CB Financial Services, Inc. — Q1 2021 Form 10-Q
Business context and period. CB Financial is a Pennsylvania bank holding company operating through Community Bank and insurance agency Exchange Underwriters. This unaudited filing covers the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Unless noted, amounts below are in millions of dollars.
Financial and operating highlights
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $2.845; $0.52 | $0.773; $0.14 in Q1 2020 |
| Net interest income | $9.977 | $10.533 in Q1 2020 |
| Net interest margin | 3.04% GAAP; 3.05% fully tax-equivalent (non-GAAP) | 3.55% GAAP; 3.57% fully tax-equivalent in Q1 2020 |
| Provision for loan losses | None | $2.500 in Q1 2020 |
| Total assets | $1,476.8 | $1,416.7 at December 31, 2020 |
| Loans, net of allowance | $1,029.0 | $1,032.0 at December 31, 2020 |
| Deposits | $1,284.5 | $1,224.6 at December 31, 2020 |
| Cash and due from banks | $230.0 | $160.9 at December 31, 2020 |
| Borrowings | $51.4 total: $45.4 short-term and $6.0 other | $49.1 total at December 31, 2020 |
| Stockholders’ equity | $133.8 | $134.5 at December 31, 2020 |
Net interest income after provision was $9.977 million, compared with $8.033 million in Q1 2020. Noninterest income rose to $3.174 million from $1.872 million, while noninterest expense increased to $9.395 million from $9.003 million. Pretax income was $3.756 million versus $0.902 million; income tax expense was $0.911 million versus $0.129 million.
Operating cash flow was $4.469 million, investing cash flow was $3.733 million, and financing cash flow was $60.887 million. Cash increased $69.089 million during the quarter, primarily alongside deposit growth. The Bank reported regulatory capital ratios of 11.85% common equity Tier 1, 11.85% Tier 1 risk-based, 13.10% total risk-based, and 7.87% Tier 1 leverage, and was categorized as well capitalized.
Material changes and credit quality
- Net income increased $2.072 million year over year, chiefly as the prior-year $2.5 million loan-loss provision was not repeated and noninterest income improved. Net interest income nevertheless fell 5.3%, and fully tax-equivalent net interest margin declined 52 basis points.
- Lower asset yields weighed on interest income: loan yield declined to 4.00% from 4.57%, and the average yield on taxable securities fell to 2.10% from 3.03%. Lower funding costs partly offset this pressure; average cost of interest-bearing deposits declined to 0.43% from 0.80%.
- Deposits increased $59.9 million from year-end. Management attributed much of the increase to $29.9 million of IRS and stimulus-related payments and approximately $23.4 million of PPP proceeds initially deposited at the Bank; stated annualized organic deposit growth excluding those items was 2.2%.
- Total loans declined $3.1 million from year-end. Excluding PPP loans, organic loan growth declined $8.3 million; construction lending grew, while residential, commercial real estate, and consumer balances declined. PPP loans rose to $60.4 million, including $25.0 million of new loans, partly offset by $19.7 million of forgiveness processed.
- The allowance for loan losses was $12.725 million, or 1.22% of loans; excluding PPP loans, the ratio was 1.30%. Net charge-offs were $46,000. Nonperforming loans were $14.252 million, or 1.37% of loans, versus $14.488 million, or 1.39%, at year-end.
- Loans in COVID-related forbearance declined to $18.440 million across 25 loans from $24.100 million across 31 loans at year-end. Management said all loans in deferral at March 31 were expected to exit deferral by July 2021. Forbearance loans covered by CARES Act or interagency relief were not classified as TDRs, delinquent, or nonaccrual.
- Accumulated other comprehensive income fell $2.416 million, primarily reflecting lower market values of available-for-sale debt securities. The securities portfolio had $2.481 million of gross unrealized losses, all on securities in loss positions for less than 12 months; management did not consider these losses other-than-temporary and said it did not expect to be required to sell the securities before recovery or maturity.
Outlook, risks, and unusual items
- Branch optimization: The Bank plans to consolidate six branches, with possible divestitures of others, and invest in technology and remaining locations. The initiative was expected to be completed in 2021. Management anticipated approximately $6.1 million of nonrecurring pretax costs during 2021 and estimated approximately $1.5 million of pretax operating-expense reduction in 2021, with $3.0 million of ongoing pretax cost savings. Actual costs and savings may differ.
- Earnings items: Q1 2021 noninterest income included a $225,000 gain on debt-security sales, a $222,000 increase in fair value of equity securities, and a $172,000 recapture of mortgage-servicing-rights valuation impairment. Q1 2020 included a $438,000 securities loss and a $2.5 million loan-loss provision. Q1 2021 tax expense also reflected an adjustment related to amended returns under the CARES Act.
- COVID-19 and credit risk: Management warned that a prolonged or deeper downturn could weaken borrowers, particularly in hospitality, retail, office space, senior housing, oil and gas, and restaurants, and could increase delinquencies, nonperforming loans, charge-offs, and provisions after forbearance periods end. Impacts on lending, fees, insurance commissions, asset values, and liquidity remain uncertain.
- Liquidity and funding: Management said liquidity was sufficient. Available sources included $230.0 million of cash, $13.1 million of unpledged securities, $332.7 million of available FHLB capacity, an $84.4 million Federal Reserve line, and $50.0 million in unaffiliated-bank lines with no draws. Time deposits of $79.8 million, or 44.2% of time deposits, mature within one year and may need replacement at higher rates.
- Other risks and contingencies: Interest-rate changes, deposit flows, loan demand, competition, economic conditions, regulatory changes, and the LIBOR transition may affect results. The Company was evaluating the impact of CECL, scheduled for adoption January 1, 2023 for the Company, and could not estimate the adjustment. It reported no pending legal proceeding believed likely to materially affect its financial condition, results, or cash flows. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the planned branch consolidations are completed on schedule and whether restructuring costs and projected savings track management’s estimates.
- Whether deposit growth persists after stimulus and PPP-related balances, and how the $79.8 million of time deposits maturing within one year is retained or replaced.
- Whether margin pressure continues and whether loan yields, funding costs, and PPP fee recognition evolve as expected.
- Credit performance after forbearance exits, particularly in commercial real estate and other pandemic-exposed sectors, and any resulting changes to the allowance and nonperforming loans.
- The sustainability of noninterest income and the effect of securities valuation changes on earnings, accumulated other comprehensive income, and tangible book value.
- Potential dividend or capital-distribution constraints if earnings, regulatory capital, or the Bank’s ability to upstream funds deteriorates.