Communities First Financial Corporation Earns Record $7.70 Million, or $2.43 per Diluted Share, for First quarter 2023

FRESNO, Calif., April 19, 2023 (GLOBE NEWSWIRE) — Communities First Financial Corporation (the “Company”) (OTCQX: CFST), the parent company of FFB Bank (the “Bank”), today reported net income increased 33% to $7.70 million, or $2.43 per diluted share, for the first quarter of 2023, compared to $5.79 million, or $1.84 per diluted share, for the first quarter of 2022, and increased 1% compared to $7.62 million, or $2.42 per diluted share, for the fourth quarter of 2022. First quarter 2023 results were highlighted by continued net interest margin expansion, which improved to 5.17% at March 31, 2023. All results are unaudited.

First Quarter 2023 Highlights: As of, or for the quarter ended March 31, 2023, compared to the quarter ended March 31, 2022:

• Pre-tax, pre-provision income increased 36% to $10.77 million.
• Net income grew 33% to $7.70 million, or $2.43 per diluted share.
• Return on average equity (“ROAE”) increased 23% to 32.49%.
• Return on average assets (“ROAA”) increased 15% to 2.47%.
• Net interest margin expanded 91 basis points to 5.17% from 4.26% a year earlier.
• Gross revenue (net interest income, before the provision for loan losses, plus non-interest income) increased 40% to $19.34 million.
• Total assets grew 16% to $1.28 billion.
• Total portfolio loans grew 24% to $861.46 million.
• Total deposits increased 14% to $1.10 billion.
• Shareholder equity was $100.99 million.
• Book value per common share was $31.87.
• The Company’s tangible common equity ratio was 7.90%, while the Bank’s regulatory leverage capital ratio was 12.29% and total risk-based capital ratio was 17.87%, at March 31, 2023.

“Following our stellar performance in 2022, we delivered yet another record earnings for first quarter 2023, supported by strong year-over-year growth in net interest income, noninterest income, a higher net interest margin and an improved efficiency ratio,” said Steve Miller, President and Chief Executive Officer. “Our capital levels and excess on and off-balance sheet liquidity positions all remain strong, and together with a solid earnings performance, a large core deposit base and excellent credit quality, we have a solid foundation upon which to continue to expand our franchise.”

“The first quarter was exciting to say the least. But when you sift through most of the noise in the market, the fundamental issues still revolve around the impact of rising rates. We feel that overall there is still much more business that can flow downstream to a strong, relationship based community bank. We continue to manage through the market anxiety well because we have tremendous goodwill with our customer base, and we can respond quicker than our larger peers. During the mid-March volatility, we were able to onboard new relationships and open accounts online, within the same day, while customers are waiting 2 weeks or never getting a return call from some of our larger competitors,” said Miller.

“Total deposits increased 14% from a year ago with non-interest bearing deposits representing 69% of total deposits,” said Miller. “As a result of the higher interest rate environment, we saw new and existing customers seek CDs with a higher yield, resulting in CDs increasing 30% from the linked quarter. As a result of the deposit growth, our borrowings fell from $65 million on December 31, 2022, to $22 million.”

“Also adding to our revenue growth was the fee income generated from our merchant services, which grew from a year ago and increased from the linked quarter,” said Miller. “We strategically sold $18.48 million in SBA loans to improve our liquidity position and recognized an immediate gain of $838,000.” The allowance for credit losses was 1.08% of total loans, and 1.16% of total loans, less government guaranteed balances, at March 31, 2023. The Company adopted the CECL (Current Expected Credit Losses) methodology as of January 1, 2023.

“In mid-March 2023, we also successfully changed our Bank’s name to ‘FFB Bank’ after being known as Fresno First Bank for 17 years. This new branding will allow us to further pursue our growth strategy, as we develop a better name recognition on a national level,” said Miller.

Return on average equity (“ROAE”) was 32.49%, return on average assets (“ROAA”) was 2.47% and the efficiency ratio was 41.46%, while the net interest margin improved to 5.17% for the first quarter of 2023. Total assets increased 16% to $1.28 billion at March 31, 2023, compared to $1.10 billion at March 31, 2022.

Results of Operations

Operating revenue, consisting of net interest income and non-interest income, increased 40% to $19.34 million for the first quarter of 2023, compared to $13.80 million for the first quarter a year ago, and grew 6% from $18.22 million from the fourth quarter of 2022.

Net interest income, before the provision for loan losses, increased 40% to $14.78 million for the first quarter of 2023, compared to $10.54 million for the first quarter a year ago, and increased 3% from $14.31 million for the fourth quarter of 2022. “The increase in net interest income in the first quarter was mainly due to higher yields from our investment and loan portfolios, partially offset by an increase in deposit and borrowing costs,” said Bhavneet Gill, EVP and Chief Financial Officer.

The Company’s net interest margin (“NIM”), which excludes interest expense on the holding company’s sub-debt, improved by 91 basis points to 5.17% for the first quarter of 2023, compared to 4.26% for the first quarter of 2022, and expanded 19 basis points from 4.98% for the preceding quarter. “With the Fed’s recent rapid rise in interest rates, and the resulting higher Prime and Fed Funds rates, many of our earning assets have repriced higher with new business producing higher yields as well,” said Gill. “Our NIM also continued to improve during the first quarter with our low cost of deposit funding these earnings assets.”

The yield on earning assets was 5.59% for the first quarter of 2023, compared to 4.34% for the first quarter a year ago, and 5.18% on a linked quarter basis. The cost of funds increased to 0.43% for the first quarter of 2023, as a result of customers seeking a higher yield due to significant hikes in interest rates. The cost of funds was 0.08% for the first quarter a year earlier, and 0.20% for the fourth quarter of 2022. “While non-interest bearing checking accounts represent 69% of total deposits, we increased interest rates paid on interest-bearing deposits during the first quarter to retain and grow deposit balances,” commented Gill. Uninsured deposit balances, excluding affiliate deposits (FFB Bank-owned funds) and collateralized deposits, totaled $599.07 million or 54.5% of total deposits as of March 31, 2023.

Total non-interest income was $4.56 million for the first quarter of 2023, compared to $3.26 million for the first quarter of 2022, and $3.92 million for the preceding quarter. The growth in non-interest income during the first quarter of 2023 was mainly due to gain on sale of loans and the increase in merchant services income from a year ago and also from the linked quarter basis. Merchant services revenue increased as a result of increases in ISO Partner sponsorship net revenue and organic FFB Payments gross revenue. Gross expenses related to organic FFB Payments lines of business are recognized in other non-interest expense. Deposit fee income also increased year-over-year and from the preceding quarter. Partially offsetting the growth in non-interest income from the fourth quarter of 2022 was $1.32 million in loss on sale of investment securities recognized during the first quarter of 2023.

“We continue to see significant progress across our ISO partner sponsorships and from our own organic ISO business, as our net merchant services income grew from $1.70 million during the first quarter of 2022 to $2.64 million for the first quarter of 2023. Compared to the linked quarter, Organic ISO revenue grew 21.9% to $679,000 while Sponsored ISO revenue increased 5.2% to $1.96 million. Net Merchant Services Income grew 9% from the linked quarter. 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 38% to $655,000 for the first quarter of 2023, compared to $475,000 for the first quarter of 2022, and grew 8% from $600,000 for the fourth quarter of 2022. Merchant services income increased 120% to $3.70 million for the first quarter, compared to $1.68 million for the first quarter 2022.

During the first quarter 2023, there was a $904,000 gain on sale of loans, compared to a gain on sale of loans of $803,000 from the first quarter 2022, and a $309,000 loss on sale of loans from the linked quarter. In addition, there was a $1.32 million loss on sale of investment securities during the first quarter. $950,000 of the $1.32 million loss was related to the sale of one bank holding company subordinated debt security. “We continue to monitor the sale of loans and investments and will sell a portion when we believe it strategic to do so, to expand capacity to replace with higher yielding loans and securities. This strategy is expected to improve earnings both in the short and in the long term,” added Miller.

Non-interest expense increased 46% to $8.57 million for the first quarter of 2023, compared to $5.88 million for the first quarter of 2022, and increased 9% from $7.85 million for the fourth quarter of 2022. “The higher operating expenses incurred during the first quarter were across the board as we absorbed existing people related costs and continued to hire additional key talent and invest in modern technology during the year,” said Miller. “These key investments will be ongoing during 2023, as we expand into new markets and add key positions related to risk management, technology and sales.”

Full-time employees increased to 107 at March 31, 2023, compared to 86 full-time employees a year earlier, and 103 full-time employees from the linked quarter. As a result of the increased headcount from a year ago, salaries and employee benefits increased 23% to $4.72 million at March 31, 2023, compared to $3.85 million at March 31, 2022, and increased 16% from $4.07 at December 31, 2022.

Occupancy and equipment expense increased 54% from a year ago, representing 4% of non-interest expense, and increased 16% from the preceding quarter. Other operating expense increased 94% or $1.69 million from a year earlier. The increase was primarily attributed to $1.06 million in operating expenses for the FFB Payments lines of business, which launched in the first quarter of 2022. Merchant operating expenses include interchange fees, chargebacks, partnership, and other card brand fees. Increases in data processing expense, software licenses and subscriptions, and loan origination expenses were the secondary drivers of the year-over-year increase.

The efficiency ratio improved to 41.46% for the first quarter of 2023, compared to 42.60% for the first quarter a year ago, and decreased compared to 38.99% for the fourth quarter of 2022.

Balance Sheet Review

Total assets increased 16% to $1.28 billion at March 31, 2023, from $1.10 billion at March 31, 2022, and declined 1% from $1.29 at December 31, 2022.

“The total portfolio of loans increased 24%, or $167.87 million, to $861.18 million, compared to $693.31 million at March 31, 2022, and grew 2%, or $15.72 million, from $845.46 million on a linked quarter basis. The remaining SBA-PPP loans were down to $204,000 at March 31, 2023, representing a fraction of the total loan portfolio. During the first quarter of 2023, we sold $18.48 million in SBA and $11.06 million in multi-family loans while still growing the portfolio overall,” said Gill.

The commercial and industrial (C&I) portfolio increased 8% to $200.71 million, at March 31, 2023, compared to $185.42 million a year earlier, and declined by 5% from $211.92 million at December 31, 2022. C&I loans represented 23% of total loans at March 31, 2023. Commercial real estate loans increased 37% year-over-year to $513.61 million, representing 60% of total loans at March 31, 2023, and grew 4% on a linked quarter basis. The CRE portfolio includes approximately $230.10 million in multi-family loans originated by the Southern California team that the Company may consider selling at some point in the future. Agriculture loans, representing 7% of the loan portfolio, at March 31, 2023, increasing 1% to $58.79 million from a year ago and remained flat from $58.49 million at December 31, 2022. Real estate construction and land development loans increased 92% from a year ago to $72.09 million, or 8% of total loans, while residential RE 1-4 family loans totaled $15.78 million, or 2% of loans, at March 31, 2023. At March 31, 2023, the SBA, USDA, and other government agencies guaranteed loans totaled $62.31 million, or 7.2% of the loan portfolio.

The investment portfolio increased 13%, or $36.60 million, to $328.58 million at March 31, 2023, from $291.98 million at March 31, 2022, and declined 4% compared to $343.84 million at December 31, 2022. The investment portfolio consists of mortgage-backed and municipal securities, both tax exempt and taxable, treasury securities as well as other domestic debt. At March 31, 2023, the Company had a net unrealized loss position on its investment securities portfolio of $31.71 million, compared to a net unrealized loss of $31.91million at December 31, 2022. Held to maturity securities totaled $3.45 million, or 1.05% of the portfolio, at March 31, 2023. The Company’s investment securities portfolio had an effective duration of 5.13 years at March 31, 2023, compared to 5.05 years at December 31, 2022.

Total deposits increased $137.80 million, or 14%, to $1.10 billion at March 31, 2023, compared to $961.51 million from a year earlier, and grew 2% from $1.08 billion at December 31, 2022. Noninterest-bearing demand deposits increased $147.53 million, or 24%, to $759.42 million at March 31, 2023, compared to $611.89 million at March 31, 2022, and increased 3% from $737.08 million at December 31, 2022. Noninterest-bearing demand deposits represented 69% of total deposits at March 31, 2023.

Total short-term borrowings were $22 million at March 31, 2023, compared to no borrowings at March 31, 2022, and decreased 66% from $65 million at December 31, 2022.

The following table summarizes the Company’s primary and secondary sources of liquidity which were available at March 31, 2023.

The total primary and secondary liquidity of $644.49 million represents 108% of uninsured deposits as of March 31, 2023.

Shareholders’ equity increased 18% to $100.99 million at March 31, 2023, compared to $85.58 million from a year ago, and grew 9% from $92.36 million at December 31, 2022. Book value per common share increased to $31.87, at March 31, 2023, compared to $27.53 at March 31, 2022, and increased 8% from $29.41 at December 31, 2022.

“The tangible common equity ratio was 7.90% at March 31, 2023, compared to 7.76% a year earlier, and 7.13% at December 31, 2022,” stated Gill. “With the Federal Reserve aggressively raising interest rates, 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 marks on 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-1capital at the Bank for regulatory purposes was $158.10 million at quarter end excluding the unrealized loss. The regulatory leverage capital ratio was 12.29% for the current quarter, while the total risk-based capital ratio was 17.87%, exceeding regulatory minimums to be considered well-capitalized.

Asset Quality

Nonperforming assets were unchanged from the preceding quarter at $6.37 million, or 0.49% of total assets, at March 31, 2023, compared to $2.90 million, or 0.26% of total assets at March 31, 2022. Included in nonperforming assets was one loan totaling $740,000 restructured and performing under the terms of its agreements at March 31, 2023, compared to $766,000 in performing restructured loans at December 31, 2022, and $800,000 in performing restructured loans at March 31, 2022. Of the $6.32 million nonperforming loans, $4.20 million are covered by SBA guarantees.

Total delinquent loans declined significantly to $7.53 million at March 31, 2023, compared to $12.75 million at December 31, 2022, and were primarily related to government guaranteed loans purchased by the Bank.

Past due loans 30-60 days were $148,000 at March 31, 2023, compared to $8.27 million at March 31, 2022, and $364,000 at December 31, 2022. There were $98,000 past due loans from 60-90 days at March 31, 2023 compared to $173,000 at March 31, 2022, and $397,000 at December 31, 2022. Past due loans 90+ days at quarter end totaled $7.29 million, compared to $11.99 three months earlier and $16,052 past due loans at March 31, 2022. Of the $7.53 million in past due loans, $7.48 million were purchased government guaranteed loans with an unconditional guarantee.

The Bank continues to hold approximately $28 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. The balance of these past due loans decreased from $12.19 million at December 31, 2022 to $7.48 million at March 31, 2023.

“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 $400,000 provision for credit loss in the first quarter of 2023, compared to zero provision for loan losses in the first quarter a year ago, and a $300,000 provision for loan losses booked in the fourth quarter of 2022.

“We incurred net charge offs of $409,000 during the quarter, compared to zero net charge offs in the fourth quarter a year ago, and $187,000 in net charge offs in the immediate prior quarter,” said Miller. “Our loan portfolio increased 24% from a year ago with commercial real estate (“CRE”) loans representing nearly 60% of the total loan portfolio. Within the CRE portfolio, there are $40.39 million in loans for CRE office as shown in the table below. Since the majority of our CRE office exposure is concentrated in the Central Valley, we feel the volatility that the city center markets are experiencing in regard to ‘return to work’ dynamics is not as pronounced in our local area. Our credit metrics remain strong as we continue to maintain conservative underwriting standards.”

The ratio of allowance for credit loss to total loans was 1.08% at March 31, 2023, compared to 1.41% a year earlier and 1.17% at December 31, 2022.

“The SBA portfolio is a segment we watch very closely as rates continue to rise,” added Miller. “A substantial portion of the portfolio consists of loans guaranteed by the U.S. Government. This group of loans consists of fully guaranteed loans the Company has purchased, 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 1.16%, as of March 31, 2023, and our total unguaranteed exposure on these SBA loans is $25.17 million spread over 179 loans.”

About Communities First Financial Corporation

Communities First Financial Corporation, a bank holding company established in 2014, is the parent company of FFB Bank, founded in 2005 in Fresno, California. FFB 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.ffb.bank 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.

Member FDIC

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