Business context and reporting period
CB Financial Services, Inc. is a Pennsylvania-based bank holding company whose Community Bank operates in southwestern Pennsylvania and West Virginia; its other operating segment is insurance brokerage. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest and dividend income | $10.8 | $11.7 | $32.6 | $35.7 |
| Net interest income | $10.0 | $10.4 | $29.9 | $31.3 |
| Provision (recovery) for loan losses | $0.0 | $1.2 | $(1.2) | $4.0 |
| Noninterest income | $2.2 | $2.2 | $7.6 | $6.7 |
| Noninterest expense | $9.8 | $29.0 | $32.9 | $47.0 |
| Net income (loss) | $2.0 | $(17.4) | $4.6 | $(13.7) |
| Diluted earnings (loss) per share | $0.37 | $(3.22) | $0.85 | $(2.54) |
Net interest margin was 2.88% GAAP (2.89% fully tax-equivalent, non-GAAP) in Q3, versus 3.19% (3.21%) a year earlier. For the nine months, it was 2.92% (2.93%) versus 3.34% (3.35%). Management attributed the decline mainly to lower loan and securities yields in the low-rate environment, partly offset by reduced deposit costs.
At September 30, 2021, total assets were $1.475 billion, loans held for investment net of allowance were $990.0 million, and total deposits were $1.185 billion, with another $102.6 million classified as deposits held for sale. The allowance for loan losses was $11.6 million, or 1.16% of total loans (1.20% excluding PPP loans). Nonperforming loans were $10.9 million, or 1.09% of loans; nonperforming assets were $10.9 million, or 0.74% of assets.
Cash and due from banks totaled $173.5 million; unpledged securities were $37.0 million. Short-term borrowings were $42.6 million and other borrowings $6.0 million. The Bank reported $351.3 million of available FHLB borrowing capacity, an $82.8 million Federal Reserve collateral line, and $50.0 million in unaffiliated-bank lines with no draws. For the nine months, operating cash flow was $2.6 million, investing cash flow was $(46.5) million, financing cash flow was $56.5 million, and cash increased $12.6 million to $173.5 million.
Stockholders’ equity was $131.0 million, down from $134.5 million at year-end 2020. Book value per share was $24.57; tangible book value per share was $21.67 (non-GAAP). The Bank was categorized as well capitalized; actual CET1, total capital and leverage ratios were 11.53%, 12.77% and 7.38%, respectively.
Material changes versus prior comparable periods
- Q3 net income improved from a $17.4 million loss to $2.0 million income, principally because Q3 2020 included a noncash $18.7 million goodwill impairment and an $0.9 million fixed-asset writedown. Nine-month net income similarly improved, but 2021 included $2.3 million of fixed-asset writedowns and $1.2 million of intangible-asset impairment.
- Net interest income fell 3.9% in Q3 and 4.3% year to date. Lower asset yields outweighed the benefit of lower funding costs. Noninterest income rose 13.4% year to date, including higher insurance commissions and securities gains, while loan-sale gains were lower.
- Loan balances declined from year-end, reflecting PPP forgiveness, loan sales and reclassification of $17.4 million to held for sale. Deposits including those held for sale increased $63.2 million; management cited stimulus-related deposits and PPP proceeds among the drivers. Securities increased $76.0 million as the Company invested excess cash.
- Credit measures improved versus year-end: nonperforming loans declined from $14.5 million to $10.9 million, and the allowance declined from $12.8 million to $11.6 million. The nine-month loan-loss provision was a $1.2 million recovery, which management linked to lower reservable balances, fewer specifically impaired loans and improving economic conditions.
- Stockholders’ equity declined despite positive earnings, reflecting $2.3 million of other comprehensive loss, $3.9 million of dividends and $2.5 million of share repurchases.
Outlook, management commentary and risks
The Company completed consolidation of six branches in June, reducing its network to 16 branches, and is pursuing process, technology and operational-efficiency changes. It agreed to sell certain loans, assets and deposits of two West Virginia branches to Citizens Bank. Regulatory approvals had been received by September 30, but closing remained subject to other conditions and was expected in Q4 2021. The agreement provides a 5% premium on assumed deposits; management estimated the premium at $5.1 million, to be recognized at closing.
Management expected approximately $7.9 million of nonrecurring 2021 expenses from the initiatives and had incurred $6.3 million by September 30. It estimated 2022 cost savings of $2.5 million to $3.5 million, plus approximately $3.0 million of ongoing pretax savings from branch optimization; these are management estimates, not guaranteed results. No formal earnings or revenue guidance was provided. A $3.6 million hotel-secured commercial real estate loan transferred to held for sale was sold in October 2021; the Company expected to recognize an $897,000 gain in Q4.
Key risks cited include local and general economic conditions, COVID-19 effects, customer repayment ability, interest rates, deposit flows, loan demand, real-estate values, competition, expense control and whether anticipated restructuring savings are achieved. Hotel and other commercial real-estate exposures remain relevant credit risks. The Company reported no pending legal proceeding it believed would materially adversely affect its financial condition, results or cash flows. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Citizens Bank branch transaction closed on the expected terms and timing, including recognition of the estimated $5.1 million deposit premium.
- Whether the estimated cost savings are realized, and how final restructuring expenses compare with management’s $7.9 million estimate.
- Trends in net interest margin, loan and deposit pricing, and the effect of interest-rate changes on earnings and economic value.
- Credit quality in commercial real estate, particularly hotel exposures, and the adequacy of the allowance as PPP balances and held-for-sale loans change.
- Whether liquidity and capital remain adequate as time deposits mature, dividends and buybacks continue, and branch-related deposits leave.
- The filing states adoption of the expected-credit-loss standard (CECL) is required for the Company beginning January 1, 2023; the one-time allowance adjustment and overall effect were not yet quantified.