CB Financial Services, Inc. — Third Quarter 2020 Form 10-Q
Business context and reporting period
CB Financial is a community bank holding company serving southwestern Pennsylvania and nearby areas of West Virginia and Ohio, with an insurance brokerage subsidiary. This unaudited filing covers the three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Results reflect the COVID-19 disruption, lower interest rates, PPP lending and a goodwill impairment. Amounts below are in U.S. dollars.
Key financial results and condition
- Third-quarter earnings: Net loss was $17.4 million, or $3.22 per diluted share, versus net income of $3.7 million, or $0.69 per diluted share, in Q3 2019. The $18.7 million goodwill impairment and $884,000 fixed-asset writedown drove the reported loss. Excluding those charges, management reported net income of $1.8 million, down 50.8% year over year; this is a non-GAAP comparison.
- Nine-month earnings: Net loss was $13.7 million, or $2.54 per diluted share, versus net income of $9.7 million, or $1.78 per diluted share, in 2019. Excluding the goodwill and fixed-asset charges, management reported net income of $5.5 million, down 42.8%.
- Interest income and margin: Q3 net interest income was $10.4 million, down 6.1%; nine-month net interest income was $31.3 million, down 3.0%. Net interest margin on a fully tax-equivalent basis was 3.21% in Q3 versus 3.74% a year earlier, and 3.35% for nine months versus 3.67%. Lower asset yields outweighed reduced funding costs.
- Other income and expenses: Noninterest income rose 10.5% to $2.2 million in Q3 and 7.2% to $6.7 million for nine months. Mortgage loan-sale gains increased, while service fees declined. Noninterest expense was $29.0 million in Q3 and $47.0 million for nine months, substantially affected by the impairment charges; excluding those charges, management reported increases of 13.7% and 5.9%, respectively.
- Loans and credit quality: Total loans were $1.05 billion, up $98.4 million from year-end, including $71.0 million of PPP loans; reported organic growth excluding PPP was $27.4 million. The allowance for loan losses rose to $13.8 million from $9.9 million. Nonperforming loans increased to $15.0 million from $5.4 million, or 1.43% of loans versus 0.57%. Two hotel loans totaling $7.9 million were impaired; hospitality conditions also contributed to higher criticized loans. Loans in forbearance fell to $22.7 million (34 loans) from $165.9 million (527 loans) at June 30.
- Assets, deposits and debt: Total assets increased 5.4% to $1.39 billion. Deposits rose 7.2% to $1.20 billion, partly reflecting PPP proceeds deposited at the Bank. Short-term borrowings were $42.1 million, versus $30.6 million at year-end; other borrowings were $11.0 million, versus $14.0 million.
- Cash flow and liquidity: For nine months, operating cash flow was $9.2 million, investing cash outflow $60.5 million and financing cash inflow $83.3 million. Cash and due from banks ended at $112.2 million. Management stated liquidity was sufficient; available borrowing capacity included $416.9 million from the FHLB, $95.7 million through the Federal Reserve line and $60.0 million of unaffiliated-bank lines. Unpledged securities were $26.6 million.
- Capital and shareholder returns: Stockholders’ equity was $133.3 million, down from $151.1 million at year-end; book value per share was $24.69 and tangible book value per share $21.23. The Bank remained “well capitalized”; actual common equity Tier 1, total capital and Tier 1 leverage ratios were 11.62%, 12.88% and 7.63%. Dividends paid year to date were $3.9 million. The share repurchase program was suspended in March 2020.
Material changes, outlook and risks
- COVID-19-related valuation pressure led to an $18.7 million goodwill impairment, reducing goodwill to $9.7 million. Management said the charge was noncash and did not affect cash flows, liquidity or regulatory capital. An $884,000 noncash fixed-asset writedown followed the Monessen branch closure. Two offices closed, reducing the branch count to 22; management expected annual earnings benefit of approximately $678,000 from consolidations.
- Management cited pandemic-related recession risks, particularly for hospitality, retail, office space, senior housing, oil and gas, and restaurants. It warned that credit deterioration, delinquencies and charge-offs could increase after forbearance periods, and that additional forbearance could affect cash flows. At September 30, 86% of loans that had been in deferral at June 30 had returned to regular payment schedules.
- The filing provides no specific earnings or financial guidance. Management said it anticipated sufficient funds for current funding commitments and was not then planning to reduce or suspend quarterly dividends, while noting that earnings or regulatory conditions could require a dividend reduction or suspension. The stock repurchase suspension was intended to preserve capital.
- Other relevant items include $1.7 million of PPP origination fees still unearned at quarter-end, expected to be recognized upon SBA forgiveness payments; goodwill valuation estimates based on projected results and market assumptions; and ongoing interest-rate risk. Management reported effective disclosure controls and no material changes to internal control over financial reporting. It reported no pending legal proceeding believed likely to materially harm financial condition, results or cash flows.
Important facts for investors to verify
- Whether hotel and other vulnerable-industry exposures, criticized loans and nonperforming loans result in further provisions or losses as deferrals expire.
- Whether the $13.8 million allowance adequately reflects credit risk, including the effect of the $71.0 million SBA-guaranteed PPP portfolio and the company’s allowance methodology.
- The assumptions supporting the remaining $9.7 million of goodwill and whether further impairment or other asset writedowns are required.
- The pace of PPP forgiveness and recognition of the remaining deferred fees, and the sustainability of mortgage-related gains and lower net interest margins.
- Deposit retention, upcoming time-deposit maturities, borrowing availability and the capacity to maintain dividends under changing liquidity, earnings and regulatory conditions.