Community Heritage Financial, Inc. Reports Earnings for the Fourth Quarter of 2022

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Jan 26, 2023, 13:54 ET

MIDDLETOWN, Md., Jan. 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 2022 the Company achieved the highest annual net income in the history of the Company. For the year ended December 31, 2022 the Company earned net income of $6.86 million or $2.85 per share, an increase of $840 thousand or 14.0% compared to net income of $6.02 million or $2.67 per share for the year ended December 31, 2021. Fourth quarter 2022 net income was $1.44 million or $0.50 per share, a decrease of $76 thousand compared to third quarter 2022 net income of $1.52 million and an increase of $187 thousand compared to $1.26 million for the fourth quarter of 2021.

Total assets as of December 31, 2022 totaled $930.1 million, an increase of $20.4 million compared to $909.7 million as of September 30, 2022 and up $112.2 for the year compared to December 31, 2021 total assets of $817.9 million. Outstanding core loan balances grew to $748.5 million as of December 31, 2022, an increase of $21.2 million compared to $727.3 million as of September 30, 2022 and were up $151.2 million (excluding PPP loans) from December 31, 2021. Core deposits grew by $61.1 million for the quarter from $778.3 million as of September 30, 2022 to $839.4 million as of December 31, 2022. Several key relationship customers added material deposit dollars to the Bank in the fourth quarter, which contributed to the volume of growth for the quarter. As a result of the strong deposit growth for the quarter, the Bank paid down all short-term debt on the balance sheet, $53 million as of September 30, 2022, to a zero balance as of December 31, 2022. As of December 31, 2022 the Bank had no outstanding wholesale funding (brokered deposits or borrowings) remaining on the balance sheet.

Earnings for the fourth quarter continued to be impacted by increased funding costs related to additional Fed rate increases during the quarter. Interest expense increased from $1.3 million in the third quarter of 2022 to $2.4 million in the fourth quarter of 2022. The increased funding cost was partially offset by increased interest income, going from $8.4 million in the third quarter to $9.4 million in the fourth quarter due to the loan growth as noted previously along with the upward repricing of a segment of the variable rate loan portfolio. Revenue related to mortgage loan activity and salary expenses were impacted during the fourth quarter due to a one-time reclassification. Operating expenses were stable and decreased slightly from $5.7 million in the third quarter to $5.4 million in the fourth quarter of 2022. Due to improved metrics in the current incurred loss model, there was a recovery of loan loss provision expense of $197 thousand for the fourth quarter of 2022 compared to an expense of $424 thousand in the third quarter of 2022. Book income tax expense decreased from $666 thousand in the third quarter to $469 thousand in the fourth quarter of 2022. Income tax expense decreased in the fourth quarter due to reduced pretax income and year end deferred tax adjustments.

Quarterly Highlights – 4Q22 vs 3Q22

Tangible book value per share decreased by $0.26 from $22.79 per share as of September 30, 2022 to $22.53 as of December 31, 2022. The slight decrease in tangible book value resulted from the completion of the common stock equity raise in October 2022, which added 649,526 shares of common stock and $12.3 million in additional paid in capital to the Company's equity during the quarter. An additional 5,127 shares of common stock were issued during the quarter through equity-based compensation plans.
Gross loans increased by $21.2 million for the fourth quarter of 2022 compared to the third quarter of 2022. Most of the growth came from the residential mortgage portfolio with slightly over $19 million in net growth for the quarter. Net growth in the commercial portfolio was offset by several expected payoffs and participation related paydowns during the fourth quarter. All PPP loan forgiveness was completed during the second quarter of 2022 and there were no loan balances, interest income or fee income included in third or fourth quarter 2022 results related to the PPP loan program.
Overall deposits increased $61.1 million for the fourth quarter of 2022 to $839.4 million as of December 31, 2022, up from $778.3 million as of September 30, 2022. Several key deposit relationships added substantial balances during the quarter, which accounted for a portion of the strong growth. The growth allowed the Bank to pay down all wholesale funding on the balance sheet during the quarter, including $10 million in brokered deposits and $53 million in short-term FHLB and overnight Fed Fund borrowings. As of December 31, 2022 the Bank had no wholesale funding remaining on the balance sheet.
Net interest margin continued to be impacted by additional Fed rate increases and increased market rate competition for deposits during the fourth quarter. Strong earning asset growth and upward repricing have remained on course to drive revenue expansion; however, the rapid increase in short-term funding rates has caused margin compression. Net interest margin fell 20 basis points from 3.35% in the third quarter of 2022 to 3.15% in the fourth quarter of 2022, resulting in net interest income to drop from $7.1 million in the third quarter of 2022 to $7.0 million for the fourth quarter.
The allowance for loan losses to total loans ratio was 0.98% at December 31, 2022, down 0.05% from 1.03% as of September 30, 2022. Improved economic and credit metrics within the currently used incurred loss model allowed for the reduction in the reserve ratio and a recovery of provision expense for the quarter.

Quarterly Highlights – 4Q22 vs 4Q21

Tangible book value per share decreased $2.03 to $22.53 as of December 31, 2022 compared to $24.56 as of December 31, 2021. Most of the tangible book value decrease on a year-over-year basis was due to an increase in the accumulated other comprehensive loss to $9.5 million as of December 31, 2022 compared to a loss of $893 thousand as of December 31, 2021. The decrease in tangible book value per share on a year-over-year basis was also impacted by the increased shares outstanding of 654,653 (649,526 from the common stock raise and 5,127 from equity-based compensation plans).
Gross loans of $748.5 million as of December 31, 2022 were up $137.9 million or 22.6% compared to December 31, 2021. Actual core growth including the full forgiveness of PPP loans of $13.3 million as of December 31, 2022 was $151.2 million or 24.8% for 2022.
Total deposits at December 31, 2022 were $839.4 million, an increase of $102.7 million or 13.9% compared to $736.7 million as of December 31, 2021. As of December 31, 2022 there were no brokered deposits on the Bank balance sheet compared to $246 thousand as of December 31, 2021.
Net interest margin for the fourth quarter of 2022 was 3.15% at the Bank level compared to 3.22% for the fourth quarter of 2021. Increased funding costs, as noted previously, along with no PPP related interest and fee income for the fourth quarter of 2022 compared to PPP interest and fee income of $255 thousand for the fourth quarter of 2021 accounted for the variance. PPP interest and fee income for the full year of 2022 was $416 thousand compared to $2.8 million for the full year of 2021.
Due to improved credit and economic metrics, there was a recovery of $197 thousand in loan loss provision expense for the fourth quarter of 2022 compared to an expense of $426 thousand for the fourth quarter of 2021. Provision expense for the year ended December 31, 2022 was $813 thousand compared to $3.1 million for the year ended December 31, 2021. Full year results for 2021 included an isolated $4.5 million loan charge-off during the second quarter. Per the credit metrics noted previously, there were only $7 thousand in total charge-offs recorded for the year in 2022.
Non-interest income totaled $98 thousand for the fourth quarter of 2022 due to lower refinance and secondary mortgage activity compared to the fourth quarter of 2021 and due to the reclassification previously noted. The $98 thousand compares to $1.3 million in non-interest income for the fourth quarter of 2021. Service charge, insurance and other non-interest income for the quarter showed gains over fourth quarter results in 2021.
Non-interest expense for the fourth quarter of 2022 was $5.4 million, an increase of $100 thousand or 1.9% compared to $5.3 million for the fourth quarter of 2021. Full year 2022 non-interest expense was $21.1 million an increase of $1.2 million or 6.2% compared to full year 2021 expense of $19.9 million. Inflation driven operating cost increases along with increased employee costs due to labor market competition and increased data processing fees related to volume and infrastructure improvements 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 January 20, 2023, for stockholders of record as of February 3, 2023, and payable on February 10, 2023. The $0.06 dividend per share represents a 50% increase from the previous quarterly dividend of $0.04 per share.

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

			December 31,		September 30,		June 30,		March 31,		December 31,
			2022		2022		2022		2022		2021
			(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Audited)

Assets
Cash and due from banks		$	15,393,440	$	15,829,569	$	15,495,064	$	34,704,104	$	41,255,045
	Total cash and cash equivalents		15,393,440		15,829,569		15,495,064		34,704,104		41,255,045

Securities available-for-sale, at fair value			39,510,486		39,352,159		38,181,195		143,435,198		144,019,313
Securities held to maturity			101,005,393		102,703,746		104,434,552		-		-
	Total securities		140,515,879		142,055,905		142,615,747		143,435,198		144,019,313
Equity securities, at cost			406,400		2,281,400		593,900		406,400		337,700

Loans			748,450,525		727,346,209		692,810,899		643,877,606		610,501,481
Less allowance for loan loss			7,330,436		7,524,423		7,097,516		6,492,858		6,499,690
	Loans, net		741,120,089		719,821,786		685,713,383		637,384,748		604,001,791

Loans held for sale			4,725,495		2,536,184		2,729,626		4,043,863		5,423,358
Premises and equipment, net			7,053,532		6,594,337		6,528,753		6,673,970		6,771,220
Right-of-use assets			2,841,736		2,989,453		2,085,283		2,191,459		2,300,829
Accrued interest receivable			2,616,879		2,124,769		2,263,562		2,067,109		1,971,018
Deferred tax assets			5,277,275		5,353,435		4,917,422		4,916,198		2,140,827
Bank-owned life insurance			6,817,058		6,746,834		6,475,884		6,484,376		6,475,067
Goodwill			1,656,507		1,656,507		1,656,507		1,656,507		1,656,507
Intangible assets			-		-		-		-		695
Other Assets			1,708,179		1,748,574		1,487,765		1,597,527		1,556,354
	Total Assets	$	930,132,469	$	909,738,753	$	872,562,896	$	845,561,459	$	817,909,724

Liabilities and Stockholders' Equity

Liabilities
Deposits:
Non-interest-bearing demand		$	276,829,209	$	277,747,419	$	294,684,219	$	287,579,008	$	272,399,626
Interest-bearing			562,601,082		500,526,922		496,127,473		482,651,234		464,285,444
	Total Deposits		839,430,291		778,274,341		790,811,692		770,230,242		736,685,070

Federal home loan bank advances			-		53,000,000		5,000,000		-		-
Subordinated debt, net			14,843,030		14,820,606		14,798,182		14,775,758		14,753,333
Other borrowings			-		-		-		(687)		1,887,060
Lease liabilities			2,908,707		3,052,126		2,155,281		2,259,527		2,367,676
Accrued interest payable			236,624		382,450		176,479		396,806		189,842
Other liabilities			5,572,659		7,252,244		6,930,947		6,839,814		5,071,852
	Total Liabilities		862,991,311		856,781,767		819,872,581		794,501,460		760,954,833

Shareholders' Equity
Common stock, par value $.01; shares authorized 10,000,000; shares
	issued and outstanding at December 31, 2022 and 2021 were 2,905,973		29,060		22,513		22,513		22,513		22,513
	and 2,251,320, respectively.

Additional paid-in-capital			40,861,801		28,580,504		28,566,129		28,551,754		28,537,379
Retained earnings			35,757,761		34,429,771		32,999,658		31,019,099		29,288,449
Accumulated other comprehensive (loss)			(9,507,464)		(10,075,802)		(8,897,985)		(8,533,367)		(893,450)
	Total Shareholders' Equity		67,141,158		52,956,986		52,690,315		51,059,999		56,954,891

	Total Liabilities and Stockholders' Equity	$	930,132,469	$	909,738,753	$	872,562,896	$	845,561,459	$	817,909,724

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

			Three Months Ended						Twelve Months Ended
			December 31,		September 30,		December 31,		December 31,		December 31,
			2022		2022		2021		2022		2021

Interest Income
	Loans, including fees	$	8,506,375	$	7,656,443	$	6,144,692	$	29,365,817	$	25,386,383
	Securities		727,876		729,659		565,044		2,804,729		1,653,013
	Fed funds sold and other		125,813		42,699		16,586		200,851		57,272
	Total interest income		9,360,064		8,428,801		6,726,322		32,371,397		27,096,668

Interest Expense
	Deposits		1,770,167		886,091		383,526		3,342,125		1,834,432
	Borrowed funds		341,905		155,208		-		513,286		947
	Subordinated debt		238,049		238,050		238,049		952,197		952,197
	Other Interest Expense		24,533		23,768		47,266		104,908		134,990
	Total interest expense		2,374,654		1,303,117		668,841		4,912,516		2,922,566

Net interest income			6,985,410		7,125,684		6,057,481		27,458,881		24,174,102
Provision for (recovery of) loan losses			(196,987)		423,907		426,483		812,855		3,079,173
Net interest income after provision for (recovery of) loan losses			7,182,397		6,701,777		5,630,998		26,646,026		21,094,929

Non-interest income
	Service charges on deposits		190,655		201,836		179,650		747,100		734,710
	Earnings bank owned life insurance		61,933		12,659		24,210		58,826		162,162
	Gain sale of fixed assets		48,940		-		18,000		65,448		18,684
	Gain sale of securities		-		-		-		-		178,265
	Mortgage loan activity		(461,671)		737,355		822,280		1,943,787		5,098,224
	Other non-interest income		257,808		225,600		232,343		983,301		818,162
	Total non-interest income		97,665		1,177,450		1,276,483		3,798,462		7,010,207

Non-interest expense
	Salaries and employee benefits		2,784,132		3,295,141		3,016,112		12,098,457		11,446,557
	Occupancy and equipment		808,870		760,527		719,872		3,110,087		2,811,633
	Legal and professional fees		181,490		187,301		238,066		710,697		712,544
	Advertising		134,085		142,327		162,770		609,356		297,595
	Data processing		803,583		726,602		625,147		2,661,606		2,262,821
	FDIC premiums		154,074		137,991		115,376		570,508		432,975
	Loss sale of securities		-		-		-		-		17,826
	Loss sale fixed assets		-		-		816		-		816
	Other intangible amortization		-		-		2,083		695		8,333
	Other		500,523		443,659		386,449		1,365,346		1,907,937
	Total non-interest expense		5,366,757		5,693,548		5,266,691		21,126,752		19,899,038
Income before taxes			1,913,305		2,185,679		1,640,790		9,317,736		8,206,098
Income tax expense			469,282		665,512		383,730		2,462,232		2,190,813
Net Income		$	$1,444,023	$	$1,520,167	$	$1,257,060	$	$6,855,504	$	$6,015,285

Basic earnings per share		$	0.50	$	0.68	$	0.56	$	2.85	$	2.67
Diluted earnings per share		$	0.50	$	0.67	$	0.56	$	2.84	$	2.67

Community Heritage Financial, Inc. and Subsidiaries
Selected Financial Data

Income Statement Review

		For the Three Months Ended						Twelve Months Ended
		December 31,		September 30,		December 31,		December 31,	December 31,
		2022		2022		2021		2022	2021
		(Unaudited)		(Unaudited)		(Audited)		(Unaudited)	(Audited)

Interest Income	$	9,360,064	$	8,428,801	$	6,726,322		32,371,397	27,096,668
Interest Expense		2,374,654		1,303,117		668,841		4,912,516	2,922,566
Net interest income		6,985,410		7,125,684		6,057,481		27,458,881	24,174,102
Provision (recovery) expense		(196,987)		423,907		426,483		812,855	3,079,173
Net interest income after (recovery) provision	$	7,182,397	$	6,701,777	$	5,630,998		26,646,026	21,094,929

Non-interest income	$	97,665	$	1,177,450	$	1,276,483		3,798,462	7,010,207
Non-interest expense		5,366,757		5,693,548		5,266,691		21,126,752	19,899,038

Yield on interest-earning assets		4.08 %		3.84 %		3.44 %		3.78 %	3.77 %
Cost of interest-bearing liabilities		1.65 %		0.96 %		0.56 %		0.94 %	0.66 %
Efficiency ratio		76.30 %		68.57 %		71.95 %		67.73 %	64.19 %

Balance Sheet Review

		December 31,		September 30,		December 31,
		2022		2022		2021
		(Unaudited)		(Unaudited)		(Audited)

Total assets	$	930,132,469	$	909,738,753	$	817,909,724
Loans, net of reserve		741,120,089		719,821,786		604,001,791
Goodwill & intangibles		1,656,507		1,656,507		1,657,201
Deposits		839,430,291		778,274,341		736,685,070
Shareholder's equity		67,141,158		52,956,986		56,954,891


Asset Quality Review
Non-accrual loans	$	893,320	$	969,229	$	1,150,518
Non-accrual troubled debt restructured		834,322		864,845		940,833
Non-performing assets		1,727,642		1,834,074		2,091,351

Trouble debt restructured loans still accruing		744,599		748,284		956,496
Other real estate owned		-		-		-
Foreclosed properties		-		-		-

Non-performing assets to total assets		0.19 %	%	0.20 %	%	0.26 %
Non-performing assets to total loans		0.23 %	%	0.25 %	%	0.34 %

Summary of Operating Results

		For the Three Months Ended				For the Twelve Months Ended
		December 31,		December 31,		December 31,		December 31,
		2022		2021		2022		2021
		(Unaudited)		(Audited)		(Unaudited)		(Audited)

Pre-allowance for Loan Loss (recovery) provision, pre-tax net income	$	1,716,318	$	2,067,273	$	10,130,591	$	11,285,271
Allowance for loan loss (recovery) provision, pre-tax		(196,987)		426,483		812,855		3,079,173
Tax expense		469,282		383,730		2,462,232		2,190,813
Net Income	$	1,444,023	$	1,257,060	$	6,855,504	$	6,015,285

(dollars in thousands)
Charge-offs	$	-	$	15,731	$	7,108	$	4,611,313
(Recoveries)		(3,000)		(7,853)		(43,669)		(551,639)
Net (recoveries) charge-offs	$	(3,000)	$	7,878	$	(36,561)	$	4,059,674

Per Common Share Data

Common shares outstanding		2,905,973		2,251,320		2,905,973		2,251,320
Weighted average shares outstanding		2,874,980		2,251,320		2,408,516		2,251,320
Diluted shares outstanding		2,874,980		2,251,320		2,410,177		2,251,320

Basic earnings per share	$	0.50	$	0.56	$	2.85	$	2.67
Diluted earnings per share*	$	0.50	$	0.56	$	2.84	$	2.67
Dividends paid	$	0.04	$	0.04	$	0.16	$	0.16

Book value per share	$	23.10	$	25.30	$	23.10	$	25.30
Tangible book value per share	$	22.53	$	24.56	$	22.53	$	24.56

Selected Financial Ratios (unaudited)

Return on average assets		0.62 %		0.63 %		0.78 %		0.80 %
Return on average equity		8.69 %		8.66 %		11.99 %		10.66 %
Allowance for loan losses to total loans		0.98 %		1.06 %		0.98 %		1.06 %
Allowance for loan loss to total loans (excluding PPP loans)		0.98 %		1.09 %		0.98 %		1.09 %
Non-performing assets to total loans		0.23 %		0.34 %		0.23 %		0.34 %
Non-performing assets to total loans (excluding PPP)		0.23 %		0.35 %		0.23 %		0.35 %
Net Charge-offs to total loans		0.00 %		0.00 %		0.00 %		0.67 %
Common equity tier 1 (CET1) capital		12.27 %		10.20 %		12.27 %		10.20 %
Tier1 capital*		12.27 %		10.20 %		12.27 %		10.20 %
Total risk based capital*		13.39 %		11.34 %		13.39 %		11.34 %
Tier-1 leverage ratio*		9.53 %		8.57 %		9.53 %		8.57 %
Average equity to average assets		7.00 %		7.25 %		6.53 %		7.54 %
Tangible Common Equity/Tangible Common Assets		7.07 %		6.77 %		7.07 %		6.77 %
Net interest margin (bank only)		3.15 %		3.22 %		3.32 %		3.51 %
Loans to deposits - (EOP)		89.72 %		82.86 %		89.72 %		82.86 %