Communities First Financial Corporation Earns $6.91 Million, or $2.20 per Diluted Share, for the Third Quarter of 2022

FRESNO, Calif., Oct. 18, 2022 (GLOBE NEWSWIRE) -- Communities First Financial Corporation (the “Company”) (OTCQX: CFST), the parent company of Fresno First Bank (the “Bank”), today reported record third quarter 2022 net income of $6.91 million, or $2.20 per diluted share, an increase of 32% from $5.22 million, or $1.68 per diluted share, for the third quarter of 2021, and an increase of 11% from $6.21 million, or $1.98 per diluted share, for the second quarter of 2022. For the nine months ended September 30, 2022, net income increased 25% to $18.90 million, or $6.02 per diluted share, compared to $15.12 million, or $4.88 per diluted share, for the nine months ended September 30, 2021. All results are unaudited.

“The team achieved record earnings for the quarter and for the first nine months of 2022,” said Steve Miller, President and Chief Executive Officer. “Year-over-year core deposit growth was solid, supporting strong organic loan growth which propelled our loan portfolio to increase 11% from a year earlier. Our strong balance sheet, together with the recent interest rate hikes, have improved our net interest margin.”

“Our merchant services income increased by 158% from a year ago and more than doubled for the first nine months of 2022, adding substantially to non-interest income, while our deposit fees continued to meaningfully grow throughout the year,” said Miller. “In addition, we continue to realize efficiency gains by leveraging technology across our service platform while maintaining a high touch relationship with our customers.”

"Our credit metrics remained strong, as the majority of the delinquencies are purchased Small Business Administration (“SBA”) loans, which are 100% guaranteed for principal and interest,” added Miller. “As explained in prior announcements, the SBA changed its fiscal transfer agent last year, and we continue to experience delays in payments. However, we expect to be fully reimbursed in the not too distant future. With the two large rate increases in the third quarter, our variable rate loan customers will see a sizeable increase in their monthly loan payments. Our SBA variable rate loans in particular reset quarterly, so these customers will see added cash flow pressure along with other challenging market conditions, which we will monitor closely.”

There was no provision for loan losses during the last two quarters while the allowance for loan losses remained strong at 1.25% to total loans, and 1.31% of total loans, less government guaranteed balances, at September 30, 2022.

“Going forward, our balance sheet remains well positioned to benefit from rising interest rates,” said Miller. “Together with our strong liquidity and capital levels, earnings capacity and our relationship focused employees, we believe are well positioned for further success as we head into the balance of the year and into 2023.”

Return on average equity (“ROAE”) was 32.38%, return on average assets (“ROAA”) was 2.30% and the efficiency ratio was 41.99% for the third quarter. Net interest margin improved to 4.58% for the quarter and 4.38% for the first nine months of 2022, while interest income was higher by 27% from a year earlier. Total assets increased 16% year-over-year to $1.19 billion at quarter end, compared to $1.02 billion at September 30, 2021.

Third Quarter 2022 Highlights: As of, or for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021:

• Pre-tax, pre-provision income increased 31% to $9.41 million.
• Net income grew 32% to $6.91 million, or $2.20 per diluted share.
• ROAE increased 27% to 32.38%, and ROAA increased 13% to 2.30%
• Gross revenue (net interest income, before the provision for loan losses, plus non-interest income) increased 35% to $16.23 million.
• Total assets grew 16% to $1.19 billion.
• Total portfolio loans grew 11% to $776.19 million.
• Total deposits increased 17% to $1.04 billion.
• Shareholder equity was $81.42 million.
• Book value per common share was $26.02.
• The Company’s tangible common equity ratio was 6.85%, while the Bank’s regulatory leverage capital ratio was 12.07% and total risk based capital ratio was 17.36%, at September 30, 2022.

Results of Operations

Operating revenue, consisting of net interest income and non-interest income, increased 35% to $16.22 million for the third quarter of 2022, compared to $12.06 million for the third quarter a year ago, and grew 14% from $14.19 million from the second quarter of 2022. For the first nine months of 2022, operating revenue increased 22% to $44.22 million, compared to $36.11 million for the first nine months of 2021.

Net interest income, before the provision for loan losses, increased 28% to $12.53 million for the third quarter of 2022, compared to $9.76 million for the third quarter a year ago, and increased 17% from $10.70 million for the second quarter of 2022. For the first nine months of 2022, net interest income increased 19% to $33.78 million from $28.42 million for the first nine months of 2021. “The substantial increase in net interest income in both the third quarter of 2022, and for the first nine months of 2022, was primarily due to a growing loan portfolio and a larger and higher yielding investment portfolio,” said Steve Canfield, Chief Financial Officer.

The Company’s net interest margin (“NIM”), which excludes interest expense on holding company sub-debt, improved by 11 basis points to 4.58% for the third quarter of 2022, compared to 4.14% for the third quarter of 2021, and expanded 7 basis points from 4.29% for the preceding quarter. For the first nine months of 2022, the NIM expanded 3 basis points to 4.38% compared to 4.27% for the first nine months of 2021. “Primarily due to the changes in the mix of our earning assets, and the continued low cost of funding these earning assets, our NIM expanded during the third quarter,” said Canfield.

The yield on earning assets was 4.67% for the third quarter of 2022, compared to 4.23% for the third quarter a year ago, and 4.37% on a linked quarter basis. The cost to fund earning assets declined to 0.07% for the third quarter of 2022, compared to 0.08% for the third quarter a year ago and remained flat at 0.07% for the second quarter of 2022. For the first nine months of 2022, the yield on earning assets was 4.47% compared to 4.37% for the first nine months of 2021, while the cost to fund earning assets declined to 0.08% for the first nine months of 2022 from 0.10% for the first nine months of 2021, primarily as a result of non-interest bearing deposits increasing as a percentage of total deposits.

Total non-interest income was $3.69 million for the third quarter of 2022, compared to $2.29 million for the third quarter of 2021, and $3.49 million for the preceding quarter. For the first nine months of 2022, non-interest income increased 36% to $10.44 million compared to $7.69 million for the first nine months of 2021. The year-over-year growth in non-interest income during the third quarter of 2022, and in the first nine months of 2022, was largely due to the increase in merchant services income and deposit fee income.

“We continue to see significant progress across our ISO partners and from our own organic ISO business, as our merchant service revenue grew by 158% from a year ago and more than doubled year-to-date,” said Miller. “With the launch of our own ISO, we have seen positive growth in new merchant acquisition this year. The team is also bringing on smaller ISOs that want to work under the umbrella of the Bank’s ISO because they may not be ready to be a full sponsor partner. These are mainly sales organizations that need to leverage the Bank’s infrastructure. This structure allows the Bank to bake in our processing costs and then share in the profits with these partners. The “Sub ISO” model, along with direct merchant acquisition, should help grow top line revenue for the Company going forward.”

For the third quarter, Organic ISO revenue grew 12.8% to $538,000 while Sponsored ISO revenue declined slightly to $2.17 million. “With higher risk merchants, the Bank and ISO partner can generate revenues from charge back fees, but when charge backs reach certain thresholds the Bank and/or ISO may be forced to terminate these relationships, which then eliminates a once rich revenue stream. So although we saw large ISO volume increases quarter on quarter, the revenue was flat because it wasn’t enough to offset some of the terminated merchant volume. These were good risk related decisions and it is a normal part of the business,” said Miller.

Total deposit fee income increased 41%, or $174,000, to $601,000 for the third quarter of 2022, compared to $427,000 for the third quarter of 2021, and grew 11%, or $60,000, from $541,000 on a linked quarter basis. For the first nine months of 2022, total deposit fee income increased 46% to $1.62 million from $1.11 million for the first nine months of 2021, while merchant services income more than doubled to $6.01 million year-to-date, compared to $2.89 million for the first nine months of 2021. During the third quarter, the Company sold $21.13 million of loans realizing $621,000 in gain on sale revenue compared to $672,000 a year ago, and $497,000 in the second quarter of 2022.

Non-interest expense for the third quarter of 2022 was $6.81 million, an increase of 53% compared to $4.45 million for the third quarter of 2021, and increased 23% from $5.54 million for the second quarter of 2022. For the first nine months of 2022, non-interest expense increased 36% to $18.23 million compared to $13.38 million for the first nine months of 2021. Compensation and employee benefits, occupancy expenses as well as other operating expenses were all up in the third quarter of 2022 and for the first nine months of 2022.

“As we continue to invest in key business strategies and focus on sales, payments and modernizing technology, we will hire critical talent to support our growth strategy. Like most businesses, we are seeing clear wage inflation across all job categories as well as an increase in basic staff benefits like medical insurance,” said Miller. Full-time employees increased to 99 at September 30, 2022, compared to 77 full-time employees a year ago, and 94 full-time employees from the linked quarter. As a result of the increased headcount from a year ago, salaries and employee benefits increased 43% to $4.07 million at September 30, 2022, compared to $2.85 million at September 30, 2021, and grew 21% from $3.36 from the preceding quarter.

Occupancy and equipment expense increased 35% from a year ago, representing 3% of non-interest expense, and declined 3% from the preceding quarter. Other operating expense represented 26% of non-interest expense increasing 78% from a year earlier and grew by 31% from the linked quarter. Increases in data processing expense, software licenses and subscriptions, and loan origination expenses were the primary drivers of this increase.

The efficiency ratio was 41.99% for the third quarter of 2022, compared to 36.87% for the third quarter a year ago, and 39.01% for the second quarter of 2022.

Balance Sheet Review

Total assets increased 16% to $1.19 billion at September 30, 2022, from $1.02 billion at September 30, 2021, and grew 4% from $1.14 billion at June 30, 2022.

The total portfolio of loans increased 11%, or $75.87 million, to $776.19 million, compared to $700.32 million at September 30, 2021, and grew 7%, or $53.56 million, from $722.63 million on a linked quarter basis. Total loans at September 30, 2022, included $1.39 million of SBA-PPP loans, which decreased 98% from the third quarter a year ago, and declined 65% from the preceding quarter and representing only 0.18% of the total loan portfolio at quarter end. “Our lending teams continue to work diligently building out our loan portfolio. Year-to-date, we have sold $56.82 million in SBA and multi-family loans, and forgiven or paid off PPP loans totaling $51.21 million while still growing the portfolio overall,” said Canfield.

The commercial and industrial (C&I) portfolio increased 4% to $192.68 million, at September 30, 2022, from $184.62 million three months earlier. C&I loans represented 25% of total loans at September 30, 2022. Commercial real estate loans increased 36% year-over-year to $452.73 million at September 30, 2022, representing 58% of total loans, and grew 12% on a linked quarter basis. The CRE portfolio includes approximately $172.48 million in multi-family loans originated by our Southern California team. Agriculture loans, representing 8% of the loan portfolio, at September 30, 2022, increased 26% to $58.53 million from a year ago and declined 8% from June 30, 2022. Real estate construction and land development loans totaled $54.48 million, or 7% of total loans, while residential RE 1-4 family loans totaled $15.82 million, or 2% of loans, at September 30, 2022. At September 30, 2022, the SBA, USDA, or other government agencies, guaranteed loans totaled $74.33 million, or 9.6% of the loan portfolio.

The investment portfolio increased 26%, or $70.29 million, to $339.52 million at September 30, 2022, from $269.24 million at September 30, 2021, and grew 6% compared to $320.28 million at June 30, 2022. The investment portfolio consists of mortgage-backed and municipal securities, both tax exempt and taxable, treasury securities as well as other domestic debt.

Total deposits increased 17% to $1.04 billion at September 30, 2022, compared to $893.25 million from a year earlier, and grew 4% from $1.00 billion at June 30, 2022. Noninterest-bearing demand deposits increased 31% to $724.43 million at September 30, 2022, compared to $554.58 million at September 30, 2021, and increased 4% from $695.98 million at June 30, 2022. Noninterest-bearing demand deposits represented 69% of total deposits at September 30, 2022.

Shareholders’ equity declined 3% to $81.42 million at September 30, 2022, compared to $84.24 million from a year ago, and remained relatively flat from $81.75 million at June 30, 2022. Book value per common share declined 5% to $26.02 at September 30, 2022, compared to $27.42 at September 30, 2021, and decreased 1% from $26.29 at June 30, 2022.

“The tangible common equity ratio was 6.85% at September 30, 2022, compared to 7.14% at June 30, 2022, and 8.23% one year ago,” stated Canfield. “During 2022 the Federal Reserve has aggressively raised interest rates. As a result, market rates have risen dramatically. Our tangible common equity and tangible book value have therefore been negatively impacted by the marked increase in interest rates and related impact on accumulated other comprehensive income.”

“Our securities portfolio, which we mark to market monthly, has swung from a $3.42 million gain at September 30, 2021, to an unrealized loss of $25.37 million at the end of September 2022, a change of $28.82 million. This is the primary reason our total shareholders’ equity and book value per share have been flat to down year-over-year. This flat shareholders’ equity position divided by a larger base of assets has caused the tangible common equity ratio to drop to its present level. With further rate increases expected, we will likely see additional volatility in the market pricing of the portfolio, which will flow through to total equity. While these unrealized losses will decline over time, or as rates decline, management continues to monitor our overall capital needs closely and manage for both growth and market fluctuations,” added Canfield.

At the Bank level, unrealized losses and gains are not included in regulatory capital. As a result, Tier-1 capital at the Bank was $144.12 million at quarter end excluding the unrealized loss. The regulatory leverage capital ratio was 12.07% for the current quarter, while the total risk based capital ratio was 17.36%.

Asset Quality

Nonperforming assets were $4.33 million, or 0.36% of total assets, at September 30, 2022, compared to $3.07 million, or 0.30% of total assets at September 30, 2021, and $2.75 million, or 0.24% of total assets at June 30, 2022. Included in nonperforming assets was one loan totaling $767,000 restructured and performing under the terms of its agreements at September 30, 2022, compared to $771,000 in performing restructured loans at June 30, 2022. There were no performing restructured loans a year earlier.

Total delinquent loans declined by $3.38 million to $12.02 million at September 30, 2022, compared to $15.40 million at June 30, 2022, and were primarily related to government guaranteed loans purchased by the Bank. Past due loans 30-60 days declined to $350,000 at September 30, 2022, compared to $934,000 at September 30, 2021, and $2.63 million at June 30, 2022. There were zero past due loans from 60-90 days at September 30, 2022 and at September 31, 2021, compared to $1.81 million at June 30, 2022. Past due loans 90+ days at quarter end totaled $11.66 million, compared to $1.56 million a year earlier and $10.96 million at June 30, 2022.

The Bank continues to hold approximately $32 million of the government guaranteed portion of Small Business Administration (“SBA”) and USDA loans originated by other banks. Many of these purchased loans were placed into a Direct Registration (“DR”) form by the SBA’s transfer agent, Colson Inc. Under the DR program, Colson was required to remit monthly payments to the investor holding the guaranteed balance, whether or not a payment had actually been received from the borrower. When Colson lost the contract in 2020 as the SBA’s fiscal transfer agent they began transitioning servicing over to the new company called Guidehouse. By late 2021, Guidehouse, under their contract with the SBA, declined to continue the DR program. As a result, all payments under the DR, and several similar programs, were being held by Guidehouse until the DR program could be unwound and the DR holdings converted into normal SBA pass through certificates. Unfortunately, Colson started requesting investors, who had received payments in advance of the borrower, to return advanced funds before they will process the conversion of certificates, which caused further delays. The SBA has informed us that Guidehouse is now receiving borrower payments and is holding all funds until a reconciliation with Colson can be completed. The Bank is fully guaranteed all principal and interest owed and is currently waiting for the reconciliation to be completed and payments forwarded. Until the unwind process is completed, it is carrying these loans as past due.

“As detailed in the chart below, most of the delinquencies are purchased government guaranteed loans, which are guaranteed by the SBA for full payment of the principal plus interest,” commented Miller. “The SBA continues to deal with backlogs and consequently we continue to incur delays in payments. We are assured that full payment can be expected in the coming quarters.” The chart below breaks out the government guaranteed portion compared to the organic delinquencies.

There was no provision for loan losses for the second or third quarter of 2022, compared to $400,000 recorded in the third quarter a year ago. “We incurred net charge offs during the current quarter of $17,000, compared to no net charge offs in the third quarter a year ago, and $30,000 in net charge offs in the immediate prior quarter,” said Miller. “We will continue to closely monitor credit quality.” Year-to-date net charge offs are $47,000 compared to $64,000 for the first nine months of 2021.

The ratio of allowance for loan losses to total loans was 1.25% at September 30, 2022, compared to 1.40% a year earlier and 1.35% at June 30, 2022. “The SBA portfolio is an area we watch very closely as rates rise,“ added Miller. “We feel that if the economy slows, and credit starts to deteriorate, this is an area where we may first see the impact. A substantial portion of our portfolio consists of loans guaranteed by the U.S. Government. This group of loans consists of fully guaranteed loans the Company has purchased, the remaining PPP loans, as well as organic SBA and USDA loans the Bank has originated. When the effect of these guarantees is considered relative to the loan portfolio, the ratio of allowance for loan losses to the total, non-guaranteed, loan portfolio was 1.39%, as of September 30, 2022, and our total unguaranteed exposure on these loans is $22.58 million spread over 182 loans.”

About Communities First Financial Corporation

Communities First Financial Corporation, a bank holding company established in 2014, is the parent company of Fresno First Bank, founded in 2005 in Fresno, California. Fresno First Bank is a leading SBA Lender in California’s Central Valley and has expanded into Southern California. The Bank is also a direct acquiring bank with VISA and MasterCard and processes payments for merchants across the country directly and through partners. Communities First Financial Corp. ranked third in the nation against its peers in the Best Community Banks Category (below $5 billion in assets) and third in the Best Growth Strategy selected from the top 50 banks in the study, reported by Bank Director. A big jump from a year ago when S&P Global ranked the Bank the #20 best performing community bank under $3 billion in assets for 2020, and #1 in California. Named to the 2019 OTCQX Best 50 and ranked one of the top performing OTCQX companies in the country, based on total return and growth in average daily dollar volume for 2018. The Bank was named to the Inc. 5000 Fastest Growing Companies list in 2017 and to Forbes Best 25 Small Businesses in America for 2016. Additional information is available from the Company’s website at www.fresnofirstbank.com or by calling 559-439-0200.

Forward Looking Statements

This earnings release may contain forward-looking statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. The forward-looking statements are based on managements’ expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Company’s ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; and, in particular, actions taken by the Federal Reserve to try and control inflation; changes in the competitive environment; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements affecting the Company’s business; international developments; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. The Company undertakes no obligation to release publicly the results of any revisions to the forward-looking statements included herein to reflect events or circumstances after today, or to reflect the occurrence of unanticipated events. The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.