Centric Financial Corporation Announces Third Quarter 2022 Earnings

Net interest income for the quarter was $11.2 million, an increase of $1.5 million, or 15%, over second quarter 2022, primarily driven by a 47 basis point increase to the net interest margin.  Rate increases during the period were the driving factor in interest income, contributing $1.3 million, as well as increases in CRE loan balances outstanding.  Cost of funds rose 10 basis points over the prior quarter primarily from money market account rates increasing 47 basis points, offset somewhat by a decline of 21 basis points in interest checking rates.  

Net interest income increased $831 thousand over third quarter 2021, resulting in a net interest margin of 4.53% for the quarter, up 46 basis points.  The increase in the Effective Federal Funds Rate of 300 basis points year over year increased interest income on Federal funds and bank balances by $278 thousand over the prior year.  Rate increases were the primary driver in the rise of interest on loans of $705 thousand, partially offset by a reduction of $1.5 million in PPP service fee income.  The cost of deposits increased 9 basis points over third quarter 2021, driving the $181 thousand increase in interest expense as average interest-bearing balances declined.  Money market deposits were the primary contributors to the increases in both rate and balances as interest rates on checking declined over the period.

Noninterest income totaled $1.0 million for the second and third quarters 2022 with a slight change in the composition of income components with mortgage loan income declining $63 thousand while gain on the sale of SBA loans increased $67 thousand. Compared to the third quarter 2021, noninterest income increased $129 thousand, or 15%, with a decrease in mortgage loan income of $169 thousand, offset by higher swap fee income of $269 thousand and a combined $45 thousand increase in deposit services fees. 

Noninterest expense of $7.1 million for the third quarter of 2022 increased over second quarter of 2022 by $523 thousand, or 8%.  Salaries and benefits increased $230 thousand due to performance-based bonus accruals, increased staffing, and the expansion of the lending teams in Devon.  Legal fees increased due to $252 thousand in merger related costs.  Data processing expense increased $146 thousand.  FDIC assessment expense increased $85 thousand, offset by reductions in loan and collection expenses and license and software expenses.  

Compared to third quarter 2021, noninterest expenses rose 17%.  Salary and benefits costs increased 11%, professional fees increased $311 thousand, largely the result of merger related legal expense, and data processing increased $146 thousand.  FDIC assessments decreased $45 thousand as peak deposits from PPP declined.  Loan and collection expenses declined $75 thousand. 

Results of Operations – Year to Date

Net income for the first nine months of 2022 ended at $8.8 million, or $1.02 per diluted share, an increase of $2.2 million, or 34%, over the prior year.  The decrease of $4.7 million in provision expense was offset by a reduction of $4.0 million in PPP deferred fee income year over year.  Pre-tax pre-provision income excluding PPP service fee income resulted in core earnings of $12.3 million for the nine months ended September 30, 2022, 20% above the same period last year.    

Net interest income decreased $1.0 million to $30.2 million over the nine months ended September 30, 2021.   Interest and fees on loans decreased $1.7 million, primarily due to the $4.0 million reduction of PPP deferred fee income.  Excluding the PPP fee income, interest and fees on loans would have increased by 8%.  Interest income on commercial real-estate loans increased $2.8 million, or 15%, over the same period last year driven by volume and rate increases.  The decline of $75.5 million in PPP loans held in the commercial loan portfolio decreased earnings by volume, offset slightly by rate increases.  The yield on total loans increased 15 basis points for the period.  Total interest expense declined $440 thousand, or 11%, from last year.  Reductions in rate and balances in certificates of deposit contributed $620 thousand to the decrease from last year, while money market deposits increased $668 thousand due to rate and volume increases.  Net interest margin for the nine-month period ending September 30, 2022, was 4.17%, a 17 basis point increase over the first nine months of 2021.

Noninterest income totaled $3.0 million for the first nine months of 2022, consistent with the same period 2021, with changes in revenue streams as discussed above.  Gains on sold loans declined $769 thousand, while swap referral fees increased $492 thousand and service fees on loans grew by $284 thousand. 

Noninterest expense totaled $19.9 million, an increase over the $18.7 million last year.  Salaries and benefits rose only 2%, professional fees increased $345 thousand and data processing services increased 27% due to the legal fees from the pending merger and a rise in other professional services.  Advertising and marketing expenses fell 30%, and FDIC assessment expenses declined $240 thousand connected to the release of wholesale funding at the end of 2021.  Other operating expenses increased $456 thousand, with increases in license fees and software maintenance, SBA mortgage servicing rights amortization and donations. 

Asset Quality

Provision expense for the first nine months of 2022 amounted to $2.3 million, compared to $7.0 million for the same period last year.  The coverage ratio for the allowance for loan and lease losses increased to 1.50%, compared to $1.28% last year.  The allowance for loan and lease losses amounted to $14.0 million and $11.8 million at September 30, 2022 and 2021, respectively.  Management believes the allowance for loan and lease losses at September 30, 2022 adequately reflects the inherent risk in the loan portfolio.

At September 30, 2022, nonperforming assets totaled $12.4 million, a slight decline from the second quarter of 2022 and an improvement of $1.4 million over September 30, 2021.  No loans remained in the 90+ days past due category at the end of the third quarter of 2022 as compared to $3.2 million in the same period last year.  SBA loans held in nonaccrual and 90+ days past due both declined over the same period last year as collections or guarantees were processed.  SBA loans that were considered nonperforming at September 30, 2022 totaled $740 thousand, a reduction of $2.5 million from the same period last year.  Nonperforming conventional loans increased $1.1 million from a year ago.  Total nonperforming assets were 1.20% of total assets at period end compared to 1.24% in the same period last year.

Balance Sheet

At September 30, 2022, Centric's total assets remained consistent at $1.0 billion compared to June 30, 2022, and decreased $74 million from September 30, 2021.  Cash and cash equivalents were reduced by $28 million and $83 million over last quarter and the prior year quarter, respectively, coinciding with the increase in net loans and the decrease in deposits, respectively.  Investments in securities declined from the last year due to the sale of an equity security late in 2021. 

Total loans ended the period at $933 million, an increase of $29 million from prior quarter.  Organic loan growth was $34 million as PPP loans declined $5 million.  Commercial loans increased $15 million, or 6%, and CRE loans increased $18 million.  Compared to the same period last year, core loans grew $90 million, or 11%.  CRE grew $54 million, and core commercial loans increased 18%, or $41 million, excluding the reduction of $75.5 million in PPP loan balances.  Annualized core loan growth is 14.6% through September 30, 2022.    

Total deposits ended the period at $884 million, similar to the prior quarter in balances with a change in the mix between money market gains and certificates of deposit losses of around $22 million.  From September 30, 2021, total deposits declined $53 million in balances due to a reduction in wholesale funding of $122 million.  Money market and savings grew 24%, or $60 million, while noninterest bearing deposits increased by 8%.  Certificates of deposit and interest-bearing demand deposit balances declined $59 million and $72 million, respectively.

During the current quarter, $8 million in long-term borrowings matured and reduced balances to $47 million.  Long-term borrowings decreased by $24 million from the same period last year. 

Shareholders' equity increased $4 million over second quarter 2022 and ended the period at $104 million.  Year over year, equity increased $13 million, or 14%.  At September 30, 2022, Centric held 96,996 shares of treasury stock repurchased under the Company's stock repurchase plan during 2020.  Tangible book value increased $0.22 per share over second quarter and ended the period at $11.94.  Tangible book value increased $1.22 per share, or 11%, from September 30, 2021, as a result of increased earnings over the period.  Centric Bank remains above bank regulatory "Well Capitalized" standards.

Centric Financial Corporation
Consolidated Balance Sheet (Unaudited)
	At Period End
	Sep 30,	Jun 30,	Sep 30,
(Dollars in thousands)	2022	2022	2021
Assets
Cash and cash equivalents	$           40,905	$           69,247	$         124,034
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