Communities First Financial Corporation Profits Soar 92% to $5.71 Million for 2Q-2021 from $2.98 Million for 2Q-2020

FRESNO, Calif., July 20, 2021 (GLOBE NEWSWIRE) -- Communities First Financial Corporation (the “Company”) (OTCQX: CFST), the parent company of Fresno First Bank (the “Bank”), today reported net income increased 92% to $5.71 million, or $1.84 per diluted share for the second quarter of 2021 (2Q-2021), compared to $2.98 million, or $0.98 per diluted share for the second quarter of 2020 (2Q-2020), and grew 36% from $4.20 million, or $1.35 per diluted share for the first quarter of 2021 (1Q-2021). For the first six months of 2021, net income increased 89% to $9.90 million, or $3.20 per diluted share, compared to $5.24 million, or $1.73 per diluted share, for the first six months of 2020. All results are unaudited.

“Second quarter results were stellar with net income nearly doubling from a year ago, led by exceptional gross revenue production, a return on average common equity of 30.99%, return on average assets of 2.33% and an improved efficiency ratio of 34.34% at quarter end,” said Steve Miller, President and Chief Executive Officer. “Our net interest margin (“NIM”) was solid at 4.20% for the quarter and 4.34% year-to-date with non-interest income growing over 100% from the preceding quarter, primarily due to gain on sale of loans and higher deposit fee income. Excluding the impact of the Small Business Administration's (‘SBA’) Paycheck Protection Program (‘PPP’) loans, our core NIM remained steady at 4.19% for both the first and second quarters of 2021.” Nonperforming assets continued to decline with nonperforming assets at 0.10% of total assets with zero nonperforming restructured loans, at June 30, 2021.

“Our franchise is growing, and we continue to focus on driving top line revenue growth through cultivating new customer relationships,” said Miller. “We made substantial progress with our digital presence over the last year, but we are looking forward to getting back out into our communities and meeting face-to-face with our customers and prospects.” Interest income was higher by 49% with meaningful loan and deposit growth. Investment securities also increased by 80% from a year earlier. At June 30, 2021, deposits totaled $864.55 million, up 27% from a year ago with noninterest-bearing deposits representing 61% of total deposits; net loans grew 23% to $689.33 million year-over-year, and shareholders’ equity increased by 30% to $78.76 million from a year ago.

“With improving economic conditions and increasing consumer confidence, our overall franchise is ramping up and we are well-positioned to take advantage of the recovery and renewed business,” stated Miller. “We will continue to invest in our franchise to create growth, and we expect these investments to drive further revenue streams creating value for our customers and shareholders. In spite of the pandemic disruption, I am proud of our employees who have dedicated themselves to our customers’ and Company’s success.”

Second Quarter 2021 Highlights:   As of, or for the quarter ended June 30, 2021, compared to the quarter ended June 30, 2020:

• Pre-tax, pre-provision income increased 92% to $8.56 million.
• Net income climbed 92% to $5.71 million or $1.84 per diluted share.
• Return on average equity of 30.99%.
• Return on average assets of 2.33%.
• Operating revenue (net interest income, before the provision for loan losses, plus non-interest income) increased by 56% to $13.04 million.
• Total assets increased 31% reaching $988.48 million.
• Total loans (ex. HFS) increased 23% to $703.48 million.
• Total deposits increased 27% to $864.55 million.
• Shareholder equity increased 30% to $78.76 million.
• Book value increased 27% to $25.63 per share.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act of 2020 has provided new COVID-19 stimulus relief, which included $284 billion allocated for another round of PPP lending, extending the program to May 31, 2021. “We have participated heavily in both the first round of PPP in 2020 and the new round of PPP in the first half of 2021,” continued Miller “For the second round we funded 392 PPP loans totaling $76.8 million. At the same time, we saw a consistent flow of requests for forgiveness of PPP loans funded in the second quarter of 2020. At June 30, 2021, we have 254, or 39%, of the original PPP loans totaling $63.5 million (34% of our original dollars funded) remaining on our books. At June 30, 2021, between both rounds of PPP, we had $3.1 million in deferred fees remaining to be accreted into income. We expect the majority of the first round PPP participants to apply for, and be granted, forgiveness between now and the end of the third quarter. As a result, we expect to see much of the $63.5 million in the original PPP loan balances payoff over the next 3-6 months.”

COVID-19 Update

California has fully reopened its economy. This means no more physical distancing, no capacity limits, no county tiers, and relaxed mask guidance.   California has remained fully open since June 15, 2021, when the lifting of restrictions went into effect statewide.

On July 12, 2021, Governor Gavin Newsom signed SB 129 legislation that reflects the majority of the 2021-22 state budget agreement. This transformative budget includes the biggest economic recovery package in California’s history – a $100 billion California Comeback Plan.   Fueled by a resurgent economy, a surge in state revenues and additional federal recovery funds, the $75.7 billion surplus reflected in the California Comeback Plan stands in stark contrast to the $54.3 billion budget shortfall estimated just over a year ago. The budget is built on a strong fiscal foundation that includes over $25 billion in reserves, pays off educational deferrals and continues to pay down long-term retirement debts. It also appropriately prioritizes one-time spending over ongoing, allocating 85% of discretionary funds to one-time spending.

https://covid19.ca.gov/safely-reopening/#reopening-california

https://www.gov.ca.gov/2021/07/12/california-roars-back-governor-newsom-signs-100-billion-california-comeback-plan-to-accelerate-states-recovery-and-tackle-persistent-challenges/

Credit Risk as a Result of the Pandemic

The Bank’s loan portfolio is diverse, and management continues to monitor and evaluate the Bank’s exposure to potentially increased loan losses related to the COVID-19 pandemic in multiple ways. As a result of federal and state stimulus money, state and federally encouraged payment deferrals, together with the SBA making payments for many SBA loans, management continues to believe that normal metrics such as delinquencies may understate potential credit issues. Due to the potential distortion of traditional metrics, management and staff are actively monitoring other sources of data more frequently for early indications of distress within the portfolio such as average deposits, overdrafts, line of credit usage and guarantors’ credit history. Management has segmented the loan portfolio several ways and examines risk exposure based on quantitative and qualitative information. Management and staff actively communicate with borrowers and key deposit clients to understand and assess the health of, and the stress their business may be experiencing, as well as the pandemic’s effects on their customers and suppliers. In addition, management and staff are engaging with borrowers frequently to understand individual challenges and are obtaining regular data from borrowers, as well as updated financials.

The following is a recap of areas considered higher risk due to the pandemic and a status of customers with deferred loan payments.

Higher Risk Industries:   Management has identified the following industry segments most at risk due to the effects of the pandemic, as of June 30, 2021. Exposure to higher risk industries comprises approximately 5.4%, or $26.29 million, of the Bank’s loan portfolio, net of government guarantees, and is spread over 80 loans. Many of these customers received PPP loans and some customers were granted payment deferrals.

Status of, and Requests for, Loan Payment Deferral

“We granted payment deferrals on 64 individual loans covering 41 borrowers,” added Miller. “Subsequently, several borrowers asked to be taken off deferral, 13 loans paid off in full, and as of June 30, 2021 all have now returned to normal payment schedules.”

The following table(s) break down the status and progression of loans granted payment deferrals.  

Results of Operations

Operating revenue, consisting of net interest income and non-interest income, increased 56% to $13.04 million for the second quarter of 2021, compared to $8.34 million for the second quarter a year ago, and was higher by 18% from $11.02 million for the first quarter of 2021. For the first six months of 2021, operating revenue increased 54% to $24.06 million, compared to $15.62 million for the first half of 2020.

Net interest income, before the provision for loan losses, increased 44% to $9.42 million for the second quarter of 2021, compared to $6.55 million for the second quarter a year ago and increased 2% from $9.24 million for the first quarter of 2021.   For the first six months of 2021, net interest income increased 51% to $18.66 million from $12.39 million for the first half of 2020. “The solid growth in net interest income in both the second quarter of 2021, and for the first six months of 2021, was a result of a growing loan portfolio and growth in, and higher yields from, our investment portfolio,” said Steve Canfield, Chief Financial Officer.

The Bank’s net interest margin (“NIM”), which excludes interest expense on holding company sub-debt, remained solid at a tax-equivalent yield of 4.20% for the second quarter of 2021, compared to 3.92% for the second quarter of 2020, and from 4.49% for the first quarter of 2021.   For the first six months of 2021, the interest margin expanded 13 basis points to 4.34% compared to 4.21% for the first half of 2020. “Our NIM remained strong during the second quarter, primarily due to the changes in the mix of our earning assets and the low cost of funding these earning assets,” stated Canfield.

“With fees earned on PPP loans, and its temporary impact on NIM, it is important to understand what a normalized NIM run rate looks like,” said Canfield. “When we exclude the impact of PPP loans on our books, and the one-time recovery of non-accrued interest we had in Q1-2021, our normalized NIM was steady at 4.19% in both the first and second quarters of 2021. NIM contracted only 4 basis points from 4.23% in the second quarter of 2020.”   

The yield on earning assets was 4.29% for the second quarter of 2021, compared to 4.05% for the second quarter a year ago, and 4.60% on a linked quarter basis. The cost to fund earning assets remained low at 0.09% for the second quarter of 2021, compared to 0.14% for the second quarter of 2020, and 0.10% for the preceding quarter. For the first six months of 2021, the yield on earning assets was 4.44% compared to 4.40% for the first half of 2020, while the cost to fund earning assets fell 47% to 0.10% for the first half of 2021 from 0.18% for the first half of 2020.

Total non-interest income more than doubled to $3.62 million for the second quarter of 2021, compared to $1.79 million for the second quarter of 2020, and from $1.78 million for the preceding quarter. For the first six months of 2021, non-interest income increased 67% to $5.40 million compared to $3.24 million for the first six months of 2020. The growth in non-interest income during the second quarter of 2021, and in the first half of 2021, was primarily due to the gain on sale of loans and deposit fee income.

“We sold $30.4 million of loans during the quarter realizing $1.88 million in gain on sale of loans, which favorably impacted non-interest income. The loan premiums for SBA and our MFR loans are currently very strong. You need to be able to generate those assets to take advantage of the market dynamics which our team has proven to do over the last several years. Going forward, we will continue to use the option of holding loans from time to time, as we manage liquidity and augment our earnings,” said Canfield. “Deposit fee income was also up substantially from a year ago and on a linked quarter basis which added to our non-interest income.”

“Our merchant services revenue run rate for 2021 is in line with 2020, but we expect a stronger 2^nd half due to several new strategic ISO relationships that came online late in the second quarter of 2021,” added Miller. “Our three newest ISOs are the largest ISO partners to date, but the onboarding process experienced some delays.”

Total deposit fee income increased by 251%, or $296,000, to $414,000 for the second quarter of 2021, compared to $118,000 for the second quarter of 2020, and grew by 53%, or $144,000, from $270,000 on a linked quarter basis. “Over the past year we have added client relationships in certain industries that many banks might shy away from due to higher regulatory scrutiny,” stated Canfield. “We have processes and systems in place where we feel comfortable managing the additional compliance burden and the clients compensate the bank because they value the partnership.”

Non-interest expense for the second quarter of 2021 was $4.48 million, an increase of 30% compared to $3.46 million for the second quarter of 2020 and increased 1% from $4.45 million for the first quarter of 2021. For the first half of 2021, non-interest expense increased 23% to $8.93 million compared to $7.25 million for the first half of 2020.   “The year-over-year increase in noninterest expense reflected continued investment in personnel, recruitment expenses, as well as technology and communications expense,” said Canfield.

The efficiency ratio improved significantly to 34.34% for the second quarter of 2021, compared to 41.51% for the second quarter a year ago, and 41.52% for the first quarter of 2021. “We have been gradually lowering our efficiency ratio over the years and believe operating efficiency is one of the key components to being a high performing franchise,” stated Canfield.  

Balance Sheet Review

Total assets increased 31% to $988.48 million, at June 30, 2021, from $756.74 million at June 30, 2020, and grew 3% from $957.48 million, at March 31, 2021.

Total portfolio loans grew 23%, or $130.78 million, to $703.48 million at June 30, 2021, from $572.70 million a year ago, and increased 2%, or $11.51 million, from $691.97 million at March 31, 2021. Total loans at June 30, 2021, included $140.32 million of SBA PPP loans, down 24% from a year earlier. “In the second quarter of 2021, we prudently decided to sell loans on the secondary market as we manage our loan concentrations and continue to monitor our liquidity and capital needs as we go forward,” said Canfield. “In spite of selling approximately $30 million in loans during the quarter, and PPP loans paying down by $49 million, we continue to see good deal flow, which allowed total loans to increase.”

The commercial and industrial (C&I) portfolio increased 9% to $178.36 million from $163.81 million recorded a year earlier and grew 1% when compared to the linked quarter.   C&I loans represented 25% of total loans at June 30, 2021.   Commercial real estate loans increased 84% to $291.04 million from the first quarter of 2021, and increased 16% on a linked quarter basis, representing 41% of total loans at June 30, 2021. “The CRE portfolio includes approximately $88.06 million in multi-family loans originated by our So Cal team that we may consider selling at some point in the future,” commented Canfield.   Agriculture loans, representing 7% of the loan portfolio, at June 30, 2021, increased 65% to $50.03 million from the second quarter a year ago and grew 33% from for the first quarter of 2021.   Real estate construction and land development loans totaled $25.37 million, or 4% of loans, while residential RE 1-4 family loans totaled $18.34 million, or 3% of loans.   SBA PPP loans represented 20% of the portfolio and there were $3.10 million in unamortized PPP fees capitalized on the balance sheet at quarter end.   At June 30, 2021, the SBA, USDA, or other government agencies, guaranteed loans totaled $220.82 million, or 31% of the loan portfolio.

The investment portfolio increased by 80%, or $111.93 million, to $251.62 million at June 30, 2021, from $139.69 million at June 30, 2020, and increased 8%, or $18.19 million, from $233.43 million at March 31, 2021.   “With the rapid growth in deposits over the past 15 months, the cash received from the $40 million capital raise last fall, and now the roll off of PPP loans, we have had significant liquidity to put to work,” stated Canfield. “We use the investment portfolio for liquidity purposes, to balance our overall asset/liability position, as well as for earnings. The growth has been primarily spread over a mix of mortgage backed and municipal securities, both tax exempt and taxable, treasury securities and some other domestic debt.”   

Total deposits increased 27% to $864.55 million at June 30, 2021, compared to $678.83 million from a year earlier, and grew 3% from $836.31 million at March 31, 2021. Noninterest-bearing demand deposits increased 27% to $527.26 million at June 30, 2021, compared to $414.40 million at June 30, 2020, and increased 3% from $511.50 million at March 31, 2021. Noninterest-bearing demand deposits represented over 61% of total deposits at June 30, 2021.

“With the holding company sub-debt raise last year, we have a strong capital base to support our growth and allow us to further expand our payments business and/or pursue further opportunities as they might arise,” added Miller. “In February 2021, the Bank received approval from Visa to support High Brand Risk processing for ourselves, and our partners, which is expected to enhance revenue opportunities in several key payment verticals.” A key requirement by Visa was for the Bank to have $100 million in Tier-1 capital, which was a key strategy for the sub-debt raised in 2020. Tier-1 capital at the Bank was $114.60 million at quarter end, or 11.33% of assets.

Net shareholders’ equity increased 30% to $78.76 million at June 30, 2021, compared to $60.78 million a year ago, and grew 11% from $70.92 million at March 31, 2021. Book value per common share increased 27% to $25.63 at June 30, 2021, compared to $20.23 at June 30, 2020, and 11% compared to $23.12 at March 31, 2021.

Asset Quality

Nonperforming assets declined to $1.02 million, or 0.10% of total assets at June 30, 2021, compared to $1.08 million, or 0.14% of total assets at June 30, 2020 and $1.49 million, or 0.16% of total assets at March 31, 2021. There were no performing restructured loans at June 30, 2021 nor on a linked quarter basis.

Past due loans 30-60 days totaled $6.61 million at June 30, 2021, compared to $4.79 million at June 30, 2020, and $7.49 million at March 31, 2021.   The majority of past due loans are SBA loans eligible for payments to be made by the SBA. The Bank has requested payment from the SBA and was awaiting receipt at June 30, 2021. Past due loans from 60-90 days were $1.94 million at June 30, 2021, compared to $1.88 million a year earlier; there were no past due loans 90+ days at quarter end.     

The provision for loan losses was $750,000 for the second quarter of 2021, compared to $800,000 recorded in the second quarter of 2020. Year-to-date, the provision for loan losses was $1.6 million and the total reserve for loan losses was $9.39 million at June 30, 2021. “We continue to add to reserves for loan losses, primarily as a result of the growth in our loan portfolio,” said Miller. “Our asset quality is strong and improving. Although we see positive signs of recovery in our markets, there are still several unknowns regarding credit quality. The largest factor being the federal government making principal and interest payments on all SBA loans over most of this calendar year.” Year-to-date, net charge-offs totaled $64,000.

The ratio of allowance for loan losses to total portfolio held for investment loans was 1.33% at June 30, 2021, compared to 1.01% a year earlier and 1.26% at March 31, 2021.   “A large portion of our portfolio consists of loans guaranteed by the U.S. Government. This group of loans consists of fully guaranteed loans the Company has purchased, the PPP loans, as well as organic SBA and USDA loans the bank has originated. When the effect of these guarantees is considered relative to the loan portfolio, the ratio of allowance for loan losses to the total, non-guaranteed, loan portfolio was 1.94%, as of June 30, 2021,” added Miller.

About Communities First Financial Corporation

Communities First Financial Corporation, a bank holding company established in 2014, is the parent company of Fresno First Bank, founded in 2005 in Fresno, California. Fresno First Bank is a leading SBA Lender in California’s Central Valley and has expanded into Southern California. The Bank is also a direct acquiring bank with VISA and MasterCard and processes payments for merchants across the country directly and through partners. In March 2021, S&P Global ranked the Bank the #20 best performing community bank under $3 billion in assets for 2020, and #1 in California. Named to the 2019 OTCQX Best 50 and ranked one of the top performing OTCQX companies in the country, based on total return and growth in average daily dollar volume for 2018. The Bank was named to the Inc. 5000 Fastest Growing Companies list in 2017 and to Forbes Best 25 Small Businesses in America for 2016. Additional information is available from the Company’s website at www.fresnofirstbank.com or by calling 559-439-0200.

Forward Looking Statements

This earnings release may contain forward-looking statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. The forward-looking statements are based on managements’ expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, our borrowers’ actual payment performance as loan deferrals related to the COVID-19 pandemic expire, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance, the Company’s ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in the competitive environment; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements affecting the Company’s business; international developments; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. The Company undertakes no obligation to release publicly the results of any revisions to the forward-looking statements included herein to reflect events or circumstances after today, or to reflect the occurrence of unanticipated events.   The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.