Touchstone Bankshares Reports 2023 First Quarter Financial Results
03/31/2023
The Company reported a net loss of $(196) thousand available to common shareholders for the quarter ended March 31, 2023. Basic and diluted loss per common share for the quarter was $(0.06). Return on average assets was (0.13)% while return on average common equity was (1.89)%. Negatively affecting the results in the first quarter of 2023 was a $1.0 million provision for credit loss associated with the Bank's 2021 investment in Signature Bank's ("SBNY") subordinated debt. Also, the Bank recorded $215 thousand of pretax one-time expenses associated with a core-accounting conversion in the first quarter of 2023. Core earnings1 (non-GAAP), which is net income available to common shareholders before the one-time expenses noted above, net of taxes, was $771 thousand, or $0.24 basic and diluted earnings per common share.
By comparison, the Company's net income for the quarter ended March 31, 2022 was $1.1 million and basic and diluted earnings per common share were $0.35 and $0.34, respectively. The return on average assets was 0.78% for the quarter ended March 31, 2022. For the fourth quarter of 2022, the Company reported net income available to common shareholders of $1.2 million, or $0.38 per common share on a basic and diluted basis.
James Black, President and CEO, stated "Touchstone Bank demonstrated strength and trust during the first quarter where there was extreme financial uncertainty and market volatility that ultimately led to the failure of two large financial institutions. Included in the results are the impacts of the Bank's subordinated debt investment in Signature Bank, which was one of the institutions taken into receivership by the Federal Deposit Insurance Corporation ("FDIC"). Despite this one-time charge, our capital position remained strong, with capital well in excess of regulatory standards."
"During the quarter, the strength of the balance sheet and our community bank model proved itself, as we experienced growth in loans and deposits. In fact, deposits grew 4.4%, or $23 million, for the quarter, outpacing loan growth, as proactive liquidity risk management strategies were taking hold. We have a well-diversified and established deposit base with ample liquidity sources to cover uninsured deposits. The loan portfolio is equally as diversified, with excellent asset quality metrics."
He continued, "Our strategic focus continued with the successful completion of a core conversion during the quarter, which was a significant and time-consuming project. By having this upgraded system, we expect to generate operational efficiencies and enhanced products and services for our valued customers and employees.
With the prevailing industry headwinds, the need for greater efficiencies is more important than ever and is of notable focus."
Earnings
Net interest income before provision for credit losses for the first quarter of 2023 was $5.4 million, compared to $4.6 million for the same period in 2022, an increase of $870 thousand, or 19.1%. Net interest income for the fourth quarter of 2022 was $5.6 million. The Company's cost of funds were 104 basis points in the first quarter of 2023 which is 64 basis points higher than the 40 basis points cost of funds for the first quarter of 2022. The net interest margin for the quarter ended March 31, 2023 was 3.78% compared to 3.34% for the quarter ended March 31, 2022. The net interest margin for the fourth quarter of 2022 was 3.87%.
The Bank recorded a $1.0 million provision for credit loss in the first quarter of 2023, which was all associated with the Bank's 2021 investment in SBNY's subordinated debt. SBNY failed in March of 2023 and was taken into receivership by regulators. No provision for credit losses associated with loans was recorded in the first quarter of 2023 as loan credit metrics remain favorable. Loans past due and on nonaccrual remain at historically low levels. No provision for credit losses was recorded in the first quarter of 2022.
Noninterest income totaled $768 thousand for the quarter ended March 31, 2023, a $100 thousand decrease when compared to the $868 thousand recorded in the same period in 2022.
Notable variances for the noninterest income table:
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Secondary marketing fees declined due to the Company deciding to keep 1-4 family loans originated on-balance sheet.
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The decrease in other operating income was mainly due to income received in the first quarter of 2022 from the Bank's other investments.
Noninterest expense totaled $5.5 million for the quarter ended March 31, 2023, an increase of $1.2 million, or 27.1%, when compared to the $4.3 million recorded in the same period in 2022.
Notable variances for the noninterest expense table:
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The increase in salaries and employee benefits for 2023 when compared to the same period in 2022 is mainly due to added staff, wage inflation, and one-time bonuses accrued for core conversion expenses ($112.5 thousand accrued as of March 31, 2023).
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The increase in occupancy expense is mostly due to a new lease for office space in the Raleigh, North Carolina MSA for a loan center. The loan center was opened in mid-2022.
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The increase in data processing expense in 2023 when compared to the same period in 2022 was mainly due to the use of additional credits provided by the Company's core provider in the first quarter of 2022. The credits were completed in October of 2022 and management believes the first quarter of 2023's data process expense will be the amount going forward.
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The decrease in telecommunications in 2023 versus 2022 was due to the Bank renegotiating its third- party telecommunication contract and management anticipates the first quarter of 2023's telecommunication expense will be this amount going forward.
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Legal and professional fees are lower for the three months ended March 31, 2023, when compared to the same period in 2022 mainly due to a nonrecurring $26 thousand recruiting fee paid in the first quarter of 2022.
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The $272 thousand increase in other noninterest expenses was due to several elevated expense categories. First, the Company began a rebranding campaign and had core-conversion related marketing which increased its marketing expense $90 thousand in the first quarter of 2023 when compared to the first quarter of 2022. Also, the Bank's Virginia Franchise Tax expense increased $22 thousand in the first quarter of 2023 when compared to the first quarter of 2022. The Bank had an increase of $74 thousand in appraisal fees due to a restructuring of its appraisal ordering process. The elevated appraisal expenses should subside beginning in the second quarter of 2023. Next, the Bank has third party information technology network support. Those network expenses increased $25 thousand in the first quarter of 2023 when compared to the first quarter of 2022 due to a few additional invoices for extra support needed in the first quarter of 2023. Lastly, the Bank had an increase of $29 thousand in its internet banking fees in the first quarter of 2023 when compared to the first quarter of 2022.
In the first quarter of 2022, the Bank recorded a one-time tax benefit of $241 thousand.
Balance Sheet
At March 31, 2023, total assets were $644.7 million, compared to $594.2 million at March 31, 2022, an increase of $50.5 million, or 8.5%, as the Company continues to build its balance sheet. Total assets increased $22.3 million, or 3.8%, during the first quarter of 2023.
Total loans were $496.8 million at March 31, 2023. Total loans increased $9.6 million, or 7.9% on an annualized basis, during the quarter. Total loans increased $16.9 million, or 13.9% on an annualized basis, during the fourth quarter of 2022.
On the liability side of the balance sheet, deposits totaled $549.5 million at March 31, 2023, as compared to $526.6 million at December 31, 2022. This represents an increase of $23.0, million or 17.5%, on an annualized basis. The Bank had $20.4 million of brokered time deposits included in its total deposits at March 31, 2023 and December 31, 2022.
In the fourth quarter of 2022, the Bank borrowed $25 million for the Federal Home Loan Bank ("FHLB"), which brought its total borrowings to $31 million, which was the balance outstanding at March 31, 2023 and December 31, 2022.
At March 31, 2023, the Bank had $17.6 million of outstanding subordinated debt. In August of 2020, the Company issued $8 million of subordinated debt with a 10-year maturity and an initial 6.00% coupon. In January of 2022, the Company issued an additional $10.0 million of subordinated debt. These notes have a maturity date of January 30, 2032 and carried an initial coupon of 4%.
Shareholders' equity totaled $43.7 million at March 31, 2023. The Company's other accumulated comprehensive loss was $9.7 at March 31, 2023. The Bank's community bank leverage ratio was 9.89% at March 31, 2023, and remains above the threshold for well capitalized status under regulatory guidelines.
Asset Quality
The allowance for loan losses at March 31, 2023, was $4.9 million, or 0.99%, of total loans. Loans past due 30 days or more and still accruing totaled $280 thousand at March 31, 2023, while nonaccrual loans totaled $356 thousand. The Company believes the current level of allowance for loan loss reserves are adequate to cover anticipated losses as credit metrics remain stable.
Liquidity/Funding
The Company believes it has sufficient on-and off-balance sheet liquidity sources to meet any liquidity event it may encounter. The Bank's estimated uninsured/uncollateralized deposits at March 31, 2023 was less than 20% of total deposits. Combined with unpledged available-for-sale securities, total liquid assets and unused borrowing capacity exceeded total estimated uninsured and uncollateralized deposits by 245%.
About Touchstone Bankshares, Inc.
Touchstone Bankshares, Inc. is the bank holding company for Touchstone Bank. The majority of the Company's business activities are conducted through Touchstone Bank. Touchstone Bank is a full-service community bank headquartered in Prince George, Virginia. The Bank has ten branches serving Southern and Central Virginia and two branches and two loan centers serving Northern North Carolina. Visit www.touchstone.bank for more information.
Forward-Looking Statements
In addition to historical information, this press release may contain certain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, changes in interest rates and general economic conditions; the legislative/regulatory climate; monetary and fiscal policies of the U.S. Government; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market area; mergers, acquisitions and dispositions; implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; and tax and accounting rules, principles, policies and guidelines.