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

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Jul 26, 2023, 16:00 ET

MIDDLETOWN, Md., July 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 six months ended June 30, 2023 the Company earned net income of $2.01 million or $0.69 per share compared to $3.89 million or $1.73 per for the six months ended June 30, 2022. Second quarter 2023 net income was $616 thousand or $0.21 per share compared to first quarter 2023 net income of $1.39 million or $0.48 per share and second quarter 2022 net income of $2.07 million or $0.92 per share.

Earnings for the second quarter were negatively impacted by the continued increase in short-term interest rates, which had an immediate effect on funding costs required to support strong loan growth for the quarter. Interest expense was $4.18 million for the second quarter of 2023, up $936 thousand compared to $3.24 million for the first quarter of 2023 and up $3.55 million when compared to interest expense of $630 thousand for the second quarter of 2022. The increased interest expense was partially off-set by increased interest income, which was $10.30 million for the second quarter of 2023, up from $10.19 million for the first quarter of 2023 and up $2.73 million from $7.56 million for the second quarter of 2022. Overall net interest income decreased from $6.95 million in the first quarter of 2023 to $6.12 million in the second quarter with a corresponding reduction in net interest margin from 3.45% in the first quarter to 2.74% for the second quarter of 2023. The first quarter of 2023 was aided by a one-time recovery of interest income of approximately $433 thousand on a non-accrual loan payoff. Operating expenses decreased $382 thousand from $6.25 million in the first quarter of 2023 to $5.87 million in the second quarter. Lower salary and benefit expense related to performance incentive accruals along with lower occupancy and equipment expense due to a one-time lease termination expense in the first quarter of 2023 accounted for most of the variance.

The Company continued strong asset growth during the second quarter of 2023 going from total assets of $936.6 million as of March 31, 2023 to total assets of $974.3 million as of June 30, 2023. Most of the asset growth resulted from strong loan growth for the quarter with loans growing $39.3 million from $757.6 million at March 31, 2023 to $796.9 million at June 30, 2023. On a year-over-year basis total outstanding loan balances grew $104.1 million or 15.0% compared to June 30, 2022 loan balances of $692.8 million. While loan balances have increased during the past quarter and year, credit quality has remained strong and improved with non-performing assets to total assets going from 0.22% for the quarters ended June 30, 2022 and March 31, 2023 to 0.20% as of June 30, 2023. Due to improved national and regional economic factors used in the CECL model, the calculated allowance for credit losses to loans ratio as of June 30, 2023 was 1.02%, a decrease of 0.02% when compared to 1.04% as of March 31, 2023. With the loan growth as noted above and corresponding CECL metrics, the provision for credit losses for the second quarter was $260 thousand, an increase of $700 thousand compared to a recovery of credit losses for the first quarter of 2023 of $440 thousand. Funding for the balance sheet growth was predominantly through deposit growth of $35.1 million with deposit balances going from $815.8 million as of March 31, 2023 to $850.9 million as of June 30, 2023.

Quarterly Highlights – 2Q23 vs 1Q23

Tangible book value per share increased by $0.02 from $22.84 per share as of March 31, 2023 to $22.86 as of June 30, 2023. The increase resulted from $616 thousand in earnings for the quarter partially off-set by an increased accumulated other comprehensive loss position, which went from an unrealized loss of $9.2 million as of March 31, 2023 to an unrealized loss of $9.6 million as of June 30, 2023.
Outstanding loan balances increased by $39.3 million for the second quarter of 2023 when compared to the first quarter of 2023. Growth was distributed between commercial with $22.6 million in growth, residential mortgage with $14.9 million and consumer/other with $1.8 million in growth.
Deposit balances increased $35.1 million for the second quarter of 2023 when compared to March 31, 2023 going from $815.8 million as of March 31, 2023 to $850.9 million as of June 30, 2023. Non-interest bearing demand deposits were down $6.4 million for the quarter while interest-bearing deposits increased $41.4 million. Interest-bearing deposit growth included $23.4 million in money market and savings type accounts along with $18.0 million in time deposit growth. The $18.0 million in time deposit growth included $10 million in brokered time deposits.
Net interest margin was impacted by increased funding costs during the second quarter and dropped to 2.74% for the second quarter from 3.45% in the first quarter of 2023. As noted previously, the first quarter of 2023 included a one-time interest income recovery on a non-accrual loan which paid off during the first quarter. Second quarter margin ranged from 2.80% in April to a low of 2.69% in May before beginning to move higher in June at 2.73% to land at the quarterly average rate of 2.74%.
The allowance for credit losses to total loans ratio was 1.02% at June 30, 2023, down .02% from 1.04% as of March 31, 2023. Loan related provision expense of $273 thousand for the quarter, due to strong loan growth, made up most of the ACL provision expense for the quarter. Unfunded commitments decreased for the quarter allowing for a release of $21 thousand in ACL while the provision for credit losses related to held-to-maturity securities increased by $8 thousand for the quarter, resulting in a net ACL provision expense of $260 thousand for the second quarter of 2023.

Quarterly Highlights – 2Q23 vs 2Q22

Tangible book value per share of $22.86 as of June 30, 2023 was an increase of $0.19 per share from $22.67 as of June 30, 2022. Book value per share comparisons on a year-over-year basis includes the impact of increased shares outstanding to 2,905,973 as of June 30, 2023 compared to 2,251,320 as of June 30, 2022 as the result of equity compensation awards and a common stock capital raise in October of 2022.
Loan balances of $796.9 million as of June 30, 2023 were up $104.1 million or 15.0% on a year-over-year basis compared to June 30, 2022. Growth over the period consisted of approximately $34.3 in commercial, $64.8 million in residential mortgage and $5.0 million in consumer and other loans.
On a year-over-year basis, deposit balances increased $60.1 million or 7.6% from $790.8 million as of June 30, 2022 to $850.9 million as of June 30, 2023. While overall deposit balances have increased, higher interest rates on deposit products have resulted in a migration from non-interest bearing demand balances to interest-bearing deposit products. Non-interest bearing demand balances dropped from $294.7 million as of June 30, 2022 to $244.3 million as of June 30, 2023. Interest bearing deposit balances increased during the same time period from $496.1 million at June 30, 2022 to $606.5 million as of June 30, 2023.
Net interest income for the second quarter of 2023 was $6.12 million compared to $6.93 million for the second quarter of 2022. While interest income increased by $2.74 million or 36% going from $7.56 million in the second quarter of 2022 to $10.30 million in the second quarter of 2023, interest expense increased 564% going from $630 thousand in the second quarter of 2022 to $4.18 million in the second quarter of 2023. The steady rate increases by the Federal Reserve over the past year along with increased competition for deposits in the market and deposit mix migration as noted above, led to the increased funding costs.
Non-interest income was $804 thousand for the second quarter of 2023, a decrease of $507 thousand compared to $1.3 million for the second quarter of 2022. Most of the reduction resulted from lower refinance and secondary residential mortgage activity on a year-over-year basis due to higher market rates for residential mortgage loans and more production going to portfolio balances.
Non-interest expense for the second quarter of 2023 was $5.9 million, an increase of $542 thousand compared to $5.3 million for the second quarter of 2022. Market driven increases in salary and benefit costs, increased data processing fees related to volume and infrastructure improvements and increased legal and professional fees 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 July 21, 2023, for shareholders of record as of August 4, 2023, and payable on August 11, 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

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

Assets
Cash and due from banks		$	14,946,927	$	12,821,166	$	15,393,207	$	15,829,569	$	15,495,064
	Total cash and cash equivalents		14,946,927		12,821,166		15,393,207		15,829,569		15,495,064

Securities available-for-sale, at fair value			41,460,794		43,142,854		39,510,486		39,352,159		38,181,195

Securities held-to-maturity			98,496,558		99,914,183		101,005,393		102,703,746		104,434,552
	Less: allowance for credit losses		(163,259)		(155,381)		-		-		-
	Total securities held-to-maturity		98,333,299		99,758,802		101,005,393		102,703,746		104,434,552

	Total securities		139,794,093		142,901,656		140,515,879		142,055,905		142,615,747

Equity securities, at cost			1,527,600		1,740,100		406,400		2,281,400		593,900

Loans			796,931,525		757,611,496		748,450,525		727,346,209		692,810,899
Less allowance for credit losses			(8,112,952)		(7,855,981)		(7,330,436)		(7,524,423)		(7,097,516)
	Loans, net		788,818,573		749,755,515		741,120,089		719,821,786		685,713,383

Loans held for sale			1,923,566		1,703,221		4,725,495		2,536,184		2,729,626
Premises and equipment, net			6,805,822		6,974,776		7,053,532		6,594,337		6,528,753
Right-of-use assets			2,615,519		2,731,604		2,841,736		2,989,453		2,085,283
Accrued interest receivable			2,512,795		2,405,851		2,616,879		2,124,769		2,263,562
Deferred tax assets			5,314,018		5,264,879		5,277,275		5,353,435		4,917,422
Bank-owned life insurance			6,927,341		6,875,378		6,817,058		6,746,834		6,475,884
Goodwill			1,656,507		1,656,507		1,656,507		1,656,507		1,656,507
Other Assets			1,502,676		1,789,199		1,708,412		1,748,574		1,487,765
	Total Assets	$	974,345,437	$	936,619,852	$	930,132,469	$	909,738,753	$	872,562,896

Liabilities and Shareholders' Equity

Liabilities
Deposits:
Non-interest-bearing demand		$	244,342,167	$	250,702,470	$	276,829,209	$	277,747,419	$	294,684,219
Interest-bearing			606,528,210		565,130,161		562,601,082		500,526,922		496,127,473
	Total Deposits		850,870,377		815,832,631		839,430,291		778,274,341		790,811,692

FRB, FHLB, and fed funds borrowings			32,000,000		30,000,000		-		53,000,000		5,000,000
Subordinated debt, net			14,887,879		14,865,455		14,843,030		14,820,606		14,798,182
Lease liabilities			2,678,348		2,789,614		2,908,707		3,052,126		2,155,281
Accrued interest payable			273,753		440,611		236,624		382,450		176,479
Other liabilities			5,540,871		4,661,833		5,572,659		7,252,244		6,930,947
	Total Liabilities		906,251,228		868,590,144		862,991,311		856,781,767		819,872,581

Shareholders' Equity
Common stock, par value $.01; shares authorized 10,000,000;
	shares issued and outstanding June 30, 2023, March 31, 2023 and		29,060		29,060		29,060		22,513		22,513
	December 31, 2022 were 2,905,973 and September 30, 2022
	and June 30, 2022 were 2,251,320.

Additional paid-in-capital			40,949,900		40,895,863		40,861,802		28,580,504		28,566,129
Retained earnings			36,729,931		36,287,937		35,757,761		34,429,771		32,999,658
Accumulated other comprehensive (loss)			(9,614,682)		(9,183,152)		(9,507,465)		(10,075,802)		(8,897,985)
	Total Shareholders' Equity		68,094,209		68,029,708		67,141,158		52,956,986		52,690,315

	Total Liabilities and Shareholders' Equity	$	974,345,437	$	936,619,852	$	930,132,469	$	909,738,753	$	872,562,896

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

			Three Months Ended						Six Months Ended
			June 30,		March 31,		June 30,		June 30,		June 30,
			2023		2023		2022		2023		2022

Interest Income
	Loans, including fees	$	9,453,437	$	9,344,705	$	6,840,541	$	18,798,142	$	13,203,000
	Securities		767,524		734,583		704,665		1,502,107		1,347,194
	Fed funds sold and other		81,306		109,705		17,832		191,011		32,338
	Total interest income		10,302,267		10,188,993		7,563,038		20,491,260		14,582,532

Interest Expense
	Deposits		3,421,730		2,894,188		351,887		6,315,918		685,866
	Borrowed funds		482,469		80,458		16,173		562,927		16,173
	Subordinated debt		238,049		238,049		238,049		476,098		476,098
	Other Interest Expense		38,017		31,145		23,874		69,162		56,608
	Total interest expense		4,180,265		3,243,840		629,983		7,424,106		1,234,745

Net interest income			6,122,002		6,945,153		6,933,055		13,067,154		13,347,787
Provision for (recovery of) credit losses			260,439		(440,391)		217,425		(179,953)		227,558
Net interest income after provision for (recovery of) credit losses			5,861,563		7,385,544		6,715,630		13,247,107		13,120,229

Non-interest income
	Service charges on deposits		187,426		187,402		196,519		374,828		354,610
	Earnings bank owned life insurance		43,672		50,029		(16,784)		93,701		(15,766)
	Gain sale of fixed assets		-		-		16,508		-		16,508
	Mortgage loan income activity		315,193		234,445		878,041		549,638		1,659,867
	Other non-interest income		257,221		240,645		236,352		497,867		499,893
	Total non-interest income		803,512		712,521		1,310,636		1,516,034		2,515,112

Non-interest expense
	Salaries and employee benefits		3,286,113		3,573,621		3,068,690		6,859,735		6,019,184
	Occupancy and equipment		815,251		991,946		771,166		1,807,197		1,540,690
	Legal and professional fees		294,626		185,509		161,210		480,135		341,906
	Advertising		177,282		154,147		149,740		331,429		332,944
	Data processing		688,228		800,986		600,583		1,489,214		1,123,184
	FDIC premiums		130,622		154,032		142,860		284,654		278,443
	Loss sale fixed assets		-		3,058		-		3,058		-
	Other intangible amortization		-		-		-		-		695
	Other		476,742		387,445		432,251		864,187		779,543
	Total non-interest expense		5,868,864		6,250,744		5,326,500		12,119,609		10,416,589
Income before taxes			796,211		1,847,321		2,699,766		2,643,532		5,218,752
Income tax expense			179,858		457,259		629,153		637,117		1,327,438
Net Income		$	$616,353	$	$1,390,062	$	$2,070,613	$	$2,006,415	$	$3,891,314

Basic earnings per share		$	0.21	$	0.48	$	0.92	$	0.69	$	1.73
Diluted earnings per share		$	0.21	$	0.48	$	0.92	$	0.68	$	1.73

Community Heritage Financial, Inc. and Subsidiaries
Selected Financial Data

Income Statement Review

		For the Three Months Ended						For the Six Months Ended
		June, 30		March 31,		June, 30		June, 30		June, 30
		2023		2023		2022		2023		2022
		(Unaudited)		(Unaudited)		(Audited)		(Unaudited)		(Unaudited)

Interest Income	$	10,302,267	$	10,188,993	$	7,563,038		20,491,260		14,582,532
Interest Expense		4,180,265		3,243,840		629,983		7,424,106		1,234,745
Net interest income		6,122,002		6,945,153		6,933,055		13,067,154		13,347,787
Provision for (recovery of) credit losses		260,439		(440,391)		217,425		(179,953)		227,558
Net interest income after provision for (recovery of) credit losses	$	5,861,563	$	7,385,544	$	6,715,630		13,247,107		13,120,229

Non-interest income	$	803,512	$	712,521	$	1,310,636		1,516,034		2,515,112
Non-interest expense		5,868,864		6,250,744		5,326,500		12,119,609		10,416,589

Yield on interest-earning assets		4.43 %		4.52 %		3.64 %		4.47 %		3.59 %
Cost of interest-bearing liabilities		2.67 %		2.22 %		0.51 %		2.45 %		0.51 %
Efficiency ratio		84.74 %		81.63 %		64.61 %		83.11 %		65.66 %

Balance Sheet Review

		June, 30		March 31,		June 30,
		2023		2023		2022
		(Unaudited)		(Unaudited)		(Unaudited)

Total assets	$	974,345,437	$	936,619,852	$	872,562,896
Loans, net of allowance for credit losses		788,818,573		749,755,515		685,713,383
Goodwill		1,656,507		1,656,507		1,656,507
Deposits		850,870,377		815,832,631		790,811,692
Shareholder's equity		68,094,209		68,029,708		52,690,315


Asset Quality Review
Non-accrual loans	$	1,929,248	$	2,082,556	$	1,880,200
Non-performing assets	$	1,929,248	$	2,082,556	$	1,880,200


Non-performing assets to total assets		0.20 %	%	0.22 %	%	0.22 %
Non-performing assets to total loans		0.24 %	%	0.27 %	%	0.27 %

Summary of Operating Results

		For theThree Months Ended				For the Six Months Ended
		June, 30		June, 30		June, 30		June, 30
		2023		2022		2023		2022
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Pre-provision for (recovery of) credit losses, pre-tax net income	$	1,056,650	$	2,917,191	$	2,463,580	$	5,446,310
Provision for (recovery of) credit losses, pre-tax		260,439		217,425		(179,953)		227,558
Tax expense		179,858		629,153		637,117		1,327,438
Net Income	$	616,353	$	2,070,613	$	2,006,415	$	3,891,314

(dollars in thousands)
Charge-offs	$	19,984	$	7,095	$	19,984	$	7,108
(Recoveries)		(3,000)		(34,134)		(6,000)		(37,669)
Net charge-offs (recoveries)	$	16,984	$	(27,039)	$	13,984	$	(30,561)

Per Common Share Data

Common shares outstanding		2,905,973		2,251,320		2,905,973		2,251,320
Weighted average shares outstanding		2,905,973		2,251,320		2,905,973		2,251,320
Diluted shares outstanding		2,935,489		2,251,320		2,929,673		2,251,320

Basic earnings per share	$	0.21	$	0.92	$	0.69	$	1.73
Diluted earnings per share	$	0.21	$	0.92	$	0.68	$	1.73
Dividend paid	$	0.06	$	0.04	$	0.12	$	0.08

Book value per share	$	23.43	$	23.40	$	23.43	$	23.40
Tangible book value per share	$	22.86	$	22.67	$	22.86	$	22.67

Selected Financial Ratios (unaudited)

Return on average assets		0.09 %	%	0.97 %	%	0.43 %	%	0.94 %	%
Return on average equity		1.21 %	%	15.99 %	%	5.91 %	%	14.47 %	%
Allowance for credit losses to total loans		1.02 %	%	1.03 %	%	1.02 %	%	1.03 %	%
Non-performing assets to total loans		0.24 %	%	0.27 %	%	0.24 %	%	0.27 %	%
Net Charge-offs to total loans		0.00 %	%	0.00 %	%	0.00 %	%	0.00 %	%
Common equity tier 1 (CET1) capital		11.95 %	%	10.90 %	%	11.95 %	%	10.90 %	%
Tier1 capital		11.95 %	%	10.90 %	%	11.95 %	%	10.90 %	%
Total risk based capital		13.12 %	%	12.03 %	%	13.12 %	%	12.03 %	%
Tier-1 leverage ratio		9.52 %	%	8.73 %	%	9.52 %	%	8.73 %	%
Average equity to average assets		7.20 %	%	6.10 %	%	7.26 %	%	6.46 %	%
Tangible Common Equity/Tangible Common Assets		6.83 %	%	5.86 %	%	6.83 %	%	5.86 %	%
Net interest margin (bank only)		2.74 %	%	3.45 %	%	2.96 %	%	3.40 %	%
Loans to deposits - (EOP)		93.66 %	%	87.95 %	%	93.66 %	%	87.95 %	%