Community Heritage Financial, Inc. Reports Earnings for the First Quarter of 2023

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Apr 26, 2023, 09:00 ET

MIDDLETOWN, Md., April 26, 2023 /PRNewswire/ -- Community Heritage Financial, Inc. (the "Company") (OTC PK: CMHF), the parent company of Middletown Valley Bank ("MVB" or the "Bank"), announced today that for the three months ended March 31, 2023 the Company earned net income of $1.39 million $0.48 per share compared to $1.44 million or $0.50 per share for the fourth quarter of 2022. First quarter 2023 net income was down $431 thousand compared to first quarter 2022 net income of $1.82 million or $0.81 per share. The first quarter of 2022 included $320 thousand in Paycheck Protection Plan (PPP) related fees and interest income. All PPP loans were fully forgiven or paid off during 2022 and no related interest or fee income was recognized during the first quarter of 2023.

Total assets as of March 31, 2023 were $936.6 million, an increase of $6.5 million compared to $930.1 million as of December 31, 2022 and on a year-over-year basis total assets were up $91.0 million compared to March 31, 2022 total assets of $845.6 million. Core loan balances grew $9.1 million during the first quarter to $757.6 million as of March 31, 2023 compared to outstanding balances of $748.5 million as of December 31, 2022 and were up $113.7 million compared to $643.9 million as of March 31, 2022. During the fourth quarter of 2022 several commercial relationship principal owners added material deposit dollars to the Bank related to the sale of their businesses. It was anticipated that a portion of those deposits would be short-term in nature until the principal owners completed reinvestment of the funds to new opportunities. During the first quarter of 2023 one specific customer reinvested approximately $25 million outside of the Bank, which contributed to an overall decrease in outstanding Bank deposit balances for the quarter. Core deposit balances at March 31, 2023 were $815.8 million, a decrease of $23.6 million compared to $839.4 million as of December 31, 2022. Outside of the one transaction as noted above, core deposit balances remained relatively flat for the quarter. To fund loan growth and compensate for the deposit decrease related to the specific transaction noted previously, the Bank added $30 million in short-term FHLB borrowings during March of 2023.

As of January 1, 2023 the Bank adopted the Current Expected Credit Losses (CECL) methodology for estimating allowances for credit losses. The initial loan adoption adjustment for ACL on loans of $867 thousand moved the on-balance sheet ACL ratio from 0.98% as of December 31, 2022 to 1.10% as of the adoption date of January 1, 2023. The Bank also adopted CECL for unfunded loan commitments and held-to-maturity (HTM) investment securities which resulted in initial ACL adjustments of ($76) thousand and $155 thousand respectively. Net of deferred taxes the overall initial CECL adjustment impact to equity was a decrease of $686 thousand.

Short-term rates in the market continued to drive up funding costs and impact earnings for the first quarter of 2023. Interest expense increased from $2.4 million in the fourth quarter of 2022 to $3.2 million in the first quarter of 2023. Higher rates also helped to push interest revenue higher on a quarter-over-quarter basis with interest income going from $9.4 million in the fourth quarter of 2022 to $10.2 million in the first quarter of 2023. Non-interest revenue for the first quarter of 2023 was $713 thousand, up from $98 thousand in the fourth quarter of 2022. Revenue related to mortgage loan activity and salary expenses were impacted during the fourth quarter due to a one-time reclassification. Operating expenses were $6.3 million for the first quarter of 2023, up from $5.4 in the fourth quarter of 2022. Most of the variance related to increased salary and benefit expense due to higher wage structures along with increased occupancy expense related to a one-time lease termination cost. Due to improved national and regional economic factors used in the CECL model, the calculated ACL to loans ratio as of March 31, 2023 was 1.04%, resulting in a recovery of credit losses of $440 thousand for the first quarter of 2023 ($345 thousand recovery for on-balance sheet loans, $96 thousand recovery for unfunded loan commitments, and $1 thousand provision for HTM securities). No qualitative factors were adjusted within the CECL model for the March 31, 2023 calculation, all remained at the original levels from the January 1, 2023 adoption date.

Subsequent Events:

In regard to recent developments in the banking industry, the Company continues to monitor and manage the balance sheet and liquidity position on a daily basis. While management feels the Bank has built a strong balance sheet to withstand volatility in the market, in order to further bolster liquidity, the Bank has recently pledged securities to the new Bank Term Funding Program to add a contingency funding source and further protect the safety of customer deposits and shareholder assets.

Quarterly Highlights – 1Q23 vs 4Q22

Tangible book value per share increased by $0.31 from $22.53 per share as of December 31, 2022 to $22.84 as of March 31, 2023. The increase is the result of $1.39 million in earnings for the quarter along with an improved accumulated other comprehensive loss position which went from an unrealized loss of $9.5 million as of December 31, 2022 to an unrealized loss of $9.2 million as of March 31, 2023. These positive factors helped to off-set the one-time CECL adjustment of $686 thousand as previously noted.
Outstanding loan balances increased by $9.1 million for the first quarter of 2023 compared to the fourth quarter of 2022. Growth came from the residential mortgage portfolio, which grew $11.1 million for the quarter while commercial portfolio balances showed a slight decrease of $2.0 million related to business sale paydowns.
Deposit balances decreased $23.6 million for the first quarter of 2023 to $815.8 million as of March 31, 2023. Interest-bearing deposits increased $2.5 million from $562.6 million at December 31, 2022 to $565.1 at March 31, 2023. Non-interest bearing demand deposits were down $26.1 million for the quarter related to an isolated customer transaction as noted previously. The Bank added $30 million in short-term (6-month term) borrowings to meet funding needs during the quarter, which are reflected in March 31, 2023 balances.
Funding costs continued to increase as additional Fed rate increases pushed short-term money market deposit rates and borrowing rates higher. While interest income increased by $829 thousand comparing first quarter 2023 to fourth quarter 2022, interest expense increased by $869 thousand over the same time period resulting in a $40 thousand decrease to net interest income.
The allowance for loan credit losses to total loans ratio was 1.04% at March 31, 2023, up from 0.98% as of December 31, 2022. The overall increase resulted from the net impact of the one-time CECL adoption adjustment along with improved economic and credit metrics as updated for the first quarter of 2023 calculation as previously noted.

Quarterly Highlights – 1Q23 vs 1Q22

Tangible book value per share increased by $0.90 from $21.94 as of March 31, 2022 to $22.84 as of March 31, 2023. Most of the increase resulted from strong earnings growth over the period resulting in higher retained earnings.
Loan balances of $757.6 million as of March 31, 2023 were up $113.7 million or 17.7% on a year-over-year basis compared to March 31, 2022. Growth over the period consisted of approximately $38.0 in commercial, $68.7 million in residential mortgage and $7.0 million in consumer and other loans.
Total deposits at March 31, 2023 were $815.8 million, an increase of $45.6 million or 5.9% compared to $770.2 million as of March 31, 2022. As of March 31, 2023 there were no brokered deposits on the Bank balance sheet compared to $248 thousand as of March 31, 2022.
Net interest margin for the first quarter of 2023 was 3.18% at the Bank level compared to 3.35% for the first quarter of 2022. Increased funding costs, along with no PPP related interest and fee income for the first quarter of 2023 compared to PPP interest and fee income of $320 thousand for the first quarter of 2022 accounted for the variance.
Non-interest income was $713 thousand for the first quarter of 2023, a decrease of $500 thousand compared to $1.2 million for the first quarter of 2022. Higher market rates have resulted in lower refinance and secondary residential mortgage activity on a year-over-year basis accounting for most of the variance in non-interest revenue.
Non-interest expense for the first quarter of 2023 was $6.3 million, an increase of $1.2 million compared to $5.1 million for the first quarter of 2022. Increased employee costs due to labor market competition, increased data processing fees related to volume and infrastructure improvements and increased occupancy expense related to a one-time lease termination cost made up most of the year-over-year variance.

Dividend

A dividend of $0.06 per share was declared by the Board of Directors on April 24, 2023, for shareholders of record as of May 5, 2023, and payable on May 12, 2023.

Community Heritage Financial, Inc.
Robert E. (BJ) Goetz, Jr.
President & Chief Executive Officer
301-371-3055

Community Heritage Financial, Inc. and Subsidiaries
Consolidated Balance Sheets

			March 31,		December 31,		September 30,		June 30,		March 31,
			2023		2022		2022		2022		2022
			(Unaudited)		(Audited)		(Unaudited)		(Unaudited)		(Unaudited)

Assets
Cash and due from banks		$	12,821,166	$	15,393,207	$	15,829,569	$	15,495,064	$	34,704,104
	Total cash and cash equivalents		12,821,166		15,393,207		15,829,569		15,495,064		34,704,104

Securities available-for-sale, at fair value			43,142,854		39,510,486		39,352,159		38,181,195		143,435,198

Securities held-to-maturity			99,914,183		101,005,393		102,703,746		104,434,552		-
	Less: allowance for credit losses		(155,381)		-		-		-		-
	Total securities held-to-maturity, net		99,758,802		101,005,393		102,703,746		104,434,552		-

	Total securities		142,901,656		140,515,879		142,055,905		142,615,747		143,435,198

Equity securities, at cost			1,740,100		406,400		2,281,400		593,900		406,400

Loans			757,611,496		748,450,525		727,346,209		692,810,899		643,877,606
Less allowance for credit losses			(7,855,981)		(7,330,436)		(7,524,423)		(7,097,516)		(6,492,858)
	Loans, net		749,755,515		741,120,089		719,821,786		685,713,383		637,384,748

Loans held for sale			1,703,221		4,725,495		2,536,184		2,729,626		4,043,863
Premises and equipment, net			6,974,776		7,053,532		6,594,337		6,528,753		6,673,970
Right-of-use assets			2,731,604		2,841,736		2,989,453		2,085,283		2,191,459
Accrued interest receivable			2,405,851		2,616,879		2,124,769		2,263,562		2,067,109
Deferred tax assets			5,264,879		5,277,275		5,353,435		4,917,422		4,916,198
Bank-owned life insurance			6,875,378		6,817,058		6,746,834		6,475,884		6,484,376
Goodwill			1,656,507		1,656,507		1,656,507		1,656,507		1,656,507
Other Assets			1,789,199		1,708,412		1,748,574		1,487,765		1,597,527
	Total Assets	$	936,619,852	$	930,132,469	$	909,738,753	$	872,562,896	$	845,561,459

Liabilities and Shareholders' Equity

Liabilities
Deposits:
Non-interest-bearing demand		$	250,702,470	$	276,829,209	$	277,747,419	$	294,684,219	$	287,579,008
Interest-bearing			565,130,161		562,601,082		500,526,922		496,127,473		482,651,234
	Total Deposits		815,832,631		839,430,291		778,274,341		790,811,692		770,230,242

Federal home loan bank advances			30,000,000		-		53,000,000		5,000,000		-
Subordinated debt, net			14,865,455		14,843,030		14,820,606		14,798,182		14,775,758
Lease liabilities			2,789,614		2,908,707		3,052,126		2,155,281		2,259,527
Accrued interest payable			440,611		236,624		382,450		176,479		396,806
Other liabilities			4,661,833		5,572,659		7,252,244		6,930,947		6,839,126
	Total Liabilities		868,590,144		862,991,311		856,781,767		819,872,581		794,501,460

Shareholders' Equity

	Common stock, par value $0.01; shares authorized 10,000,000; shares issued and outstanding March 31, 2023 and December 31, 2022 were 2,905,973 and September 30, June 30 and March 31, 2021 were 2,251,320		29,060		29,060		22,513		22,513		22,513

Additional paid-in-capital			40,895,863		40,861,802		28,580,504		28,566,129		28,551,754
Retained earnings			36,287,937		35,757,761		34,429,771		32,999,658		31,019,099
Accumulated other comprehensive (loss)			(9,183,152)		(9,507,465)		(10,075,802)		(8,897,985)		(8,533,367)
	Total Shareholders' Equity		68,029,708		67,141,158		52,956,986		52,690,315		51,059,999

	Total Liabilities and Shareholders' Equity	$	936,619,852	$	930,132,469	$	909,738,753	$	872,562,896	$	845,561,459

Community Heritage Financial, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

			Three Months Ended
			March 31,		December 31,		March 31,
			2023		2022		2022

Interest Income
	Loans, including fees	$	9,344,705	$	8,506,375	$	6,362,459
	Securities		734,583		727,876		642,529
	Fed funds sold and other		109,705		125,813		14,506
	Total interest income		10,188,993		9,360,064		7,019,494

Interest Expense
	Deposits		2,894,188		1,770,167		333,979
	Borrowed funds		80,458		341,905		-
	Subordinated debt		238,049		238,049		238,049
	Other Interest Expense		31,145		24,533		32,734
	Total interest expense		3,243,840		2,374,654		604,762

Net interest income			6,945,153		6,985,410		6,414,732
Provision for (recovery of) credit losses			(440,391)		(196,987)		10,133
Net interest income after provision for (recovery of) credit losses			7,385,544		7,182,397		6,404,599

Non-interest income
	Service charges on deposits		187,402		190,655		158,091
	Earnings bank owned life insurance		50,029		61,933		1,018
	Gain sale of fixed assets		-		48,940		-
	Mortgage loan income activity		234,445		(461,671)		790,060
	Other non-interest income		240,645		257,808		263,541
	Total non-interest income		712,521		97,665		1,212,710

Non-interest expense
	Salaries and employee benefits		3,573,621		2,784,133		2,950,494
	Occupancy and equipment		991,946		808,870		769,524
	Legal and professional fees		185,509		181,490		180,696
	Advertising		154,147		134,085		183,204
	Data processing		800,986		803,583		575,433
	FDIC premiums		154,032		154,074		135,583
	Loss sale fixed assets		3,058		-		-
	Other intangible amortization		-		-		695
	Other		387,445		500,523		302,693
	Total non-interest expense		6,250,744		5,366,757		5,098,322
Income before taxes			1,847,321		1,913,305		2,518,987
Income tax expense			457,259		469,282		698,285
Net Income		$	$1,390,062	$	$1,444,023	$	$1,820,702

Basic earnings per share		$	0.48	$	0.50	$	0.81
Diluted earnings per share		$	0.48	$	0.50	$	0.81

Community Heritage Financial, Inc. and Subsidiaries Selected Financial Data

Income Statement Review

		For the Three Months Ended
		March 31,		December 31,		March 31,
		2023		2022		2022
		(Unaudited)		(Audited)		(Unaudited)

Interest Income	$	10,188,993	$	9,360,064	$	7,019,494
Interest Expense		3,243,840		2,374,654		604,762
Net interest income		6,945,153		6,985,410		6,414,732
Provision for (recovery of) credit losses		(440,391)		(196,987)		10,133
Net interest income after provision for (recovery of) credit losses	$	7,385,544	$	7,182,397	$	6,404,599

Non-interest income	$	712,521	$	97,665	$	1,212,710
Non-interest expense		6,250,744		5,366,757		5,098,322

Yield on interest-earning assets		4.52 %		4.08 %		3.57 %
Cost of interest-bearing liabilities		2.22 %		1.65 %		0.51 %
Efficiency ratio		81.63 %		75.77 %		66.84 %

Balance Sheet Review

		March 31,		December 31,		March 31,
		2023		2022		2022
		(Unaudited)		(Audited)		(Unaudited)

Total assets	$	936,619,852	$	930,132,469	$	845,561,459
Loans, net of allowance for credit losses		749,755,515		741,120,089		637,384,748
Goodwill		1,656,507		1,656,507		1,656,507
Deposits		815,832,631		839,430,291		770,230,242
Shareholder's equity		68,029,708		67,141,158		51,059,999

Asset Quality Review
Non-accrual loans	$	1,295,856	$	893,320	$	1,022,637
Non-accrual troubled debt restructured		786,700		834,322		912,317
Non-performing assets		2,082,556		1,727,642		1,934,954

Non-performing assets to total assets		0.22 %	%	0.19 %	%	0.23 %
Non-performing assets to total loans		0.27 %	%	0.23 %	%	0.31 %

Summary of Operating Results

		For the Three Months Ended
		March 31,		December 31,		March 31,
		2023		2022		2022
		(Unaudited)		(Audited)		(Unaudited)

Pre-provision for (recovery of) credit losses, pre-tax net income	$	1,406,930	$	1,716,318	$	2,529,120
Provision for (recovery of) credit losses, pre-tax		(440,391)		(196,987)		10,133
Tax expense		457,259		469,282		698,285
Net Income	$	1,390,062	$	1,444,023	$	1,820,702

(dollars in thousands)
Charge-offs	$	-	$	-	$	-
(Recoveries)		(3,000)		(3,000)		(3,535)
Net (recoveries) charge-offs	$	(3,000)	$	(3,000)	$	(3,535)

Per Common Share Data

Common shares outstanding		2,905,973		2,905,973		2,251,320
Weighted average shares outstanding		2,905,973		2,874,980		2,251,320
Diluted shares outstanding		2,906,676		2,874,980		2,251,320

Basic earnings per share	$	0.48	$	0.50	$	0.81
Diluted earnings per share	$	0.48	$	0.50	$	0.81
Dividend paid	$	0.06	$	0.04	$	0.04

Book value per share	$	23.41	$	23.10	$	22.68
Tangible book value per share	$	22.84	$	22.53	$	21.94

Selected Financial Ratios (unaudited)

Return on average assets		0.60 %	%	0.62 %	%	0.89 %
Return on average equity		8.25 %	%	8.69 %	%	13.16 %
Allowance for credit losses to total loans		1.04 %	%	0.98 %	%	1.01 %
Allowance for credit losses to total loans (excluding PPP loans)		1.04 %	%	0.98 %	%	1.01 %
Non-performing assets to total loans		0.27 %	%	0.23 %	%	0.31 %
Non-performing assets to total loans (excluding PPP)		0.27 %	%	0.23 %	%	0.30 %
Net Charge-offs to total loans		0.00 %	%	0.00 %	%	0.00 %
Common equity tier 1 (CET1) capital		12.30 %	%	12.22 %	%	10.21 %
Tier1 capital		12.30 %	%	12.22 %	%	10.21 %
Total risk based capital		13.47 %	%	13.33 %	%	11.26 %
Tier-1 leverage ratio		9.57 %	%	9.53 %	%	8.84 %
Average equity to average assets		7.30 %	%	7.00 %	%	6.75 %
Tangible Common Equity/Tangible Common Assets		7.10 %	%	7.07 %	%	5.85 %
Net interest margin (bank only)		3.18 %	%	3.15 %	%	3.35 %
Loans to deposits - (EOP)		92.86 %	%	89.16 %	%	83.60 %