FIDELITY D & D BANCORP INC

Previous wording

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of June 30, 2024 compared to December 31, 2023 and a comparison of the results of operations for the three and six months ended June 30, 2024 and 2023. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s 2023 Annual Report filed on Form 10-K.

Current wording

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of September 30, 2024 compared to December 31, 2023 and a comparison of the results of operations for the three and nine months ended September 30, 2024 and 2023. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s 2023 Annual Report filed on Form 10-K.

Previous wording

The Company is a Pennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank and trust subsidiary is The Fidelity Deposit and Discount Bank. The Company is headquartered in Dunmore, Pennsylvania. We consider Lackawanna, Northampton and Luzerne Counties our primary marketplace.

Current wording

The Company is a Pennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank and trust subsidiary is The Fidelity Deposit and Discount Bank. The Company is headquartered in Dunmore, Pennsylvania. We consider Lackawanna, Northampton and Luzerne Counties our primary marketplace, the "market area".

Previous wording

As a leading Northeastern and Eastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses. We continue to implement management strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase the amount of relationship core deposits (see “Funds Provided” section of this management’s discussion and analysis). These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new business prospects. The Bank has a personal and corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand and optimize our franchise footprint, consisting presently of our 21-branch network.

Current wording

As a leading Northeastern and Eastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses. We continue to implement management strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase the amount of relationship core deposits (see “Funds Provided” section of this management’s discussion and analysis). These strategies include a focus on commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new business prospects. The Bank has a personal and corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand and optimize our franchise footprint, consisting presently of our 21-branch network.

Previous wording

We are impacted by national, regional and market area economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, Lackawanna and Luzerne counties, and Eastern Pennsylvania, Northampton county. The Federal Open Market Committee (FOMC) increased interest rates by 425 basis points during 2022 and another 100 basis points during 2023; no change since prior year. According to the U.S. Bureau of Labor Statistics, the national unemployment rate for June 2024 was 4.1%, up 0.4 percentage points from December 2023. The unemployment rates in the Scranton - Wilkes-Barre – Hazleton (market area north) and the Allentown – Bethlehem – Easton (market area south) Metropolitan Statistical Areas (local) increased faster than the national unemployment rate. The local unemployment rates at June 30, 2024 were 4.3% in market area north and 3.9% in market area south, respectively, an increase of 0.8 percentage points and 0.7 percentage points from the 3.5% and 3.2%, respectively, at December 31, 2023. The median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro each increased 8.0% and 7.7% from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, and values are expected to grow 1.1% and 1.7% in the next year. In light of these expectations, we are uncertain if real estate values could continue to increase at these levels with the current elevated rate environment, however we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

Current wording

We are impacted by national, regional and market area economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, Lackawanna and Luzerne counties, and Eastern Pennsylvania, Northampton county. In the third quarter of 2024, the Federal Open Market Committee (FOMC) decreased interest rates by 50 basis points. According to the U.S. Bureau of Labor Statistics, the national unemployment rate for September 2024 was 4.1%, up 0.4 percentage points from December 2023. However, the unemployment rates in the Scranton - Wilkes-Barre – Hazleton (market area north) and the Allentown – Bethlehem – Easton (market area south) Metropolitan Statistical Areas (local) decreased as the national unemployment increased. The local unemployment rates at September 30, 2024 were 3.4% in market area north and 3.1% in market area south, respectively, a decrease of 0.1 percentage point and 0.1 percentage point from the 3.5% and 3.2%, respectively, at December 31, 2023. The median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro each increased 7.0% and 5.8% from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, and values are expected to grow 1.0% and 2.0% in the next year. In light of these expectations, we believe the real estate values could continue to increase at these levels with the declining rate environment. Management will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

Previous wording

For the six months ended June 30, 2024, net income was $10.0 million, or $1.73 diluted earnings per share, compared to $12.4 million, or $2.18 diluted earnings per share, for the six months ended June 30, 2023.

Current wording

For the nine months ended September 30, 2024, net income was $15.0 million, or $2.59 diluted earnings per share, compared to $17.7 million, or $3.11 diluted earnings per share, for the nine months ended September 30, 2023.

Previous wording

As of June 30, 2024 and June 30, 2023, tangible common book value per share (non-GAAP) was $30.52 and $27.59, respectively. See reconciliation on page 36. The increase in tangible book value was due primarily to an increase in retained earnings from net income. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located below within this management’s discussion and analysis.

Current wording

As of September 30, 2024 and September 30, 2023, tangible common book value per share (non-GAAP) was $32.55 and $25.37, respectively. See reconciliation on page 37. The increase in tangible book value was due primarily to an increase in retained earnings from net income and the increase in unrealized loss in AFS securities. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located below within this management’s discussion and analysis.

Previous wording

The following table provides a reconciliation of the tangible common equity (non-GAAP) and the calculations of tangible book value per share and tangible common equity ratio:

Current wording

The following table provides a reconciliation of tangible common equity (non-GAAP) and the calculations of tangible book value per share and tangible common equity ratio:

Previous wording

For the second quarter of 2024, the Company generated net income of $4.9 million, or $0.86 per diluted share, compared to $5.4 million, or $0.94 per diluted share, for the second quarter of 2023. The $0.5 million decline in net income resulted primarily from the $0.4 million decrease in net interest income caused in major part by higher interest expense. The increase of $0.2 million in non-interest expenses and $0.2 million higher provision for credit losses on unfunded loan commitments was offset by the $0.4 million reduction in the provision for credit losses on loans. In the year-to-date comparison, net income decreased by $2.4 million to $10.0 million, or $1.73 per diluted share, from $12.4 million, or $2.18 per diluted share. The decline in net income stemmed from the $2.4 million reduction in net interest income and $1.0 million higher non-interest expenses partially offset by the reduction of $0.5 million in provision for credit losses on loans and $0.4 million in provision for income taxes.

Current wording

Net income for the quarter ended September 30, 2024 was $5.0 million, or $0.86 diluted earnings per share, compared to $5.3 million, or $0.93 diluted earnings per share, for the quarter ended September 30, 2023. The $0.3 million decline in net income resulted primarily from the $1.0 million increase in non-interest expenses coupled with a $0.4 million increase in the provision for credit losses on unfunded loan commitments and $0.2 million increase in the provision for credit losses on loans. This was partially offset by a $0.8 million increase in net interest income and a $0.7 million increase in non-interest income. For the nine months ended September 30, 2024, net income was $15.0 million, or $2.59 diluted earnings per share, compared to $17.7 million, or $3.11 diluted earnings per share, for the nine months ended September 30, 2023. The $2.7 million, or 15%, decline in net income stemmed from the $2.0 million higher non-interest expenses and $1.6 million reduction in net interest income partially offset by the increase of $0.8 million in non-interest income.

Previous wording

Return on average assets (ROA) was 0.81% and 0.89% for the second quarters of 2024 and 2023, respectively, and 0.82% and 1.04% for the six months ended June 30, 2024 and 2023, respectively. During the same time periods, return on average shareholders’ equity (ROE) was 10.44% and 12.19%, respectively, and 10.57% and 14.52%, respectively. The decreases in ROA and ROE were primarily the result of the decline in net income during the second quarter of 2024 and year-to-date 2024. Pre-provision net revenue to average assets (non-GAAP) was 1.00% and 1.10% for the three months ended June 30, 2024 and 2023, respectively, and 0.98% and 1.28% for the six months ended June 30, 2024 and 2023, respectively. The decreases were due to a decline in income before taxes quarter-over-quarter and year-over-year.

Current wording

Return on average assets (ROA) was 0.79% and 0.88% for the third quarters of 2024 and 2023, respectively, and 0.81% and 0.99% for the nine months ended September 30, 2024 and 2023, respectively. During the same time periods, return on average shareholders’ equity (ROE) was 9.89% and 11.96%, respectively, and 10.34% and 13.64%, respectively. The decreases in ROA and ROE were primarily the result of the decline in net income as average assets and equity increased during the third quarter of 2024 and year-to-date 2024, compared to the same periods of 2023. Pre-provision net revenue to average assets (non-GAAP) was 1.05% and 1.02% for the three months ended September 30, 2024 and 2023, respectively, and 1.00% and 1.19% for the nine months ended September 30, 2024 and 2023, respectively. The increase quarter-over-quarter was due to an increase in pre-provision net revenue in the third quarter of 2024. The year-over-year decrease is due to a decline in income before taxes.

Previous wording

Net interest income was $15.1 million for the second quarter of 2024, a 2% decrease over the $15.5 million earned for the second quarter of 2023. The $0.4 million decline in net interest income resulted primarily from the increase of $3.4 million in interest expense due to an 82 basis point increase in the rates paid on interest-bearing deposits coupled with a $108.8 million quarter-over-quarter increase in average interest-bearing deposits, which resulted in $3.9 million in additional interest expense. The Company utilized $36.1 million less average short-term borrowings during the second quarter of 2024 which decreased interest expense by $0.4 million compared to the second quarter of 2023. Partially offsetting the higher interest expense, interest income grew $3.1 million mainly due to a $44.2 million increase in the average balance of interest-earning assets and a 46 basis point increase in FTE yield. The loan portfolio had the biggest impact, producing a $2.9 million increase in FTE interest income from $82.1 million in higher average balances and an increase of 46 basis points in FTE loan yield.

Current wording

Net interest income was $15.4 million for the third quarter of 2024, a 5% increase over the $14.6 million earned for the third quarter of 2023. The $0.8 million increase in net interest income resulted from the increase of $3.6 million in interest income primarily due to a $71.0 million increase in the average balance of interest-earning assets and a 50 basis point increase in fully-taxable equivalent ("FTE") yield. The loan portfolio had the biggest impact, producing a $3.7 million increase in FTE interest income from $122.8 million in higher quarterly average balances and an increase of 49 basis points in FTE loan yield. Slightly offsetting the higher interest income, a $2.8 million increase in interest expense was due to a 55 basis point increase in the rates paid on interest-bearing deposits coupled with a $94.4 million quarter-over-quarter increase in average deposit balances.

Previous wording

Net interest income was $30.1 million for the six months ended June 30, 2024 compared to $32.5 million for the six months ended June 30, 2023. The $2.4 million, or 8%, reduction was the result of interest expense growing faster than interest income. On the asset side, the loan portfolio caused interest income growth by producing $5.9 million more in interest income from an increase of 47 basis points in FTE loan yields on $84.5 million in higher average balances. On the funding side, total interest expense increased by $8.8 million primarily due to an increase in interest expense paid on deposits of $9.2 million from a 102 basis point higher rate paid on a $98.6 million larger average balance of interest-bearing deposits, partially offset by a decrease in interest expense on borrowings of $0.4 million for the six months ended June 30, 2024 compared to the same period in 2023.

Current wording

Net interest income was $45.5 million for the nine months ended September 30, 2024 compared to $47.1 million for the nine months ended September 30, 2023. The $1.6 million, or 3%, decrease was the result of interest expense growing faster than interest income. On the asset side, the loan portfolio caused interest income growth by producing $9.5 million more in interest income primarily from an increase of 47 basis points in FTE loan yields on $97.4 million in higher average balances. On the funding side, total interest expense increased by $11.6 million primarily due to an increase in interest expense paid on deposits of $12.0 million from an 86 basis point higher rate paid on a $97.1 million larger average balance of interest-bearing deposits, partially offset by a decrease in interest expense on borrowings of $0.4 million for the nine months ended September 30, 2024 compared to the same period in 2023.

Previous wording

The overall cost of interest-bearing liabilities was 2.58% for the second quarter of 2024, an increase of 74 basis points from the 1.84% for the second quarter of 2023. The cost of funds increased 59 basis points to 1.96% for the second quarter of 2024 from 1.37% for the second quarter of 2023. The FTE yield on interest-earning assets was 4.58% for the second quarter of 2024, an increase of 46 basis points from the 4.12% for the second quarter of 2023. The Company’s FTE (non-GAAP measurement) net interest spread was 2.00% for the second quarter of 2024, decrease of 28 basis points from the 2.28% recorded for the second quarter of 2023. FTE net interest margin decreased by 11 basis points to 2.71% for the three months ended June 30, 2024 from 2.82% for the same 2023 period due to the increase in rates paid on interest-bearing liabilities accelerating at a faster pace than the yields on interest-earning assets.

Current wording

The overall cost of interest-bearing liabilities was 2.70% for the third quarter of 2024, an increase of 53 basis points from the 2.17% for the third quarter of 2023. The cost of funds increased 45 basis points to 2.08% for the third quarter of 2024 from 1.63% for the third quarter of 2023. The FTE yield on interest-earning assets was 4.68% for the third quarter of 2024, an increase of 50 basis points from the 4.18% for the third quarter of 2023. The Company’s FTE (non-GAAP measurement) net interest spread was 1.98% for the third quarter of 2024, a decrease of 3 basis points from the 2.01% recorded for the third quarter of 2023. FTE net interest margin increased to 2.70% for the three months ended September 30, 2024 from 2.63% for the same 2023 period due to allocation of better performing interest earning assets, which led to a 7 basis point margin improvement. In the third quarter of 2024, management continued to re-invest cash flow into more effective interest earning assets, such as the commercial loan portfolio. As a result, the Company experienced an increase in FTE adjusted net interest income of $0.9 million from $15.3 million to $16.2 million, or 6%, for the three months ended September 30, 2023 and 2024, respectively.

Previous wording

The overall cost of interest-bearing liabilities was 2.54% for the six months ended June 30, 2024 compared to 1.59% for the six months ended June 30, 2023. The cost of funds increased 78 basis points to 1.95% for the six months ended June 30, 2024 from 1.17% from the same period of 2023. For the month of July 2024, the cost of interest-bearing liabilities was 15 basis points higher than the first six months of 2024 at 2.69% which shows the higher costs are expected to continue. The FTE yield on earning assets was 4.55% for the six months ended June 30, 2024, an increase of 46 basis points from the 4.09% from year-to-date June 30, 2023. The Company’s FTE (non-GAAP measurement) net interest spread was 2.01% for the six months ended June 30, 2024, a decrease of 49 basis points from the 2.50% recorded for the same period of 2023. FTE net interest margin decreased by 27 basis points to 2.70% for the six months ended June 30, 2024 from 2.97% for the same 2023 period due to the increase in rates paid on interest-bearing liabilities growing at a faster pace than the yields on interest-earning assets.

Current wording

The overall cost of interest-bearing liabilities was 2.60% for the nine months ended September 30, 2024 compared to 1.79% for the nine months ended September 30, 2023. The cost of funds increased 66 basis points to 1.99% for the nine months ended September 30, 2024 from 1.33% for the same period of 2023. The FTE yield on interest-earning assets was 4.59% for the nine months ended September 30, 2024, an increase of 47 basis points from the 4.12% for year-to-date September 30, 2023. The Company’s FTE (non-GAAP measurement) net interest spread was 1.99% for the nine months ended September 30, 2024, a decrease of 34 basis points from the 2.33% recorded for the same period of 2023. FTE net interest margin decreased by 16 basis points to 2.70% for the nine months ended September 30, 2024 from 2.86% for the same 2023 period due to the increase in rates paid on interest-bearing liabilities growing at a faster pace than the yields on interest-earning assets.

Previous wording

For the remainder of 2024, the Company currently expects to operate in a modestly declining interest rate environment during the second half of the year that may accelerate during 2025. Management is primarily reliant on the Federal Open Market Committee's statements and forecast. The Company’s net interest income performance has been reduced by asset yields being outpaced by higher cost of funds compressing net interest spread. The risk to net interest income improvement is rapid acceleration of deposit rates in the Company's market area. The FOMC increased the federal funds rate by 425 basis points during 2022 and another 100 basis points in 2023, which had a disproportional effect on rates paid on interest-bearing liabilities in 2024. On the asset side, the Prime interest rate, the benchmark rate that banks use as a base rate for adjustable-rate loans was also increased 425 basis points during 2022 and another 100 basis points through 2023. Consensus economic forecasts are predicting small declines between 25 to 50 basis points in the short-term rates towards the end of 2024, with at least another 100 basis points during 2025. For the remainder of 2024, the Company currently maintains a loan pipeline which is expected to grow the loan portfolio funded by utilizing borrowing capacity until such time deposit growth will be able to pay down short-term borrowings. The focus remains to manage net interest income through a declining forecasted rate cycle by exercising disciplined and proactive loan pricing and managing deposit costs to maintain a reasonable spread, to the extent possible, in order to mitigate further margin compression. Once interest rates begin to decline, focus shifts towards rebuilding net interest spread capacity to begin expanding margin back towards 3%.

Current wording

For the remainder of 2024, the Company currently expects to operate in a moderately declining interest rate environment that is expected to continue into the fourth quarter and into fiscal year 2025. Management is primarily reliant on the Federal Open Market Committee's statements and forecast. For the nine months ended September 30, 2024 compared to September 30, 2023, the Company’s net interest income performance has been reduced due to asset yields being outpaced by higher cost of funds, compressing net interest spread. For the three months ended September 30, 2024 compared to September 30, 2023, the Company experienced an increase in net interest income due to redeployment of assets into more effective interest earning assets, partially offset by the continued increase in cost of funds. In September 2024, the FOMC decreased the federal funds rate by 50 basis points, which did not have much of an impact on improving net interest margin as of quarter end. In November 2024, the FOMC decreased the fed funds rate another 25 basis points. Consensus economic forecasts are expecting small declines between 25 to 50 basis points through the end of 2024, with at least another 100 basis points during 2025. The Company does not expect to see improvement in net interest margin in the immediate effect, as rates on interest bearing deposits will take time to match the decreasing rate environment. For the remainder of 2024 and into fiscal year 2025, the Company currently maintains a loan pipeline which is expected to grow the loan portfolio funded by utilizing excess cash holdings and will plan to borrow in the event cash is depleted and there is not enough deposit growth to fund loan growth. The focus remains to manage margin compression by restructuring the balance sheet, being proactive with loan pricing and managing deposit costs to maintain a reasonable spread.

Previous wording

The Company’s cost of interest-bearing liabilities was 2.58% and 2.54% for the three and six months ended June 30, 2024, respectively, compared to 1.84% and 1.59% for the same 2023 periods. The increase in interest paid on deposits contributed to the higher cost of interest-bearing liabilities. The FOMC is expected to continue holding the federal funds rate at current levels in the beginning of the third quarter of 2024, but the Company may continue to experience pressure to further increase rates paid on deposits. To help mitigate the impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships and generate new loan volumes. Strategically deploying relationship deposits into interest earning-assets is an effective margin-building strategy that the Company expects to pursue and expand to help enhance net interest margin.

Current wording

The Company’s cost of interest-bearing liabilities was 2.70% and 2.60% for the three and nine months ended September 30, 2024, respectively, compared to 2.17% and 1.79% for the same 2023 periods. The increase in interest paid on deposits contributed to the higher cost of interest-bearing liabilities. The FOMC is expected to decrease the federal funds rate throughout the remainder of 2024, but the Company may continue to experience pressure to maintain higher rates on interest-bearing deposits due to the competitive nature of deposits in our market area. To help mitigate any impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships and generate new loan volumes.

Previous wording

The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% for June 30, 2024 and 2023 to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. See “Non-GAAP Financial Measures” within this management’s discussion and analysis for the FTE adjustments. This treatment allows a uniform comparison among yield on interest-earning assets. Loans include loans held-for-sale (HFS) and non-accrual loans but exclude the allowance for credit losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan cost amortization of $0.2 million and $0.2 million during the second quarters of 2024 and 2023, respectively, and $0.4 million and $0.5 million for the six months ended June 30, 2024 and 2023, respectively, are included in interest income from loans. Merchants Bank of Bangor and Landmark Community Bank loan fair value purchase accounting adjustments of $0.4 million and $0.7 million are included in interest income from loans and $1 thousand and $10 thousand reduced interest expense on deposits and borrowings for the three months ended June 30, 2024 and 2023. Merchants Bank of Bangor and Landmark Community Bank loan fair value purchase accounting adjustments of $0.9 million and $1.6 million are included in interest income from loans and $5 thousand and $21 thousand reduced interest expense on deposits and borrowings for the six months ended June 30, 2024 and 2023. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans.

Current wording

The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% for September 30, 2024 and 2023 to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. See “Non-GAAP Financial Measures” within this management’s discussion and analysis for the FTE adjustments. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans held-for-sale (HFS) and non-accrual loans but exclude the allowance for credit losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan cost amortization of $0.2 million and $0.3 million during the third quarters of 2024 and 2023, respectively, and $0.7 million and $0.7 million for the nine months ended September 30, 2024 and 2023, respectively, are included in interest income from loans. Merchants Bank of Bangor and Landmark Community Bank loan fair value purchase accounting adjustments of $0.3 million and $0.5 million are included in interest income from loans and $1 thousand and $7 thousand reduced interest expense on deposits and borrowings for the three months ended September 30, 2024 and 2023. Merchants Bank of Bangor and Landmark Community Bank loan fair value purchase accounting adjustments of $1.2 million and $2.0 million are included in interest income from loans and $6 thousand and $27 thousand reduced interest expense on deposits and borrowings for the nine months ended September 30, 2024 and 2023. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans.

Previous wording

For the three months ended June 30, 2024, the provision for credit losses on loans was $0.3 million and provision for credit losses on unfunded loan commitments was $0.1 million. For the three months ended June 30, 2024, the provision for credit losses on loans decreased $0.4 million compared to the three months ended June 30, 2023 due to lower growth in the loan portfolio and a reduction in net charge-offs. For the three months ended June 30, 2024, the provision for credit losses on unfunded loan commitments increased $0.2 million compared to the three months ended June 30, 2023 due to a higher growth in unfunded loan commitments, specifically commercial construction commitments.

Current wording

For the nine months ended September 30, 2024, the provision for credit losses on loans was $1.1 million and the provision for credit losses on unfunded loan commitments was $0.2 million. For the nine months ended September 30, 2024, the provision for credit losses on loans decreased $0.3 million compared to the nine months ended September 30, 2023 due to a reduction in net charge-offs. For the nine months ended September 30, 2024, the provision for credit losses on unfunded loan commitments increased $0.3 million compared to the nine months ended September 30, 2023 due to a higher growth in unfunded loan commitments, specifically commercial construction commitments.

Previous wording

The provision for credit losses derives from the reserve required from the allowance for credit losses calculation. The Company continued provisioning for six months ended June 30, 2024 to maintain an allowance level that management deemed adequate.

Current wording

The provision for credit losses derives from the reserve required from the allowance for credit losses calculation. The Company continued provisioning for nine months ended September 30, 2024 to maintain an allowance level that management deemed adequate.

Previous wording

For the second quarter of 2024, non-interest income increased $0.1 million, or 2%, to $4.6 million compared to $4.5 million for the second quarter of 2023. The increase in non-interest income was primarily attributable to $0.2 million higher fees from trust fiduciary activities and a $0.2 million loss on the write-down of premises and equipment that reduced non-interest income during the second quarter of 2023. Partially offsetting these increases, fees from commercial loans with interest rate hedges declined $0.3 million.

Current wording

Total non-interest income increased $0.7 million, or 15%, to $5.0 million for the third quarter of 2024 compared to $4.3 million for the third quarter of 2023. The increase in non-interest income was primarily attributable to an additional $0.1 in million service charges on commercial loans, $0.1 million in higher fees from trust fiduciary activities, $0.1 million more in financial services revenue, and fees from commercial loans with interest rate hedges which increased $0.1 million.

Previous wording

Total non-interest income for the six months ended June 30, 2024 was $9.2 million, an increase of $0.2 million, or 2%, from $9.0 million for the six months ended June 30, 2023. The increase was primarily due to $0.3 million in additional trust fiduciary fees and $0.1 million higher fees from financial services. The Company also had $0.2 million more non-interest income resulting from a write-down of premises and equipment during the first half of 2023. Partially offsetting these increases were decreases as follows: $0.3 million in recoveries from acquired charged-off loans and $0.3 million in fees from commercial loans with interest rate hedges recorded during the first half of 2023.

Current wording

Total non-interest income for the nine months ended September 30, 2024 was $14.2 million, an increase of $0.8 million, or 7%, from $13.4 million for the nine months ended September 30, 2023. The increase was primarily due to $0.5 million in additional trust fiduciary fees and $0.2 million higher fees from financial services. During the first nine months of 2023, the Company recorded a $0.1 million write-down associated with a branch closure reducing non-interest income. In the third quarter of 2023, the Company received $0.3 million in recoveries from acquired charged-off loans, offsetting the increase in other income. Additionally, the Company experienced a decrease of $0.2 million in fees from commercial loans with interest rate hedges compared to the first nine months of 2023.

Previous wording

Non-interest expenses increased $0.2 million, or 1%, for the second quarter of 2024 to $13.6 million from $13.4 million for the same quarter of 2023. The increase in non-interest expenses was primarily due to $0.5 million higher salaries and benefits expense from higher salaries related to new hires and banker incentives. There were also increases in professional services of $0.1 million and PA shares tax of $0.1 million. Partially offsetting these increases, net fraud losses decreased by $0.3 million and FDIC assessment expense decreased by $0.1 million in the second quarter of 2024 compared to the same quarter in 2023.

Current wording

Non-interest expenses increased $1.0 million, or 8%, for the third quarter of 2024 to $13.8 million from $12.8 million for the same quarter of 2023. The increase in non-interest expenses was primarily due to $0.9 million higher salaries and benefits expense from higher salaries related to new hires and banker incentives. There were also increases in professional services of $0.1 million and PA shares tax of $0.1 million.

Previous wording

Non-interest expenses increased to $27.3 million for the six months ended June 30, 2024, an increase of $1.0 million, or 4%, from $26.3 million for the six months ended June 30, 2023. The increase in non-interest expenses was primarily due to the $1.1 million increase in salaries and benefits expense coupled with an increase in professional fees of $0.3 million. The increases were partially offset by $0.4 million less in fraud losses and $0.2 million less advertising and marketing expenses.

Current wording

Non-interest expenses increased to $41.1 million for the nine months ended September 30, 2024, an increase of $2.0 million, or 5%, from $39.1 million for the nine months ended September 30, 2023. The increase in non-interest expenses was primarily due to the $2.0 million increase in salaries and benefits expense coupled with increases in professional fees of $0.3 million and PA shares tax of $0.3 million for the nine months ended September 30, 2024 compared to the same period in 2023. The increases were partially offset by $0.4 million less in fraud losses and $0.2 million less advertising and marketing expenses.

Previous wording

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were 1.48% and 1.45% for the six months ended June 30, 2024 and 2023. The expense ratio increased because of higher non-interest expenses. The efficiency ratio (non-GAAP) increased from 61.10% at June 30, 2023 to 67.01% at June 30, 2024 due to non-interest expenses increasing as net interest income declined. For more information on the calculation of the efficiency ratio, see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.

Current wording

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were 1.46% and 1.43% for the nine months ended September 30, 2024 and 2023. The expense ratio increased because of higher non-interest expenses. The efficiency ratio (non-GAAP) increased from 62.33% at September 30, 2023 to 66.44% at September 30, 2024 due to non-interest expenses increasing as net interest income declined. For more information on the calculation of the efficiency ratio, see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.

Previous wording

The provision for income taxes decreased $0.4 million during the six months ended June 30, 2024 compared to the same period in 2023 primarily due to lower income before taxes. The Company's effective tax rate was 12.7% at June 30, 2024 compared to 12.8% at June 30, 2023. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The decrease in the effective tax rate was primarily due to lower pre-tax income. If the federal corporate tax rate is increased, the Company’s net deferred tax liabilities and deferred tax assets will be re-valued upon adoption of the new tax rate. A federal tax rate increase will increase net deferred tax assets with a corresponding decrease to provision for income taxes.

Current wording

The provision for income taxes decreased $0.2 million during the nine months ended September 30, 2024 compared to the same period in 2023 primarily due to lower income before taxes. The Company's effective tax rate was 13.1% at September 30, 2024 compared to 11.9% at September 30, 2023. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The increase in the effective tax rate was primarily due to less in tax credits during 2024.

Previous wording

The Company's consolidated assets totaled $2.5 billion as of June 30, 2024, a decrease of $2.5 million from December 31, 2023. Cash and cash equivalents declined $33.9 million and the investment portfolio reduced by $15.8 million. The decline in the investment portfolio was primarily due to $11 million in paydowns and a $2 million decrease in market value of available-for-sale securities. During the first six months of 2024, the market value of held-to-maturity securities also decreased by $4 million, with $31 million in unrealized losses at June 30, 2024. These decreases were partially offset by $42 million in growth in the loans and leases portfolio during the first half of 2024. During the same time period, total liabilities decreased $8.7 million, or less than 1%. Reductions of $18.9 million in short-term borrowings were partially offset by deposit growth of $10.7 million with the remainder paid from cash balances.

Current wording

The Company’s total assets had a balance of $2.6 billion as of September 30, 2024, an increase of $0.1 billion, from $2.5 billion as of December 31, 2023. The increase primarily resulted from $107.9 million in growth in the loans and leases portfolio during the nine months ended September 30, 2024. Cash and cash equivalents increased $8.2 million and the investment portfolio decreased by $8.5 million. The decline in the investment portfolio was primarily due to $16.7 million in paydowns partially offset by an $8.4 million increase in market value of available-for-sale securities. As of September 30, 2024, the market value of held-to-maturity securities also increased by $6.0 million compared to December 31, 2023, with $22.2 million in unrealized losses. During the same time period, total liabilities increased $95.0 million, or 4%. Deposit growth of $184.1 million was utilized to pay down $92.0 million in short-term borrowings and fund growth in the loan portfolio.

Previous wording

At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. Some of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Debt securities AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity. For the six months ended June 30, 2024, AOCI declined by $0.5 million due to the change in fair value of the Company's investment securities.

Current wording

At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. Some of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Debt securities AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity. For the nine months ended September 30, 2024, AOCI increased by $8.0 million primarily due to the change in fair value of the Company's investment securities.

Previous wording

As of June 30, 2024, the carrying value of held-to-maturity securities was $225.0 million, net of $14.8 million in remaining transferred discount.

Current wording

As of September 30, 2024, the carrying value of held-to-maturity securities was $225.4 million, net of $14.3 million in remaining transferred discount.

Previous wording

During September 2023, the Company entered into a $100 million interest rate swap with a third-party financial institution to limit the risk to the investment portfolio of rising interest rates. The interest rate swap was designated as a fair value hedge and utilized a pay fixed interest rate swap to hedge the change in fair value attributable to the movement in the Secured Overnight Financing Rate ("SOFR"). The Company designated $50 million of the swap's notional balance as a hedge against the closed portfolio of 20-year mortgage-backed securities and $50 million as a hedge against the closed portfolio of tax-free municipal bonds. As of June 30, 2024, the Company recorded the fair value of the swap of $0.3 million in accrued interest payable and other liabilities on the consolidated balance sheet offset by a $0.3 million increase to the carrying value of designated investment securities.

Current wording

During September 2023, the Company entered into a $100 million interest rate swap with a third-party financial institution to limit the risk to the investment portfolio of rising interest rates. The interest rate swap was designated as a fair value hedge and utilized a pay fixed interest rate swap to hedge the change in fair value attributable to the movement in the Secured Overnight Financing Rate ("SOFR"). The Company designated $50 million of the swap's notional balance as a hedge against the closed portfolio of 20-year mortgage-backed securities and $50 million as a hedge against the closed portfolio of tax-free municipal bonds. As of September 30, 2024, the Company recorded the fair value of the swap of $2.3 million in accrued interest payable and other liabilities on the consolidated balance sheet offset by a $2.3 million increase to the carrying value of designated investment securities.

Previous wording

As of June 30, 2024, the carrying value of investment securities amounted to $552.5 million, or 22% of total assets, compared to $568.3 million, or 23% of total assets, as of December 31, 2023. On June 30, 2024, 33% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations. The mortgage-backed securities portfolio includes only pass-through bonds issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (GNMA).

Current wording

As of September 30, 2024, the carrying value of investment securities amounted to $559.8 million, or 21% of total assets, compared to $568.3 million, or 23% of total assets, as of December 31, 2023. On September 30, 2024, 33% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations. The mortgage-backed securities portfolio includes only pass-through bonds issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (GNMA).

Previous wording

The Company’s municipal (obligations of states and political subdivisions) portfolio is comprised of tax-free municipal bonds with a book value of $187.2 million ($179.8 million including the remaining net unrealized loss transferred on HTM securities) and taxable municipal bonds with a book value of $88.6 million ($82.9 million including the remaining net unrealized loss transferred on HTM securities). The overall credit ratings of these municipal bonds were as follows: 37% AAA, 61% AA, and 1% A. For municipal securities HTM, the Company utilized a third-party model to analyze whether a credit loss reserve is needed for these bonds. The amount of the credit loss reserve calculated was immaterial because of the underlying strong credit quality of the municipal portfolio.

Current wording

The Company’s municipal (obligations of states and political subdivisions) portfolio is comprised of tax-free municipal bonds with a carrying value of $189.2 million ($168.5 million including the remaining net unrealized loss transferred on HTM securities) and taxable municipal bonds with a carrying value of $89.4 million ($97.5 million including the remaining net unrealized loss transferred on HTM securities). The overall credit ratings of these municipal bonds were as follows: 37% AAA, 61% AA, and 1% A. For municipal securities HTM, the Company utilized a third-party model to analyze whether a credit loss reserve is needed for these bonds. The amount of the credit loss reserve calculated was immaterial because of the underlying strong credit quality of the municipal portfolio.

Previous wording

During the first six months of 2024, the carrying value of total investments decreased $15.8 million, or 3%. The decline was primarily due to principal reductions totaling $10.8 million, a decline in the unrealized loss position of $1.7 million in the AFS portfolio and a $1.8 million decrease in the fair value of the swap. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile, to the extent possible.

Current wording

During the first nine months of 2024, the carrying value of total investments decreased $8.5 million, or 1%. The decline was primarily due to principal reductions totaling $17.5 million, partially offset by an increase in the unrealized loss position of $8.4 million in the AFS portfolio. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile, to the extent possible.

Previous wording

Investment securities were comprised of AFS and HTM securities as of June 30, 2024 and December 31, 2023. The AFS securities were recorded with a net unrealized loss of $53.3 million and a net unrealized loss of $51.6 million as of June 30, 2024 and December 31, 2023, respectively. Of the $1.7 million net decline; $0.6 million was attributable to municipal securities and $1.1 million was attributable to mortgage-backed securities. During 2022, securities with net unrealized losses totaling $23.9 million were transferred to HTM, of which $1.2 million and $1.1 million was accreted into other comprehensive income for the six months ended June 30, 2024 and 2023, respectively. The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve rise, especially at the intermediate and long end, the values of debt securities tend to decline. Whether or not the value of the Company’s investment portfolio will change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates decline, the market values of the Company’s debt securities portfolio could be subject to market value increases.

Current wording

Investment securities were comprised of AFS and HTM securities as of September 30, 2024 and December 31, 2023. The AFS securities were recorded with a net unrealized loss of $43.2 million and a net unrealized loss of $51.6 million as of September 30, 2024 and December 31, 2023, respectively. Of the $8.4 million net increase; $5.5 million was attributable to mortgage-backed securities, $2.0 million was attributable to municipal securities, and $1.0 million was attributable to agency securities. The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve rise, especially at the intermediate and long end, the values of debt securities tend to decline. Whether or not the value of the Company’s investment portfolio will change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates decline, the market values of the Company’s debt securities portfolio could be subject to market value increases.

Previous wording

As of June 30, 2024, the Company had $275.3 million in public deposits, or 13% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on public and trust deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. The Company also pledges securities for derivative instruments and certain borrowed funds. As of June 30, 2024, the balance of pledged securities required was $335.4 million, or 61% of total securities.

Current wording

As of September 30, 2024, the Company had $294.5 million in public deposits, or 13% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on public and trust deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. The Company also pledges securities for derivative instruments and certain borrowed funds. As of September 30, 2024, the balance of pledged securities required was $362.2 million, or 65% of total securities.

Previous wording

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether credit losses on debt securities exist. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security has credit losses. If a decline in value is deemed to be a credit loss, a contra-asset is recorded on both HTM and AFS securities, limited by the amount that the fair value is less than the amortized cost basis. During the six months ended June 30, 2024, the Company did not incur any credit losses on debt securities from its investment securities portfolio.

Current wording

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether credit losses on debt securities exist. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security has credit losses. If a decline in value is deemed to be a credit loss, a contra-asset is recorded on both HTM and AFS securities, limited by the amount that the fair value is less than the amortized cost basis. During the nine months ended September 30, 2024, the Company did not incur any credit losses on debt securities from its investment securities portfolio.

Previous wording

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaled $82 thousand as of June 30, 2024 and December 31, 2023. The balance in FHLB stock was $3.9 million and $3.8 million as of June 30, 2024 and December 31, 2023, respectively. The dividends received from the FHLB totaled $148 thousand and $161 thousand for the six months ended June 30, 2024 and 2023, respectively.

Current wording

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaled $82 thousand as of September 30, 2024 and December 31, 2023. The balance in FHLB stock was $3.9 million and $3.8 million as of September 30, 2024 and December 31, 2023, respectively. The dividends received from the FHLB totaled $227 thousand and $229 thousand for the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

As of June 30, 2024 and December 31, 2023, loans HFS consisted of residential mortgages with carrying amounts of $0.7 million and $1.5 million, respectively, which approximated their fair values. During the six months ended June 30, 2024, residential mortgage loans with principal balances of $25.5 million were sold into the secondary market and the Company recognized net gains of $0.5 million, compared to $23.2 million and $0.4 million, respectively, during the six months ended June 30, 2023.

Current wording

As of September 30, 2024 and December 31, 2023, loans HFS consisted of residential mortgages with carrying amounts of $1.8 million and $1.5 million, respectively, which approximated their fair values. During the nine months ended September 30, 2024, residential mortgage loans with principal balances of $44.7 million were sold into the secondary market and the Company recognized net gains of $0.8 million, compared to $37.9 million and $0.7 million, respectively, during the nine months ended September 30, 2023.

Previous wording

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster relationships. At June 30, 2024 and December 31, 2023, the servicing portfolio balance of sold residential mortgage loans was $483.9 million and $477.7 million, respectively, with mortgage servicing rights of $1.4 million and $1.5 million for the same periods, respectively.

Current wording

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster relationships. At September 30, 2024 and December 31, 2023, the servicing portfolio balance of sold residential mortgage loans was $490.9 million and $477.7 million, respectively, with mortgage servicing rights of $1.4 million and $1.5 million for the same periods, respectively.

Previous wording

As of June 30, 2024, the Company had gross loans and leases totaling $1.7 billion, an increase of $42.7 million, or 3%, compared to $1.7 billion at December 31, 2023.

Current wording

As of September 30, 2024, the Company had gross loans and leases totaling $1.8 billion, an increase of $108.6 million, or 6%, compared to $1.7 billion at December 31, 2023.

Previous wording

During the six months ended June 30, 2024, the growth in the portfolio was primarily attributed to a $42.0 million increase in the commercial portfolio due to an origination to a single municipal borrower totaling $15 million, the origination of three commercial real estate non-owner occupied loans to three different borrowers totaling $23 million and portfolio growth. The Company also experienced a $13.1 million increase in the residential portfolio, the result of a higher percentage of adjustable-rate mortgages recorded as held-for-investment during this period. This growth was offset by the $12.3 million reduction in the consumer portfolio attributed to a strategic reduction in the auto portfolio.

Current wording

During the nine months ended September 30, 2024, the growth in the portfolio was primarily attributed to a $113.4 million increase in the commercial portfolio due to the origination of two commercial & industrial loans to two unrelated borrowers totaling $11 million; an origination to a single municipal borrower totaling $15 million; the origination of five commercial real estate non-owner occupied loans to five different borrowers totaling $39 million; the origination of two commercial real estate owner occupied loans to two different borrowers totaling $19 million; the origination of four commercial construction loans to three different borrowers totaling $10 million; and general portfolio growth. The Company also experienced a $18.1 million increase in the residential portfolio, the result of a higher percentage of adjustable-rate mortgages recorded as held-for-investment during this period. This growth was offset by the $22.9 million reduction in the consumer portfolio attributed to a strategic reduction in the auto portfolio.

Previous wording

As of June 30, 2024, the commercial portfolio increased by $42.0 million, or 5%, to $945.1 million compared to the December 31, 2023 balance of $903.1 million. The increase was due to growth of $14.0 million in commercial and industrial loans and growth of $28.0 million in commercial real estate loans.

Current wording

As of September 30, 2024, the commercial portfolio increased by $113 million, or 13%, to $1.0 billion compared to the December 31, 2023 balance of $0.9 billion. The increase was due to growth of $35 million in commercial and industrial loans and growth of $78 million in commercial real estate loans.