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. 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.

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 and the three and six months ended June 30, 2024, please refer to our first and second quarter Form 10-Qs filed with the SEC on May 7, 2024 and August 2, 2024, respectively. 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 $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.

Current wording

Consolidated net income decreased $357,000 and $4.8 million for the third quarter and first nine months of 2024, respectively, compared to the same periods 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 second quarter and first six months of 2024 are as follows.

Current wording

Key highlights for the third quarter and first nine months of 2024 are as follows.

Previous 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.

Current wording

Total equity was $228.0 million at September 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 September 30, 2024 were 11.6 percent and 13.8 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 September 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 September 30, 2024, the book value per share of the Corporation’s common stock was $70.29, and tangible book value per share, which is a non-GAAP financial measure, was $62.13, compared to $64.28 and $56.40, respectively, at December 31, 2023.

Previous 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.

Current wording

Total equity increased $10.4 million at September 30, 2024 compared to December 31, 2023, due primarily to net income and lower unrealized losses in the market value of securities available for sale, which are recognized as a component of other comprehensive 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 decreased to $17.2 million at September 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 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.

Current wording

The Corporation declared a quarterly cash dividend of 44 cents per share during the third quarter of 2024, which was paid on October 1, 2024. This dividend represents a payout ratio of 26.7 percent of earnings per share for the third 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 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.

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 third quarter and first nine months of 2024, the Corporation repurchased 60,520 shares, or $3.2 million, and 149,594 shares, or $7.3 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 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.

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 nine months ended September 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 second quarter of 2024 decreased to $24.1 million, compared to $24.6 million for the second quarter of 2023. Net interest income, on a taxable-equivalent basis, for the first six months of 2024 decreased to $47.6 million, compared to $49.7 million for the first six months of 2023. The decreases in net interest income, on a taxable-equivalent basis, for both the second quarter and first six months of 2024, as compared to the same periods of 2023, were due primarily to a decrease in net interest margin, partially offset by higher average balances of earning assets. Annualized net interest margin decreased 17 basis points to 4.12 percent for the second quarter of 2024 compared to the second quarter of 2023. Annualized net interest margin decreased 31 basis points to 4.10 percent for the

Current wording

Net interest income, on a taxable-equivalent basis, for the third quarter of 2024 increased to $25.0 million, compared to $24.7 million for the third quarter of 2023, due primarily to higher average balances of earning assets, partially offset by a decrease in net interest margin. Net interest income, on a taxable-equivalent basis, for the first nine months of 2024 decreased to $72.5 million, compared to $74.5 million for the first nine months of 2023, due primarily to a decrease in net interest margin, partially offset by higher average balances of earning assets. Annualized net interest margin decreased 16 basis points to 4.13 percent for the third quarter of 2024 and decreased 26 basis points to 4.11 percent for the first nine months of 2024, compared to the same periods of 2023, due primarily to an increase in costs of interest-bearing deposits

Previous 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.

Current wording

and a shift to higher cost deposits, partially offset by an increase in yields and higher balances of earning assets. Annualized net interest margin increased to 4.13 percent for the third quarter of 2024 compared to 4.12 percent and 4.09 percent for the second quarter of 2024 and the first quarter of 2024, respectively. 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 5.50 percent by September 30, 2023, where it remained unchanged until September 2024 when it was lowered to 5.00 percent. The yield on interest-earning assets increased by 48 basis points and 47 basis points for the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. The cost of interest-bearing liabilities increased by 82 basis points and 97 basis points for the third quarter and first nine months of 2024, respectively, compared to the same periods of 2023. Average earning assets increased $119.0 million and $77.1 million for the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. Average interest-bearing liabilities increased $144.8 million and $113.4 million for the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. Average noninterest-bearing demand deposits decreased $39.6 million and $49.5 million for the third quarter and first nine 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 $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.

Current wording

Average loans, which includes both loans held for investment and loans held for sale, increased $204.9 million to $1.93 billion for the third quarter of 2024 and increased $165.5 million to $1.87 billion for the first nine months of 2024, compared to the same periods in 2023. Average loans at the community banking segment increased $186.5 million, or 15.2 percent, for the third quarter of 2024 and increased $158.4 million, or 13.2 percent, for the first nine months of 2024, compared to the same periods in 2023, due primarily to growth in the construction, commercial real estate, and residential mortgage segments of the loan portfolio. Average loans at the consumer finance segment increased $8.3 million, or 1.8 percent, for the third quarter of 2024 and increased $3.0 million, or less than 1.0 percent, for the first nine 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 $10.0 million, or 33.2 percent, for the third quarter of 2024 and increased $4.0 million, or 15.2 percent, for the first nine months of 2024, compared to the same periods in 2023.

Previous 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.

Current wording

The community banking segment average loan yield increased 43 basis points to 5.58 percent for the third quarter of 2024 and increased 42 basis points to 5.48 percent for the first nine 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 39 basis points to 10.48 percent for the third quarter of 2024 and increased 43 basis points to 10.37 percent for the first nine months of 2024, compared to the same periods in 2023, due primarily to the effects of the higher interest rate environment, partially offset by the effects of purchasing higher credit quality loan contracts which have lower yields. The mortgage banking segment average loan yield decreased 89 basis points to 5.90 percent for the third quarter of 2024 and decreased 44 basis points to 6.13 percent for the first nine 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 $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.

Current wording

Average securities available for sale decreased $86.1 million and $85.5 million for the third quarter and first nine 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 31 basis points to 2.70 percent for the third quarter of 2024 and increased 28 basis points to 2.62 percent for the first nine 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, 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.

Current wording

Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the FRB, increased $200,000 for the third quarter of 2024 and decreased $2.9 million for the first nine months of 2024, compared to the same periods of 2023. The average yield on interest-bearing deposits in other banks increased 9 basis points for the third quarter of 2024 and increased 21 basis points for the first nine months of 2024, compared to the same periods in 2023, due to the higher interest rate environment.

Previous 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.

Current wording

nine months of 2024, respectively, compared to the same periods in 2023. The average cost of interest-bearing deposits increased 97 basis points for the third quarter of 2024 and increased 114 basis points for the first nine 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 $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.

Current wording

Average borrowings decreased $30.5 million and $37.2 million for the third quarter and first nine 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 7 basis points for the third quarter of 2024 and decreased 10 basis points for the first nine 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 higher interest rates.

Previous wording

The Corporation believes that higher interest rates will continue to have a positive effect on yields of new loan originations, renewals of fixed rate loans originated during periods of lower interest rates, and purchases of securities available for sale. The Corporation also expects the cost of deposits may continue to rise, albeit at a decelerating rate, amid competition for deposits and due to repricing of time deposits upon maturity, and that a portion of the Corporation’s funding will continue to be drawn from borrowings in the near term, which may result in a higher cost of funds. The effect of these factors on the Corporation’s net interest margin will depend on a number of factors, including the Corporation’s ability to grow loans at the community banking segment and consumer finance segment, to compete for deposits, and to the extent of its reliance on borrowings. The Corporation can give no assurance as to the timing or extent of changes in market interest rates or the impact of those changes or any other factor on the Corporation's ability to compete for loans and deposits or on its net interest margin. If market interest rates begin to decline, the Corporation’s net interest margin could be adversely affected as its assets typically reprice downward more quickly than its deposits and borrowings. Alternatively, if market interest rates were to rise, net interest margin could be positively impacted as the Corporation generally expects its assets to reprice upward more quickly than its deposits and borrowings.

Current wording

The Corporation believes that the effects of declining market interest rates could adversely affect its net interest margin in the short term as its assets typically reprice downward more quickly than its deposits and borrowings. The Corporation also believes that the higher interest rate environment will continue to have a positive effect on yields of renewals of fixed rate loans originated during periods of lower interest rates and purchases of securities available for sale. The Corporation also expects that a portion of the Corporation’s funding will continue to be drawn from borrowings in the near term, which may result in a higher cost of funds. The effect of these factors on the Corporation’s net interest margin will depend on a number of factors, including the Corporation’s ability to grow loans at the community banking segment and consumer finance segment, to compete for deposits, and the extent of its reliance on borrowings. The Corporation can give no assurance as to the timing or extent of changes in market interest rates or the impact of those changes or any other factor on the Corporation's ability to compete for loans and deposits or on its net interest margin. If market interest rates were to rise, net interest margin could be positively impacted in the short term as the Corporation generally expects its assets to reprice upward more quickly than its deposits and borrowings.

Previous 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.

Current wording

Total noninterest income increased $2.6 million, or 41.2 percent, for the third quarter of 2024 and increased $1.8 million, or 8.1 percent, for the first nine months of 2024, compared to the same periods of 2023, due primarily to fluctuations in unrealized gains on the rabbi trust, higher wealth management services income, higher other service charges and fees, and higher investment income from other equity interests. The increase for the third quarter of 2024 also included higher gains on sales of loans due to higher volume of mortgage loan originations.

Previous 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.

Current wording

Total noninterest expenses increased $1.6 million, or 7.3 percent, in the third quarter of 2024 and increased $1.8 million, or 2.7 percent, in the first nine months of 2024, compared to the same periods in 2023 due primarily to fluctuations in deferred compensation liabilities, and higher occupancy expense related to branch network improvements, data processing expenses related to investments in operational technology and professional fees, partially offset by lower compensation, payroll taxes and employee benefits and other expenses. Additionally, the mortgage banking segment recorded a net reversal of provision for indemnifications for the third quarter and the first nine months of 2024 of $100,000 and $375,000, respectively, compared to a net reversal of provision for indemnifications of $200,000 and $435,000 for the third quarter and the first nine months of 2023, respectively.

Previous 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.

Current wording

The Corporation’s consolidated effective income tax rate was 18.7 percent for the third quarter of 2024, an increase compared to 18.6 percent for the same period in 2023 due primarily to a lower share of income at the community banking segment, which is primarily not subject to state income taxes. The Corporation’s consolidated effective income tax rate was 17.8 percent for the first nine months of 2024, a decrease compared to 18.8 percent for the same period in 2023 due primarily to a higher share of income at the community banking segment, which is primarily not subject to state income taxes.

Previous wording

The community banking segment reported net income of $4.6 million and $8.6 million for the second quarter and first six months of 2024, respectively, compared to $5.6 million and $12.1 million for the same periods in 2023. The decreases in community banking segment net income were due primarily to:

Current wording

The community banking segment reported net income of $5.3 million and $13.9 million for the third quarter and first nine months of 2024, respectively, compared to $5.7 million and $17.7 million for the same periods in 2023. The decreases in community banking segment net income were due primarily to:

Previous 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

Current wording

Net interest income for the community banking segment decreased by $126,000 to $18.3 million for the third quarter of 2024 and decreased $3.3 million to $52.9 million for the first nine months of 2024, compared to the same periods in 2023 due primarily to a decrease in net interest margin, partially offset by higher average balances of earning assets. 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 third quarter and first nine months of 2024, compared to the same periods of 2023, due primarily to the effects of the higher interest rate environment.

Previous 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.

Current wording

The community banking segment recorded $700,000 and $1.7 million in provision for credit losses for the third quarter and first nine months of 2024, respectively, due primarily to growth in the loan portfolio, compared to $500,000 and $1.6 million in provision for credit losses for the same periods in 2023. Noninterest income increased for the third quarter and first nine months of 2024, compared to the same periods in 2023, due primarily to higher wealth management services income and higher investment income from other equity interests. Noninterest expenses increased for the third quarter and first nine months of 2024, compared to the same periods in 2023, due primarily to higher occupancy, data processing 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 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.

Current wording

Elevated level of mortgage interest rates, combined with higher home prices and lower levels of inventory, has led to a level of mortgage loan originations in 2024 and 2023 for the industry that is lower than levels during 2022 and 2021. Mortgage loan originations for the mortgage banking segment increased 21.1 percent and decreased less than 1.0 percent for the third quarter and first nine 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 27.7 percent and 4.3 percent for the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. Locked loan commitments were $48.2 million at September 30, 2024 compared to $26.2 million and $40.9 million at December 31, 2023 and September 30, 2023, respectively. Mortgage loan segment originations include originations of loans sold to the community banking segment, at prices similar to those paid by third-party investors. All interest expense at the mortgage banking segment is on variable rate borrowings from the community banking segment. These transactions are eliminated to reach consolidated totals.

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 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.

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 third quarter and first nine months of 2024, compared to the same periods in 2023, due primarily to the negative impacts of reduced mortgage loan volume in the industry, partially offset by an increase in the number of institutional customers and the types of services provided.

Previous wording

During the second quarter and first six months of 2024, the mortgage banking segment recorded a reversal of provision for indemnification losses of $135,000 and $275,000, respectively, compared to a reversal of provision for indemnification

Current wording

During the third quarter and first nine months of 2024, the mortgage banking segment recorded a reversal of provision for indemnification losses of $100,000 and $375,000, respectively, compared to a reversal of provision for indemnification

Previous 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.

Current wording

and economic uncertainty related to the COVID-19 pandemic. The release of indemnification reserves in 2024 and 2023 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 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:

Current wording

The consumer finance segment reported net income of $311,000 and $1.1 million for the third quarter and first nine months of 2024, respectively, compared to net income of $682,000 and $2.3 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 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.

Current wording

Average loan yields and average cost of borrowings were higher for the third quarter and first nine months of 2024, compared to the same periods of 2023, due primarily to the effects of the higher interest rate environment. All interest expense at the consumer finance segment is on fixed and variable rate borrowings from the community banking segment. These transactions are eliminated to reach consolidated totals.

Previous 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.

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 larger loan amounts due to higher automobile values during 2020 and 2021 and a decline in wholesale values of used automobiles since then. Delinquency and loss rates have generally returned to pre-pandemic levels due to the

Previous wording

Table 14 summarizes the Corporation’s credit ratios on a consolidated basis and Table 15 summarizes nonperforming assets by principal business segment as of June 30, 2024 and December 31, 2023. The mortgage banking segment did not have any nonperforming assets as of June 30, 2024 or December 31, 2023.

Current wording

Table 14 summarizes the Corporation’s credit ratios on a consolidated basis and Table 15 summarizes nonperforming assets by principal business segment as of September 30, 2024 and December 31, 2023. The mortgage banking segment did not have any nonperforming assets as September 30, 2024 or December 31, 2023.

Previous 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.

Current wording

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 September 30, 2024 from 1.26 percent at December 31, 2023, due primarily to improvement in current and expected economic conditions, notably inflation and the prospects of a soft landing. 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 $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

Current wording

Nonaccrual loans at the consumer finance segment were $1.1 million at September 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 (i.e. the deficiency) is charged against the allowance for credit losses. At September 30, 2024, repossessed vehicles available for sale totaled $522,000 compared to $646,000 at December 31, 2023.

Previous 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.

Current wording

The consumer finance segment experienced net charge-offs at an annualized rate of 2.65 percent and 2.36 percent of average total loans for the third quarter and first nine months of 2024, respectively, compared to 1.99 percent and 1.75 percent for the same periods 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 larger loan amounts due to higher automobile values during 2020 and 2021 and a decline in wholesale values of used automobiles since then. Annualized net charge-offs for third quarter of 2024 increased from 1.88 percent for the second quarter of 2024 due primarily to seasonal trends within the portfolio. At September 30, 2024, total delinquent loans as a percentage of total loans was 3.49 percent compared to 4.09 percent at December 31, 2023 and 3.30 percent at September 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 $23.2 million at September 30, 2024 and $23.6 million at December 31, 2023. The allowance for credit losses as a percentage of total loans decreased to 4.87 percent at September 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 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.

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 1.91 percent, 2.20 percent and 1.58 percent as a percentage of average automobile loans outstanding for the third quarter of 2024, the third quarter of 2023 and the second quarter of 2024, respectively. Average amounts of payment deferrals of automobile loans on a monthly basis, which are not included in delinquent loans, were 1.70 percent and 1.83 percent as a percentage of average automobile loans outstanding for the first nine months of 2024 and 2023, respectively.

Previous wording

The consumer finance segment’s focus has included non-prime borrowers and, therefore, the anticipated rates of delinquencies, defaults, repossessions and losses on the consumer finance loans are higher than those experienced in the general automobile finance industry and could be more dramatically affected by changes in general economic conditions. Changes in economic conditions may also affect consumer demand for used automobiles and values of automobiles securing outstanding loans, due to changes in demand or changes in levels of inventory of used automobiles, which may directly affect the amount of a loss incurred by the consumer finance segment in the event of default. While we manage the higher risk inherent in loans made to non-prime borrowers through the underwriting criteria, portfolio management and collection methods employed by the consumer finance segment, we cannot guarantee that these criteria or methods will afford adequate protection against these risks. With the consumer finance segment’s implementation of a scorecard model for purchasing loan contracts, the credit-worthiness of borrowers at origination has improved for automobile loans purchased and the level of credit losses experienced has decreased relative to long-term historical averages. We cannot provide any assurance that the consumer finance segment’s net charge-off ratio will not increase in future periods. However, we believe that the current allowance for credit losses is adequate to reflect the net amount expected to be collected on existing consumer finance segment loans that may become uncollectible. If factors influencing the consumer finance segment result in higher net charge-off ratios in future periods, the consumer finance segment may need to increase the level of its allowance for credit losses through additional provisions for credit losses, which could negatively affect future earnings of the consumer finance segment.

Current wording

and collection methods employed by the consumer finance segment, we cannot guarantee that these criteria or methods will afford adequate protection against these risks. With the consumer finance segment’s use of a scorecard model for purchasing loan contracts, the credit-worthiness of borrowers at origination has improved for automobile loans purchased and the level of credit losses experienced has decreased relative to long-term historical averages. We cannot provide any assurance that the consumer finance segment’s net charge-off ratio will not increase in future periods. However, we believe that the current allowance for credit losses is adequate to reflect the net amount expected to be collected on existing consumer finance segment loans that may become uncollectible. If factors influencing the consumer finance segment result in higher net charge-off ratios in future periods, the consumer finance segment may need to increase the level of its allowance for credit losses through additional provisions for credit losses, which could negatively affect future earnings of the consumer finance segment.

Previous 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.

Current wording

At September 30, 2024, the Corporation had total assets of $2.6 billion, an increase of $112.4 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, additional borrowings, and deployment of cash on hand. 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 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.

Current wording

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

Previous 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.

Current wording

Securities available for sale decreased by $53.4 million to $409.0 million at September 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 decreased to $21.7 million at September 30, 2024, compared to $31.6 million at December 31, 2023.

Previous wording

The following table presents additional information pertaining to the composition of the securities portfolio at amortized cost, by the earlier of contractual maturity or expected maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

Current wording

The following table presents additional information pertaining to the composition of the securities portfolio at amortized cost, by the earlier of contractual maturity or expected maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties. The total effective duration of the investment portfolio is 4.1 years as of September 30, 2024.