CFFI · Read the filing

ITEM 1A.RISK FACTORS

Investments in the Company’s common stock involve risk. In addition to the other information set forth in this Report on Form 10-K, including the information addressed under “Cautionary Statement Regarding Forward-Looking Statements,” investors in the Company’s common stock should carefully consider the factors discussed below. The following discussion highlights the risks that we believe are material to the Company, but the following discussion does not necessarily include all risks that we may face, and an investor in the Company’s common stock should not interpret the disclosure of a risk in the following discussion to state or imply that the risk has not already materialized. These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations, and capital position, and could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, in which case the trading price of the Company’s common stock could decline. Additionally, investors should not interpret the disclosure of a risk to imply that the risk has not already materialized.

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; a deterioration in the value of collateral for loans made by our various business segments; and changes in the fair value of financial instruments held by the Corporation or its subsidiaries.

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 throughout eastern and central 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 credit-worthy 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.

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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 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.

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, which may result in losses to investors who purchased residential mortgage loans originated by C&F Mortgage and sold in the secondary market, especially if accompanied by declines in the value of residential real estate securing those loans. This may result in potential repurchase or indemnification obligations for C&F Mortgage. 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

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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, 2021, 50.9 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, 2021, 22.8 percent of our loan portfolio consisted of consumer finance loans that provide automobile financing, primarily 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 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 while financial markets expect interest rates to increase during 2022 as the FOMC policy stance shifts toward addressing inflationary pressures in the economy, expectations for interest rates remain historically low. Longer-term market interest rates, including yields on U.S. treasury bonds, have also remained below historical levels. 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.

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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, general-purpose reloadable prepaid cards, or in other types of assets, including crypto currencies or other digital assets. 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.

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, and includes firms that attract customers primarily through digital and online products which may offer greater convenience to customers than traditional banking products and services. 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.

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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 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,

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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 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 or impair our ability to implement our business strategy effectively and efficiently, which could materially adversely affect our business.

The Corporation or any of its subsidiaries is a defendant from time to time in a variety of litigation and other actions.

The Corporation or any of its subsidiaries may be involved from time to time in a variety of litigation arising out of its business, and the Corporation operates in a legal and regulatory environment that exposes it to potential significant litigation risk. The Corporation’s insurance may not cover all claims that may be asserted against it in legal or administrative actions or costs that it may incur defending such actions, and any claims asserted against it, regardless of merit or eventual outcome, may harm the Corporation’s reputation. Should the ultimate judgments or settlements and/or

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costs incurred in any litigation exceed any applicable insurance coverage, they could have a material adverse effect on the Corporation’s financial condition and results of operation for any period.

Risk Factors Related to the COVID-19 Pandemic

The Corporation’s results of operations and financial condition may be adversely affected by the COVID-19 pandemic.

The outbreak of the 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 may have had or may 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 initially responded to the pandemic in ways that resulted in a significant disruption of economic activity, and the businesses of many of our customers have been adversely impacted, which could result in adverse impacts on our results of operations.

Although the scope, duration and full effects of the pandemic are evolving and cannot be fully known at this time, consequences of the pandemic have included and may include further market volatility, lower interest rates, disrupted trade and supply chains, increased unemployment, rising prices, inflation and reduced economic activity. The period of recovery from the negative economic effects of the pandemic cannot be predicted and may be protracted. The effects of the pandemic on our borrowers has been mitigated by loan payment deferral programs and government stimulus or relief efforts, such as the PPP. However, as these programs have largely ended, signs of credit deterioration that were masked or obscured may emerge, and the Corporation can give no assurance that loan performance or net charge-offs will continue at the levels experienced in 2021 and 2020.

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 and severity of the COVID-19 pandemic, the acceptance and continued effectiveness of vaccines and treatments for COVID-19, the effects of the pandemic on our customers and vendors, the short- and long-term health impacts of the pandemic, and how quickly and to what extent normal economic and operating conditions can resume. If the severity of the COVID-19 pandemic worsens, additional actions may be taken by federal, state, and local governments, or public behavior may change in response to evolving circumstances, to mitigate its effects. 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 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.

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.

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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.

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.

Risks Related to Owning the Corporation’s Common Stock

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

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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.

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, 25 are owned by the community banking segment, 6 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 19 loan production offices, of which 3 in Virginia are located in C&F Bank branches and 16 are leased from nonaffiliates, including: 11 in Virginia, 1 in Maryland, 2 in North Carolina, 1 in South Carolina and 1 in West Virginia.

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The consumer finance segment’s headquarters and its loan and administrative functions and staff are located in Richmond, Virginia, in offices that are owned. The consumer finance segment also has an office in a building owned by C&F Bank that also houses a branch of C&F Bank.

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.

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INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Name (Age)Present Position Business ExperienceDuring Past Five Years

PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 February 28, 2022 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 $50.33.

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 stock, the Corporation’s Board of Directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors.

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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 2020 Repurchase Program). The 2020 Repurchase Program expired on November 30, 2021. As of November 30, 2021, the Corporation made aggregate common stock repurchases of 151,538 shares for an aggregate cost of $7.5 million under the 2020 Repurchase Program.

The Corporation’s Board of Directors authorized a program, effective December 1, 2021, to repurchase up to $10.0 million of the Corporation’s common stock through November 30, 2022 (the 2021 Repurchase Program). Repurchases under the 2021 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, 2021, the Corporation has made aggregate common stock repurchases of 1,106 shares at an aggregate cost of $56,000 under the 2021 Repurchase Program.

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

Maximum Number

(or Approximate

Total Number of Dollar Value) of

Shares Purchased as Shares that May Yet

Part of Publicly Be Purchased

Shares Purchased1 per Share Programs Programs

The following graph compares the yearly cumulative total shareholder return on the common stock of 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, 2020 of between $1 billion and $3.6 billion. For 2021, the Peer Group consisted of 22 publicly-traded commercial financial institutions with a median asset size of $1.8 billion based on total assets as of December 31, 2020. The following financial institutions were included in the Peer Group: American National Bankshares Inc. (VA), Blue Ridge Bankshares, Inc. (VA), CapStar Financial Holdings, Inc. (TN), The Community Financial Corporation (MD), First Community Bancshares, Inc. (VA), First Community Corporation (SC), First United Corporation (MD), FVCBankcorp, Inc. (VA), 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), Partners Bancorp, Inc. (MD), Peoples Bancorp of North Carolina, Inc. (NC), Primis Financial Corporation (VA), Reliant Bancorp, Inc. (TN), Shore Bancshares, Inc. (MD), SmartFinancial, Inc. (TN), Southern First Bancshares, Inc. (SC), Summit Financial Group, Inc. (WV).

The graph below assumes $100 invested on December 31, 2016 in the Corporation, the NASDAQ Composite Index and the Peer Group, and shows the total return on such an investment as of December 31, 2021, 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.

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Period Ending

ITEM 6.RESERVED

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following table presents selected financial performance highlights for the periods indicated:

TABLE 1: Financial Performance Highlights

(Dollars in thousands, except for per share data) Year Ended December 31,

Net Income (Loss):

Earnings per share - basic and diluted $ 7.95 $ 6.06 $ 5.47

Adjusted earnings per share - basic and diluted1 $ 8.20 $ 6.06 $ 5.66

Adjusted return on average equity1 15.22 % 12.54 % 12.44 %

Return on average assets 1.34 % 1.14 % 1.20 %

Adjusted return on average assets1 1.38 % 1.14 % 1.25 %

Consolidated net income for the Corporation was $29.1 million in 2021, or $7.95 per share assuming dilution, compared to $22.4 million in 2020, or $6.06 per share assuming dilution, and $18.9 million in 2019, or $5.47 per share assuming dilution. The Corporation’s ROE and ROA were 14.77 percent and 1.34 percent, respectively, for 2021,

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compared to 12.54 percent and 1.14 percent, respectively, for 2020 and 12.02 percent and 1.20 percent, respectively, for 2019.

The Corporation uses adjusted net income, which is a non-GAAP measure of financial performance, to provide meaningful information about operating performance by excluding the effects of certain items that management does not expect to have an ongoing impact on consolidated net income. Adjusted net income for 2021, 2020 and 2019 excludes the effects of charges related to pension settlement accounting, a gain upon sale of a pool of purchased credit impaired (PCI) loans, charges related to early repayment of borrowings, merger related expenses incurred in connection with the Corporation’s acquisition of Peoples Bankshares, Incorporated (Peoples), branch consolidation activity, and changes in tax law. Excluding the effects of these items, adjusted net income for 2021 was $30.0 million, or $8.20 per share, compared to $22.4 million, or $6.06 per share, for 2020 and $19.5 million, or $5.66 per share, for 2019. Adjusted ROE and adjusted ROA were 15.22 percent and 1.38 percent, respectively, for 2021, compared to 12.54 percent and 1.14 percent, respectively, for 2020 and 12.44 percent and 1.25 percent, respectively, for 2019.

Consolidated net income and earnings per share increased 29.9 percent and 31.2 percent, respectively, for 2021, compared to 2020. Adjusted net income and adjusted earnings per share increased 33.8 percent and 35.3 percent, respectively, for 2021, compared to 2020. The increase in consolidated net income and adjusted net income for 2021 compared to 2020 is due primarily to higher net income of the community banking segment and consumer finance segment, partially offset by lower net income at the mortgage banking segment. The increase in earnings per share and adjusted earnings per share for 2021 compared to 2020 is due primarily to higher net income and fewer shares outstanding, primarily as a result of share repurchases.

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

Key factors affecting comparisons of consolidated net income for the years ended December 31, 2021 and 2020 are as follows. Comparisons are to the prior year unless otherwise stated.

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● In 2020, the Corporation recorded merger related expenses of $1.4 million.

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 was 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.

Capital Management and Dividends

Total equity was $211.0 million at December 31, 2021, compared to $194.5 million at December 31, 2020. Capital growth resulted primarily from earnings for the year ended December 31, 2021, which was partially offset by share repurchases and cash dividends during 2021. Under regulatory capital standards, the Corporation’s tier I capital and total capital ratios at December 31, 2021 were 13.0 percent and 15.8 percent, respectively, compared to 12.5 percent and 15.2 percent, respectively, at December 31, 2020.

The Corporation’s Board of Directors continued its historical practice of paying dividends in 2021. For the year ended December 31, 2021, the Corporation declared dividends of $1.58 per share. Annual dividends per share increased 3.9 percent over dividends of $1.52 per share declared in 2020. 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.

In November 2020, the Board of Directors of the Corporation authorized a program, effective November 17, 2020, to repurchase up to 365,000 shares of the Corporation’s common stock through November 30, 2021 (the 2020 Repurchase Program). During the year ended December 31, 2021, the Corporation repurchased $7.2 million of its common stock under the 2020 Repurchase Program. At the expiration of the 2020 Repurchase Program, the Corporation had made aggregate common stock repurchases of 151,538 shares for an aggregate cost of $7.5 million under that program.

On November 16, 2021, the Board of Directors of the Corporation authorized a new program, effective December 1, 2021, to repurchase up to $10.0 million of the Corporation’s common stock through November 30, 2022 (the 2021 Repurchase Program). Repurchases under the 2021 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. During the year ended December 31, 2021, the Corporation repurchased 1,106 shares, or $56,000, of its common stock under the 2021 Repurchase Program.

At December 31, 2021, the book value per share of the Corporation’s common stock was $59.32, and tangible book value per share, a non-GAAP measure, was $51.66, compared to $52.80 and $45.32, respectively, at December 31, 2020. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for information about non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.

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

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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). There were no merger related expenses in the year ended December 31, 2021.

2022 Outlook

Management’s overall outlook for 2022 is positive as a result of the continued successes of our diversified business strategy and initiatives underway at each of our business segments; however, we will continue to face numerous ongoing challenges in 2022, including the COVID-19 pandemic, economic uncertainty and inflation, cyber security risks and increased competition in our markets due to increased adoption of digital platforms and the impact of data-driven commerce. The following additional factors could influence our financial performance in 2022:

CRITICAL ACCOUNTING ESTIMATES

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.

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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. In evaluating the level of the allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. Under alternative assumptions that we considered in developing our estimate of an allowance that will be adequate to absorb probable losses inherent in the loan portfolio at December 31, 2021, our estimate of the allowance varied between $36 million and $41 million.

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 deterioration in the financial condition of the borrower. For more information see the section titled “Asset Quality” within this 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 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

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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 last evaluation of goodwill at the community banking segment and the consumer finance segment, which was the annual evaluation in the fourth quarter of 2021, the Corporation concluded that no impairment existed based on an assessment of qualitative factors.

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, 2021, 2020 and 2019. Loans include loans held for sale. Loans placed on a nonaccrual status are included in the balances and are included in the computation of yields, but had no material effect. Accretion 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 26 basis points and 18 basis points to the yields on community banking segment loans and total loans, respectively, and 13 basis points to both the yield on interest earning assets and net interest margin for the year ended December 31, 2021, compared to 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, and 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. The yield on loans includes, with respect to PPP loans, interest at a note rate of one percent as well as net deferred origination fees that are amortized based on the contractual maturity of the related loan or accelerated into interest income upon repayment of the loan. Accretion of net PPP origination fees contributed approximately 39 basis points and 27 basis points to the yields on community banking segment loans and total loans, respectively, and 20 basis points to both the yield on interest earning assets and net interest margin for the year ended December 31, 2021, compared to approximately 16 basis points and 11 basis points to the yields on community banking segment loans and total loans, respectively, and 9 basis points to both the yield on interest earning assets and net interest margin for the year ended December 31, 2020. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans

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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 2: Average Balances, Income and Expense, Yields and Rates

Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/

Assets

Securities:

Loans:

Liabilities and Equity

Interest-bearing deposits:

Borrowings:

Other liabilities 50,929 51,406 33,364

Interest rate spread 4.06 % 4.36 % 5.18 %

Net interest margin 4.26 % 4.65 % 5.52 %

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.

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TABLE 3: Rate-Volume Recap

Increase (Decrease) Total Increase (Decrease) Total

Due to Increase Due to Increase

(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease)

Interest income:

Loans:

Securities:

Interest expense:

Interest-bearing deposits:

Savings accounts (20) 24 4 (29) 30 1

Borrowings:

Repurchase agreements (27) 40 13 34 (81) (47)

Net interest income, on a taxable-equivalent basis, for 2021 increased to $85.9 million, compared to $84.2 million for 2020, primarily as a result of lower cost of deposits, higher accretion of net PPP origination fees and using deposit growth to fund higher average balances of loans and securities and repayment of borrowings, partially offset by lower yields on interest earning assets. The yield on interest-earning assets and cost of interest-bearing liabilities decreased by 72 basis points and 42 basis points, respectively, for 2021, compared to 2020. Average earning assets grew $207.2 million, or 11.5 percent, in 2021 compared to 2020, and net interest margin decreased 39 basis points to 4.26 percent in 2021, compared to 4.65 percent in 2020. The net interest margin decline for 2021 as compared to 2020 was due primarily to (1) lower average yields on loans and other earning assets and (2) growth in lower yielding securities and cash reserves outpacing loan growth, partially offset by (1) lower average cost of deposits (including growth in noninterest-bearing deposits) and (2) using lower cost deposits to fund growth in loans and securities and repay borrowings.

Average loans, which includes both loans held for investment and loans held for sale, increased $30.6 million to $1.51 billion for the year ended December 31, 2021, compared to 2020. Average loans held for investment at the community banking segment increased $41.6 million, or 4.2 percent, for 2021, compared to 2020. Average loans held for investment at the community banking segment included $60.5 million and $59.7 million of average balances of loans originated under the PPP for 2021 and 2020, respectively. The remaining increase in average loans outstanding at the community banking segment for 2021 compared to 2020 was due primarily to growth in the commercial real estate segment of the loan portfolio. Average loans held for investment at the consumer finance segment increased $26.6 million, or 8.6 percent, for 2021, compared to 2020 due to higher average balances of marine and RV loans, due to the continued expansion of the consumer finance segment’s purchases of those loan contracts, and higher average balances of non-prime automobile loans, due to higher loan originations resulting from greater demand for used automobiles and higher loan amounts. Average loans at the mortgage banking segment, which consist primarily of loans held for sale, decreased $37.6 million, or 22.0 percent, for 2021, compared to 2020, as a result of lower mortgage loan production volume and reducing the average holding period for loans held for sale, in 2021, compared to 2020, due to lower volume and increased capacity for the processing and sale of loans.

The overall yield on loans decreased 32 basis points to 5.86 percent for 2021, compared to 2020, due primarily to lower average yields at the consumer finance and community banking segments, partially offset by changes in the

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composition of the loan portfolio, as growth in higher-yielding loans at the consumer finance segment outpaced growth in lower-yielding loans at the community banking segment. The community banking segment average loan yield decreased 26 basis points to 4.49 percent for 2021, compared to 2020, due primarily to lower market interest rates, especially on commercial real estate loans, and lower interest income on PCI loans, partially offset by higher accretion of net PPP origination fees. 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 origination fees that are amortized based on the contractual maturity of the related loan or accelerated into interest income upon repayment of the loan. Net PPP origination fees recognized in 2021 were $4.1 million, compared to $1.6 million in 2020, and there were unrecognized net deferred PPP origination fees at December 31, 2021 of $679,000, which are expected to be recognized in 2022. The recognition of interest income on PCI loans, which were acquired in connection with past mergers and acquisitions, is based on management’s expectation of future payments of principal and interest, which are inherently uncertain. Earlier than expected repayments of certain PCI loans resulted in the recognition of additional interest income during the years ended December 31, 2021 and 2020. Interest income recognized on PCI loans was $2.5 million for the year ended December 31, 2021 and $3.0 million for the year ended December 31, 2020. The consumer finance segment average loan yield decreased 135 basis points to 11.30 percent for 2021, compared to 2020, due to purchases of loan contracts at lower yields than the portfolio average yield, partially as a result of lower interest rates for non-prime automobile loans and the consumer finance segment continuing to pursue loan contracts of higher credit quality, including prime marine and RV loans. The mortgage banking segment average loan yield decreased 2 basis points to 2.88 percent, as mortgage interest rates decreased throughout 2020 (although mortgage interest rates also began to rise in 2021).

Average securities available for sale increased $96.5 million for 2021, compared to 2020, due primarily to higher purchases of securities. The average yield on the securities portfolio on a taxable-equivalent basis decreased 66 basis points for 2021, compared to 2020, due to purchases of securities in 2020 and 2021 at lower average yields relative to the average yield of the portfolio as a whole, increased calls of securities that were issued during periods of higher market interest rates and accelerated amortization of premiums on mortgage-backed securities as a result of increased prepayment activity.

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, increased $80.1 million during 2021, compared to 2020, due primarily to excess liquidity resulting from deposit growth and decreases in loans held for sale. The average yield on these overnight funds decreased 62 basis points for 2021, compared to 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, and increased the interest rate to 0.15 percent by the end of 2021.

Average money market, savings and interest-bearing demand deposits increased $145.8 million for 2021, compared to 2020, and average time deposits decreased $41.4 million for 2021, compared to 2020. Average noninterest-bearing demand deposits increased $125.0 million for 2021, compared to 2020. Higher average deposit balances are due primarily to growth in consumer and business deposits primarily as a result of new accounts and liquidity from government stimulus programs. The average cost of interest-bearing deposits decreased 40 basis points for 2021, compared to 2020, due primarily to lower rates on time deposits and a shift in composition toward non-time deposits. Offered rates on interest-bearing deposit accounts were reduced in response to changes in market interest rates beginning in March 2020. While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity. Rates on outstanding time deposits continued to decrease during 2021 as accounts at higher rates matured.

Average borrowings decreased $46.2 million for 2021, compared to 2020, due primarily to the repayment of long-term borrowings in 2020, partially offset by the issuance of $20.0 million of subordinated notes by the Corporation and increases in balances of repurchase agreements with commercial deposit customers. The average cost of borrowings increased 61 basis points during 2021 compared to 2020, due primarily to the higher cost of the subordinated notes relative to the borrowings that were repaid.

The Corporation believes that it may be challenging to maintain net interest margin at its current level based on the effects of (1) continued pressure on loan yields at the community banking segment and consumer finance segment related

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to the current environment of low interest rates and competition for loans, (2) the temporary effect on loan yields of recognition of net PPP origination fees, (3) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment (4) lower accretion of purchase discounts on loans related to acquisitions, which is included in yields on loans and (5) lower mortgage loan production and therefore lower average loans held for sale at the mortgage banking segment. However, if market interest rates rise to a meaningful degree in 2022, as some financial markets predict, the Corporation may benefit from higher yields on certain interest earning assets, which would be expected to outpace any increases in the cost of interest bearing liabilities.

Discussion of net interest income for the year ended December 31, 2019 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, 2020, which was filed with the SEC on March 3, 2021, and is incorporated herein by reference.

NONINTEREST INCOME

TABLE 4: Noninterest Income

Year Ended December 31,

Service charges on deposit accounts 3,718 3,357 3,923

Wealth management services income, net 2,761 2,618 2,029

Mortgage lender services income 2,492 2,176 390

Total noninterest income decreased $5.4 million, or 10.0 percent, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease in noninterest income was due primarily to decreases in gains on sales of loans and mortgage banking fee income, partially offset by (1) increased debit card interchange income and service charges on deposit accounts at the community banking segment, (2) increased mortgage lender services income primarily as a result of new customers at the mortgage banking segment (3) a decrease in asset write-downs, included in other income, net, at the community banking segment and (4) higher income recognized in connection with investments in small business investment company funds, included in other income, net, at the community banking segment. Gains on sales of loans decreased as a result of lower mortgage loan production at the mortgage banking segment, which was partially offset by higher margins on loans sold, and the sale of a pool of PCI loans in 2020, which resulted in a gain of $3.5 million at the community banking segment. Asset write-downs at the community banking segment in 2020 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, 2019 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, 2020, which was filed with the SEC on March 3, 2021, and is incorporated herein by reference.

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NONINTEREST EXPENSE

TABLE 5: Noninterest Expense

Year Ended December 31,

Early debt repayment charges — 2,197 —

Other expenses:

Mortgage banking loan processing expenses 3,128 3,235 1,666

Other real estate (gain)/loss and expense, net (379) 213 58

Other components of net periodic pension cost 161 (810) (569)

Total noninterest expense decreased $2.0 million, or 2.0 percent, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease in noninterest expenses was due primarily to (1) early debt repayment charges at the community banking segment in 2020 incurred in connection with the voluntary early repayment of FHLB advances, (2) merger related expenses in 2020, and (3) provision for indemnifications at the mortgage banking segment, included in “Other expenses,” of $881,000 for 2020 compared to reversal of provision for indemnifications of $104,000 in 2021, partially offset by (1) a non-cash charge of $1.3 million related to pension settlement accounting at the community banking segment in 2021, as a result of lump sum distributions under the normal terms of C&F Bank’s cash balance pension plan during the year that exceeded the threshold for settlement accounting and (2) higher salaries and employee benefits expense, primarily at the mortgage banking segment.

There were no merger related expenses for the year ended December 31, 2021. Merger related expenses for the year ended December 31, 2020 included $1.4 million, of which $501,000 was data processing expense, $336,000 was professional fees expense, $119,000 was salaries and employee benefits expense, $81,000 was occupancy expense, 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, 2019 included $709,000, of which $614,000 was professional fees expense, $50,000 was data processing expense and $45,000 was included in all other noninterest expenses.

Discussion of noninterest expense for the year ended December 31, 2019 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, 2020, which was filed with the SEC on March 3, 2021, and is incorporated herein by reference.

INCOME TAXES

Income tax expense on 2021 earnings was $9.0 million, resulting in an effective tax rate of 23.5 percent, compared with $6.8 million, or 23.3 percent, in 2020 and $5.1 million, or 21.2 percent, in 2019. The Corporation recognized income tax benefits of $326,000 in 2020 arising from a change in tax law enacted in response to the COVID-19 pandemic which changed the tax rate applied to certain net operating losses related to prior tax years of Peoples. The effects of changes in tax law are recognized in income tax expense in the period in which the changes are enacted. The Corporation’s consolidated effective tax rate was also affected by tax benefits of tax-exempt interest income that was lower as a percentage of pre-tax income in 2021 compared to 2020 and an increase in nondeductible executive compensation due to incentive based compensation and the timing of deferred compensation arrangements, partially offset by lower state

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income taxes in 2021, as a greater share of income before taxes was earned at C&F Bank, which is not subject to state income tax, and income tax benefits recorded in 2021 related to branch consolidation activities of $107,000.

Discussion of income taxes for the year ended December 31, 2019 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, 2020, which was filed with the SEC on March 3, 2021, and is incorporated herein by reference.

BUSINESS SEGMENTS

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

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

TABLE 6: Community Banking Segment Operating Results

Year Ended December 31,

Provision for loan losses (200) 4,600 360

Noninterest income:

Gain on sales of loans — 3,489 —

Service charges on deposit accounts 3,740 3,357 3,923

Noninterest expense:

Other real estate loss/(gain) and expense, net (379) 213 58

The community banking segment reported net income of $14.1 million and $6.1 million for the years ended December 31, 2021 and 2020, respectively. The increase in community banking segment net income for the year ended December 31, 2021 compared to the year ended December 31, 2020 was due primarily to:

● lower provision for loan losses,

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● $2.2 million of early repayment charges in 2020 related to FHLB advances,

● $1.3 million of merger related expenses in 2020,

● higher average balances of loans,

partially offset by:

● lower average yields on loans, securities and cash reserves,

● a $3.5 million gain on the sale of PCI loans in 2020,

● a $1.3 million pension settlement charge in 2021,

● benefits of a change in tax law recognized in 2020.

Adjusted net income for the community banking segment, which excludes the effects of the sale of PCI loans, early repayment charges, pension settlement charges, merger related expenses, branch consolidation activity and certain one-time tax benefits, was $15.0 million for the year ended December 31, 2021, compared to $6.1 million for the year ended December 31, 2020. Adjusted net income for the community banking segment increased $8.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 due primarily to the items discussed above.

Net interest income for the community banking segment increased $5.2 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. This increase was due primarily to (1) higher average balances of interest earning assets, (2) lower average costs of deposits, resulting from lower rates and a shift in composition toward non-time deposits, and (3) lower interest expense on borrowings, due to lower borrowings outstanding, partially offset by lower yields on loans, securities and excess cash. Comparisons of interest income on loans were significantly impacted by recognition of net PPP origination fees, which was higher for the year ended December 31, 2021 than in the year ended December 31, 2020, and interest income on PCI loans, which was lower for the year ended December 31, 2021 compared to the year ended December 31, 2020. In addition to the effects of these items, higher average advances to fund loans at subsidiaries and loan growth contributed to the increases in interest income on loans for the year ended December 31, 2021 compared to the year ended December 31, 2020, partially offset by lower average yields on other loans, especially commercial real estate loans, as a result of changes in interest rates. Higher average advances to subsidiaries resulted primarily from the repayment of a third-party bank line of credit at the consumer finance segment in the second quarter of 2020 that was previously used to fund consumer finance loans. Net PPP origination fees recognized in the year ended December 31, 2021 were $4.1 million, compared to $1.6 million for the year ended December 31, 2020. Deferred net PPP origination fees that remained unrecognized at December 31, 2021 were $679,000, which are expected to be recognized in 2022. Interest income recognized on PCI loans was $2.5 million for the year ended December 31, 2021 and $3.0 million for the year ended December 31, 2020.

Provision for loan losses for the community banking segment decreased $4.8 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, due primarily to qualitative adjustments to reserves due to the COVID-19 pandemic that were recognized in 2020 and a portion of which was released in 2021, as credit deterioration has not yet been experienced to the extent previously anticipated, and improvement in asset quality during 2021, including impaired loans, which were partially offset by provision related to growth in the loan portfolio in 2021. As of December 31, 2021, we have not experienced significant declines in the overall credit quality of the loan portfolio during the COVID-19 pandemic. Management believes that PPP loans and other forms of government stimulus may have delayed and partially mitigated credit deterioration during 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 are further challenges to the economic recovery, including a resurgence in COVID-19 cases that leads to economic disruption, additional provision for loan losses may be required in future periods.

There were no merger related expenses in the year ended December 31, 2021. Merger related expenses at the community banking segment of $1.3 million ($1.0 million after income taxes) were recorded in the year ended December

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31, 2020, of which $501,000 was data processing expense, $236,000 was professional fees expense, $119,000 was salaries and employee benefits expense, $81,000 was occupancy expense, $61,000 was included in all other noninterest expenses, and $298,000 was a loss on disposition of assets and was recorded in other noninterest income. Cost savings related to the integration of Peoples were realized primarily in salaries and employee benefits expense.

C&F Bank amended its cash balance pension plan and closed the plan to new entrants hired after December 31, 2021. The amendment is expected to result in lower expense related to the cash balance pension plan as the number of active participants decreases over time. Separately, the community banking segment recorded a non-cash pension settlement charge of $1.3 million ($995,000 after income taxes) in connection with certain lump sum benefit payments during the year ended December 31, 2021.

Branch consolidation activity resulted in income tax benefits recognized during the year ended December 31, 2021 of $107,000 and pre-tax charges of $281,000 ($222,000 after income taxes) recorded in other noninterest income during the year ended December 31, 2020. Income tax benefits of $326,000 were recognized during the year ended December 31, 2020 related to a change in tax law enacted in response to the COVID-19 pandemic which changed the tax rate applied to certain net operating losses related to prior tax years of Peoples.

Discussion of the community banking segment for the year ended December 31, 2019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Principal Business Segments” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 3, 2021, and is incorporated herein by reference.

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

TABLE 7: Mortgage Banking Segment Operating Results

Year Ended December 31,

Provision for loan losses (45) 10 —

Noninterest income:

Mortgage lender services fee income 2,492 2,176 390

Noninterest expense:

The mortgage banking segment reported net income of $7.7 million and $10.7 million for the years ended December 31, 2021 and 2020, respectively. The decrease in mortgage banking segment net income of $3.0 million for the

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year ended December 31, 2021 compared to the year ended December 31, 2020 was due primarily to (1) lower mortgage loan production volume, which resulted in lower gains on sales of loans and mortgage banking fee income as well as lower expenses related to mortgage loan production, (2) lower interest income due to lower average balances of loans held for sale and (3) higher salaries and benefits expense, primarily as a result of the addition of operations staff during 2020 in response to record origination volume, partially offset by (1) higher average margins on loans originated for resale, (2) lower provision for indemnification losses included in other expenses and (3) higher fee income from mortgage lender services as a result of serving a growing number of third-party lenders.

Discussion of the mortgage banking segment for the year ended December 31, 2019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Principal Business Segments” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 3, 2021, and is incorporated herein by reference.

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

TABLE 8: Mortgage Loan Originations & Mortgage Loans Sold

Year Ended December 31,

Mortgage loan originations:

1 Total mortgage loan originations does not include mortgage lender services.

Mortgage loan originations for the mortgage banking segment decreased 17.7 percent for the year ended December 31, 2021, compared to the year ended December 31, 2020, while remaining substantially above mortgage loan origination levels experienced prior to the record levels of 2020. We believe sustained historically low interest rates on mortgage loans and higher demand in the housing market have contributed to continued higher volume in the broader mortgage industry during the years ended December 31, 2021 and 2020. Production of the mortgage banking segment began to moderate beginning in the second quarter of 2021, and appears to have normalized as of December 31, 2021. Refinancings, which increased as a share of mortgage loan originations during 2020 compared to historical levels, declined for the year ended December 31, 2021 compared to the year ended December 31, 2020, and purchase volume for the year ended December 31, 2021 has grown compared to the years ended December 31, 2020 and 2019, which contributed to higher average margins on sales of loans for the year ended December 31, 2021 compared to the year ended December 31, 2020. Gains on sales of loans, while driven in part by mortgage loan originations, also includes the effects of changes in locked loan commitments, which reflect the volume of mortgage loan applications that are in process and have not closed. Locked loan commitments decreased by $115.2 million in the year ended December 31, 2021 and grew by $123.6 million in the year ended December 31, 2020. Locked loan commitments were $83.4 million at December 31, 2021, compared to $198.6 million at December 31, 2020 and $75.1 million at December 31, 2019. Mortgage lender services fee income is derived from providing mortgage origination functions to third-party mortgage lenders. Mortgage lender services volume increased for the year ended December 31, 2021 compared to the years ended December 31, 2020 and 2019 as a result of business with new customers as well as higher volume with existing customers.

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

TABLE 9: Consumer Finance Segment Operating Results

Year Ended December 31,

Noninterest expense:

The consumer finance segment reported net income of $10.0 million and $7.6 million for the years ended December 31, 2021 and 2020, respectively. The increase in consumer finance segment net income was due primarily to lower provision for loan losses, partially offset by lower net interest income. Interest income decreased $1.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 due primarily to lower average yields on loans, partially offset by higher average balances of prime marine and RV loans and non-prime auto loans. Average yields decreased as a result of purchases of loan contracts at lower yields than the portfolio average yield, partially due to lower interest rates for non-prime auto loans and the consumer finance segment continuing to pursue loan contracts of higher credit quality, including prime marine and RV loans. Provision for loan losses decreased $5.7 million for the year ended December 31, 2021, as compared to the same period of 2020 as a result of reserves recognized in 2020 related to the COVID-19 pandemic, a portion of which were released in 2021, and lower charge-offs, partially offset by loan growth in 2021. Charge-offs at the consumer finance segment have continued to decrease as a result of continued improvement in the credit quality of purchased loan contracts, borrowers benefitting from the effects of government stimulus programs in 2021 and 2020, and a strong used car market, which results in lower charge-offs upon sale of repossessed autos. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases that results in economic disruption, additional provision for loan losses may be required in future periods. In addition, provision for loan losses may be higher in future periods if net charge-offs increase, including due to lower recoveries from sales of used automobiles if prices decline.

Discussion of the consumer finance segment for the year ended December 31, 2019 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis,” under the heading “Principal Business Segments” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 3, 2021, and is incorporated herein by reference.

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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 the nature and volume of the portfolio and in the terms of loans;

● Changes in the quality of our loan review system;

● The effect of other external factors, such as competition;

● Significant one-time transactions affecting the allowance for loan losses.

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:

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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 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:

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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 Estimates” 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 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 the volume and severity of past due loans;

● Changes in the value of the underlying collateral;

● The effect of other external factors, such as competition;

C & F Financial Corp CFFI US Equity

CFFI · 10-K · period ended 2021-12-31

ITEM 1A.RISK FACTORS

ITEM 1B.UNRESOLVED STAFF COMMENTS

ITEM 2.PROPERTIES

ITEM 3.LEGAL PROCEEDINGS

ITEM 4.MINE SAFETY DISCLOSURES

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 6.RESERVED

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

C & F Financial Corp CFFI US Equity☆

CFFI · 10-K · period ended 2021-12-31

ITEM 1A.RISK FACTORS

ITEM 1B.UNRESOLVED STAFF COMMENTS

ITEM 2.PROPERTIES

ITEM 3.LEGAL PROCEEDINGS

ITEM 4.MINE SAFETY DISCLOSURES

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 6.RESERVED

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

C & F Financial Corp CFFI US Equity