CB Financial Services, Inc. — Q1 2020 Form 10-Q
Business and period: Community bank and insurance brokerage serving southwestern Pennsylvania, West Virginia and Ohio. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Figures below are in millions of dollars unless noted.
Financial results and position
- Earnings: Net income was $0.77 million, or $0.14 per diluted share, versus $2.93 million, or $0.54 per share, in Q1 2019. Pretax income was $0.90 million; income tax expense was $0.13 million.
- Revenue and margins: Interest and dividend income was $12.33 million and noninterest income was $1.87 million. Net interest income rose 0.9% to $10.53 million. Provision expense of $2.50 million reduced net interest income after provision to $8.03 million. Tax-equivalent net interest margin was 3.57%, down from 3.64% a year earlier; tax-equivalent net interest spread was 3.35%, versus 3.43%.
- Costs and unusual items: Noninterest expense was $9.00 million, up 1.4%. Noninterest income fell 11.5%, including a $0.44 million fair-value loss on marketable equity securities, primarily bank stocks. The filing also cites CEO-transition costs and a prior-year health-insurance stop-loss reimbursement as factors affecting expense comparisons.
- Assets and lending: Total assets were $1.313 billion, down 0.6% from year-end. Net loans were $962.3 million, up 2.1%; total loans before allowance were $974.7 million. Available-for-sale securities were $171.4 million, down from $197.4 million.
- Credit: The allowance for loan losses rose to $12.32 million, or 1.26% of loans, from $9.87 million, or 1.04%, at year-end. The quarter included $2.50 million of provision and $45,000 of net charge-offs. Nonperforming loans were $5.23 million, 0.54% of loans, compared with $5.38 million, or 0.57%, at year-end.
- Funding and liquidity: Deposits were $1.107 billion, down 1.0%. Short-term borrowings were $35.0 million and other borrowings were $11.0 million. Cash and due from banks totaled $78.1 million. Management reported sufficient liquidity; available borrowing capacity included $369.8 million at the FHLB, a $98.0 million Federal Reserve line and $60.0 million in lines with other banks. These facilities are subject to their terms and collateral requirements.
- Cash flow: Operating activities provided $3.59 million and investing activities provided $7.88 million; financing activities used $13.59 million. Cash and due from banks decreased $2.12 million during the quarter.
- Capital and shareholder returns: Stockholders’ equity was $151.5 million. The Bank remained categorized as well capitalized: common equity Tier 1 and Tier 1 risk-based ratios were each 11.60%, total capital was 12.85%, and Tier 1 leverage was 8.23%. The company paid $1.30 million in dividends ($0.24 per share) and repurchased 67,816 shares for $1.91 million during the quarter.
Material changes versus comparable periods
- Net income declined by $2.15 million year over year, principally reflecting the $2.50 million loan-loss provision compared with $25,000 in Q1 2019, as well as the marketable-equity-securities loss.
- Net interest income increased modestly, but the tax-equivalent net interest margin declined 7 basis points year over year. Loan income benefited from higher average loan balances, while lower market rates reduced yields on some interest-earning assets.
- Loan growth was concentrated in construction and consumer lending. The allowance increased amid COVID-19-related economic uncertainty; management also changed its historical loss lookback from two years to five years.
- Compared with year-end 2019, total loans rose $22.2 million before allowance, deposits declined $11.7 million, and total assets declined $8.4 million. Available-for-sale securities fell $26.0 million, principally due to calls and mortgage-backed-security paydowns, partly offset by purchases.
Outlook, risks and contingencies
- COVID-19: Management said the pandemic’s duration and economic effects were unknown and could materially adversely affect borrowers, loan demand, credit quality, liquidity, earnings, asset values and operations. The filing identifies particular exposure to hospitality, oil and gas, retail and restaurants; it also describes risks from low interest rates, remote work, cybersecurity and third-party disruptions. No quantitative earnings guidance was provided.
- Credit relief and PPP, subsequent to quarter-end: As of April 29, 2020, 515 loans totaling $142.9 million were in COVID-19 forbearance. The Bank reported originating 181 first-round PPP loans totaling $38.6 million after quarter-end, with about $1.2 million in processing fees. It expected to submit approximately 315 additional applications totaling $27.6 million in the second round, with about $1.0 million in expected fees. These were not March 31 loan balances.
- Credit trends: Special-mention loans increased $20.3 million from year-end, mainly due to hospitality downgrades associated with COVID-19. The filing also reports increases in substandard loans related to a commercial-property lease dispute and speculative residential construction loans.
- Capital actions: The company suspended its stock repurchase program on March 19, 2020 to preserve capital. Management said it was not then planning to reduce or suspend quarterly dividends, but warned that a significant earnings decline could require a reduction or suspension.
- Other items: Goodwill of $28.4 million was tested due to COVID-19-related impairment indicators; management concluded it was not impaired at March 31, 2020, while noting further deterioration could prompt another assessment. The company reported no pending legal proceeding it believed would materially adversely affect its financial condition, results or cash flows.
Important facts for investors to verify
- Whether pandemic-related borrower stress, forbearance expirations and vulnerable-industry exposures lead to further downgrades, delinquencies, charge-offs or provision increases.
- How the $142.9 million of reported forbearance balances perform after relief periods, and the eventual forgiveness, repayment and fee recognition of post-quarter PPP loans.
- Whether lower rates and loan repricing pressure net interest income and margin, and whether deposits and liquidity facilities remain sufficient as funding needs change.
- Whether the five-year loss-history methodology and COVID-19 assumptions adequately reflect expected credit losses, and whether goodwill or other assets require further impairment testing.
- Whether earnings and regulatory capital support continued dividends; confirm the duration of the share-repurchase suspension.