C & F FINANCIAL CORP

Previous wording

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

Current wording

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. For additional information regarding the Company’s results for the three months ended March 31, 2024, please refer to our first quarter Form 10-Q filed with the SEC on May 7, 2024. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition or results of operations, see “Cautionary Statement About Forward-Looking Statements” at the end of this discussion and analysis.

Previous wording

Consolidated net income decreased $3.1 million for the first quarter of 2024 compared to the same period in 2023 due primarily to lower net income of the community banking segment and consumer finance segment, partially offset by higher net income of the mortgage banking segment.

Current wording

Consolidated net income decreased $1.4 million for the second quarter of 2024 compared to the same period in 2023 and decreased $4.4 million for the first six months of 2024 compared to the same period in 2023 due primarily to lower net income of the community banking segment and consumer finance segment, partially offset by higher net income of the mortgage banking segment.

Previous wording

Key highlights for the first quarter of 2024 are as follows.

Current wording

Key highlights for the second quarter and first six months of 2024 are as follows.

Previous wording

Total equity was $216.9 million at March 31, 2024, compared to $217.5 million at December 31, 2023. Under regulatory capital standards, the Corporation’s tier 1 risk-based capital and total risk-based capital ratios at March 31, 2024 were 12.2 percent and 14.5 percent, respectively, compared to 12.6 percent and 14.8 percent, respectively, at December 31, 2023. The decrease in the Corporation’s tier 1 risk-based capital and total risk-based capital ratios at March 31, 2024 compared to December 31, 2023 was due primarily to growth in risk-weighted assets resulting from higher balances of loans outpacing growth in equity. At March 31, 2024, the book value per share of the Corporation’s common stock was $64.24, and tangible book value per share, which is a non-GAAP financial measure, was $56.36, compared to $64.28 and $56.40, respectively, at December 31, 2023.

Current wording

Total equity was $219.1 million at June 30, 2024, compared to $217.5 million at December 31, 2023. Under regulatory capital standards, the Corporation’s tier 1 risk-based capital and total risk-based capital ratios at June 30, 2024 were 11.8 percent and 14.1 percent, respectively, compared to 12.6 percent and 14.8 percent, respectively, at December 31, 2023. The decrease in the Corporation’s tier 1 risk-based capital and total risk-based capital ratios at June 30, 2024 compared to December 31, 2023 was due primarily to growth in risk-weighted assets resulting from higher balances of loans outpacing growth in equity. At June 30, 2024, the book value per share of the Corporation’s common stock was $66.32, and tangible book value per share, which is a non-GAAP financial measure, was $58.28, compared to $64.28 and $56.40, respectively, at December 31, 2023.

Previous wording

Total equity decreased $567,000 at March 31, 2024 compared to December 31, 2023, due primarily to higher unrealized losses in the market value of securities available for sale, which are recognized as a component of other comprehensive income, share repurchases and dividends paid on the Corporation’s common stock, the significant majority of which was offset by net income. The Corporation’s securities available for sale are fixed income debt securities, and their unrealized loss position is a result of rising market interest rates since they were purchased. The Corporation expects to recover its investments in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Corporation or the Bank. The accumulated other comprehensive loss related to the Corporation’s securities available for sale increased to $27.1 million at March 31, 2024, compared to $25.0 million at December 31, 2023, as a result of an increase in debt security market interest rates.

Current wording

Total equity increased $1.6 million at June 30, 2024 compared to December 31, 2023, due primarily to net income, partially offset by share repurchases and dividends paid on the Corporation’s common stock. The Corporation’s securities available for sale are fixed income debt securities and their unrealized loss position, a component of accumulated other comprehensive income, is a result of rising market interest rates since they were purchased. The Corporation expects to recover its investments in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Corporation or C&F Bank. The accumulated other comprehensive loss related to the Corporation’s securities available for sale increased to $25.4 million at June 30, 2024, compared to $25.0 million at December 31, 2023, as a result of fluctuations in debt security market interest rates.

Previous wording

The Corporation declared a quarterly cash dividend of 44 cents per share during the first quarter of 2024, which was paid on April 1, 2024. This dividend represents a payout ratio of 43.6 percent of earnings per share for the first quarter of 2024. 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.

Current wording

The Corporation declared a quarterly cash dividend of 44 cents per share during the second quarter of 2024, which was paid on July 1, 2024. This dividend represents a payout ratio of 29.3 percent of earnings per share for the second quarter of 2024. 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, growth expectations and other factors.

Previous wording

The Corporation has a share repurchase program that was authorized by the Board of Directors and effective January 1, 2024, to repurchase up to $10.0 million of the Corporation’s common stock through December 31, 2024. During the first quarter of 2024, the Corporation repurchased 9,654 shares, or $516,000, of its common stock under this share repurchase program.

Current wording

The Corporation has a share repurchase program that was authorized by the Board of Directors to repurchase up to $10.0 million of the Corporation’s common stock, effective January 1, 2024 through December 31, 2024. During the second quarter and first six months of 2024, the Corporation repurchased 79,420 shares, or $3.5 million, and 89,074 shares, or $4.0 million, of its common stock under this share repurchase program, respectively.

Previous wording

The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three months ended March 31, 2024 and 2023. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented. Average balances of securities

Current wording

The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three and six months ended June 30, 2024 and 2023. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented. Average balances of securities available for sale are included at amortized cost. 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.

Previous wording

Net interest income, on a taxable-equivalent basis, for the first quarter of 2024 decreased to $23.4 million, compared to $25.2 million for the first quarter of 2023. The decrease in net interest income for the first quarter of 2024 as compared to the first quarter of 2023 was due primarily to a decrease in net interest margin, partially offset by higher average balances of earning assets. Annualized net interest margin decreased 43 basis points to 4.09 percent for the first quarter of 2024 compared to the first quarter of 2023 due primarily to an increase in costs of interest-bearing deposits and borrowings and a shift to higher cost deposits, partially offset by an increase in yields of earning assets. The Federal Reserve Bank (FRB) increased the target federal funds interest rate from an upper limit of 4.50 percent at December 31, 2022 to 5.00 percent by March 31, 2023 and to 5.50 percent by the end of 2023, where it remained unchanged through the first quarter of 2024. The yield on interest-earning assets increased by 45 basis points for the first quarter of 2024 compared to the same period in 2023. The cost of interest-bearing liabilities increased by 121 basis points for the first quarter of 2024 compared to the same period of 2023. Average earning assets increased $55.0 million for the first quarter of 2024 compared to the same period in 2023. Average interest-bearing liabilities increased $97.9 million for the first quarter of 2024 compared to the same period in 2023. Average noninterest-bearing demand deposits decreased $59.8 million for the first quarter of 2024 compared to the same period in 2023.

Current wording

first six months of 2024 compared to the first six months of 2023. These decreases in annualized net interest margin were due primarily to an increase in costs of interest-bearing deposits and a shift to higher cost deposits, partially offset by an increase in yields and higher balances of earning assets. The Federal Reserve Bank (FRB) increased the target federal funds interest rate from an upper limit of 4.50 percent at December 31, 2022 to 5.25 percent by June 30, 2023 and to 5.50 percent by the end of 2023, where it remained unchanged through the first half of 2024. The yield on interest-earning assets increased by 50 basis points and 47 basis points for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. The cost of interest-bearing liabilities increased by 89 basis points and 105 basis points for the second quarter and first six months of 2024, respectively, compared to the same periods of 2023. Average earning assets increased $57.0 million and $55.9 million for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. Average interest-bearing liabilities increased $97.4 million and $97.6 million for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. Average noninterest-bearing demand deposits decreased $49.2 million and $54.5 million for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023.

Previous wording

Average loans, which includes both loans held for investment and loans held for sale, increased $127.3 million to $1.8 billion for the first quarter of 2024 compared to the same period in 2023. Average loans at the community banking segment increased $130.1 million, or 11.1 percent, for the first quarter of 2024 compared to the same period in 2023 due primarily to growth in the commercial real estate, construction, and residential mortgage segments of the loan portfolio. Average loans at the consumer finance segment decreased $1.4 million, or less than one percent, for the first quarter of 2024 compared to the same period in 2023 due primarily to a decrease in the automobile segment of the loan portfolio. Average loans at the mortgage banking segment, which consist of loans held for sale, decreased $1.4 million, or 7.2 percent, for the first quarter of 2024 compared to the same period in 2023 due primarily to lower mortgage loan production volume as a result of conditions in the housing markets and higher interest rates on mortgage loans.

Current wording

Average loans, which includes both loans held for investment and loans held for sale, increased $164.2 million to $1.87 billion for the second quarter of 2024 and increased $145.6 million to $1.83 billion for the first six months of 2024 compared to the same periods in 2023. Average loans at the community banking segment increased $158.6 million, or 13.2 percent, for the second quarter of 2024 and increased $144.2 million, or 12.2 percent, for the first six months of 2024, compared to the same periods in 2023, due primarily to growth in the commercial real estate, construction, and residential mortgage segments of the loan portfolio. Average loans at the consumer finance segment increased $2.1 million, or less than one percent, for the second quarter of 2024 and increased $355,000, or less than one percent, for the first six months of 2024, compared to the same periods in 2023, due primarily to an increase in the marine and recreational vehicles segment of the loan portfolio. Average loans at the mortgage banking segment, which consist of loans held for sale, increased $3.5 million, or 11.4 percent, for the second quarter of 2024 and increased $1.0 million, or 4.2 percent, for the first six months of 2024, compared to the same periods in 2023, due primarily to an increase in the average size of each mortgage loan originated due to higher home prices.

Previous wording

The community banking segment average loan yield increased 40 basis points to 5.35 percent for the first quarter of 2024 compared to the same period in 2023 due primarily to the effects of the higher interest rate environment. The consumer finance segment average loan yield increased 39 basis points to 10.21 percent for the first quarter of 2024 compared to the same period in 2023 due primarily to the effects of the higher interest rate environment, which were partially offset by the

Current wording

The community banking segment average loan yield increased 41 basis points to 5.48 percent for the second quarter of 2024 and increased 41 basis points to 5.42 percent for the first six months of 2024, compared to the same periods in 2023, due primarily to the effects of the higher interest rate environment. The consumer finance segment average loan yield increased 48 basis points to 10.41 percent for the second quarter of 2024 and increased 44 basis points to 10.31 percent for the first six months of 2024, compared to the same periods in 2023, due primarily to the effects of the higher interest rate environment, which were partially offset by the effects of purchasing higher credit quality loan contracts which have lower yields. The mortgage banking segment average loan yield decreased 25 basis points to 6.26 percent for the second quarter of 2024 and decreased 13 basis points to 6.30 percent for the first six months of 2024, compared to the same periods in 2023, due to fluctuations in mortgage interest rates and in the mix of mortgage loan products originated.

Previous wording

Average securities available for sale decreased $74.9 million for the first quarter of 2024 compared to the same period in 2023 due primarily to maturities and paydowns of government agencies, treasuries, and mortgage-backed securities outpacing purchases. The average yield on the securities portfolio on a taxable-equivalent basis increased 25 basis points to 2.55 percent for the first quarter of 2024 compared to the same period in 2023 due primarily to rising interest rates and the maturity of lower-yielding securities.

Current wording

Average securities available for sale decreased $95.7 million and $85.3 million for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023, due primarily to maturities of U.S. treasury and government agency securities outpacing purchases in all sectors of the portfolio. The average yield on the securities portfolio on a taxable-equivalent basis increased 28 basis points to 2.61 percent for the second quarter of 2024 and increased 26 basis points to 2.58 percent for the first six months of 2024, compared to the same periods in 2023, due primarily to the higher interest rate environment and the maturity of lower-yielding securities.

Previous wording

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the FRB, increased $2.5 million for the first quarter of 2024 compared to the same period of 2023. The average yield on interest-bearing deposits in other banks increased 92 basis points for the first quarter of 2024 compared to the same period in 2023 due to rising interest rates.

Current wording

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the FRB, decreased $11.4 million for the second quarter of 2024 and decreased $4.5 million for the first six months of 2024, compared to the same periods of 2023. The average yield on interest-bearing deposits in other banks decreased 43 basis points for the second quarter of 2024, compared to the second quarter of 2023, due to the timing of cash items in process, which don’t earn interest until they settle and have a larger effect on yields during periods of lower average balances, and increased 25 basis points for the first six months of 2024, compared to the first six months of 2023, due to the higher interest rate environment.

Previous wording

Average money market, savings and interest-bearing demand deposits combined and average non-interest bearing demand deposits decreased $138.2 million and $59.8 million, respectively, for the first quarter of 2024 compared to the same period in 2023 due primarily to customers seeking higher yielding opportunities as a result of higher interest rates paid on time deposits. Average time deposits increased $270.4 million for the first quarter of 2024 compared to the same period in 2023. The average cost of interest-bearing deposits increased 137 basis points for the first quarter of 2024 compared to the same period in 2023 due primarily to higher rates on money market and time deposits and a shift in composition towards time deposits amid the higher interest rate environment and increased competition for deposits.

Current wording

million and $54.5 million, respectively, for the first six months of 2024, compared to the same periods in 2023. The decreases in both periods were due primarily to customers seeking higher yielding opportunities as a result of higher interest rates paid on time deposits. Average time deposits increased $231.5 million and $250.7 million for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. The average cost of interest-bearing deposits increased 109 basis points for the second quarter of 2024 and increased 123 basis points for the first six months of 2024, compared to the same periods in 2023, due primarily to higher rates on money market and time deposits, a shift in composition towards time deposits amid the higher interest rate environment and increased competition for deposits.

Previous wording

Average borrowings decreased $34.2 million for the first quarter of 2024 compared to the same period in 2023 due primarily to decreases in short-term Federal Home Loan Bank of Atlanta (FHLB) advances. The average cost of borrowings increased 8 basis points for the first quarter of 2024 compared to the same period in 2023 due primarily to the effects of rising interest rates and a shift in the mix of borrowings from lower cost repurchase agreements to FHLB borrowings.

Current wording

Average borrowings decreased $46.9 million and $40.6 million for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023, due primarily to fluctuations in repurchase agreements and net paydowns of Federal Home Loan Bank of Atlanta (FHLB) advances. The average cost of borrowings decreased 28 basis points for the second quarter of 2024 and decreased 12 basis points for the first six months of 2024, compared to the same periods in 2023, due primarily to a shift in the mix of borrowings related to paydowns of higher-rate short-term borrowings, partially offset by the effects of rising interest rates.

Previous wording

Total noninterest income decreased $145,000, or 1.9 percent, for the first quarter of 2024 compared to the first quarter of 2023 due primarily to lower volume of mortgage loan production, which resulted in lower gains on sales of loans and mortgage banking fee income, partially offset by higher wealth management services income, fluctuations in unrealized gains on the rabbi trust, higher investment income in other equity investments and higher mortgage lender services income, as a result of an increase in the number of institutional customers and the types of services provided.

Current wording

Total noninterest income decreased $637,000, or 8.0 percent, for the second quarter of 2024 and decreased $782,000, or 5.0 percent, for the first six months of 2024, compared to the same periods of 2023, due primarily to lower volume of mortgage loan production, which resulted in lower gains on sales of loans and mortgage banking fee income, and fluctuations in unrealized gains on the rabbi trust, partially offset by higher wealth management services income.

Previous wording

processing expenses. Additionally, the mortgage banking segment recorded a net reversal of provision for indemnifications for the first quarter of 2024 compared to no provision for indemnifications expense in the first quarter of 2023.

Current wording

Total noninterest expenses decreased $316,000, or 1.4 percent, in the second quarter of 2024 and increased $239,000, or less than one percent, in the first six months of 2024, compared to the same periods in 2023. The decrease in the second quarter of 2024 as compared to the same period in 2023 was due primarily to fluctuations in deferred compensation liabilities and marketing expenses, partially offset by higher data processing expenses and professional fees. The increase in the first six months of 2024 as compared to the same period in 2023 was due primarily to higher data processing expenses and professional fees, partially offset by fluctuations in deferred compensation liabilities, lower marketing expenses and lower expenses tied to mortgage loan production volume at the mortgage banking segment. Additionally, the mortgage banking segment recorded a net reversal of provision for indemnifications for the second quarter and the first six months of 2024 of $135,000 and $275,000, respectively, compared to a net reversal of provision for indemnifications of $235,000 for both the second quarter and the first six months of 2023.

Previous wording

The Corporation’s consolidated effective income tax rate was 14.1 percent and 18.3 percent for the first quarter of 2024 and 2023, respectively. The Corporation’s consolidated effective tax rate for the first quarter of 2024 was lower compared to the same period in 2023 primarily as a result of a lower share of income at the consumer finance and mortgage banking segments, which are subject to state income taxes.

Current wording

The Corporation’s consolidated effective income tax rate was 17.2 percent and 18.8 percent for the first six months of 2024 and 2023, respectively. The Corporation’s consolidated effective tax rate for the first six months of 2024 was lower compared to the same period in 2023 primarily as a result of a lower share of income at the consumer finance and mortgage banking segments, which are subject to state income taxes.

Previous wording

Net interest income for the community banking segment decreased by $2.2 million to $17.2 million for the first quarter of 2024 compared to the same period in 2023. Included in net interest income is interest income on variable rate loans to the consumer finance and mortgage banking segments. Average loan yields were higher for the first quarter of 2024 compared to the same period of 2023 due primarily to the effects of the higher interest rate environment as market interest rates rose in 2023. Average costs of interest-bearing liabilities were higher for the first quarter of 2024 compared to the same period of 2023 due primarily to the effects of the higher interest rate environment and a shift in the mix from lower cost deposits to time deposits. The community banking segment expects both loan and investment yields and costs of interest-bearing deposits to continue to rise in 2024.

Current wording

Net interest income for the community banking segment decreased by $1.0 million to $17.5 million for the second quarter of 2024 and decreased $3.2 million to $34.7 million for the first six months of 2024, respectively, compared to the same periods in 2023. Included in net interest income is interest income on variable rate loans to the consumer finance and mortgage banking segments. Average loan yields and average costs of interest-bearing deposits were higher for the second quarter and first six months of 2024, compared to the same periods of 2023, due primarily to the effects of the higher

Previous wording

The community banking segment recorded $500,000 and $450,000 in provision for credit losses for the first quarter of 2024 and 2023, respectively, due primarily to growth in the loan portfolio. Noninterest income increased for the first quarter of 2024 compared to the same period in 2023 as a result of higher wealth management services income and higher investment income in other equity investments. Noninterest expenses increased during the first quarter of 2024 compared to the same period in 2023 due primarily to higher salaries and employee benefits and higher other expenses, due primarily to an increase in professional fees and data processing fees, partially offset by lower marketing and advertising expenses.

Current wording

The community banking segment recorded $450,000 and $950,000 in provision for credit losses for the second quarter and first six months of 2024, respectively, due primarily to growth in the loan portfolio, compared to $600,000 and $1.1 million in provision for credit losses for the same periods in 2023. Noninterest income increased for the second quarter and first six months of 2024, compared to the same periods in 2023, due primarily to higher wealth management services income. Noninterest expenses increased for the second quarter and first six months of 2024, compared to the same periods in 2023, due primarily to higher salaries and employee benefits, data processing expenses and other expenses.

Previous wording

The sustained elevated level of mortgage interest rates, combined with higher home prices and lower levels of inventory, has led to a substantial decline in mortgage loan originations for the mortgage industry during 2024 and 2023. Mortgage loan originations for the mortgage banking segment decreased 18.5 percent for the first quarter of 2024 compared to the same period in 2023. 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. Lock-adjusted originations for the mortgage banking segment decreased 14.4 percent for the first quarter of 2024 compared to the same period in 2023. Locked loan commitments were $55.8 million at March 31, 2024 compared to $26.2 million and $70.5 million at December 31, 2023 and March 31, 2023, respectively.

Current wording

The sustained elevated level of mortgage interest rates, combined with higher home prices and lower levels of inventory, has led to a substantial decline in mortgage loan originations for the mortgage industry during 2024 and 2023 compared to levels during 2022 and 2021. Mortgage loan originations for the mortgage banking segment decreased 5.9 percent and 11.3 percent for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. 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. Lock-adjusted originations for the mortgage banking segment increased 4.1 percent and decreased 5.1 percent for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. Locked loan commitments were $60.3 million at June 30, 2024 compared to $26.2 million and $58.1 million at December 31, 2023 and June 30, 2023, respectively.

Previous wording

Mortgage lender services fee income is derived from providing mortgage origination functions to third-party mortgage lenders for a fee. Mortgage lender services fee income increased for the first quarter of 2024 compared to the same period in 2023 due primarily to an increase in the number of institutional customers and the types of services provided, partially offset by the negative impacts of reduced mortgage loan volume in the industry.

Current wording

Mortgage lender services fee income is derived from providing mortgage origination functions to third-party mortgage lenders for a fee. Mortgage lender services fee income decreased for the second quarter and first six months of 2024, compared to the same periods in 2023, due primarily to the negative impacts of reduced mortgage loan volume in the industry.

Previous wording

The mortgage banking segment recorded a net reversal of provision for indemnification losses of $140,000 for the first quarter of 2024 compared to no provision for indemnification losses for the same period in 2023. The mortgage banking segment increased reserves for indemnification losses during 2020 based on widespread forbearance on mortgage loans and economic uncertainty related to the COVID-19 pandemic. The release of indemnification reserves in 2024 was due primarily to improvement in the mortgage banking segment’s assessment of borrower payment performance and other factors affecting expected losses on mortgage loans sold in the secondary market, such as time since origination. Management believes that the indemnification reserve is sufficient to absorb losses related to loans that have been sold in the secondary market.

Current wording

losses of $235,000 for both the second quarter and first six months of 2023. The mortgage banking segment increased reserves for indemnification losses during 2020 based on widespread forbearance on mortgage loans and economic uncertainty related to the COVID-19 pandemic. The release of indemnification reserves in 2024 was due primarily to improvement in the mortgage banking segment’s assessment of borrower payment performance, lower volume of mortgage loan originations in recent years and other factors affecting expected losses on mortgage loans sold in the secondary market, such as time since origination. Management believes that the indemnification reserve is sufficient to absorb losses related to loans that have been sold in the secondary market.

Previous wording

The consumer finance segment reported a net loss of $63,000 for the first quarter of 2024 compared to net income of $509,000 for the same period in 2023 due primarily to:

Current wording

The consumer finance segment reported net income of $894,000 and $831,000 for the second quarter and first six months of 2024, respectively, compared to net income of $1.1 million and $1.6 million for the same periods in 2023. The decreases in consumer finance segment net income were due primarily to:

Previous wording

Average loan yields and average cost of borrowings were higher for the first quarter of 2024 compared to the same period of 2023 due primarily to the effects of the higher interest rate environment as market interest rates rose in 2023.

Current wording

Average loan yields and average cost of borrowings were higher for the second quarter and first six months of 2024, compared to the same periods of 2023, due primarily to the effects of the higher interest rate environment.

Previous wording

Provision for credit losses increased due primarily to increased net charge-offs. Net charge-offs increased due primarily to an increase in the number of delinquent loans and repossessions, which coupled with a decline in wholesale values of used automobiles, results in an increased charge-off amount on a per-unit basis. If loan performance deteriorates, resulting in continued elevated delinquencies or net charge-offs, or if values of used vehicles decline, provision for credit losses may increase in future periods.

Current wording

Provision for credit losses increased due primarily to increased net charge-offs and loan growth. Net charge-offs increased due primarily to an increase in the number of delinquent loans and repossessions and a higher average charge-off per unit as a result of a decline in wholesale values of used automobiles. Delinquency and loss rates have generally returned to pre-pandemic levels due to the passage of time since the expiration of stimulus and enhanced unemployment benefits that benefitted borrowers. If loan performance deteriorates, resulting in further elevated delinquencies or net charge-offs, or if values of used vehicles decline, provision for credit losses may increase in future periods.

Previous wording

The community banking segment’s nonaccrual loans were $550,000 at March 31, 2024 compared to $406,000 at December 31, 2023. The community banking segment recorded $600,000 and $350,000 in provision for loans for the first quarter of 2024 and 2023, respectively, due primarily to growth in the loan portfolio. At March 31, 2024, the allowance for credit losses increased to $16.6 million compared to an allowance for credit losses of $16.1 million at December 31, 2023 due primarily to growth in the loan portfolio. Management believes that the level of the allowance for credit losses is adequate to reflect the net amount expected to be collected.

Current wording

The community banking segment’s nonaccrual loans were $1.1 million at June 30, 2024 compared to $406,000 at December 31, 2023. The community banking segment recorded $450,000 and $950,000 in provision for loans for the second quarter and first six months of 2024, respectively, compared to $600,000 and $1.1 million for the same periods of 2023, due primarily to growth in loans outstanding and unfunded loan commitments. At June 30, 2024, the allowance for credit losses increased to $16.9 million, compared to an allowance for credit losses of $16.1 million at December 31, 2023, due primarily to growth in the loan portfolio. The allowance for credit losses as a percentage of total loans decreased to 1.22 percent at June 30, 2024 from 1.26 percent at December 31, 2023. Management believes that the level of the allowance for credit losses is adequate to reflect the net amount expected to be collected.

Previous wording

Nonaccrual loans at the consumer finance segment were $741,000 at March 31, 2024 compared to $892,000 at December 31, 2023. Nonaccrual consumer finance loans remain low relative to the allowance for credit losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent. Repossessed vehicles of the consumer finance segment are classified as other assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the deficiency) is charged against the allowance for credit losses. At March 31, 2024, repossessed vehicles available for sale totaled $544,000 compared to $646,000 at December 31, 2023.

Current wording

Nonaccrual loans at the consumer finance segment were $802,000 at June 30, 2024 compared to $892,000 at December 31, 2023. Nonaccrual consumer finance loans remain low relative to the allowance for credit losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent. Repossessed vehicles of the consumer finance segment are classified as other assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle

Previous wording

The consumer finance segment experienced net charge-offs at an annualized rate of 2.54 percent of average total loans for the first quarter of 2024, compared to 1.77 percent for the first quarter of 2023 and 2.72 percent for the fourth quarter of 2023, due primarily to an increase in the number of delinquent loans and repossessions, which coupled with a decline in wholesale values of used automobiles, results in an increased charge-off amount on a per-unit basis. At March 31, 2024, total delinquent loans as a percentage of total loans was 2.78 percent compared to 4.09 percent at December 31, 2023 and 2.33 percent at March 31, 2023. Delinquency and loss rates have returned to pre-pandemic levels due to the passage of time since the expiration of stimulus and enhanced unemployment benefits that benefitted borrowers. The allowance for credit losses was $23.6 million at both March 31, 2024 and December 31, 2023. The allowance for credit losses as a percentage of total loans decreased to 4.95 percent at March 31, 2024 compared to an allowance for credit losses as a percentage of total loans of 5.03 percent at December 31, 2023 due primarily to growth in loans with stronger credit quality while balances of loans with lower credit quality declined.

Current wording

The consumer finance segment experienced net charge-offs at an annualized rate of 2.21 percent of average total loans for the first six months of 2024, compared to 1.63 percent for the first six months of 2023, due primarily to an increase in the number of delinquent loans and repossessions and a higher average charge-off per unit as a result of a decline in wholesale values of used automobiles. Net charge-offs decreased to an annualized rate of 1.88 percent of average total loans for the second quarter of 2024, compared to 2.54 percent for the first quarter of 2024, due primarily to seasonal trends within the portfolio. At June 30, 2024, total delinquent loans as a percentage of total loans was 3.51 percent compared to 4.09 percent at December 31, 2023 and 2.88 percent at June 30, 2023. Delinquency and loss rates have generally returned to pre-pandemic levels due to the passage of time since the expiration of stimulus and enhanced unemployment benefits that benefitted borrowers. The allowance for credit losses was $23.4 million at June 30, 2024 and $23.6 million at December 31, 2023. The allowance for credit losses as a percentage of total loans decreased to 4.90 percent at June 30, 2024, compared to 5.03 percent at December 31, 2023, due primarily to growth in loans with stronger credit quality while balances of loans with lower credit quality declined.

Previous wording

The consumer finance segment at times offers payment deferrals to borrowers as a portfolio management technique to achieve higher ultimate cash collections on select loan accounts. A significant reliance on deferrals as a means of managing collections may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio. Average amounts of payment deferrals on a monthly basis, which are not included in delinquent loans, were 1.62 percent, 1.60 percent and 2.02 percent as a percentage of average automobile loans outstanding for the first quarter of 2024, the first quarter of 2023 and the fourth quarter of 2023, respectively.

Current wording

The consumer finance segment at times offers payment deferrals to borrowers as a portfolio management technique to achieve higher ultimate cash collections on select loan accounts. A significant reliance on deferrals as a means of managing collections may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio. Average amounts of payment deferrals of automobile loans on a monthly basis, which are not included in delinquent loans, were 1.58 percent, 1.70 percent and 1.62 percent as a percentage of average automobile loans outstanding for the second quarter of 2024, the second quarter of 2023 and the first quarter of 2024, respectively. Average amounts of payment deferrals of automobile loans on a monthly basis, which are not included in delinquent loans, were 1.60 percent and 1.65 percent as a percentage of average automobile loans outstanding for the first six months of 2024 and 2023, respectively.

Previous wording

The consumer finance segment is an indirect lender that provides automobile financing through lending programs that are designed to serve customers in both the prime and “non-prime” markets, including those who may have limited access to traditional automobile financing due to having experienced prior credit difficulties. The preferred automobile is a later model, low mileage used vehicle because the value of new vehicles typically depreciates rapidly. In addition to automobile financing, marine and RV loan contracts are also purchased on an indirect basis through a referral program administered

Current wording

The consumer finance segment is an indirect lender that provides automobile financing through lending programs that are designed to serve customers in both the prime and “non-prime” markets, including those who may have limited access to traditional automobile financing due to having experienced prior credit difficulties. The preferred automobile is a later model, low mileage used vehicle because the value of new vehicles typically depreciates rapidly. In addition to automobile financing, marine and RV loan contracts are also purchased on an indirect basis through a referral program administered by a third party. The marine and RV loan contracts are for prime loans averaging less than $50,000 made to individuals with higher credit scores.

Previous wording

At March 31, 2024, the Corporation had total assets of $2.5 billion, which was an increase of $31.3 million since December 31, 2023. The increase was attributable primarily to growth in loans held for investment and loans held for sale, funded by maturities and paydowns of available for sale securities, increases in deposits, including brokered deposits, deployment of cash on hand, and long-term borrowings. The significant components of the Corporation’s Consolidated Balance Sheets are discussed below.

Current wording

At June 30, 2024, the Corporation had total assets of $2.5 billion, an increase of $53.6 million since December 31, 2023. The increase was attributable primarily to growth in loans held for investment and loans held for sale, funded by maturities and paydowns of available for sale securities, increases in deposits, deployment of cash on hand, and additional borrowings. The significant components of the Corporation’s Consolidated Balance Sheets are discussed below.

Previous wording

The increase in total loans from December 31, 2023 to March 31, 2024 was due primarily to growth in construction, commercial real estate, and residential mortgage lending at the community banking segment and an increase in automobile loans at the consumer finance segment.

Current wording

The increase in total loans from December 31, 2023 to June 30, 2024 was due primarily to growth in commercial real estate construction, commercial real estate, and residential mortgage lending at the community banking segment and an increase in automobile loans at the consumer finance segment.

Previous wording

Securities available for sale decreased by $32.0 million to $430.4 million at March 31, 2024 compared to $462.4 million at December 31, 2023 due primarily to maturities, calls and paydowns of securities and increases in net unrealized losses in the market value of securities available for sale, as a result of increases in market interest rates. Net unrealized losses in the market value of securities available for sale increased to $34.3 million at March 31, 2024 compared to net unrealized losses in the market value of securities available for sale of $31.6 million at December 31, 2023.

Current wording

Securities available for sale decreased by $57.6 million to $404.8 million at June 30, 2024 compared to $462.4 million at December 31, 2023 due primarily to decreases in U.S. treasury and government agency securities. Net unrealized losses in the market value of securities available for sale increased to $32.2 million at June 30, 2024, compared to $31.6 million at December 31, 2023.

Previous wording

During the first quarter of 2024, deposits increased $21.8 million to $2.09 billion at March 31, 2024. Noninterest bearing demand deposits decreased $14.3 million, savings and interest-bearing demand deposits decreased $26.9 million, and time deposits increased $63.0 million during the same period. The decrease in non-time deposits was due in part to a shift in balances toward time deposits amid a higher interest rate environment and to seasonal factors related to municipal deposits, which tend to increase with tax collections primarily in the fourth quarter of each year and decline with spending thereafter. The Corporation had $140.5 million in municipal deposits at March 31, 2024 compared to $167.9 million at December 31, 2023.

Current wording

During the first six months of 2024, deposits increased $40.0 million to $2.11 billion at June 30, 2024. Noninterest bearing demand deposits decreased $15.7 million, savings and interest-bearing demand deposits decreased $54.8 million, and time deposits increased 110.5 million during the same period. The decrease in non-time deposits was due in part to a shift in balances toward time deposits amid a higher interest rate environment and to seasonal factors related to municipal deposits, which tend to increase with tax collections primarily in the fourth quarter of each year and decline with spending thereafter. The Corporation had $135.6 million in municipal deposits at June 30, 2024 compared to $167.9 million at December 31, 2023.

Previous wording

The Corporation had $35.0 million in brokered money market and time deposits outstanding at March 31, 2024 compared to $25.0 million at December 31, 2023. The Corporation may continue to use brokered deposits on a limited basis as a means of maintaining and diversifying liquidity and funding sources.

Current wording

The Corporation had $25.0 million in brokered money market and time deposits outstanding at both June 30, 2024 and December 31, 2023. The Corporation may continue to use brokered deposits on a limited basis as a means of maintaining and diversifying liquidity and funding sources.

Previous wording

Borrowings increased to $121.6 million at March 31, 2024 from $109.5 million at December 31, 2023 due primarily to increased long-term borrowings from the FHLB to support lending activities and securities purchases.

Current wording

Borrowings increased to $118.8 million at June 30, 2024 from $109.5 million at December 31, 2023 due primarily to increased borrowings from the FHLB to support lending activities.

Previous wording

Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled $298.5 million at March 31, 2024 compared to $338.8 million at December 31, 2023. The Corporation’s funding sources, including capacity, amount outstanding and amount available at March 31, 2024 are presented in Table 21. The Corporation’s capacity and amount available increased $36.2 million and $23.7 million, respectively, from December 31, 2023 as a result of pledging additional loans in order to increase funding capacity under secured funding arrangements with the FRB.

Current wording

Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled $272.9 million at June 30, 2024 compared to $338.8 million at December 31, 2023. The Corporation’s funding sources, including capacity, amount outstanding and amount available at June 30, 2024 are presented in Table 21. The Corporation’s capacity and amount available increased $56.6 million and $44.1 million, respectively, from December 31, 2023 as a result of pledging additional loans in order to increase funding capacity under secured funding arrangements with the FRB and FHLB.

Previous wording

Uninsured deposits represent an estimate of amounts above the Federal Deposit Insurance Corporation (FDIC) insurance coverage limit of $250,000. As of March 31, 2024, the Corporation’s uninsured deposits were approximately $560.3 million, or 26.8 percent of total deposits. Excluding intercompany cash holdings and municipal deposits which are secured with pledged securities, amounts uninsured were approximately $408.3 million, or 19.6 percent of total deposits as of March 31, 2024 compared to 19.6 percent of total deposits as of December 31, 2023. The Corporation’s liquid assets and borrowing availability as of March 31, 2024 totaled $872.3 million, exceeding uninsured deposits, excluding intercompany cash holdings and secured municipal deposits, by $464.0 million.

Current wording

Uninsured deposits represent an estimate of amounts above the Federal Deposit Insurance Corporation (FDIC) insurance coverage limit of $250,000. As of June 30, 2024, the Corporation’s uninsured deposits were approximately $592.3 million, or 28.1 percent of total deposits. Excluding intercompany cash holdings and municipal deposits which are secured with pledged securities, amounts uninsured were approximately $445.2 million, or 21.1 percent of total deposits as of June 30, 2024, compared to 19.6 percent of total deposits as of December 31, 2023. The Corporation’s liquid assets and borrowing availability as of June 30, 2024 totaled $867.1 million, exceeding uninsured deposits, excluding intercompany cash holdings and secured municipal deposits, by $421.9 million.

Previous wording

The Corporation’s internal policy limits brokered deposits to 20 percent of total deposits, representing approximately $382.6 million of additional net availability for additional brokered deposits as of March 31, 2024.

Current wording

The Corporation’s internal policy limits brokered deposits to 20 percent of total deposits, representing approximately $396.2 million of additional net availability for additional brokered deposits as of June 30, 2024.