CB Financial Services, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are noted below. The company is a Pennsylvania bank holding company operating Community Bank and an insurance agency across southwestern Pennsylvania, West Virginia, and Ohio.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets | $1.417 billion | $1.322 billion |
| Total loans, gross | $1.045 billion | $952.5 million |
| Deposits | $1.225 billion | $1.118 billion |
| Net interest income | $41.9 million | $43.2 million |
| Provision for loan losses | $4.0 million | $725,000 |
| Noninterest income | $9.5 million | $8.6 million |
| Noninterest expense | $56.8 million | $35.0 million |
| Net income (loss) | $(10.6) million | $14.3 million |
| Diluted earnings (loss) per share | $(1.97) | $2.63 |
- Profitability and margins: The 2020 net loss included an $18.7 million noncash goodwill impairment and a $1.1 million fixed-asset write-down. Excluding these charges, management reported adjusted net income of $8.8 million and adjusted diluted EPS of $1.63 (non-GAAP). Net interest margin was 3.32%, down from 3.64%; the GAAP efficiency ratio rose to 110.50% from 67.57% (adjusted non-GAAP ratio: 68.14% versus 63.83%).
- Fourth quarter: Q4 2020 net income was $3.1 million, or $0.57 per diluted share, compared with $4.7 million, or $0.85, in Q4 2019. Q4 provision for loan losses was zero; quarterly noninterest expense was $9.7 million.
- Cash flow: Cash and due from banks increased $80.7 million to $160.9 million. Net cash provided by operating activities was $14.1 million; investing activities used $36.9 million and financing activities provided $103.5 million. The filing attributes increased cash and deposits in part to pandemic-related activity and PPP proceeds.
- Asset quality: Nonperforming assets increased to $14.7 million from $5.6 million; nonperforming loans were $14.5 million, or 1.39% of loans, versus $5.4 million, or 0.57%. The allowance was $12.8 million, 1.22% of total loans (1.29% excluding PPP loans), versus $9.9 million and 1.04% a year earlier. Net charge-offs were $1.1 million versus $416,000.
- Funding, debt, and liquidity: Deposits grew 9.5%, including PPP-related deposits; management reported 4.6% growth excluding those deposits. Year-end borrowings included $41.1 million in repurchase agreements and $8.0 million in FHLB advances. Available FHLB borrowing capacity was $320.8 million; the Bank also had a $91.5 million Federal Reserve credit line and $60.0 million in unaffiliated-bank lines, none drawn at year-end. Management said liquidity was sufficient. The Bank was well capitalized: total risk-based capital was 13.04% and Tier 1 leverage was 7.81%.
- Equity and distributions: Stockholders’ equity declined to $134.5 million from $151.1 million, principally reflecting the net loss, dividends, and share repurchases. The company paid $5.2 million in dividends and repurchased 68,434 shares for $1.9 million; the repurchase program was suspended in March 2020 and expired in November.
Material changes versus 2019
- Loan balances grew $92.3 million, or 9.7%, including $71.0 million of PPP originations; excluding PPP, reported organic loan growth was $37.2 million, or 3.9%. Construction and commercial real estate lending grew notably.
- Lower rates reduced asset yields and interest income. Lower deposit costs partly offset the effect, but net interest income fell 2.9% and net interest margin contracted 32 basis points.
- The credit-loss provision rose to $4.0 million amid pandemic uncertainty, higher reserves for vulnerable industries, and a $931,000 hotel-loan charge-off. Special-mention and classified loans increased to $74.2 million from $32.7 million, mainly reflecting hospitality exposure.
- Noninterest income rose 10.6%, supported by insurance commissions and mortgage-loan sale gains; deposit service fees declined. Reported noninterest expense rose 62.4%, largely due to impairment charges; excluding the goodwill and fixed-asset charges, management reported expense growth of 5.7%.
- Goodwill fell to $9.7 million from $28.4 million after the $18.7 million impairment. Management stated the impairment was noncash and did not affect liquidity, cash flows, or regulatory capital.
Outlook, risks, and unusual items
- Management cautioned that the duration and economic effects of COVID-19 were uncertain, with possible further pressure on borrowers, credit quality, collateral values, fee income, loan demand, and operating continuity. At year-end, 31 loans totaling $24.1 million remained in forbearance, compared with 527 loans totaling $165.9 million at June 30; most affected commercial loans were scheduled to resume payments in July 2021.
- At December 31, PPP loans totaled $55.1 million. The Bank had originated 639 loans totaling $71.0 million during 2020; $1.1 million of net deferred PPP fees remained unearned. PPP loans carried an SBA guarantee subject to program requirements, and no allowance was assigned to them.
- On February 23, 2021, the company announced plans to consolidate six branches, potentially divest other branches, and invest in technology and process automation. Management estimated up to $6.1 million of 2021 nonrecurring pretax costs, approximately $1.5 million of expense reduction in 2021, and $3.0 million of ongoing annual pretax savings. These are estimates, and the cost estimate excludes certain potential items described in the filing.
- Other key risks include commercial real estate and hospitality credit concentrations, sensitivity to interest rates, competition for deposits and loans, cybersecurity and third-party service risks, energy-sector exposure in the market area, and the uncertain effect of adopting CECL, scheduled for January 1, 2023.
- The independent auditor issued an unqualified opinion on the financial statements and identified allowance-for-loan-loss qualitative factors and goodwill impairment valuation as critical audit matters.
Investor facts to verify
- Whether hospitality and other pandemic-affected borrowers resume regular payments, and how nonperforming, criticized, and forborne loans develop.
- Whether reserve levels remain adequate as PPP balances are forgiven or repaid and economic assumptions change.
- How quickly the announced branch consolidations are completed, actual restructuring costs incurred, and savings achieved.
- Whether the company sustains earnings and margins after excluding one-time impairment charges, and how rate movements affect net interest income.
- Deposit retention and liquidity trends, including upcoming time-deposit maturities, unfunded commitments, and the continued availability of borrowing facilities.
- The basis and sensitivity of the goodwill valuation, and the eventual allowance and capital effects of CECL adoption.