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

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Oct 24, 2023, 10:57 ET

MIDDLETOWN, Md., Oct. 24, 2023 /PRNewswire/ -- Community Heritage Financial, Inc. (the "Company") (OTC PK: CMHF), the parent company of Middletown Valley Bank ("MVB" or the "Bank"), announced today that for the nine months ended September 30, 2023 the Company earned net income of $3.37 million or $1.16 per share compared to $5.41 million or $2.40 per for the nine months ended September 30, 2022. Third quarter 2023 net income was $1.37 million or $0.47 per share compared to second quarter 2023 net income of $616 thousand or $0.21 per share and third quarter 2022 net income of $1.52 million or $0.68 per share.

The Company continued strong balance sheet growth during the third quarter of 2023 growing from total assets of $974.3 million as of June 30, 2023 to total assets of $995.7 million as of September 30, 2023. Most of the balance sheet growth resulted from core deposit growth of $38.1 million for the quarter. The bulk of the deposit growth was attributed to bolstered or new commercial money market/ICS relationships with only modest growth in retail time deposit balances ($3.9 million) for the quarter. Loan balances grew by $1.1 million for the quarter but were impacted by several strategic management decisions and transactions which included: 1) management decision to place more emphasis on moving residential mortgage production towards secondary market and away from portfolio loans, 2) a $5 million pay-off on a watch list commercial real estate credit resulting from the sale of the property by the borrower. On a year-over-year basis, total outstanding loan balances grew to $798.0 million as of September 30, 2023, an increase of $70.7 million or 9.7% compared to September 30, 2022 loan balances of $727.3 million. While loan balances have increased during the past year, credit quality has remained strong with non-performing assets to total assets going from 0.20% for the quarter ended September 30, 2022 to 0.19% for the quarter ended September 30, 2023.

The third quarter saw a stabilization in net interest margin with a Bank quarterly average for the third quarter of 2023 of 2.69%, down only slightly from 2.74% in the second quarter of 2023. Net interest income increased from $6.12 million in the second quarter of 2023 to $6.30 million in the third quarter of 2023. Interest income for the third quarter was $11.11 million, an increase of $804 thousand compared to $10.30 million for the second quarter of 2023. The increase in interest revenue outpaced the increase in interest expense for the quarter. Interest expense increased $629 thousand, going from $4.18 million in the second quarter of 2023 to $4.81 million for the third quarter.

Higher interest rates continue to impact residential mortgage volumes, which are a main contributor to non-interest income at the Bank. While mortgage volumes are lower when compared to 2022 levels, low housing supply has continued to keep home values stable and markets open for residential lending. This has resulted in overall non-interest income for the Bank to stabilize and show a slight improvement from $804 thousand in the second quarter to $841 thousand in the third quarter of 2023. Operating expenses increased by $279 thousand from $5.87 million in the second quarter of 2023 to $6.15 million in the third quarter of 2023. The increase was related to one-time salary and benefit costs in the third quarter of 2023 of approximately $500 thousand associated with management transition and Company structural changes.

Due to a more favorable forecast based on reduced evidence of a pending recession probability and other economic factors used in the CECL model, the calculated allowance for credit losses to loans ratio as of September 30, 2023 was 0.92%, a decrease of 0.10% when compared to 1.02% as of June 30, 2023. Based on the loan growth as noted above and updated CECL metrics, the adjustment for credit losses for the second quarter was a recovery of $843 thousand.

Quarterly Highlights – 3Q23 vs 2Q23

Tangible book value per share increased by $0.32 from $22.86 per share as of June 30, 2023 to $23.18 as of September 30, 2023. The increase resulted from $1.37 million in earnings for the quarter, partially off-set by an increased accumulated other comprehensive loss position, which went from an unrealized loss of $9.61 million as of June 30, 2023 to an unrealized loss of $9.97 million as of September 30, 2023.
Outstanding loan balances increased by $1.1 million for the third quarter of 2023 compared to the second quarter of 2023. The net growth resulted from a decrease in commercial loans of $4.6 million due in part to the $5.0 million watch list loan pay-off, $5.9 million growth in residential mortgage loans and a slight decrease of approximately $200 thousand in consumer/other loans.
Deposit balances increased to $889.0 million as of September 30, 2023, an increase of $38.1 million for the third quarter when compared to June 30, 2023 balances of $850.9 million. Non-interest bearing demand deposits increased $4.1 million for the quarter while interest-bearing deposits increased $34.0 million. Interest-bearing deposit growth was driven by commercial relationship growth in money market and savings products with approximately $30.1 million in growth. Retail time deposits made up only $3.9 million of the overall deposit growth for the quarter. There were no new wholesale brokered deposits added during the third quarter of 2023.
The strong deposit growth during the quarter allowed the Bank to retire $17 million in borrowed funds with balances moving from $32 million as June 30, 2023 to $15 million as of September 30, 2023.
Net interest margin was down from 2.74% in the second quarter of 2023 to an average of 2.69% in the third quarter of 2023 and continued to be impacted by higher funding costs. However, margin showed signs of stabilization with earning asset yields repricing at or near the pace of funding cost increases near the end of the third quarter. Third quarter margin at the Bank ranged from 2.67% in July, 2.71% in August, and 2.70% in September resulting in a quarterly average of 2.69%.
Based on updated CECL model calculations for September 30, 2023, the allowance for credit losses to total loans ratio was 0.92% at September 30, 2023, down .10% from 1.02% as of June 30, 2023. The calculations resulted in a total recovery of $843 thousand for the third quarter of 2023 broken down as follows: a loan related recovery of $779 thousand , a recovery of $48 thousand related to unfunded commitments and a recovery of $16 thousand related to held-to-maturity securities. The decrease in the calculated reserve requirements were driven by reduced evidence of a pending recession and other economic factors within the CECL model with no adjustments to other qualitative factor assumptions or methodology.

Quarterly Highlights – 3Q23 vs 3Q22

Tangible book value per share of $23.18 as of September 30, 2023 was an increase of $0.39 per share from $22.79 as of September 30, 2022. Book value per share comparisons on a year-over-year basis include the impact of increased shares outstanding to 2,905,973 as of September 30, 2023 compared to 2,251,320 as of September 30, 2022 as the result of equity compensation awards and a common stock capital raise in October of 2022. Accumulated other comprehensive loss, which also factors into the calculation, was a loss of $9.97 million at September 30, 2023 compared to a loss of $10.08 million as of September 30, 2022.
Loan balances of $798.0 million as of September 30, 2023 were up $70.7 million or 9.7% compared to September 30, 2022 balances of $727.3 million. Growth was split between commercial of $16.9 million, residential mortgage of $51.8 million and consumer/other of $ 2.0 million.
Deposit balances increased $110.7 million or 14.2% from $778.3 million as of September 30, 2022 to $889.0 million as of September 30, 2023. Due to higher market rates for deposit products we have seen a shift in non-interest deposit balances to interest bearing deposit balances over the past year. Non-interest bearing demand balances dropped $29.3 million from $277.7 million as of September 30, 2022 to $248.4 million as of September 30, 2023. Interest bearing deposit balances increased on a year-over-year basis from $500.5 million at September 30, 2022 to $640.6 million as of September 30, 2023.
Net interest income for the third quarter of 2023 was $6.30 million compared to $7.13 million for the third quarter of 2022. Rate increases by the Federal Reserve over the past year have led to higher funding costs and higher interest expense. Interest expense for the third quarter of 2022 was $1.30 million compared to interest expense of $4.81 million for the third quarter of 2023, an increase of $3.51 million. Interest income for the same period increased by $2.68 million, resulting in the overall decrease to interest income. However, as noted above, over the third quarter of 2023 margin began to stabilize with the cost of funds beginning to level off while earning asset yields continued upward trends.
Non-interest income was down $336 thousand from $1.18 million in the third quarter of 2022 to $841 thousand for the third quarter of 2023. Higher market rates for residential mortgage loans resulted in lower refinance and secondary residential mortgage activity on a year-over-year basis, which accounted for most of the reduction.
Non-interest expense for the third quarter of 2023 was $6.15 million, an increase of $453 thousand compared to $5.69 million for the third quarter of 2022. As noted above, the increase resulted from one-time salary and benefit costs of approximately $500 thousand during the third quarter of 2023 associated with management transition and Company structural changes.

Dividend

A dividend of $0.06 per share was declared by the Board of Directors on October 20, 2023, for shareholders of record as of November 3, 2023, and payable on November 10, 2023.

Community Heritage Financial, Inc.
Robert E. (BJ) Goetz, Jr.
President & Chief Executive Officer
301-371-3055

Community Heritage Financial, Inc. and Subsidiaries
Consolidated Balance Sheets

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

Assets
Cash and due from banks		$	36,448,539	$	14,946,927	$	12,821,166	$	15,393,207	$	15,829,569
	Total cash and cash equivalents		36,448,539		14,946,927		12,821,166		15,393,207		15,829,569

Securities available-for-sale, at fair value			39,917,313		41,460,794		43,142,854		39,510,486		39,352,159

Securities held-to-maturity			97,217,237		98,496,558		99,914,183		101,005,393		102,703,746
	Less: allowance for credit losses		(147,457)		(163,259)		(155,381)		-		-
	Total securities held-to-maturity		97,069,780		98,333,299		99,758,802		101,005,393		102,703,746

	Total securities		136,987,093		139,794,093		142,901,656		140,515,879		142,055,905

Equity securities, at cost			1,363,600		1,527,600		1,740,100		406,400		2,281,400

Loans			798,035,073		796,931,525		757,611,496		748,450,525		727,346,209
Less allowance for credit losses			(7,337,327)		(8,112,952)		(7,855,981)		(7,330,436)		(7,524,423)
	Loans, net		790,697,746		788,818,573		749,755,515		741,120,089		719,821,786

Loans held for sale			2,879,397		1,923,566		1,703,221		4,725,495		2,536,184
Premises and equipment, net			6,639,595		6,805,822		6,974,776		7,053,532		6,594,337
Right-of-use assets			2,498,508		2,615,519		2,731,604		2,841,736		2,989,453
Accrued interest receivable			2,733,565		2,512,795		2,405,851		2,616,879		2,124,769
Deferred tax assets			5,289,000		5,314,018		5,264,879		5,277,275		5,353,435
Bank-owned life insurance			6,943,992		6,927,341		6,875,378		6,817,058		6,746,834
Goodwill			1,656,507		1,656,507		1,656,507		1,656,507		1,656,507
Other Assets			1,556,491		1,502,676		1,789,199		1,708,412		1,748,574
	Total Assets	$	995,694,033	$	974,345,437	$	936,619,852	$	930,132,469	$	909,738,753


Liabilities
Deposits:
Non-interest-bearing demand		$	248,440,805	$	244,342,167	$	250,702,470	$	276,829,209	$	277,747,419
Interest-bearing			640,593,734		606,528,210		565,130,161		562,601,082		500,526,922
	Total Deposits		889,034,539		850,870,377		815,832,631		839,430,291		778,274,341

FRB, FHLB, and fed funds borrowings			15,000,000		32,000,000		30,000,000		-		53,000,000
Subordinated debt, net			14,910,303		14,887,879		14,865,455		14,843,030		14,820,606
Lease liabilities			2,565,151		2,678,348		2,789,614		2,908,707		3,052,126
Accrued interest payable			526,354		273,753		440,611		236,624		382,450
Other liabilities			4,644,608		5,540,871		4,661,833		5,572,659		7,252,244
	Total Liabilities		926,680,955		906,251,228		868,590,144		862,991,311		856,781,767

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

Additional paid-in-capital			41,035,733		40,949,900		40,895,863		40,861,802		28,580,504
Retained earnings			37,921,329		36,729,931		36,287,937		35,757,761		34,429,771
Accumulated other comprehensive (loss)			(9,973,044)		(9,614,682)		(9,183,152)		(9,507,465)		(10,075,802)
	Total Shareholders' Equity		69,013,078		68,094,209		68,029,708		67,141,158		52,956,986

	Total Liabilities and Shareholders' Equity	$	995,694,033	$	974,345,437	$	936,619,852	$	930,132,469	$	909,738,753

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

			Three Months Ended						Nine Months Ended
			September 30,		June 30,		September 30,		September 30,		September 30,
			2023		2023		2022		2023		2022

Interest Income
	Loans, including fees	$	10,139,353	$	9,453,437	$	7,656,443	$	28,937,495	$	20,859,443
	Securities		763,606		767,524		729,659		2,265,714		2,076,853
	Fed funds sold and other		203,555		81,306		42,699		394,564		75,037
	Total interest income		11,106,514		10,302,267		8,428,801		31,597,773		23,011,333

Interest Expense
	Deposits		4,316,598		3,421,730		886,091		10,632,515		1,571,957
	Borrowed funds		201,753		482,469		155,208		764,681		171,381
	Subordinated debt		238,049		238,049		238,050		714,148		714,148
	Other Interest Expense		53,259		38,017		23,768		122,421		80,376
	Total interest expense		4,809,659		4,180,265		1,303,117		12,233,765		2,537,862

Net interest income			6,296,855		6,122,002		7,125,684		19,364,008		20,473,471
Provision for (recovery of) credit losses			(842,717)		260,439		423,907		(1,022,669)		1,009,842
Net interest income after provision for (recovery of) credit losses			7,139,572		5,861,563		6,701,777		20,386,677		19,463,629

Non-interest income
	Service charges on deposits		202,778		187,426		201,836		577,607		556,446
	Earnings bank owned life insurance		8,360		43,672		12,659		102,061		(3,107)
	Gain sale of fixed assets		19,907		-		-		19,907		16,508
	Mortgage loan income activity		353,586		315,193		737,355		1,148,154		2,397,222
	Other non-interest income		256,347		257,221		225,600		509,283		725,493
	Total non-interest income		840,978		803,512		1,177,450		2,357,012		3,692,562

Non-interest expense
	Salaries and employee benefits		3,736,317		3,286,113		3,295,141		10,596,052		9,314,325
	Occupancy and equipment		842,651		815,251		760,527		2,649,848		2,301,217
	Legal and professional fees		242,671		294,626		187,301		722,806		529,207
	Advertising		167,531		177,282		142,327		498,960		475,271
	Data processing		618,592		688,228		726,602		2,107,807		1,849,786
	FDIC premiums		163,731		130,622		137,991		448,385		416,434
	Loss sale fixed assets		-		-		-		3,058		-
	Other		375,819		476,742		443,659		1,240,003		864,825
	Total non-interest expense		6,147,312		5,868,864		5,693,548		18,266,919		15,751,760
Income before taxes			1,833,238		796,211		2,185,679		4,476,770		7,404,431
Income tax expense			467,482		179,858		665,512		1,104,599		1,992,950
Net Income		$	$1,365,756	$	$616,353	$	$1,520,167	$	$3,372,171	$	$5,411,481

Basic earnings per share		$	0.47	$	0.21	$	0.68	$	1.16	$	2.40
Diluted earnings per share		$	0.47	$	0.21	$	0.67	$	1.15	$	2.40

Community Heritage Financial, Inc. and Subsidiaries
Selected Financial Data

Income Statement Review

		For the Three Months Ended						For the Nine Months Ended
		September, 30		June, 30		September, 30		September, 30		September, 30
		2023		2023		2022		2023		2022
		(Unaudited)		(Unaudited)		(Audited)		(Unaudited)		(Unaudited)

Interest Income	$	11,106,514	$	10,302,267	$	8,428,801		31,597,773		23,011,333
Interest Expense		4,809,659		4,180,265		1,303,117		12,233,765		2,537,862
Net interest income		6,296,855		6,122,002		7,125,684		19,364,008		20,473,471
Provision for (recovery of) credit losses		(842,717)		260,439		423,907		(1,022,669)		1,009,842
Net interest income after provision for (recovery of) credit losses	$	7,139,572	$	5,861,563	$	6,701,777		20,386,677		19,463,629

Non-interest income	$	840,978	$	803,512	$	1,177,450		2,357,012		3,692,562
Non-interest expense		6,147,312		5,868,864		5,693,548		18,266,919		15,751,760

Yield on interest-earning assets		4.57 %		4.43 %		3.84 %		4.50 %		3.68 %
Cost of interest-bearing liabilities		2.91 %		2.67 %		0.96 %		2.61 %		0.67 %
Efficiency ratio		86.12 %		84.74 %		68.57 %		84.10 %		65.18 %

Balance Sheet Review

		September, 30		June, 30		September, 30
		2023		2023		2022
		(Unaudited)		(Unaudited)		(Unaudited)

Total assets	$	995,694,033	$	974,345,437	$	909,738,753
Loans, net of allowance for credit losses		790,697,746		788,818,573		719,821,786
Goodwill		1,656,507		1,656,507		1,656,507
Deposits		889,034,539		850,870,377		778,274,341
Shareholder's equity		69,013,078		68,094,209		52,956,986


Asset Quality Review
Non-accrual loans	$	1,882,614	$	1,929,248	$	1,834,074
Non-performing assets		1,882,614		1,929,248		1,834,074


Non-performing assets to total assets		0.19 %		0.20 %		0.20 %
Non-performing assets to total loans		0.24 %		0.24 %		0.25 %

Summary of Operating Results

		For the Three Months Ended				For the Nine Months Ended
		September, 30		September, 30		September, 30		September, 30
		2023		2022		2023		2022
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Pre-provision for (recovery of) credit losses, pre-tax net income	$	990,522	$	2,609,586	$	3,454,101	$	8,414,273
Provision for (recovery of) credit losses, pre-tax		(842,717)		423,907		(1,022,669)		1,009,842
Tax expense		467,482		665,512		1,104,599		1,992,950
Net Income	$	1,365,756	$	1,520,167	$	3,372,171	$	5,411,481

(dollars in thousands)
Charge-offs	$	19,984	$	-	$	19,984	$	7,108
(Recoveries)		(6,000)		(3,000)		(9,000)		(40,669)
Net charge-offs (recoveries)	$	13,984	$	(3,000)	$	10,984	$	(33,561)

Per Common Share Data

Common shares outstanding		2,905,973		2,251,320		2,905,973		2,251,320
Weighted average shares outstanding		2,905,973		2,251,320		2,905,973		2,251,320
Diluted shares outstanding		2,932,636		2,253,309		2,930,782		2,253,148

Basic earnings per share	$	0.47	$	0.68	$	1.16	$	2.40
Diluted earnings per share	$	0.47	$	0.67	$	1.15	$	2.40
Dividend paid	$	0.06	$	0.04	$	0.18	$	0.12

Book value per share	$	23.75	$	23.52	$	23.75	$	23.52
Tangible book value per share	$	23.18	$	22.79	$	23.18	$	22.79

Selected Financial Ratios (unaudited)

Return on average assets		0.55 %	%	0.68 %	%	0.47 %	%	0.85 %	%
Return on average equity		7.95 %	%	11.33 %	%	6.56 %	%	13.33 %	%
Allowance for credit losses to total loans		0.92 %	%	1.03 %	%	0.92 %	%	1.03 %	%
Non-performing assets to total loans		0.24 %	%	0.25 %	%	0.24 %	%	0.25 %	%
Net Charge-offs to total loans		0.00 %	%	0.00 %	%	0.00 %	%	0.00 %	%
Common equity tier 1 (CET1) capital		12.15 %	%	10.71 %	%	12.15 %	%	10.71 %	%
Tier1 capital		12.15 %	%	10.71 %	%	12.15 %	%	10.71 %	%
Total risk based capital		13.21 %	%	11.86 %	%	13.21 %	%	11.86 %	%
Tier-1 leverage ratio		9.34 %	%	8.50 %	%	9.34 %	%	8.50 %	%
Average equity to average assets		7.13 %	%	6.08 %	%	7.18 %	%	6.33 %	%
Tangible Common Equity/Tangible Common Assets		6.78 %	%	5.65 %	%	6.78 %	%	5.65 %	%
Net interest margin (bank only)		2.69 %	%	3.35 %	%	2.87 %	%	3.38 %	%
Loans to deposits - (EOP)		89.76 %	%	93.78 %	%	89.76 %	%	93.78 %	%