Touchstone Bankshares, Inc. (the “Company”) (OTC Pink: TSBA), and its wholly-owned subsidiary, Touchstone Bank (the “Bank”), reported an unaudited net income of $607 thousand for the quarter ended September 30, 2020, a decrease of $239 thousand, or 28.3%, when compared to the $846 thousand of net income recorded for the same quarter in 2019. Return on average assets was 0.47% for the third quarter of 2020, a decrease of 25 basis points when compared to the 0.72% return on average assets recorded for the third quarter of 2019. Basic and diluted earnings per common share for the quarter ended September 30, 2020 was $0.18. For the nine months ended September 30, 2020, net income was $1.5 million and basic and diluted earnings per common share were $0.44 and $0.43, respectively.
James Black, President and CEO commented “Our priority remains with taking care of our employees and customers and that stayed top of mind during the third quarter. Secondly, we strengthened the Company’s financial posture and flexibility through a subordinated debt issuance, boosted loan loss reserves, and executed a previously announced efficiency improvement plan. Each of the initiatives adding shareholder value and better positioning us for when we return to normality.”
Earnings
Net interest income for the quarters ended September 30, 2020, and September 30, 2019, was $4.3 million and $4.4 million, respectively. Net interest income for the second quarter of 2020 was $4.3 million. The net interest margin for the third quarter of 2020 was 3.61% compared to 4.12% for the same period in 2019. This decline in the margin was mainly attributable to the drop of the Federal Funds target rates during the preceding twelve months. The net interest margin for the second quarter of 2020 was 3.74%. Net interest income for the nine months ended September 30, 2020, was $13.2 million compared to $12.9 million for the same period in 2019. The net interest margin declined 33 basis points to 3.89% for the nine months ended September 30, 2020, when compared to the 4.22% recorded for the nine months ended September 30, 2019.
The Bank recorded a $300 thousand provision for loan losses in the third quarter of 2020, while no provision for loan losses was recorded in the third quarter of 2019. Year to date, the Bank has recorded provision for loan losses of $1.5 million compared to a recovery of loan losses of $37 thousand recorded for the same period in 2019. Though credit quality metrics as of September 30, 2020 remain sound, the Bank is taking proactive measures by adding to the reserve in anticipation of the credit challenges it believes it could face in late 2020 and early 2021 due to the COVID-19 pandemic.
Noninterest income totaled $722 thousand for the quarter ended September 30, 2020, a decrease of $28 thousand, or 3.7%, when compared to the $750 thousand recorded for the same period in 2019.
Noninterest expense for the three-month periods ended September 30, 2020 and 2019 were $4.0 million and $4.1 million, respectively. Noninterest expense for the second quarter of 2020 was $4.1 million.
For the nine months ended September 30, 2020, noninterest expense was $12.1 million, an improvement of $217 thousand when compared to the $12.3 million of noninterest expense recorded in the first nine months of 2019.
Balance Sheet
At September 30, 2020, total assets were $527.1 million, compared to $468.2 million as of December 31, 2019, an increase of $58.9 million, or 12.6%. Total loans, net of the $32.5 million of outstanding Paycheck Protection Program loans (“PPP loans”), were $341.5 million at September 30, 2020, which was a decrease of $8.8 million, or 2.5%, when compared to total loans of $350.3 million at December 31, 2019. Loan demand has softened in the Bank’s markets due to the COVID-19 pandemic. Deposits totaled $441.5 million at September 30, 2020, and increase of $58.6 million, or 15.3%, when compared to the $382.9 million as of December 31, 2019. Borrowings from the Federal Home Loan Bank totaled $21.0 million at September 30, 2020, compared to $30.0 million at December 31, 2019. The Company issued $8 million of subordinated debt in the third quarter of 2020 (the “2020 Notes”), bringing the net total subordinated debt to $11.3 million at September 30, 2020. The 2020 Notes have a maturity date of August 15, 2030 and carry a coupon of 6.00% for the first five years. Thereafter, the 2020 Notes will pay interest at 3-month SOFR plus 596 basis points, resetting quarterly. The Company is entitled to redeem the Notes without penalty, in whole or in part, on any interest payment date on or after August 15, 2025, or at any time, in whole but not in part, upon certain other specified events. The Company plans to use the proceeds from the placement of the 2020 Notes for general corporate purposes, including the potential repayment of the existing $3.5 million of subordinated debt in 2021 and to support capital levels at Touchstone Bank. The 2020 Notes have been structured to qualify as Tier 2 capital for regulatory purposes at the holding company.
Total equity at September 30, 2020, was $49.9 million, compared to $47.2 million at December 31, 2019. The Bank remains well-capitalized as defined by regulatory guidelines.
Asset Quality
The allowance for loan losses at September 30, 2020, was $3.7 million, or 1.08% of total loans, net of PPP loans, compared to $2.3 million, or 0.65% of total loans, at December 31, 2019. Charge-offs, net of recoveries, for the quarter ended September 30, 2020, were $116 thousand, bringing the year-to-date net charge-offs to $105 thousand. Nonperforming loans (excluding Purchased Credit Impaired loans, or “PCI loans”) declined $1.6 million, or 35.6% during the third quarter to $2.9 million, or 0.85% of total loans, net of PPP loans, at September 30, 2020.
In response to the COVID-19 pandemic, the Bank offered its borrowers an option to defer loan payments for an initial three months (“initial deferral”). The Bank grants an additional three-month deferral (“second deferral”) to borrowers after management evaluates each borrower’s status after the initial three-month deferral period had ended. Initial deferrals were granted on 294 loans totaling approximately $64.1 million. At September 30, 2020, the Bank had twelve loans totaling of $13.7 million on the second deferral. Of the twelve loans on the second deferral, three loans totaling $8.3 million are hotel-related loans.
