Communities First Financial Corporation Earns $6.21 Million, or $1.98 per Diluted Share, for the Second Quarter of 2022

FRESNO, Calif., July 19, 2022 (GLOBE NEWSWIRE) — Communities First Financial Corporation (the “Company”) (OTCQX: CFST), the parent company of Fresno First Bank (the “Bank”), today reported a record net income of $6.21 million, or $1.98 per diluted share for the second quarter of 2022, up 9% compared to $5.71 million, or $1.84 per diluted share, for the second quarter of 2021, and up 7% from $5.79 million, or $1.84 per diluted share, for the first quarter of 2022. For the first six months of 2022, net income increased 21% to $12.00 million, or $3.82 per diluted share, compared to $9.90 million, or $3.20 per diluted share, for the first six months of 2021. All results are unaudited.

“We delivered record earnings for the second quarter of 2022, highlighted by top line revenue growth, strong year-over-year deposit growth, which crossed the $1.0 billion mark in total deposits at quarter end. We generated solid organic loan growth during the quarter, while replacing SBA PPP loans as they continue to roll off at a rapid rate; PPP loans are down 97% from a year ago. Merchant services income doubled from a year ago adding significantly to non-interest income, while deposit fee income also contributed meaningfully to our non-interest income,” said Steve Miller, President and Chief Executive Officer. “We continue to benefit from the progress we are making on advancing our digital offerings, expanding our payment services capabilities, and enhancing our core technology.”

“Our capital and liquidity positions remain strong. As we head into the second half of 2022, we are well positioned to benefit from rising interest rates, as we continue to execute upon our strategic plan,” said Miller. “I would like to personally thank our employees for their continued dedication to help our clients, communities and shareholders.”

Return on average equity (“ROAE”) was 30.25%, return on average assets (“ROAA”) 2.25% and our efficiency ratio was 39.01% at quarter end. Net interest margin was also solid at 4.29% for the quarter and 4.28% for the first six months of 2022, while interest income was higher by 13% from a year earlier. Total assets increased 16% year-over-year to $1.14 billion at quarter end, compared to $988.48 million at June 30, 2021.  

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

• Pre-tax, pre-provision income increased 1% to $8.66 million.
• Net income grew 9% to $6.21 million, or $1.98 per diluted share.
• ROAE of 30.25%, and ROAA of 2.25%.
• Gross revenue (net interest income, before the provision for loan losses, plus non-interest income) increased by 9% to $14.19 million.
• Total assets grew 16% to $1.14 billion.
• Total portfolio loans grew 3% to $722.63 million.
• Total deposits increased 16% to $1.00 billion.
• Shareholder equity increased 4% to $81.75 million.
• Book value increased 3% to $26.29 per share.
• The Company’s tangible common equity ratio was 7.14%, while the Bank’s regulatory leverage capital ratio was 12.34% and total risk based capital ratio was 17.96%, at June 30, 2022.

Results of Operations

Operating revenue, consisting of net interest income and non-interest income, increased 9% to $14.19 million for the second quarter of 2022, compared to $13.04 million for the second quarter a year ago, and grew 3% from $13.80 million for the first quarter of 2022. For the first six months of 2022, operating revenue increased 16% to $27.99 million, compared to $24.06 million for the first half of 2021.

Net interest income, before the provision for loan losses, increased 14% to $10.70 million for the second quarter of 2022, compared to $9.42 million for the second quarter a year ago, and increased 2% from $10.54 million for the first quarter of 2022. For the first six months of 2022, net interest income increased 14% to $21.25 million from $18.66 million for the first half of 2022. “The increase in net interest income in both the second quarter of 2022, and for the first six months of 2022, was primarily a result of 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 9 basis points to 4.29% for the second quarter of 2022, compared to 4.20% for the second quarter of 2021, and expanded 3 basis points from 4.26% for the preceding quarter. For the first six months of 2022, the NIM contracted 6 basis point to 4.28% compared to 4.34% for the first half of 2021. “Our NIM remained solid during the second quarter, primarily due to the changes in the mix of our earning assets and the continued low cost of funding these earning assets,” stated Canfield.

The yield on earning assets was 4.37% for the second quarter of 2022, compared to 4.29% for the second quarter a year ago, and 4.34% on a linked quarter basis. The cost to fund earning assets declined to 0.07% for the second quarter of 2022, compared to 0.09% for the second quarter a year ago and 0.08% for the first quarter of 2022.   For the first six months of 2022, the yield on earning assets was 4.36% compared to 4.44% for the first half of 2021, while the cost to fund earning assets declined 18% to 0.08% for the first half of 2022 from 0.10% for the first half of 2021.

Total non-interest income was $3.49 million for the second quarter of 2022, compared to $3.62 million for the second quarter of 2021, and $3.26 million for the preceding quarter. For the first six months of 2022, non-interest income increased 25% to $6.75 million compared to $5.40 million for the first six months of 2021. The growth in non-interest income during the second quarter of 2022, and in the first half of 2022, was largely due to the increase in merchant services income and deposit fee income.

“Our merchant service revenue doubled from a year ago as we continue to see significant processing volume increases across our ISO partners and from our own organic ISO business,” said Miller. “We continue to maintain a strong pipeline of ISO Sponsorship partners that we will onboard over the remainder of the year and into the first quarter of 2023. At the beginning of this year, the bank launched its own ISO business as part of our overall payments strategy, which enables us to control a bigger part of the merchant payment experience. The bank now assumes more of the payment risk, but we also garner a larger share of the revenue stream. Our payments business will now have two distinct revenue streams: ISO sponsorship and Organic ISO. We will continue to invest in both of these business lines in our effort to maximize the entire payments ecosystem.”

For the second quarter Organic ISO revenue was $469,000 while ISO sponsorship revenue was $1.70 million.

Total deposit fee income increased 31%, or $127,000, to $541,000 for the second quarter of 2022, compared to $414,000 for the second quarter of 2021, and grew 14%, or $66,000, from $475,000 on a linked quarter basis.   Debit/credit card interchange income grew 8% from the second quarter a year ago and increased 11% from the preceding quarter. For the first six months of 2022, total deposit fee income increased 49% to $1.02 million from $694,000 for the first half of 2021, while merchant services income grew 88% to $3.85 million year-to-date compared to $2.05 million for the first half of 2021. During the second quarter the Company sold $7.74 million of loans realizing $497,000 in gain on sale revenue compared to $1.88 million a year ago, and $803,000 in the first quarter of 2022.

Non-interest expense for the second quarter of 2022 was $5.54 million, an increase of 23% compared to $4.48 million for the second quarter of 2021, and a decrease of 6% from $5.88 million for the first quarter of 2022. For the first six months of 2022, non-interest income increased 28% to $11.42 million compared to $8.93 million for the first half of 2021.   Compensation and benefits expense was the largest component of non-interest expense for the second quarter of 2022 and for the first half of 2022.

Full-time employees increased to 93.5 at June 30, 2022, compared to 69 full-time employees from a year ago, and 86 full-time employees from the linked quarter. As a result of the increased headcount from a year ago, salaries and employee benefits increased 20% to $3.36 million at June 30, 2022, compared to $2.80 million but decreased 13% from $3.85 million from the preceding quarter. “As we continue to invest in key business strategies and focus on sales, payments and modernizing technology, we will be adding crucial talent to support our growth strategy,” said Miller.

Occupancy and equipment expense increased 46% from a year ago and represented 5% of non-interest expense. The increase in occupancy and equipment expense was primarily the result of new equipment acquisition and a lease of additional space adjacent to the company’s headquarters building. Other operating expense represented the remaining 33% of non-interest expense and increased 27% to $1.50 million from a year ago and declined 5% from the preceding quarter. Increases in data processing expense, software licenses and subscriptions, and loan origination expenses were the primary drivers of the increase.

The efficiency ratio was 39.01% for the second quarter of 2022, compared to 34.34% for the second quarter a year ago, and 42.60% for the first quarter of 2022.  

Balance Sheet Review

Total assets increased 16% to $1.14 billion at June 30, 2022, from $988.48 million at June 30, 2021, and grew 4% from $1.10 billion million at March 31, 2022.

The total portfolio of loans increased 3%, or $19.16 million, to $722.63 million, compared to $703.48 million at June 30, 2021, and grew 4%, or $29.31 million, from $693.31 million on a linked quarter basis.   Total loans at June 30, 2022, included $3.9 million of SBA-PPP loans, a decrease of 97% from the second quarter a year ago, down 82% from the preceding quarter and representing only 0.54% of the total loan portfolio at quarter end. There were $50,300 in unamortized PPP fees capitalized on the balance sheet at quarter end. “Over the last year we have sold $43.10 million in SBA and multi-family loans, and PPP loans forgiven or paid off totaled $136.38 million,” said Canfield. “Our lending teams have worked extremely hard in building out our loan portfolio and replacing loans that have either been sold or rolled off.”

The commercial and industrial (C&I) portfolio increased 4% to $184.62 million, at June 30, 2022, from $185.42 million recorded a year earlier.   C&I loans represented 26% of total loans at June 30, 2022.   Commercial real estate loans increased 39% year-over-year to $404.97 million at June 30, 2022, representing 56% of total loans, and grew 8% on a linked quarter basis. The CRE portfolio includes approximately $140.35 million in multi-family loans originated by our So Cal team.

Agriculture loans, representing 9% of the loan portfolio, at June 30, 2022, increased 27% to $63.37 million from a year ago and grew 9% from March 31, 2022. Real estate construction and land development loans totaled $49.54 million, or 7% of total loans, while residential RE 1-4 family loans totaled $16.02 million, or 2% of loans, at June 30, 2022.   At June 30, 2022, the SBA, USDA, or other government agencies, guaranteed loans totaled $80.83 million, or 11% of the loan portfolio.

The investment portfolio increased 27%, or $68.66 million, to $320.28 million at June 30, 2022, from $251.62 million at June 30, 2021, and grew 10% compared to $291.97 at March 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.

Total deposits increased 16% to $1.00 billion at June 30, 2022, compared to $864.55 million from a year earlier, and grew 4% from $961.51 million at March 31, 2022. Noninterest-bearing demand deposits increased 32% to $695.98 million at June 30, 2022, compared to $527 million at June 30, 2021, and increased 14% from $611.89 million at March 31, 2022. Noninterest-bearing demand deposits represented 69% of total deposits at June 30, 2022. Short-term borrowed funds, excluding sub-debt, were zero at June 30, 2022, March 31, 2022 and December 31, 2021, compared to $5.00 million from a year earlier.

Shareholders’ equity increased 4% to $81.75 million at June 30, 2022, compared to $78.76 million from a year ago, and decreased 4% from $85.58 million at March 31, 2022. Book value per common share increased 19% to $26.29 at June 30, 2022, compared to $25.63 at June 30, 2021, and decreased by 5% from $27.53 at March 31, 2022.

“The tangible common equity ratio was 7.14% at June 30, 2022, compared to 7.76% at March 31, 2022, and 7.97% one year ago,” stated Canfield. “During 2022 the Federal Reserve has aggressively raised interest rates in their efforts to cool inflation. As a result, market rates have risen dramatically. Our tangible common equity and tangible book value have been negatively impacted by the marked increase in interest rates and related impact on accumulated other comprehensive income (“AOCI”). Our securities portfolio, which we mark to market monthly, has swung from a $3.42 million gain at June 30, 2021, to an unrealized loss of $17.67 million at the end of June 2022, a change of $21.09 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 plan for both growth and market fluctuations.”

At the Bank level, unrealized losses and gains are not included in regulatory capital. As a result, Tier-1 capital at the Bank was $136.55 million at quarter end excluding the unrealized loss. The regulatory leverage capital ratio was 12.34% for the current quarter, while the total risk based capital ratio was 17.96%.

Asset Quality

Nonperforming assets were $2.75 million, or 0.24% of total assets, at June 30, 2022, compared to $1.02 million, or 0.10% of total assets at June 30, 2021, and $2.90 million, or 0.26% of total assets at March 31, 2022.   Included in nonperforming assets were two loans totaling $1,310,000 restructured and performing under the terms of their agreements at June 30, 2022, compared to $800,000 in performing restructured loans at March 31, 2022. There were no performing restructured loans a year earlier.  

Total delinquent loans decreased by $9.10 million during the quarter, to $15.40 million at June 30, 2022, from $24.50 million at March 31, 2022 and were mainly related to government guaranteed loans purchased by the Bank.   Past due loans 30-60 days declined to $2.63 million at June 30, 2022, compared to $4.67 million at June 30, 2021, and $8.27 million at March 31, 2022. Past due loans from 60-90 days were $1.81 million at June 30, 2022, compared to $1.94 million a year earlier and $173,000 at the preceding quarter end. Past due loans 90+ days at quarter end totaled $11.0 million, compared to no past due loans 90+ days from a year ago and $16.05 million at March 31, 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 shown in the chart below, the majority of the delinquencies are purchased government guaranteed loans, which are guaranteed by the SBA for full payment of the principal plus interest,” commented Miller. “Although these unforeseen delays in payments are taking longer than anticipated, because of the backlog at the SBA, we are expecting full payment in the very near future.” The chart below breaks out the government guaranteed portion compared to the organic delinquencies.

There was no provision for loan losses for the second quarter of 2022, compared to $750,000 recorded in the second quarter a year ago and zero provisioning in the linked quarter. “We incurred a small net charge off during the current quarter of $36,000, compared to no net charge off in the second quarter a year ago, or in the immediate prior quarter,” said Miller. “With the Fed tightening to control inflation and the uncertain future of the economy, we will continue to keep a close eye on credit quality.”

The ratio of allowance for loan losses to total loans was 1.35% at June 30, 2022, compared to 1.33% a year earlier and 1.41% at March 31, 2022.   “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 1.52%, as of June 30, 2022,” added Miller.

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.