ 296,154
$ 22,999
2017
764
$
—
$
$
250
$ 292,004
$ 24,353
2016
1,215
$
—
$
$
580
$ 304,357
$ 25,353
0.20 %
6.96
3.05
0.24 %
7.77
4.14
0.26 %
8.34
5.82
0.40 %
8.33
5.55
Table 9 presents the changes in the OREO balance for 2020 and 2019.
TABLE 9: OREO Changes
(Dollars in thousands)
Balance at the beginning of year, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
2019
1,191 $
344
(57)
(364)
—
1,114
(207)
907 $
303
1,401
—
(521)
8
1,191
(88)
1,103
Year Ended December 31,
Nonperforming assets of the community banking segment totaled $3.9 million at December 31, 2020, compared to
$2.6 million at December 31, 2019. Nonperforming assets included $3.0 million in nonaccrual loans at December 31, 2020
compared to $1.5 million at December 31, 2019, and included $907,000 in other real estate owned at December 31, 2020,
compared to $1.1 million at December 31, 2019. The increase in nonaccrual loans at December 31, 2020 compared to
December 31, 2019 was due primarily to the downgrading of one commercial relationship in 2020, partially offset by
payoffs. Nonaccrual loans were comprised primarily of commercial business loans at December 31, 2020 and residential
mortgages and equity lines at December 31, 2019. If interest on loans on nonaccrual at December 31, 2020 had been
recognized throughout the year, the community banking segment would have recorded additional gross interest income in
2020 of $30,000.
Nonaccrual loans at the consumer finance segment decreased to $402,000 at December 31, 2020 from $611,000 at
December 31, 2019. As noted above, the allowance for loan losses at the consumer finance segment increased from $21.8
million at December 31, 2019 to $23.5 million at December 31, 2020, and the ratio of the allowance for loan losses to total
consumer finance loans was 7.53 percent as of December 31, 2020, compared to 6.96 percent at December 31, 2019.
Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer finance
loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan
56
becomes more than 60 days delinquent. Repossessed vehicles of the consumer finance segment are classified as other
assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to
repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the
deficiency) is charged against the allowance for loan losses. At December 31, 2020, repossessed vehicles at fair value less
estimated costs to sell included in other assets totaled $291,000, compared to $410,000 at December 31, 2019. If interest
on loans on nonaccrual at December 31, 2020 had been recognized throughout the year, the consumer finance segment
would have recorded additional gross interest income in 2020 of $4,000.
As discussed above, 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. 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.
Impaired loans, which included TDRs of $3.6 million, and the related allowance at December 31, 2020, were as
follows:
TABLE 10A: Impaired Loans
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . $ 2,326 $
Commercial, financial and agricultural:
Recorded
Investment
in Loans
without
Recorded
Investment
in Loans
with
Related
Average
Balance-
Impaired
Specific Reserve Specific Reserve Allowance Loans
Unpaid
Principal
Balance
931
$
1,279
$
77 $ 2,353 $
Interest
Income
Recognized
105
Commercial real estate lending . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,420 $
1,397
2,430
120
147
—
—
111
—
1,042
$
1,397
2,428
—
132
5,236
$
89
585
—
128
879 $ 6,603 $
1,404
2,573
119
154
73
—
2
3
183
Impaired loans, which included TDRs of $4.4 million, and the related allowance at December 31, 2019, were as
follows:
TABLE 10B: Impaired Loans
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . $ 3,891 $
Commercial, financial and agricultural:
Recorded
Investment
in Loans
without
Recorded
Investment
in Loans
with
Unpaid
Principal
Related
Balance Specific Reserve Specific Reserve Allowance
2,192 $
1,479 $
Average
Balance-
Impaired
Interest
Income
Loans Recognized
155
72 $ 3,506 $
Commercial real estate lending . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,511 $
1,459
31
130
4
31
—
2,227 $
1,447
—
121
3,047 $
77
—
118
267 $ 5,242 $
1,581
32
123
82
2
—
239
57
TDRs at December 31, 2020 and 2019 were as follows:
TABLE 11: Troubled Debt Restructurings
(Dollars in thousands)
Accruing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonaccrual TDRs1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total TDRs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
2019
3,318 $
257
3,575 $
4,099
254
4,353
December 31, December 31,
1
2
Included in nonaccrual loans in Table 8: Nonperforming Assets.
Included in impaired loans in Tables 10A and 10B: 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 on loans with aggregate balances of $104.7 million during the year
ended December 31, 2020. Generally, a short-term payment deferral does not result in a loan modification being classified
as a TDR. As of December 31, 2020, there were $30.7 million of loans whose modification periods had not ended or had
been extended. Of these loans, $30.2 million were not required to be evaluated as TDRs as a result of the CARES Act;
however, management believes that these loans have been risk rated appropriately. 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
SUMMARY
A financial institution’s primary sources of revenue are generated by its earning assets and sales of financial assets,
while its major expenses are produced by the funding of those assets with interest-bearing liabilities, provisions for loan
losses and compensation to employees. Effective management of these sources and uses of funds is essential in attaining
a financial institution’s maximum profitability while maintaining an acceptable level of risk.
At December 31, 2020, the Corporation had total assets of $2.09 billion compared to $1.66 billion at
December 31, 2019. The increase resulted primarily from increases in loans and securities and the acquisition of Peoples
on January 1, 2020, which added total assets of $190.5 million, funded primarily by deposit growth. The significant
components of the Corporation’s Consolidated Balance Sheets are discussed below.
LOAN PORTFOLIO
General
Through the community banking segment, we engage in a wide range of lending activities, which include the
origination, primarily in the community banking segment’s market area, of (1) one-to-four family and multi-family
residential mortgage loans, (2) commercial real estate loans, (3) construction loans, (4) land acquisition and development
58
loans, (5) consumer loans and (6) commercial business loans. We engage in non-prime automobile, and marine and RV
lending through the consumer finance segment and in residential mortgage lending through the mortgage banking segment
with substantially all of the loans originated through the mortgage banking segment sold to third-party investors. At
December 31, 2020, the Corporation’s loans held for investment in all categories, net of the allowance for loan losses,
totaled $1.31 billion and loans held for sale had a fair value of $214.3 million.
Tables 12 and 13 present information pertaining to the composition of loans held for investment and the
maturity/repricing of certain loans held for investment.
TABLE 12: Summary of Loans Held for Investment
2019
December 31,
2018
2017
(Dollars in thousands)
184,901 $ 184,863 $ 188,264
Real estate—residential mortgage . . . . . . . . . . $
Real estate—construction 1 . . . . . . . . . . . . . . . .
55,732
54,461
Commercial, financial, and agricultural 2 . . . .
390,388
455,935
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52,600
55,660
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,399
15,009
304,357
296,154
Consumer finance . . . . . . . . . . . . . . . . . . . . . . .
999,740
1,062,120
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for loan losses . . . . . . . . . . . . .
(37,066)
(34,023)
Total loans, net . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,313,250 $ 1,082,318 $ 1,028,097 $ 992,062 $ 962,674
2020
218,298 $ 181,295 $
62,147
700,215
48,466
11,028
312,252
54,246
500,812
52,083
13,756
312,999
1,352,406 1,115,191
(32,873)
44,782
437,884
55,237
13,018
292,004
1,027,788
(35,726)
(39,156)
2016
1
2
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line
lending and commercial business lending (which includes loans originated under the PPP during 2020).
TABLE 13: Maturity/Repricing Schedule of Loans Held for Investment
(Dollars in thousands)
Variable Rate:
December 31, 2020
Commercial,
Financial,
Real Estate
and Agricultural Construction
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Rate:
Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
176,264 $
36,642
497
52,607 $
207,996
226,209
33,076
—
—
28,838
—
233
Beginning in April 2020, the community banking segment originated loans under the PPP which are guaranteed by
the SBA, and in some cases borrowers may be eligible to obtain forgiveness of the loans, in which case loans would be
repaid by the SBA. Aggregate fees from the SBA of $3.7 million, net of direct costs, will be recognized in interest income
over the life of the loans, of which $2.2 million remains unrecognized as of December 31, 2020. As repayment of the loans
is guaranteed by the SBA, the community banking segment does not recognize a reserve for PPP loans in its allowance for
loan losses. Table 14 presents the outstanding principal of loans originated under the PPP at December 31, 2020, which
are recorded in the Consolidated Balance Sheet net of unrecognized net deferred fees of $2.2 million.
59
TABLE 14: Paycheck Protection Loans as of December 31, 2020
(Dollars in thousands)
Below $50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At least $50 and below $250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At least $250 and below $500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$500 and greater . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Loans
Outstanding
807 $
308
43
17
1,175 $
15,510
32,794
14,585
15,795
78,684
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 15
presents balances of loans to borrowers in these sensitive industries at December 31, 2020, excluding PPP loans, and the
exposure of the community banking segment to those borrowers, which includes available credit.
TABLE 15: Sensitive Industries and Exposure
(Dollars in thousands)
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Health care1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - retail2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fitness centers and recreation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hospitality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2020
Balance
Exposure
82,031 $
71,636
50,455
13,608
11,487
5,963
235,180 $
96,095
73,596
57,009
14,120
12,206
31,786
284,812
________________________
1
2
Includes primarily loans secured by medical office buildings and assisted living facilities.
Includes loans secured by commercial real estate used or being constructed for use in a retail business, a majority of which are
leased to unrelated retail tenants.
The increase in total loans from December 31, 2019 to December 31, 2020 was primarily due to commercial loan
growth at the community banking segment resulting from loans acquired in the acquisition of Peoples, loans originated
under the PPP, and growth in the commercial real estate and commercial business lending segments of the portfolio.
Total loans at December 31, 2020 and 2019 included loans purchased in connection with the Corporation’s
acquisitions. These loans were recorded at estimated fair value on the date of acquisition without the carryover of the
related allowance for loan losses. The following tables present the outstanding principal balance and the carrying amount
of purchased loans that are included in the Corporation’s Consolidated Balance Sheets at December 31, 2020 and 2019.
60
TABLE 16: PCI and Purchased Performing Loans
December 31, 2020
Purchased
Credit
(Dollars in thousands)
Impaired
Outstanding principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,760
Carrying amount
$
Purchased
Performing
89,043
Total
$ 101,803
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate – construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,473 $
—
4,758
80
48
6,359 $
15,117 $
1,077
58,796
10,182
1,924
87,096 $
16,590
1,077
63,554
10,262
1,972
93,455
December 31, 2019
(Dollars in thousands)
Outstanding principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Carrying amount
Purchased
Credit
Impaired
6,262
Purchased
Performing
$
27,839
Total
34,101
$
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
107 $
563
35
—
705 $
7,035 $
11,338
8,046
3
26,422 $
7,142
11,901
8,081
3
27,127
For a description of the Corporation’s accounting for purchased performing and PCI loans, see “Critical Accounting
Policies” in this Item 7.
Credit Policy
The Corporation’s credit policy establishes minimum requirements and provides for appropriate limitations on
overall concentration of credit within the Corporation. The policy provides guidance in general credit policies,
underwriting policies and risk management, credit approval, and administrative and problem asset management policies.
The overall goal of the Corporation’s credit policy is to ensure that loan growth is accompanied by acceptable asset quality
with uniform and consistently applied approval, administration, and documentation practices and standards.
Residential Mortgage Lending – Held for Sale
The mortgage banking segment’s guidelines for underwriting conventional conforming loans comply with the
underwriting criteria established by Fannie Mae, Freddie Mac and/or the applicable third party investor. The guidelines
for non-conforming conventional loans are based on the requirements of private investors and information provided by
third-party investors. The guidelines used by C&F Mortgage to originate FHA-insured, USDA-guaranteed and VA-
guaranteed loans comply with the criteria established by HUD, the USDA, the VA and/or the applicable third party
investor. The conventional loans that C&F Mortgage originates that have loan-to-value ratios greater than 80 percent at
origination are generally insured by private mortgage insurance.
61
Residential Mortgage Lending – Held for Investment
The community banking segment originates residential mortgage loans secured by first and second liens on
properties located in its primary market area in the Hampton to Charlottesville corridor in Virginia. The Bank offers various
types of residential first mortgage loans in addition to traditional long-term, fixed-rate loans. The majority of such loans
include 10, 15 and 30 year amortizing mortgage loans with fixed rates of interest and fixed-rate mortgage loans with terms
of 20, 25 and 30 years but subject to call after five years at the Bank’s option. Second mortgage loans are offered with
fixed and adjustable rates. Second mortgage loans are granted for a fixed period of time, usually between 5 and 20 years.
Call option provisions are included in the loan documents for some longer-term, fixed-rate second mortgage loans, and
these provisions allow the Bank to make interest rate adjustments for such loans.
Loans associated with residential mortgage lending are included in the real estate—residential mortgage category
in Table 12: Summary of Loans Held for Investment.
Construction Lending
The community banking segment has a real estate construction lending program. We make loans primarily for the
construction of one-to-four family residences and, to a lesser extent, multi-family dwellings. The Bank also makes
construction loans for office and warehouse facilities and other nonresidential projects, generally limited to borrowers that
present other business opportunities for the community banking segment.
The amounts, interest rates and terms for construction loans vary, depending upon market conditions, the size and
complexity of the project, and the financial strength of the borrower and any guarantors of the loan. The term for a typical
construction loan ranges from 9 months to 15 months for the construction of an individual residence and from 15 months
to a maximum of 3 years for larger residential or commercial projects. We do not typically amortize construction loans,
and the borrower pays interest monthly on the outstanding principal balance of the loan. The Bank offers fixed and variable
interest rates on construction loans. We do not generally finance the construction of commercial real estate projects built
on a speculative basis. For residential builder loans, we limit the number of models and/or speculative units allowed
depending on market conditions, the builder’s financial strength and track record and other factors. Generally, the
maximum loan-to-value ratio for one-to-four family residential construction loans is 80 percent of the property’s fair
market value, or 85 percent of the property’s fair market value if the property will be the borrower’s primary residence.
The fair market value of a project is determined on the basis of an appraisal of the project conducted by an appraiser
approved by the Bank. For larger projects where unit absorption or leasing is a concern, we may also obtain a feasibility
study or other acceptable information from the borrower or other sources about the likely disposition of the property
following the completion of construction.
Construction loans for nonresidential projects and multi-unit residential projects are generally larger and involve a
greater degree of risk to the Bank than residential mortgage loans. We attempt to minimize such risks (1) by making
construction loans in accordance with our underwriting standards and to established customers in our primary market area
and (2) by monitoring the quality, progress and cost of construction. Generally, our maximum loan-to-value ratio for non-
residential projects and multi-unit residential projects is 80 percent; however, this maximum can be waived for particularly
strong borrowers on an exception basis.
Loans associated with construction lending are included in the real estate—construction category in Table 12:
Summary of Loans Held for Investment.
Consumer Lot Lending
The community banking segment’s consumer lot loans are made to individuals for the purpose of acquiring an
unimproved building site for the construction of a residence that generally will be occupied by the borrower. Consumer
lot loans are made only to individual borrowers, and each borrower generally must certify his or her intention to build and
occupy a single-family residence on the lot. These loans typically have a maximum term of either three or five years with
a balloon payment of the entire balance of the loan being due in full at the end of the initial term. The interest rate for these
62
loans is fixed or variable at a rate that is slightly higher than prevailing rates for one-to-four family residential mortgage
loans. We do not believe consumer lot loans bear as much risk as land acquisition and development loans because such
loans are not made for the construction of residences for immediate resale, are not made to developers and builders, and
are not concentrated in any one subdivision or community.
Loans associated with consumer lot lending are included in the real estate—construction category in Table 12:
Summary of Loans Held for Investment.
Commercial Real Estate Lending
The community banking segment’s commercial real estate loans are primarily secured by the value of real property.
The proceeds of commercial real estate loans are generally used by the borrower to finance or refinance the cost of
acquiring and/or improving a commercial property. The properties that typically secure these loans are office and
warehouse facilities, hotels, apartment complexes, retail facilities, restaurants and other commercial properties. Present
policy authorizes commercial real estate loans to borrowers who will occupy or use the financed property in connection
with their normal business operations. We also will consider making commercial real estate loans secured by non-owner-
occupied properties under the following two conditions: (1) the borrower is in strong financial condition and presents a
substantial business opportunity for the Corporation and (2) the borrower has substantially pre-leased the property to high-
caliber tenants.
Our commercial real estate loans are usually amortized over a period of time ranging from 15 years to 30 years and
usually have a term to maturity ranging from 5 years to 15 years. These loans normally have provisions for interest rate
adjustments after the loan is three to five years old. The maximum loan-to-value ratio for a commercial real estate loan is
80 percent; however, this maximum can be waived for particularly strong borrowers on an exception basis. Most
commercial real estate loans are further secured by one or more unconditional personal guarantees.
In recent years, we have structured a portion of our commercial real estate loans as mini-permanent loans. The
amortization period, term and interest rates for these loans vary based on borrower preferences and our assessment of the
loan and the degree of risk involved. If the borrower prefers a fixed rate of interest, we usually offer a loan with a fixed
rate of interest for a term of 3 to 10 years with an amortization period of up to 30 years. The remaining balance of the loan
is due and payable in a single balloon payment at the end of the initial term. We believe these loan terms provide some
protection from changes in the borrower’s business and income as well as changes in general economic conditions. In the
case of fixed-rate commercial real estate loans, shorter maturities also provide an opportunity to adjust the interest rate on
this type of interest-earning asset in accordance with our asset and liability management strategies. Certain commercial
customers qualify for participation in an interest rate swap program. This program provides flexible pricing structures for
our larger borrowers who wish to pay a fixed rate of interest, while preserving a floating rate for the Bank, which protects
C&F Bank from exposure to rising interest rates.
Loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential
mortgage loans. Because payments on loans secured by commercial real estate are usually dependent on successful
operation or management of the properties securing such loans, repayment of such loans is subject to changes in both
general and local economic conditions and the borrower’s business and income. As a result, events beyond our control,
such as a downturn in the local economy, could adversely affect the performance of the commercial real estate loan
portfolio. We seek to minimize these risks by lending to established customers and generally restricting our commercial
real estate loans to our primary market area. Emphasis is placed on the income producing characteristics and quality of the
collateral.
Loans associated with commercial real estate lending are included in the commercial, financial and agricultural
category in Table 12: Summary of Loans Held for Investment.
63
Land Acquisition and Development Lending
The community banking segment makes land acquisition and development loans to builders and developers for the
purpose of acquiring unimproved land to be developed for residential building sites, residential housing subdivisions,
multi-family dwellings and a variety of commercial uses. Our policy is to make land acquisition loans to borrowers for the
purpose of acquiring developed lots for single-family, townhouse or condominium construction. We will make both land
acquisition and development loans to residential builders, experienced developers and others in strong financial condition
to provide additional construction and mortgage lending opportunities for the Bank.
We underwrite and process land acquisition and development loans in much the same manner as commercial
construction loans and commercial real estate loans. For land acquisition and development loans, we use lower loan-to-
value ratios, which are a maximum of 65 percent for raw land, 75 percent for land development and improved lots and 80
percent of the discounted appraised value of the property as determined in accordance with the appraisal policies for
developed lots for single-family or townhouse construction. We can waive the maximum loan-to-value ratio for
particularly strong borrowers on an exception basis. The term of land acquisition and development loans ranges from a
maximum of two years for loans relating to the acquisition of unimproved land to, generally, a maximum of three years
for other types of projects. All land acquisition and development loans generally are further secured by one or more
unconditional personal guarantees. Because these loans are usually larger in amount and involve more risk than consumer
lot loans, we carefully evaluate the borrower’s assumptions and projections about market conditions and absorption rates
in the community in which the property is located and the borrower’s ability to carry the loan if the borrower’s assumptions
prove inaccurate.
Loans associated with land acquisition and development lending are included in the commercial, financial and
agricultural category in Table 12: Summary of Loans Held for Investment.
Builder Line Lending
The community banking segment offers builder lines of credit to residential home builders to support their land and
lot inventory needs. A construction loan facility for a builder will typically have an expiration of 12 months or less. Each
loan that is made under the master loan facility will have a stated maturity that allows time for the residential unit to be
constructed and sold to a homebuyer under prevailing market conditions. Specific terms vary based on the purpose of the
loan (e.g., lot inventory, spec or non pre-sold units, pre-sold units) and previous sales activity to new homebuyers in the
particular development. Repayment relies upon the successful performance of the underlying residential real estate project.
This type of lending carries a higher level of risk related to residential real estate market conditions, a functioning first and
secondary market in which to sell residential properties, and the borrower’s ability to manage inventory and run projects.
We manage this risk by lending to experienced builders and by using specific underwriting policies and procedures for
these types of loans.
Loans associated with builder line lending are included in the commercial, financial and agricultural category in
Table 12: Summary of Loans Held for Investment.
Commercial Business Lending
The community banking segment’s commercial business loan products include revolving lines of credit to provide
working capital, term loans to finance the purchase of vehicles and equipment, letters of credit to guarantee payment and
performance, and other commercial loans. In general, these credit facilities carry the unconditional guaranty of the owners
and/or stockholders.
Revolving and operating lines of credit are typically secured by all current assets of the borrower, provide for the
acceleration of repayment upon any event of default, are monitored monthly or quarterly to ensure compliance with loan
covenants, and are re-underwritten or renewed annually. Interest rates generally will float at a spread tied to the Bank’s
prime lending rate. Term loans are generally advanced for the purchase of, and are secured by, vehicles and equipment
and are normally fully amortized over a term of two to five years, on either a fixed or floating rate basis.
64
Loans associated with commercial business lending are included in the commercial, financial and agricultural
category in Table 12: Summary of Loans Held for Investment.
Equity Line Lending
The community banking segment offers its customers home equity lines of credit that enable customers to borrow
funds secured by the equity in their homes. Currently, home equity lines of credit are offered with adjustable rates of
interest that are generally priced at a spread to the prime lending rate. Home equity lines of credit are made on an open-
end, revolving basis. Home equity loans generally do not present as much risk to the Bank as other types of consumer
loans. These loans must satisfy our underwriting criteria, including loan-to-value and credit score guidelines.
Loans associated with equity line lending are included in the equity lines category in Table 12: Summary of Loans
Held for Investment.
Consumer Lending
The community banking segment offers a variety of consumer loans, including automobile, personal secured and
unsecured, and loans secured by savings accounts or certificates of deposit. The shorter terms and generally higher interest
rates on consumer loans help the Bank maintain a profitable spread between its average loan yield and its cost of funds.
Consumer loans secured by collateral other than a personal residence generally involve more credit risk than residential
mortgage loans because of the type and nature of the collateral or, in certain cases, the absence of collateral. However, we
believe the higher yields generally earned on such loans compensate for the increased credit risk associated with such
loans. These loans must satisfy our underwriting criteria, including loan-to-value, debt ratio and credit score guidelines.
Loans associated with consumer lending are included in the consumer category in Table 12: Summary of Loans
Held for Investment.
Consumer Finance
The consumer finance segment has an extensive automobile dealer network through which it purchases installment
contracts throughout its markets. Credit approval is centralized in two locations, which along with the application
processing system, ensures that contract purchase decisions comply with C&F Finance’s underwriting policies and
procedures.
Finance contract application packages completed by prospective borrowers are submitted by the automobile dealers
electronically through a third-party online automotive sales and finance platform to C&F Finance’s automated origination
and application system, which processes the credit bureau report, generates all relevant loan calculations and displays the
requested contract structure. C&F Finance personnel with credit authority review the transaction and determine whether
to approve or deny the purchase of the contract. The purchase decision is based primarily on the applicant’s credit history
with emphasis on prior auto loan history, current employment status, income, collateral type and mileage, and the loan-to-
value ratio.
The consumer finance segment’s underwriting and collateral guidelines form the basis for the purchase decision.
Exceptions to credit policies and authorities must be approved by a designated credit officer. C&F Finance’s typical
automobile customers have experienced prior credit difficulties. Because C&F Finance serves customers who are unable
to meet the credit standards imposed by most traditional automobile financing sources, we expect C&F Finance to sustain
a higher level of credit losses in the automobile portfolio than traditional financing sources. However, C&F Finance
generally purchases these contracts with interest at higher rates than those charged by traditional financing sources. These
higher rates should more than offset the increase in the provision for loan losses for this segment of the Corporation’s loan
portfolio. Beginning in 2016 with C&F Finance’s implementation of a scorecard model for purchasing loan contracts, the
credit worthiness of borrowers at origination has improved for automobile loans purchased by C&F Finance and both the
interest rates charged and level of credit losses experienced have decreased.
65
In addition to purchasing automobile contracts through a dealer network, C&F Finance began purchasing marine
and RV contracts, also on an indirect basis, through a third party provider in 2018. While the approval process is generally
the same as the automobile approval process described above, borrowers on marine and RV contracts purchased by C&F
Finance have not had prior credit issues and these contracts are considered prime. The rates charged on these loans are
significantly less than the automobile portfolio with a much lower expected level of credit losses.
Loans associated with indirect automobile and marine and recreational vehicle financing are included in the
consumer finance category in Table 12: Summary of Loans Held for 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 December 31, 2020 and 2019, all securities in the Corporation’s investment portfolio were
classified as available for sale.
Table 17 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: Securities Available for Sale
(Dollars in thousands)
U.S. government agencies and corporations . . . . . . . . . . . . . . . . . . . . . $ 48,282
123,714
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . .
102,805
11,588
Corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available for sale securities at fair value . . . . . . . . . . . . . . . . $ 286,389
December 31, 2020
December 31, 2019
Amount Percent Amount Percent
11 %
46
43
—
100 %
17 % $ 21,440
86,585
43
81,708
36
—
4
100 % $ 189,733
The Corporation seeks to diversify its portfolio to minimize risk, including by purchasing (1) shorter-duration
mortgage-backed securities to reduce interest rate risk and for cash flow and reinvestment opportunities and (2) securities
issued by states and political subdivisions due to the tax benefits and the higher tax-adjusted yield obtained from these
securities. All of the Corporation’s mortgage-backed securities are direct issues of United States government agencies or
government-sponsored enterprises. At December 31, 2020, all of the Corporation’s obligations of states and political
subdivisions that were in a net unrealized loss position were rated “A” or better by Standard & Poor’s or Moody’s Investors
Service. The Corporation also invests in the debt securities of corporate issuers, primarily financial institutions, that the
Corporation views as having a strong financial position and earnings potential.
Table 18 presents additional information pertaining to the composition of the securities portfolio at amortized cost,
by the earlier of contractual maturity or expected maturity. Expected maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
66
TABLE 18: Maturity of Securities
December 31, 2020
Weighted
Amortized Average
(Dollars in thousands)
U.S. government agencies and corporations:
Maturing within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Maturing after 1 year, but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 5 years, but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. government agencies and corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost
Yield 1
37,450
5,223
5,498
—
48,171
0.90 %
1.29
1.03
—
0.96
Mortgage-backed securities:
Maturing within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 1 year, but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 5 years, but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and municipals:1
Maturing within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 1 year, but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 5 years, but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total states and municipals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other debt securities:
Maturing within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 1 year, but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 5 years, but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,277
98,975
18,331
2,081
120,664
33,382
41,862
25,161
—
100,405
2,630
7,454
1,500
—
11,584
Total securities:
Maturing within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 1 year, but within 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 5 years, but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,739
153,514
50,490
2,081
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 280,824
3.53
1.77
1.35
3.35
1.76
2.75
2.13
1.92
—
2.28
3.11
3.83
4.17
—
3.71
1.74
1.77
1.56
3.35
1.74
1. Yields on tax-exempt securities have been computed on a taxable-equivalent basis using the federal corporate income tax rate of
21 percent.
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.
Deposits totaled $1.75 billion at December 31, 2020, compared to $1.29 billion at December 31, 2019. This increase
resulted from deposit growth, including the effect of PPP loans and direct government payments received by depositors,
and the addition of $171.8 million of deposits in connection with the acquisition of Peoples.
The Corporation had $6.1 million in brokered money market deposits outstanding at December 31, 2020, compared
to $2.0 million in brokered money market deposits at December 31, 2019. The source of these brokered deposits is
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.
67
Table 19 presents the average deposit balances and average rates paid for the years 2020, 2019 and 2018.
TABLE 19: Average Deposits and Rates Paid
2020
Year Ended December 31,
2019
2018
(Dollars in thousands)
Noninterest-bearing demand deposits . . . . . . . . . . . . . . $ 431,789
260,478
Interest-bearing transaction accounts . . . . . . . . . . . . . .
260,342
Money market deposit accounts . . . . . . . . . . . . . . . . . .
163,763
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
266,236
Certificates of deposit, $100 thousand or more . . . . . . .
224,065
Other certificates of deposit . . . . . . . . . . . . . . . . . . . . .
1,174,884
Total interest-bearing deposits . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,606,673
Average
Balance
Average
Rate
Average
Rate
Average
Rate
$
0.21 %
0.37
0.07
1.76
1.49
0.82
Average
Balance
283,505
218,394
199,840
120,644
207,931
184,613
931,422
$ 1,214,927
Average
Balance
$ 266,415
221,750
215,662
116,896
172,616
177,279
904,203
$ 1,170,618
0.53 %
0.51
0.09
1.86
1.58
0.98
0.36 %
0.32
0.09
1.28
1.06
0.63
Table 20 details maturities of certificates of deposit with balances of $100,000 or more at December 31, 2020.
TABLE 20: Maturities of Certificates of Deposit with Balances of $100,000 or More
(Dollars in thousands)
3 months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3-6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2020
85,062
18,385
30,529
335,607
469,583
$
BORROWINGS
In addition to deposits, the Corporation utilizes short-term and long-term borrowings as sources of funds. Short-
term borrowings from the Federal Reserve Bank and the FHLB may be used to fund the Corporation’s day-to-day
operations. Short-term borrowings also include securities sold under agreements to repurchase, which are secured
transactions with customers and generally mature the day following the day sold, as well as overnight unsecured fed funds
lines with correspondent banks. Long-term borrowings consist of subordinated notes which rank junior to all future senior
indebtedness of the Corporation and are structurally subordinated to all existing and future debt and liabilities of the
Corporation and its subsidiaries. C&F Finance also has a non-recourse revolving bank line of credit secured by its
consumer finance loans.
Trust I, Trust II and CVBK Trust I are wholly-owned non-operating subsidiaries of the Corporation, formed for the
purpose of issuing trust preferred capital securities. Collectively, these trusts have issued $25.0 million of trust preferred
capital securities to institutional investors through private placements and $775,000 in common equity that is held by the
Corporation. Trust preferred capital securities of $5.0 million issued by CVBK Trust I, $10.0 million issued by Trust I,
and $10.0 million issued by Trust II mature in 2033, 2035 and 2037, respectively, and are redeemable at the Corporation’s
option. The principal assets of CVBK Trust I, Trust I and Trust II are trust preferred capital notes of the Corporation of
$5.2 million, $10.3 million and $10.3 million, respectively, which have like maturities and like interest rates to the trust
preferred capital securities. The interest payments by the Corporation on the notes will be used by the trusts to pay the
quarterly distributions on the trust preferred capital securities.
For further information concerning the Corporation’s borrowings, refer to Item 8. “Financial Statements and
Supplementary Data” under the heading “Note 12: Borrowings.”
68
OFF-BALANCE-SHEET ARRANGEMENTS
To meet the financing needs of customers, the Corporation is a party, in the normal course of business, to financial
instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit, commitments
to sell loans and standby letters of credit. These instruments involve elements of credit and interest rate risk in addition to
the amount on the balance sheet. 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. We use the same credit policies in making these commitments and conditional
obligations as we do for on-balance-sheet instruments. We obtain collateral based on our credit assessment of the customer
in each circumstance.
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. Since many of the commitments may expire without being completely drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. The total amount of unused loan
commitments at the Bank was $327.0 million at December 31, 2020, and $256.2 million at December 31, 2019.
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 was $19.1 million at
December 31, 2020 and $16.6 million at December 31, 2019.
The mortgage banking segment enters into interest rate lock commitments (IRLCs) with customers to originate
loans for which the interest rates are determined (or “locked”) prior to funding. The mortgage banking segment is exposed
to interest rate risk through fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans
are sold in the secondary market. The mortgage banking segment mitigates this interest rate risk by either (1) entering into
forward sales contracts with investors at the time that interest rates are locked for loans to be delivered on a best efforts
basis or (2) entering into forward sales contracts for unspecified mortgage backed securities (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.
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.
At December 31, 2019, the mortgage banking segment had $63.3 million of IRLCs and $65.8 million of unpaid
principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts
for $129.1 million in mortgage loans. Also at December 31, 2019, the mortgage banking segment had $11.7 million of
IRLCs and $22.0 of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward
sales of $24.0 million of TBA securities and mandatory-delivery forward sales contracts for $6.7 million in mortgage
loans. At December 31, 2018, C&F Mortgage had best-efforts forward sales contracts for all of its IRLCs and mortgage
loans held for sale.
The mortgage banking segment sells substantially all of the residential mortgage loans it originates to third-party
investors. As is customary in the industry, the agreements with these investors require the mortgage banking segment to
extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early
payment performance. Under the agreements, the investors are entitled to make loss claims and repurchase requests of the
mortgage banking segment for loans that contain covered deficiencies. The mortgage banking segment has obtained early
payment default recourse waivers for a significant portion of its business. Recourse periods for early payment default for
the remaining investors vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or
69
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, including the volume of loans sold, historical experience, current economic conditions,
changes in operational and compliance processes, and information provided by investors. Actual indemnification payments
may differ materially from management’s estimates, which may result in additional provision for indemnification losses
in future periods. Payments made under these recourse provisions were $66,000 in 2019. There were no payments made
in 2020 or 2018.
Risks also arise from the possible inability of investors to meet the terms of their contracts. The mortgage banking
segment has procedures in place to evaluate the credit risk of investors and does not expect any counterparty to fail to meet
its obligations.
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 December 31, 2020, the cash flow
hedges had a fair value of $1.9 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 December 31, 2020, the
total notional amount of the interest rate swaps related to these loans was $169.5 million, and the interest rate swaps had
a net fair value of zero, with $8.2 million recognized in other assets and $8.2 million recognized in other liabilities. These
swaps are not designated as hedging instruments; therefore, changes in fair value are recorded in other noninterest expense.
The Corporation’s contracts with dealer counterparties for interest rate swaps and forward sales of TBA securities
require the Corporation to post collateral for derivative instruments in a loss position, subject to certain thresholds and
offsets. At December 31, 2020 and 2019, $9.9 million and $2.5 million, respectively, of cash collateral was maintained
with dealer counterparties and was included in “Other assets” in the Consolidated Balance Sheets.
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, federal funds sold
and nonpledged securities available for sale, totaled $222.9 million at December 31, 2020, compared to $227.7 million at
December 31, 2019. The Corporation’s funding sources, including capacity, amount outstanding and amount available at
December 31, 2020 are presented in Table 21.
70
TABLE 21: Funding Sources
(Dollars in thousands)
Unsecured federal funds agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Repurchase lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from Federal Reserve Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capacity
December 31, 2020
Outstanding Available
95,000
— $
50,000
—
155,730
—
124,892
—
50,000
—
475,622
— $
95,000 $
50,000
155,730
124,892
50,000
475,622 $
We have no reason to believe these arrangements will not be renewed at maturity. During the year ended December
31, 2020, the Corporation pledged additional loans as collateral in order to increase available liquidity at the Federal
Reserve Bank that had been unpledged as of December 31, 2019. Additional loans and securities are available that can be
pledged as collateral for future borrowings from the Federal Reserve Bank or the FHLB above the current lendable
collateral value. Our ability to maintain sufficient liquidity may be affected by numerous factors, including economic
conditions nationally and in our markets. Depending on our liquidity levels, our capital position, conditions in the capital
markets, our business operations and initiatives, and other factors, we may from time to time consider the issuance of debt,
equity or other securities or other possible capital market transactions, the proceeds of which could provide additional
liquidity for our operations.
Time deposits of $100,000 or more, maturing in less than a year, totaled $134.0 million at December 31, 2020; time
deposits of $100,000 or more, maturing in more than one year, totaled $335.6 million.
The Corporation’s contractual obligations and scheduled payment amounts due at various intervals over the next
five years and beyond as of December 31, 2020 are presented in Table 22.
TABLE 22: Contractual Obligations
Payments Due by Period
Less than
More than
(Dollars in thousands)
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . $
Trust preferred capital notes . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total
24,093 $
25,316
2,602
7,802
59,813 $
1 Year
1‑3 Years
3‑5 Years
— $
—
1,172
61
1,233 $
— $
—
1,130
667
1,797 $
— $
—
283
701
984 $
5 Years
24,093
25,316
17
6,373
55,799
1 At December 31, 2020, there were no outstanding Federal Funds purchased or borrowings from the Federal Reserve Bank.
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.
CAPITAL RESOURCES
Total equity was $194.5 million at year-end 2020, compared with $165.3 million at year-end 2019. During 2020,
the Corporation declared common stock dividends of $1.52 per share, compared to $1.49 per share declared in 2019 and
$1.41 per share declared in 2018.
The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and
changing competitive conditions and economic forces. We regularly review the adequacy of the Corporation’s and the
Bank’s capital. We maintain a structure that will assure an adequate level of capital to support anticipated asset growth
71
and to absorb potential losses. While we will continue to look for opportunities to invest capital in profitable growth, share
repurchases are another tool that facilitates improving shareholder return, as measured by ROE and earnings per share.
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 disclosure 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.
At December 31, 2020 and 2019, the Corporation’s CET1 to total risk-weighted assets ratio was 10.9 percent and 11.7
percent, respectively; the Corporation’s Tier 1 capital to risk-weighted assets ratio was 12.5 percent and 13.6 percent,
respectively; the Corporation’s total capital to risk-weighted assets ratio was 15.2 percent and 14.9 percent, respectively;
and the Corporation’s Tier 1 leverage ratio was 9.6 percent and 11.1 percent, respectively. These ratios include $25.0
million of trust preferred capital securities in tier 1 capital of the Corporation and $24.0 million of subordinated notes in
Tier 2 capital. Additionally, all applicable regulatory capital ratios of C&F Bank were in excess of mandated minimum
requirements at December 31, 2020 and 2019. Total regulatory capital of the Corporation increased during 2020 by $44.1
million, due primarily to the issuance of subordinated notes, undistributed net income and the acquisition of Peoples. Risk-
weighted assets also increased during 2020 due primarily to growth in loans held for investment, loans held for sale,
securities available for sale and other assets, and the acquisition of Peoples.
In addition to the regulatory risk-based capital requirements, the Bank must maintain a capital conservation buffer
of additional capital of 2.5 percent of risk-weighted assets as required by the Basel III Final Rule. At 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. At December 31, 2019, the Bank exceeded the total capital conservation buffer and the tier
1 capital conservation buffer by 355 and 428 basis points, respectively.
The Corporation's capital resources may be affected by the Corporation's Repurchase Program, which was
authorized by the Corporation's Board of Directors during the fourth quarter of 2020. Under the Repurchase Program the
Corporation is authorized to purchase up to 365,000 shares of its common stock. 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. The timing, number and
purchase price of shares repurchased under the program will be determined by management in its discretion and will
depend on a number of factors, including the market price of the shares, general market and economic conditions,
applicable legal requirements and other conditions, and there is no assurance that the Corporation will purchase any shares
under the Repurchase Program. The Repurchase Program is authorized through November 30, 2021. The Corporation’s
previous share repurchase program expired on May 31, 2020.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Corporation are described in Item 8. “Financial Statements and
Supplementary Data” under the heading “Note 1: Summary of Significant Accounting Policies-Recent Significant
Accounting Pronouncements.”
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
72
rate. Interest rates are highly sensitive to many factors that are beyond the control of the Corporation, including changes
in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies
of the United States government, its agencies and various other governmental regulatory authorities.
USE OF CERTAIN NON-GAAP FINANCIAL MEASURES
The accounting and reporting policies of the Corporation conform to U.S. GAAP and prevailing practices in the
banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the
Corporation’s performance. These include adjusted net income; adjusted earnings per share; adjusted ROE; and adjusted
ROA, (all of which are adjusted to exclude the one-time effect of a gain upon sale of a pool of PCI loans in 2020, charges
related to early repayment of borrowings in 2020, merger related expenses in connection with the acquisition of Peoples
recorded in 2020 and 2019, impairment charges related to branch consolidation in 2020, and provisions of the CARES
Act, enacted in 2020, which provided income tax benefits related to prior tax years), tangible book value per share and the
following fully-taxable equivalent (FTE) measures: interest income on loans-FTE, interest income on securities-FTE,
total interest income-FTE and net interest income-FTE.
Management believes that the use of these non-GAAP measures provide meaningful information about operating
performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP
measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing
operating performance, including non-recurring gains or charges, balances of intangible assets, including goodwill, that
vary significantly between institutions and tax benefits that are not consistent across different opportunities for investment.
These non-GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial statements,
and other bank holding companies may define or calculate these or similar measures differently.
A reconciliation of the non-GAAP financial measures used by the Corporation to evaluate and measure the
Corporation’s performance to the most directly comparable U.S. GAAP financial measures is presented below.
73
(Dollars in thousands, except per share amounts)
Adjusted Net Income and Earnings Per Share
Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sale of PCI loans1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early debt repayment charges2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger related expenses3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Branch consolidation4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in tax law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For The Year Ended
December 31,
2019
2018
2020
22,424 $
(2,756)
1,735
1,132
222
(326)
22,431 $
18,850 $
-
-
653
-
-
19,503 $
18,020
-
-
-
-
-
18,020
Weighted average shares - basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,648,696
3,450,745
3,501,221
Earnings per share - basic and diluted, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sale of PCI loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early debt repayment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Branch consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in tax law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted earnings per share - basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6.06 $
(0.76)
0.48
0.31
0.06
(0.09)
6.06 $
5.47 $
-
-
0.19
-
-
5.66 $
5.15
-
-
-
-
-
5.15
Adjusted ROE
Average total equity, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
178,862 $
156,810 $
145,318
ROE, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.54 %
12.54 %
12.02 %
12.44 %
12.40 %
12.40 %
Adjusted ROA
Average total assets, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,966,299 $
1,565,428 $
1,508,904
ROA, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.14 %
1.14 %
1.20 %
1.25 %
1.19 %
1.19 %
Fully Taxable Equivalent Net Interest Income5
Interest income on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTE adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTE interest income on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTE adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTE interest income on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTE adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTE interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTE adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FTE net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
90,992 $
162
91,154 $
87,519 $
42
87,561 $
84,529
25
84,554
5,208 $
527
5,735 $
5,312 $
561
5,873 $
96,913 $
689
97,602 $
95,010 $
603
95,613 $
83,531 $
689
84,220 $
80,454 $
603
81,057 $
5,922
726
6,648
92,548
751
93,299
81,521
751
82,272
Tangible Book Value Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity attributable to C&F Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible equity attributable to C&F Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
193,805 $
December 31,
2019
164,798 $
25,191
2,291
166,323 $
14,425
912
149,461 $
2018
151,958
14,425
1,142
136,391
Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,670,301
3,438,126
3,497,122
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tangible book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
52.80 $
45.32 $
48.07 $
43.61 $
43.45
39.00
________________________
1
2
3 Merger related expenses are net of related income tax benefits of $264,000 and $56,000 for the years ended December 31, 2020 and 2019,
Sale of PCI loans is net of related income taxes of $733,000 for the year ended December 31, 2020.
Early debt repayment charges are net of related income tax benefits of $462,000 for the year ended December 31, 2020.
respectively.
Branch consolidation charges are net of related income taxes of $59,000 for the year ended December 31, 2020.
Assuming a tax rate of 21%.
4
5
74
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will
affect the amount of interest income and expense the Corporation receives or pays on a significant portion of its assets and
liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a
very short term until maturity. The Corporation does not subject itself to foreign currency exchange rate risk or commodity
price risk due to the current nature of its operations.
The primary objective of the Corporation’s asset/liability management process is to maximize current and future
net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements.
Management recognizes that a certain amount of interest rate risk is inherent and appropriate. Thus the goal of interest rate
risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk
is maintained at an acceptable level.
The Corporation assumes interest rate risk in the normal course of operations. The fair values of most of the
Corporation’s financial instruments will change when interest rates change and that change may be either favorable or
unfavorable to the Corporation. Management attempts to match maturities and repricing dates of assets and liabilities to
the extent believed necessary to balance minimizing interest rate risk and increasing net interest income in current market
conditions. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more
likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to
withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.
Management monitors rates, maturities and repricing dates of assets and liabilities and attempts to manage interest rate
risk by adjusting terms of new loans, deposits and borrowings, by investing in securities with terms that manage the
Corporation’s overall interest rate risk, and in some cases by using derivative contracts to reduce the Corporation’s overall
exposure to changes in interest rates. The Corporation does not enter into interest rate-sensitive instruments for trading
purposes.
We use simulation analysis to assess earnings at risk and economic value of equity (EVE) analysis to assess
economic value at risk. These methods allow management to regularly monitor both the direction and magnitude of the
Corporation’s interest rate risk exposure. These modeling techniques involve assumptions and estimates that inherently
cannot be measured with complete precision. Key assumptions in the analyses include maturity and repricing
characteristics of both assets and liabilities, prepayments on amortizing assets, other embedded options, non-maturity
deposit sensitivity and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude
and frequency of rate changes and changes in market conditions and management strategies, among other factors.
However, the analyses are useful in quantifying risk and provide a relative gauge of the Corporation’s interest rate risk
position over time.
Simulation analysis evaluates the potential effect of upward and downward changes in market interest rates on
future net interest income. The analysis involves changing the interest rates used in determining net interest income over
the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication
of the Corporation’s shorter-term interest rate risk. The analysis utilizes a “static” balance sheet approach, which assumes
changes in interest rates without any management response to change the composition of the balance sheet. The
measurement date balance sheet composition is maintained over the simulation time period with maturing and repayment
dollars being rolled back into like instruments for new terms at current market rates. Additional assumptions are applied
to modify volumes and pricing under the various rate scenarios. These assumptions include loan prepayments, time deposit
early withdrawals, the sensitivity of deposit repricing to changes in market rates, withdrawal behavior of non-maturing
deposits, and other factors that management deems significant.
75
The simulation analysis results are presented in the table below. These results, based on a measurement date balance
sheet as of December 31, 2020, indicate that the Corporation would expect net interest income to decrease over the next
twelve months 3.38 percent assuming an immediate downward shift in market interest rates of 200 basis points (BP) and
to increase 8.11 percent if rates shifted upward to the same degree.
One-Year Net Interest Income Simulation (dollars in thousands)
Hypothetical Change in Net
Interest Income
Over the Next Twelve Months
as of December 31,
2020
2019
Assumed Market Interest Rate Shift
-200 BP shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,548)
+200 BP shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,114
Dollars Percentage Dollars Percentage
(8.83)%
7.43 %
(3.38)% $ (6,584)
8.11 % $ 5,538
The EVE analysis provides information on the risk inherent in the balance sheet that might not be taken into account
in the simulation analysis due to the shorter time horizon used in that analysis. The EVE of the balance sheet is defined as
the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash
flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting
the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer
term repricing risk and options embedded in the balance sheet.
The EVE analysis results are presented in the table below. These results as of December 31, 2020 indicate that the
EVE would increase 8.14 percent assuming an immediate downward shift in market interest rates of 200 BP and would
increase 5.57 percent if rates shifted upward to the same degree.
Static EVE Change (dollars in thousands)
Hypothetical Change in EVE
as of December 31,
2020
2019
Assumed Market Interest Rate Shift
-200 BP shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,278
+200 BP shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,190
Dollars Percentage Dollars Percentage
(15.60)%
6.60 %
8.14 % $ (36,038)
5.57 % $ 15,256
In the simulation analysis above, net interest income increases over the next twelve months in the event of an
immediate upward shift in interest rates, but declines in the event of an immediate downward shift in interest rates. In a
rising rate environment, the Corporation’s assets would reprice quicker than the Corporation’s borrowings and deposits
primarily due to the shorter maturity or repricing dates of its interest-bearing deposits in other banks and its loan portfolio.
However, in a falling rate environment the simulation assumes that adjustable-rate assets will continue to reprice
downward, subject to floors on certain loans, and fixed-rate assets with prepayment or callable options will reprice at lower
rates while certain deposits cannot reprice any lower.
The EVE analysis above indicates an increase in the EVE in both an immediate upward shift in interest rates and
an immediate downward shift in interest rates. In a rising rate environment, the Corporation’s assets would reprice quicker
over time than the Corporation’s borrowings and deposits due to the shorter maturity or repricing dates of its interest-
bearing deposits in other banks and its loan portfolio as compared to time deposits and borrowings and the longer average
life of non-maturing deposits, such as interest checking and money market accounts. In a falling rate environment, the
simulation assumes that adjustable-rate assets will continue to reprice downward, subject to floors on certain loans, and
fixed-rate assets with prepayment or callable options will reprice at lower rates while certain deposits cannot reprice any
lower given the current exceptionally low interest rate environment.
76
The Corporation uses interest rate swaps to manage select exposures to interest rate risk. 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 as cash flow hedges. The cash flow hedges effectively modify the Corporation’s exposure to interest rate risk
associated with the Corporation’s trust preferred capital notes by converting variable rates of interest on the trust preferred
capital notes to fixed rates of interest for periods ending between June 2024 and June 2029. Also, as part of the
Corporation’s overall strategy for maximizing net interest income while managing interest rate risk, the Corporation enters
into interest rate swaps in connection with originating loans to certain commercial borrowers as a means to offer a fixed-
rate instrument to the borrower while effectively retaining a variable-rate instrument.
The mortgage banking segment enters into IRLCs with customers to originate loans for which the interest rates are
determined prior to funding. The mortgage banking segment then mitigates interest rate risk on these IRLCs and loans
held for sale by (1) entering into forward sales contracts with investors at the time that interest rates are locked for loans
to be delivered on a best efforts basis or (2) entering into forward sales contracts for unspecified mortgage backed securities
(TBA securities) until it can enter into forward sales contracts with investors for loans to be delivered on a mandatory
basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments.
We believe that our current interest rate exposure is manageable and does not indicate any significant exposure to
interest rate changes.
77
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
C&F FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest-bearing deposits in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2020
2019
17,742 $
68,927
86,669
21,148
144,285
165,433
Securities—available for sale at fair value, amortized cost of $280,824 and
$187,759, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net of allowance for loan losses of $39,156 and $32,873, respectively . . . . . . . . . . . . . . . . .
Restricted stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned, net of valuation allowance of $207 and $88, respectively . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189,733
90,500
1,082,318
3,257
35,261
1,103
6,776
14,425
912
16,044
11,219
40,451
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,086,310 $ 1,657,432
286,389
214,266
1,313,250
1,636
44,132
907
8,103
25,191
2,291
20,205
13,555
69,716
Liabilities
Deposits
Noninterest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Savings and interest-bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred capital notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
501,945 $
780,645
469,583
1,752,173
20,455
30,398
25,316
1,109
62,388
1,891,839
296,985
572,209
422,056
1,291,250
16,360
119,529
25,281
1,291
38,442
1,492,153
Commitments and contingent liabilities (Note 19)
Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,670,301 and 3,438,126
shares issued and outstanding, respectively, includes 155,945 and 142,020 of unvested
3,296
shares, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,503
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
154,248
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,249)
Accumulated other comprehensive loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
164,798
Equity attributable to C&F Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
481
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
165,279
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,086,310 $ 1,657,432
3,514
21,427
170,819
(1,955)
193,805
666
194,471
See notes to consolidated financial statements.
78
C&F FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2019
2018
2020
90,992 $
713
87,519 $
2,179
84,529
2,097
(Dollars in thousands, except per share amounts)
Interest income
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest on interest-bearing deposits and federal funds sold . . . . . . . . . . . . . . . . . .
Interest and dividends on securities
U.S. government agencies and corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt obligations of states and political subdivisions . . . . . . . . . . . . . . . .
Taxable obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
Savings and interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred capital notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . . . . . . . . . . . . . . . .
Noninterest income
Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth management services income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage lender services income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other service charges and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on sales, maturities and calls of available for sale securities . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expenses
463
2,109
1,984
406
246
96,913
1,614
8,020
2,592
1,156
13,382
83,531
11,080
72,451
29,224
7,713
4,768
3,357
2,618
2,176
1,551
38
3,973
55,418
427
2,210
2,110
358
207
95,010
2,298
6,796
4,327
1,135
14,556
80,454
8,515
71,939
10,603
4,700
4,203
3,923
2,029
390
1,496
10
4,658
32,012
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early debt repayment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less net income (loss) attributable to noncontrolling interest . . . . . . . . . . . .
Net income attributable to C&F Financial Corporation . . . . . . . . . . . . . . . . . $
Net income per share - basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
57,668
8,639
2,197
30,146
98,650
29,219
6,795
22,424
307
22,117 $
6.06 $
47,201
7,912
—
24,906
80,019
23,932
5,082
18,850 $
(9)
18,859 $
5.47 $
See notes to consolidated financial statements.
79
361
2,314
2,725
319
203
92,548
1,601
4,085
4,189
1,152
11,027
81,521
11,006
70,515
7,841
3,686
3,882
4,213
1,860
329
1,386
10
3,161
26,368
42,003
7,719
—
24,620
74,342
22,541
4,521
18,020
—
18,020
5.15
C&F FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,424 $
Other comprehensive income (loss):
2020
Year Ended December 31,
2019
18,850 $
2018
18,020
Defined benefit plan:
Net actuarial losses arising during the period . . . . . . . . . . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of recognized net actuarial losses into net income1 . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service credit into net income1 . . . . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges:
Unrealized holding (losses) gains arising during the period . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of hedging gains into net income2 . . . . . . . . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale:
Unrealized holding gains (losses) arising during the period . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of net realized gains into net income3 . . . . . . . . . . . . .
Related income tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less comprehensive income (loss) attributable to noncontrolling interest . . .
(1,706)
358
197
(42)
(66)
14
(1,245)
(1,737)
447
(11)
3
(1,298)
3,629
(762)
(38)
8
2,837
294
22,718
307
Comprehensive income attributable to C&F Financial Corporation . . . . . $ 22,411 $
(409)
86
187
(38)
(68)
14
(228)
(325)
84
(56)
14
(283)
(1,155)
242
125
(26)
(62)
13
(863)
123
(32)
—
—
91
3,724
(782)
(10)
2
2,934
2,423
21,273
(9)
21,282 $
(2,538)
533
(10)
2
(2,013)
(2,785)
15,235
—
15,235
1 These items are included in the computation of net periodic benefit cost and are included in “Noninterest income-
Other” on the Consolidated Statements of Income. See “Note 15: Employee Benefit Plans,” for additional
information.
2 These items are included in “Interest expense – Trust preferred capital notes” on the Consolidated Statements of
Income.
3 These items are included in “Net gains on sales, maturities and calls of available for sale securities” on the
Consolidated Statements of Income.
See notes to consolidated financial statements.
80
C&F FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Attributable to C&F Financial Corporation
Common
Additional
Paid - In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive Noncontrolling
Loss, Net
Interest
Total
Equity
(1,887)
— $ 141,702
—
(2,785)
—
—
—
—
—
(4,672)
—
2,423
—
—
—
—
—
—
(2,249)
—
294
—
—
—
—
—
—
—
(1,955) $
— 18,020
(2,785)
—
1,345
—
—
—
144
—
(1,537)
—
—
(4,931)
— 151,958
(9) 18,850
2,423
—
490
490
1,466
—
—
—
140
—
(4,917)
—
—
(5,131)
481 165,279
307 22,424
—
294
—
1,447
—
—
— 11,612
144
—
(1,061)
—
(5,546)
—
(122)
(122)
666 $ 194,471
(Dollars in thousands, except per share amounts)
Balance December 31, 2017 . . . . . . . . . . . . . . . . . . . $ 3,358 $ 12,800 $ 127,431 $
Comprehensive income:
Stock
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . .
Restricted stock vested . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . .
Common stock purchased . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared ($1.41 per share) . . . . . . . . .
Balance December 31, 2018 . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . .
Issuance of noncontrolling interest . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . .
Restricted stock vested . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . .
Common stock purchased . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared ($1.49 per share) . . . . . . . . .
Balance December 31, 2019 . . . . . . . . . . . . . . . . . . .
Comprehensive income:
—
—
—
26
3
(29)
—
3,358
—
—
—
—
32
3
(97)
—
3,296
—
—
1,345
(26)
141
(1,508)
—
18,020
—
—
—
—
—
(4,931)
12,752 140,520
—
—
—
1,466
(32)
137
(4,820)
—
18,859
—
—
—
—
—
—
(5,131)
9,503 154,248
22,117
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other comprehensive income . . . . . . . . . . . . . . . .
—
Share-based compensation . . . . . . . . . . . . . . . . . . . . .
—
Restricted stock vested . . . . . . . . . . . . . . . . . . . . . . .
—
Acquisition of Peoples Bankshares, Incorporated . . . .
—
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . .
—
Common stock purchased . . . . . . . . . . . . . . . . . . . . .
(5,546)
Cash dividends declared ($1.52 per share) . . . . . . . . .
Distributions to noncontrolling interest . . . . . . . . . . .
—
Balance December 31, 2020 . . . . . . . . . . . . . . . . . . . $ 3,514 $ 21,427 $ 170,819 $
—
—
1,447
(30)
11,402
140
(1,035)
—
—
—
—
—
30
210
4
(26)
—
—
See notes to consolidated financial statements.
81
C&F FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2019
2020
2018
$
22,424
$
18,850
$
18,020
11,080
(3,707)
1,447
4,189
2,271
(817)
881
(506)
(3,489)
2,197
793
(2,000)
1,668,113
(1,765,449)
(25,735)
624
(897)
6,882
(442)
1,767
(80,374)
19,101
8,004
123,741
(201,870)
(5,478)
129,011
(132,897)
3,366
(110,862)
—
(10,228)
(7,400)
2,226
(183,286)
318,598
(29,212)
4,095
19,924
(121,726)
(1,061)
(5,546)
(176)
184,896
(78,764)
165,433
86,669
14,168
6,410
63
—
—
8,515
(2,871)
1,466
3,866
1,534
354
—
(711)
—
—
649
—
903,968
(941,001)
(10,603)
(28)
660
137
371
212
(14,632)
—
—
75,583
(48,216)
—
123,140
(149,377)
—
(31,886)
785
(2,706)
(2,490)
(762)
(35,929)
11,006
(3,034)
1,345
3,671
1,783
632
52
(424)
—
—
403
(3,000)
720,250
(699,028)
(7,841)
(212)
153
3,936
82
(240)
47,554
—
—
51,067
(51,322)
—
117,014
(133,484)
—
(27,720)
—
(3,374)
—
296
(47,523)
34,093
75,496
1,444
7,000
(7,000)
(4,917)
(5,131)
(4)
100,981
50,420
115,013
$ 165,433
11,625
(1,393)
(5,705)
—
(2,500)
(1,537)
(4,931)
—
(4,441)
(4,410)
119,423
$ 115,013
$
$
$
$
14,150
2,296
496
835
490
10,909
821
98
—
—
(Dollars in thousands)
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of certain acquisition-related discounts, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of discounts and amortization of premiums on securities, net . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for indemnifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early debt repayment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origination of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other losses (gains), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Acquisition of Peoples Bankshares, Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition of assets related to business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales, maturities and calls of securities available for sale and payments
on mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of time deposits, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments on loans held for investment by non-bank affiliates . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of loans held for investment by non-bank affiliates . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in community banking loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of corporate premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in collateral posted with other financial institutions, net . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Net increase in demand and savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental cash flow disclosures:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of noncash investing and financing activities:
Transfers from loans to other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers from corporate premises and equipment to other real estate owned . . . . . . . . . . . . . . .
Issuance of noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
See notes to consolidated financial statements.
82
C&F FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies
Principles of Consolidation: The 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 accounting principles generally accepted in the United States of America
(U.S. GAAP) and to predominant practices within the banking industry.
Nature of Operations: The Corporation is a bank holding company incorporated under the laws of the Commonwealth
of Virginia. The Corporation owns all of the stock of its subsidiary, C&F Bank, which is an independent commercial bank
chartered under the laws of the Commonwealth of Virginia.
C&F Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company
(C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc., and
CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in
September 1995, originates and sells residential mortgages, provides mortgage loan origination services to third-party
lenders and, through its subsidiary Certified Appraisals LLC, provides ancillary mortgage loan production services for
residential appraisals. C&F Mortgage owns a 51 percent interest in C&F Select LLC, which was organized in January
2019 and is also engaged in the business of originating and selling residential mortgages. C&F Finance, acquired in
September 2002, is a finance company purchasing automobile, marine and recreational vehicle (RV) loans through indirect
lending programs. C&F Wealth Management, organized in April 1995, is a full-service brokerage firm offering a
comprehensive range of wealth management services and insurance products through third-party service providers. C&F
Insurance Services, Inc., was organized in July 1999, for the primary purpose of owning an equity interest in an
independent insurance agency that operates in Virginia and North Carolina. CVB Title Services, Inc. was organized for
the primary purpose of owning an equity interest in a full service title and settlement agency. Business segment data is
presented in Note 21.
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 December 31, 2020 include probable losses
related to the pandemic. The Corporation expects that the pandemic will continue to have an effect on its results of
operations. If economic conditions deteriorate further, then additional provision for loan losses may be required in future
periods. It is unknown how long these conditions will last and what the ultimate financial impact will be to the Corporation.
Depending on the severity and duration of the economic consequences of the pandemic, the Corporation’s goodwill may
become impaired.
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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.
Significant Group Concentrations of Credit Risk: The Corporation invests in a variety of securities, principally
obligations of U.S. government agencies and obligations of states and political subdivisions. At December 31, 2020,
securities issued by the Commonwealth of Virginia and its political subdivisions comprised 16.8 percent of its state and
political subdivision portfolio. There are no concentrations of any state or issuer in the Corporation’s portfolio of securities
available for sale that exceed ten percent of stockholders’ equity at December 31, 2020, and the Corporation does not have
any other significant securities concentrations in any one industry or geographic region. Additional information about the
Corporation’s securities portfolio and investment activities is presented in Note 4.
States in which significant concentrations of the Corporation’s lending activities exist include Virginia, Tennessee,
Georgia and Ohio. At December 31, 2020, 51.8 percent of the Corporation’s loan portfolio consisted of commercial,
financial and agricultural loans, which include loans secured by real estate for builder lines, acquisition and development
and commercial development, as well as commercial loans secured by personal property. In addition, 19.8 percent of the
Corporation’s loan portfolio consisted of non-prime consumer finance loans to individuals, secured by automobiles. The
Corporation does not have any significant loan concentrations to any one customer. Additional information about the
Corporation’s lending activities is presented in Note 5.
Cash and Cash Equivalents: For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents
include cash, balances due from banks, interest-bearing deposits in banks and federal funds sold, all of which mature
within 90 days. The Bank is typically required to maintain cash reserve balances on hand or with the Federal Reserve Bank
(FRB). At December 31, 2020, there was no minimum reserve requirement as a result of a rule adopted by the FRB in
March 2020 eliminating the reserve requirement. At December 31, 2019, the minimum reserve requirement was $1.03
million.
Securities: Investments in debt securities are classified as either held to maturity, available for sale, or trading, based on
management’s intent. Currently all of the Corporation’s debt securities are classified as available for sale. Available for
sale debt securities are carried at estimated fair value with the corresponding unrealized gains and losses recognized in
other comprehensive income. Gains or losses are recognized in net income on the trade date using the amortized cost of
the specific security sold. Purchase premiums are recognized in interest income using the effective interest rate method
over the period from purchase to maturity or, for callable securities, the earliest call date, and purchase discounts are
recognized in the same manner from purchase to maturity.
Impairment of debt securities occurs when the fair value of a security is less than its amortized cost. For debt securities,
impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend to sell
the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized
cost basis. If, however, the Corporation does not intend to sell the security and it is not more-likely-than-not that the
Corporation will be required to sell the security before recovery, the Corporation must determine what portion of the
impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present
value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary
impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net
income and the remaining portion of impairment must be recognized in other comprehensive income. The Corporation
regularly reviews unrealized losses in its investments in securities based on criteria including the extent to which market
value is below amortized cost, the duration of that market decline, the financial health of and specific prospects for the
issuer, the Corporation’s best estimate of the present value of cash flows expected to be collected from debt securities, the
Corporation’s intention with regard to holding the security to maturity and the likelihood that the Corporation would be
required to sell the security before recovery.
Loans Held for Sale: The Corporation has elected to use a fair value accounting option for loans originated for resale by
its mortgage banking segment. These loans are classified as loans held for sale (LHFS) and are measured at fair value in
accordance with Accounting Standards Codification (ASC) Topic 820 - Fair Value Measurement, with changes in fair
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value reported in net income as a component of “Gains on sales of loans.” Substantially all loans originated by the mortgage
banking segment are held for sale to outside investors.
Loans Acquired in a Business Combination: Loans acquired in a business combination, such as the Corporation’s
acquisition of Peoples, are recorded at estimated fair value on the date of acquisition without the carryover of the related
allowance for loan losses. Purchased credit-impaired (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 were 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,” and is not recorded. Any excess of cash flows expected at acquisition over the
estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the
loan when there is a reasonable expectation about the amount and timing of such cash flows. On a quarterly basis, the
Corporation evaluates its estimate of cash flows expected to be collected. 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,
while subsequent 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 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.
Loans not designated PCI loans as of the acquisition date are designated purchased performing 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 in future periods for any deterioration in these loans in future periods.
Originated Loans: The Corporation makes mortgage, commercial and consumer loans to customers. The Corporation’s
recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity
or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred
fees or costs on originated loans, and the allowance for loan losses. Interest on loans is credited to operations based on the
principal amount outstanding. Loan fees and origination costs are deferred and the net amount is amortized as an
adjustment of the related loan’s yield using the level-yield method. The Corporation is amortizing these amounts over the
contractual life of the related loans.
A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally
placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection
is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower.
Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to
cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal
outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment
performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will
continue to make payments as agreed. These policies are applied consistently across our loan portfolio.
The Corporation considers 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. A loan is not considered impaired during a period of delay in
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payment if the ultimate collectibility of all amounts due is expected. Impairment is measured based on either 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. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Troubled debt restructurings (TDRs) occur when the Corporation agrees to significantly modify the original terms of a
loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans and are
evaluated individually. Upon designation as a TDR, the Corporation evaluates the borrower’s payment history, past due
status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified
as a TDR and if the Corporation concludes that the borrower is able to make such payments, and there are no other factors
or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on
nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may
be returned to accrual status based on the policy for returning loans to accrual status as noted above.
The Corporation has accommodated certain borrowers affected by the COVID-19 pandemic by granting short-term
payment deferrals or periods of interest-only payments, including loans that remain in deferral as of December 31, 2020,
with an aggregate balance of $30.74 million. Generally, a short-term payment deferral does not result in a loan
modification being classified as a TDR. Additionally, the Coronavirus Aid, Relief and Economic Security Act (CARES
Act), enacted on March 27, 2020, and as subsequently supplemented, provided that certain loan modifications that were
(1) related to COVID-19 and (2) for loans that were not more than 30 days past due as of December 31, 2019 are not
required to be designated as TDRs. Additional information on loan modifications related to COVID-19 is presented in
Note 5.
In the ordinary course of business, the Corporation has entered into commitments to extend credit and standby letters of
credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.
Paycheck Protection Program: Beginning in April 2020, the Corporation originated loans under the Paycheck Protection
Program (PPP) of the Small Business Administration (SBA). PPP loans are fully guaranteed by the SBA, and in some
cases borrowers may be eligible to obtain forgiveness of the loans, in which case loans would be repaid by the SBA. As
repayment of the PPP loans is guaranteed by the SBA, the Corporation does not recognize a reserve for PPP loans in its
allowance for loan losses. The Corporation received fees from the SBA of one percent to five percent of the principal
amount of each loan originated under the PPP. Fees received from the SBA are recognized net of direct origination costs
in interest income over the life of the related loans. Recognition of fees related to PPP loans is dependent upon the timing
of ultimate repayment or forgiveness. Aggregate fees from the SBA of $3.72 million, net of direct costs, will be recognized
in interest income over the life of the loans, of which $2.16 million remains unrecognized as of December 31, 2020. In
2020, the Corporation recognized $1.56 million in net loan fees related to PPP loans in interest income on loans in the
Consolidated Statement of Income.
Allowance for Loan Losses: The allowance for loan losses is established through charges to earnings in the form of a
provision for loan losses. Loan losses are charged against the allowance for loan losses for the difference between the
carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when
management believes that the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses inherent
in the loan portfolio. Management’s 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, 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
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subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The
evaluation also considers the following risk characteristics of each loan portfolio:
• Real estate residential mortgage loans carry risks associated with the continued credit-worthiness of the borrower
and changes in the value of the collateral.
• Real estate construction loans carry risks that the project will not be finished according to schedule, the project
will not be finished according to budget and the value of the collateral may, at any point in time, be less than the
principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may
not be a loan customer, may be unable to finish the construction project as planned because of financial pressure
unrelated to the project.
• Commercial, financial and agricultural loans carry risks associated with the successful operation of a business or
a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment
of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there
is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be
appraised with as much precision.
• Consumer and consumer finance loans carry risks associated with the continued credit-worthiness of the borrower
and the value of the collateral (e.g., rapidly-depreciating assets such as automobiles and marine and recreational
vehicles (RVs)), or lack thereof. Consumer loans are more likely than real estate loans to be immediately
adversely affected by job loss, divorce, illness or personal bankruptcy.
• Equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in
the value of the collateral.
The allowance consists of specific and general components. The specific component relates to loans that are individually
evaluated for impairment, and is established when the discounted cash flows (or collateral value or observable market
price) of an impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal
will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant
industry experience. Adjustments to the appraised value may be made based on recent sales of similar properties or general
market conditions when appropriate. The general component covers non-classified loans and those loans classified as
substandard or special mention that are not individually evaluated for impairment. The general component is based on
historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home
sales and foreclosures, unemployment rates and retail sales. Relative to non-classified loans, non-impaired classified loans
are assigned a higher allowance factor which increases with the severity of classification. 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
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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.
• 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.
On a quarterly basis the Corporation evaluates its estimate of cash flows to be collected on PCI loans. These evaluations
require the continued assessment of key assumptions and estimates similar to the initial estimate of fair value as of the
acquisition date, such as the effect of collateral value changes, changing loss severities, estimated and experienced
prepayment speeds and other relevant factors. Subsequent decreases to the expected cash flows to be collected on a PCI
loan will generally result in a provision for loan losses.
The consumer finance loans are segregated between performing and nonperforming loans. Performing loans are those that
have made timely payments in accordance with the terms of the loan agreement and are not past due 90 days or
more. Nonperforming loans are those that do not accrue interest and are greater than 90 days past due.
Allowance for Indemnifications: The allowance for indemnifications is established through charges to earnings in the
form of a provision for indemnifications, which is included in other noninterest expenses. A loss is charged against the
allowance for indemnifications when a purchaser of a loan (investor) sold by the mortgage banking segment incurs a
validated indemnified loss due to borrower misrepresentation, fraud, early payment default or underwriting error.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses that are
probable of arising from valid indemnification requests for loans that have been sold by the mortgage banking segment.
Management’s judgment in determining the level of the allowance is based on the volume of loans sold, historical
experience, current economic conditions, changes in operational and compliance processes, and information provided by
investors. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as
more information becomes available.
Other Real Estate Owned (OREO): Assets acquired through, or in lieu of, foreclosure are held for sale and are initially
recorded at fair value less estimated costs to sell at the date of foreclosure. Physical possession of residential real estate
securing consumer mortgage loans occurs when legal title is obtained upon completion of foreclosure or when the borrower
conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or similar legal
agreement. 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 intention 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. Revenue and expenses from operations and changes in the property valuations are
included in other noninterest expenses and improvements are capitalized.
The Corporation records a gain/loss from the sale of OREO when control of the property transfers to the buyer, which
generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the
Corporation assesses whether the buyer is committed to perform the obligations under the contract and whether
collectability of the transaction price is probable. In determining the gain/loss on the sale, the Corporation adjusts the
transaction price and the related gain/loss on sale if a significant financing component is present.
Repossessed Assets: Repossessed assets primarily consist of vehicles repossessed by C&F Finance due to borrowers’
payment defaults. The repossession process is generally initiated after a loan becomes more than 60 days delinquent. Most
customers have an opportunity to redeem their repossessed vehicles by paying all outstanding balances, including finance
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charges and fees. Vehicles that are not redeemed within a prescribed waiting period following repossession are then
reclassified from loans to repossessed assets available-for-sale (included in other assets) and recorded initially at fair value
less estimated costs to sell. The difference between the carrying amount of each loan and the fair value of the vehicle (i.e.,
the deficiency) is charged against the allowance for loan losses. The waiting period is determined as the length of time
after repossession that C&F Finance is prohibited to sell the vehicle under the laws of the state where the vehicle was
repossessed. Accounts still in process of collection or for which the Corporation does not have the legal right to sell
continue to be classified as loans until such legal authority is obtained. At December 31, 2020, repossessed vehicles at
fair value less estimated costs to sell included in other assets totaled $291,000, compared to $410,000 at December 31,
2019.
Repossession expense includes the costs to repossess and sell vehicles. These costs include transportation, storage,
rekeying, condition reports, legal fees, fees paid to repossession agents and auction fees. These costs are included in
noninterest expenses.
Corporate Premises and Equipment: Land is carried at cost. Buildings and equipment are carried at cost less
accumulated depreciation computed using a straight-line method over the estimated useful lives of the assets. Estimated
useful lives range from ten to forty years for buildings and from three to ten years for equipment, furniture and fixtures.
Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Upon sale or
retirement of depreciable properties, the cost and related accumulated depreciation are netted against proceeds and any
resulting gain or loss is included in income.
Goodwill: The Corporation’s goodwill was recognized in connection with past business combinations and is reported at
the community banking segment and the consumer finance segment. The Corporation reviews the carrying value of
goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment,
the Corporation may first consider qualitative factors to determine whether the existence of events or circumstances lead
to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If,
after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit
is 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 amount to determine whether an impairment exists.
Transfer of Financial Assets: Transfers of loans are accounted for as sales when control over the loans has been
surrendered. Control over transferred loans is deemed to be surrendered when (1) the loans have been isolated from the
Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred loans and (3) the Corporation does not maintain effective control over the transferred
loans through an agreement to repurchase them before their maturity. During the year ended December 31, 2020, the
Corporation recognized a gain of $3.49 million upon the sale of a pool of loans that were held for investment. The loans
sold were a pool of PCI loans, and the gain recognized resulted from the release of a portion of the remaining purchase
discount on the pool of loans.
Income Taxes: The Corporation determines deferred income tax assets and liabilities 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. Income tax expense includes taxes on income or loss that is taxable in the period and changes during the
period in deferred tax assets and liabilities.
C&F Bank invests in qualified affordable housing projects through housing equity funds, the purpose of which is to
encourage investment in low-income residential property development in Virginia by providing a return on investment
through federal income tax credits and other tax benefits on losses generated by the projects. C&F Bank recognizes its
share of losses on these projects as a component of income tax expense.
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The benefit of an uncertain tax position is recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the position will be sustained upon examination by
the applicable taxing authority, including the resolution of appeals or litigation processes, if any. Tax positions taken are
not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with
the applicable taxing authority. Interest and penalties associated with unrecognized tax benefits are recognized as a
component of income tax expense.
Retirement Plan: The Corporation recognizes the overfunded or underfunded status of its defined benefit pension plan
as an asset or liability in its Consolidated Balance Sheets, measured as the difference between plan assets at fair value and
the projected benefit obligation as of December 31. Net periodic pension cost or income is recorded each period based on
actuarially determined amounts in accordance with GAAP and recognized in salaries and employment benefits and other
noninterest income in the Consolidated Statements of Income. Actuarial determinations of net periodic pension cost or
income are based on assumptions related to disount rates, rates of return on plan assets, employee compensation and
mortality and interest crediting rates. Other changes in the overfunded or underfunded status of the pension plan are
recorded in the year in which the changes occur through other comprehensive income.
Share-Based Compensation: Share-based compensation expense for grants of restricted shares is accounted for using the
fair value of the Corporation’s common stock on the date the restricted shares are awarded. Compensation expense for
restricted shares is charged to income ratably over the required service period. Forfeitures reduce compensation expense
for the periods in which forfeitures actually occur. Income tax windfalls or shortfalls related to the amount deductible upon
vesting of restricted stock awards is recorded in income tax expense in the period the stock awards become vested.
Earnings Per Share: The Corporation applies the two-class method of computing basic and diluted earnings per share
(EPS), which allocates a portion of undistributed earnings to the Corporation’s unvested restricted shares awarded to
employees and non-employee directors. These restricted shares are participating securities which contain rights to
nonforfeitable dividends prior to vesting. Accordingly, the weighted average number of shares outstanding used in the
calculation of basic and diluted EPS includes both common shares and unvested restricted shares outstanding. EPS
calculations are presented in Note 13.
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 22.
Leases: The Corporation’s leases comprise primarily operating and financing leases of real estate and office equipment in
which the Corporation or one of its subsidiaries is the lessee. The Corporation recognizes a lease liability and a right-of-
use asset in connection with leases in which it is a lessee, except for leases with a term of twelve months or less. A lease
liability represents the Corporation’s obligation to make future payments under lease contracts, and a right-of-use asset
represents the Corporation’s right to control the use of the underlying property during the lease term. Lease liabilities and
right-of-use assets are recognized upon commencement of a lease and measured as the present value of lease payments
over the lease term, discounted at the incremental borrowing rate of the lessee. The Corporation has elected not to separate
lease and nonlease components within the same contract and instead to account for the entire contract as a lease.
Service Charges on Deposit Accounts. The Corporation earns fees from its deposit customers for overdraft and account
maintenance services. Overdraft fees are recognized when the overdraft occurs. Account maintenance fees, which relate
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primarily to monthly maintenance, are earned over the course of a month, representing the period over which the
Corporation satisfies the performance obligation.
Other Service Charges and Fees. The Corporation earns fees from its customers for transaction-based services. Such
services include ATM, stop payment and wire transfer fees at the community banking segment and on-line payment
processing fees at the consumer finance segment. In each case, these service charges and fees are recognized in income at
the time or within the same period that the Corporation’s performance obligation is satisfied.
Interchange Income. The Corporation earns interchange fees from debit and credit cardholder transactions conducted
through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying
transaction value and are recognized daily, concurrently with the transaction processing services.
Wealth Management Services Income, Net. The Corporation earns revenue by providing wealth management services
and health and life insurance products to its customers through third-party service providers. Fees that are transaction-
based (e.g., execution of trades) are recognized on a monthly basis. Other fees and commissions are earned over time as
services are provided and are generally assessed based on either account activity or the market value of assets under
management at the end of each period. Fees and commissions collected from customers are reported net of related fees
paid to the third-party service providers and presented in noninterest income.
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.
91
NOTE 2: Adoption of New Accounting Standards
On January 1, 2020, the Corporation adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modified the
disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and
weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative
description of measurement uncertainty. The applicable amendments of ASU 2018-13 were applied prospectively and did
not have a material effect on the Corporation’s consolidated financial statements.
NOTE 3: Business Combination
On January 1, 2020, the Corporation completed its acquisition of Peoples Bankshares, Incorporated (Peoples). Peoples
shareholders received 0.5366 shares of the Corporation’s common stock and $27.00 in cash for each share of Peoples
common stock, with cash paid in lieu of any fractional shares of the Corporation’s common stock. In connection with the
transaction, the Corporation paid aggregate cash consideration of $10.58 million and issued 209,871 shares of its common
stock to the shareholders of Peoples.
The Corporation accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805,
Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the
acquisition and the common stock of the Corporation issued as consideration were recorded at their respective acquisition
date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently
subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value.
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.
92
(Dollars in thousands)
Purchase price:
Amounts
Recognized as of
January 1, 2020
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10,579
11,612
22,191
Identifiable assets acquired:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in small business investment company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable liabilities assumed:
Demand and savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries, benefits and deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,680
17,169
124,195
430
3,105
281
1,711
3,591
1,493
5,234
3,658
190,547
94,798
77,018
4,245
260
2,054
747
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.
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.
93
Information about PCI loans acquired from Peoples as of January 1, 2020 is as follows:
(Dollars in thousands)
Contractual principal and interest due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonaccretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased credit impaired loans - estimated fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
January 1, 2020
20,310
(7,679)
12,631
(3,372)
9,259
Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Loans: The acquired loans were recorded at fair value at the acquisition date without carryover of People's allowance for
loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and
timing of both principal and interest cash flows expected to be collected on the loans and then discounting those cash flows
based on a discount rate that would be required by a market participant. In this regard, the acquired loans were segregated
into pools based on loan type and credit risk. Loan type was determined based on collateral type, loan purpose and loan
structure. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated
loan-to-value ratios and lien position, and past loan performance. For valuation purposes, these pools were further
disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities).
Core Deposit Intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a
discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account
servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative
funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were
determined using Peoples’ historical deposit data. The CDI was estimated at $1.71 million or 1.8% of non-maturity
deposits.
Deposits: The fair value adjustment of deposits represents a premium over the value of the contractual repayments of
fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit. The resulting
estimated fair value adjustment of certificates of deposit ranging in maturity from three months to five years is a $557,000
premium and is being amortized into income over a period of two years.
The following table presents certain unaudited pro forma information as if the acquisition had taken place on January 1,
2019. These results combine the historical results of Peoples and the Corporation for the period prior to the merger. While
certain adjustments were made for estimated effects resulting from the application of the acquisition method, including
certain fair value adjustments, this pro forma information is not indicative of what would have occurred had the acquisition
actually taken place on January 1, 2019. Pro forma adjustments for the year ended December 31, 2019 include the net
impact of accretion of loan discounts related to market interest rates, amortization of premiums on deposits and borrowings,
amortization of intangible assets and related income taxes. Unaudited pro forma net income for the year ended December
31, 2019 includes after tax merger related expenses of $2.76 million, or $(0.75) per share. These amounts include $2.11
million recorded by Peoples, which was primarily related to pre-existing employment agreements, contract termination
costs paid to Peoples’ core processing provider, and fees for legal and financial advisors. Unaudited pro forma net income
also includes provision for loan losses recorded by Peoples for loans that were recorded by the Corporation at fair value
upon acquisition and have no allowance for loan losses in the books of the Corporation. Additionally, the Corporation has
achieved certain operational cost savings and other efficiencies as a result of the acquisition and integration of Peoples
which are not reflected in the unaudited pro forma amounts below.
(Dollars in thousands, except per share amounts)
Total revenues (net interest income plus nonintererest income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unaudited Pro Forma
Year Ended
December 31, 2019
120,173
18,261
4.99
94
The revenue and earnings amounts specific to Peoples since the acquisition date that are included in the consolidated
results for 2020 are not readily determinable. Disclosure of these amounts is impracticable due to the merging of certain
processes and systems at the acquisition date.
The Corporation recorded merger related expenses in connection with the acquisition of Peoples of $1.40 million ($1.13
million after income taxes) for the year ended December 31, 2020 and $709,000 ($653,000, after income taxes) for the
year ended December 31, 2019. As of December 31, 2020, the Corporation has recorded aggregate merger related
expenses of $2.10 million ($1.78 million after income taxes). These costs included primarily the integration of systems
and operations and legal and consulting expenses, which have been expensed as incurred.
NOTE 4: Securities
The Corporation’s debt securities, all of which are classified as available for sale, are summarized as follows:
December 31, 2020
Gross
Gross
Amortized Unrealized Unrealized
(Dollars in thousands)
U.S. government agencies and corporations . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . .
Corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . .
Gains
Losses
Cost
48,171 $
120,664
100,405
11,584
$ 280,824 $
121 $
3,165
2,436
47
5,769 $
(10) $
Fair Value
48,282
123,714
102,805
11,588
(204) $ 286,389
(115)
(36)
(43)
(Dollars in thousands)
U.S. government agencies and corporations . . . . . . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . .
Cost
21,454 $
85,649
80,656
$ 187,759 $
3 $
979
1,111
2,093 $
Fair Value
21,440
86,585
81,708
(119) $ 189,733
(17) $
(43)
(59)
December 31, 2019
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
The amortized cost and estimated fair value of securities at December 31, 2020, by the earlier of contractual maturity or
expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may
have the right to prepay obligations with or without call or prepayment penalties.
December 31, 2020
(Dollars in thousands)
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
74,739 $
153,514
50,490
2,081
Fair Value
75,015
157,622
51,572
2,180
$ 280,824 $ 286,389
The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of
securities. During the year ended December 31, 2020, $5.99 million in proceeds were related to sales of securities acquired
in the acquisition of Peoples. There were no sales of securities during the years ended December 31, 2019 and 2018.
95
(Dollars in thousands)
Realized gains from sales, maturities and calls of securities:
Year Ended December 31,
2019
2020
2018
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
38 $
—
38 $
Proceeds from sales, maturities, calls and paydowns of securities . . . . . . . . . $ 123,741 $
10 $
—
10 $
75,583 $
10
—
10
51,067
The Corporation pledges securities primarily to secure public deposits and repurchase agreements. 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 with an aggregate amortized cost of $126.22 million and an aggregate fair value of $127.47
million were pledged at December 31, 2019.
Securities in an unrealized loss position at December 31, 2020, by duration of the period of the unrealized loss, are shown
below.
(Dollars in thousands)
U.S. government agencies and corporations . . . $ 12,719 $
Mortgage-backed securities . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions .
Corporate and other debt securities . . . . . . . . . .
Total temporarily impaired securities . . . . . . . . $ 37,791 $
15,691
5,110
4,271
Less Than 12 Months 12 Months or More
Unrealized
Fair
Fair
Value
Unrealized
Loss
Total
Unrealized
Loss
Value Loss
— $
—
—
—
— $
10 $
115
36
43
204 $
Fair
Value
— $ 12,719 $
— 15,691
— 5,110
—
4,271
— $ 37,791 $
10
115
36
43
204
There were 31 debt securities totaling $37.79 million of aggregate fair value considered temporarily impaired at
December 31, 2020. The primary cause of the temporary impairments in the Corporation’s investments in debt securities
was fluctuations in interest rates. The Corporation concluded that no other-than-temporary impairment existed in its
securities portfolio at December 31, 2020, and no other-than-temporary impairment loss has been recognized in net
income, based primarily on the fact that changes in fair value were caused primarily by fluctuations in interest rates, there
were no securities with unrealized losses that were significant relative to their carrying amounts, no 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, 2019, by duration of the period of the unrealized loss, are shown
below.
(Dollars in thousands)
U.S. government agencies and corporations . . . $
6,256 $
4,099
Mortgage-backed securities . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions .
9,187
Total temporarily impaired securities . . . . . . . . $ 19,542 $
11 $ 4,094 $
7 10,166
53
1,368
71 $ 15,628 $
Fair
Value
6 $ 10,350 $
36 14,265
6 10,555
48 $ 35,170 $
17
43
59
119
Less Than 12 Months 12 Months or More
Unrealized
Fair
Fair
Value
Unrealized
Loss
Value Loss
Total
Unrealized
Loss
96
The Corporation’s investment in restricted stock totaled $1.64 million at December 31, 2020 and consisted of Federal
Home Loan Bank (FHLB) stock. Restricted stock is generally viewed as a long-term investment, which is carried at cost
because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment,
its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value.
The Corporation did not consider its investment in restricted stock to be other-than-temporarily impaired at
December 31, 2020 and no impairment has been recognized.
NOTE 5: Loans
Major classifications of loans are summarized as follows:
December 31,
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate – construction 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial, financial and agricultural 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
181,295
54,246
500,812
52,083
13,756
312,999
1,115,191
Less allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(32,873)
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,313,250 $ 1,082,318
2020
218,298 $
62,147
700,215
48,466
11,028
312,252
1,352,406
(39,156)
1
2
Includes the Corporation’s real estate construction lending and consumer real estate lot lending.
Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line
lending and commercial business lending (which includes loans originated under the PPP).
Consumer loans included $284,000 and $449,000 of demand deposit overdrafts at December 31, 2020 and 2019,
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 December
31, 2020 and 2019 of loans acquired in business combinations were as follows:
December 31, 2020
Acquired Loans - Acquired Loans -
December 31, 2019
Acquired Loans - Acquired Loans -
Purchased
Credit Impaired
Purchased
Performing
Acquired Loans -
Total
Purchased
Credit Impaired
Purchased
Performing
Acquired Loans -
Total
(Dollars in thousands)
Outstanding principal
balance . . . . . . . . . . . . . . . $
Carrying amount
Real estate –
residential mortgage . . $
Real estate –
construction . . . . . . . .
Commercial, financial
and agricultural1 . . . . .
Equity lines . . . . . . . .
Consumer . . . . . . . . . .
Total acquired loans . . . . $
12,760 $
89,043 $
101,803 $
6,262 $
27,839 $
34,101
1,473 $
15,117 $
16,590 $
107 $
7,035 $
7,142
—
1,077
1,077
—
—
—
4,758
80
48
6,359 $
58,796
10,182
1,924
87,096 $
63,554
10,262
1,972
93,455 $
563
35
—
705 $
11,338
8,046
3
26,422 $
11,901
8,081
3
27,127
1
Includes acquired loans classified by the Corporation as commercial real estate lending and commercial business
lending.
97
The following table presents a summary of the change in the accretable yield of loans classified as PCI loans:
Year Ended December 31,
(Dollars in thousands)
Accretable yield, balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of Peoples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of PCI loan pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of nonaccretable difference due to improvement in expected cash
flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretable yield, balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
2020
2019
$
4,721
3,372
(3,032)
(323)
521
(1,211)
4,048 $
5,987
—
(3,360)
—
1,587
507
4,721
Loans on nonaccrual status at December 31, 2020 and 2019 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial, financial and agricultural:
Commercial business lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans on nonaccrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2020
2019
276 $
1,526
2,428
191
107
402
3,404 $
11
229
118
611
2,495
The past due status of loans as of December 31, 2020 was as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . $
Real estate – construction:
30 - 59 Days 60 - 89 Days 90+ Days Total
Past Due
Past Due
Past Due Past Due PCI
Current1
Total Loans Accruing
90+ Days
Past Due and
1,100 $
154 $
176 $ 1,430 $ 1,473 $ 215,395 $ 218,298 $
145
Construction lending . . . . . . . . . . . . . . .
Consumer lot lending . . . . . . . . . . . . . . .
Commercial, financial and agricultural:
Commercial real estate lending . . . . . . .
Land acquisition and development
lending . . . . . . . . . . . . . . . . . . . . . . . . .
Builder line lending . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
—
—
—
—
—
—
—
49,659
12,488
49,659
12,488
—
—
— 4,758
437,145
441,903
—
—
24
52
2
8,249
9,427 $
—
—
—
—
—
967
1,121 $
—
—
—
—
—
402
578 $ 11,126 $ 6,359 $ 1,334,921 $ 1,352,406 $
37,724
18,194
202,394
48,466
11,028
312,252
37,724
18,194
202,370
48,334
10,978
302,634
—
—
24
52
2
9,618
—
—
—
80
48
—
—
—
—
—
—
—
—
—
—
145
1
For the purposes of the table above, “Current” includes loans that are 1-29 days past due.
The table above includes nonaccrual loans that are current of $2.86 million, 30-59 days past due of $115,000 and 90+ days
past due of $433,000.
98
The past due status of loans as of December 31, 2019 was as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . $
Real estate – construction:
Construction lending . . . . . . . . . . . . . . .
Consumer lot lending . . . . . . . . . . . . . . .
Commercial, financial and agricultural:
Commercial real estate lending . . . . . . .
Land acquisition and development
lending . . . . . . . . . . . . . . . . . . . . . . . . .
Builder line lending . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer finance . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
30 - 59 Days 60 - 89 Days 90+ Days Total
Past Due
Past Due
Past Due Past Due PCI
Current1
Total Loans Accruing
90+ Days
Past Due and
1,428 $
161 $ 1,016 $ 2,605 $ 107 $ 178,583 $ 181,295 $
—
—
—
—
—
—
—
—
—
—
—
—
—
40,943
13,303
40,943
13,303
—
563
325,991
326,554
—
—
73
229
20
11,034
12,784 $
—
—
18
56
10
1,420
1,665 $ 1,850 $ 16,299 $ 705 $ 1,098,187 $ 1,115,191 $
—
—
91
508
30
13,065
42,891
26,373
104,994
52,083
13,756
312,999
42,891
26,373
104,903
51,540
13,726
299,934
—
—
—
223
—
611
—
—
—
35
—
—
—
—
—
—
—
—
—
109
—
—
109
1
For the purposes of the table above, “Current” includes loans that are 1-29 days past due.
The table above includes nonaccrual loans that are current of $547,000, 30-59 days past due of $197,000, 60-89 days past
due of $10,000 and 90+ days past due of $1.74 million.
Loan modifications that were classified as TDRs, and the recorded investment in those loans at the time of their
modification, during the years ended December 31, 2020 and 2019 and 2018 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
Loans
Number of Recorded
Investment
176
84
—
260
2 $
1
—
3 $
Year Ended December 31,
2019
Number of Recorded
Investment
Loans
2 $
—
1
3 $
95
—
121
216
Loans
2018
Number of Recorded
Investment
140
—
5
145
—
1
2 $
1 $
Each of the TDRs during the year ended December 31, 2020, two TDRs during the year ended December 31, 2019 and
one during the year ended December 31, 2018 included modifications of the loan’s payment structure. One TDR during
the year ended December 31, 2019 and one during the year ended December 31, 2018 included modifications of the loan’s
interest rate. There were no TDRs in the years ended December 31, 2020, 2019 or 2018 that included a reduction in
principal as part of the loan’s modification.
All TDRs are considered impaired loans and are individually evaluated in the determination of the allowance for loan
losses. A TDR payment default occurs when, within 12 months of the original TDR modification, either a full or partial
charge-off occurs or a TDR becomes 90 days or more past due. The specific reserve associated with a TDR is reevaluated
when a TDR payment default occurs. There were no TDR payment defaults during the years ended December 31, 2020,
2019 or 2018.
In response to the effects of the COVID-19 pandemic, including economic disruption and adverse impacts to commercial
and consumer borrowers, the Bank has accommodated certain borrowers by granting short-term payment deferrals or
periods of interest-only payments, which generally were less than six months for each borrower. Generally, a short-term
payment deferral does not result in a loan modification being classified as a TDR. As of December 31, 2020, there were
$30.74 million of loans whose modification periods had not ended or had been extended. Of these loans, $30.17 million
were not required to be evaluated as TDRs as a result of the CARES Act.
99
Impaired loans, which included TDRs of $3.58 million, and the related allowance at December 31, 2020 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . $ 2,326 $
Commercial, financial and agricultural:
Recorded
Investment
in Loans
without
Recorded
Investment
in Loans
with
Specific Reserve Specific Reserve Allowance Loans
Average
Balance-
Impaired
Related
Unpaid
Principal
Balance
931
$
1,279 $
77 $ 2,353 $
Interest
Income
Recognized
105
Commercial real estate lending . . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,420 $
1,397
2,430
120
147
—
—
111
—
1,042
$
1,397
2,428
—
132
5,236 $
89
585
—
128
879 $ 6,603 $
1,404
2,573
119
154
73
—
2
3
183
Impaired loans, which included TDRs of $4.35 million, and the related allowance at December 31, 2019 were as follows:
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . . . . $ 3,891 $
Commercial, financial and agricultural:
Recorded
Investment
in Loans
without
Recorded
Investment
in Loans
with
Specific Reserve Specific Reserve Allowance Loans
Average
Balance-
Impaired
Related
Unpaid
Principal
Balance
2,192
$
1,479 $
72 $ 3,506 $
Interest
Income
Recognized
155
Commercial real estate lending . . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,511 $
1,459
31
130
4
31
—
2,227
$
1,447
—
121
3,047 $
77
—
118
267 $ 5,242 $
1,581
32
123
82
2
—
239
NOTE 6: Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, 2020, 2019 and 2018 were as follows:
(Dollars in thousands)
Balance at December 31, 2017 . . . . . . . . . . . . . $
Provision charged to operations . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of loans previously charged off . . . .
Balance at December 31, 2018 . . . . . . . . . . . . .
Provision charged to operations . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of loans previously charged off . . . .
Balance at December 31, 2019 . . . . . . . . . . . . .
Provision charged to operations . . . . . . . . . . . .
Loans charged off . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of loans previously charged off . . . .
Balance at December 31, 2020 . . . . . . . . . . . . . $
Commercial,
Real Estate
Residential Real Estate
Financial & Equity
Mortgage Construction Agricultural Lines
605 $
122
—
—
727
(46)
—
—
681
294
—
—
975 $
2,371 $
(140)
(42)
57
2,246
(146)
(46)
26
2,080
808
(62)
88
2,914 $
7,478 $
(440)
(409)
59
6,688
458
(29)
4
7,121
3,589
(18)
4
688 $
418
—
—
1,106
(235)
(138)
—
733
(47)
—
1
687 $
10,696 $
Consumer
Consumer Finance
Total
231 $ 24,353 $ 35,726
10,906
11,006
140
(16,477)
(17,272)
(344)
4,217
4,563
230
22,999
34,023
257
8,155
8,515
329
(13,991)
(14,553)
(349)
4,630
4,888
228
21,793
32,873
465
6,470
11,080
(34)
(9,642)
(9,331)
(231)
171
4,845
4,581
371 $ 23,513 $ 39,156
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.
100
(Dollars in thousands)
Allowance balance attributable to loans:
Real Estate
Residential Real Estate Financial & Equity
Mortgage Construction Agricultural Lines
Commercial,
Consumer
Consumer Finance
Total
Individually evaluated for impairment . . . . $
Collectively evaluated for impairment . . . .
Acquired loans - PCI . . . . . . . . . . . . . . . . . .
Total allowance . . . . . . . . . . . . . . . . . . . . . . . $
Loans:
77 $
2,837
—
2,914 $
— $
975
—
975 $
674 $
10,022
—
10,696 $
— $
687
—
687 $
— $
128 $
23,513
243
—
—
371 $ 23,513 $
879
38,277
—
39,156
2,210 $
Individually evaluated for impairment . . . . $
Collectively evaluated for impairment . . . . 214,615
1,473
Acquired loans - PCI . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,298 $
3,825 $
— $
62,147
—
6,278
691,632 48,275 10,848 312,252 1,339,769
6,359
62,147 $ 700,215 $ 48,466 $ 11,028 $ 312,252 $ 1,352,406
4,758
111 $
132 $
— $
48
80
—
The following table presents, as of December 31, 2019, the balance of the allowance for loan losses, the allowance by
impairment methodology, total loans and loans by impairment methodology.
(Dollars in thousands)
Allowance balance attributable to loans:
Commercial,
Real Estate
Financial & Equity
Residential Real Estate
Mortgage Construction Agricultural Lines
Consumer
Consumer Finance
Total
Individually evaluated for impairment . . . . . . . . $
Collectively evaluated for impairment . . . . . . . .
Acquired loans - PCI . . . . . . . . . . . . . . . . . . . .
Total allowance . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans:
72 $
2,008
—
2,080 $
— $
681
—
681 $
77 $
7,044
—
7,121 $
— $
733
—
733 $
118 $
— $
347 21,793
—
—
465 $ 21,793 $
267
32,606
—
32,873
Individually evaluated for impairment . . . . . . . . $
Collectively evaluated for impairment . . . . . . . .
Acquired loans - PCI . . . . . . . . . . . . . . . . . . . .
3,671 $
177,517
107
— $
54,246
—
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181,295 $
54,246 $
31 $
1,451 $
498,798
563
5,274
1,109,212
705
500,812 $ 52,083 $ 13,756 $ 312,999 $ 1,115,191
13,635 312,999
—
52,017
35
121 $
— $
—
Loans by credit quality indicators as of December 31, 2020 were as follows:
Special
Substandard
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . $
Real estate – construction:
Pass
215,712 $
Mention
Substandard Nonaccrual
595 $
276 $
Total1
218,298
1,715 $
Construction lending . . . . . . . . . . . . . . . . . . . . . .
Consumer lot lending . . . . . . . . . . . . . . . . . . . . . .
49,659
12,488
—
—
—
—
—
—
49,659
12,488
Commercial, financial and agricultural:
Commercial real estate lending . . . . . . . . . . . . . .
Land acquisition and development lending . . . . .
Builder line lending . . . . . . . . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
415,506
37,724
18,194
196,743
48,140
10,832
$ 1,004,998 $
15,507
—
—
3,124
132
48
20,526 $
10,890
—
—
99
3
41
11,628 $
—
—
—
2,428
191
107
441,903
37,724
18,194
202,394
48,466
11,028
3,002 $ 1,040,154
1 At December 31, 2020, the Corporation did not have any loans classified as Doubtful or Loss.
Included in the table above are loans purchased in connection with the acquisition of Peoples of $53.01 million pass rated,
$695,000 special mention and $2.98 million substandard.
Non-
(Dollars in thousands)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Performing Performing
311,850 $
402 $
Total
312,252
101
Loans by credit quality indicators as of December 31, 2019 were as follows:
Special
Substandard
(Dollars in thousands)
Real estate – residential mortgage . . . . . . . . . . . . . . . $
Real estate – construction:
Pass
177,049 $
Mention
Substandard Nonaccrual
881 $
1,526 $
Total1
181,295
1,839 $
Construction lending . . . . . . . . . . . . . . . . . . . . . .
Consumer lot lending . . . . . . . . . . . . . . . . . . . . . .
40,943
13,303
—
—
Commercial, financial and agricultural:
Commercial real estate lending . . . . . . . . . . . . . .
Land acquisition and development lending . . . . .
Builder line lending . . . . . . . . . . . . . . . . . . . . . . .
Commercial business lending . . . . . . . . . . . . . . . .
Equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
323,218
33,870
25,995
104,291
51,662
13,632
783,963 $
3,266
9,021
378
692
181
6
15,383 $
—
—
70
—
—
—
11
—
962 $
—
—
40,943
13,303
—
—
—
11
229
118
1,884 $
326,554
42,891
26,373
104,994
52,083
13,756
802,192
1 At December 31, 2019, the Corporation did not have any loans classified as Doubtful or Loss.
Non-
(Dollars in thousands)
Consumer finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Performing Performing
312,388 $
611 $
Total
312,999
NOTE 7: OREO
At December 31, 2020 and 2019, the carrying amount of OREO was $907,000 and $1.10 million, respectively. At both
December 31, 2020 and 2019, OREO was primarily comprised of a property in Midlothian, Virginia previously used by
the Bank as its Bellgrade branch, which was consolidated into a nearby branch in 2019. OREO is otherwise comprised of
residential properties and non-residential properties associated with commercial relationships, and are located primarily in
Virginia. Changes in the balance for OREO are as follows:
(Dollars in thousands)
Balance at the beginning of year, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
2019
1,191
344
(57)
(364)
—
1,114
(207)
907
$
$
303
1,401
—
(521)
8
1,191
(88)
1,103
Year Ended December 31,
Changes in the allowance for OREO losses are as follows:
(Dollars in thousands)
Balance at the beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2019
2020
2018
88 $
176
(57)
207 $
57 $
31
—
88 $
57
—
—
57
Other net noninterest expense applicable to OREO, excluding the provision for losses and gain or loss on disposition, was
$38,000, $34,000 and $26,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
102
NOTE 8: Corporate Premises and Equipment
Major classifications of corporate premises and equipment are summarized as follows:
(Dollars in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment, furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
NOTE 9: Goodwill and Other Intangible Assets
December 31,
2020
8,961 $
45,352
21,278
75,591
(31,459)
44,132 $
2019
7,806
35,933
18,285
62,024
(26,763)
35,261
The carrying amount of goodwill was $25.19 million and $14.43 million at December 31, 2020 and 2019, respectively.
The following table presents the changes in goodwill during the year ended December 31, 2020. There were no changes
in the recorded balance of goodwill during the year ended December 30, 2019.
Community Consumer
(Dollars in thousands)
Balance as of January 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquisition of Peoples Bankshares, Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Banking
Finance
Total
3,702 $
10,766
14,468 $
10,723 $
—
10,723 $
14,425
10,766
25,191
The Corporation had $2.29 million and $912,000 of other intangible assets as of December 31, 2020 and 2019,
respectively. Other intangible assets were recognized in connection with the core deposits acquired from Peoples in 2020
and customer relationships acquired by C&F Wealth Management in 2016. The following table summarizes the gross
carrying amounts and accumulated amortization of other intangible assets:
(Dollars in thousands)
Amortized intangible assets:
December 31,
2020
December 31,
2019
Gross
Gross
Carrying
Amount
Accumulated Carrying
Amortization Amount
Accumulated
Amortization
Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,711 $
1,405
3,116 $
(171)
(654)
(825)
$
$
— $
1,405
1,405 $
—
(493)
(493)
Amortization expense was $332,000, $230,000 and $451,000 for the years ended December 31, 2020, 2019 and 2018,
respectively. Amortization expense for 2019 and 2018 included expense related to core deposit intangibles recognized in
a previous acquisistion, which was fully amortized by December 31, 2019.
Estimated future amortization expense by year as of December 31, 2020 is as follows:
(Dollars in thousands)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
314
298
273
260
237
909
2,291
103
NOTE 10: Leases
The Corporation’s leases comprise primarily leases of real estate and office equipment in which the Corporation is the
lessee. Lease cost for the years ended December 31, 2020 and 2019 is as follows:
(Dollars in thousands)
Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance lease cost:
Amortization of right-of-use asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2020
2019
$
1,616
$
1,681
166
70
219
52
2,123 $
—
—
128
43
1,852
Interest on lease liability cost is included in “Interest expense – Borrowings” and all other lease costs are included in
“Occupancy” on the Consolidated Statements of Income. Variable lease payments primarily represent payments for
common area maintenance related to real estate leases and taxes and fees related to equipment leases that are not included
in base rent payments and changes in lease payments that are adjusted for inflation.
The Corporation adopted ASC 842 effective January 1, 2019. Prior to January 1, 2019, the Corporation measured lease
expense in accordance with ASC Topic 840. During the year ended December 31, 2018, the Corporation recognized lease
expense of $1.68 million.
Certain of the Corporation’s leases contain options to extend the lease term beyond the initial term. Options to extend the
lease term are recognized as part of the Corporation’s lease liabilities and right-of-use assets at the commencement of a
lease to the extent the Corporation is reasonably certain to exercise such options.
The Corporation’s right-of-use assets, lease liabilities, weighted average remaining lease term and weighted average
discount rate of the Corporation’s leases are set forth in the table below.
(Dollars in thousands)
Operating leases:
December 31, December 31,
2020
2019
Right of use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average remaining lease term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases:
Right of use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average remaining lease term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,404 $
2,488
3.0
2.2 %
6,193 $
6,305
19.5
2.0 %
2,785
2,813
3.0
3.2 %
—
—
—
— %
Right of use assets are included in “Other Assets” on the Consolidated Balance Sheets. Operating lease liabilities are
included in “Other Liabilities,” and Finance lease liabilities are included in “Long-term Borrowings” in the Consolidated
Balance Sheets. During the year ended December 31, 2020, the Corporation obtained right-of-use assets in exchange for
lease liabilities in operating leases and finance leases of $1.11 million and $6.36 million, respectively. During the year
ended December 31, 2019, the Corporation obtained right of use assets in exchange for lease liabilities in operating leases
of $1.14 million.
104
Cash paid for amounts included in the measurement of lease liabilities for the years ended December 31, 2020 and 2019
is as follows:
(Dollars in thousands)
Operating leases:
Year Ended December 31,
2020
2019
Operating cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,659
$
1,567
Finance leases:
Operating cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
70
53
1,782 $
—
—
1,567
Maturities of the Corporation’s lease liabilities are as follows:
December 31, 2020
(Dollars in thousands)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
Operating Leases Finance Leases
61
$
329
338
346
355
6,373
7,802
(1,497)
6,305
1,172
670
460
161
122
17
2,602
(114)
2,488 $
NOTE 11: Time Deposits
Time deposits are summarized as follows:
December 31,
(Dollars in thousands)
Certificates of deposit, over $250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125,293 $
Other time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
344,290
$ 469,583 $
2019
109,310
312,746
422,056
Remaining maturities on time deposits are as follows:
(Dollars in thousands)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020
328,215
77,042
28,707
19,454
13,833
2,332
469,583
$
105
NOTE 12: Borrowings
The table below presents selected information on short-term borrowings:
December 31,
(Dollars in thousands)
Balance outstanding at year end1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,455
Maximum balance at any month end during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,481
Average balance for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,737
Weighted average rate for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average rate on borrowings at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,455
$
$
$
0.54 %
0.49 %
$
2020
2019
16,360
17,178
15,533
1.05 %
0.82 %
16,360
1 Consists of repurchase transactions with customers, which generally mature the day following the day sold and are secured by
investment securities.
Long-term borrowings at December 31, 2020 are comprised of $4.00 million of the Corporation’s subordinated notes due
in 2028 (the 2028 Subordinated Notes) and $20.00 million of the Corporation’s subordinated notes due in 2030 (the 2030
Subordinated Notes). The 2028 Subordinated Notes bear interest at a fixed rate of 6.99 percent, and may be redeemed at
the option of the Corporation at any time beginning in April 2023. The 2030 Subordinated Notes bear interest at a fixed
rate of 4.875 percent until September 2025 and at the three month SOFR plus 475.5 basis points thereafter. The 2030
Subordinated Notes may be redeemed at the option of the Corporation at any time beginning in September 2025. The
subordinated notes of the Corporation rank junior to all future senior indebtedness of the Corporation and are structurally
subordinated to all existing and future debt and liabilities of the Corporation and its subsidiaries. These borrowings are
presented in the Consolidated Balance Sheets net of issuance costs and, as applicable, acquisition premium.
C&F Finance has a $50.00 million non-recourse revolving bank line of credit secured by its consumer finance loans. The
interest rate on the revolving bank line of credit, which matures in 2022, floats at the one-month LIBOR rate with a floor
of 30 basis points plus a margin of 200 basis points. There was no outstanding balance on the C&F Finance revolving bank
line of credit at December 31, 2020, and the outstanding balance of $75.03 million at December 31, 2019 was presented
in long-term borrowings in the Consolidated Balance Sheet. The maximum commitment amount was reduced to $50.00
million in 2020 at the request of C&F Finance. C&F Finance pays an unused commitment fee of up to 75 basis points on
the portion of the commitment amount that is not outstanding. The line of credit agreement contains certain covenants
regarding C&F Finance’s capital adequacy, collateral performance, adequacy of the allowance for loan losses and interest
expense coverage. C&F Finance satisfied all such covenants during 2020.
During the year ended December 31, 2020, the Corporation repaid its outstanding revolving bank line of credit balance of
$75.03 million and repaid FHLB advances of $44.50 million using excess cash. The Corporation incurred early debt
repayment charges of $2.20 million in connection with the payoff of the FHLB advances.
The Corporation’s available sources of credit for future borrowings total approximately $475.62 million at
December 31, 2020, which consists of $155.73 million available from the FHLB, $50.00 million on C&F Finance’s
revolving bank line of credit, $124.89 million available from the FRB, $95.00 million under unsecured federal funds
agreements with third party financial institutions and $50.00 million in repurchase lines of credit with third party financial
institutions. Credit available from the FHLB is secured by a blanket floating lien on all qualifying closed-end and
revolving, open-end loans of C&F Bank secured by 1-4 family residential properties. Credit available from the FRB is
secured by liens on specific loans of C&F Bank. Additional loans and securities are available that can be pledged as
collateral for future borrowings from the FRB or the FHLB above the current lendable collateral value, including loans
held for sale.
C&F Financial Statutory Trust I (Trust I), C&F Financial Statutory Trust II (Trust II) and Central Virginia Bankshares
Statutory Trust I (CVBK Trust I) are wholly-owned non-operating subsidiaries of the Corporation, formed for the purpose
of issuing trust preferred capital securities. Collectively, these trusts have issued $25.00 million of trust preferred capital
securities to institutional investors through private placements and $775,000 in common equity that is held by the
106
Corporation. Trust preferred capital securities of $5.00 million issued by CVBK Trust I, $10.00 million issued by Trust
I, and $10.00 million issued by Trust II mature in 2033, 2035 and 2037, respectively, and are redeemable at the
Corporation’s option. Each of the trusts is required to make quarterly distributions to the holders of the securities at a rate
based on the three-month LIBOR plus a spread of between 1.57 percent and 3.15 percent. During 2020, 2019 and 2018,
the Corporation used interest rate swaps in designated cash flow hedges of interest payments on the trust preferred capital
securities to mitigate the effects of changes in interest rates. At December 31, 2020, the effect of the interest rate swaps
was a fixed rate of interest on the securities issued by CVBK Trust I, Trust I and Trust II of 4.64 percent, 3.32 percent and
5.10 percent, respectively. The principal assets of CVBK Trust I, Trust I and Trust II are trust preferred capital notes of
the Corporation of $5.16 million, $10.31 million and $10.31 million, respectively, which have like maturities and like
interest rates to the trust preferred capital securities. The interest payments by the Corporation on the notes will be used
by the trusts to pay the quarterly distributions on the trust preferred capital securities. The trusts are unconsolidated
subsidiaries of the Corporation, and the Corporation’s trust preferred capital notes are presented as liabilities in the
Consolidated Balance Sheets net of acquisition discount, as applicable.
Subject to certain exceptions and limitations, the Corporation may elect from time to time to defer interest payments on
the junior subordinated debt securities, which would result in a deferral of distribution payments on the related capital
securities.
NOTE 13: Equity, Other Comprehensive Income and Earnings Per Share
Equity and Noncontrolling Interest
During the years ended December 31, 2020, 2019 and 2018, the Corporation repurchased 16,422 shares, 86,523 shares
and 21,232 shares of its common stock, respectively, for an aggregate cost of $630,000, $4.39 million and $1.11 million,
respectively, under share repurchase programs authorized by its Board of Directors. Additionally, during the years ended
December 31, 2020, 2019 and 2018, the Corporation withheld 9,670 shares, 9,909 shares and 7,982 shares of its common
stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock.
In 2019, C&F Select LLC, a subsidiary of C&F Mortgage, issued a 49 percent ownership interest to an unrelated investor.
In exchange for this noncontrolling interest in C&F Select LLC, C&F Bank received a note receivable from the investor
for $490,000, which is included in loans 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 $630,000 and $604,000 as of December 31, 2020 and 2019, respectively.
(Dollars in thousands)
Net unrealized gains on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net unrecognized losses on cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrecognized losses on defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accumulated other comprehensive loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2020
4,397 $
(1,367)
(4,985)
(1,955) $
2019
1,560
(69)
(3,740)
(2,249)
Earnings Per Share (EPS)
The components of the Corporation’s EPS calculations are as follows:
(Dollars in thousands)
Net income attributable to C&F Financial Corporation . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding—basic and diluted . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2019
18,859 $
2020
22,117 $
3,648,696
3,450,745
2018
18,020
3,501,221
107
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.
NOTE 14: Income Taxes
Principal components of income tax expense as reflected in the Consolidated Statements of Income are as follows:
(Dollars in thousands)
Current taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended December 31,
2019
2020
2018
7,612 $
(817)
6,795 $
4,728 $
354
5,082 $
3,889
632
4,521
Income tax expense for the years ended December 31, 2020, 2019 and 2018 differed from the federal statutory rate applied
to income before income taxes for the following reasons:
2020
Year Ended December 31,
2019
2018
Amount Percent
(Dollars in thousands)
Income tax at statutory rates . . . . . . . . . . . . . . . . . . $ 6,136
1,449
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
(493)
Tax-exempt interest income . . . . . . . . . . . . . . . . . .
328
Excess compensation . . . . . . . . . . . . . . . . . . . . . . .
Change in tax law . . . . . . . . . . . . . . . . . . . . . . . . . .
(326)
Income from bank-owned life insurance . . . . . . . .
(107)
Investments in qualified housing projects . . . . . . .
(82)
(77)
Share based compensation . . . . . . . . . . . . . . . . . . .
Merger related expenses . . . . . . . . . . . . . . . . . . . . .
29
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(62)
$ 6,795
Amount Percent Amount Percent
21.0 %
2.6
(2.5)
—
—
(0.4)
(0.4)
(0.5)
—
0.3
20.1 %
21.0 % $ 4,734
575
2.9
(574)
(1.9)
—
—
—
—
(89)
(0.6)
(85)
(0.4)
(103)
(0.5)
—
0.4
63
0.3
21.2 % $ 4,521
21.0 % $ 5,026
695
5.0
(453)
(1.7)
—
1.1
—
(1.1)
(149)
(0.4)
(93)
(0.3)
(126)
(0.3)
96
0.1
86
(0.2)
23.2 % $ 5,082
The CARES Act, enacted in March 2020, included a provision that allowed net operating losses generated in years prior
to 2020 to be carried back for up to five tax years. Previously, tax law only allowed for net operating losses to be carried
forward to future tax years. During 2020 the Corporation recognized income tax benefits of $326,000 related to net
operating losses generated by Peoples in 2019, which were able to be applied to years prior to 2018 at higher income tax
rates than the current statutory rate as a result of the CARES Act.
108
The Corporation’s net deferred income taxes totaled $13.56 million and $11.22 million at December 31, 2020 and 2019,
respectively. The tax effects of each type of significant item that gave rise to deferred taxes are:
(Dollars in thousands)
Deferred tax asset
December 31,
2020
2019
Allowances for loan losses and OREO losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,743 $ 8,227
3,247
Nonqualified defined contribution plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
667
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustments related to business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,053
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
863
645
Reserve for indemnification losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
426
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,359
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,511
3,595
1,906
1,716
920
879
779
471
1,364
21,373
Deferred tax liability
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,818)
Right of use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(664)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(972)
Net unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(415)
Defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(423)
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,292)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,555 $ 11,219
(3,164)
(1,868)
(1,272)
(1,169)
(345)
(7,818)
The Corporation files income tax returns in the U.S. federal jurisdiction and several states. With few exceptions, the
Corporation is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior
to 2017.
NOTE 15: Employee Benefit Plans
The Corporation’s subsidiaries maintain defined contribution plans that provide the opportunity for voluntary tax-qualified
deferral to substantially all of its full-time employees who are at least 18 years of age. These plans also provide for
employer contributions as a discretionary or non-discretionary matching contribution and in some cases as a discretionary
profit-sharing contribution to the account of each partipant. The total expense recognized in connection with these
qualified defined contribution plans for 2020, 2019 and 2018 were $2.09 million, $1.52 million and $1.31 million,
respectively.
C&F Bank has a non-contributory, defined benefit pension plan (Cash Balance Plan) for all full-time employees over 21
years of age. Under the Cash Balance Plan, the benefit account for each participant will grow each year with annual pay
credits based on age and years of service and monthly interest credits based on the prior year’s December average yield
on 30-year Treasuries plus 150 basis points. C&F Bank funds pension costs in accordance with the funding provisions of
the Employee Retirement Income Security Act.
The Corporation has a nonqualified deferred compensation plan for certain executives. The plan allows for elective salary
and bonus deferrals. The plan also allows for employer contributions to make up for limitations on covered compensation
imposed by the Internal Revenue Code with respect to qualified plans and to enhance retirement benefits by providing
supplemental contributions from time to time. Expenses under this plan were $465,000, $294,000 and $297,000 in 2020,
2019 and 2018, respectively. Investments for this plan are held in a Rabbi trust. These investments are included in other
assets and the related liability is included in other liabilities.
On December 16, 2014, the Corporation approved an additional compensation benefit for the Corporation’s then Chief
Executive Officer at the time to provide post-retirement medical and dental insurance premiums for him and his spouse
109
for life. There was no expense recognized for this arrangement in 2020 or 2019, and the expense recognized in 2018 was
$88,000. The related liability is included in other liabilities.
The following table summarizes the projected benefit obligations, plan assets, funded status and related assumptions
associated with the Cash Balance Plan based upon actuarial valuations.
(Dollars in thousands)
Change in benefit obligation
December 31,
2020
2019
Projected benefit obligation, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,794
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,603
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
551
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,996
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,301)
Projected benefit obligation, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,643
Change in plan assets
Fair value of plan assets, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amounts recognized as an other asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amounts recognized in accumulated other comprehensive loss
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average assumptions for benefit obligation at valuation date
22,806
2,782
2,000
(1,301)
26,287
1,644
1,644
6,748
(438)
(1,325)
4,985
$ 17,205
1,218
609
2,834
(1,072)
20,794
20,156
3,722
—
(1,072)
22,806
2,012
2,012
5,239
(504)
(995)
3,740
$
$
$
$
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest crediting rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1 %
3.0
5.0
2.9 %
3.0
5.0
The accumulated benefit obligation was $24.64 million and $20.79 million as of the actuarial valuation dates
December 31, 2020 and 2019, respectively. The actuarial loss of $3.00 million on the projected benefit obligation for 2020
is due primarily to a decrease in the discount rate as well as demographic changes in the population.
110
The following table summarizes the components of net periodic benefit cost and related assumptions associated with the
Cash Balance Plan.
(Dollars in thousands)
Components of net periodic benefit cost:
Year Ended December 31,
2019
2020
2018
Service cost, included in salaries and employee benefits . . . . . . . . . . . . . . . . . $ 1,603 $ 1,218 $ 1,232
Other components of net periodic benefit cost:
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net obligation at transition . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized net actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
551
(1,492)
(66)
—
197
609
(1,297)
(68)
—
187
521
(1,413)
(62)
—
125
Other components of net periodic benefit cost, included in other
noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(810)
(569)
(829)
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
793 $
649
403
2020
January 1,
2019
2018
Weighted-average assumptions for net periodic benefit cost
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest crediting rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.9 %
7.3
3.0
5.0
4.0 %
7.3
3.0
5.0
3.3 %
7.3
3.0
5.0
The benefits expected to be paid by the plan in the next ten years are as follows:
(Dollars in thousands)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,059
810
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,560
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,376
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,251
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 – 2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,515
C&F Bank selects the expected long-term rate of return on assets in consultation with its investment advisors and actuary.
This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested
to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation),
for the major asset classes held or anticipated to be held by the trust and for the trust itself. Undue weight is not given to
recent experience, which may not continue over the measurement period. Higher significance is placed on current forecasts
of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose,
the plan is assumed to continue in force and not terminate during the period during which assets are invested. However,
consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust,
and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not
explicitly within periodic costs).
111
C&F Bank’s defined benefit pension plan’s weighted average asset allocations by asset category are as follows:
Mutual funds-fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds-equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2020
2019
37 %
63
*
100 %
38 %
62
*
100 %
* Less than one percent.
The following table summarizes the fair value of the defined benefit plan assets as of December 31, 2020 and 2019. For
more information about fair value measurements, see “Note 20: Fair Value of Assets and Liabilities.”
December 31, 2020
(Dollars in thousands)
Mutual funds-fixed income 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mutual funds-equity 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,726 $
16,561
—
Total pension plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,287 $
— $
—
—
— $
— $
—
—
— $
9,726
16,561
—
26,287
Fair Value Measurements Using
Level 3
Level 2
Level 1
Assets at Fair
Value
(Dollars in thousands)
Mutual funds-fixed income 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mutual funds-equity 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pension plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2019
Fair Value Measurements Using
Level 1
Level 2
Level 3
Assets at Fair
Value
8,744 $
14,062
—
22,806 $
— $
—
—
— $
— $
—
—
— $
8,744
14,062
—
22,806
1 This category includes investments in mutual funds focused on fixed income securities with both short-term and long-
term investments. The funds are valued using the net asset value method in which an average of the market prices for
the underlying investments is used to value the funds.
2 This category includes investments in mutual funds focused on equity securities with a diversified portfolio and
includes investments in large cap and small cap funds, growth funds, international focused funds and value funds. The
funds are valued using the net asset value method in which an average of the market prices for the underlying
investments is used to value the funds.
3 This category comprises cash and short-term cash equivalent funds. The funds are valued at cost which approximates
fair value.
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with
a targeted asset allocation of 40 percent fixed income and 60 percent equities. The investment advisor selects investment
fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the
implementation of the plan’s investment strategy. The investment manager will consider both actively and passively
managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.
It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful to
avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees,
transaction costs and other administrative costs chargeable to the trust.
112
NOTE 16: Related Party Transactions
Loans outstanding to the Corporation’s management, including directors and senior officers and certain of their affiliates,
totaled $2.17 million and $2.26 million at December 31, 2020 and 2019, respectively. For the year ended
December 31, 2020, the Corporation named new directors with loans outstanding at C&F Bank of $6,000, made $53,000
new loan advances to directors and senior officers, and received repayments totaling $148,000. Total deposits of directors
and senior officers and their related interests were $5.81 million and $7.21 million at December 31, 2020 and 2019,
respectively. In the opinion of management, these transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates, collateral and repayment terms, as those prevailing at
the same time for comparable transactions with unrelated persons, and, in the opinion of management and the
Corporation’s Board of Directors, do not involve more than normal risk or present other unfavorable features.
NOTE 17: Share-Based Plans
On April 16, 2013, the Corporation’s shareholders approved the C&F Financial Corporation 2013 Stock and Incentive
Compensation Plan for the grant of equity awards to certain key employees of the Corporation, as well as non-employee
directors (including non-employee regional or advisory directors). The plan authorizes the Corporation to issue equity
awards in the form of stock options, tandem stock appreciation rights, restricted stock, restricted stock units and/or other
stock-based awards. Since the plan’s approval, equity awards have only been issued in the form of restricted stock.
As permitted under the plan, the Corporation awards shares of restricted stock to certain key employees and non-employee
directors. Restricted shares awarded to employees generally vest on the fifth anniversary of the grant date and restricted
shares awarded to non-employee directors generally vest on the third anniversary of the grant date. A summary of the
activity for restricted stock awards for the periods indicated is presented below:
Nonvested at beginning of year . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at end of year . . . . . . . . . . . . . . . . . . . . .
2020
Weighted-
2019
Weighted-
Average
Grant Date
Fair Value
Average
Grant Date
Fair Value
Shares
142,020 $
47,385
(30,550)
(2,910)
155,945
48.88
42.01
39.84
53.46
48.52
Shares
139,455 $
36,115
(32,155)
(1,395)
142,020
45.75
53.75
40.69
51.05
48.88
2018
Weighted-
Average
Grant Date
Fair Value
43.52
52.82
42.41
42.54
45.75
Shares
137,880 $
30,185
(26,450)
(2,160)
139,455
The fair value of shares that vested during the years ended December 31, 2020, 2019 and 2018 were $1.37 million, $1.72
million, and $1.44 million, respectively. Compensation is accounted for using the fair value of the Corporation’s common
stock on the date the restricted shares are awarded. Compensation expense is charged to income ratably over the required
service periods, and was $1.45 million ($981,000 after income taxes) in 2020, $1.47 million ($932,000 after income taxes)
in 2019 and $1.35 million ($872,000 after income taxes) in 2018. As of December 31, 2020, there was $3.76 million of
total unrecognized compensation cost related to restricted stock granted under the plan. This amount is expected to be
recognized through 2025.
NOTE 18: Regulatory Requirements and Restrictions
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are subject to qualitative
judgments by the regulators about components, risk weightings, and other factors. Federal banking regulations also impose
regulatory capital requirements on bank holding companies. Under the small bank holding company policy statement of
113
the FRB, 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.
As of December 31, 2020, the most recent notification from the FDIC categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized under regulations applicable at
December 31, 2020, the Bank was required to maintain minimum total risk-based, Tier 1 risk-based, CET1 risk-based and
Tier 1 leverage ratios as set forth in the table below.
The Corporation’s and the Bank’s actual capital amounts and ratios as of December 31, 2020 and 2019 are presented in
the following table along with regulatory requirements for the Bank and requirements that apply to bank holding companies
that are subject to regulatory capital requirements for bank holding companies. The Corporation’s consolidated capital is
determined under regulations that apply to bank holding companies that are not small bank holding companies. Total risk-
weighted assets at December 31, 2020 for the Corporation were $1.57 billion and for the Bank were $1.55 billion. Total
risk-weighted assets at December 31, 2019 for the Corporation were $1.32 billion and for the Bank were $1.29 billion.
Management believes that, as of December 31, 2020, the Bank met all capital adequacy requirements to which it is subject.
Minimum To Be
Well Capitalized
Under Prompt
(Dollars in thousands)
As of December 31, 2020:
Total Capital (to Risk-Weighted Assets)
Minimum Capital Corrective Action
Requirements
Amount Ratio Amount Ratio Amount Ratio
Provisions
Actual
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 240,060
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
214,151
15.2 %$ 125,947
124,291
13.8
Tier 1 Capital (to Risk-Weighted Assets)
8.0 %
8.0 $ 155,364
N/A N/A
10.0 %
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
196,140
194,487
12.5
12.5
94,460
93,219
6.0
6.0
N/A N/A
8.0
124,291
Common Equity Tier 1 Capital (to Risk-
Weighted Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
171,140
194,487
10.9
12.5
70,845
69,914
4.5
4.5
N/A N/A
6.5
100,987
Tier 1 Capital (to Average Tangible Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
196,140
194,487
9.6
9.6
81,414
80,640
4.0
4.0
N/A N/A
5.0
100,800
As of December 31, 2019:
Total Capital (to Risk-Weighted Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 195,927
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181,369
14.9 % $ 105,544
103,307
14.0
Tier 1 Capital (to Risk-Weighted Assets)
8.0 %
8.0 $ 129,134
N/A N/A
10.0 %
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
179,233
165,021
13.6
12.8
79,158
77,480
6.0
6.0
N/A N/A
8.0
103,307
Common Equity Tier 1 Capital (to Risk-
Weighted Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
154,233
165,021
11.7
12.8
59,369
58,110
4.5
4.5
N/A N/A
6.5
83,937
Tier 1 Capital (to Average Tangible Assets)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
179,233
165,021
11.1
10.3
64,863
64,201
4.0
4.0
N/A N/A
5.0
80,251
114
In addition to the regulatory risk-based capital amounts presented above, the Bank must maintain a capital conservation
buffer of additional capital of 2.5 percent of risk-weighted assets as required by the Basel III Final Rule. At
December 31, 2020, the Bank exceeded the total capital conservation buffer and the tier 1 capital conservation buffer by
328 and 402 basis points, respectively. At December 31, 2019, the Bank exceeded the total capital conservation buffer
and the tier 1 capital conservation buffer by 355 and 428 basis points, respectively.
Between 2003 and 2007, the Corporation’s statutory business trusts issued $25.00 million of aggregate trust preferred
securities. Based on the Corporation’s Tier 1 capital levels, the entire $25.00 million of trust preferred securities was
included in the Corporation’s Tier 1 capital as of December 31, 2020 and 2019. The Corporation’s 2028 Subordinated
Notes, assumed upon the acquisition of Peoples in 2020, and the Corporation’s 2030 Subordinated Notes, issued in 2020,
each qualify for inclusion in Tier 2 capital of the Corporation. In each case, the amount included in regulatory capital with
respect to trust preferred securities or subordinated notes may be reduced as those instruments near maturity.
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by C&F
Bank to the Corporation. The total amount of dividends that may be paid at any date by C&F Bank is generally limited to
the retained earnings of C&F Bank, while other measures of capital adequacy may also restrict the Bank’s ability to declare
dividends.
NOTE 19: 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 $326.98 million at
December 31, 2020 and $256.15 million at December 31, 2019, which does not include IRLCs at the mortgage banking
segment, which are discussed in Note 22.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent
credit risk, was $19.07 million at December 31, 2020 and $16.60 million at December 31, 2019.
The mortgage banking segment sells substantially all of the residential mortgage loans it originates to third-party investors.
As is customary in the industry, the agreements with these investors require the mortgage banking segment to extend
representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment
performance. Under the agreements, the investors are entitled to make loss claims and repurchase requests of the mortgage
banking segment for loans that contain covered deficiencies. The mortgage banking segment has obtained early payment
default recourse waivers for a significant portion of its business. Recourse periods for early payment default for the
remaining investors vary from 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or
underwriting error do not have a stated time limit. The mortgage banking segment maintains an allowance for
indemnifications that represents management’s estimate of losses that are probable of arising under these recourse
provisions. As performance data for loans that have been sold is not made available to the mortgage banking segment by
the investors, the 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
115
been sold in the secondary market. The following table presents the changes in the allowance for indemnification losses
for the periods presented:
(Dollars in thousands)
Allowance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for indemnification losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
2019
2,475 $
881
—
3,356 $
2,541
—
(66)
2,475
Year Ended December 31,
NOTE 20: 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 LHFS.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of
certain assets recorded at fair value on a recurring basis in the financial statements.
Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value
measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At
December 31, 2020 and 2019, the Corporation’s entire investment securities portfolio was comprised of securities
available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third
party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security
valuation are ICE Data Services (ICE) and Thomson Reuters Pricing Service (TRPS). Each source provides opinions,
known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are
partially based on available market data, including prices for similar instruments in active markets and prices for identical
assets in markets that are not active. ICE provides evaluated prices for the Corporation's obligations of states and political
subdivisions category of securities. ICE uses proprietary pricing models and pricing systems, mathematical tools and
judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that
116
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 December 31, 2020, the fair value of the Corporation’s investment
in small business investment companies, based on net asset value, was $1.48 million. Investments in small business
investment company funds measured at net asset value are not presented in the tables below related to fair value
measurements. Changes in fair value of small business investment company funds resulted in the recognition of unrealized
losses of $62,000 for the year ended December 31, 2020.
Loans held for sale. Fair value of the Corporation’s LHFS is based on observable market prices for similar instruments
traded in the secondary mortgage loan markets in which the Corporation conducts business. The Corporation’s portfolio
of LHFS is classified as Level 2.
Derivative asset - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the
price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the
observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis.
All of the Corporation’s IRLCs are classified as Level 2.
Derivative asset/liability – interest rate swaps on loans. The Corporation recognizes interest rate swaps at fair value.
The Corporation has contracted with a third party vendor to provide valuations for these interest rate swaps using standard
valuation techniques. All of the Corporation’s interest rate swaps on loans are classified as Level 2.
Derivative asset/liability - cash flow hedges. The Corporation recognizes cash flow hedges at fair value. The fair value
of the Corporation’s cash flow hedges is determined using the discounted cash flow method. All of the Corporation’s cash
flow hedges are classified as Level 2.
Derivative asset/liability – forward sales of TBA securities. The Corporation recognizes forward sales of TBA securities
at fair value. The fair value of forward sales of TBA securities is based on prices obtained from market makers and live
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.
117
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis.
(Dollars in thousands)
Assets:
Securities available for sale
December 31, 2020
Fair Value Measurements Using Assets/Liabilities at
Level 1 Level 2
Level 3
Fair Value
U.S. government agencies and corporations . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . .
Corporate and other debt securities . . . . . . . . . . . . . . . . . .
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives
— $
—
—
—
—
—
48,282 $
123,714
102,805
11,588
286,389
214,266
IRLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps on loans . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
— $ 513,422 $
4,582
8,185
— $
—
—
—
—
—
—
—
— $
Liabilities:
Derivatives
Interest rate swaps on loans . . . . . . . . . . . . . . . . . . . . . . . . $
Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward sales of TBA securities . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
—
— $
8,185 $
1,882
47
10,114 $
— $
—
—
— $
48,282
123,714
102,805
11,588
286,389
214,266
4,582
8,185
513,422
8,185
1,882
47
10,114
(Dollars in thousands)
Assets:
Securities available for sale
December 31, 2019
Fair Value Measurements Using Assets/Liabilities at
Level 1 Level 2
Level 3
Fair Value
U.S. government agencies and corporations . . . . . . . . . . $
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . .
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives
IRLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps on loans . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
—
—
—
21,440 $
86,585
81,708
189,733
90,500
—
—
— $ 283,778 $
1,083
2,462
— $
—
—
—
—
—
—
— $
Liabilities:
Derivatives
Interest rate swaps on loans . . . . . . . . . . . . . . . . . . . . . . . . $
Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward sales of TBA securities . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
—
— $
2,462 $
145
25
2,632 $
— $
—
—
— $
21,440
86,585
81,708
189,733
90,500
1,083
2,462
283,778
2,462
145
25
2,632
118
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Corporation may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring
basis in accordance with U.S. GAAP. The following describes the valuation techniques and inputs used by the Corporation
in determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the financial statements.
Impaired loans. The Corporation does not record loans held for investment at fair value on a recurring basis. However,
there are instances when a loan is considered impaired and an allowance for loan losses is established. The Corporation
measures impairment either based on the fair value of the loan using the loan’s obtainable market price or the fair value of
the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the
loan’s effective interest rate, which is not a fair value measurement. The Corporation maintains a valuation allowance to
the extent that this measure of the impaired loan is less than the recorded investment in the loan. When an impaired loan
is measured at fair value based solely on observable market prices or a current appraisal without further adjustment for
unobservable inputs, the Corporation records the impaired loan as a nonrecurring fair value measurement classified as
Level 2. However, if based on management’s review, additional discounts to observed market prices or appraisals are
required or if observable inputs are not available, the Corporation records the impaired loan as a nonrecurring fair value
measurement classified as Level 3.
Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather
than the market rate of interest, are not recorded at fair value and are therefore excluded from fair value disclosure
requirements.
OREO. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less
estimated costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Corporation obtains from
independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the
foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time
the properties have been held, and our ability and intent with regard to continued ownership of the properties. The
Corporation may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations
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 December 31, 2020
there were no impaired loans that were measured at fair value.
(Dollars in thousands)
Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2020
Fair Value Measurements Using Assets at Fair
Level 1 Level 2 Level 3
Value
— $
— $
— $
— $
72 $
72 $
72
72
December 31, 2019
Fair Value Measurements Using Assets at Fair
Level 1 Level 2 Level 3
Value
— $
—
— $
— $
—
— $
102 $
268
370 $
102
268
370
(Dollars in thousands)
Impaired loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
119
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 December 31, 2020 and 2019:
(Dollars in thousands)
At December 31, 2020:
Fair Value Valuation Technique(s) Unobservable Inputs
Range (Weighted Average)1
Fair Value Measurements
Other real estate owned, net . . . . . $
72
Appraisals
Total . . . . . . . . . . . . . . . . . . . . . . . . $
72
At December 31, 2019:
Impaired loans, net . . . . . . . . . . . . . $
102
Appraisals
Other real estate owned, net . . . . .
268
Appraisals
75%-80% (79%)
30% (30%)
33% - 75% (37%)
Discount to reflect
current market
conditions and
estimated selling
costs
Discount to reflect
current market
conditions and
estimated selling
costs
Discount to reflect
current market
conditions and
estimated selling
costs
Total . . . . . . . . . . . . . . . . . . . . . . . . $
370
1 The weighted average of unobservable inputs is calculated based on the relative asset fair values.
Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those
financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or
nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair
value of the Corporation. The Corporation uses the exit price notion in calculating the fair values of financial instruments
not measured at fair value on a recurring basis.
120
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.
(Dollars in thousands)
Financial assets:
Carrying
Fair Value Measurements at December 31, 2020 Using Total Fair
Value
Level 1
Level 2
Level 3
Value
Cash and short-term investments . . . $
Securities available for sale . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . .
Derivatives
86,669 $
286,389
1,313,250
214,266
IRLC . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps on loans . . . . .
Bank-owned life insurance . . . . . . . .
Accrued interest receivable . . . . . . .
4,582
8,185
20,205
8,103
86,669
—
—
—
—
—
—
8,103
Financial liabilities:
Demand and savings deposits . . . . . . 1,282,590
469,583
Time deposits . . . . . . . . . . . . . . . . . .
69,864
Borrowings . . . . . . . . . . . . . . . . . . . .
Derivatives
Cash flow hedges . . . . . . . . . . . .
Interest rate swaps on loans . . . . .
Forward sales of TBA securities .
Accrued interest payable . . . . . . . . .
1,882
8,185
47
1,109
1,282,590
—
—
—
—
—
1,109
$
—
286,389
—
214,266
$
— $
—
1,308,569
—
86,669
286,389
1,308,569
214,266
4,582
8,185
20,205
—
—
474,154
71,119
1,882
8,185
47
—
—
—
—
—
4,582
8,185
20,205
8,103
—
—
—
1,282,590
474,154
71,119
—
—
—
—
1,882
8,185
47
1,109
(Dollars in thousands)
Financial assets:
Carrying
Value
Fair Value Measurements at December 31, 2019 Using Total Fair
Level 1
Level 2
Level 3
Value
$
165,433
—
—
—
—
189,733
—
90,500
$
— $
—
1,082,783
—
165,433
189,733
1,082,783
90,500
165,433 $
Cash and short-term investments . . . $
Securities available for sale . . . . . . .
189,733
Loans, net . . . . . . . . . . . . . . . . . . . . . 1,082,318
90,500
Loans held for sale . . . . . . . . . . . . . .
Derivatives
IRLC . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps on loans . . . . .
Bank-owned life insurance . . . . . . . .
Accrued interest receivable . . . . . . .
1,083
2,462
16,044
6,776
Financial liabilities:
—
—
—
6,776
Demand and savings deposits . . . . . .
Time deposits . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . .
Derivatives
Cash flow hedges . . . . . . . . . . . .
Interest rate swaps on loans . . . . .
Forward sales of TBA securities .
Accrued interest payable . . . . . . . . .
869,194
422,056
161,170
869,194
—
—
145
2,462
25
1,291
—
—
—
1,291
1,083
2,462
16,044
—
—
423,605
154,964
145
2,462
25
—
—
—
—
—
—
—
—
—
—
—
1,083
2,462
16,044
6,776
869,194
423,605
154,964
145
2,462
25
1,291
The Corporation assumes interest rate risk (the risk that general interest rate levels will change) in the normal course of
operations. As a result, the fair values of the Corporation’s financial instruments will change when interest rate levels
change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match
maturities of assets and liabilities to the extent believed necessary to balance minimizing interest rate risk and increasing
net interest income in current market conditions. However, borrowers with fixed rate obligations are less likely to prepay
in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are
121
receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do
so in a falling rate environment. Management monitors interest rates, maturities and repricing dates of assets and liabilities
and attempts to manage interest rate risk by adjusting terms of new loans, deposits and borrowings and by investing in
securities with terms that mitigate the Corporation’s overall interest rate risk.
NOTE 21: Business Segments
The Corporation operates in a decentralized fashion in three principal business segments: community banking, mortgage
banking and consumer finance. Revenues from community banking operations consist primarily of interest earned on loans
and investment securities and fees earned on deposit accounts and debit card interchange activity. Previously, the
community banking segment was referred to as the retail banking segment. Mortgage banking operating revenues consist
principally of gains on sales of loans in the secondary market, mortgage banking fee income related to loan originations,
and interest earned on mortgage loans held for sale. Revenues from consumer finance consist primarily of interest earned
on purchased retail installment sales contracts.
C&F Wealth Management derives revenues from offering wealth management services and insurance products through
third-party service providers. The Corporation’s revenues and expenses are comprised primarily of interest expense
associated with the Corporation’s trust preferred capital notes, general corporate expenses, and changes in the value of the
rabbi trust and deferred compensation liability related to its nonqualified deferred compensation plan. The results of C&F
Wealth Management and the Corporation are not significant to the Corporation on a consolidated basis and are included
in “Other.”
Year Ended December 31, 2020
Eliminations Consolidated
Community Mortgage Consumer
Banking
Other
Finance
Banking
4,954 $ 38,949 $
25,792
9,985
40,731
—
492
39,441
62,173 $
3,489
10,843
76,505
(Dollars in thousands)
Revenues:
Interest income . . . . . . . . . . . . . . . . . . . . . . $
Gains on sales of loans . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . .
Total operating income . . . . . . . . . . . . . . . .
Expenses:
6,470
Provision for loan losses . . . . . . . . . . . . . . .
8,726
Interest expense . . . . . . . . . . . . . . . . . . . . . .
8,716
Salaries and employee benefits . . . . . . . . . .
175
Depreciation and amortization . . . . . . . . . . .
4,937
Other noninterest expenses . . . . . . . . . . . . .
29,024
Total operating expenses . . . . . . . . . . . . . . .
10,417
Income (loss) before income taxes . . . . . . .
2,805
Income tax expense (benefit) . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $
7,612 $ (1,283) $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,950,514 $ 239,417 $ 314,746 $ 44,934 $
— $
Capital expenditures . . . . . . . . . . . . . . . . . . $
4,600
10,630
30,774
3,561
21,358
70,923
5,582
155
10
1,579
13,908
281
9,825
25,603
15,128
4,392
—
1,611
4,270
172
673
6,726
(1,822)
(539)
— $
—
4,904
4,904
5,427 $ 10,736 $
3,346 $
6,528 $
354 $
(9,163) $
(57)
(30)
(9,250)
96,913
29,224
26,194
152,331
—
(9,164)
—
—
—
(9,164)
(86)
(18)
(68) $
11,080
13,382
57,668
4,189
36,793
123,112
29,219
6,795
22,424
(463,301) $ 2,086,310
10,228
— $
122
Year Ended December 31, 2019
Eliminations Consolidated
Community Mortgage Consumer
Banking
Other
Finance
Banking
2,699 $ 41,389 $
10,603
5,103
18,405
—
565
41,954
59,465 $
—
11,392
70,857
(Dollars in thousands)
Revenues:
Interest income . . . . . . . . . . . . . . . . . . . . . . $
Gains on sales of loans . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . .
Total operating income . . . . . . . . . . . . . . . .
Expenses:
8,155
Provision for loan losses . . . . . . . . . . . . . . .
10,169
Interest expense . . . . . . . . . . . . . . . . . . . . . .
Salaries and employee benefits . . . . . . . . . .
8,668
196
Depreciation and amortization . . . . . . . . . . .
Other noninterest expenses . . . . . . . . . . . . .
5,338
32,526
Total operating expenses . . . . . . . . . . . . . . .
9,428
Income (loss) before income taxes . . . . . . .
2,560
Income tax expense (benefit) . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $
6,868 $ (1,706) $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,468,627 $ 102,467 $ 314,431 $ 30,299 $
67 $
Capital expenditures . . . . . . . . . . . . . . . . . . $
—
1,618
5,965
246
5,467
13,296
5,109
1,336
3,773 $
360
10,181
28,231
3,242
17,091
59,105
11,752
1,837
9,915 $
—
1,135
4,337
182
1,056
6,710
(2,357)
(651)
4 $
—
4,349
4,353
2,270 $
246 $
123 $
(8,547) $
—
—
(8,547)
95,010
10,603
21,409
127,022
—
(8,547)
—
—
—
(8,547)
—
—
— $
8,515
14,556
47,201
3,866
28,952
103,090
23,932
5,082
18,850
(258,392) $ 1,657,432
2,706
— $
Year Ended December 31, 2018
Eliminations Consolidated
Community Mortgage Consumer
Banking
Other
Finance
Banking
—
738
43,527
55,019 $
—
11,029
66,048
2,018 $ 42,789 $
7,841
4,015
13,874
(Dollars in thousands)
Revenues:
Interest income . . . . . . . . . . . . . . . . . . . . . . $
Gains on sales of loans . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . .
Total operating income . . . . . . . . . . . . . . . .
Expenses:
Provision for loan losses . . . . . . . . . . . . . . .
10,906
Interest expense . . . . . . . . . . . . . . . . . . . . . .
9,413
Salaries and employee benefits . . . . . . . . . .
8,542
Depreciation and amortization . . . . . . . . . . .
211
Other noninterest expenses . . . . . . . . . . . . .
5,303
Total operating expenses . . . . . . . . . . . . . . .
34,375
Income (loss) before income taxes . . . . . . .
9,152
Income tax expense (benefit) . . . . . . . . . . . .
2,460
6,692 $ (1,208) $
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,351,932 $ 51,226 $ 296,876 $ 16,461 $
4 $
Capital expenditures . . . . . . . . . . . . . . . . . . $
100
6,842
26,632
3,014
16,869
53,457
12,591
1,958
10,633 $
—
904
5,298
269
4,803
11,274
2,600
697
1,903 $
—
1,152
1,531
177
1,693
4,553
(1,802)
(594)
6 $
—
2,745
2,751
3,178 $
133 $
59 $
(7,284) $
—
—
(7,284)
92,548
7,841
18,527
118,916
—
(7,284)
—
—
—
(7,284)
—
—
— $
11,006
11,027
42,003
3,671
28,668
96,375
22,541
4,521
18,020
(195,084) $ 1,521,411
3,374
— $
During the year ended December 31, 2020, the Corporation recorded merger related expenses of $1.40 million ($1.13
million after income taxes), in connection with its acquisition of Peoples, of which $1.30 million ($1.03 million after
income taxes) was allocated to the community banking segment and recorded as $119,000 of salaries and benefits expense,
$879,000 of other noninterest expense and a loss on disposal of equipment of $298,000 included in other noninterest
income. The remainder was recorded as other noninterest expense at the holding company. During the year ended
December 31, 2019, the Corporation recorded merger related expenses of $709,000 ($653,000 after income taxes) in
connection with its acquisition of Peoples, of which $236,000 ($196,000 after income taxes) was allocated to the
community banking segment and recorded as other noninterest expense, and the remainder was recorded as other
noninterest expense at the holding company.
The community banking segment extends two warehouse lines of credit to the mortgage banking segment, providing a
portion of the funds needed to originate mortgage loans. The community banking segment charges the mortgage banking
segment interest at the daily FHLB advance rate plus a spread ranging from 50 basis points to 175 basis points. The
community banking segment also provides the consumer finance segment with a portion of the funds needed to purchase
123
loan contracts by means of variable rate notes that carry interest at one-month LIBOR plus 200 basis points, with a floor
of 3.5 percent, and fixed rate notes that carry interest at rates ranging from 2.4 percent to 8.0 percent. The community
banking segment acquires certain residential real estate loans from the mortgage banking segment at prices similar to those
paid by third-party investors. These transactions are eliminated to reach consolidated totals. Certain corporate overhead
costs incurred by the community banking segment are not allocated to the mortgage banking, consumer finance and other
segments.
NOTE 22: 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 December 31, 2020, the
Corporation has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate
borrowings for periods that end between June 2024 and June 2029.
All interest rate swaps were entered into with counterparties that met the Corporation’s credit standards and the agreements
contain collateral provisions protecting the at-risk party. The Corporation believes that the credit risk inherent in these
derivative contracts is not significant.
Unrealized gains or losses recorded in other comprehensive income related to cash flow hedges are reclassified into
earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging
instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain
or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest
payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest
rate swaps are reported in interest expense. The Corporation does not expect any unrealized losses related to cash flow
hedges to be reclassified into earnings in the next twelve months.
Loan swaps. The Bank also enters into interest rate swaps with certain qualifying commercial loan customers to meet
their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer
counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the
customer pays a fixed rate of interest and the Corporation receives a floating rate. These back-to-back loan swaps are
derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated
Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because
of the offsetting terms of swaps with borrowers and swaps with dealer counterparties.
Mortgage banking. The mortgage banking segment enters into IRLCs with customers to originate loans for which the
interest rates are determined (or “locked”) prior to funding. The mortgage banking segment is exposed to interest rate risk
through fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans are sold in the
secondary market. The mortgage banking segment mitigates this interest rate risk by either: (1) entering into forward sales
contracts with investors at the time that interest rates are locked for mortgage loans to be delivered on a best efforts basis
or (2) entering into forward sales contracts for TBA securities until it can enter into forward sales contracts with investors
124
for mortgage loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities
are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated
Balance Sheets. Changes in the fair value of mortgage banking derivatives are recorded as a component of gains on sales
of loans.
At 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.
At December 31, 2019, the mortgage banking segment had $63.35 million of IRLCs and $65.77 million of unpaid principal
on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $129.12
million in mortgage loans. Also at December 31, 2019, the mortgage banking segment had $11.72 million of IRLCs and
$21.98 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using forward
sales of $24.00 million of TBA securities and mandatory-delivery forward sales contracts for $6.73 million in mortgage
loans.
The following tables summarize key elements of the Corporation’s derivative instruments other than forward sales of
mortgage loans. The fair values of forward sales of mortgage loans were not material to the consolidated financial
statements of the Corporation at December 31, 2020 and 2019.
(Dollars in thousands)
Cash flow hedges:
December 31, 2020
Notional
Amount
Assets
Liabilities
Interest rate swap contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000 $
— $
1,882
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matched interest rate swaps with counterparty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,753
84,753
Mortgage banking contracts:
IRLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward sales of TBA securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
198,632
8,000
8,185
—
4,582
—
—
8,185
—
47
(Dollars in thousands)
Cash flow hedges:
December 31, 2019
Notional
Amount
Assets
Liabilities
Interest rate swap contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000 $
— $
145
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Matched interest rate swaps with counterparty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,266
74,266
Mortgage banking contracts:
IRLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward sales of TBA securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,073
24,000
2,454
8
1,083
—
8
2,454
—
25
The Corporation and the Bank are required to maintain cash collateral with dealer counterparties for interest rate swap
relationships in a loss position. At December 31, 2020 and 2019, $9.92 million and $2.49 million, respectively, of cash
collateral was maintained with dealer counterparties and was included in “Other assets” in the Consolidated Balance
Sheets.
1
125
NOTE 23: Holding Company Condensed Financial Information
The following tables present the condensed balance sheets as of December 31, 2020 and 2019 and the condensed
statements of comprehensive income and cash flows for the years ended December 31, 2020, 2019 and 2018 for the
Corporation on a standalone basis:
(Dollars in thousands)
Condensed Balance Sheets
Assets
December 31,
2020
2019
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,464
17,687
175,254
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 262,100 $ 204,405
21,272 $
22,680
218,148
Liabilities and shareholders’ equity
Trust preferred capital notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,281
—
14,326
164,798
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 262,100 $ 204,405
25,316 $
24,093
18,886
193,805
Year Ended December 31,
2019
2018
(Dollars in thousands)
Condensed Statements of Comprehensive Income
Interest expense on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividends received from C&F Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of C&F Bank. . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,411 $
(1,611) $
8,746
15,373
2,041
(2,432)
22,117
294
2020
(1,152)
(1,135) $
6,312
22,632
13,228
(1,697)
45
2,108
(413)
(3,049)
18,020
18,859
2,423
(2,785)
21,282 $ 15,235
126
Year Ended December 31,
2019
2018
(Dollars in thousands)
Condensed Statements of Cash Flows
Operating activities:
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,141 $ 20,674
Investing activities:
Acquisition of Peoples Bankshares, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swap collateral, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,084)
(1,710)
(11,794)
—
(150)
(150)
2020
Financing activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,272 $ 11,464 $
—
(4,385)
(5,131)
140
(9,376)
11,148
316
19,924
(1,061)
(5,546)
144
13,461
9,808
11,464
$
5,801
—
—
—
—
(1,105)
(4,931)
144
(5,892)
(91)
407
316
NOTE 24: Other Noninterest Expenses
The following table presents the significant components in the Consolidated Statements of Income line “Noninterest
Expenses-Other.”
(Dollars in thousands)
Data processing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking loan processing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and advertising expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunication expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel and educational expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
$ 8,041
1,444
3,044
1,601
1,331
1,231
7,928
Total other noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,146 $ 24,906 $ 24,620
Year Ended December 31,
2019
$ 8,958
1,666
3,265
1,781
1,328
1,329
6,579
2020
$ 10,916
3,235
3,046
1,663
1,455
1,153
8,678
The table above includes merger related expenses for the year ended December 31, 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. The table above includes merger related expenses for the year ended December 31, 2019 of
approximately $709,000, of which $50,000 was included in data processing fees, $614,000 was included in professional
fees, $1,000 was included in telecommunication expenses and $44,000 was included in all other noninterest expenses.
There were no merger related expenses for the year ended December 31, 2018.
127
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
C&F Financial Corporation
Toano, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of C&F Financial Corporation and its subsidiaries (the
Corporation) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income,
equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the
consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results
of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013, and our report dated March 3, 2021 expressed an unqualified opinion on the effectiveness
of the Corporation’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an
opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Corporation in accordance with U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of
the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements
that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses – Qualitative Factors
As described in Note 1 – Summary of Significant Accounting Policies and Note 6 – Allowance for Loan Losses to the
consolidated financial statements, the Corporation maintains an allowance for loan losses that management believes will
be adequate to absorb probable losses inherent in the loan portfolio. For loans that are not specifically identified for
impairment, management determines the allowance for loan losses based on historical loss experience adjusted for
qualitative factors. Qualitative adjustments to the historical loss experience are established by applying a loss percentage
to the loan segments established by management based on their assessment of shared risk characteristics within groups of
similar loans.
128
Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying
the quality of the loan portfolio. Management evaluates qualitative factors by loan segment, primarily considering current
economic conditions, changes in concentrations, nature and volume of loans, delinquency trends, collateral values, and
lending policies and procedures, and may also consider the experience and tenure of the lending team, loan review system,
and other external factors. Qualitative factors contribute significantly to the allowance for loan losses. Management
exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We
identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved
especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective
estimates.
The primary audit procedures we performed to address this critical audit matter included:
• Testing the effectiveness of controls over the evaluation of qualitative factors, including management's review of the
data inputs used as the basis for the allocations and management's review and approval of the reasonableness of the
assumptions used to develop the qualitative adjustments.
• Substantively testing management’s process, including evaluating their judgments and assumptions for developing
the qualitative factors, which included:
o Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.
o Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors.
o Evaluating the qualitative factors for directional consistency and for reasonableness.
o Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative
factors.
Business Combinations – Fair Value of Acquired Loans
As described in Note 1 – Summary of Significant Accounting Policies and Note 3 – Business Combination to the
consolidated financial statements, the Corporation completed its acquisition of Peoples Bankshares, Inc. on January 1,
2020 for total consideration valued at approximately $22.2 million. The transaction was accounted for as a business
combination using the acquisition method of accounting. Accordingly, assets acquired and liabilities assumed were
recorded at fair value on the acquisition date, including acquired loans. As disclosed by management, determining the
acquired fair values, particularly in relation to the loan portfolio, is inherently subjective and involves significant judgment
regarding the methods and assumptions used to estimate fair value. In determining the fair value of loans acquired,
management must determine whether or not acquired loans have evidence of credit deterioration at acquisition, the amount
and timing of cash flows expected to be collected, and market discount rates, among other assumptions. Changes in these
assumptions could have a significant impact on the fair value of the loans acquired and the amount of goodwill recorded.
We identified the acquisition date fair value of acquired loans as a critical audit matter as auditing this estimate is especially
complex and requires subjective auditor judgment. Auditing this estimate required a high level of judgment in evaluating
management’s identification of loans with evidence of credit deterioration, the need for specialized skill in development
and application of subjective assumptions in estimated cash flows, and the size of the acquired loan portfolio.
129
The primary audit procedures we performed to address this critical audit matter included the following:
• Testing the effectiveness of controls over the Corporation’s fair value measurement process, which included:
o
o Management’s review of the work performed by a third-party valuation specialist, including review of the
specialist’s key assumptions and inputs in estimating fair value, as well as the completeness and accuracy of the
data utilized in forming the estimates.
Identification of loans with credit deterioration at the acquisition date and the valuation of those loans.
• Substantively testing management’s process, including the use of our own valuation specialist to assess the
Corporation’s methods and significant assumptions utilized in determining the fair value of the acquired loan portfolio
and evaluating whether the assumptions used were reasonable with respect to market participant views and other
factors.
• Testing the completeness and accuracy of loans determined to have credit deterioration at acquisition and evaluating
the reasonableness of the criteria utilized by management in making the determination.
• Testing the accuracy of the data utilized in the development of acquisition date fair values by confirming, on a sample
basis, select data.
Assessment of the Carrying Value of Goodwill
As described in Note 1 – Summary of Significant Accounting Policies and Note 9 – Goodwill and Other Intangible Assets
to the consolidated financial statements, the Corporation recognized goodwill in connection with past business
combinations and its acquisition of Peoples Bankshares, Inc. on January 1, 2020. Goodwill is reported at both the
community banking and the consumer finance segments. The Corporation’s goodwill is not amortized but is subject to
annual tests for impairment, or more frequently, if certain impairment indicators exist. The impairment test compares the
fair value of the reporting unit with its carrying amount to determine whether impairment exists. Management’s
measurements of the community banking and consumer finance segments involves significant judgment regarding the
methods and key assumptions used to estimate fair value.
We identified the goodwill impairment assessment of the community banking and consumer finance segments as a critical
audit matter. Auditing this estimate required a high degree of auditor judgment in performing procedures over the key
assumptions, which included the selection of valuation techniques and valuation multiples, discount rate, control premium,
and expectations of future earnings, among others. In addition, auditor judgment was required to evaluate the overall fair
value of each reporting unit, which incorporated multiple approaches.
The primary procedures we performed to address the critical audit matter included:
•
•
Testing the effectiveness of controls over the Corporation’s goodwill impairment analysis, which involved
management’s review of the work performed by a third-party valuation specialist, including their application of
subjective assumptions as well as the completeness and accuracy of data utilized in the fair value determination by
the third-party specialist.
Substantively testing management’s impairment analysis, including the use of our own valuation specialist, to
evaluate the Corporation’s fair value methodology, the significant assumptions used, the accuracy and completeness
of inputs, and the overall conclusions reached.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Corporation’s auditor since 1997.
Richmond, Virginia
March 3, 2021
130
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Corporation’s management, including the Corporation’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and
procedures (as defined in Rule 13a-15(e) of 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 December 31, 2020 to ensure that information required to be
disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms and that such information is accumulated and
communicated to the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls and
procedures will detect or uncover every situation involving the failure of persons within the Corporation or its subsidiaries
to disclose material information required to be set forth in the Corporation’s periodic reports.
Management’s Report on Internal Control over Financial Reporting. Management of the Corporation is also
responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of
December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on our
assessment, we believe that, as of December 31, 2020, the Corporation’s internal control over financial reporting was
effective based on those criteria.
The effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2020 has been
audited by Yount, Hyde & Barbour, P.C., the independent registered public accounting firm who also audited the
Corporation’s consolidated financial statements included in this Annual Report on Form 10-K. Yount, Hyde & Barbour,
P.C.’s attestation report on the Corporation’s internal control over financial reporting appears on the following page.
Changes in Internal Controls. There were no changes in the Corporation’s internal control over financial reporting
during the Corporation’s fourth quarter ended December 31, 2020 that have materially affected, or are reasonably likely
to materially affect, the Corporation’s internal control over financial reporting.
131
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
C&F Financial Corporation
Toano, Virginia
Opinion on the Internal Control Over Financial Reporting
We have audited C&F Financial Corporation’s (the Corporation’s) internal control over financial reporting as of December
31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Corporation maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated
statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended
December 31, 2020 of the Corporation and its subsidiaries, and our report dated March 3, 2021 expressed an unqualified
opinion.
Basis for Opinion
The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Corporation in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial
statements.
132
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Yount, Hyde & Barbour, P.C.
Richmond, Virginia
March 3, 2021
133
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect to the directors of the Corporation is contained in the 2021 Proxy Statement under the
caption, “Proposal One: Election of Directors,” and is incorporated herein by reference. The information regarding the
Section 16(a) reporting requirements of the directors and executive officers is contained in the 2021 Proxy Statement under
the caption, “Delinquent Section 16(a) Reports,” and is incorporated herein by reference. The information concerning
executive officers of the Corporation is included after Item 4 of this Form 10-K under the caption, “Information about Our
Executive Officers.” The information regarding the Corporation’s Audit Committee is contained in the 2021 Proxy
Statement under the caption “Audit Committee Report” and is incorporated herein by reference.
The Corporation has adopted a Code of Business Conduct and Ethics (Code) that applies to its directors, executives
and employees including the principal executive officer, principal financial officer, principal accounting officer and
controller, or persons performing similar functions. This Code is posted on our Internet website at http://www.cffc.com
under “Investor Relations.” The Corporation will provide a copy of the Code to any person without charge upon written
request to C&F Financial Corporation, c/o Secretary, 3600 La Grange Parkway, Toano, Virginia 23168. The Corporation
intends to provide any required disclosure of any amendment to or waiver of the Code that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on
http://www.cffc.com under “Investor Relations” promptly following the amendment or waiver. The Corporation may elect
to disclose any such amendment or waiver in a report on Form 8-K filed with the SEC either in addition to or in lieu of the
website disclosure. The information contained on or connected to the Corporation’s Internet website is not incorporated
by reference in this report and should not be considered part of this or any other report that we file or furnish to the SEC.
The Corporation provides an informal process for security holders to send communications to its Board of Directors.
Security holders who wish to contact the Board of Directors or any of its members may do so by addressing their written
correspondence to C&F Financial Corporation, Board of Directors, c/o Corporate Secretary, 3600 La Grange Parkway,
Toano, Virginia 23168. Correspondence directed to an individual board member will be referred, unopened, to that
member. Correspondence not directed to a particular board member will be referred, unopened, to the Chairman of the
Board.
ITEM 11.
EXECUTIVE COMPENSATION
The information contained in the 2021 Proxy Statement under the captions, “Compensation Committee Interlocks
and Insider Participation,” “Compensation Policies and Practices as They Relate to Risk Management,” “Executive
Compensation” and “Compensation Committee Report,” and the compensation tables that follow the Compensation
Committee Report in the 2021 Proxy Statement are incorporated herein by reference. The information regarding director
compensation contained in the 2021 Proxy Statement under the caption, “Director Compensation,” is incorporated herein
by reference.
ITEM 12.
AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the 2021 Proxy Statement under the caption, “Security Ownership of Certain
Beneficial Owners and Management,” is incorporated herein by reference.
The information contained in the 2021 Proxy Statement under the caption, “Equity Compensation Plan
Information,” is incorporated herein by reference.
134
ITEM 13.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
The information contained in the 2021 Proxy Statement under the caption, “Interest of Management in Certain
Transactions,” is incorporated herein by reference. The information contained in the 2021 Proxy Statement under the
caption, “Director Independence,” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the 2021 Proxy Statement under the captions, “Principal Accountant Fees” and “Audit
Committee Pre-Approval Policy,” is incorporated herein by reference.
135
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
PART IV
2.1
3.1
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)
Amended and Restated Articles of Incorporation of C&F Financial Corporation, effective March 7, 1994 (incorporated
by reference to Exhibit 3.1 to Form 10-Q filed November 8, 2017)
3.1.1
Amendment to Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit 3.1.1 to
Form 8-K filed January 14, 2009)
3.2
4.1
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)
Description of Securities Registered under Section 12(b) of the Securities Exchange Act of 1934 (incorporated by
reference to Exhibit 4.1 to Form 10-K filed March 3, 2020)
4.2
Form of Subordinated Note (incorporated by reference to Exhibit 4.1 to Form 8-K filed September 30, 2020)
Certain instruments relating to trust preferred securities not being registered have been omitted in accordance with
Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and
Exchange Commission upon its request.
*10.1
*10.3
Amended and Restated Change in Control Agreement dated December 30, 2008 between C&F Financial Corporation and
Larry G. Dillon (incorporated by reference to Exhibit 10.1 to Form 10-K filed March 9, 2009)
Amended and Restated Change in Control Agreement dated December 30, 2008 between C&F Financial Corporation and
Thomas F. Cherry (incorporated by reference to Exhibit 10.3 to Form 10-K filed March 9, 2009)
*10.3.1 Amendment to Amended and Restated Change in Control Agreement dated March 1, 2012 between C&F Financial
Corporation and Thomas F. Cherry (incorporated by reference to Exhibit 10.3.1 to Form 10-K filed March 5, 2012)
*10.4
C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Executives (incorporated by reference to
Exhibit 10.4 to Form 10-K filed March 8, 2018)
*10.4.1 Amendment to C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Executives (As Restated
Effective January 1, 2018), effective January 1, 2018
*10.4.2 Amendment to C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Executives (As Restated
Effective January 1, 2018), effective November 1, 2018
*10.4.3 Amendment to C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Executives (As Restated
Effective January 1, 2018), effective January 1, 2020
*10.4.4 Adoption Agreement for C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Executives (As
Restated Effective January 1, 2018) (Updated Form January 1, 2020)
*10.5
C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Directors (incorporated by reference to
Exhibit 10.5 to Form 10-K filed March 8, 2018)
*10.5.1 Amendment to C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Directors (As Restated
Effective January 1, 2018), effective January 1, 2018
136
*10.5.2 Amendment to C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Directors (As Restated
Effective January 1, 2018), effective November 1, 2018
*10.5.3 Adoption Agreement for C&F Financial Corporation Non-Qualified Deferred Compensation Plan for Directors (As
Restated Effective January 1, 2018) (Updated Form January 1, 2020)
*10.9
C&F Financial Corporation Management Incentive Plan dated June 13, 2019 (incorporated by reference to Exhibit 10.9
to Form 8-K filed June 14, 2019)
*10.12
Employment Agreement (Amended and Restated) between C&F Mortgage Corporation and Bryan McKernon, dated
January 1, 2013 (incorporated by reference to Exhibit 10.12 to Form 10-K filed March 5, 2013)
*10.14 Amended and Restated Change in Control Agreement dated December 30, 2008 between C&F Financial Corporation and
Bryan McKernon (incorporated by reference to Exhibit 10.14 to Form 10-K filed March 9, 2009)
*10.14.1 Amendment to Amended and Restated Change in Control Agreement dated March 1, 2012 between C&F Financial
Corporation and Bryan McKernon (incorporated by reference to Exhibit 10.14.1 to Form 10-K filed March 5, 2012)
10.19
Amended and Restated Loan and Security Agreement by and between Wells Fargo Preferred Capital, Inc., various
financial institutions and C&F Finance Company dated as of August 25, 2008 (incorporated by reference to Exhibit 10.19
to Form 8-K filed August 28, 2008)
10.19.1
First Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Preferred Capital,
Inc., various financial institutions and C&F Finance Company dated as of July 1, 2010 (incorporated by reference to
Exhibit 10.19.1 to Form 10-Q filed August 6, 2010)
10.19.2
Second Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A.,
various financial institutions and C&F Finance Company dated as of September 17, 2012 (incorporated by reference to
Exhibit 10.19.2 to Form 10-Q filed November 8, 2012)
10.19.3 Third Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A.,
various financial institutions and C&F Finance Company dated as of November 12, 2013 (incorporated by reference to
Exhibit 10.19.3 to Form 10-K filed March 7, 2014)
10.19.4
Fourth Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A.,
various financial institutions and C&F Finance Company dated as of September 2, 2015 (incorporated by reference to
Exhibit 10.19.4 to Form 10-Q filed November 6, 2015)
10.19.5
Fifth Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A.,
various financial institutions and C&F Finance Company dated as of November 1, 2016 (incorporated by reference to
Exhibit 10.19.5 to Form 10-Q filed November 7, 2016)
10.19.6
Sixth Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A.,
various financial institutions and C&F Finance Company dated as of June 28, 2017 (incorporated by reference to Exhibit
10.19.6 to Form 10-Q filed August 8, 2017)
10.19.7
Seventh Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A.,
various financial institutions and C&F Finance Company dated as of December 21, 2017 (incorporated by reference to
Exhibit 10.19.7 to Form 10-K filed March 8, 2018)
10.19.8 Eighth Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A.,
various financial institutions and C&F Finance Company dated as of April 30, 2019 (incorporated by reference to Exhibit
10.19.8 to Form 10-Q filed May 8, 2019)
10.19.9 Ninth Amendment to Amended and Restated Loan and Security Agreement by and among Wells Fargo Bank, N.A.,
various financial institutions and C&F Finance Company dated as of May 8, 2020 (incorporated by reference to Exhibit
10.19.9 to Form 10-Q filed May 13, 2020)
137
*10.29 C&F Financial Corporation 2013 Stock and Incentive Compensation Plan (incorporated by reference to Appendix A to
the Corporation's Proxy Statement filed March 15, 2013)
*10.29.1 Form of C&F Financial Corporation Restricted Stock Agreement for Chief Executive Officer (for awards granted between
2016 and 2018) (approved December 15, 2015) (incorporated by reference to Exhibit 10.29.1 to Form 10-K filed March
4, 2016)
*10.29.2 Form of C&F Financial Corporation Restricted Stock Agreement for Key Employees (approved December 15, 2015)
(incorporated by reference to Exhibit 10.29.2 to Form 10-K filed March 4, 2016)
*10.29.3 Form of C&F Financial Corporation Restricted Stock Agreement for Non-Employee Directors (approved December 15,
2015) (incorporated by reference to Exhibit 10.29.3 to Form 10-K filed March 4, 2016)
*10.33 Change in Control Agreement dated October 9, 2012 between C&F Financial Corporation and John Anthony Seaman
(incorporated by reference to Exhibit 10.33 to Form 10-K filed March 7, 2014)
*10.34 Change in Control Agreement dated August 5, 2015 between C&F Financial Corporation and S. Dustin Crone
(incorporated by reference to Exhibit 10.34 to Form 10-Q filed August 7, 2015)
*10.35 Change in Control Agreement dated May 5, 2016 between C&F Financial Corporation and Jason E. Long (incorporated
by reference to Exhibit 10.35 to Form 10-Q filed May 9, 2016)
*10.36
Incentive Compensation Opportunity for years beginning in 2019 for Larry G. Dillon (incorporated by reference to Item
5.02 of Form 8-K filed June 14, 2019)
10.37
Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 10.1 on Form 8-K filed September
30, 2020)
21
23
Subsidiaries of the Registrant
Consent of Yount, Hyde & Barbour, P.C.
31.1
Certification of CEO pursuant to Rule 13a-14(a)
31.2
Certification of CFO pursuant to Rule 13a-14(a)
32
Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350
101 INS
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its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are
contained within Exhibit 101
*
Indicates management contract
ITEM 16.
FORM 10-K SUMMARY
None.
138
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
C&F FINANCIAL CORPORATION
(Registrant)
Date: March 3, 2021
By:
/S/ THOMAS F. CHERRY
Thomas F. Cherry
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/S/ THOMAS F. CHERRY
Thomas F. Cherry, President,
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 3, 2021
/S/ JASON E. LONG
Jason E. Long,
Senior Vice President, Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
Date: March 3, 2021
/S/ DR. JULIE R. AGNEW
Dr. Julie R. Agnew, Director
/S/ J. P. CAUSEY JR.
J. P. Causey Jr., Director
Date: March 3, 2021
Date: March 3, 2021
/S/ LARRY G. DILLON
Larry G. Dillon, Executive Chairman
Date: March 3, 2021
/S/ AUDREY D. HOLMES
Audrey D. Holmes, Director
/S/ JAMES H. HUDSON III
James H. Hudson III, Director
/S/ ELIZABETH R. KELLEY
Elizabeth R. Kelley, Director
/S/ JAMES T. NAPIER
James T. Napier, Director
/S/ C. ELIS OLSSON
C. Elis Olsson, Director
/S/ D. ANTHONY PEAY
D. Anthony Peay, Director
/S/ PAUL C. ROBINSON
Paul C. Robinson, Director
/S/ GEORGE R. SISSON III
George R. Sisson III, Director
/S/ DR. JEFFERY O. SMITH
Dr. Jeffery O. Smith, Director
Date: March 3, 2021
Date: March 3, 2021
Date: March 3, 2021
Date: March 3, 2021
Date: March 3, 2021
Date: March 3, 2021
Date: March 3, 2021
Date: March 3, 2021
Date: March 3, 2021
139
The following graph compares the yearly cumulative total shareholder return on the common stock of C&F
Financial Corporation (the Corporation) with the yearly cumulative total shareholder return on stock included in (1) the
NASDAQ Composite Index and (2) a group of peer commercial financial institutions identified by the Corporation (the
Peer Group). The Peer Group consists of entities that meet the following criteria: (i) publicly-traded commercial financial
institution headquartered in Virginia, Kentucky, Maryland, North Carolina, South Carolina, Tennessee and West Virginia
and (ii) total assets as of December 31, 2019 of between $1 billion and $3.6 billion. For 2020, the Peer Group consisted of
24 publicly-traded commercial financial institutions with a median asset size of $1.8 billion based on total assets as of
December 31, 2019. The following financial institutions were included in the Peer Group: American National Bankshares
Inc. (VA), CapStar Financial Holdings, Inc. (TN), Community Bankers Trust Corporation (VA), The Community
Financial Corporation (MD), First Community Bancshares, Inc. (VA), First Community Corporation (SC), First United
Corporation (MD), FVCBankcorp, Inc. (VA), HomeTrust Bancshares, Inc. (NC), Howard Bancorp, Inc. (MD), Limestone
Bancorp, Inc. (KY), MainStreet Bancshares, Inc. (VA), MVB Financial Corp. (WV), National Bankshares, Inc. (VA), Old
Point Financial Corporation (VA), Peoples Bancorp of North Carolina, Inc. (NC), Premier Financial Bancorp, Inc. (WV),
Reliant Bancorp, Inc. (TN), Select Bancorp, Inc. (NC), Shore Bancshares, Inc. (MD), SmartFinancial, Inc. (TN), Southern
First Bancshares, Inc. (SC), Southern National Bancorp of Virginia, Inc. (VA), Summit Financial Group, Inc. (WV).
The graph below assumes $100 invested on December 31, 2015 in the Corporation, the NASDAQ Composite Index
and the Peer Group, and shows the total return on such an investment as of December 31, 2020, assuming reinvestment of
dividends. There can be no assurance that the Corporation’s stock performance in the future will continue with the same
or similar trends depicted in the graph below.
C&F Financial Corporation
Total Return Performance
C&F Financial Corporation
NASDAQ Composite Index
Peer Group
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
Index
C&F Financial Corporation
NASDAQ Composite Index
Peer Group
12/31/15
100.00
100.00
100.00
12/31/16
131.72
108.87
140.19
12/31/17
157.35
141.13
156.77
12/31/18
148.15
137.12
138.11
12/31/19
158.55
187.44
166.12
12/31/20
111.17
271.64
129.09
Period Ending
C&F Financial Corporation is a one-bank holding company providing a
full range of banking services to individuals and businesses through
its subsidiaries.
C&F Bank (Citizens and Farmers Bank) offers quality banking services
to individuals and businesses through 31 retail banking locations
in Virginia.
C&F Mortgage Corporation originates and sells residential mortgages
throughout Virginia, West Virginia, Maryland, North Carolina and
South Carolina. Through its subsidiary, C&F Mortgage also provides
residential appraisal services.
C&F Finance Company specializes in new and used indirect auto,
marine and recreational vehicle lending in select areas of the following
states: Alabama, Colorado, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, North
Carolina, Ohio, Pennsylvania, Tennessee, South Carolina, Texas,
Virginia and West Virginia.
C&F Wealth Management Corporation provides a full range of
securities brokerage, life and health insurance, and investment
services to individuals and businesses through C&F Bank’s 31 retail
banking locations in Virginia.
Visit cffc.com for full listing of locations.
Investor Relations &
Financial Statements
C&F Financial Corporation’s Annual Report on Form 10-K and
quarterly reports on Form 10-Q, as filed with the Securities and
Exchange Commission, may be obtained without charge by visiting
the Corporation’s website at cffc.com.
Copies of these documents can also be obtained without charge
upon written request. Requests for this or other financial information
about C&F Financial Corporation should be directed to:
Jason E. Long
Chief Financial Officer, C&F Financial Corporation
P.O. Box 391, West Point, VA 23181
Stock Listing
Current market quotations for the common stock of C&F Financial
Corporation are available under the symbol CFFI.
Stock Transfer Agent
American Stock Transfer & Trust Company, LLC
serves as transfer agent for the Corporation.
You may write them at:
6201 15th Avenue, Brooklyn, NY 11219
telephone them toll-free at: 800.937.5449
or visit their website at: astfinancial.com
cffc.com
757.741.2201
3600 La Grange Parkway
Toano, Virginia 23168
O p p o r t u n i t y l E x p a n s i o n l G r o w t h
2020
Annual Report