Provision for Loan Losses:
During the three months ended June 30, 2022, a $222,000 loan loss provision expense was recorded, compared to a provision credit of $200,000 during the three months ended June 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 and net recoveries during the three months ended June 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 June 30, 2022 was $1.4 million compared to $1.3 million in the three months ended June 30, 2021, an increase of $80,000, or 6.1%.
Most significantly impacting non-interest income in the comparative three month periods was a $1.1 million loss on sales and calls of securities during the three months ended June 30, 2022 which was offset by $1.2 million in gains from the termination of two derivatives contracts recorded in other non-interest income as part of a balance sheet and regulatory capital management strategy. See Notes 5 and 12 in the Notes to Consolidated Financial Statements. Also affecting the change in non-interest income between the three months ended June 30, 2022 and 2021 was a $65,000 decline in the value of equity securities, which was partially offset by $51,000 in life insurance proceeds recorded in the 2022 period.
As a percentage of average assets, annualized non-interest income was 0.67% during the three months ended June 30, 2022 compared to 0.64% during the three months ended June 30, 2021.
Non-interest Expense:
Non-interest expense was $5.0 million for the three months ended June 30, 2022, compared to $4.9 million for the same period in 2021, an increase of $161,000, or 3.3%.
Most significantly impacting non-interest expense in the comparative three month periods was a $151,000 increase in employee compensation expense during the three months ended June 30, 2022 due to temporary duplication of compensation expense as a result of employee transitions, which was partially offset by a $23,000 decline in data processing expense over the same periods.
As a percentage of average assets, annualized non-interest expense was 2.45% during the three months ended June 30, 2022 compared to 2.37% during the three months ended June 30, 2021.
Provision for income taxes:
An income tax provision of $177,000 was recorded in the three months ended June 30, 2022, compared to an income tax provision of $89,000 recorded during the three months ended June 30, 2021, predominantly due to higher taxable income recorded in 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 June 30, 2022 and 2021, the tax credit was $226,000, offsetting $403,000 and $315,000 in tax expense in the 2022 and 2021 periods, respectively. For the three months ended June 30, 2022, the tax credit lowered the effective tax rate from 18.7% to 8.2% compared to the same period in 2021, when the tax credit lowered the effective tax rate from 17.2% to 4.9%.