York, Pennsylvania-based Traditions Bancorp, Inc. (OTC: TRBK) today reported net income of $1.6 million for the third quarter ended September 30, 2022, compared to $1.5 million in the most recent quarter and $2.3 million for the third quarter of 2021.
Real Estate Market Headwinds
The 28% decrease in net income was largely driven by a $1.8 million decline in mortgage banking gains on the sale of loans due to the impact of surging inflation on mortgage interest rates, shrinking home inventory levels, and waning consumer sentiment around purchasing a home. Favorable offsets to these headwinds included robust loan growth, rising variable rate loan yields, and deposit pricing discipline, which contributed to a 24% increase in net interest income compared to the third quarter of 2021. Additionally, credit quality remained strong with a decrease in both nonaccrual loans and delinquencies from the prior quarter.
TRBK Earnings Per Share
TRBK reported EPS (diluted) of 58 cents for the third quarter ended September 30, 2022, compared to 54 cents in the linked quarter and 74 cents for the third quarter of 2021. Unrealized investment portfolio losses, flowing through Accumulated Other Comprehensive Loss, have grown to $13.3 million at quarter end compared to $9.7 million in the linked quarter. This resulted in a book value per common share of $19.61 on September 30, 2022, versus $20.37 in the linked quarter and $22.65 for the third quarter of 2021. Absent this accounting adjustment, Tier 1 book value per share stood at $24.39 on September 30, 2022.
“Traditions Bancorp has built upon the performance achieved in the first half of 2022, focusing our efforts on the fundamental elements of banking,” stated Eugene J. Draganosky, Chief Executive Officer. “We bolstered our net interest income with robust commercial loan production in our core and expanded geographies. Through enhanced adjustable-rate mortgage generation, we are holding a greater volume of these loans in our portfolio. Lastly, we improved our net interest margin through disciplined deposit pricing. These initiatives, combined with an unwavering commitment to risk management, pristine credit quality, and expense control, collectively contribute to our performance. The immediate challenges include funding our strong commercial loan pipeline amid a nationwide reduction in liquidity and declines in mortgage volumes as 30-year mortgage rates more than doubled since last year at this time. Deposits were reduced by $34.4 million in the third quarter due to anticipated outflows. In response, and to mitigate further possible deposit contraction, we are initiating several steps, including proactive deposit generation strategies, greater use of wholesale funding, and selective increases in deposit rates.”
TRBK Quarterly Highlights – Q3 2022 vs. Q3 2021
- Loans grew by $86.6 million, or 17%, over 3Q21, despite being tempered by Paycheck Protection Program (PPP) loan forgiveness. Without the impact of PPP forgiveness, loans grew by $102.8 million, or 21%.
- As of September 30, 2022, PPP loan balances outstanding were nearly $1.7 million.
- Deposits increased by $11.6 million, or 2%, during the last 12 months.
- Net interest margin expanded to 3.66% in 3Q22 compared to 3.23% in 3Q21, driven by growth in commercial and adjustable rate residential mortgage loans, the positive impact of recent short-term interest rate increases on the loan portfolio’s yield, and a 0.39% cost of funds for the quarter.
- Gains on the sale of mortgages were $0.9 million for 3Q22, declining 68% from $2.6 million in 3Q21.
- The mortgage pipeline decreased to $19.5 million from $53.3 million in the linked quarter and $50.5 million on September 30, 2021. Residential mortgage loans sold in 3Q22 were $58.5 million compared to $62.9 million in the linked quarter and $85.3 million for 3Q21. The associated mortgage gains have declined due to higher mortgage rates and lack of inventory.
- On April 19, 2022, the company announced regular cash dividends and paid quarterly distributions of eight cents per common share on May 13 and August 15, 2022. A third-quarter cash dividend of eight cents per common share was declared on October 20, 2022, and is payable on November 14, 2022, to shareholders of record at the close of business on November 4, 2022.
- As part of its Share Repurchase Plan announced on March 24, 2022, the company repurchased 11,700 shares during the third quarter. The total number of shares repurchased since the program’s launch was 72,017.
YTD Highlights – 9 Months Ended Sept. 30, ’22, versus 9 Months Ended Sept. 30, ’21
- Net interest income increased $2.8 million, or 18%, primarily driven by growth in commercial and residential mortgage loans, the Federal Reserve Bank’s interest rate increases, and a low cost of funds.
- On a YTD basis through September, net fee revenue from PPP loans totaled $250 thousand versus $1.0 million in the third quarter of 2021. $41 thousand in gross fees have yet to be recognized.
- Other expense has increased 5% from $17.8 million in 3Q21 to $18.7 million in 3Q22 as a result of the company’s investment to build out the necessary infrastructure in the Lancaster and Capital Region markets. These expenses will be managed closely for the remainder of the year.
- Provision for loan losses decreased by $100 thousand, or 100%, from the prior year.
- Credit Quality and Capital Insights:
- Nonaccrual loans decreased 10% in 3Q22, from $1.2 million in 2Q22 to $1.1 million in the current quarter.
- The company had no foreclosed other real estate owned, or net charge-offs, through the end of the third quarter.
- Non-performing assets to total assets fell from 0.16% in the linked quarter to 0.14% in the current quarter.
- Delinquencies greater than 30 days were 0.25% of total loans as of September 30, 2022, down from 0.39% as of June 30, 2022.
- The loan loss reserve ratio on September 30, 2022, excluding the PPP portfolio, was 1.23%, and reserves were over six and a half times greater than non-performing assets. The company will adopt CECL in 2023.
- The bank remains well capitalized.
Read the full Traditions Bancorp, Inc. press release here.