THE COMMUNITY FINANCIAL CORPORATION CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that involve significant
judgments and uncertainties and could result in materially different results
under different assumptions and conditions. The Company considers its
determination of the allowance for credit losses ("ACL"), goodwill impairment,
and the valuation of deferred tax assets to be critical accounting policies. The
Company believes that the most critical accounting policies upon which its
financial condition and results of operation depend, and which involve the most
complex subjective decisions or assessments, are included in the discussion
entitled "Critical Accounting Policies" in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2021 , as filed
with the SEC .
For additional information regarding the ACL, Goodwill , and the valuation of
deferred taxes, refer to Notes 1, 3, 4, and 14 in the Consolidated Financial
Statements as presented in the Company's Form 10-K for the year ended
December 31, 2021 .
On January 1, 2022 , the Company adopted FASB ASU 2016-13, which changes the
accounting for the allowance for credit losses. For a discussion of this new
accounting policy, refer to Note 1 "Basis of Presentation" to the Consolidated
Financial Statements.
OVERVIEW
Community Bank of the Chesapeake (the "Bank") is headquartered in Southern
Maryland with 11 branches located in Maryland and Virginia . The Bank is a
wholly-owned subsidiary of The Community Financial Corporation (the "Company").
The Company provides financial services to individuals and businesses through
its offices in Southern Maryland and Fredericksburg, Virginia . Its primary
deposit products are demand, savings and time deposits, and its primary lending
products are commercial and residential mortgage loans, commercial loans,
construction and land development loans, home equity and second mortgages and
commercial equipment loans.
Our customer focus is to serve small and medium sized commercial businesses as
well as local municipal agencies and not-for-profits. Relationship teams provide
customers with specific banker contacts and a support team to address product
and service demands. The Bank believes that its ability to offer fast, flexible,
local decision-making will continue to attract significant new business
relationships. Our structure provides a consistent and superior level of
professional service and excelling at customer service is a critical part of our
culture. The Bank's marketing is directed towards increasing its balances of
transactional deposit accounts. The Bank believes that increases in these
account types will lessen the Bank's dependence on higher-cost funding, such as
certificates of deposit and borrowings.
The Company's income is primarily earned from interest received on its loans and
investments. The Company's primary source of funds for making these loans and
investments is its deposits. One of the key measures of the Company's success is
its net interest income, or the difference between the income on its
interest-earning assets, such as loans and investments, and the expense on its
interest-bearing liabilities, such as deposits and borrowings. Another key
measure is the spread between the yield the Company earns on these
interest-earning assets and the rate the Company pays on interest-bearing
liabilities, which is called net interest spread. In addition to earning
interest on loans and investments, the Company earns income through fees and
other charges for services to clients.
Management will continue to focus on delivering strong results during 2022 to
drive profitability and operating efficiency. During the first quarter of 2022,
we had robust portfolio loan growth, strong non-interest bearing and transaction
deposit growth, and continued to optimize our branch and virtual banking
operations.
•Net income totaled $6.3 million for the quarter ended March 31, 2022 , or $1.10
per diluted common share compared to net income of $6.3 million or $1.07 per
diluted common share for the quarter ended March 31, 2021 and $6.8 million or
$1.18 per diluted common share for the quarter ended December 31, 2021 .
•Total portfolio loans increased to $1,629.5 million , an increase of $50.7
million or 12.9% annualized, compared to the prior quarter, and $121.5 million
or 8.1% from March 31, 2021 . The loan pipeline at March 31, 2022 was $193.0
million compared to $160.0 million at December 31, 2021 .
•Non-interest-bearing accounts increased $198.6 million to $644.4 million or
30.75% of deposits at March 31, 2022 from 21.68% of deposits at December 31,
2021 . In January 2022 , the Bank provided customers with required regulatory
notifications to change the terms of certain transaction deposit accounts from
low interest-bearing to non-interest bearing accounts. Transaction deposits
increased $46.2 million , or 10.7% annualized, to $1,775.0 million in the first
quarter of 2022.
•During the first quarter of 2022, total common equity decreased $15.0 million
or 7.2% to $193.1 million , and tangible common equity ("TCE") decreased $14.9
million or 7.6% to $181.4 million at March 31, 2022 . The decreases were
primarily due to an increase of $17.0 million in accumulated other comprehensive
losses ("AOCL") in the Bank's available for sale ("AFS") securities portfolio
due to changes in interest rates.
41--------------------------------------------------------------------------------
Table of Contents
•Portfolio loan end of period contractual rates increased by one basis point to 3.85% atMarch 31, 2021 compared toDecember 31, 2021 . The loan portfolio is positioned for rising rates with$517.7 million or 32% of net loans, excluding the allowance for credit losses, scheduled to reprice monthly or in the next three months and an additional$50.0 million or 3% repricing the following nine months. The Bank's effective duration on the loan portfolio was 2.1 years atMarch 31, 2022 . In addition, increased non-interest bearing accounts as a percentage of deposits also better positions the Company for a rising rate environment. •InMarch 2021 , we improved asset quality with the sale of impaired non-accrual and classified commercial real estate and residential mortgage loans with an amortized cost of$9.1 million , net of charge-offs of$1.4 million . •OnApril 21, 2021 , the Bank purchased its second branch location inVirginia at5831 Plank Road ,Spotsylvania . The full-service branch is expected to open in second quarter of 2022 and will provide banking, lending and wealth management services with a focus on digital banking. AtMarch 31, 2022 , loans in the greaterFredericksburg, Virginia area accounted for almost 50% of the Bank's outstanding portfolio loans, andFredericksburg branch deposits were$101 million with an average cost of deposits of three basis points. Management believes the greaterFredericksburg area provides significant opportunities for continued organic growth supported by our efficient operating model and ability to leverage technology.
The Company is addressing COVID-19 credit concerns by maintaining an adequate allowance for credit losses. We believe current market disruptions in the banking industry caused by both the COVID-19 pandemic as well as industry consolidation will provide opportunities for continued organic growth in 2022.
For additional information regarding the Company's COVID-19 programs, including risk factors and accounting treatment, refer to Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , as filed with theSEC . The following summarizes major activities we remain engaged in related to the pandemic at and for the three months endedMarch 31, 2022 : •The Company offered payment deferral programs for its business and individual customers. Generally, depending on the demonstrated need of the client, the Company deferred either the full loan payment or the principal component of the loan payment between 90 and 180 days. Management closely monitors previously COVID-19 deferred loans in reviews of credit quality indicators as part of individual loan and relationship reviews and changes classification ratings as needed.
•The Company actively assisted customers and community businesses with
applications for resources through the
Subsequent events
The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued.
42--------------------------------------------------------------------------------
Table of Contents
USE OF NON-GAAP FINANCIAL MEASURES
Statements included in management's discussion and analysis 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. See Non-GAAP reconciliation schedules that immediately follow:
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
Reconciliation ofU.S. 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 Form 10-Q, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with 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) March 31, 2022 December 31, 2021 March 31, 2021 Total assets$ 2,351,923 $ 2,327,306 $ 2,149,531 Less: intangible assets Goodwill 10,835 10,835 10,835 Core deposit intangible 924 1,032 1,394 Total intangible assets 11,759 11,867 12,229 Tangible assets$ 2,340,164 $ 2,315,439 $ 2,137,302 Total common equity$ 193,140 $ 208,133$ 200,759 Less: intangible assets 11,759 11,867 12,229 Tangible common equity$ 181,381 $ 196,266$ 188,530 Common shares outstanding at end of period 5,686,799 5,718,528 5,897,685 GAAP common equity to assets 8.21 % 8.94 % 9.34 % Non-GAAP tangible common equity to tangible assets 7.75 % 8.48 % 8.82 % GAAP common book value per share$ 33.96 $ 36.40$ 34.04 Non-GAAP tangible common book value per share$ 31.90 $ 34.32$ 31.97 43
--------------------------------------------------------------------------------
Table of Contents
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
Return on Average Common Equity ("ROACE")
The ROACE is a financial ratio that measures the profitability of a company in
relation to the average shareholders' equity. This financial metric is expressed
in the form of a percentage which is equal to net income after tax divided by
the average shareholders' equity for a specific period of time.
Three Months Ended March 31,
(dollars in thousands) 2022 2021
Net income (as reported) $ 6,288 $ 6,299
ROACE 12.30 % 12.53 %
Average equity $ 204,554 $ 201,124 Return on Average Tangible Common Equity ("ROATCE")
ROATCE is computed by dividing net earnings applicable to common shareholders by
average tangible common shareholders' equity. Management believes that ROATCE is
meaningful because it measures the performance of a business consistently,
whether acquired or internally developed. ROATCE is a non-GAAP measure and may
not be comparable to similar non-GAAP measures used by other companies.
Three Months Ended March 31,
(dollars in thousands) 2022 2021
Net income (as reported) $ 6,288 $ 6,299
Core deposit intangible amortization (net of tax) 81 99
Net earnings applicable to common shareholders $ 6,369 $ 6,398
ROATCE 13.22 % 13.56 %
Average tangible common equity $ 192,725 $ 188,808
44--------------------------------------------------------------------------------
Table of Contents
COMPARISON OF RESULTS OF OPERATIONS
A comparison of the results of operations for the quarter ended
(Unaudited)
Three Months Ended March 31,
(dollars in thousands, except per share amounts) 2022 2021
OPERATING DATA
Interest and dividend income $ 17,336 $ 17,678
Interest expenses 867 1,169
Net interest income ("NII") 16,469 16,509
Provision for credit losses 450 295
Provision (recovery) for unfunded commitments (31) -
NII after provision for credit losses and unfunded
commitments 16,050 16,214
Noninterest income 1,451 2,360
Noninterest expenses 9,080 10,148
Income before income taxes 8,421 8,426
Income taxes 2,133 2,127
Net income 6,288 6,299
Income available to common shares $ 6,288 $ 6,299
(Unaudited)
Three Months Ended March 31,
2022 2021
KEY OPERATING RATIOS
Return on average assets ("ROAA") 1.08 % 1.22 %
Return on average common equity ("ROACE") 12.30 12.53
Return on Average Tangible Common Equity ("ROATCE") 13.22 13.56
Average total equity to average total assets 8.79 9.71
Interest rate spread 3.05 3.43
Net interest margin 3.12 3.50
Efficiency ratio (1) 50.67 53.78
Non-interest expense to average assets 1.56 1.96
Net operating expense to average assets (2) 1.31 1.50
_______________________________________
(1) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.
(2) Net operating expense is the sum of non-interest expense offset by non-interest income.
Summary of Financial Results
The Company reported net income for the three months endedMarch 31, 2022 of$6.3 million or diluted earnings per share of$1.10 compared to net income of$6.3 million or$1.07 per diluted earnings per share for the three months endedMarch 31, 2021 . The Company's ROAA and ROACE were 1.08% and 12.30% for the three months endedMarch 31, 2022 compared to 1.22% and 12.53% inMarch 31, 2021 . Net income in the first quarter of 2022 remained relatively flat as compared to the same quarter in 2021. In the quarter endedMarch 31, 2021 , we recorded a$1.3 million charge related to an isolated wire transfer fraud incident, there was no comparable loss during the three months endedMarch 31, 2022 . The decrease in other expenses was offset by decreased noninterest income, increased provision for credit losses and decreased net interest income. 45
--------------------------------------------------------------------------------
Table of Contents
Three Months Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Interest and dividend income $ 17,336 $ 17,678 $ (342) (1.9) %
Interest expense 867 1,169 (302) (25.8) %
Net interest income 16,469 16,509 (40) (0.2) %
Provision for credit losses 450 295 155 52.5 %
Provision (recovery) for unfunded
commitments (31) - (31) - %
Noninterest income 1,451 2,360 (909) (38.5) %
Noninterest expense 9,080 10,148 (1,068) (10.5) %
Income before income taxes 8,421 8,426 (5) (0.1) %
Income tax (income) expense 2,133 2,127 6 0.3 %
Net income $ 6,288 $ 6,299 $ (11) (0.2) %
Net Interest Income
Net interest income is the difference between income earned on assets and
interest paid on the deposits and borrowings used to fund them. Net interest
income is affected by the difference between the yields earned on the Company's
interest-earning assets and the rates paid on interest-bearing liabilities, as
well as the relative amounts of such assets and liabilities. Net interest
income, divided by average interest-earning assets, represents the Company's net
interest margin. The following table shows the components of net interest income
and the dollar and percentage changes for the periods presented.
Three Months Ended March 31,
(dollars in thousands) 2022 2021 $ Change % Change
Interest and Dividend Income
Loans, including fees $ 15,610 $ 16,592 $ (982) (5.9) %
Taxable interest and dividends on
investment securities 1,666 1,064 602 56.6 %
Interest on deposits with banks 60 22 38 172.7 %
Total Interest and Dividend Income 17,336 17,678 (342) (1.9) %
Interest Expenses
Deposits 513 802 (289) (36.0) %
Long-term debt 354 367 (13) (3.5) %
Total Interest Expenses 867 1,169 (302) (25.8) %
Net Interest Income (NII) $ 16,469 $ 16,509 $ (40) (0.2) %
46--------------------------------------------------------------------------------
Table of Contents
Average Balances and Yields
The following table sets forth average balances, average yields and costs, and
certain other information for the periods indicated. No tax-equivalent yield
adjustments were made, as the effect thereof was not material. All average
balances are daily average balances. Non-accrual loans were included in the
computation of average balances. The yields set forth below include the effect
of deferred fees, discounts and premiums that are amortized or accreted to
interest income or expense.
Three Months Ended March 31,
2022 2021
(dollars in thousands) Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost
Assets
Commercial real estate $ 1,112,108 $ 10,737 3.86 % $ 1,059,803 $ 10,696 4.04 %
Residential first mortgages 86,805 713 3.29 % 124,984 914 2.93 %
Residential rentals 197,312 1,831 3.71 % 139,220 1,445 4.15 %
Construction and land development 33,669 407 4.84 % 36,091 402 4.46 %
Home equity and second mortgages 25,946 245 3.78 % 29,272 248 3.39 %
Commercial loans 46,668 550 4.71 % 44,740 551 4.93 %
Commercial equipment loans 61,715 642 4.16 % 60,544 519 3.43 %
U.S. SBA PPP loans 20,444 452 8.84 % 116,003 1,802 6.21 %
Consumer loans 3,213 33 4.11 % 1,320 15 4.55 %
Allowance for loan losses (21,043) - - (19,614) - 0.00 %
Loan portfolio (1) 1,566,837 15,610 3.99 % 1,592,363 16,592 4.17 %
Taxable investment securities 484,157 1,572 1.30 % 229,810 951 1.66 %
Nontaxable investment securities 17,513 94 2.15 % 20,841 114 2.19 %
Interest-bearing deposits in other banks 42,608 60 0.56 % 25,064 14 0.22 %
Federal funds sold - - - % 18,721 7 0.15 %
Interest-Earning Assets ("IEAs") 2,111,115 17,336 3.28 % 1,886,799 17,678 3.75 %
Cash and cash equivalents 116,560 82,669
Goodwill 10,835 10,835
Core deposit intangible 994 1,481
Other assets 86,488 88,791
Total Assets $ 2,325,992 $ 2,070,575
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 609,945 $ - - % $ 381,059 $ - - %
Interest-bearing demand deposits
Savings 121,236 15 0.05 % 101,782 13 0.05 %
Demand deposits 625,241 103 0.07 % 602,836 97 0.06 %
Money market deposits 378,781 100 0.11 % 349,718 98 0.11 %
Certificates of deposit 322,346 295 0.37 % 351,365 594 0.68 %
Total interest-bearing deposits 1,447,604 513 0.14 % 1,405,701 802 0.23 %
Total Deposits 2,057,549 513 0.10 % 1,786,760 802 0.18 %
Long-term debt 12,219 25 0.82 % 27,291 41 0.60 %
Subordinated Notes 19,515 251 5.14 % 19,490 251 5.15 %
Guaranteed preferred beneficial interest in
junior subordinated debentures ("TRUPs") 12,000 78 2.60 % 12,000 75 2.50 %
Total Debt 43,734 354 3.24 % 58,781 367 2.50 %
47--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
