MERIDIAN CORPORATION You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year endedDecember 31, 2021 included inMeridian Corporation's Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC").
Cautionary Statement Regarding Forward-Looking Statements
Meridian Corporation may from time to time make written or oral "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect toMeridian Corporation's strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words "may," "could," "should," "pro forma," "looking forward," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan," or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyondMeridian Corporation's control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties that could cause actual results to differ materially include, without limitation: the impact of the COVID-19 pandemic and government responses thereto; on theU.S. economy, including the markets in which we operate; actions that we and our customers take in response to these factors and the effects such actions have on our operations, products, services and customer relationships; and the risk that theSmall Business Administration may not fund some or all PPP loan guaranties; increased competitive pressures; changes in the interest rate environment; changes in 29
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general economic conditions and conditions within the securities markets; legislative and regulatory changes; geopolitical tensions; and the effects of inflation, a potential recession, among others, could causeMeridian Corporation's financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements.Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management's current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to reviewMeridian Corporation's filings with theSecurities and Exchange Commission , including our Annual Report on Form 10-K for the year endedDecember 31, 2021 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any.Meridian Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time byMeridian Corporation or by or on behalf ofMeridian Bank .
Critical Accounting Policies and Estimates
Our critical accounting policies are described in detail in the "Critical Accounting Policies" section within Item 7 of our 2021 Annual Form Form 10-K. TheSEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. There have been no material changes in these policies during the nine months endedSeptember 30, 2022 . Executive Overview The following items highlight the Corporation's changes in its financial condition as ofSeptember 30, 2022 compared toDecember 31, 2021 and the results of operations for the three and nine months endedSeptember 30, 2022 compared to the same periods in 2021. More detailed information related to these highlights can be found in the sections that follow.
Changes in Financial Condition -
•Total assets increased$208.5 million , or 12.2%, to$1.92 billion as ofSeptember 30, 2022 . •Portfolio loans, excluding PPP loans, increased$299.9 million , or 23.1%, to$1.60 billion as ofSeptember 30, 2022 , which is 30.9% on an annualized basis. •Mortgage loans held for sale decreased$47.1 million , or 58.2%, to$33.8 million atSeptember 30, 2022 . •PPP loans decreased to$8.8 million as ofSeptember 30, 2022 which is a decrease of$81.4 million , or 90.2%, sinceDecember 31, 2021 . •During the quarter-endedMarch 31, 2022 ,$27.7 million of municipal securities previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio. •Total deposits increased$227.1 million or 15.7% to$1.67 billion atSeptember 30, 2022 . •The Corporation returned$19.0 million of capital to Meridian shareholders during the nine months endedSeptember 30, 2022 through dividends, including a$1.00 special dividend,$0.20 quarterly dividends, and also purchased$9.2 million or 295 thousand shares of treasury stock.
Three Month Results of Operations -
•Consolidated net income was$5.8 million , or$0.96 per diluted share, down$3.6 million , or 38.6%, driven by a decline in non-interest income, partially offset by continued strong margin and lower operating expenses. •The return on average assets and return on average equity was 1.23% and 14.59%, respectively, for the third quarter 2022, compared to 2.15% and 24.07%, respectively, for the third quarter 2021. •Net interest margin increased to 4.01% from 3.83% due to higher yield on earning assets in this rising rate environment. •Provision for loan losses decreased$71 thousand as a result of lower levels of specific reserves and improvements in certain qualitative factors, largely offset by increased provisioning for loan growth. •Non-interest income decreased$11.9 million , or 53.8%, to$10.2 million driven by a$11.4 million decrease in mortgage banking income and a$1.7 million decrease in SBA loan income. •Non-interest expense decreased$5.2 million , or 20.5%, to$20.3 million due to a$6.1 million decrease in salaries and employee benefits. •OnOctober 27, 2022 , the Board of Directors declared a quarterly cash dividend of$0.20 per common share payableNovember 21, 2022 to shareholders of record as ofNovember 14, 2022 .
Nine Month Results of Operations -
•Consolidated net income was$17.3 million , or$2.80 per diluted share, down$10.6 million , or 38.0%, driven by a lower level of non-interest income from mortgage banking activity, partially offset by continued strong margin and lower operating expenses. •The return on average assets and return on average equity were 1.28% and 14.49%, respectively, for the nine months endedSeptember 30, 2022 , compared to 2.17% and 25.43%, respectively, for the nine months endedSeptember 30, 2021 . •Net interest margin increased to 3.99% from 3.75% due to higher yield on earning assets in this rising rate environment along with$286 thousand in one-time loan fees. •Provision for loan losses increased$451 thousand , or 34.9%, due to loan growth, partially offset by decreases in specific reserves. 30
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•Non-interest income decreased$37.2 million , or 52.4%, to$33.7 million driven by a$40.9 million decrease in mortgage banking income and a$2.5 million decline in the fair value on loans held-for-investment, partially offset by an increase of$4.8 million in the fair value of derivatives and loans held-for-sale and a$2.5 million increase in net gains on hedging activity related to mortgage banking activity. •Non-interest expense decreased$18.6 million , or 23.2% to$61.4 million as the result of a$20.2 million decrease in salaries and employee benefits tied to a decrease in variable compensation in our mortgage segment.
Key Performance Ratios
The following table presents key financial performance ratios for the periods
indicated:
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Return on average assets, annualized 1.23 % 2.15 % 1.28 % 2.17 %
Return on average equity, annualized 14.59 % 24.07 % 14.49 % 25.43 %
Net interest margin (tax effected yield),
annualized 4.01 % 3.83 % 3.99 % 3.75 %
Basic earnings per share $ 0.99 $ 1.56 $ 2.90 $ 4.62
Diluted earnings per share $ 0.96 $ 1.52 $ 2.80 $ 4.49
The following table presents certain key period-end balances and ratios at the
dates indicated:
September 30, December 31,
(dollars in thousands, except per share amounts) 2022 2021
Book value per common share $ 25.86 $ 27.07
Tangible book value per common share (1) $
25.16
1.35 %
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)
1.20 % 1.46 %
Tier I capital to risk weighted assets 9.28 % 10.83 %
Tangible common equity to tangible assets ratio (1) 7.67 % 9.42 %
Loans, net of fees and costs $ 1,610,349 $ 1,386,457
Total assets $ 1,921,924 $ 1,713,443
Total stockholders' equity $ 151,161 $ 165,360 (1) Non-GAAP financial measure. See "Non-GAAP Financial Measures" below for Non-GAAP to GAAP reconciliation.
Components of Net Income
Net income is comprised of five major elements:
•Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;
•Provision For Loan and Lease Losses, or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases;
•Non-interest Income, which is made up primarily of mortgage banking income, wealth management income, SBA loan sale income, fair value adjustments, gains and losses from the sale of loans, gains and losses from the sale of investment securities available for sale and other fees from loan and deposit services;
•Non-interest Expense, which consists primarily of salaries and employee benefits, occupancy, professional fees, advertising & promotion, data processing, information technology, loan expenses, and other operating expenses; and
•Income Taxes, which include state and federal jurisdictions.
NET INTEREST INCOME
Net interest income is an integral source of the Corporation's revenue. The tables below present a summary for the three and nine months endedSeptember 30, 2022 and 2021, of the Corporation's average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the result of net free funding sources such as non-interest bearing deposits and stockholders' equity. 31
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Analyses of Interest Rates and Interest Differential
The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields on a tax equivalent basis.
For the Three Months Ended
2022 2021 Change
Interest Interest Interest
Income/ Income/ Average Income/
(dollars in thousands) Average Balance Expense Yields/ Rates Average Balance Expense Yields/ Rates Balance Expense Yields/ Rates
Assets:
Due from banks $ 15,678 $ 92 2.33 % $ 40,249 $ 16 0.16 % $ (24,571) $ 76 2.17 %
Federal funds sold 219 1 1.81 23,013 1 0.02 (22,794) - 1.79
Investment securities -
taxable (1) 107,929 648 2.38 79,785 357 1.78 28,144 291 0.60
Investment securities - tax
exempt (1) 63,711 451 2.81 67,250 377 2.22 (3,539) 74 0.59
Loans held for sale 37,857 479 5.02 110,905 824 2.97 (73,048) (345) 2.05
Loans held for investment (1) 1,565,861 21,371 5.41 1,370,439 16,804 4.84 195,422 4,567 0.57
Total loans 1,603,718 21,850 5.41 1,481,344 17,628 4.72 122,374 4,222 0.69
Total interest-earning assets 1,791,255 23,042 5.10 % 1,691,641 18,379 4.31 % 99,614 4,663 0.79 %
Noninterest earning assets 76,939 48,207 28,732
Total assets $ 1,868,194 $ 1,739,848 $ 128,346
Liabilities and stockholders' equity:
Interest-bearing demand
deposits $ 221,402 $ 798 1.43 % $ 270,518 $ 201 0.29 % $ (49,116) $ 597 1.14 %
Money market and savings
deposits 718,744 2,075 1.15 647,093 853 0.52 71,651 1,222 0.63
Time deposits 361,527 1,202 1.32 237,080 273 0.46 124,447 929 0.86
Total deposits 1,301,673 4,075 1.24 1,154,691 1,327 0.46 146,982 2,748 0.78
Borrowings 41,313 266 2.55 111,075 126 0.45 (69,762) 140 2.10
Subordinated debentures 40,578 591 5.78 40,740 596 5.85 (162) (5) (0.07)
Total interest-bearing
liabilities 1,383,564 4,932 1.41 1,306,506 2,049 0.62 77,058 2,883 0.79
Noninterest-bearing deposits 295,975 254,843 41,132
Other noninterest-bearing
liabilities 31,041 22,919 8,122
Total liabilities 1,710,580 1,584,268 126,312
Total stockholders' equity 157,614 155,580 2,034
Total stockholders' equity
and liabilities $ 1,868,194 $ 1,739,848 $ 128,346
Net interest income and spread (1) $ 18,110 3.69 $ 16,330 3.69 $ 1,780 -
Net interest margin (1) 4.01 % 3.83 % 0.18 %
(1)Yields and net interest income are reflected on a tax-equivalent basis.
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For the Nine Months Ended
2022 2021 Change
Interest Interest Interest
Income/ Income/ Average Income/
(dollars in thousands) Average Balance Expense Yields/ Rates Average Balance Expense Yields/ Rates Balance Expense Yields/ Rates
Assets:
Due from banks $ 23,612 $ 153 0.87 % $ 24,340 $ 22 0.12 % $ (728) $ 131 0.75 %
Federal funds sold 1,440 4 0.37 18,991 3 0.02 (17,551) 1 0.35
Investment securities -
taxable (1) 105,624 1,599 2.02 78,951 1,076 1.82 26,673 523 0.20
Investment securities - tax
exempt (1) 63,848 1,240 2.60 64,023 1,094 2.28 (175) 146 0.32
Loans held for sale 52,495 1,580 4.02 139,101 2,922 2.80 (86,606) (1,342) 1.22
Loans held for investment (1) 1,489,345 56,614 5.08 1,349,780 48,375 4.79 139,565 8,239 0.29
Total loans 1,541,840 58,194 5.05 1,488,881 51,297 4.61 52,959 6,897 0.44
Total interest-earning assets 1,736,364 61,190 4.71 % 1,675,186 53,492 4.27 % 61,178 7,698 0.44 %
Noninterest earning assets 74,313 44,388 29,925
Total assets $ 1,810,677 $ 1,719,574 $ 91,103
Liabilities and stockholders' equity:
Interest-bearing demand
deposits $ 242,863 $ 1,183 0.65 % $ 252,074 $ 739 0.39 % $ (9,211) $ 444 0.26 %
Money market and savings
deposits 702,696 4,003 0.76 609,201 2,505 0.55 93,495 1,498 0.21
Time deposits 319,927 1,996 0.83 258,099 1,017 0.53 61,828 979 0.30
Total deposits 1,265,486 7,182 0.76 1,119,374 4,261 0.51 146,112 2,921 0.25
Borrowings 24,621 391 2.12 139,716 437 0.42 (115,095) (46) 1.70
Subordinated debentures 40,548 1,775 5.85 40,711 1,787 5.87 (163) (12) (0.02)
Total interest-bearing
liabilities 1,330,655 9,348 0.94 1,299,801 6,485 0.67 30,854 2,863 0.27
Noninterest-bearing deposits 291,261 248,355 42,906
Other noninterest-bearing
liabilities 29,452 24,928 4,524
Total liabilities 1,651,368 1,573,084 78,284
Total stockholders' equity 159,309 146,490 12,819
Total stockholders' equity
and liabilities $ 1,810,677 $ 1,719,574 $ 91,103
Net interest income and spread (1) $ 51,842 3.77 $ 47,007 3.60 $ 4,835 0.17
Net interest margin (1) 3.99 % 3.75 % 0.24 %
(1)Yields and net interest income are reflected on a tax-equivalent basis.
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Table of Contents Rate/Volume Analysis The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and nine months endedSeptember 30, 2022 as compared to the same periods in 2021, allocated by rate and volume. Changes in interest income and/or expense attributable to both rate and volume have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category. 2022 Compared to 2021 Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) Rate Volume Total Rate Volume Total Interest income: Due from banks $ 91$ (15) $ 76 $ 132 $ (1) $ 131 Federal funds sold 2 (2) - 6 (5) 1 Investment securities - taxable (1) 143 148 291 129 394 523 Investment securities - tax exempt (1) 95 (21) 74 149 (3) 146 Loans held for sale 382 (727) (345) 942 (2,284) (1,342) Loans held for investment (1) 2,020 2,547 4,567 3,046 5,193 8,239 Total loans 2,402 1,820 4,222 3,988 2,909 6,897 Total interest income$ 2,733 $ 1,930 $ 4,663 $ 4,404 $ 3,294 $ 7,698 Interest expense: Interest-bearing demand deposits$ 640 $ (43) $ 597 $ 472 $ (28) $ 444 Money market and savings deposits 1,118 104 1,222 1,071 427 1,498 Time deposits 727 202 929 694 285 979 Total deposits 2,485 263 2,748 2,237 684 2,921 Borrowings 263 (123) 140 561 (607) (46) Subordinated debentures (3) (2) (5) (5) (7) (12) Total interest expense$ 2,745 $ 138 $ 2,883 $ 2,793 $ 70 $ 2,863 Interest differential$ (12) $ 1,792 $ 1,780 $ 1,611 $ 3,224 $ 4,835
(1)Yields and net interest income are reflected on a tax-equivalent basis.
Three Months Ended
For the three months endedSeptember 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased$4.7 million as favorable rate and volume changes contributed$2.7 million , and$1.9 million , respectively. The favorable change in rates was driven by increased yield on loans held for sale (up 205 basis points) and loans held for investment (up 57 basis points) that favorably impact interest income by$2.4 million , combined. The loans held for investment average balances increased$195.4 million , leading to a favorable volume impact on interest income of$2.5 million , while the decline in loans held for sale average balances of$73.0 million had an unfavorable impact to interest income of$727 thousand as shown in the table above. Within the loans held for investment portfolio, average balances on commercial loans and leases increased$33.6 million , and$54.0 million , respectively, construction loans were up$65.3 million , and residential real estate loans average balances increased$78.2 million , while the average balance of PPP loans decreased$132.4 million as such loans continue to be forgiven by the SBA. On the funding side, interest expense increased$2.9 million due to the impact from rate hikes issued by the Fed, which were partially offset by volume declines on borrowings. The cost of deposits were up across the board, causing a$2.5 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased 114 basis points, 63 basis points and 86 basis points, respectively, while the cost of borrowings increased 210 basis points. Money market/savings accounts and time deposit average balances increased$71.7 million , and$124.4 million , respectively, while interest-bearing demand deposits decreased$49.1 million on average, and borrowings decreased$69.8 million on average.
Overall, the
Nine Months Ended
For the nine months endedSeptember 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased$7.7 million as positive rate changes on average earning assets contributed$4.4 million and favorable volume changes helped to increase interest income by$3.3 million . The favorable change in interest income due to rate changes was driven by growth in the loans held for sale (increase of 122 basis points) and the overall loans held for investment portfolio (increase of 29 basis points). This large 34
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increase in the yield on loans held for sale was the result of interest rates hovering at historical lows throughout much of 2021, but then as the Fed raised interest rates in 2022, the yield benefited from this action. The$3.3 million positive impact that volume changes had to interest income was largely the result of loan average balance increases, which contributed$5.2 million to interest income, offset by a decline in the volume of loans held or sale which had an unfavorable impact of$2.3 million on interest income. The increase in loans held for investment average balances were led by an increases in commercial loans, small business loans and leases of$30 million ,$58.1 million , and$56.5 million , respectively, construction loans of$50.8 million , and residential loans held for investment of$47.3 million , offset somewhat by a$152.3 million decline in PPP loan balances as they continue to be forgiven by the SBA. On the funding side, interest expense increased$2.9 million . The cost of deposits was up, having a$2.9 million negative effect on interest expense. The cost of interest-bearing demand deposits, money market and savings deposits, and time deposits increased 26 basis points, 21 basis points, and 30 basis points, respectively, while the cost of borrowings increased 170 basis points. Money market and savings accounts, and time deposits increased$93.5 million , and$61.8 million on average respectively, while interest bearing demand deposits and borrowings were down$9.2 million and$115.1 million on average, respectively, leading to a$70 thousand increase in interest expense.
Overall, the
PROVISION FOR LOAN AND LEASE LOSSES
Three Months Ended
The provision for loan losses decreased$71 thousand due to decreases in specific reserves on non-performing loans as the underlying credit quality improved and certain qualitative factors improved as well, partially offset by providing for continued loan growth and charge-offs on small ticket equipment leases.
Nine Months Ended
The provision for loan losses increased
Asset Quality Summary
Meridian's credit culture is strong and asset quality remains a primary focus of management. The ratio of non-performing assets to total assets declined to 1.20% as ofSeptember 30, 2022 , from 1.34% as ofDecember 31, 2021 . There was no other real estate property included in non-performing assets for either period. Total non-performing loans were$23.1 million and$23.0 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively, however subsequent toSeptember 30, 2022 , principal payments of$3.2 million and$307 thousand on a non-performing loan relationship were received. Meridian realized net charge-offs of 0.10% of total average loans for the year endingSeptember 30, 2022 which is higher than the 0.01% over the same period in 2021. Charge-offs amounted to$431 thousand for the quarter endingSeptember 30, 2022 , while recoveries were$74 thousand during this quarter. Nearly all of the charge-offs for the quarter endingSeptember 30, 2022 were from small ticket equipment leases, while recoveries were split between commercial loans and home equity loans. The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.20% as ofSeptember 30, 2022 and 1.46% as ofDecember 31, 2021 . As ofSeptember 30, 2022 there were specific reserves of$2.8 million against a non-performing loans, down from$3.2 million as ofDecember 31, 2021 due to improvement in the underlying credit quality for certain loans, as discussed in the above paragraph. The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. The Corporation believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss. 35
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Nonperforming Assets and Related Ratios
The following table presents nonperforming assets and related ratios for the
periods indicated:
September 30 , December 31 ,(dollars in thousands) 2022 2021 Non-performing assets: Nonaccrual loans: Real estate loans: Home equity lines and loans$ 878 $ 911 Residential mortgage 2,097 2,398 Total real estate loans 2,975 3,309 Commercial and industrial 18,202 18,801 Small business loans 1,401 666 Leases 506 212 Total nonaccrual loans 23,084 22,988 Total non-performing assets$ 23,084 $ 22,988 Troubled debt restructurings: TDRs included in non-performing loans and leases$ 193 $ 361 TDRs in compliance with modified terms 3,637 3,446 Total TDRs$ 3,830 $ 3,807 Asset quality ratios: Non-performing assets to total assets 1.20 % 1.34 % Non-performing loans to: Total loans and leases 1.40 % 1.57 % Total loans held-for-investment 1.43 % 1.66 %
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)
1.45 % 1.80 %
Allowance for loan losses to:
Total loans and leases 1.15 % 1.28 %
Total loans held-for-investment 1.18 % 1.35 %
Total loans held-for-investment (excluding loans at fair value and
PPP loans) (1) 1.20 % 1.46 %
Non-performing loans 82.20 % 81.60 %
Total loans and leases $ 1,644,149 $ 1,467,339
Total loans and leases held-for-investment $
1,610,349
$ 1,587,037 $ 1,280,654 Allowance for loan and lease losses$ 18,974 $ 18,758 (1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation of this measure to its most comparable GAAP measure. 36
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NON-INTEREST INCOME
Three Months Ended
The following table presents the components of non-interest income for the
periods indicated:
Quarter Ended
September 30, September 30,
(Dollars in thousands) 2022 2021 $ Change % Change
Mortgage banking income $ 7,329 $ 18,726 $ (11,397) (60.9) %
Wealth management income 1,114 1,232 (118) (9.6) %
SBA loan income 989 2,688 (1,699) (63.2) %
Earnings on investment in life insurance 138 93 45 48.4 %
Net change in the fair value of derivative
instruments 127 (339) 466 (137.5) %
Net change in the fair value of loans
held-for-sale (237) (532) 295 (55.5) %
Net change in the fair value of loans
held-for-investment (886) 37 (923) (2494.6) %
Net gain on hedging activity 399 (1,189) 1,588 (133.6) %
Net gain on sale of investment securities
available-for-sale - 314 (314) (100.0) %
Service charges 32 35 (3) (8.6) %
Other 1,219 1,057 162 15.3 %
Total non-interest income $ 10,224 $ 22,122 $ (11,898) (53.8) %
Total non-interest income decreased $11.9 million due primarily to lower income
from our mortgage segment, which was impacted by lower levels of mortgage loan
originations in a rising rate environment and a lack of housing inventory.
Partially offsetting the impact of the decline in mortgage banking income were
net changes in the fair value of derivative instruments and loans held-for-sale,
along with an improvement in net gains on hedging activity which increased $2.3
million , combined.
SBA loan income decreased $1.7 million as a higher volume of SBA loans were sold
into the secondary market in the prior year comparable quarter: $20.8 million of
loans were sold in the quarter-ending September 30, 2022 compared to $25.0
million in loans sold in the quarter-ending September 30, 2021 . Contributing to
lower SBA loan income, margins on the SBA loan sales decreased from the prior
year due to the upward movement in interest rates, which drove SBA loan prices
down.
The net change in the fair value of loans held-for-investment decreased to a
loss of $886 thousand for the quarter ended September 30, 2022 , compared to a
gain of $37 thousand for the comparable prior year quarter, due to the negative
impact the rising interest rate environment had on the fair value of the loans
in portfolio that are held at fair value. Other non-interest income was up $162
thousand due to increases in title fee income, FHLB stock dividend income and
broker fee income.
Nine Months Ended
The following table presents the components of non-interest income for the
periods indicated:
Year Ended
September 30, September 30,
(Dollars in thousands) 2022 2021 $ Change % Change
Mortgage banking income $ 21,367 $ 62,293 $ (40,926) (65.7) %
Wealth management income 3,672 3,531 141 4.0 %
SBA loan income 3,946 5,423 (1,477) (27.2) %
Earnings on investment in life insurance 413 224 189 84.4 %
Net change in the fair value of derivative
instruments (713) (3,431) 2,718 (79.2) %
Net change in the fair value of loans
held-for-sale (1,094) (3,164) 2,070 (65.4) %
Net change in the fair value of loans
held-for-investment (2,499) (24) (2,475) 10312.5 %
Net gain on hedging activity 4,941 2,397 2,544 106.1 %
Net gain on sale of investment securities
available-for-sale - 362 (362) (100.0) %
Service charges 90 99 (9) (9.1) %
Other 3,605 3,192 413 12.9 %
Total non-interest income $ 33,728 $ 70,902 $ (37,174) (52.4) %
Total non-interest income decreased due primarily to lower income from our mortgage segment, which was impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory.
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NON-INTEREST EXPENSE
Three Months Ended
The following table presents the components of non-interest income for the
periods indicated:
Quarter Ended
September 30,
(Dollars in thousands) 2022 September 30, 2021 $ Change % Change
Salaries and employee benefits $ 13,360 $ 19,472 $ (6,112) (31.4) %
Occupancy and equipment 1,191 1,133 58 5.1 %
Professional fees 899 873 26 3.0 %
Advertising and promotion 1,165 1,089 76 7.0 %
Data processing 574 530 44 8.3 %
Information technology 868 476 392 82.4 %
Pennsylvania bank shares tax 202 152 50 32.9 %
Other 2,002 1,756 246 14.0 %
Total non-interest expense $ 20,261 $ 25,481 $ (5,220) (20.5) %
Total non-interest expense decreased largely attributable to a decrease in salaries and employee benefits expense in the mortgage segment, which had reduced fixed and variable based compensation.
Information technology expense increased$392 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth. Other non-interest expense increased$246 thousand due to the increased level of client engagement and business development our employees were able to do in the current period versus the prior year due to COVID-19 pandemic restrictions.
Nine Months Ended
The following table presents the components of non-interest income for the
periods indicated:
Year Ended
September 30, September 30,
(Dollars in thousands) 2022 2021 $ Change % Change
Salaries and employee benefits $ 41,585 $ 61,824 $ (20,239) (32.7) %
Occupancy and equipment 3,619 3,460 159 4.6 %
Professional fees 2,659 2,629 30 1.1 %
Advertising and promotion 3,340 2,795 545 19.5 %
Data processing 1,633 1,666 (33) (2.0) %
Information technology 2,306 1,365 941 68.9 %
Pennsylvania bank shares tax 612 478 134 28.0 %
Other 5,646 5,773 (127) (2.2) %
Total non-interest expense $ 61,400 $ 79,990 $ (18,590) (23.2) %
Total non-interest expense decreased largely attributable to a decrease in
salaries and employee benefits expense at the mortgage segment, which recognized
decreased and variable compensation. Partially offsetting this decrease was an
increase in salaries & benefits expense for the bank and wealth segments due to
an increase in FTEs and a higher level of stock-based compensation expense
year-over-year.
Advertising and promotion expense increased $545 thousand as the result of a
renewed and focused priority placed on business development and community
outreach efforts. Information technology expense increased $941 thousand due to
cybersecurity improvements, cloud-based costs and other software upgrades, all
as a result of growth.
INCOME TAX EXPENSE
Income tax expense for the three months ended September 30, 2022 was $1.7
million , as compared to $2.9 million for the same period in 2021. The decrease
in income tax expense was attributable to the decrease in earnings, period over
period. Our effective tax rate was 22.3% for the three months ended September
30, 2022 and 23.3% for the three months ended September 30, 2021 .
Income tax expense for the nine months ended September 30, 2022 was $4.9
million , as compared to $8.5 million for the same period in 2021. The decrease
in income tax expense was attributable to the decrease in earnings, period over
period. Our effective tax rate was 22.2% for the nine months ended September 30,
2022 and 23.5% for the nine months ended June 30, 2021 .
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