Traditions Bancorp, Inc. Reports Fourth Quarter Earnings and Results for 2023

YORK, Pa., Jan. 30, 2024

"Traditions Bancorp's 2023 performance was impacted by slowed mortgage banking activity and higher funding costs driven by the FOMC's decision to keep interest rates higher for longer to stem inflation," stated Eugene J. Draganosky, Chair of the Board and Chief Executive Officer. "To offset these earnings pressures, we curtailed portfolio loan growth in the latter half of the year to preserve capital, prudently managed our cost of funds by employing laddered diversified funding strategies, and undertook a strategic realignment. This includes a $3.0 million reduction in 2024 non-interest expense. These proactive decisions have allowed us to better position the company for the future."

Quarterly Highlights – Fourth Quarter 2023 versus Fourth Quarter 2022

• Loans grew by $70.9 million, or 12%, over 4Q22. Loan growth was slowed and essentially flat in the fourth quarter to help insulate the margin from further compression as funding costs continued to rise.
• Over the previous 12 months, deposits increased by $58.8 million, or 9%, over 4Q22. As depositor preferences shifted, much of this growth was concentrated in higher cost time deposits, including brokered certificates of deposit. Brokered CDs grew from $38.7 million at the end of 2022 to $64.7 million at the end of 2023, representing 9% of total deposits.
• The cost of deposits has increased to 2.84% for 4Q23, up from 2.14% for 3Q23 and 1.02% for 4Q22.
• Net interest margin contracted to 2.94% in 4Q23 compared to 3.44% in 4Q22. This was driven by an increase in the total cost of funds, including borrowings, from 1.21% in 4Q22 to 3.00% in 4Q23.
• Gains on the sale of mortgages were $0.8 million for 4Q23, increasing from $0.4 million in 4Q22.
• Elevated market rates and limited home inventories continue to impact mortgage banking revenue. The mortgage pipeline declined to $9.2 million from $17.2 million in the linked quarter, and is down from $16.8 million on December 31, 2022. Residential mortgage loans sold in 4Q23 were $50.1 million compared to $51.8 million in the linked quarter and $41.3 million for 4Q22.
• A fourth-quarter cash dividend of eight cents per common share was declared on January 18, 2024, and is payable on February 12, 2024, to shareholders of record at the close of business on February 2, 2024.
• Net interest income decreased $0.4 million in 4Q23 from 4Q22, or 6%, driven by escalating funding costs.
• Other expense increased by 5%, from $6.1 million in 4Q22 to $6.4 million in 4Q23. In 4Q23, the company incurred $193 thousand of severance payments associated with the strategic realignment and $160 thousand related to increases in self-insured medical expenses due to a higher than normal claims.
• The 4Q23 loan loss provision was $194 thousand.

YTD Highlights – Twelve Months Ended December 31, 2023, versus Twelve Months Ended December 31, 2022

• Measured commercial and residential mortgage loan growth and the Federal Reserve Bank's interest rate increases helped interest income outpace interest expense for the year, as net interest income increased $0.8 million, or 3%, despite rising funding costs.
• Gains on sale of mortgages decreased by $1.1 million, or 24%, as a result of increased market rates and limited home inventories within the company's footprint.
• Other expense increased $0.4 million, or 2%, year over year.
• Net interest margin contracted 22 basis points, from 3.46% in 2022 to 3.24% in 2023, driven by an increase in the cost of funds.

Credit Quality and Capital Insights:

• Nonaccrual loans increased from $3.8 million in 3Q23 to $4.0 million in the current quarter. This is comprised of $2.9 million in residential mortgage and consumer loans, and $1.1 million in commercial loans. The overall increase in nonaccrual loans in 4Q23 was driven by the residential mortgage portfolio.
• The company reported a net recovery of $7 thousand in 2023. Non-performing assets to total assets increased from 0.44% in the linked quarter to 0.47% in the current quarter. On a year over year basis, non-performing assets to total assets increased from 0.30% at the end of 2022 to 0.47% at the end of 2023.
• Delinquencies greater than 30 days were 0.70% of total loans as of December 31, 2023, down from 0.88% as of September 30, 2023, but up from 0.65% as of December 31, 2022.
• Since adopting CECL in 1Q23, the company's ACL ratio has gradually increased from 0.52% in 1Q23 to 0.56% in 4Q23.
• Traditions Bancorp and Traditions Bank remain well capitalized.