The Community Financial Corporation Reports Record EPS of $1.34 and ROAA of 1.31% for the Third Quarter 2022

WALDORF, Md., Oct. 24, 2022 (GLOBE NEWSWIRE) — The Community Financial Corporation (NASDAQ: TCFC) (the “Company”), the holding company for Community Bank of the Chesapeake (the “Bank”), today reported record net income for the three months ended September 30, 2022 of $7.6 million, or $1.34 per diluted common share. This compares to net income of $6.8 million, or $1.21 per diluted common share for the second quarter of 2022, and net income of $6.4 million or $1.12 per diluted common share for the quarter ended September 30, 2021. The Company reported record net income for the nine months ended September 30, 2022 of $20.7 million or diluted earnings per share of $3.65 compared to net income for the comparable 2021 period of $19.1 million or diluted earnings per share of $3.29.

Third Quarter 2022 Highlights

• Record Net Income: Net income totaled $7.6 million for the quarter ended September 30, 2022, or $1.34 per diluted common share compared to net income of $6.4 million or $1.12 per diluted common share for the quarter ended September 30, 2021 and $6.8 million or $1.21 per diluted common share for the quarter ended June 30, 2022.
• Increasing Profitability: Return on average assets (“ROAA”), return on average common equity (“ROACE”) and return on average tangible common equity (“ROATCE”) were 1.31%, 15.97% and 17.18% respectively, for the three months ended September 30, 2022 compared to 1.17%, 12.45% and 13.41% for the three months ended September 30, 2021. ROAA, ROACE and ROATCE were 1.19%, 14.39% and 15.50% for the three months ended June 30, 2022.
• Expanding Net Interest Margin: Net interest margin increased to 3.47% for the three months ended September 30, 2022 from 3.25% for the second quarter of 2022. Loan and overall interest-earning asset yields increased 33 and 41 basis points to 4.46% and 3.89% in the third quarter of 2022 from 4.13% and 3.48% for the three months ended June 30, 2022. The Company’s cost of funds increased 20 basis points for the comparable three month period from 0.23% to 0.43%.
• Positioned for Rising Rates:
  • Increasing Loan Yields: End of period contractual rates increased by 36 basis points to 4.41% at September 30, 2022 compared to June 30, 2022. The loan portfolio is positioned for rising rates with $467.8 million or 27% of net portfolio loans scheduled to reprice monthly or in the next three months and an additional $76.6 million or 4% repricing in the following nine months. The Bank’s effective duration on the loan portfolio was 2.1 years at September 30, 2022.
  • Improved Deposit Franchise: Focused efforts have increased non-interest-bearing accounts to 30.5% of deposits at September 30, 2022 from 21.6% of deposits at September 30, 2021.
• Prudent Loan Growth: Total portfolio loans increased to $1,743.3 million, an increase of $90.8 million or 22.0% annualized, compared to the prior quarter, and $164.5 million or 13.9% annualized, from December 31, 2021, as the Company continued to gain market share in Virginia. The loan pipeline at September 30, 2022 was $153.0 million, which is expected to provide solid loan growth in the fourth quarter.
• Stable Asset Quality: Non-accrual loans, OREO and TDRs were $6.7 million or 0.28% of total assets at September 30, 2022 compared to $6.7 million or 0.29% of total assets at June 30, 2022, and $7.2 million or 0.31% at September 30, 2021.

Management Commentary

“Increasing net interest income and stable expenses drove another quarter of record performance at Community Bank in the third quarter,” stated James M. Burke, President and Chief Executive Officer of The Community Financial Corporation. “Our expansion into Virginia has delivered consistent loan growth while maintaining our conservative credit culture. Increasing revenue resulted in net interest margin and profitability improvements which we anticipate should continue into the fourth quarter. Market rate increases did lead to an increase in demand deposit costs, but we are optimistic that our assets will continue to reprice more quickly than our liabilities in the fourth quarter driven, in part, by our leading Southern Maryland deposit franchise.”

Results of Operations

Net Interest Income

Net interest income for the comparable quarters increased primarily from increases in interest-earning asset yields and growth in loans and investments partially offset by increased interest expense from higher funding costs. Net interest margin of 3.47% for the three months ended September 30, 2022 increased 19 basis points from 3.28% for the three months ended September 30, 2021 and increased 22 basis points from 3.25% for the three months ended June 30, 2022. Net interest margin expanded during the third quarter of 2022, primarily due to average yields on loans and investment securities (not including interest-bearing deposits) increasing to 4.46% and 2.02% for the three months ended September 30, 2022 from 4.13% and 1.52% for the three months ended June 30, 2022. Interest income from the Company’s participation in the U.S. SBA PPP program was $0.2 million and $1.2 million for the three months ended September 30, 2022 and September 30, 2021, respectively and $0.3 million for the three months ended June 30, 2022.

Net interest income increased for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 due primarily to growth in investment balances and yields and increases in loan yields from the re-pricing of the Bank’s adjustable rate portfolios as well as a change in the mix of loans from lower yielding U.S. PPP loans to higher yielding commercial real estate loans. Increases to net interest income were partially offset by increased interest expense from higher funding costs. Loan interest income increased $1.9 million to $51.1 million for the nine months ended September 30, 2022 from $49.3 million for the three months ended September 30, 2021. Excluding U.S. SBA PPP interest income, for the same comparable periods loan interest income increased $5.1 million. Net interest margin of 3.28% for the nine months ended September 30, 2022 was 10 basis points lower than the 3.38% for the nine months ended September 30, 2021. U.S. SBA PPP loan interest positively impacted margins by four basis points for the nine months ended September 30, 2022 and 14 basis points for the nine months ended September 30, 2021.

The Company’s cost of funds was 0.43% during the third quarter of 2022 compared to 0.23% for the prior quarter and increased from 0.21% for the three months ended September 30, 2021. The Bank’s interest rate asset sensitivity has improved in 2022, as average non-interest bearing (“NIB”) deposit accounts have increased. For the third quarter of 2022 total average NIB deposits increased to 31.2% compared to 22.8% for the comparable period in 2021. The Company’s cost of funds was 0.28% during the first nine months of 2022 compared to 0.23% for the nine months ended September 30, 2021.

Management anticipates that net interest margins will expand in the fourth quarter of 2022, but at a slower rate than the second and third quarters of 2022, as deposit betas are likely to increase due to FOMC rate increases and more aggressive competition for funding. The average cost of deposits increased 24 basis points from 0.20% for the month of June to 0.44% for the month of September. Higher beta municipal relationships have been the main driver of increased deposit rates through the third quarter of 2022. For the same comparative periods, average interest-earning asset yields increased 41 basis points from 3.60% to 4.01%.

Management is optimistic that improvements in the Bank’s funding composition and asset-sensitivity in the loan portfolio will benefit margins and profitability in an increasing interest-rate environment.

Noninterest Income

The $0.2 million decrease in noninterest income in the current quarter was due to no interest rate protection referral fee income compared to $0.2 million for the three months ended September 30, 2021. In addition, changes in interest rates resulted in $0.2 million of unrealized losses in the third quarter of 2022 on securities invested in a Community Reinvestment Act mutual fund. These reductions in noninterest income for the comparable quarters were partially offset by increases in service charges of $0.1 million due to increased interchange fees from increased volume. Noninterest income as a percentage of average assets was 0.21% and 0.26%, respectively, for the three months ended September 30, 2022 and 2021.

The $1.5 million decrease in noninterest income for the nine months ended September 30, 2022 compared to the same period in the prior year was principally due to reductions in interest rate protection referral fee income of $0.9 million, $0.6 million in gains on the sale of investment securities sold in the first nine months of 2021 and $0.5 million in unrealized losses on securities invested in a Community Reinvestment Act mutual fund. These reductions for the comparable periods were partially offset by $0.1 million in increased service charge income and $0.4 million related to the sale of impaired loans. In the first quarter of 2021, the Bank sold non-accrual and classified commercial real estate and residential mortgage loans and recognized a loss on the sale of $0.2 million, and in the second quarter of 2022, impaired loan sales resulted in a gain of $0.2 million. Noninterest income as a percentage of assets was 0.24% and 0.35%, respectively, for the nine months ended September 30, 2022 and 2021.

Noninterest Expense

Noninterest expense of $9.6 million for the three months ended September 30, 2022 increased $0.2 million or 1.9% compared to the three months ended September 30, 2021. The flat overall expense run rate for the comparable periods was primarily due to increases of $0.2 million in data processing expenses and $0.2 million in professional fees as well as other operating expenses of $0.2 million, partially offset by a decrease of $0.5 million in compensation and benefits. Professional fees, occupancy and data processing have increased substantially compared to the same quarter in the prior year due in large part to increased cost of labor and materials due to inflation. Actual compensation expenses were lower due to lower health insurance claims and a slightly lower average FTE count than anticipated.

In the second quarter of 2022, the Bank increased base compensation by 4% and its minimum starting wage to $20.00 per hour for non-executive employees to address local wage pressures caused by inflation and to attract and retain our employees. Management expects a $9.6-$9.8 million normalized expense run rate in the fourth quarter.

Noninterest expense of $28.0 million decreased $0.9 million or 3.2% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease in noninterest expense for the comparable periods was primarily due to decreases in compensation and benefits of $0.5 million, OREO expenses of $0.7 million and fraud losses of $1.1 million.

Compensation expenses were lower for the comparative periods due to lower health insurance claims, a lower average FTE count than the prior year and lower deferred compensation accruals. In addition, compensation and benefits expense has benefited from the Company’s increased use of technology. Deferred costs for U.S. SBA PPP loans originated were $0.3 million for the nine months ended September 30, 2021. Compensation and benefits would have increased overall 2021 noninterest expense if U.S. SBA PPP loans deferred costs were not included in loan origination costs.

Noninterest expense in the first nine months of 2021 included a $1.3 million initial expense and subsequent recovery of $0.2 million related to an isolated wire transfer fraud incident. Our investigation determined that no information systems of the Bank were compromised, and no employee fraud was involved. Excluding the impact of the $1.1 million isolated fraud losses and the $0.3 million in U.S. SBA PPP deferred costs, the Company’s noninterest expense was $28.2 million for the nine months ended September 30, 2021.

OREO expenses have moderated as the Bank reduced foreclosed assets from $1.5 million at September 30, 2021 to no OREO assets at September 30, 2022.

These decreases to noninterest expense were partially offset by increases of $0.6 million in professional fees, $0.3 million in data processing expenses, and $0.2 million in occupancy expense. As noted above, inflationary pressures have increased the cost of labor and materials affecting these financial line items.

The Company’s efficiency ratio was 47.45% and 49.03% for the three and nine months ended September 30, 2022 compared to 52.46% and 52.52% for the three and nine months ended September 30, 2021. The Company’s net operating expense ratio was 1.45% and 1.38% for the three and nine months ended September 30, 2022 compared to 1.47% for both the three and nine months ended September 30, 2021. The efficiency and net operating expense ratios have improved (decreased) as the Company has improved asset quality and grown operating revenues while controlling expense growth.

Income Tax Expense

The effective tax rate for the three months ended September 30, 2022 was 23.90% compared to an effective tax rate of 25.20% for the three months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 was 24.95% compared to an effective tax rate of 25.28% for the nine months ended September 30, 2021.

Balance Sheet

Assets

Total assets increased $32.3 million, or 1.4%, to $2.36 billion at September 30, 2022 compared to total assets of $2.33 billion at December 31, 2021, primarily due to net loan growth. Cash decreased a net of $86.4 million and was used to fund net loan growth of $135.7 million. Available for sale (“AFS”) debt securities, which are reported at fair value, decreased $33.3 million to $464.5 million, primarily due to unrealized losses from rising interest rates during 2022. In addition, deferred tax assets increased $15.7 million to $24.8 million primarily due to increases in unrealized losses of the Bank’s AFS investment portfolio related to changes in interest rates. Deferred tax assets also increased due to the adoption of the current expected credit losses (“CECL”) accounting standard on January 1, 2022.

During the third quarter of 2022, total net loans increased 21.1% annualized or $86.4 million from $1,636.1 million at June 30, 2022 to $1,722.5 million at September 30, 2022. The Company’s loan pipeline was $153.0 million at September 30, 2022. Non-owner occupied commercial real estate as a percentage of risk-based capital at September 30, 2022 and December 31, 2021 were $978.2 million or 374% and $813.0 million or 331%, respectively. Construction loans as a percentage of risk-based capital at September 30, 2022 and December 31, 2021 were $145.4 million or 56% and $140.4 million or 57%, respectively.

Funding

Total deposits increased $70.4 million or 3.4% (4.6% annualized) to $2,126.6 million at September 30, 2022 compared to $2,056.2 million at December 31, 2021. The increase included a $105.4 million increase to transaction deposits offset by a $35.0 million decrease to time deposits. During the first nine months of 2022, non-interest-bearing demand deposits increased $201.7 million to $647.4 million at September 30, 2022, representing 30.5% of deposits, compared to 21.7% of deposits at December 31, 2021. The Company’s business development efforts continue to focus on increasing non-interest bearing and lower cost transaction accounts.

Stockholders’ Equity and Regulatory Capital

During the nine months ended September 30, 2022, total stockholders’ equity decreased $29.0 million. The decrease in equity was primarily due to an increase of $42.0 million in accumulated other comprehensive loss (“AOCL”) related to the Bank’s AFS securities portfolio due to changes in market interest rates. In addition, equity decreased due to common dividends paid of $2.8 million, stock repurchases of $3.6 million and $2.0 million for the adoption of the CECL accounting standard on January 1, 2022. Decreases in equity were partially offset by net income of $20.7 million and net stock related activities in connection with stock-based compensation and ESOP activity of $0.7 million.

The Company’s common equity to assets ratio decreased to 7.59% at September 30, 2022 from 8.94% at December 31, 2021. The Company’s ratio of tangible common equity (“TCE”) to tangible assets decreased to 7.14% at September 30, 2022 from 8.48% at December 31, 2021 (see Non-GAAP reconciliation schedules) due primarily to increases in AOCL. Regulatory capital was not impacted by the increase in AOCL and Tier 1 capital to average asset ratios at the Bank and the Company remained strong at 10.25% and 9.56% at September 30, 2022 compared to 9.95% and 9.23% at December 31, 2021.

On December 9, 2021, the Company announced its Board of Directors approved the resumption of repurchases allowed under the stock repurchase plan originally adopted in October 2020 (the “2020 Repurchase Plan”). The Company was permitted to repurchase up to the 99,450 shares remaining under the 2020 Repurchase Plan using up to $4.0 million in the aggregate and up to $1.5 million in the aggregate on a quarterly basis. During the third quarter of 2022, the Company repurchased 13,647 shares at an average price of $37.11 per share. At September 30, 2022, the Company had no remaining shares available for repurchase under the 2020 Repurchase Plan.

Asset Quality

Allowance for credit losses (“ACL“) and provision for credit losses (“PCL“); Allowance for Loan Losses (“ALLL“) and provision for loan losses (“PLL“)¹; Classified and Non-Performing Assets

On January 1, 2022, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology for determining our ACL with an expected loss methodology that is referred to as the CECL. The measurement of expected credit losses under the CECL methodology applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. In addition, ASU 2016-13 made changes to the accounting for available-for-sale (“AFS”) debt securities. Credit- related impairments on AFS debt securities are now recognized as an allowance for credit loss rather than a write-down of the securities’ amortized cost basis when management does not intend to sell or believes that it is not likely that they will be required to sell the securities prior to recovery of the securities amortized cost basis. We adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2022 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. At adoption, the Company did not hold Held to Maturity (“HTM”) investment debt securities.

The impact at adoption was an increase to the ACL of $2.5 million, the recording of a reserve for unfunded commitments of $0.2 million, an increase in deferred taxes of $0.7 million, and a decrease in retained earnings of $2.0 million.

ACL balances increased to 1.26% of portfolio loans at September 30, 2022 compared to an ALLL of 1.17% of portfolio loans at December 31, 2021. At and for the three months ended September 30, 2022, the Company’s ACL increased $3.6 million or 19.6% to $22.0 million from $18.4 million at December 31, 2021. The Company recorded a $0.7 million and $1.6 million PCL for the three and nine months ended September 30, 2022 compared to no PLL and $0.6 million PLL for the three and nine months ended September 30, 2021. There were $0.5 million in net charge-offs during the nine months ended September 30, 2022 compared to $1.4 million in net charge-offs for the nine months ended September 30, 2021.

Management believes that the allowance is adequate at September 30, 2022.

Classified assets increased $0.8 million from $5.2 million at December 31, 2021 to $6.0 million at September 30, 2022. Management considers classified assets to be an important measure of asset quality. The Company’s risk rating process for classified loans is an important factor in the Company’s ACL qualitative framework. Management remains committed to expeditiously resolving non-performing or substandard credits that are not likely to become performing or passing credits in a reasonable timeframe.

During 2021, classified assets decreased $17.1 million. Asset quality improved with the resolution of $16.9 million in non-accrual and impaired loans through loan sales and negotiated payoffs, as well as the resolution of $3.1 million in OREO. The Company’s sale of impaired loans decreased the specific reserve, improved asset quality, and improved several ALLL qualitative factors.

The ratio of non-accrual loans and OREO to total portfolio loans and OREO decreased 12 basis points from 0.48% at December 31, 2021 to 0.36% at September 30, 2022. The ratio of non-accrual loans, OREO and TDRs to total assets decreased seven basis points from 0.35% at December 31, 2021 to 0.28% at September 30, 2022. 

Non-accrual loans decreased $1.3 million from $7.6 million at December 31, 2021 to $6.3 million at September 30, 2022. There were no OREO balances at September 30, 2022 and December 31, 2021.

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 $2.4 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 branches are located at its main office in Waldorf, Maryland, and branch offices in Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick, Lusby and California, Maryland; and Fredericksburg – Downtown and Fredericksburg – Harrison Crossing, 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 – Certain statements contained in this news release may not be based on historical facts and are “forward-looking statements” within the meaning Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 or phrases such as “is optimistic,” “project,” “believe,” “expect,” “anticipate,” “estimate”, “assume” 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: (i) those relating to the Company’s and the Bank’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 future financial or business performance strategies or expectations; (ii) 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 undertaken or that we undertake in the future; (iii) plans and cost savings regarding branch closings or consolidation; (iv) projections related to certain financial metrics, including with respect to the quarterly expense run rate; (v) expected benefits of programs we introduce, including residential mortgage programs and retail and commercial credit card programs; and (vi) any statement of expectation or belief, and any 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: (i) 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; (ii) 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); (iii) the impacts related to or resulting from Russia’s military action in Ukraine, including the broader impacts to financial markets and the global macroeconomic and geopolitical environments; (iv) assumptions that interest-earning assets will reprice faster than interest-bearing liabilities and the Bank’s ability to maintain its current favorable funding mix; (v) the synergies and other expected financial benefits from any acquisition that we have undertaken or may undertake in the future may or may not be realized within the expected time frames; (vi) the impact of our adoption of the CECL standard; (vii) limitations on our ability to declare and pay dividends or engage in share repurchases; (viii) changes in the Company’s or the Bank’s strategy, costs or difficulties related to integration matters might be greater than expected; (ix) availability of and costs associated with obtaining adequate and timely sources of liquidity; (x) the ability to maintain credit quality; (xi) general economic trends and conditions, including inflation and its impacts; (xii) changes in interest rates; (xiii) loss of deposits and loan demand to other financial institutions; (xiv) substantial changes in financial markets; (xv) changes in real estate value and the real estate market; (xxi) regulatory changes; (xvii) the impact of government shutdowns or sequestration; (xviii) the possibility of unforeseen events affecting the industry generally; (xix) the uncertainties associated with newly developed or acquired operations; (xx) the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future; (xxi) market disruptions and other effects of terrorist activities; and (xxii) the matters described in “Item 1A Risk Factors” in the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2021, 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.

You are cautioned not to place undue reliance on the forward-looking statements contained in this document in that actual results could differ materially from those indicated in such forward-looking statements, due to a variety of factors. Any forward-looking statement speaks only as of the date of this new release, and the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this new release.

Data is unaudited as of September 30, 2022. 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, 2021.

CONTACTS:
James M. Burke, Chief Executive Officer
Todd L. Capitani, Chief Financial Officer
(888) 745-2265

** Non-GAAP financial measure. See reconciliation of GAAP and NON-GAAP measures.
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(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. December 31, 2021 and September 30, 2021 reported balance are shown net of deferred costs and fees to conform with the current period’s presentation.
(2)  Delinquency excludes Purchase Credit Impaired (“PCI”) loans for December 31, 2021 and September 30, 2021.
(3)  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 September 30, 2022 and December 31, 2021, the Company had current non-accrual loans of $5.7 million and $6.7 million, respectively.

** Non-GAAP financial measure. See reconciliation of GAAP and NON-GAAP measures.
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(1)  Asset quality ratios are calculated using total portfolio loans. Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio.

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** Non-GAAP financial measure. See reconciliation of GAAP and NON-GAAP measures.

RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)

Reconciliation of U.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 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.

RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)

Pre-Tax Pre-Provision (“PTPP“) Income, PTPP Return on Average Assets (“ROAA“), PTPP Return on Average Common Equity (“ROACE“), and Return on Average Tangible Common Equity (“ROATCE“)

Management believes that PTPP income, which reflects the Company’s profitability before income taxes and provisions for credit losses, allows investors to better assess the Company’s operating income and expenses in relation to the Company’s core operating revenue by removing the volatility that is associated with credit provisions and different state income tax rates for comparable institutions. 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. Management also believes that during a crisis such as the COVID-19 pandemic, this information is useful as the impact of the pandemic on the provisions for credit losses of various institutions will likely vary based on the geography of the communities served by a particular institution.