The Community Financial Corporation Announces Third Quarter 2020 Results

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Third Quarter 2020 Highlights

  • Net income totaled $3.8 million for the quarter ended September 30, 2020, or $0.64 per diluted common share compared to net income of $3.7 million or $0.66 per diluted common share for the quarter ended September 30, 2019.

  • A $2.5 million provision for loan losses was recorded during the quarter ended September 30, 2020, primarily due to economic uncertainties from the COVID-19 pandemic, bringing the year to date provision to $10.1 million.

  • Efficiency ratio was 55.5% and 56.0% for the third quarter and nine months ended September 30, 2020 compared to 62.5% and 61.7% for the same periods in 2019.

  • The Companys return on average assets  ("ROAA") and return on average common equity ("ROACE") were 0.73% and 7.86% for the three months ended September 30, 2020 compared to 0.84% and 8.86% for the three months ended September 30, 2019. The Companys ROAA and ROACE were 0.68% and 7.06% for the nine months ended September 30, 2020 compared to 0.87% and 9.22% for the nine months ended September 30, 2019.

  • Pre-tax, pre-provision ("PTPP") ROAA and PTPP ROACE increased to 1.46% and 15.7% for the quarter ended September 30, 2020 compared to 1.26% and 13.3% for the quarter ended September 30, 2019.

  • PTPP ROA and ROACE were 1.53% and 15.9% during the first nine months of 2020 compared to 1.29% and 13.7% for the same period in 2019.

  • Subordinated debt of $20.0 million issued on October 14, 2020.

WALDORF, Md., Nov. 02, 2020 (GLOBE NEWSWIRE) -- The Community Financial Corporation (NASDAQ: TCFC) (the Company), the holding company for Community Bank of the Chesapeake (the Bank), today reported its results of operations for the third quarter and nine months ended September 30, 2020. Net income for the three months ended September 30, 2020 was $3.8 million, or $0.64 per diluted common share compared with net income of $3.5 million, or $0.59 per diluted common share for the second quarter of 2020, and net income of $3.7 million or $0.66 per diluted common share for the quarter ended September 30, 2019. The Company reported net income for the nine months ended September 30, 2020 of $10.0 million, or $1.70 per diluted common share compared to a net income for the comparable period of 2019 of $11.2 million, or $2.01 per diluted common share. As a result of the COVID-19 pandemic, third quarter and year to date 2020 earnings were impacted by increased provisions for loan losses ("PLL") of $2.5 million and $10.1 million, respectively, compared to $450,000 and $1.3 million for the three and nine months ended September 30, 2019.

"As we continue to work with our customers during the pandemic, I am proud of our team's focus and commitment to each other and our communities, which has resulted in an increase in core earnings. We completed the third quarter of 2020 with net income of $3.8 million, which included a $2.5 million provision for loan losses," stated William J. Pasenelli, President and Chief Executive Officer. "The Company's pre-tax pre-provision ("PTPP") income improved to $22.5 million, a $5.8 million or 35.1% increase over the first nine months of 2019. This has resulted in PTPP ROAA and ROACE improving to 1.53% and 15.9% during the first nine months of 2020."

"We are expecting the COVID-19 deferred portfolio to decrease from $251.5 million or 16.8% of loans at September 30, 2020 to between 2% and 4% by December 31, 2020," stated James M. Burke, Executive Vice President and Bank President. "Deferral customers are returning to normal payments as scheduled with very few exceptions. At this time, additional deferrals have only been granted to those clients in industries that have been the most negatively impacted by the pandemic. The continued improvement has been driven by the resilience of our local economy which is inextricably tied to federal government spending. Our ongoing commitment to our communities will continue by providing access to existing and future federal and state relief programs."

Balance Sheet - Asset Quality

COVID-19 Loan Programs

The outbreak of COVID-19 has adversely impacted a range of industries in the Company's footprint. The length and the severity of the pandemic could prevent our customers from fulfilling their financial obligations to the Company. The Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law on March 27, 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. There have been additional clarifications to regulation and legislation since the original law was passed. The Company has taken significant steps to protect the health and well-being of its employees and customers and to assist customers who have been impacted by the COVID-19 pandemic.

We have originated U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans for our customers. As of September 30, 2020, the Company had originated 963 SBA PPP loans with balances of $131.1 million. We are ready to assist our customers if an additional round of funding is authorized by the President of the United States ("POTUS") and Congress. No credit issues are anticipated with SBA PPP loans as they are guaranteed by the SBA and the Bank's allowance for loan loss does not include an allowance for U.S. SBA PPP loans.

We have payment deferral programs for our customers who are adversely affected by the pandemic. Beginning in April of 2020, the Company deferred either the full loan payment or the principal component of the loan payment between 90 and 180 days with most deferrals set to a six month period. As of September 30, 2020, $251.5 million or 16.8% of gross portfolio loans   had deferral agreements, down $13.4 million from $264.9 million or 17.7% of total gross portfolio loans as of June 30, 2020. These loans were current prior to the COVID-19 crisis and will not be considered delinquent loans or troubled debt restructures ("TDRs") upon completion of the modification agreements. Additionally, none of the deferrals are reflected in the Companys asset quality measures (i.e., non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the U.S. GAAP requirements to treat such short-term loan modifications as TDRs.

We expect the COVID-19 pandemic to have an adverse effect on our loan production and the credit quality of our loan portfolio during the remainder of 2020. Disruption to our customers could result in increased loan delinquencies and defaults and a decline in local loan demand. The Company's COVID-19 loan deferral commercial and retail programs could delay the identification and resolution of problem credits. Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic.

The Bank's borrowers in the hotel, restaurant and retail industries continue to endure economic distress, which may cause them to draw on their existing lines of credit. This scenario may adversely affect their ability to repay existing indebtedness and may impact the value of collateral. These developments, together with economic conditions, could materially impact our commercial real estate portfolio, particularly with respect to real estate with exposure to specific industries, and the value of certain collateral securing our loans. As a result, our financial condition, capital levels and results of operations could be adversely affected.

Below are schedules that provide information on the COVID-19 deferred loans. The schedules summarize the COVID-19 loan modifications by loan portfolio, the amount of interest recognized but not received, monthly interest and principal deferral amounts, maturity or next payment due dates and the Bank's industry classification using the North American Industry Classification System ("NAICS").

COVID-19 Deferred Loans

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Loan
Balances

 

% of
Deferred
Loans

 

% of Gross
Portfolio Loans

 

Number
of Loans

 

Interest
Recognized
Not Received

 

Scheduled
Monthly
Principal

 

Scheduled
Monthly
Interest

Commercial real estate

 

$

224,275

 

 

89.19

%

 

14.98

%

 

134

 

$

4,015

 

 

$

546

 

 

$

806

 

Residential first mortgages

 

12,665

 

 

5.04

%

 

0.85

%

 

36

 

275

 

 

33

 

 

43

 

Residential rentals

 

7,598

 

 

3.02

%

 

0.51

%

 

27

 

196

 

 

31

 

 

34

 

Commercial loans

 

336

 

 

0.13

%

 

0.02

%

 

3

 

7

 

 

 

 

1

 

Consumer loans

 

1

 

 

%

 

%

 

1

 

 

 

 

 

 

Commercial equipment

 

6,600

 

 

2.62

%

 

0.44

%

 

49

 

89

 

 

115

 

 

24

 

Total

 

$

251,475

 

 

100.00

%

 

16.80

%

 

250

 

$

4,582

 

 

$

725

 

 

$

908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


COVID-19 Deferred Loans - Next Payment Due by Month

 

 

 

 

 

 

(dollars in thousands)

 

Loan Balances

 

%

 

Number of Loans

October-20

 

$

96,917

 

 

38.54

%

 

109

November-20

 

121,588

 

 

48.35

%

 

108

December-20

 

30,158

 

 

11.99

%

 

27

January-21

 

2,812

 

 

1.12

%

 

6

Total

 

$

251,475

 

 

100.00

%

 

250

 

 

 

 

 

 

 

 

 

 


COVID-19 Deferred Loans by NAICS Industry

 

 

 

 

(dollars in thousands)

 

September 30, 2020

 

Number of Loans

Real Estate Rental and Leasing

 

$

114,542

 

 

88

Accommodation and Food Services

 

43,281

 

 

18

Other Services (except Public Administration)

 

40,974

 

 

25

Health Care and Social Assistance

 

11,273

 

 

11

Professional, Scientific, and Technical Services

 

7,337

 

 

11

Construction

 

5,863

 

 

12

Arts, Entertainment, and Recreation

 

3,984

 

 

3

Transportation and Warehousing

 

4,285

 

 

15

Retail Trade

 

1,488

 

 

8

Educational Services

 

1,765

 

 

5

Other Industries, Residential Mortgages and Consumer **

 

16,683

 

 

54

Total

 

$

251,475

 

 

250

** No NAICS code has been assigned.

 

 

 

 


COVID-19 Deferred Loans by Top Four NAICS Industries

 

 

 

 

(dollars in thousands)

 

September 30, 2020

 

Number of Loans

Real Estate Rental and Leasing

 

 

 

 

Lessors of Nonresidential Buildings (except Mini-warehouse)

 

$

94,382

 

 

50

Lessors of Residential Buildings and Dwellings

 

11,017

 

 

18

Other Activities Related to Real Estate

 

3,963

 

 

7

Lessors of Other Real Estate Property

 

3,506

 

 

6

General Rental Centers

 

830

 

 

3

Nonresidential Property Managers

 

600

 

 

2

Offices of Real Estate Agents and Brokers

 

126

 

 

1

Residential Property Managers

 

118

 

 

1

 

 

$

114,542

 

 

88

 

 

 

 

 

Accommodation and Food Services

 

 

 

 

Hotels (except Casino Hotels) and Motels

 

$

34,095

 

 

9

Full-Service Restaurants

 

5,027

 

 

6

Limited-Service Restaurants

 

2,747

 

 

1

Caterers

 

1,412

 

 

2

 

 

$

43,281

 

 

18

 

 

 

 

 

Other Services (except Public Administration)

 

 

 

 

Religious Organizations

 

$

28,607

 

 

16

Civic and Social Organizations

 

10,219

 

 

4

General Automotive Repair

 

848

 

 

1

Pet Care (except Veterinary) Services

 

661

 

 

3

Auto Body, Paint, & Interior Repair and Maintenance

 

639

 

 

1

 

 

$

40,974

 

 

25

 

 

 

 

 

Health Care and Social Assistance

 

 

 

 

Assisted Living Facilities for the Elderly

 

$

9,129

 

 

3

Offices of Physicians (except Mental Health Specialists)

 

1,297

 

 

2

Offices of Dentists

 

824

 

 

5

Offices of Physical, Occupational and Speech Therapists, and Audiologists

 

23

 

 

1

 

 

$

11,273

 

 

11

 

 

 

 

 

 

 

Allowance for loan losses ("ALLL") and provision for loan losses ("PLL")

Since December 31, 2019, the Company's general allowance increased reflecting economic uncertainty from the COVID-19 pandemic and the specific allowance decreased as specifically identified impaired loans were resolved. ALLL levels increased to 1.26% of portfolio loans at September 30, 2020 compared to 0.75% at December 31, 2019. At and for the three months ended September 30, 2020, the Company's ALLL increased $7.9 million or 72.1% to $18.8 million at September 30, 2020 from $10.9 million at December 31, 2019.

The Company recorded a $2.5 million and $10.1 million PLL for the three and nine months ended September 30, 2020 compared to $450,000 and $1.3 million for the three and nine months ended September 30, 2019. Net charge-offs also increased from comparable periods as we resolved several relationships that were substandard relationships prior to the pandemic. The Company's allowance methodology considers quantitative historical loss factors and qualitative factors to determine the estimated level of incurred losses in the Company's loan portfolios. The increased provision was primarily due to the economic effects of the COVID-19 pandemic and considered the potential impact of our loan payment deferral program. The current year growth in the commercial loan portfolios also contributed to provision expense.

Management believes that COVID-19 deferred loans are more likely to default in the future and in our evaluation of the deferred loan portfolio, management considered the length of the deferral period, the type and amount of collateral and customer industries. The analysis considered the impact to the allowance model if certain metrics were available (e.g., delinquency), but will remain as unavailable indicators until most of our deferred loans return to a normal payment schedule. When most of the deferral periods end in the fourth quarter of 2020, we plan to use additional customer specific qualitative metrics in our ALLL calculation. The Company has established a process for tracking loans during the deferral period. All COVID-19 deferred loans are reviewed each quarter. Consistent with regulatory guidance, if new information during the deferral period indicates that there is evidence of default, the Bank may change the classification rating (e.g., change from passing credit to substandard) and accrual status (e.g., change from accrual to non-accrual status) as deemed appropriate. As of September 30, 2020, there were no COVID-19 deferred loans deemed to be non-accrual or substandard based on reviews.

Management believes that the allowance is adequate at September 30, 2020. The ALLL as a percent of total loans may increase in future periods based on our belief that the credit quality of our loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic.

Non-Performing Assets

Classified assets decreased $10.0 million from $34.6 million at December 31, 2019 to $24.6 million at September 30, 2020. Management considers classified assets to be an important measure of asset quality. The Company's risk rating process for classified loans is an important input into the Company's allowance methodology. Risk ratings are expected to be an important indicator in assessing ongoing credit risks of COVID-19 deferred loans.

Non-accrual loans and OREO to total gross portfolio loans and OREO decreased 14 basis points from 1.75% at December 31, 2019 to 1.61% at September 30, 2020. Non-accrual loans, OREO and TDRs to total assets decreased 30 basis points from 1.46% at December 31, 2019 to 1.16% at September 30, 2020. 

Non-accrual loans increased $2.3 million from $17.9 million at December 31, 2019 to $20.1 million at September 30, 2020. The increase in non-accrual loans during the first nine months 2020 was largely the result of several substandard classified relationships that were performing before the COVID-19 crisis. Non-accrual loans of $2.9 million (14%) were current with all payments of principal and interest with specific reserves of $42,000 at September 30, 2020. Delinquent non-accrual loans were $17.2 million (86%) with specific reserves of $468,000 at September 30, 2020.

During the nine months ended September 30, 2020, the Company did not offer any COVID-19 deferrals to substandard credits and as of September 30, 2020 there were no non-accrual loans with approved COVID-19 loan deferrals in process. All COVID-19 deferred loans were current prior to the COVID-19 crisis.

The OREO balance decreased $3.8 million from $7.8 million at December 31, 2019 to $4.0 million at September 30, 2020. During the nine months ended September 30, 2020, OREO additions of $1.2 million consisted of a commercial lot with a contract expected to settle during the fourth quarter of 2020. OREO disposals of $2.8 million netted losses of $7,000 on disposals for the nine months ended September 30, 2020.

Balance Sheet

Assets

Total assets increased $339.9 million, or 18.9%, to $2.14 billion at September 30, 2020 compared to total assets of $1.80 billion at December 31, 2019 primarily due to increased net loans of $162.0 million with U.S. SBA PPP loans accounting for $131.1 million of the increase. In addition, total assets increased $21.6 million for investments, OREO decreased $3.8 million, cash increased $155.2 million and all other assets increased $4.9 million. The Companys loan pipeline was approximately $152.0 million at September 30, 2020.

During the third quarter of 2020, total net loans, which include portfolio loans and U.S. SBA PPP loans, increased 0.7% annualized or $3.0 million from $1,604.1 million at June 30, 2020 to $1,607.1 million at September 30, 2020. Gross portfolio loans increased 1.0% annualized or $3.8 million from $1,492.7 million at June 30, 2020 to $1,496.5 million at September 30, 2020. Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio.

Non-owner occupied commercial real estate as a percentage of risk-based capital at September 30, 2020 and December 31, 2019 were $687 million or 339% and $639 million or 320%, respectively. Construction loans as a percentage of risk-based capital at September 30, 2020 and December 31, 2019 were $144 million or 71% and $147 million or 74%, respectively. Regulatory loan concentrations increased in the first nine months of 2020 due to commercial real estate growth and due to a reduction in total regulatory capital from the redemption of the $23.0 million of 6.25% fixed-to-floating rate subordinated notes in February 2020.

Funding

The Bank uses retail deposits and wholesale funding. Wholesale funding includes short-term borrowings, long-term debt and brokered deposits. Retail deposits continue to be the most significant source of funds totaling $1,768.6 million or 97.1% of funding at September 30, 2020 compared to $1,510.8 million or 97.0% of funding at December 31, 2019. Wholesale funding, which consisted of FHLB advances and brokered deposits, was $53.3 million or 2.9% of funding at September 30, 2020 compared to $46.4 million or 3.0% of funding at December 31, 2019. The September 30, 2020 Federal Reserve Bank's PPPLF Program outstanding balance of $85.9 million is excluded from the preceding deposit and wholesale analysis.

Total deposits increased $267.8 million or 17.71% (23.6% annualized) at September 30, 2020 compared to December 31, 2019. The increase comprised a $298.5 million increase to transaction deposits offsetting a $30.7 million decrease to time deposits. Non-interest-bearing demand deposits increased $119.7 million or 49.62% at September 30, 2020, representing 20.3% of deposits, compared to 15.95% of deposits at December 31, 2019. The Bank increased on-balance sheet liquidity in the first nine months as deposit balances increased compared to the prior year. Customer deposit balances increased due to new customer acquisitions as well as lower levels of consumer and business spending related to the COVID-19 pandemic.

Management has increased oversight and review of customer line of credit usage. If we were to experience increases in draws on customer lines of credit or decreased deposit levels in future periods as a result of the distressed economic conditions in our market areas relating to the COVID-19 pandemic, our level of borrowed funds could increase.

Stockholders' Equity and Regulatory Capital

During the nine months ended September 30, 2020, total stockholders equity increased $11.4 million due to net income of $10.0 million, an increase in accumulated other comprehensive income of $3.3 million due to increased unrealized gains in the investment portfolio and net stock related activities in connection with stock-based compensation and ESOP activity of $225,000. These increases to stockholders equity were partially offset by common dividends paid of $2.1 million.

The Companys ratio of tangible common equity ("TCE") to tangible assets decreased to 8.49% at September 30, 2020 from 9.44% at December 31, 2019 (see Non-GAAP reconciliation schedules). The decrease in the TCE ratio was due primarily to significant increases in cash and loans from COVID-19 government stimulus. In April 2020, banking regulators issued an interim final rule that excluded U.S. SBA PPP loans pledged under the PPPLF from the calculation of the leverage ratio. In addition, the interim final rule excluded U.S. SBA PPP loans from the calculation of risk-based capital ratios by assigning a zero percent risk weight. The Company remains well capitalized at September 30, 2020 with a Tier 1 capital to average assets ("leverage ratio") of 9.73% at September 30, 2020 compared to 10.08% at December 31, 2019.

On December 31, 2019, the Company issued a total of 312,747 shares of its common stock, par value $0.01 in a private placement offering. The Company received net proceeds of $10.6 million after deal expenses. On February 15, 2020, the Company used the proceeds and a cash dividend from the Bank to redeem the Companys outstanding $23.0 million of 6.25% fixed-to-floating rate subordinated notes.

Due to economic uncertainties surrounding COVID-19, on October 14, 2020, the Company issued $20.0 million in aggregate principal amount 4.75% Fixed to Floating Rate Subordinated Notes due 2030 (the "Offering"), which will be treated as Tier 2 Capital at the Company. The Company contributed $10.0 million of net proceeds from the Offering to the Bank as Tier 1 Capital on October 15, 2020 and may use the remainder of the Offering net proceeds for general corporate purposes, to support bank regulatory capital ratios and for potential common stock share repurchases.

Results of Operations

 

 

Three Months Ended September 30,

 

 

 

 

(dollars in thousands)

 

2020

 

2019

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

17,483

 

 

$

18,259

 

 

$

(776

)

 

 

(4.2

)

%

Interest expense

 

2,115

 

 

4,734

 

 

(2,619

)

 

 

(55.3

)

%

Net interest income

 

15,368

 

 

13,525

 

 

1,843

 

 

 

13.6

 

%

Provision for loan losses

 

2,500

 

 

450

 

 

2,050

 

 

 

455.6

 

%

Noninterest income

 

1,666

 

 

1,239

 

 

427

 

 

 

34.5

 

%

Noninterest expense

 

9,451

 

 

9,224

 

 

227

 

 

 

2.5

 

%

Income before income taxes

 

5,083

 

 

5,090

 

 

(7

)

 

 

(0.1

)

%

Income tax (income) expense

 

1,284

 

 

1,397

 

 

(113

)

 

 

(8.1

)

%

Net income

 

$

3,799

 

 

$

3,693

 

 

$

106

 

 

 

2.9

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The increase to net income in the third quarter of 2020 compared to the same quarter in 2019 was due to increased net interest income and noninterest income, a decrease in income tax expense partially offset by increases in noninterest expense and provision for loan losses related to the economic uncertainty of the COVID-19 pandemic.

 

 

Nine Months Ended September 30,

 

 

 

 

(dollars in thousands)

 

2020

 

2019

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

53,160

 

 

$

54,174

 

 

$

(1,014

)

 

 

(1.9

)

%

Interest expense

 

8,215

 

 

14,353

 

 

(6,138

)

 

 

(42.8

)

%

Net interest income

 

44,945

 

 

39,821

 

 

5,124

 

 

 

12.9

 

%

Provision for loan losses

 

10,100

 

 

1,325

 

 

8,775

 

 

 

662.3

 

%

Noninterest income

 

6,046

 

 

3,553

 

 

2,493

 

 

 

70.2

 

%

Noninterest expense

 

28,531

 

 

26,745

 

 

1,786

 

 

 

6.7

 

%

Income before income taxes

 

12,360

 

 

15,304

 

 

(2,944

)

 

 

(19.2

)

%

Income tax expense

 

2,363

 

 

4,107

 

 

(1,744

)

 

 

(42.5

)

%

Net income

 

$

9,997

 

 

$

11,197

 

 

$

(1,200

)

 

 

(10.7

)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The decrease to net income in the first nine months of 2020 compared to the same period in 2019 was due to increased provision for loan losses related to the economic uncertainty of the COVID-19 pandemic and increased noninterest expense partially offset by increases in net interest income and non-interest income and a decrease to income tax expense. The decrease in income tax expense was due to a change in the Company's state tax apportionment approach that was implemented in the first quarter of 2020 as well as lower pre-tax income.

Net Interest Income

Net interest income increased $1.84 million or 13.6% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Net interest margin of 3.27% for the three months ended September 30, 2020 decreased six basis points from 3.33% for the comparable period. The increase in net interest income resulted primarily from significant decreases in interest expense from lower funding costs. Interest income decreased from significantly lower asset yields partially offset by increased interest income from larger average balances.

Net interest income increased $5.1 million or 12.9% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Net interest margin of 3.34% for the nine months ended September 30, 2020 was two basis points higher than the 3.32% for the nine months ended September 30, 2019. The increase in net interest margin from the first nine months of 2019 resulted primarily from the Companys interest earning asset yields decreasing at a slower rate than overall funding costs. Interest earning asset yields decreased 57 basis points from 4.52% for the nine months ended September 30, 2019 to 3.95% for the nine months ended September 30, 2020. The Companys cost of funds decreased 61 basis points from 1.24% for the nine months ended September 30, 2019 to 0.63% for the nine months ended September 30, 2020. For the nine months ended September 30, 2020, net interest margin was reduced six basis points as a result of net U.S. SBA PPP loans and Federal Reserve PPPLF funding.

The sharp decline in interest rates during the first nine months of 2020 not only reduced interest income on floating-rate commercial loans and liquid interest-earning assets, but it also reduced competitive pressures and depositor expectations concerning deposit interest rates. Due to a slightly liability-sensitive balance sheet, the Company increased its net interest margin in the first quarter of 2020, had stable margins during the second quarter of 2020 after adjusting for PPP loan and funding activity and had minimal net interest margin compression of seven basis point in the third quarter of 2020. Net interest margin declined from 3.34% for the three months ended June 30, 2020 to 3.27% for the three months ended September 30, 2020.

Some compression of our net interest margin is probable in the fourth quarter of 2020 as interest-earning assets begin to reprice faster than interest-bearing liabilities. The Bank's loan growth may slow due to overall economic conditions. Conversely, PPP loan forgiveness will positively impact margins and net interest income in the quarter(s) of forgiveness with the recognition of remaining net deferred fees.

Noninterest Income

Noninterest income increased $427,000 or 34.5% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase for the comparable periods was primarily due to new revenues from interest rate protection referral fee income and gains on the sale of investment securities. During the fourth quarter of 2019, the Bank began referring customers to a third-party financial institution that offers interest rate protection for the length of a loan. Noninterest income as a percentage of average assets was 0.32% and 0.28%, respectively, for the three months ended September 30, 2020 and 2019.

Noninterest income increased $2.5 million or 70.2% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increases were primarily due to increased interest rate protection referral fee income of $1.8 million and $670,000 in gains on sales of investments. Noninterest income as a percentage of assets was 0.41% and 0.27%, respectively, for the nine months ended September 30, 2020 and 2019. The COVID-19 crisis has impacted spending habits of customers and reduced growth in service fee income as well as curtailed expected commercial loan volume which impacts interest rate protection agreement referral fee opportunities.

Noninterest Expense

Noninterest expense increased $227,000 or a modest 2.5% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase in noninterest expense for the comparable periods was due to increases in data processing, professional fees, FDIC insurance and OREO. Data processing costs are comparable to average 2020 quarterly expenses and include the Bank's continued investment in technology with the addition of the nCino Bank Operating System. The Company's investments in technology have slowed the growth of expenses as the asset size of the Bank has increased. The increase in FDIC insurance for the third quarter of 2020 was due to the application of a $172,000 FDIC insurance credit taken in the third quarter of 2019. Increased OREO expenses reflect management's actions in 2020 to reduce non-performing assets. These increases in noninterest expense were partially offset by reductions in compensation and benefits and advertising. Compensation and benefits were lower in the third quarter of 2020 primarily due to reductions in health care costs and 401K employer contributions. The Company's projected quarterly expense run rate for the remainder of 2020 remains between $9.2-$9.4 million.

The Companys efficiency ratio was 55.48% for the three months ended September 30, 2020 compared to 62.48% for the three months ended September 30, 2019. The Companys net operating expense ratio was 1.50% for the three months ended September 30, 2020 compared to 1.82% for the three months ended September 30, 2019. The efficiency and net operating expense ratios have improved (decreased) as the Company has been able to generate more noninterest income while controlling expense growth.

Noninterest expense increased $1.8 million or 6.7% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase in noninterest expense for the comparable periods was primarily due to increased OREO expenses. Noninterest expense increased for the comparable periods as increases in data processing, professional fees and FDIC insurance were offset by decreases in all other operating expenses including occupancy, advertising, depreciation and other expenses. Noninterest expense increased $234,000 or less than 1% for the comparable periods if OREO expenses were excluded.

Year to date compensation and benefits for the nine months ended were reduced a total $484,000 due to the allocation of deferred costs for U.S. SBA PPP loans originated during the second and third quarter of 2020.

The Companys efficiency ratio was 55.95% for the nine months ended September 30, 2020 compared to 61.66% for the nine months ended September 30, 2019. The Companys net operating expense ratio was 1.53% at September 30, 2020 compared to 1.79% at September 30, 2019. The efficiency and net operating expense ratios have improved (decreased) as the Company has been able to generate more noninterest income while controlling expense growth.

Income Tax Expense

For the nine months ended September 30, 2020 the effective tax rate at 19.1%.The Company's new state tax apportionment approach was implemented during the first quarter of 2020 and included the impact of amended income tax filings of the Company and Bank. Management evaluated the tax position and determined the change in tax position qualified as a change in estimate under FASB ASC Section 250. The following table shows a breakdown of income tax expense for the nine months ended September 30, 2020 split between the apportionment adjustment and a normalized 2020 income tax provision:

 

 

Nine Months Ended September 30, 2020

(dollars in thousands)

 

Tax Provision

 

Effective Tax Rate

Income tax apportionment adjustment

 

$

(743

)

 

(6.0

)

%

Income taxes before apportionment adjustment

 

3,106

 

 

25.1

 

%

Income tax expense as reported

 

$

2,363

 

 

19.1

 

%

 

 

 

 

 

Income before income taxes

 

$

12,360

 

 

 

 

 

 

 

 

 

 

About The Community Financial Corporation - Headquartered in Waldorf, MD, The Community Financial Corporation is the bank holding company for Community Bank of the Chesapeake, a full-service commercial bank with assets of approximately $2.1 billion. Through its branch offices and commercial lending centers, Community Bank of the Chesapeake offers a broad range of financial products and services to individuals and businesses. The Companys banking centers are located at its main office in Waldorf, Maryland, and branch offices in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick, Lusby and California, Maryland; and downtown Fredericksburg, Virginia. More information about Community Bank of the Chesapeake can be found at www.cbtc.com.

Use of non-GAAP Financial Measures - Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Companys management uses these non-GAAP financial measures, and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Companys performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP.

Forward-looking Statements - This news release contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements can generally be identified by the fact that they do not relate strictly to historical or current facts. They often include words like believe, expect, anticipate, estimate and intend or future or conditional verbs such as will, would, should, could or may. Statements in this release that are not strictly historical are forward-looking and are based upon current expectations that may differ materially from actual results. These forward-looking statements include, without limitation, those relating to the Companys and Community Bank of the Chesapeakes future growth and managements outlook or expectations for revenue, assets, asset quality, profitability, business prospects, net interest margin, non-interest revenue, allowance for loan losses, the level of credit losses from lending, liquidity levels, capital levels, or other future financial or business performance strategies or expectations, and any statements of the plans and objectives of management for future operations products or services, including the expected benefits from, and/or the execution of integration plans relating to any acquisition we have undertaking or that we undertake in the future; plans and cost savings regarding branch closings or consolidation; any statement of expectation or belief; projections related to certain financial metrics; and any statement of assumptions underlying the foregoing. These forward-looking statements express managements current expectations or forecasts of future events, results and conditions, and by their nature are subject to and involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein. Factors that might cause actual results to differ materially from those made in such statements include, but are not limited to: risks, uncertainties and other factors relating to the COVID-19 pandemic (including the length of time that the pandemic continues, the ability of states and local governments to successfully implement the lifting of restrictions on movement and the potential imposition of further restrictions on movement and travel in the future, the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state and local governments, and the inability of employees to work due to illness, quarantine, or government mandates); the synergies and other expected financial benefits from the County First acquisition, or any other acquisition that we undertake in the future; may not be realized within the expected time frames; changes in The Community Financial Corporation or Community Bank of the Chesapeakes strategy, costs or difficulties related to integration matters might be greater than expected; availability of and costs associated with obtaining adequate and timely sources of liquidity; the ability to maintain credit quality; general economic trends; changes in interest rates; loss of deposits and loan demand to other financial institutions; substantial changes in financial markets; changes in real estate value and the real estate market; regulatory changes; the impact of government shutdowns or sequestration; the possibility of unforeseen events affecting the industry generally; the uncertainties associated with newly developed or acquired operations; the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future; market disruptions and other effects of terrorist activities; and the matters described in Item 1A Risk Factors in the Companys Annual Report on Form 10-K for the Year Ended December 31, 2019 and the Company's Quarterly Report on Form 10-Q for the Period Ended June 30, 2020, and in its other Reports filed with the Securities and Exchange Commission (the SEC). The Companys forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this news release or in its filings with the SEC, accessible on the SECs Web site at www.sec.gov. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required under the rules and regulations of the SEC.

Data is unaudited as of September 30, 2020. This selected information should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

CONTACTS:
William J. Pasenelli, Chief Executive Officer
Todd L. Capitani, Chief Financial Officer
888.745.2265

SUPPLEMENTAL QUARTERLY FINANCIAL DATA
 CONSOLIDATED INCOME STATEMENT

 

 

Three Months Ended

(dollars in thousands)

 

September 30, 2020

 

June 30, 2020

 

March 31, 2020

 

December 31, 2019

 

September 30, 2019

Interest and Dividend Income

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

16,176

 

 

$

16,277

 

 

$

16,502

 

 

$

16,565

 

 

$

16,542

 

Interest and dividends on securities

 

1,269

 

 

1,341

 

 

1,469

 

 

1,508

 

 

1,606

 

Interest on deposits with banks

 

38

 

 

20

 

 

68

 

 

206

 

 

111

 

Total Interest and Dividend Income

 

17,483

 

 

17,638

 

 

18,039

 

 

18,279

 

 

18,259

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,534

 

 

1,937

 

 

3,044

 

 

3,777

 

 

3,867

 

Short-term borrowings

 

14

 

 

28

 

 

69

 

 

65

 

 

140

 

Long-term debt

 

567

 

 

449

 

 

573

 

 

724

 

 

727

 

Total Interest Expense

 

2,115

 

 

2,414

 

 

3,686

 

 

4,566

 

 

4,734

 

Net Interest Income (NII)

 

15,368

 

 

15,224

 

 

14,353

 

 

13,713

 

 

13,525

 

Provision for loan losses

 

2,500

 

 

3,500

 

 

4,100

 

 

805

 

 

450

 

NII After Provision For Loan Losses

 

12,868

 

 

11,724

 

 

10,253

 

 

12,908

 

 

13,075

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

Loan appraisal, credit, and misc. charges

 

49

 

 

35

 

 

14

 

 

131

 

 

109

 

Gain on sale of assets

 

6

 

 

 

 

 

 

 

 

 

Net gains on sale of investment securities

 

229

 

 

112

 

 

329

 

 

226

 

 

 

Unrealized gain (losses) on equity securities

 

 

 

40

 

 

75

 

 

(22

)

 

35

 

Loss on premises and equipment held for sale

 

 

 

 

 

 

 

(1

)

 

 

Income from bank owned life insurance

 

222

 

 

220

 

 

219

 

 

223

 

 

223

 

Service charges

 

839

 

 

709

 

 

982

 

 

916

 

 

834

 

Referral fee income

 

321

 

 

1,143

 

 

502

 

 

740

 

 

38

 

Total Noninterest Income

 

1,666

 

 

2,259

 

 

2,121

 

 

2,213

 

 

1,239

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

5,099

 

 

4,714

 

 

5,188

 

 

5,408

 

 

5,353

 

OREO valuation allowance and expenses

 

421

 

 

1,100

 

 

782

 

 

212

 

 

263

 

Sub Total

 

5,520

 

 

5,814

 

 

5,970

 

 

5,620

 

 

5,616

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

Occupancy expense

 

734

 

 

736

 

 

734

 

 

812

 

 

730

 

Advertising

 

129

 

 

130

 

 

121

 

 

152

 

 

250

 

Data processing expense

 

990

 

 

924

 

 

928

 

 

780

 

 

793

 

Professional fees

 

652

 

 

477

 

 

626

 

 

649

 

 

523

 

Depreciation of premises and equipment

 

142

 

 

151

 

 

158

 

 

165

 

 

165

 

Telephone communications

 

43

 

 

53

 

 

43

 

 

39

 

 

46

 

Office supplies

 

31

 

 

30

 

 

31

 

 

45

 

 

34

 

FDIC Insurance

 

249

 

 

260

 

 

170

 

 

(3

)

 

2

 

Core deposit intangible amortization

 

144

 

 

151

 

 

157

 

 

163

 

 

169

 

Other

 

817

 

 

671

 

 

745

 

 

1,066

 

 

896

 

Total Operating Expenses

 

3,931

 

 

3,583

 

 

3,713

 

 

3,868

 

 

3,608

 

Total Noninterest Expense

 

9,451

 

 

9,397

 

 

9,683

 

 

9,488

 

 

9,224

 

Income before income taxes

 

5,083

 

 

4,586

 

 

2,691

 

 

5,633

 

 

5,090

 

Income tax expense

 

1,284

 

 

1,136

 

 

(57

)

 

1,558

 

 

1,397

 

Net Income

 

$

3,799

 

 

$

3,450

 

 

$

2,748

 

 

$

4,075

 

 

$

3,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL QUARTERLY FINANCIAL DATA - Continued
 CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

 

September 30, 2020

 

June 30, 2020

 

March 31, 2020

 

December 31, 2019

 

September 30, 2019

Assets

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

93,130

 

 

$

103,914

 

 

$

15,498

 

 

$

25,065

 

 

$

37,923

 

Federal funds sold

 

69,431

 

 

29,456

 

 

 

 

 

 

42,205

 

Interest-bearing deposits with banks

 

25,132

 

 

13,051

 

 

10,344

 

 

7,404

 

 

36,563

 

Securities available for sale (AFS), at fair value

 

229,620

 

 

234,982

 

 

214,163

 

 

208,187

 

 

131,288

 

Securities held to maturity (HTM), at amortized cost

 

 

 

 

 

 

 

 

 

88,654

 

Equity securities carried at fair value through income

 

4,851

 

 

4,831

 

 

4,768

 

 

4,669

 

 

4,665

 

Non-marketable equity securities held in other financial institutions

 

209

 

 

209

 

 

209

 

 

209

 

 

209

 

Federal Home Loan Bank (FHLB) stock - at cost

 

3,415

 

 

4,691

 

 

5,627

 

 

3,447

 

 

4,510

 

Net U.S. Small Business Administration ("SBA") Paycheck Protection ("PPP") Loans

 

127,811

 

 

125,638

 

 

 

 

 

 

 

Portfolio Loans Receivable net of allowance for loan losses of $18,829, $16,319, $15,061, $10,942 and $11,252

 

1,479,313

 

 

1,478,498

 

 

1,477,087

 

 

1,445,109

1,405,856 Net Loans 1,607,124 1,604,136 1,477,087 1,445,109 1,405,856 Goodwill 10,835 10,835 10,835 10,835 10,835 Premises and equipment, net 20,671 20,972 21,305 21,662 22,320 Premises and equipment held for sale 430 430 430 430 — Other real estate owned (OREO) 3,998 3,695 6,338 7,773 10,195 Accrued interest receivable 8,975 6,773 5,077 5,019 5,213 Investment in bank owned life insurance 37,841 37,619 37,399 37,180 36,958 Core deposit intangible 1,666 1,810 1,961 2,118 2,281 Net deferred tax assets 7,307 6,565 6,421 6,168 5,979 Right of use assets - operating leases 8,005 8,132 8,257 8,382 8,521 Other assets 4,797 1,655 902 3,879 1,557 Total Assets $2,137,437 $2,093,756 $1,826,621 $1,797,536 $1,855,732 Liabilities and Stockholders' Equity Liabilities Deposits Non-interest-bearing deposits $360,839 $356,196 $254,114 $241,174 $243,425 Interest-bearing deposits 1,418,767 1,314,168 1,258,475 1,270,663 1,316,535 Total deposits 1,779,606 1,670,364 1,512,589 1,511,837 1,559,960 Short-term borrowings — 5,000 27,000 5,000 15,000 Long-term debt 42,319 67,336 67,353 40,370 55,387 Paycheck Protection Program Liquidity Facility ("PPPLF") Advance 85,893 126,801 — — — Guaranteed preferred beneficial interest in junior subordinated debentures (TRUPs) 12,000 12,000 12,000 12,000 12,000 Subordinated notes - 6.25% — — 23,000 23,000 Lease liabilities - operating leases 8,193 8,296 8,397 8,495 8,607 Accrued expenses and other liabilities 16,576 14,517 14,015 15,340 14,369 Total Liabilities 1,944,587 1,904,314 1,641,354 1,616,042 1,688,323 Stockholders' Equity Common stock 59 59 59 59 56 Additional paid in capital 95,799 95,687 95,581 95,474 84,713 Retained earnings 92,814 89,781 87,070 85,059 81,682 Accumulated other comprehensive income (loss) 4,780 4,517 3,159 1,504 1,715 Unearned ESOP shares (602) (602) (602) (602) (757)Total Stockholders' Equity 192,850 189,442 185,267 181,494 167,409 Total Liabilities and Stockholders' Equity $2,137,437 $2,093,756 $1,826,621 $1,797,536 $1,855,732 Common shares issued and outstanding 5,911,940 5,911,715 5,910,064 5,900,249 5,583,492

SUPPLEMENTAL QUARTERLY FINANCIAL DATA - Continued
SELECTED FINANCIAL INFORMATION AND RATIOS

Three Months Ended

(dollars in thousands, except per share amounts)

September 30, 2020

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

KEY OPERATING RATIOS

Return on average assets ("ROAA")

0.73

%

0.69

%

0.61

%

0.91

%

0.84

%

Pre-tax Pre-Provision ROAA**

1.46

1.62

1.51

1.43

1.26

Return on average common equity ("ROACE")

7.86

7.27

6.00

9.58

8.86

Pre-tax Pre-Provision ROACE**

15.69

17.03

14.82

15.14

13.29

Average total equity to average total assets

9.33

9.52

10.20

9.46

9.50

Interest rate spread

3.15

3.21

3.21

3.05

3.07

Net interest margin

3.27

3.34

3.43

3.29

3.33

Cost of funds

0.46

0.54

0.93

1.14

1.21

Cost of deposits

0.37

0.48

0.82

1.00

1.05

Cost of debt

1.16

1.06

2.61

3.19

3.54

Efficiency ratio

55.48

53.75

58.78

59.58

62.48

Non-interest expense to average assets

1.82

1.88

2.15

2.11

2.10

Net operating expense to average assets

1.50

1.43

1.68

1.62

1.82

Avg. int-earning assets to avg. int-bearing liabilities

125.40

125.51

124.44

122.50

122.24

Net charge-offs to average portfolio loans

0.61

0.32

0.03

COMMON SHARE DATA

Basic net income per common share

$

0.64

$

0.59

$

0.47

$

0.73

$

0.66

Diluted net income per common share

0.64

0.59

0.47

0.73

0.66

Cash dividends paid per common share

0.125

0.125

0.125

0.13

0.13

Basic - weighted average common shares outstanding

5,895,074

5,894,009

5,886,981

5,563,455

5,560,878

Diluted - weighted average common shares outstanding

5,895,074

5,894,009

5,886,981

5,563,455

5,560,878

ASSET QUALITY

Total assets

$

2,137,437

$

2,093,756

$

1,826,621

$

1,797,536

$

1,855,732

Gross portfolio loans (1)

1,496,532

1,492,745

1,490,089

1,454,172

1,415,417

Classified assets

24,600

25,115

33,489

34,636

37,166

Allowance for loan losses

18,829

16,319

15,061

10,942

11,252

Past due loans - 31 to 89 days

838

5,843

7,921

549

2,252

Past due loans >=90 days

17,230

20,072

12,877

12,778

11,673

Total past due loans (2) (3)

18,068

25,915

20,798

13,327

13,925

Non-accrual loans (4)

20,148

22,896

16,349

17,857

15,433

Accruing troubled debt restructures (TDRs)

573

593

641

650

655

Other real estate owned (OREO)

3,998

3,695

6,338

7,773

10,195

Non-accrual loans, OREO and TDRs

$

24,719

$

27,184

$

23,328

$

26,280

$

26,283

** Non-GAAP financial measure. See reconciliation of GAAP and NON-GAAP measures.
____________________________________

(1) Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio. Asset quality ratios for loans exclude U.S. SBA PPP loans.
(2) Delinquency excludes Purchase Credit Impaired ("PCI") loans.
(3) As of October 30, 2020 there were zero loans that were reported as delinquent as of September 30, 2020 with approved COVID-19 loan deferrals not yet completed.
(4) Non-accrual loans include all loans that are 90 days or more delinquent and loans that are non-accrual due to the operating results or cash flows of a customer. Non-accrual loans can include loans that are current with all loan payments. At September 30, 2020 and December 31, 2019, the Company had current non-accrual loans of $2.9 million and $5.1 million, respectively.

SUPPLEMENTAL QUARTERLY FINANCIAL DATA - Continued
SELECTED FINANCIAL INFORMATION AND RATIOS

Three Months Ended

(dollars in thousands, except per share amounts)

September 30, 2020

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

ASSET QUALITY RATIOS (1)

Classified assets to total assets

1.15

%

1.20

%

1.83

%

1.93

%

2.00

%

Classified assets to risk-based capital

11.89

12.49

17.00

16.21

18.63

Allowance for loan losses to total loans

1.26

1.09

1.01

0.75

0.79

Allowance for loan losses to non-accrual loans

93.45

71.27

92.12

61.28

72.91

Past due loans - 31 to 89 days to total loans

0.06

0.39

0.53

0.04

0.16

Past due loans >=90 days to total loans

1.15

1.34

0.86

0.88

0.82

Total past due (delinquency) to total loans

1.21

1.74

1.40

0.92

0.98

Non-accrual loans to total loans

1.35

1.53

1.10

1.23

1.09

Non-accrual loans and TDRs to total loans

1.38

1.57

1.14

1.27

1.14

Non-accrual loans and OREO to total assets

1.13

1.27

1.24

1.43

1.38

Non-accrual loans and OREO to total loans and OREO

1.61

1.78

1.52

1.75

1.80

Non-accrual loans, OREO and TDRs to total assets

1.16

1.30

1.28

1.46

1.42

COMMON SHARE DATA

Book value per common share

$

32.62

$

32.05

$

31.35

$

30.76

$

29.98

Tangible book value per common share**

30.51

29.91

29.18

28.57

27.63

Common shares outstanding at end of period

5,911,940

5,911,715

5,910,064

5,900,249

5,583,492

OTHER DATA

Full-time equivalent employees

189

194

196

194

198

Branches

12

12

12

12

12

Loan Production Offices

4

4

4

5

5

CAPITAL RATIOS

Tier 1 capital to average assets

9.73

%

9.76

%

10.20

%

10.08

%

9.49

%

Tier 1 common capital to risk-weighted assets

11.11

11.12

11.04

11.11

10.35

Tier 1 capital to risk-weighted assets

11.87

11.89

11.82

11.91

11.16

Total risk-based capital to risk-weighted assets

13.06

12.94

12.80

14.16

13.48

Common equity to assets

9.02

9.05

10.14

10.10

9.02

Tangible common equity to tangible assets **

8.49

8.50

9.51

9.44

8.37

** Non-GAAP financial measure. See reconciliation of GAAP and NON-GAAP measures.
____________________________________

(1) Asset quality ratios are calculated using total portfolio loans. Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio.


SUPPLEMENTAL YEAR TO DATE FINANCIAL DATA
CONSOLIDATED INCOME STATEMENT

Nine Months Ended September 30,

(dollars in thousands)

2020

2019

Interest and Dividend Income

Loans, including fees

$

48,955

$

49,037

Interest and dividends on securities

4,079

4,906

Interest on deposits with banks

126

231

Total Interest and Dividend Income

53,160

54,174

Interest Expense

Deposits

6,515

11,601

Short-term borrowings

111

709

Long-term debt

1,589

2,043

Total Interest Expense

8,215

14,353

Net Interest Income (NII)

44,945

39,821

Provision for loan losses

10,100

1,325

NII After Provision For Loan Losses

34,845

38,496

Noninterest Income

Loan appraisal, credit, and misc. charges

98

204

Gain on sale of assets

6

Net gains on sale of investment securities

670

Unrealized gain on equity securities

115

156

Income from bank owned life insurance

661

662

Service charges

2,530

2,392

Referral fee income

1,966

139

Total Noninterest Income

6,046

3,553

Noninterest Expense

Compensation and benefits

15,001

15,037

OREO valuation allowance and expenses

2,303

751

Sub-total

17,304

15,788

Operating Expense

Occupancy expense

2,204

2,289

Advertising

380

610

Data processing expense

2,842

2,268

Professional fees

1,755

1,547

Depreciation of premises and equipment

451

520

Telephone communications

139

164

Office supplies

92

104

FDIC Insurance

679

337

Core deposit intangible amortization

452

525

Other

2,233

2,593

Total Operating Expense

11,227

10,957

Total Noninterest Expense

28,531

26,745

Income before income taxes

12,360

15,304

Income tax expense

2,363

4,107

Net Income

$

9,997

$

11,197

SUPPLEMENTAL YEAR TO DATE FINANCIAL DATA

Nine Months Ended September 30,

2020

2019

KEY OPERATING RATIOS

Return on average assets ("ROAA")

0.68

%

0.87

%

Pre-tax Pre-Provision ROAA**

1.53

1.29

Return on average common equity ("ROACE")

7.06

9.22

Pre-tax Pre-Provision ROACE**

15.86

13.70

Average total equity to average total assets

9.66

9.38

Interest rate spread

3.19

3.07

Net interest margin

3.34

3.32

Cost of funds

0.63

1.24

Cost of deposits

0.55

1.07

Cost of debt

1.42

3.72

Efficiency ratio

55.95

61.66

Non-interest expense to average assets

1.95

2.07

Net operating expense to average assets

1.53

1.79

Avg. int-earning assets to avg. int-bearing liabilities

125.14

121.31

Net charge-offs to average portfolio loans

0.20

0.10

COMMON SHARE DATA

Basic net income per common share

$

1.70

$

2.01

Diluted net income per common share

1.70

2.01

Cash dividends paid per common share

0.38

0.38

Weighted average common shares outstanding:

Basic

5,892,107

5,559,622

Diluted

5,892,107

5,559,622

____________________________________
** Non-GAAP financial measure. See reconciliation of GAAP and NON-GAAP measures.


RECONCILIATION OF NON-GAAP MEASURES

Reconciliation of US GAAP total assets, common equity, common equity to assets and book value to Non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value.

This press release, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with generally accepted accounting principles, or GAAP. This financial information includes certain performance measures, which exclude intangible assets. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.

(dollars in thousands, except per share amounts)

September 30, 2020

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

Total assets

$

2,137,437

$

2,093,756

$

1,826,621

$

1,797,536

$

1,855,732

Less: intangible assets

Goodwill

10,835

10,835

10,835

10,835

10,835

Core deposit intangible

1,666

1,810

1,961

2,118

2,281

Total intangible assets

12,501

12,645

12,796

12,953

13,116

Tangible assets

$

2,124,936

$

2,081,111

$

1,813,825

$

1,784,583

$

1,842,616

Total common equity

$

192,850

$

189,442

$

185,267

$

181,494

$

167,409

Less: intangible assets

12,501

12,645

12,796

12,953

13,116

Tangible common equity

$

180,349

$

176,797

$

172,471

$

168,541

$

154,293

Common shares outstanding at end of period

5,911,940

5,911,715

5,910,064

5,900,249

5,583,492

GAAP common equity to assets

9.02

%

9.05

%

10.14

%

10.10

%

9.02

%

Non-GAAP tangible common equity to tangible assets

8.49

%

8.50

%

9.51

%

9.44

%

8.37

%

GAAP common book value per share

$

32.62

$

32.05

$

31.35

$

30.76

$

29.98

Non-GAAP tangible common book value per share

$

30.51

$

29.91

$

29.18

$

28.57

$

27.63

RECONCILIATION OF NON-GAAP MEASURES

Pre-Tax Pre-Provision ("PTPP") Income, PTPP Return on Average Assets ("ROAA") and PTPP Return on Average Common Equity ("ROACE")

We believe that pre-tax pre-provision income, which reflects our profitability before income taxes and loan loss provisions, allows investors to better assess our operating income and expenses in relation to our core operating revenue by removing the volatility that is associated with credit provisions and different state income tax rates for comparable institutions. We also believe that during a crisis such as the COVID-19 pandemic, this information is useful as the impact of the pandemic on the loan loss provisions of various institutions will likely vary based on the geography of the communities served by a particular institution.

Three Months Ended

Nine Months Ended

(dollars in thousands)

September 30, 2020

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

September 30, 2020

September 30, 2019

Net income (as reported)

$

3,799

$

3,450

$

2,748

$

4,075

$

3,693

$

9,997

$

11,197

Provision for loan losses

2,500

3,500

4,100

805

450

10,100

1,325

Income tax expenses

1,284

1,136

(57

)

1,558

1,397

2,363

4,107

Non-GAAP PTPP income

$

7,583

$

8,086

$

6,791

$

6,438

$

5,540

$

22,460

$

16,629

GAAP ROAA

0.73

%

0.69

%

0.61

%

0.91

%

0.84

%

0.68

%

0.87

%

Pre-tax Pre-Provision ROAA

1.46

%

1.62

%

1.51

%

1.43

%

1.26

%

1.53

%

1.29

%

GAAP ROACE

7.86

%

7.27

%

6.00

%

9.58

%

8.86

%

7.06

%

9.22

%

Pre-tax Pre-Provision ROACE

15.69

%

17.03

%

14.82

%

15.14

%

13.29

%

15.86

%

13.70

%

Average assets

$

2,071,487

$

1,995,552

$

1,797,426

$

1,797,182

$

1,755,022

$

1,955,247

$

1,725,339

Average equity

$

193,351

$

189,890

$

183,272

$

170,058

$

166,695

$

188,853

$

161,873



AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME

For the Three Months Ended September 30,

For the Three Months Ended

2020

2019

September 30, 2020

June 30, 2020

(dollars in thousands)

Average Balance

Interest

Average Yield/Cost

Average Balance

Interest

Average Yield/Cost

Average Balance

Interest

Average Yield/Cost

Average Balance

Interest

Average Yield/Cost

Assets

Interest-earning assets:

Commercial real estate

$

1,006,436

$

10,627

4.22

%

$

923,724

$

10,790

4.67

%

$

1,006,436

$

10,627

4.22

%

$

981,188

$

10,537

4.30

%

Residential first mortgages

157,039

1,188

3.03

%

160,609

1,486

3.70

%

157,039

1,188

3.03

%

168,958

1,397

3.31

%

Residential rentals

132,572

1,499

4.52

%

119,343

1,618

5.42

%

132,572

1,499

4.52

%

131,018

1,521

4.64

%

Construction and land development

38,861

448

4.61

%

31,200

459

5.88

%

38,861

448

4.61

%

39,856

445

4.47

%

Home equity and second mortgages

32,670

295

3.61

%

36,061

538

5.97

%

32,670

295

3.61

%

35,135

318

3.62

%

Commercial and equipment loans

116,472

1,205

4.14

%

116,329

1,635

5.62

%

116,472

1,205

4.14

%

131,186

1,554

4.74

%

SBA PPP loans

127,092

902

2.84

%

%

127,092

902

2.84

%

90,132

493

2.19

%

Consumer loans

1,102

12

4.36

%

945

16

6.77

%

1,102

12

4.36

%

1,119

12

4.29

%

Allowance for loan losses

(16,738

)

%

(11,046

)

%

(16,738

)

%

(15,597

)

%

Loan portfolio (1)

$

1,595,506

$

16,176

4.06

%

$

1,377,165

$

16,542

4.80

%

$

1,595,506

$

16,176

4.06

%

$

1,562,995

$

16,277

4.17

%

Taxable investment securities

218,305

1,143

2.09

%

232,707