Communities First Financial Corporation Earns Record $7.62 Million, or $2.42 per Diluted Share, for Fourth quarter 2022; Earns Record $26.52 Million, or $8.44 per Diluted Share, for Full Year 2022

FRESNO, Calif., Jan. 19, 2023 (GLOBE NEWSWIRE) — Communities First Financial Corporation (the “Company”) (OTCQX: CFST), the parent company of Fresno First Bank (the “Bank”), today reported net income increased 41% to $7.62 million, or $2.42 per diluted share, for the fourth quarter of 2022 compared to $5.41 million, or $1.74 per diluted share, for the fourth quarter of 2021, and increased 10% compared to $6.91 million, or $2.20 per diluted share, for the third quarter of 2022. For the year ended December 31, 2022, net income increased 29% to $26.52 million, or $8.44 per diluted share, from $20.53 million, or $6.62 per diluted share, for year ended December 31, 2021. All results are unaudited.

“Fourth quarter 2022 results capped a stellar year for our Company which delivered record earnings for both the fourth quarter and for the full year of 2022. Our performance was driven by solid revenue growth supported by strong loan and deposit growth,” said Steve Miller, President, and Chief Executive Officer. “As we start the new year, we are encouraged by the momentum we have built in our digital transformation and payments systems. Our continued success is directly attributable to our unique team of bankers who focus on exceptional customer service and fostering solid client relationships.”

“Our merchant services fee income grew by 118% propelling our total fee income by 30% in the fourth quarter 2022, compared to the fourth quarter a year ago,” said Miller. “During the quarter, we prudently added $300,000 to our loan loss reserves. Our net interest income, after the provision for loan losses, increased by 34% from a year ago. At the same time, we strategically sold a portion of our securities portfolio at a loss during the fourth quarter, replacing them with higher yielding securities that we expect will outperform in all interest rate scenarios in the future.”

“Our credits metrics remained strong, and net charge-offs were minimal during the fourth quarter. We believe our consistently strong underwriting and credit risk management practices prepare us well for any change in the business cycle,” said Miller. “The majority of the delinquencies are purchased Small Business Administration (“SBA”) loans, which are 100% guaranteed for principal and interest. As previously stated, the SBA changed its fiscal transfer agent in 2021, and we continue to experience delays in payments.” The allowance for loan losses was at 1.17% to total loans, and 1.29% of total loans, less government guaranteed balances, at December 31, 2022.

“In the first quarter 2023, we will be adopting CECL (Current Expected Credit Losses) standards,” said Miller. “Based on our initial modeling, current reserve levels, and strong credit quality, we do not anticipate any adverse effect from a conversion to the CECL methodology.”  

Return on average equity (“ROAE”) was 34.86%, return on average assets (“ROAA”) was 2.41% and the efficiency ratio was 38.99% for the fourth quarter. Net interest margin improved to 4.98% for the fourth quarter and 4.54% for the full year 2022, while interest income was higher by 37% from a year earlier. Total assets increased 20% year-over-year to $1.29 billion at December 31, 2022, compared to $1.08 billion at December 31, 2021.

Fourth Quarter 2022 Highlights: As of, or for the quarter ended December 31, 2022, compared to the quarter ended December 31, 2021:

• Pre-tax, pre-provision income increased 39% to $10.38 million.
• Net income grew 41% to $7.62 million, or $2.42 per diluted share.
• Return on average equity (“ROAE”) increased 39% to 34.86%.
• Return on average assets (“ROAA”) increased 21% to 2.41%.
• Gross revenue (net interest income, before the provision for loan losses, plus non-interest income) increased 36% to $17.21 million.
• Total assets grew 20% to $1.29 billion.
• Total portfolio loans grew 16% to $845.46 million.
• Total deposits increased 15% to $1.08 billion.
• Shareholder equity was $92.36 million.
• Book value per common share was $29.41.
• The Company’s tangible common equity ratio was 7.13%, while the Bank’s regulatory leverage capital ratio was 11.93% and total risk-based capital ratio was 16.38%, at December 31, 2022.

Results of Operations

Operating revenue, consisting of net interest income and non-interest income, increased 36% to $17.21 million for the fourth quarter of 2022, compared to $12.70 million for the fourth quarter a year ago, and grew 6% from $16.23 million from the third quarter of 2022. For the year ended December 31, 2022, operating revenue increased 26% to $61.42 million, compared to $48.81 million for the year ended December 31, 2021.

Net interest income, before the provision for loan losses, increased 37% to $14.31 million for the fourth quarter of 2022, compared to $10.42 million for the fourth quarter a year ago, and increased 14% from $12.53 million for the third quarter of 2022. For the full year 2022, net interest income increased 24% to $48.09 million compared to $38.84 million for 2021. “The substantial increase in net interest income in both the fourth quarter of 2022, and for the full year, was primarily due to higher yields from our investment and loan portfolios, as well as growth of both portfolios,” said Bhavneet Gill, Chief Financial Officer.

The Company’s net interest margin (“NIM”), which excludes interest expense on the holding company’s sub-debt, improved by 82 basis points to 4.98% for the fourth quarter of 2022, compared to 4.16% for the fourth quarter of 2021, and expanded 39 basis points from 4.59% for the preceding quarter. For the year ended December 31, 2022, the NIM expanded 30 basis points to 4.54% from 4.24% for the year ended December 31, 2021. “With the Fed increasing rates in 2022 and the resulting higher Prime and Fed Funds rates many of our earning assets have repriced higher, and new business is producing higher yields as well. With our low cost deposits funding these earning assets, our NIM continued to improve during the fourth quarter,” said Gill.

The yield on earning assets was 5.18% for the fourth quarter of 2022, compared to 4.25% for the fourth quarter a year ago, and 4.67% on a linked quarter basis. The cost to fund earning assets remained low at 0.20% for the fourth quarter of 2022, although increased from 0.08% for the fourth quarter a year ago and 0.07% for the third quarter of 2022. For the full year 2022, the yield on earnings assets was 4.66%, up from 4.34% for 2021, while the cost to fund earnings assets was 0.12% for 2022, compared to 0.10% for 2021. “While we have raised rates on our interest bearing deposit products, our overall cost of funding has remained low with 68% of our deposits in non-interest bearing accounts,” commented Gill.   

Total non-interest income was $2.90 million for the fourth quarter of 2022, compared to $2.28 million for the fourth quarter of 2021, and $3.69 million for the preceding quarter. For the year ended December 31, 2022, non-interest income increased 34% to $13.34 million compared to $9.97 million for the year ended December 31, 2021. The year-over-year growth in non-interest income during the fourth quarter of 2022, and for the full year of 2022, was primarily due to the increase in merchant services income and deposit fee income, which was partially offset by the lower gain on sale of loans.  

“We continue to see significant progress across our ISO partners and from our own organic ISO business, as our merchant service revenue grew by 111% from a year ago.   For the fourth quarter, Organic ISO revenue grew 3.5% to $557,000 while Sponsored ISO revenue increased 14.5% to $1.86 million. The team continues to build a strong pipeline of payment related partners that will help fuel further revenue expansion. The evolution of the payments space is quite dynamic, and we are working diligently to ensure the bank and our partners can capitalize on current and future payment rails,” said Miller.

Total deposit fee income increased 30%, or $138,000, to $600,000 for the fourth quarter of 2022, compared to $462,000 for the fourth quarter of 2021, and remained flat from $601,000 on a linked quarter basis. Merchant services income increased 118% to $2.42 million for the fourth quarter, compared to $1.11 million for the fourth quarter 2021. For the year ended December 31, 2022, total deposit fee income increased 41% to $2.18 million from $1.57 million for the year ended December 31, 2021, while merchant services income grew 111% to $8.44 million from $4.00 million for 2021.

“During the fourth quarter 2022, we recorded a loss of $309,000 on the sale of loans,” said Miller. “We strategically decided to sell a portion of the lower rate multi-family loans to expand capacity, which will be replaced by higher yield loans. We anticipate this strategy to begin to improve earnings in the short term, but more importantly in the long term.” In the fourth quarter 2021, there was a gain of $413,000 on the sale of loans, compared to a $621,000 gain on sale of loans in the third quarter of 2022.

“While our operating expenses were higher in the fourth quarter compared to a year ago, expenses were flat on a linked quarter basis,” said Miller. “The sharp increase in operating costs year-over-year was primarily due to the hiring of excellent people and our strategic investments in modern technology during the year. We expect these efficiency investments to continue into 2023, and we will also need to hire key talent. Inflationary elements are pushing all non-people cost lines, but the main driver of our costs is labor, and the labor market is very competitive. Consequently, we expect to see similar people cost increases going forward.” Non-interest expense for the fourth quarter of 2022 increased 31% to $6.83 million, compared to $5.22 million for the fourth quarter of 2021, and remained flat from $6.81 million for the third quarter of 2022. For the full year 2022, non-interest expense increased 35% to $25.06 million compared to $18.59 million for 2021.

Full-time employees increased to 103.0 at December 31, 2022, compared to 77.5 full-time employees a year ago, and 99.0 full-time employees from the linked quarter. As a result of the increased headcount from a year ago, salaries and employee benefits increased 25% to $4.07 million at December 31, 2022, compared to $3.27 million at December 31, 2021, and remained flat from $4.07 million from the preceding quarter.

Occupancy and equipment expense increased 51% from a year ago, representing 4% of non-interest expense, and increased 6% from the preceding quarter. Other operating expense represented 36% of non-interest expense increasing 40% from a year earlier and unchanged from the linked quarter. Increases in data processing expense, software licenses and subscriptions, and loan origination expenses were the primary drivers of the year-over-year increase.

The efficiency ratio improved to 38.99% for the fourth quarter of 2022, compared to 41.09% for the fourth quarter a year ago, and 41.99% for the third quarter of 2022.  

Balance Sheet Review

Total assets increased 20% to $1.29 billion at December 31, 2022, from $1.08 billion at December 31, 2021, and grew 9% from $1.19 billion at September 30, 2022.

The total portfolio of loans increased 16%, or $119.21 million, to $845.46 million, compared to $726.25 million at December 31, 2021, and grew 9%, or $69.27 million, from $776.19 million on a linked quarter basis. The remaining SBA-PPP loans were down to $242,000 at December 31, 2022, representing a fraction of the total loan portfolio. “Our lending teams continue to work diligently building out our loan portfolio. In 2022, we sold $57.61 million in SBA and multi-family loans, and had $52.35 million in PPP loans forgiven or paid off while still growing the portfolio overall,” said Gill.

The commercial and industrial (C&I) portfolio increased 14% to $211.92 million, at December 31, 2022, compared to $185.16 a year earlier, and increased 10% from $192.68 at September 30, 2022. C&I loans represented 25% of total loans at December 31, 2022. Commercial real estate loans increased 29% year-over-year to $493.36 million at December 31, 2022, representing 58% of total loans, and grew 9% on a linked quarter basis. The CRE portfolio includes approximately $206.61 million in multi-family loans originated by our Southern California team. Agriculture loans, representing 7% of the loan portfolio, at December 31, 2022, increased 2% to $58.49 million from a year ago and remained flat from $58.53 million at September 30, 2022. Real estate construction and land development loans increased 98% from a year ago to $63.27 million, or 7% of total loans, while residential RE 1-4 family loans totaled $17.80 million, or 2% of loans, at December 31, 2022.   At December 31, 2022, the SBA, USDA, and other government agencies guaranteed loans totaled $72.43 million, or 8.6% of the loan portfolio.

The investment portfolio increased 18%, or $51.88 million, to $343.84 million at December 31, 2022, from $291.97 million at December 31, 2021, and grew 1% compared to $339.52 million at September 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 $144.68 million or 15% to $1.08 billion at December 31, 2022, compared to $936.55 million from a year earlier, and grew 3% from $1.04 billion at September 30, 2022. Noninterest-bearing demand deposits increased $143.03 million or 24% to $737.08 million at December 31, 2022, compared to $594.04 million at December 31, 2021, and increased 2% from $724.43 million at September 30, 2022. Noninterest-bearing demand deposits represented 68% of total deposits at December 31, 2022.

Shareholders’ equity increased 3% to $92.36 million at December 31, 2022, compared to $89.29 million from a year ago, and grew 13% from $81.42 million at September 30, 2022. Book value per common share increased slightly to $29.41at December 31, 2022, compared to $29.08 at December 31, 2021, and increased 13% from $26.02 at September 30, 2022.

“The tangible common equity ratio was 7.13% at December 31, 2022, compared to 6.85% at September 30, 2022, and 8.27% one year ago,” stated Gill. “With the Federal Reserve aggressively raising interest rates during 2022, market rates have risen considerably. Consequently, our tangible common equity and tangible book value have been adversely impacted by the increase in rates and the related impact on our securities portfolio through accumulated other comprehensive income (‘AOCI’).”

At the Bank level, unrealized losses and gains reflected in AOCI are not included in regulatory capital. As a result, Tier-1 capital at the Bank for regulatory purposes was $149.44 million at quarter end excluding the unrealized loss. The regulatory leverage capital ratio was 11.93% for the current quarter, while the total risk-based capital ratio was 16.38%.

Asset Quality

Nonperforming assets were $6.37 million, or 0.49% of total assets, at December 31, 2022, compared to $2.93 million, or 0.27% of total assets at December 31, 2021, and $4.33 million, or 0.36% of total assets at September 30, 2022. Included in nonperforming assets was one loan totaling $766,000 restructured and performing under the terms of its agreements at December 31, 2022, compared to $771,000 in performing restructured loans at September 30, 2022, and $828,000 in performing restructured loans at December 31, 2021. Of the $6.37 million nonperforming loans, $4.23 million are covered by SBA guarantees.

Total delinquent loans were $12.75 million at December 31, 2022, compared to $12.01 million at September 30, 2022, and were primarily related to government guaranteed loans purchased by the Bank.

Past due loans 30-60 days were $364,000 at December 31, 2022, compared to $3.83 million at December 31, 2021, and $350,000 at September 30, 2022. There were $397,000 past due loans from 60-90 days at December 31, 2022 compared to $254,000 at December 31, 2021, and zero at September 30, 2022. Past due loans 90+ days at quarter end totaled $11.99 million, compared to $11.66 three months earlier and $10,000 past due loans at December 31, 2021. Of the $12.75 million in past due loans, $12.19 million were purchased government guaranteed loans with an unconditional guarantee.

The Bank continues to hold approximately $30 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 would process the conversion of certificates, which caused further delays.   A reconciliation between Guidehouse, Colson and the Bank has taken place, and all are in agreement. The Bank has submitted all paperwork and original certificates to Colson | Guidehouse for processing and is awaiting reissue of the certificates and payment. The Bank is fully guaranteed; however, until the unwind process is completed it will continue to carry 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 the 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 organic delinquencies.

There was a $300,000 provision for loan losses taken in the fourth quarter of 2022, compared to no provision for loan losses for the third or the fourth quarter of 2021. For the full year 2022, the provision for loan losses was $300,000 compared to a provision for loan losses of $2.00 million for 2021.

“We incurred a small net charge off during the current quarter of $124,000, compared to zero net charge offs in the fourth quarter a year ago of, and $17,000 in net charge offs in the immediate prior quarter,” said Miller. For the full year 2022, net charge offs were $171,000 compared to $64,000 for 2021.  

The ratio of allowance for loan losses to total loans was 1.17% at December 31, 2022, compared to 1.35% a year earlier and 1.25% at September 30, 2022. “The SBA portfolio is an area we watch very closely as rates rise,“ added Miller. “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 1.29%, as of December 31, 2022, and our total unguaranteed exposure on these SBA loans is $23.05 million spread over 183 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. For 2021 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. In 2020 S&P Global ranked the Bank the #20 best performing community bank under $3 billion in assets, 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.

Contact:
Steve Miller – President & CEO
Bhavneet Gill – Executive Vice President & CFO
(559) 439-0200