CB Financial Services, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. CB Financial is a community banking and insurance-services company operating principally in southwestern Pennsylvania, West Virginia and Ohio. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $10.3 million | $10.7 million | $20.9 million | $21.1 million |
| Provision for loan losses | $0.3 million | $0.4 million | $2.8 million | $0.4 million |
| Noninterest income | $2.6 million | $2.2 million | $4.5 million | $4.3 million |
| Noninterest expense | $9.1 million | $8.8 million | $18.1 million | $17.7 million |
| Net income | $2.9 million | $3.0 million | $3.7 million | $5.9 million |
| Diluted earnings per share | $0.54 | $0.55 | $0.68 | $1.08 |
| Net interest margin, FTE | 3.30% | 3.62% | 3.43% | 3.63% |
Q2 net income declined 2.6% year over year; six-month net income declined 37.7%. Lower interest rates reduced asset yields, while lower deposit costs partly offset the impact. The first-half earnings decline chiefly reflects the sharply higher loan-loss provision. Q2 noninterest income benefited from $489,000 of investment-security gains and $441,000 of loan-sale gains; these gains are not necessarily recurring. The company also recorded a $269,000 temporary mortgage-servicing-rights impairment in the first half.
Financial position, cash flow and capital
- At June 30, 2020, total assets were $1.407 billion, up 6.5% from year-end 2019. Net loans were $1.030 billion, up $86.9 million; deposits were $1.194 billion, up $75.6 million.
- Cash and due from banks were $131.4 million. Short-term borrowings were $42.3 million and other borrowings were $11.0 million. Stockholders’ equity was $152.4 million.
- First-half operating cash flow was $6.7 million; investing activities used $35.3 million and financing activities provided $79.8 million. Cash increased $51.2 million to $131.4 million.
- Management reported available FHLB borrowing capacity of $399.3 million, a $90.4 million Federal Reserve Bank collateral line and $60.0 million in unaffiliated-bank lines. The company said liquidity was sufficient to meet short- and long-term needs.
- The Bank was categorized as well capitalized. June 30 ratios included 11.90% common equity Tier 1, 13.16% total capital and 7.90% Tier 1 leverage.
Material changes, outlook and risks
- COVID-19 and credit exposure: The Bank originated 628 Paycheck Protection Program loans totaling $70.0 million. Net SBA origination fees were $2.1 million, of which $191,000 had been recognized by June 30; management expected to recognize most remaining fees in the third and fourth quarters as forgiveness requests were processed.
- Borrowers with $165.9 million of loans, or 15.9% of total loans, were in COVID-related forbearance at quarter-end. About $105.2 million was scheduled to exit forbearance in July. The company used CARES Act and interagency accounting relief and did not classify these modified loans as TDRs or nonperforming solely due to forbearance.
- The allowance for loan losses rose to $12.6 million from $9.9 million at year-end; coverage was 1.21% of total loans, or 1.30% excluding PPP loans. Special-mention loans increased $28.5 million, primarily from hospitality-related downgrades. The filing warns that delinquencies, losses and foreclosures could rise after forbearance ends.
- Loan growth included $70.0 million of PPP loans and $22.7 million of construction-loan advances. Excluding PPP, management reported first-half organic loan growth of $19.6 million, a 4.1% annualized rate.
- The Federal Reserve’s rate cuts contributed to lower yields and net interest margin. Management also cited potential impacts from weaker loan demand, customer payment difficulties, lower fee activity, pressure on insurance commissions, employee or vendor disruption, cybersecurity threats and asset impairment if economic conditions deteriorate.
- Goodwill of $28.4 million was assessed and determined not impaired at June 30; management cautioned that worsening economic or business conditions could trigger further testing. The stock-repurchase program was suspended March 19 to preserve capital. The company said it was not then planning to reduce or suspend dividends, but noted future dividends could be affected by earnings, capital or regulatory constraints.
- No specific financial guidance was provided. Management emphasized that COVID-19’s duration and economic effects were uncertain. It reported effective disclosure controls and no material pending legal proceeding identified as likely to adversely affect the company.
Key facts for investors to verify
- Whether borrowers exiting forbearance resume payments, particularly in hospitality and other vulnerable sectors, and how that affects credit quality and the allowance.
- PPP forgiveness timing and the recognition of remaining deferred fees, along with the sustainability of loan growth excluding PPP.
- Whether deposit and borrowing costs can continue to offset lower asset yields, and the trajectory of net interest margin.
- Subsequent changes in nonperforming and special-mention loans, charge-offs, liquidity and regulatory capital.
- Potential further mortgage-servicing-rights or goodwill impairment, and any change to the dividend or suspended share-repurchase program.