The Community Financial Corporation Announces Record Results of 1.18% Return on Average Assets for Fourth Quarter 2020
02/05/2021 - 09:28 AM
Fourth Quarter and Full Year 2020 Highlights
Net Income: Net income totaled $6.1 million for the quarter ended December 31, 2020, or $1.04 per diluted common share, a 42% increase per share compared to net income of $4.1 million or $0.73 per diluted common share for the quarter ended December 31, 2019.Overall Profitability: The Company’s return on average assets ("ROAA") and return on average common equity ("ROACE") were 1.18% and 12.51% for the three months ended December 31, 2020 compared to 0.91% and 9.58% for the three months ended December 31, 2019. The Company’s ROAA and ROACE were 0.81% and 8.46% for the twelve months ended December 31, 2020 compared to 0.88% and 9.32% for the twelve months ended December 31, 2019.Core Profitability: Pre-tax, pre-provision ("PTPP") ROAA and PTPP ROACE increased to 1.71% and 18.08% for the quarter ended December 31, 2020 compared to 1.43% and 15.14% for the quarter ended December 31, 2019. PTPP ROAA and ROACE were 1.58% and 16.43% for the year ended December 31, 2020 compared to 1.32% and 14.07% for the same period in 2019.Loan Deferrals: At December 31, 2020, COVID-19 deferred loans decreased to $35.4 million, 1.75% of assets, or 2.35% of gross loans, excluding U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans.Provision: The Company's provision for loan losses ("PLL") decreased to $0.6 million during the quarter ended December 31, 2020 compared to $2.5 million in the previous quarter. Economic uncertainty from the COVID-19 pandemic resulted in the Company increasing the provision to $10.7 million in 2020 from $2.1 million in 2019.Capital Infusion: $20.0 million of 4.75% subordinated debt was issued on October 14, 2020.Debt Retirement: The Company used excess liquidity to decrease debt $100.9 million in the fourth quarter of 2020, paying off $85.9 million of the Federal Reserve Paycheck Protection Program Liquidity Facility ("PPPLF") and higher cost Federal Home Loan Bank ("FHLB") advances of $15.0 million. WALDORF, Md., Feb. 05, 2021 (GLOBE NEWSWIRE) -- The Community Financial Corporation (NASDAQ: TCFC) (the “Company”), the holding company for Community Bank of the Chesapeake (the “Bank”), reported its results of operations for the fourth quarter and year ended December 31, 2020. Net income for the three months ended December 31, 2020 of $6.1 million, or $1.04 per diluted common share compared with net income of $3.8 million, or $0.64 per diluted common share for the third quarter of 2020, and net income of $4.1 million, or $0.73 per diluted common share for the quarter ended December 31, 2019. The Company reported net income for the year ended December 31, 2020 of $16.1 million, or $2.74 per diluted common share compared to a net income of $15.3 million, or $2.75 per diluted common share for the year ended December 31, 2019. As a result of the COVID-19 pandemic, year to date 2020 earnings were impacted by an increased PLL of $10.7 million compared to $2.1 million for the year ended December 31, 2019.
"The 2020 COVID pandemic presented unprecedented challenges, and I could not be prouder of our team’s response. We helped our community and customers navigate economic uncertainty by originating Paycheck Protection Program loans and providing payment deferrals on our own portfolio loans. At the same time, we increased core profitability by maintaining a stable net interest margin, improving our funding composition, adding non-interest income and controlling expenses. To fortify our balance sheet in light of COVID-19 pandemic credit concerns we increased our allowance for loans losses, resolved multiple OREO assets and strengthened regulatory capital by issuing subordinated debt. We believe the Bank is well-positioned to address potential future charge-offs related to the COVID-19 pandemic. We are optimistic that the Company's 2020 core profitability will result in increased overall profitability in 2021," stated William J. Pasenelli, President and Chief Executive Officer. "Due to the Company's strong balance sheet and increased profitability we intend to increase common stock repurchases in 2021 and increase our quarterly per share dividend 20% to $0.15 for first quarter dividends paid in the second quarter of 2021."
"At December 31, 2020, COVID-19 deferred loans decreased to $35.4 million, 2.35% of portfolio loans or 1.75% of assets. We are encouraged that deferred loans at quarter end were in the lower range of our estimated 2% to 4% reported last quarter. During the fourth quarter, deferral customers returned to normal payments as scheduled with very few exceptions. Additional deferrals granted during the fourth quarter were to customers in industries that continue to require support to weather the pandemic. The overall improvement has been driven by the resilience of our local economy which is tied to the federal government. We will continue to support our communities with the next round of US SBA PPP relief passed by Congress in December 2020," stated James M. Burke, TCFC Executive Vice President and Bank President. "The addition of new customers throughout the pandemic contributed to our success in increasing lower cost transaction deposits in every year the last five years. Non-interest bearing accounts and transaction accounts increased to 20.7% and 79.7% of deposits at December 31, 2020 from 16.0% and 73.9% at December 31, 2019. We will continue to evaluate and, where applicable, rationalize our branch structure and physical footprint while still providing an optimal customer experience."
On October 20, 2020, the Board approved the 2020 stock repurchase plan which authorized the Company to repurchase up to 300,000 shares of the Company’s outstanding common stock using up to $7.0 million of the proceeds the Company raised in its recently completed $20.0 million subordinated debt offering. At that time, the Company expected to limit the capital allocated to repurchases during the fourth quarter of 2020 and the first quarter of 2021 to $0.3 million per quarter, for an aggregate of $0.6 million, while we monitored the impact of the pandemic on asset quality. Based on management's assessment of the adequacy of capital and loan loss reserves at December 31, 2020, the Board has approved up to $1.0 million of repurchases in the first quarter of 2021. If conditions continue to merit repurchases the Company intends to repurchase between $1.0 million and $2.0 million per quarter during 2021.
Results of Operations
(UNAUDITED) Three Months Ended December 31, (dollars in thousands) 2020 2019 $ Change % Change Interest and dividend income $ 17,913 $ 18,279 $ (366 ) (2.0 ) % Interest expense 1,941 4,566 (2,625 ) (57.5 ) Net interest income 15,972 13,713 2,259 16.5 Provision for loan losses 600 805 (205 ) (25.5 ) Noninterest income 2,370 2,213 157 7.1 Noninterest expense 9,472 9,488 (16 ) (0.2 ) Income before income taxes 8,270 5,633 2,637 46.8 Income tax (income) expense 2,131 1,558 573 36.8 Net income $ 6,139 $ 4,075 $ 2,064 0.5 %
Net interest income increased as funding costs decreased at a faster rate than interest-earning asset repricing. The Company recorded $10.1 million in the provision for loan losses for the nine months ended September 30, 2020 due to the economic uncertainty of the COVID-19 pandemic. The provision for loan losses moderated in the fourth quarter of 2020 and management believes the ALLL at December 31, 2020 is adequate. Noninterest income increased primarily due to increased gains on the sale of investment securities partially offset by lower interest rate protection referral fee income. Noninterest expense was comparable for the periods as lower compensation and benefits and other expenses were offset by increased OREO valuation allowances and FDIC insurance.
(UNAUDITED) Year Ended December 31, (dollars in thousands) 2020 2019 $ Change % Change Interest and dividend income $ 71,073 $ 72,453 $ (1,380 ) (1.9 ) % Interest expense 10,156 18,919 (8,763 ) (46.3 ) Net interest income 60,917 53,534 7,383 13.8 Provision for loan losses 10,700 2,130 8,570 402.4 Noninterest income 8,416 5,766 2,650 46.0 Noninterest expense 38,003 36,233 1,770 4.9 Income before income taxes 20,630 20,937 (307 ) (1.5 ) Income tax expense 4,494 5,665 (1,171 ) (20.7 ) Net income $ 16,136 $ 15,272 $ 864 5.7 %
Net interest income increased in 2020 as funding costs decreased at a faster rate than interest-earning asset repricing. The economic uncertainty of the COVID-19 pandemic increased the provision for loan losses and noninterest expense. The increase in noninterest expense was primarily attributable to OREO valuation adjustments in connection with sales. Noninterest income increased primarily due to gains on the sale of investment securities and interest rate protection referral fee income. 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 $2.3 million or 16.5% for the three months ended December 31, 2020 compared to the three months ended December 31, 2019. Net interest margin of 3.40% for the three months ended December 31, 2020 increased 11 basis points from 3.29% 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 and accelerated loan fee recognition following the forgiveness of PPP loans.
Net interest income increased $7.4 million or 13.8% for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019. Net interest margin of 3.36% for the twelve months ended December 31, 2020 was five basis points higher than the 3.31% for the twelve months ended December 31, 2019. The increase in net interest margin from the twelve months of 2019 resulted primarily from the Company’s interest earning asset yields decreasing at a slower rate than overall funding costs. Interest earning asset yields decreased 56 basis points from 4.48% for the twelve months ended December 31, 2019 to 3.92% for the twelve months ended December 31, 2020. The Company’s cost of funds decreased 65 basis points from 1.22% for the twelve months ended December 31, 2019 to 0.57% for the twelve months ended December 31, 2020.
The sharp decline in interest rates in 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. In 2020, due to a slightly liability-sensitive balance sheet, the Company increased its net interest margin in the first quarter. Margins were stable during the second and third quarters and slightly increased during the fourth quarter of 2020 after adjusting for PPP loan and funding activity. Net interest margin increased from 3.27% for the three months ended September 30, 2020 to 3.40% for the three months ended December 31, 2020.
FHLB advances of $30.0 million were repaid early with a 2.2% average rate in the last six months of 2020. Prepayment fees totaled $0.6 million, increasing interest expense $0.1 million and $0.5 million in the three months ended September 30, 2020 and December 31, 2020, respectively.
Some compression of our core net interest margin is probable in 2021 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 $0.2 million or 7.1% for the three months ended December 31, 2020 compared to the three months ended December 31, 2019. The increase for the comparable periods was primarily due to gains on the sale of investment securities partially offset by decrease interest rate protection referral fee income. Noninterest income as a percentage of average assets was 0.46% and 0.49%, respectively, for the three months ended December 31, 2020 and 2019.
Noninterest income increased $2.7 million or 46.0% for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019. The increase was primarily due to increased interest rate protection referral fee income of $1.5 million and increased gains on the sale of securities of $1.2 million. Noninterest income as a percentage of assets was 0.42% and 0.33%, respectively, for the twelve months ended December 31, 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 for the three months ended December 31, 2020 was comparable to the three months ended December 31, 2019. Compensation and benefits decreased due to adjustments to incentive compensation accruals. These reductions were partially offset by increases in FDIC insurance and OREO. The increase in FDIC insurance for the fourth quarter of 2020 was due to the application of a $0.2 million FDIC insurance credit taken in the fourth quarter of 2019. Increased OREO expenses reflect management's actions in 2020 to reduce non-performing assets. The Company's projected quarterly expense run rate for the first quarter of 2021 remains between $9.2-$9.4 million.
The Company’s efficiency ratio was 51.64% for the three months ended December 31, 2020 compared to 59.58% for the three months ended December 31, 2019. The Company’s net operating expense ratio was 1.37% for the three months ended December 31, 2020 compared to 1.62% for the three months ended December 31, 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 4.9% for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019. The increase in noninterest expense for the comparable periods was primarily due to increased OREO expenses. In addition, 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 compensation and benefits, occupancy, advertising, depreciation and other expenses. Noninterest expense decreased $0.5 million or 1.3% for the comparable periods if OREO expenses were excluded. Data processing cost increases 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. Year to date compensation and benefits for the twelve months ended decreased a total of $0.9 million primarily due to the allocation of $0.5 million of deferred costs for U.S. SBA PPP loans originated during the second and third quarters of 2020.
The Company’s efficiency ratio was 54.81% for the twelve months ended December 31, 2020 compared to 61.10% for the twelve months ended December 31, 2019. The Company’s net operating expense ratio was 1.49% at December 31, 2020 compared to 1.75% at December 31, 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 year ended December 31, 2020 the effective tax rate was 21.8%.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 year ended December 31, 2020 split between the apportionment adjustment and a normalized 2020 income tax provision:
(UNAUDITED) For the Year Ended December 31, 2020 (dollars in thousands) Tax Provision Effective Tax Rate Income tax apportionment adjustment $ (743 ) (3.6 ) % Income taxes before apportionment adjustment 5,237 25.4 % Income tax expense as reported $ 4,494 21.8 % Income before income taxes $ 20,630
Balance Sheet
Assets
Total assets increased $228.9 million, or 12.7%, to $2.0 billion at December 31, 2020 compared to total assets of $1.8 billion at December 31, 2019, primarily due to increased net loans of $149.0 million with U.S. SBA PPP loans accounting for $108.0 million of the increase. In addition, investments increased $37.4 million, OREO decreased $4.7 million, cash increased $44.6 million and all other assets increased $2.6 million. The Company’s loan pipeline was approximately $134.0 million at December 31, 2020.
During the fourth quarter of 2020, total net loans, which include portfolio loans and U.S. SBA PPP loans, decreased 3.2% annualized or $13.0 million from $1,607.1 million at September 30, 2020 to $1,594.1 million at December 31, 2020. Gross portfolio loans increased 2.1% annualized or $7.7 million from $1,496.5 million at September 30, 2020 to $1,504.3 million at December 31, 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 December 31, 2020 and December 31, 2019 were $695.8 million or 316% and $639.1 million or 320%, respectively. Construction loans as a percentage of risk-based capital at December 31, 2020 and December 31, 2019 were $139.2 million or 63% and $147.2 million or 74%, respectively. Regulatory loan concentrations decreased in the fourth quarter of 2020 from the investment of $10.0 million in the Bank from the issuance of subordinated debt of $20.0 million on October 14, 2020.
Funding
The Bank uses retail deposits and wholesale funding. Retail deposits continue to be the most significant source of funds totaling $1,737.6 million or 98.0% of funding at December 31, 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 $35.3 million or 2.0% of funding at December 31, 2020 compared to $46.4 million or 3.0% of funding at December 31, 2019.
Total deposits increased $233.8 million or 15.5% at December 31, 2020 compared to December 31, 2019. The increase comprised a $274.1 million increase to transaction deposits offsetting a $40.3 million decrease to time deposits. Non-interest-bearing demand deposits increased $120.9 million or 50.1% at December 31, 2020, representing 20.74% of deposits, compared to 15.95% of deposits at December 31, 2019. The Bank increased on-balance sheet liquidity 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.
Stockholders' Equity and Regulatory Capital
During the twelve months ended December 31, 2020, total stockholders’ equity increased $16.5 million due to net income of $16.1 million, an increase in accumulated other comprehensive income of $3.0 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 $0.5 million. These increases to stockholders’ equity were partially offset by common dividends paid of $2.8 million and stock repurchases of $0.3 million. The Company’s ratio of tangible common equity ("TCE") to tangible assets decreased to 9.22% at December 31, 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 which 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 December 31, 2020 with a Tier 1 capital to average assets ("leverage ratio") of 9.56% at December 31, 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 Company’s outstanding $23.0 million of 6.25% fixed-to-floating rate subordinated notes.
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 is 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.
Asset Quality
COVID-19 Loan Programs
While the outbreak of COVID-19 adversely impacted a range of industries in the Company's footprint, we have taken steps to protect the health and well-being of our employees and customers and to assist customers who have been impacted by the COVID-19 pandemic. The Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law on March 27, 2020. There have been additional clarifications to regulation and legislation since the original law was passed, including the recent legislation that authorized another round of federal government funding for US SBA PPP loans in December 2020.
During 2020 the Company originated 971 US SBA PPP loans with original balances of $140.9 million. As of December 31, 2020, US SBA PPP there were 867 loans with outstanding balances of $110.3 million. We are presently assisting our customers with the additional round of funding which began in January 2021. No credit issues are anticipated with US SBA PPP loans as they are guaranteed by the SBA and the Bank's allowance for loan loss does not include an allowance for US SBA PPP loans.
Beginning in April of 2020, the Company added COVID-19 payment deferral programs for impacted customers. 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 December 31, 2020, $35.4 million or 2.4% of gross portfolio loans had deferral agreements, down $216.1 million from $251.5 million or 16.8% of total gross portfolio loans as of September 30, 2020. This decline was in line with management's estimate of 2% to 4% of loans made at the end of the third quarter. All COVID-19 deferred loans were current prior to the crisis and will not be considered delinquent loans or troubled debt restructures ("TDRs") upon completion of the modification agreements due to provisions in the CARES Act and regulations that permit U.S. financial institutions to temporarily suspend U.S. GAAP requirements to treat such loan modifications as TDRs.
At December 31, 2020, deferrals were reflected in the Company’s asset quality measures for credit classifications (i.e., pass, special mention, substandard, doubtful) and accrual status (i.e., accrual vs. non-accrual). Below are schedules that provide information on COVID-19 deferred loans as of December 31, 2020:
(UNAUDITED) COVID-19 Deferred Loans December 31, 2020 Accrual Loans Non-Accrual Loans (dollars in thousands) Loan Balances % of Deferred Loans % of Gross Portfolio Loans Loan Balances Number of Loans Loan Balances Number of Loans Commercial real estate $ 29,883 84.45 % 1.98 % $ 26,500 10 $ 3,382 4 Residential first mortgages 1,514 4.28 0.10 1,514 3 — — Commercial equipment 3,987 11.27 0.27 3,987 17 — — Total $ 35,384 100.00 % 2.35 % $ 32,001 30 $ 3,382 4
COVID-19 Deferred Loans - Next Payment Due by Month (UNAUDITED) (dollars in thousands) Loan Balances % Number of Loans February-21 $ 4,024 11.38 % 5 March-21 8,956 25.31 5 April-21 638 1.80 3 May-21 4,123 11.65 3 June-21 12,821 36.23 5 July-21 1,317 3.72 2 December-21 3,505 9.91 11 Total $ 35,384 100.00 % 34
COVID-19 Deferred Loans by NAICS Industry (UNAUDITED) % of Deferred Loans % of Gross Portfolio Loans (dollars in thousands) December 31, 2020 Number of Loans Real Estate Rental and Leasing $ 8,639 5 24.41 % 0.57 % Accommodation and Food Services 17,210 5 48.64 1.14 Arts, Entertainment, and Recreation 3,716 4 10.50 0.25 Transportation and Warehousing 3,505 11 9.91 0.23 Retail Trade 395 5 1.12 0.03 Other Industries, Residential Mortgages and Consumer ** 1,919 4 5.42 0.13 Total $ 35,384 34 100.00 % 2.35 % ** No NAICS code has been assigned.
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. ALLL levels increased to 1.29% of portfolio loans at December 31, 2020 compared to 0.75% at December 31, 2019. At and for the year ended December 31, 2020, the Company's ALLL increased $8.5 million or 77.5% to $19.4 million at December 31, 2020 from $10.9 million at December 31, 2019.
The Company recorded a $0.6 million and $10.7 million PLL for the three and twelve months ended December 31, 2020 compared to $0.8 million and $2.1 million for the three and twelve months ended December 31, 2019. During 2020, net charge-offs also increased from the prior year 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 loans that were part of the COVID-19 deferral program in 2020 are more likely to default in the future and that the identification and resolution of problem credits could be delayed. In our evaluation of current and previously deferred loans, we considered the length of the deferral period, the type and amount of collateral and customer industries. 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 December 31, 2020, there were $3.4 million of COVID-19 deferred loans deemed to be non-accrual and substandard based on reviews.
Management believes that the allowance is adequate at December 31, 2020. The ALLL as a percent of total loans may increase or decrease in future periods based on the success or failure of economic recovery coming out of COVID-19 pandemic.
Non-Performing Assets
Classified assets decreased $12.3 million from $34.6 million at December 31, 2019 to $22.4 million at December 31, 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. During the year ended December 31, 2020, the Company offered COVID-19 deferrals to one substandard relationship that was current as of December 31, 2019. As of December 31, 2020 this relationship consisted of four loans totaling $3.4 million that were also considered non-accrual loans.
Non-accrual loans and OREO to total gross portfolio loans and OREO decreased 33 basis points from 1.75% at December 31, 2019 to 1.42% at December 31, 2020. Non-accrual loans, OREO and TDRs to total assets decreased 38 basis points from 1.46% at December 31, 2019 to 1.08% at December 31, 2020. Non-accrual loans increased $0.3 million from $17.9 million at December 31, 2019 to $18.2 million at December 31, 2020. Non-accrual loans of $6.3 million (34%) were current with all payments of principal and interest with specific reserves of $0.1 million at December 31, 2020. Delinquent non-accrual loans were $11.9 million (66%) with specific reserves of $1.3 million at December 31, 2020.
The OREO balance decreased $4.7 million from $7.8 million at December 31, 2019 to $3.1 million at December 31, 2020.
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 $2.0 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 Company’s 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 Company’s 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 Company’s 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,” "probable" 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 Company’s and Community Bank of the Chesapeake’s future growth and management’s 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 management’s 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 any acquisition that we have undertaken or may undertake in the future; may not be realized within the expected time frames; changes in The Community Financial Corporation or Community Bank of the Chesapeake’s strategy, costs or difficulties related to integration matters which 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 Company’s Annual Report on Form 10-K for the Year Ended December 31, 2019, and in its other Reports filed with the Securities and Exchange Commission (the “SEC”). The Company’s 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 SEC’s 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 December 31, 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 (UNAUDITED) CONDENSED CONSOLIDATED INCOME STATEMENT
(dollars in thousands, except per share amounts) Three Months Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Interest and Dividend Income Loans, including fees $ 16,776 $ 16,176 $ 16,277 $ 16,502 $ 16,565 Interest and dividends on securities 1,091 1,269 1,341 1,469 1,508 Interest on deposits with banks 46 38 20 68 206 Total Interest and Dividend Income 17,913 17,483 17,638 18,039 18,279 Interest Expense Deposits 1,166 1,534 1,937 3,044 3,777 Short-term borrowings — 14 28 69 65 Long-term debt 775 567 449 573 724 Total Interest Expense 1,941 2,115 2,414 3,686 4,566 Net Interest Income ("NII") 15,972 15,368 15,224 14,353 13,713 Provision for loan losses 600 2,500 3,500 4,100 805 NII After Provision For Loan Losses 15,372 12,868 11,724 10,253 12,908 Noninterest Income Loan appraisal, credit, and miscellaneous charges 76 49 35 14 131 Gain on sale of asset — 6 — — — Net gains on sale of investment securities 714 229 112 329 226 Unrealized gains (losses) on equity securities (14 ) — 40 75 (22 ) Loss on premises and equipment held for sale — — — — (1 ) Income from bank owned life insurance 220 222 220 219 223 Service charges 960 839 709 982 916 Referral fee income 414 321 1,143 502 740 Total Noninterest Income 2,370 1,666 2,259 2,121 2,213 Noninterest Expense Compensation and benefits 4,552 5,099 4,714 5,188 5,408 OREO valuation allowance and expenses 897 421 1,100 782 212 Sub Total 5,449 5,520 5,814 5,970 5,620 Operating Expenses Occupancy expense 806 734 736 734 812 Advertising 145 129 130 121 152 Data processing expense 829 990 924 928 780 Professional fees 658 652 477 626 649 Depreciation of premises and equipment 154 142 151 158 165 Telephone communications 49 43 53 43 39 Office supplies 28 31 30 31 45 FDIC Insurance 260 249 260 170 (3 ) Core deposit intangible amortization 139 144 151 157 163 Other 955 817 671 745 1,066 Total Operating Expenses 4,023 3,931 3,583 3,713 3,868 Total Noninterest Expense 9,472 9,451 9,397 9,683 9,488 Income before income taxes 8,270 5,083 4,586 2,691 5,633 Income tax expense 2,131 1,284 1,136 (57 ) 1,558 Net Income $ 6,139 $ 3,799 $ 3,450 $ 2,748 $ 4,075
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued CONDENSED CONSOLIDATED BALANCE SHEETS
(Audited) (dollars in thousands, except per share amounts) December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Assets Cash and due from banks $ 56,887 $ 93,130 $ 103,914 $ 15,498 $ 25,065 Federal funds sold — 69,431 29,456 — — Interest-bearing deposits with banks 20,178 25,132 13,051 10,344 7,404 Securities available for sale ("AFS"), at fair value 246,105 229,620 234,982 214,163 208,187 Equity securities carried at fair value through income 4,855 4,851 4,831 4,768 4,669 Non-marketable equity securities held in other financial institutions 207 209 209 209 209 Federal Home Loan Bank ("FHLB") stock - at cost 2,777 3,415 4,691 5,627 3,447 Net U.S. Small Business Administration ("SBA") Paycheck Protection ("PPP") Loans 107,960 127,811 125,638 — — Portfolio Loans Receivable net of allowance for loan losses of $19,424, $18,829, $16,319, $15,061, and $10,942 1,486,115 1,479,313 1,478,498 1,477,087 1,445,109 Net Loans 1,594,075 1,607,124 1,604,136 1,477,087 1,445,109 Goodwill 10,835 10,835 10,835 10,835 10,835 Premises and equipment, net 20,271 20,671 20,972 21,305 21,662 Premises and equipment held for sale 430 430 430 430 430 Other real estate owned ("OREO") 3,109 3,998 3,695 6,338 7,773 Accrued interest receivable 8,717 8,975 6,773 5,077 5,019 Investment in bank owned life insurance 38,061 37,841 37,619 37,399 37,180 Core deposit intangible 1,527 1,666 1,810 1,961 2,118 Net deferred tax assets 7,909 7,307 6,565 6,421 6,168 Right of use assets - operating leases 7,831 8,005 8,132 8,257 8,382 Other assets 2,665 4,797 1,655 902 3,879 Total Assets $ 2,026,439 $ 2,137,437 $ 2,093,756 $ 1,826,621 $ 1,797,536 Liabilities and Stockholders' Equity Liabilities Deposits Noninterest-bearing deposits $ 362,079 $ 360,839 $ 356,196 $ 254,114 $ 241,174 Interest-bearing deposits 1,383,523 1,418,767 1,314,168 1,258,475 1,270,663 Total deposits 1,745,602 1,779,606 1,670,364 1,512,589 1,511,837 Short-term borrowings — — 5,000 27,000 5,000 Long-term debt 27,302 42,319 67,336 67,353 40,370 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 - 4.75% and 6.25% 19,526 — — — 23,000 Lease liabilities - operating leases 8,088 8,193 8,296 8,397 8,495 Accrued expenses and other liabilities 15,908 16,576 14,517 14,015 15,340 Total Liabilities 1,828,426 1,944,587 1,904,314 1,641,354 1,616,042 Stockholders' Equity Common stock 59 59 59 59 59 Additional paid in capital 95,965 95,799 95,687 95,581 95,474 Retained earnings 97,944 92,814 89,781 87,070 85,059 Accumulated other comprehensive income 4,504 4,780 4,517 3,159 1,504 Unearned ESOP shares (459 ) (602 ) (602 ) (602 ) (602 ) Total Stockholders' Equity 198,013 192,850 189,442 185,267 181,494 Total Liabilities and Stockholders' Equity $ 2,026,439 $ 2,137,437 $ 2,093,756 $ 1,826,621 $ 1,797,536 Common shares issued and outstanding 5,903,613 5,911,940 5,911,715 5,910,064 5,900,249
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued SELECTED FINANCIAL INFORMATION AND RATIOS
(dollars in thousands, except per share amounts) Three Months Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 KEY OPERATING RATIOS Return on average assets ("ROAA") 1.18 % 0.73 % 0.69 % 0.61 % 0.91 % Pre-tax Pre-Provision ROAA** 1.71 1.46 1.62 1.51 1.43 Return on average common equity ("ROACE") 12.51 7.86 7.27 6.00 9.58 Pre-tax Pre-Provision ROACE** 18.08 15.69 17.03 14.82 15.14 Average total equity to average total assets 9.46 9.33 9.52 10.20 9.46 Interest rate spread 3.29 3.15 3.21 3.21 3.05 Net interest margin 3.40 3.27 3.34 3.43 3.29 Cost of funds 0.42 0.46 0.54 0.93 1.14 Cost of deposits 0.26 0.37 0.48 0.82 1.00 Cost of debt 3.45 1.16 1.06 2.61 3.19 Efficiency ratio 51.64 55.48 53.75 58.78 59.58 Noninterest expense to average assets 1.83 1.82 1.88 2.15 2.11 Net operating expense to average assets 1.37 1.50 1.43 1.68 1.62 Avg. int-earning assets to avg. int-bearing liabilities 126.18 125.40 125.51 124.44 122.50 Net charge-offs to average portfolio loans — — 0.61 — 0.32 COMMON SHARE DATA Basic net income per common share $ 1.04 $ 0.64 $ 0.59 $ 0.47 $ 0.73 Diluted net income per common share 1.04 0.64 0.59 0.47 0.73 Cash dividends paid per common share 0.125 0.125 0.125 0.125 0.125 Weighted average common shares outstanding: Basic 5,892,751 5,895,074 5,894,009 5,886,981 5,563,455 Diluted 5,894,494 5,895,074 5,894,009 5,886,981 5,563,455 ASSET QUALITY Total assets $ 2,026,439 $ 2,137,437 $ 2,093,756 $ 1,826,621 $ 1,797,536 Gross portfolio loans (1) 1,504,275 1,496,532 1,492,745 1,490,089 1,454,172 Classified assets 22,358 24,600 25,115 33,489 34,636 Allowance for loan losses 19,424 18,829 16,319 15,061 10,942 Past due loans - 31 to 89 days 179 838 5,843 7,921 549 Past due loans >=90 days 12,144 17,230 20,072 12,877 12,778 Total past due loans (2) (3) 12,323 18,068 25,915 20,798 13,327 Non-accrual loans (4) 18,222 20,148 22,896 16,349 17,857 Accruing troubled debt restructures ("TDRs") 572 573 593 641 650 Other real estate owned ("OREO") 3,109 3,998 3,695 6,338 7,773 Non-accrual loans, OREO and TDRs $ 21,903 $ 24,719 $ 27,184 $ 23,328 $ 26,280
** 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 January 31, 2021 there were zero loans that were reported as delinquent as of December 31, 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 December 31, 2020 and December 31, 2019, the Company had current non-accrual loans of $6.3 million and $5.1 million, respectively.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued SELECTED FINANCIAL INFORMATION AND RATIOS
(dollars in thousands, except per share amounts) Three Months Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 ASSET QUALITY RATIOS (1) Classified assets to total assets 1.10 % 1.15 % 1.20 % 1.83 % 1.93 % Classified assets to risk-based capital 9.61 11.89 12.49 17.00 16.21 Allowance for loan losses to portfolio loans 1.29 1.26 1.09 1.01 0.75 Allowance for loan losses to non-accrual loans 106.60 93.45 71.27 92.12 61.28 Past due loans - 31 to 89 days to portfolio loans 0.01 0.06 0.39 0.53 0.04 Past due loans >=90 days to portfolio loans 0.81 1.15 1.34 0.86 0.88 Total past due (delinquency) to portfolio loans 0.82 1.21 1.74 1.40 0.92 Non-accrual loans to portfolio loans 1.21 1.35 1.53 1.10 1.23 Non-accrual loans and TDRs to portfolio loans 1.25 1.38 1.57 1.14 1.27 Non-accrual loans and OREO to total assets 1.05 1.13 1.27 1.24 1.43 Non-accrual loans and OREO to portfolio loans and OREO 1.42 1.61 1.78 1.52 1.75 Non-accrual loans, OREO and TDRs to total assets 1.08 1.16 1.30 1.28 1.46 COMMON SHARE DATA Book value per common share $ 33.54 $ 32.62 $ 32.05 $ 31.35 $ 30.76 Tangible book value per common share** 31.45 30.51 29.91 29.18 28.57 Common shares outstanding at end of period 5,903,613 5,911,940 5,911,715 5,910,064 5,900,249 OTHER DATA Full-time equivalent employees 189 189 194 196 194 Branches 12 12 12 12 12 Loan Production Offices 4 4 4 4 5 CAPITAL RATIOS Tier 1 capital to average assets 9.56 % 9.73 % 9.76 % 10.20 % 10.08 % Tier 1 common capital to risk-weighted assets 11.47 11.11 11.12 11.04 11.11 Tier 1 capital to risk-weighted assets 12.23 11.87 11.89 11.82 11.91 Total risk-based capital to risk-weighted assets 14.69 13.06 12.94 12.80 14.16 Common equity to assets 9.77 9.02 9.05 10.14 10.10 Tangible common equity to tangible assets ** 9.22 8.49 8.50 9.51 9.44
** 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 (UNAUDITED) CONDENSED CONSOLIDATED INCOME STATEMENT
(Audited) (dollars in thousands, except per share amounts) Three Months Ended December 31, Years Ended December 31, 2020 2019 2020 2019 Interest and Dividend Income Loans, including fees $ 16,776 $ 16,565 $ 65,731 $ 65,602 Interest and dividends on securities 1,091 1,508 5,170 6,414 Interest on deposits with banks 46 206 172 437 Total Interest and Dividend Income 17,913 18,279 71,073 72,453 Interest Expense Deposits 1,166 3,777 7,681 15,378 Short-term borrowings — 65 111 774 Long-term debt 775 724 2,364 2,767 Total Interest Expense 1,941 4,566 10,156 18,919 Net Interest Income ("NII") 15,972 13,713 60,917 53,534 Provision for loan losses 600 805 10,700 2,130 NII After Provision For Loan Losses 15,372 12,908 50,217 51,404 Noninterest Income Loan appraisal, credit, and misc. charges 76 131 174 335 Gain on sale of assets — — 6 — Net gains on sale of investment securities 714 226 1,384 226 Unrealized gains (losses) on equity securities (14 ) (22 ) 101 134 Loss on premises and equipment held for sale — (1 ) — (1 ) Income from bank owned life insurance 220 223 881 885 Service charges 960 916 3,490 3,308 Referral fee income 414 740 2,380 879 Total Noninterest Income 2,370 2,213 8,416 5,766 Noninterest Expense Compensation and benefits 4,552 5,408 19,553 20,445 OREO valuation allowance and expenses 897 212 3,200 963 Sub-total 5,449 5,620 22,753 21,408 Operating Expense Occupancy expense 806 812 3,010 3,101 Advertising 145 152 525 762 Data processing expense 829 780 3,671 3,048 Professional fees 658 649 2,413 2,196 Depreciation of premises and equipment 154 165 605 685 Telephone communications 49 39 188 203 Office supplies 28 45 120 149 FDIC Insurance 260 (3 ) 939 334 Core deposit intangible amortization 139 163 591 688 Other 955 1,066 3,188 3,659 Total Operating Expense 4,023 3,868 15,250 14,825 Total Noninterest Expense 9,472 9,488 38,003 36,233 Income before income taxes 8,270 5,633 20,630 20,937 Income tax expense 2,131 1,558 4,494 5,665 Net Income $ 6,139 $ 4,075 $ 16,136 $ 15,272
SUPPLEMENTAL YEAR TO DATE FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 2020 2019 KEY OPERATING RATIOS Return on average assets ("ROAA") 0.81 % 0.88 % Pre-tax Pre-Provision ROAA** 1.58 1.32 Return on average common equity ("ROACE") 8.46 9.32 Pre-tax Pre-Provision ROACE** 16.43 14.07 Average total equity to average total assets 9.61 9.40 Interest rate spread 3.22 3.06 Net interest margin 3.36 3.31 Cost of funds 0.57 1.22 Cost of deposits 0.47 1.06 Cost of debt 1.74 3.59 Efficiency ratio 54.81 61.10 Noninterest expense to average assets 1.91 2.08 Net operating expense to average assets 1.49 1.75 Avg. int-earning assets to avg. int-bearing liabilities 125.41 121.62 Net charge-offs to average portfolio loans (1) 0.15 0.16 COMMON SHARE DATA Basic net income per common share $ 2.74 $ 2.75 Diluted net income per common share 2.74 2.75 Cash dividends paid per common share 0.50 0.50 Weighted average common shares outstanding: Basic 5,892,269 5,560,588 Diluted 5,893,559 5,560,588
____________________________________ ** 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.
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
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) December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Total assets $ 2,026,439 $ 2,137,437 $ 2,093,756 $ 1,826,621 $ 1,797,536 Less: Intangible assets Goodwill 10,835 10,835 10,835 10,835 10,835 Core deposit intangible 1,527 1,666 1,810 1,961 2,118 Total intangible assets 12,362 12,501 12,645 12,796 12,953 Tangible assets $ 2,014,077 $ 2,124,936 $ 2,081,111 $ 1,813,825 $ 1,784,583 Total common equity $ 198,013 $ 192,850 $ 189,442 $ 185,267 $ 181,494 Less: Intangible assets 12,362 12,501 12,645 12,796 12,953 Tangible common equity $ 185,651 $ 180,349 $ 176,797 $ 172,471 $ 168,541 Common shares outstanding at end of period 5,903,613 5,911,940 5,911,715 5,910,064 5,900,249 GAAP common equity to assets 9.77 % 9.02 % 9.05 % 10.14 % 10.10 % Non-GAAP tangible common equity to tangible assets 9.22 % 8.49 % 8.50 % 9.51 % 9.44 % GAAP common book value per share $ 33.54 $ 32.62 $ 32.05 $ 31.35 $ 30.76 Non-GAAP tangible common book value per share $ 31.45 $ 30.51 $ 29.91 $ 29.18 $ 28.57
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
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 For the Year Ended (dollars in thousands) December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Net income (as reported) $ 6,139 $ 3,799 $ 3,450 $ 2,748 $ 4,075 $ 16,136 $ 15,272 Provision for loan losses 600 2,500 3,500 4,100 805 10,700 2,130 Income tax expenses 2,131 1,284 1,136 (57 ) 1,558 4,494 5,665 Non-GAAP PTPP income $ 8,870 $ 7,583 $ 8,086 $ 6,791 $ 6,438 $ 31,330 $ 23,067 GAAP ROAA 1.18 % 0.73 % 0.69 % 0.61 % 0.91 % 0.81 % 0.88 % Pre-tax Pre-Provision ROAA 1.71 % 1.46 % 1.62 % 1.51 % 1.43 % 1.58 % 1.32 % GAAP ROACE 12.51 % 7.86 % 7.27 % 6.00 % 9.58 % 8.46 % 9.32 % Pre-tax Pre-Provision ROACE 18.08 % 15.69 % 17.03 % 14.82 % 15.14 % 16.43 % 14.07 % Average assets $ 2,074,707 $ 2,071,487 $ 1,995,552 $ 1,797,426 $ 1,797,182 $ 1,985,275 $ 1,743,448 Average equity $ 196,279 $ 193,351 $ 189,890 $ 183,272 $ 170,058 $ 190,720 $ 163,936
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME (UNAUDITED)
Three Months Ended December 31, For the Three Months Ended 2020 2019 December 31, 2020 September 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 $ 1,027,831 $ 10,833 4.22 % $ 939,570 $ 11,044 4.70 % $ 1,027,831 $ 10,833 4.22 % $ 1,006,436 $ 10,627 4.22 % Residential first mortgages 140,303 1,132 3.23 166,448 1,457 3.50 140,303 1,132 3.23 157,039 1,188 3.03 Residential rentals 134,564 1,468 4.36 119,851 1,485 4.96 134,564 1,468 4.36 132,572 1,499 4.52 Construction and land development 35,910 435 4.85 32,707 468 5.72 35,910 435 4.85 38,861 448 4.61 Home equity and second mortgages 30,045 268 3.57 36,102 477 5.29 30,045 268 3.57 32,670 295 3.61 Commercial and equipment loans 107,245 1,320 4.92 125,272 1,620 5.17 107,245 1,320 4.92 116,472 1,205 4.14 SBA PPP loans 120,473 1,308 4.34 — — — 120,473 1,308 4.34 127,092 902 2.84 Consumer loans 1,058 12 4.54 1,020 14 5.49 1,058 12 4.54 1,102 12 4.36 Allowance for loan losses (19,138 ) — — (11,472 ) — — (19,138 ) — — (16,738 ) — — Net loans (1) $ 1,578,291 $ 16,776 4.25 1,409,498 16,565 4.70 1,578,291 16,776 4.25 1,595,506 16,176 4.06 Taxable investment securities 211,101 978 1.85 218,741 1,508 2.76 211,101 978 1.85 218,305 1,143 2.09 Nontaxable investment securities 20,378 113 2.22 — — — 20,378 113 2.22 23,633 126 2.13 Interest-bearing deposits in other banks 28,970 23 0.32 25,087 133 2.12 28,970 23 0.32 24,713 25 0.40 Federal funds sold 42,841 23 0.21 12,846 73 2.27 42,841 23 0.21 20,561 13 0.25 Total Interest-Earning Assets 1,881,581 17,913 3.81 1,666,172 18,279 4.39 1,881,581 17,913 3.81 1,882,718 17,483 3.71 Cash and cash equivalents 88,963 27,808 88,963 87,895 Goodwill 10,835 10,835 10,835 10,835 Core deposit intangible 1,617 2,224 1,617 1,761 Other assets 91,711 90,143 91,711 88,278 Total Assets $ 2,074,707 $ 1,797,182 $ 2,074,707 $ 2,071,487 Liabilities and Stockholders' Equity Noninterest-bearing demand deposits $ 366,726 $ — — % $ 243,728 $ — — % $ 366,726 $ — — % $ 351,951 $ — — % Interest-bearing liabilities: Savings 96,529 17 0.07 68,855 17 0.10 96,529 17 0.07 89,036 20 0.09 Interest-bearing demand and money market accounts 948,449 268 0.11 771,542 1,785 0.93 948,449 268 0.11 848,981 313 0.15 Certificates of deposit 356,261 881 0.99 420,877 1,975 1.88 356,261 881 0.99 363,296 1,201 1.32 Total interest-bearing deposits 1,401,239 1,166 0.33 1,261,274 3,777 1.20 1,401,239 1,166 0.33 1,301,313 1,534 0.47 Total Deposits 1,767,965 1,166 0.26 1,505,002 3,777 1.00 1,767,965 1,166 0.26 1,653,264 1,534 0.37 Long-term debt 28,341 457 6.45 49,343 229 1.86 28,341 457 6.45 63,847 380 2.38 Short-term debt — — — 14,565 65 1.79 — — — 3,159 14 1.77 PPPLF Advance 32,677 29 0.35 — — — 32,677 29 0.35 121,070 107 0.35 Subordinated Notes 16,888 211 5.00 23,000 359 6.24 16,888 211 5.00 — — — Guaranteed preferred beneficial interest in junior subordinated debentures 12,000 78 2.60 12,000 136 4.53 12,000 78 2.60 12,000 80 2.67 Total Debt 89,906 775 3.45 98,908 789 3.19 89,906 775 3.45 200,076 581 1.16 Total Interest-Bearing Liabilities 1,491,145 1,941 1,360,182 4,566 1,491,145 1,941 1,501,389 2,115 Total Funds 1,857,871 1,941 1,603,910 4,566 1,857,871 1,941 1,853,340 2,115 Other liabilities 20,557 23,214 20,557 24,796 Stockholders' equity 196,279 170,058 196,279 193,351 Total Liabilities and Stockholders' Equity $ 2,074,707 $ 1,797,182 $ 2,074,707 $ 2,071,487 Net interest income $ 15,972 $ 13,713 $ 15,972 $ 15,368 Interest rate spread 3.29 % 3.05 % 3.29 % 3.15 % Net yield on interest-earning assets 3.40 % 3.29 % 3.40 % 3.27 % Average interest-earning assets to average interest bearing liabilities 126.18 % 122.50 % 126.18 % 125.40 % Average loans to average deposits 89.27 % 93.65 % 89.27 % 96.51 % Average transaction deposits to total average deposits ** 79.85 % 72.03 % 79.85 % 78.03 % Cost of funds 0.42 % 1.14 % 0.42 % 0.46 % Cost of deposits 0.26 % 1.00 % 0.26 % 0.37 % Cost of debt 3.45 % 3.19 % 3.45 % 1.16 %
(1) Loan average balance includes non-accrual loans. There are no tax equivalency adjustments. There was $96,000, $240,000 and $111,000 of accretion interest for the three months ended December 31, 2020 and 2019, and September 30, 2020, respectively.
** Transaction deposits exclude time deposits.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME (UNAUDITED)
For the Years Ended December 31, 2020 2019 (dollars in thousands) Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost Assets Interest-earning assets: Commercial real estate $ 993,478 $ 43,239 4.35 % $ 912,954 $ 43,016 4.71 % Residential first mortgages 159,265 5,229 3.28 159,702 5,840 3.66 Residential rentals 132,524 5,841 4.41 121,912 6,186 5.07 Construction and land development 37,930 1,795 4.73 32,590 1,897 5.82 Home equity and second mortgages 33,458 1,334 3.99 36,330 2,066 5.69 Commercial and equipment loans 113,886 5,539 4.86 118,399 6,538 5.52 SBA PPP loans 90,345 2,704 2.99 — — — Consumer loans 1,099 50 4.55 920 59 6.41 Allowance for loan losses (15,681 ) — — (11,170 ) — — Net loans (1) $ 1,546,304 $ 65,731 4.25 $ 1,371,637 $ 65,602 4.78 Taxable investment securities 214,187 4,832 2.26 227,693 6,414 2.82 Nontaxable investment securities 14,214 338 2.38 — — — Interest-bearing deposits in other banks 19,444 110 0.57 8,719 237 2.72 Federal funds sold 20,890 62 0.30 7,577 200 2.64 Total Interest-Earning Assets 1,815,039 71,073 3.92 1,615,626 72,453 4.48 Cash and cash equivalents 68,651 23,044 Goodwill 10,835 10,835 Core deposit intangible 1,837 2,479 Other assets 88,913 91,464 Total Assets $ 1,985,275 $ 1,743,448 Liabilities and Stockholders' Equity Noninterest-bearing demand deposits $ 324,597 $ — — % $ 226,964 $ — — % Interest-bearing liabilities: Savings 84,463 85 0.10 70,130 70 0.10 Interest-bearing demand and money market accounts 850,023 2,386 0.28 710,709 6,771 0.95 Certificates of deposit 370,743 5,210 1.41 448,924 8,537 1.90 Total Interest-bearing deposits 1,305,229 7,681 0.59 1,229,763 15,378 1.25 Total Deposits 1,629,826 7,681 0.47 1,456,727 15,378 1.06 Debt: Long-term debt 53,615 1,373 2.56 32,702 743 2.27 Short-term borrowings 8,156 111 1.36 30,965 774 2.50 PPPLF Advances 60,360 211 0.35 — — — Subordinated Notes 7,953 395 4.97 23,000 1,438 6.25 Guaranteed preferred beneficial interest in junior subordinated debentures 12,000 385 3.21 12,000 586 4.88 Total Debt 142,084 2,475 1.74 98,667 3,541 3.59 Total Interest-Bearing Liabilities 1,447,313 10,156 0.70 1,328,430 18,919 1.42 Total funds 1,771,910 10,156 1,555,394 18,919 Other liabilities 22,645 24,118 Stockholders' equity 190,720 163,936 Total Liabilities and Stockholders' Equity $ 1,985,275 $ 1,743,448 Net interest income $ 60,917 $ 53,534 Interest rate spread 3.22 % 3.06 % Net yield on interest-earning assets 3.36 % 3.31 % Average interest-earning assets to average interest bearing liabilities 125.41 % 121.62 % Average loans to average deposits 94.88 % 94.16 % Average transaction deposits to total average deposits ** 77.25 % 69.18 % Cost of funds 0.57 % 1.22 % Cost of deposits 0.47 % 1.06 % Cost of debt 1.74 % 3.59 %
(1) Loan average balance includes non-accrual loans. There are no tax equivalency adjustments. There was $0.6 million and $0.9 million of accretion interest years ended December 31, 2020 and 2019, respectively.
** Transaction deposits exclude time deposits.
SUMMARY OF LOAN PORTFOLIO (UNAUDITED) (dollars in thousands)
BY LOAN TYPE December 31, 2020 % September 30, 2020 % June 30, 2020 % March 31, 2020 % December 31, 2019 % Portfolio Type: Commercial real estate $ 1,049,147 69.75 % $ 1,021,987 68.29 % $ 996,111 66.73 % $ 977,678 65.61 % $ 964,777 66.34 % Residential first mortgages 133,779 8.89 147,756 9.87 165,670 11.10 170,795 11.46 167,710 11.53 Residential rentals 139,059 9.24 137,950 9.22 132,590 8.88 133,016 8.93 123,601 8.50 Construction and land development 37,520 2.49 36,061 2.41 37,580 2.52 38,627 2.59 34,133 2.35 Home equity and second mortgages 29,129 1.94 31,427 2.10 33,873 2.27 35,937 2.41 36,098 2.48 Commercial loans 52,921 3.52 58,894 3.94 63,249 4.24 70,971 4.76 63,102 4.34 Consumer loans 1,027 0.07 1,081 0.07 1,117 0.07 1,134 0.08 1,104 0.08 Commercial equipment 61,693 4.10 61,376 4.10 62,555 4.19 61,931 4.16 63,647 4.38 Gross portfolio loans 1,504,275 100.00 % 1,496,532 100.00 % 1,492,745 100.00 % 1,490,089 100.00 % 1,454,172 100.00 % Net deferred costs 1,264 0.08 % 1,610 0.11 % 2,072 0.14 % 2,059 0.14 % 1,879 0.13 % Allowance for loan losses (19,424 ) (1.29 ) % (18,829 ) (1.26 ) % (16,319 ) (1.09 ) % (15,061 ) (1.01 ) % (10,942 ) (0.75 ) % (18,160 ) (17,219 ) (14,247 ) (13,002 ) (9,063 ) Net portfolio loans $ 1,486,115 $ 1,479,313 $ 1,478,498 $ 1,477,087 $ 1,445,109 U.S. SBA PPP loans $ 110,320 $ 131,088 $ 129,384 $ — $ — Net deferred fees (2,360 ) (3,277 ) (3,746 ) — — Net SBA PPP loans $ 107,960 $ 127,811 $ 125,638 $ — $ — Total net loans $ 1,594,075 $ 1,607,124 $ 1,604,136 $ 1,477,087 $ 1,445,109 Gross loans $ 1,614,595 $ 1,627,620 $ 1,622,129 $ 1,490,089 $ 1,454,172
END OF PERIOD CONTRACTUAL RATES (UNAUDITED)
The following table is based on contractual interest rates and does not include the amortization of deferred costs and fees or assumptions regarding non-accrual interest:
December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 (dollars in thousands) EOP Contractual Interest rate EOP Contractual Interest rate EOP Contractual Interest rate EOP Contractual Interest rate EOP Contractual Interest rate Commercial real estate 4.11 % 4.20 % 4.32 % 4.52 % 4.59 % Residential first mortgages 3.93 % 3.93 % 3.93 % 3.93 % 3.95 % Residential rentals 4.26 % 4.30 % 4.45 % 4.69 % 4.79 % Construction and land development 4.28 % 4.40 % 4.46 % 5.02 % 5.12 % Home equity and second mortgages 3.54 % 3.56 % 3.56 % 4.89 % 4.90 % Commercial loans 4.56 % 4.51 % 4.53 % 4.92 % 5.26 % Consumer loans 5.99 % 5.94 % 6.05 % 6.17 % 6.25 % Commercial equipment 4.42 % 4.42 % 4.44 % 4.46 % 4.49 % U.S. SBA PPP loans 1.00 % 1.00 % 1.00 % — % — % Total Loans 3.92 % 3.94 % 4.03 % 4.51 % 4.58 % Yields without U.S. SBA PPP Loans 4.13 % 4.20 % 4.29 % — % — %
ALLOWANCE FOR LOAN LOSSES (UNAUDITED)
Three Months Ended (dollars in thousands) December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Beginning of period $ 18,829 $ 16,319 $ 15,061 $ 10,942 $ 11,252 Charge-offs (30 ) (65 ) (2,262 ) — (1,155 ) Recoveries 25 75 20 19 40 Net charge-offs (5 ) 10 (2,242 ) 19 (1,115 ) Provision for loan losses 600 2,500 3,500 4,100 805 End of period $ 19,424 $ 18,829 $ 16,319 $ 15,061 $ 10,942 Net charge-offs to average portfolio loans (annualized) — % — % 0.61 % — % 0.32 % Breakdown of general and specific allowance as a percentage of gross portfolio loans ( 1 ) General allowance $ 18,068 $ 18,319 $ 16,215 $ 13,412 $ 10,114 Specific allowance 1,356 510 104 1,649 828 $ 19,424 $ 18,829 $ 16,319 $ 15,061 $ 10,942 General allowance 1.20 % 1.22 % 1.09 % 0.90 % 0.70 % Specific allowance 0.09 % 0.03 % 0.01 % 0.11 % 0.05 % Allowance to gross portfolio loans 1.29 % 1.26 % 1.09 % 1.01 % 0.75 % Allowance to non-acquired gross portfolio loans 1.35 % 1.31 % 1.14 % 1.06 % 0.79 % Allowance+ Non-PCI FV Mark $ 20,174 $ 19,643 $ 17,208 $ 16,096 $ 12,128 Allowance+ Non-PCI FV Mark to gross portfolio loans 1.34 % 1.31 % 1.15 % 1.08 % 0.83 %
(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.
CLASSIFIED AND SPECIAL MENTION ASSETS (UNAUDITED)
The following is a breakdown of the Company’s classified and special mention assets at December 31, 2020, 2019, 2018, 2017 and 2016, respectively:
As of (dollars in thousands) 12/31/2020 12/31/2019 12/31/2018 12/31/2017 12/31/2016 Classified loans Substandard $ 19,249 $ 26,863 $ 32,226 $ 40,306 $ 30,463 Doubtful — — — — 137 Loss — — — — — Total classified loans 19,249 26,863 32,226 40,306 30,600 Special mention loans 7,672 — 96 — Total classified and special mention loans $ 26,921 $ 26,863 $ 32,226 $ 40,402 $ 30,600 Classified loans $ 19,249 $ 26,863 $ 32,226 $ 40,306 $ 30,600 Classified securities — — 482 651 883 Other real estate owned 3,109 7,773 8,111 9,341 7,763 Total classified assets $ 22,358 $ 34,636 $ 40,819 $ 50,298 $ 39,246 Total classified assets as a percentage of total assets 1.10 % 1.93 % 2.42 % 3.58 % 2.94 % Total classified assets as a percentage of Risk Based Capital 9.61 % 16.21 % 21.54 % 32.10 % 26.13 %
SUMMARY OF DEPOSITS (UNAUDITED)
December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 (dollars in thousands) Balance % Balance % Balance % Balance % Balance % Noninterest-bearing demand $ 362,079 20.74 % $ 360,839 20.28 % $ 356,196 21.32 % $ 254,114 16.80 % $ 241,174 15.95 % Interest-bearing: Demand 590,159 33.81 635,176 35.69 547,639 32.79 517,069 34.19 523,802 34.65 Money market deposits 340,725 19.52 329,617 18.52 314,781 18.85 281,656 18.62 283,438 18.75 Savings 98,783 5.66 90,514 5.09 85,257 5.10 73,874 4.88 69,254 4.58 Certificates of deposit 353,856 20.27 363,460 20.42 366,491 21.94 385,876 25.51 394,169 26.07 Total interest-bearing 1,383,523 79.26 1,418,767 79.72 1,314,168 78.68 1,258,475 83.20 1,270,663 84.05 Total Deposits $ 1,745,602 100.00 % $ 1,779,606 100.00 % $ 1,670,364 100.00 % $ 1,512,589 100.00 % $ 1,511,837 100.00 % Transaction accounts $ 1,391,746 79.73 % $ 1,416,146 79.58 % $ 1,303,873 78.06 % $ 1,126,713 74.49 % $ 1,117,668 73.93 %