Provision for Loan Losses:
During the three months ended September 30, 2022, a $100,000 loan loss provision expense was recorded, compared to a provision credit of $257,000 during the three months ended September 30, 2021. Loan growth, coupled with the continued uncertainty in the economic outlook due to inflation, labor shortages and supply chain disruptions, resulted in an increased loan loss provision, despite favorable asset quality trends during the three months ended September 30, 2022.
Management regularly reviews the adequacy of the allowance for loan losses and makes assessments as to specific loan impairment, charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. See the earlier discussion in the Financial Condition section explaining the information used to determine the provision.
Non-interest Income:
Non-interest income during the three months ended September 30, 2022 was $1.3 million in both three month periods ended September 30, 2022 and 2021. Most significantly impacting non-interest income in the comparative three month periods was a $378,000 loss on sales and calls of securities due to the execution of a balance sheet and regulatory capital management strategy, as well as a $68,000 decline in the value of equity securities during the three months ended September 30, 2022. These declines were partially offset by receipt of $329,000 in life insurance proceeds and an $83,000 increase in fees derived from loan activity during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
As a percentage of average assets, annualized non-interest income was 0.63% in each of the three months ended September 30, 2022 and 2021. Excluding the gain/loss on sales and calls of securities, change in fair value of equity securities and life insurance proceeds, annualized non-interest income as a percentage of average assets was 0.67% for the three months ended September 30, 2022 compared to 0.61% for the three months ended September 30, 2021.
Non-interest Expense:
Non-interest expense was $5.0 million for the three months ended September 30, 2022, compared to $4.9 million for the same period in 2021, an increase of $59,000, or 1.2%. Most significantly impacting non-interest expense in the comparative three month periods was a $63,000 increase in FDIC insurance premiums, which was partially offset by a decline of $44,000 in data processing expense primarily from a reduction in core processing expenses for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
As a percentage of average assets, annualized non-interest expense was 2.42% during the three months ended September 30, 2022 compared to 2.37% during the three months ended September 30, 2021.
Provision for income taxes:
An income tax provision of $102,000 was recorded in the three months ended September 30, 2022, compared to an income tax provision of $142,000 recorded during the three months ended September 30, 2021 as taxable income was lower for the 2022 period primarily due to the receipt of non-taxable life insurance proceeds during the 2022 period.
The Company qualifies for a federal tax credit for low-income housing project investments, and the tax provisions for each period reflect the application of the tax credit. For the three months ended September 30, 2022 and 2021, the tax credit was $225,000, offsetting $327,000 and $367,000 in tax expense in the 2022 and 2021 periods, respectively. For the three months ended September 30, 2022, the tax credit lowered the effective tax rate from 14.7% to 4.6% compared to the same period in 2021, when the tax credit lowered the effective tax rate from 18.0% to 7.0%.