CB Financial Services, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. The company provides community banking in Pennsylvania, Ohio and West Virginia, with insurance brokerage operations. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest and dividend income | $9.9 | $10.3 | $19.9 | $20.9 |
| Net interest margin, GAAP | 2.84% | 3.28% | 2.94% | 3.41% |
| Provision for loan losses (recovery) | $(1.2) | $0.3 | $(1.2) | $2.8 |
| Noninterest income | $2.2 | $2.6 | $5.4 | $4.5 |
| Noninterest expense | $13.7 | $9.1 | $23.1 | $18.1 |
| Net income (loss) | $(0.2) | $2.9 | $2.6 | $3.7 |
| Basic and diluted EPS | $(0.04) | $0.54 | $0.48 | $0.68 |
- Balance sheet and liquidity: Total assets were $1.462 billion, up 3.2% from year-end. Cash and due from banks totaled $172.0 million; available-for-sale securities were $205.7 million. Gross loans held for investment were $1.007 billion, with an $11.5 million allowance and $995.9 million net loans. Deposits were $1.174 billion, plus $102.6 million classified as held for sale. Management said liquidity was sufficient; cash, unpledged securities and available borrowing facilities were additional sources.
- Debt and capital: Short-term borrowings were $39.1 million and other borrowings $6.0 million. The Bank was categorized as well capitalized; its June 30 common equity Tier 1, total capital and leverage ratios were 11.67%, 12.92% and 7.23%, respectively.
- Cash flow: For the first six months, operating activities provided $2.0 million, investing activities used $35.3 million and financing activities provided $44.4 million. Cash and due from banks increased $11.1 million to $172.0 million.
Changes and drivers
- Q2 shifted from $2.9 million of prior-year profit to a $223,000 loss. The main unusual charges were a $2.3 million fixed-asset writedown and $1.2 million intangible-asset impairment related to branch actions; the quarter also included a $1.2 million loan-loss recovery.
- For the first half, net income fell to $2.6 million from $3.7 million. Net interest income and margin declined as lower market rates reduced asset yields, partly offset by lower deposit and borrowing costs. First-half noninterest income rose, including higher insurance commissions and securities gains, while expense increased substantially.
- Loans held for investment declined $37.3 million from year-end, including the transfer of $11.4 million to loans held for sale. Deposits, including those held for sale, increased $51.5 million. Securities increased $63.1 million, reflecting purchases and portfolio activity.
- Nonperforming loans were $15.4 million, or 1.53% of total loans, versus $14.5 million and 1.39% at year-end. The increase was primarily associated with a $2.0 million hotel construction loan placed on nonaccrual. Loans in COVID-related forbearance fell to $7.8 million from $24.1 million at year-end.
Outlook, actions and risks
- The Bank completed consolidation of six branches on June 30, reducing its network to 16. A sale of two West Virginia branches to Citizens Bank is expected to close in Q4 2021, subject to regulatory approval and other conditions. The agreement provides for a 5% premium on assumed deposits, estimated by the company at $5.1 million, to be recognized upon closing.
- Management expects $7.9 million of nonrecurring 2021 expenses from the initiatives and had incurred $5.1 million through June 30. It expects approximately $1.0 million of lower pretax operating expenses in 2021, approximately $3.0 million of ongoing pretax savings from branch optimization, and $2.5 million to $3.5 million of savings in 2022 from operational-efficiency work. The company says ongoing savings are expected to benefit net income beginning in 2022; these are estimates, not guarantees.
- Key risks cited include local and general economic conditions, COVID-19 effects, loan repayment and real-estate values, interest rates and deposit flows, competition, cost control, and whether the branch initiatives achieve expected savings. The bank also disclosed interest-rate sensitivity modeling; actual outcomes may differ from those estimates. Management reported effective disclosure controls and no material adverse pending litigation.
Important facts for investors to verify
- Whether the Citizens Bank branch transaction closes on schedule, receives approvals and delivers the expected deposit premium.
- Whether projected cost savings materialize, and how total restructuring costs compare with the $7.9 million estimate.
- Performance of the hotel-related exposure and broader commercial real-estate portfolio, including trends in nonaccrual and forbearance loans.
- Whether asset yields and net interest margin stabilize as deposit costs and balances change.
- How much deposit growth is sustained after stimulus and PPP-related inflows, and how upcoming time-deposit maturities affect funding costs.