MIDDLETOWN, Md., Oct. 25, 2022 /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, 2022 the Company earned net income of $5.41 million or $2.40 per share, an increase of $653 thousand or 13.7% compared to net income of $4.76 million or $2.11 per share for the nine months ended September 30, 2021. Third quarter 2022 net income was $1.52 million or $0.68 per share, a decrease of $550 thousand compared to second quarter 2022 net income of $2.07 million and a decrease of $737 thousand compared to $2.26 million for the third quarter of 2021.

Balance sheet growth remained strong during the third quarter with total assets growing by $37.1 million, up from $872.6 million as of June 30, 2022 to $909.7 million as of September 30, 2022.  Total assets were up $91.8 million on a year-to-date basis for 2022 compared to $817.9 million as of December 31, 2021. The asset growth for the quarter and for the year has been driven by strong loan growth.  Total loans grew $34.5 million from $692.8 million as of June 30, 2022 to $727.3 million as of September 30, 2022 and are up $129.3 million (excluding PPP loans) from December 31, 2021. Due to rapidly rising market rates and a decline in liquidity within the economy due to higher inflation, the third quarter saw increased competition for core deposit dollars within the banking industry. Overall funding for the balance sheet and loan growth as noted previously has come from: 1) the deployment of cash, with cash balances going from $41.3 million as of December 31, 2021 to $15.8 million as of September 30, 2022, 2) deposit growth of $41.6 million, with deposit balances increasing from $736.7 million as of December 31, 2021 to $778.3 million as of September 30, 2022 and 3) an increase in short-term borrowing from zero outstanding at December 31, 2021 and $5.0 million as of June 30, 2022 to $53.0 million as of September 30, 2022.

Earnings for the third quarter were impacted by increased interest expense related to the balance sheet funding as noted above. Interest expense increased from $630 thousand in the second quarter of 2022 to $1.3 million for the third quarter of 2022.  While funding costs increased, this was largely off-set by increased interest income directly related to the strong loan growth noted above and by the repricing of variable rate loan products within the portfolio, which were tied to the Fed rate increases during the quarter.  While net interest margin dropped quarter over quarter from 3.45% in the second quarter of 2022 to 3.35% in the third quarter of 2022, earning asset volumes helped to push overall net interest income higher for the quarter.  Most of the decrease in earnings comparing third quarter 2022 to second quarter 2022 can be attributed to lower non-interest income, down $133 thousand due to a slow-down in mortgage activity related to rising rates, and increased operating expenses, up $727 thousand for the quarter, related to higher employee costs, data processing expense and other operating expenses. Management continues to recognize the importance of the employee base to the success of the Company and in a proactive move to reward all employees and to help off-set higher cost of living due to high inflation, the Company increased salaries by 5% effective July 1, 2022 to all employees throughout the organization.  Increased communications expense related to volume and technology upgrades contributed to increased data processing expense on a quarter over quarter basis, up $126 thousand comparing the third quarter to second quarter 2022.  "Other" operating expense increased $372 thousand when comparing third quarter 2022 to second quarter 2022.   The second quarter expense was lower than normal due to a one-time credit adjustment to the provision for off-balance sheet credit lines of approximately $356 thousand to better represent unused line commitments.  Income tax expense was also slightly higher during the third quarter due to small adjustments related to the effective tax rate and deferred tax calculations.

In summary, strong earning asset growth for the quarter helped to off-set funding cost pressure and lower secondary mortgage revenue; however, higher operating expenses, due in part to a one-time credit in the second quarter, resulted in lower overall earnings for the third quarter of 2022 when compared to second quarter 2022 results.  Year-to-date through September 30, 2022 the Company has recorded net income of $5.4 million, the highest first nine-month earnings in the history of the Company.        

Subsequent Events:

On October 3, 2022 the Company announced the closing of its underwritten public offering of 600,000 shares of common stock at a public offering price of $21.00 per share.  The offering resulted in gross proceeds to the Company of approximately $12.6 million.  The net proceeds to the Company, after deducting underwriting discount and estimated offering expenses was approximately $11.4 million.

The Company is also providing an update on its previously reported data security incident.  On October 1, 2022, the Bank determined there was unauthorized access to a portion of its information technology system.  Within hours of the detection of the event, the Bank implemented a series of containment and remediation measures to address the situation.  The Bank also launched an investigation and engaged legal counsel, a computer forensic firm and other incident response professionals.  In connection with the investigation, the Bank subsequently became aware that the incident impacted files containing certain customer information.  The Bank is currently notifying all individuals identified to date, consistent with applicable laws whose information may have been impacted, including Bank customers and others whose information was contained in those files.  All impacted individuals will be offered free credit monitoring and identity theft protection services.  Currently, the Company does not believe that this data security incident will have a material adverse impact on its financial condition or results of operation.

Quarterly Highlights – 3Q22 vs 2Q22

• Tangible book value per share increased by $0.12 from $22.67 per share at June 30, 2022, to $22.79 as of September 30, 2022. The tangible book value increase was due to earnings of $1.52 million for the quarter partially off-set by additional adjustments to accumulated other comprehensive loss of $1.18 million for the third quarter.
• Gross loans increased by $34.5 million or 5.0% for the third quarter of 2022 compared to the second quarter of 2022. All PPP loan forgiveness was completed during the second quarter and there were no loan balances, interest income or fee income included in third quarter results related to the PPP loan program.
• Overall deposits were down $12.5 million for the third quarter from $790.8 million as of June 30, 2022 to $778.3 million as of September 30, 2022. Balances were down due to less liquidity in the economy due to higher inflation and less government stimulus along with higher market rates and competition for deposit dollars. Ending deposit balances included $10 million in brokered CDs, as of September 30 and June 30, 2022.
• Net interest margin was impacted by increased market pressure on rates as a result of the numerous Fed rate increases during the quarter and year-to-date. While loan growth has remained strong, deposit growth slowed during the third quarter and the Bank added wholesale funds to the balance sheet to fund the growth. As of September 30, 2022 the Bank had $50 million in short-term (less than 30-day maturities) FHLB advances outstanding and an additional $3 million in overnight fed funds outstanding. Net interest margin fell 10 basis points to 3.35% in the third quarter of 2022 from 3.45% in the second quarter of 2022; however, due to the increased volume in earning assets as noted previously, net interest income increased $193 thousand at the Company level.
• The allowance for loan losses to total loans ratio was 1.03% at September 30, 2022, no change from the June 30, 2022 ratio of 1.03%. The reserve ratio stayed consistent for the third quarter based on additional provision expense of $424 thousand directly related to the loan growth as noted above. Credit quality remained strong with non-performing assets to total assets at 0.20% as of September 30, 2022 and no loan charge offs for the third quarter of 2022.

Quarterly Highlights – 3Q22 vs 3Q21

• Tangible book value per share decreased $1.30 per share to $22.79 as of September 30, 2022 compared to $24.09 as of September 30, 2021. The tangible book value decrease was due to an increase in the accumulated other comprehensive loss to $10.1 million as of September 30, 2022 compared to $779 thousand as of September 30, 2021.
• Gross loans of $727.3 million as of September 30, 2022 were up $156.6 million or 27.4% compared to September 30, 2021, which includes PPP loan forgiveness of $17.9 million during the time period. Excluding PPP loans, core loan growth on a year-over-year basis was $174.4 million or 31.6%.
• Total deposits at September 30, 2022 were $778.3 million, an increase of $79.7 million or 11.4% compared to $698.6 million as of September 30, 2021. September 30, 2022 includes $10 million in brokered CD deposits compared to $244 thousand as of September 30, 2021.
• Net interest margin for the third quarter of 2022 was 3.35% at the Bank level compared 3.48% for the third quarter of 2021. Increased cost of funds for the third quarter of 2022 as noted earlier along with no PPP interest and fee income in the third quarter of 2022 compared to $698 thousand in the third quarter of 2021 accounts for most of the variance.
• The loan loss provision for the quarter ended September 30, 2022 was $424 thousand compared to a recovery of $243 thousand for the third quarter of 2021. The third quarter of 2021 included $550 thousand in recoveries related to an isolated charge-off in the second quarter of 2021, which allowed for the recovery in the third quarter of 2021.
• Non-interest income of $1.18 million for the third quarter of 2022 was down $508 thousand compared to $1.69 million for the third quarter of 2021. Lower refinancing and secondary mortgage activity due to the rising rate environment in 2022 account for most of the decrease.
• Non-interest expense for the third quarter of 2022 was $5.69 million, an increase of $682 thousand compared to $5.01 million for the third quarter of 2021. Increased employee costs and data processing fees to support the growth of the Company account for most of the increase along with year-over-year inflation related to general operating costs.

Dividend

A dividend of $0.04 per share was declared by the Board of Directors on October 21, 2022, for stockholders of record as of November 4, 2022, and payable on November 11, 2022.

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

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SOURCE Community Heritage Financial, Inc.