Classified in: Business, Covid-19 virus
Subjects: EARNINGS, Dividend, Conference Call, Webcast

CB Financial Services, Inc. Announces Third Quarter and Year-to-Date 2021 Financial Results and Declares Quarterly Cash Dividend

CB Financial Services, Inc. ("CB" or the "Company") (NASDAQGM: CBFV), the holding company of Community Bank (the "Bank") and Exchange Underwriters, Inc. ("EU"), a wholly-owned insurance subsidiary of the Bank, today announced its third quarter and year-to-date 2021 financial results.

2021 Third Quarter Financial Highlights

(Comparisons to three months ended September 30, 2020 unless otherwise noted)

• Net income was $2.0 million, compared to a net loss of $17.4 million, largely due to noninterest expense reductions as part of the previously announced bank optimization initiative as well as the absence in the current year period of non-cash charges from the prior year period related to goodwill impairment that were due to economic conditions triggered by the COVID-19 pandemic.
  • Adjusted net income (non-GAAP) improved to $2.0 million, compared to adjusted net income of $1.9 million.
• Earnings per diluted common share (EPS) increased to $0.37 from loss per diluted common share of $(3.22).
  • Adjusted earnings per common share - diluted (non-GAAP) was $0.36, compared to $0.36.
• Return on average assets (annualized) of 0.54%, compared to loss on average assets (annualized) of (4.90)%.
  • Adjusted return on average assets (annualized) (non-GAAP) of 0.53%, compared to 0.55%.
• Return on average equity (annualized) of 5.93%, compared to loss on average equity (annualized) of (45.13)%.
  • Adjusted return on average equity (annualized) (non-GAAP) of 5.88%, compared to 5.04%.
• Net interest margin (NIM) improved quarter over quarter to 2.88% from 2.84% for the three months ended June 30, 2021. NIM was 3.19% for the prior year period.
• Net interest and dividend income was $10.0 million, compared to $10.4 million.
• Noninterest income was $2.2 million and remained consistent.

(Amounts at September 30, 2021; comparisons to December 31, 2020, unless otherwise noted)

• Total loans, including Payroll Protection Program ("PPP") loans and loans held for sale, were $1.02 billion, a decrease of $25.7 million.
• Total loans, including loans held for sale and excluding PPP loans, increased $17.0 million, or 7.0% annualized, to $986.3 million compared to June 30, 2021. Total loans, including loans held for sale and excluding PPP loans, were $989.7 million at December 31, 2020.
• Total deposits, including deposits held for sale, were $1.29 billion, an increase of $63.2 million.
• Total assets increased to $1.47 billion, compared to $1.42 billion.
• Book value per share was $24.57, compared to $24.76 and $24.50 at June 30, 2021.
• Tangible book value per share (Non-GAAP) increased to $21.67, compared to $21.42 and $21.56 at June 30, 2021.

Branch Optimization and Operational Efficiency Update

As previously announced in February 2021, CB has implemented strategic initiatives to improve Community Bank's financial performance and to position the bank for continued profitable growth. Since that announcement, the Company has made substantive progress, including:

• The consolidation of six branches that was completed on June 30, 2021;
• The sale of two branches expected to be finalized in the fourth quarter of 2021; and
• The identification and enhancement of over 185 individualized processes within its remaining branch network and operating environment designed to improve the Bank's infrastructure, client experience, efficiency and profitability.

CB presently expects to incur $7.9 million of non-recurring expenses in 2021 and, as of September 30, 2021, has incurred $6.3 million of expenses related to these items. The expenses include a $2.3 million writedown on fixed assets and a $1.2 million impairment of intangible assets associated with the branch consolidations in the second quarter and the pending branch sales expected to be finalized in the fourth quarter. In addition, as part of CB's branch optimization and operational efficiency initiatives, the Company incurred $2.9 million of expenses related to contracted services, employee severance costs, branch lease impairment, professional fees, data processing fees, legal and other expenses.

The majority of the remaining expenses to be recognized in 2021 are related to approximately $600,000 in contracted services aimed at improving the operational and revenue efficiency at the bank in the long-term. CB anticipates cost savings from this initiative ranging from approximately $2.5 million to $3.5 million in 2022, as well as expected enhanced revenue and fee generating capacity in future years.

In addition, the Company expects an annual reduction in pre-tax operating expenses in 2021 of approximately $1.0 million, along with $3.0 million of ongoing pre-tax cost savings as a result of the branch optimization initiatives.

The Company expects these estimated cost savings to be incremental to net income beginning in 2022. These estimated cost savings exclude the favorable impact of the expected premium from sale of branches expected to be recognized in the fourth quarter of 2021 and currently estimated to be $5.1 million.

Management Commentary

President and CEO John H. Montgomery stated, "The third quarter reflected many of the positive changes implemented as part of our branch optimization strategy early in 2021, with substantive improvement in operating expenses that helped to drive improvements in net income and quarter-over-quarter growth in book value. The Bank increased deposits while our commercial loan book grew quarter over quarter excluding PPP loans that continue to roll-off our balance sheet. Commercial real-estate lending continued to improve due to a pipeline of activity in our core Southwestern Pennsylvania and Ohio Valley markets, and we remain conservatively optimistic about the overall economic recovery in our geographic regions. Our focus remains on driving loan production in advance of this recovery, expanding core deposit relationships with greater efficiency, and further reducing the overall cost of funds. During the period, CB improved in all aspects of its asset quality and we're pleased to see quarter-over-quarter improvement in NIM despite a tightening environment."

Mr. Montgomery continued, "Throughout the first half of 2021, our goal was to execute on a cost-savings program designed to enhance the operating efficiency of the Company without any disruption to our loyal customer base and commercial relationships. We moved quickly and were transparent, and have been very pleased to have achieved many of our initial objectives with minimal disruption. Moving forward, we intend to utilize a streamlined operating environment to drive revenue and compete with greater efficiency in core markets where CB has an acknowledged brand recognition and presence. In the coming months, we are implementing more digitization throughout the Bank with a review of each individual process from larger loans to each ATM. We have been very pleased with our progress to date and expect to drive operating returns that are better than our peers in local markets. In addition, we remain committed to CB's shareholders through the payment of dividends and an active share buy-back program."

Dividend Information

The Company's Board of Directors has declared a $0.24 quarterly cash dividend per outstanding share of common stock, payable on or about November 30, 2021, to stockholders of record as of the close of business on November 19, 2021.

Stock Repurchase Program

On June 10, 2021, CB authorized a program to repurchase up to $7.5 million of the Company's outstanding common stock. The program was effective as of June 14, 2021 and is authorized through June 13, 2022. As of October 25, 2021, the Company had expended $3.1 million to repurchase 135,968 shares at an average price of $23.02 per share.

2021 Third Quarter Financial Review

Net Interest and Dividend Income

Net interest and dividend income decreased $406,000, or 3.9%, to $10.0 million for the three months ended September 30, 2021 compared to $10.4 million for the three months ended September 30, 2020.

• Net interest margin (FTE) (Non-GAAP) decreased 32 basis points ("bps") to 2.89% for the three months ended September 30, 2021 compared to 3.21% for the three months ended September 30, 2020. Net interest margin (GAAP) decreased to 2.88% for the three months ended September 30, 2021 compared to 3.19% for the three months ended September 30, 2020. While CB has further controlled its deposit cost structure as deposit balances increased and benefited from nonrenewal or repricing of higher cost time deposits, the net interest margin decreased year-over-year due to the low interest rate environment decreasing yields on loans and securities. Net interest margin (GAAP) for the three months ended June 30, 2021 was 2.84%.
• Interest and dividend income decreased $870,000, or 7.5%, to $10.8 million for the three months ended September 30, 2021 compared to $11.7 million for the three months ended September 30, 2020.
  • Interest income on loans decreased $991,000, or 9.3%, to $9.7 million for the three months ended September 30, 2021 compared to $10.7 million for the three months ended September 30, 2020. The average balance of loans decreased $31.0 million and the average yield decreased 28 bps to 3.85% compared to the three months ended September 30, 2020. Interest and fee income on PPP loans was $484,000 for the three months ended September 30, 2021 and contributed 4 bps to loan yield, compared to $454,000 for the three months ended September 30, 2020, which decreased loan yield 11 bps. The impact of the accretion of the credit mark on acquired loan portfolios was $94,000 for the three months ended September 30, 2021 compared to $127,000 for the three months ended September 30, 2020, or 4 bps in the current period compared to 5 bps in the prior period.
  • Interest income on taxable investment securities increased $90,000, or 12.0%, to $843,000 for the three months ended September 30, 2021 compared to $753,000 for the three months ended September 30, 2020 driven by a $74.4 million increase in average balance and 73 bps decrease in average yield. The Federal Reserve's pandemic-driven decision to drop the benchmark interest rate in 2020 resulted in significant calls of U.S. government agency securities and paydowns on mortgage-backed securities in the declining interest rate environment, which were replaced with lower-yielding securities or maintained in cash.
  • Other interest and dividend income, which primarily consists of interest-bearing cash, increased $39,000, or 40.6% to $135,000 for the three months ended September 30, 2021 compared to $96,000 for the three months ended September 30, 2020. While the average yield remained comparable to the three months ended September 30, 2020, the average balance of other interest-earning assets increased $41.3 million primarily from buildup of cash as a result of securities activity, PPP loan funds and government stimulus payments deposited with the Bank.
• Interest expense decreased $464,000, or 37.4%, to $776,000 for the three months ended September 30, 2021 compared to $1.2 million for the three months ended September 30, 2020.
  • Interest expense on deposits decreased $435,000, or 37.8%, to $715,000 for the three months ended September 30, 2021 compared to $1.2 million for the three months ended September 30, 2020. While average interest-earning deposit balances increased $33.7 million compared to the three months ended September 30, 2020, interest rate declines for all products driven by pandemic-related market interest rate cuts resulted in a 21 bp, or 39.5%, decrease in average cost compared to the three months ended September 30, 2020. In addition, the average balance of time deposits and the related average cost decreased $29.5 million and 37 bps, respectively.

Provision for Loan Losses

There was no provision for loan losses for the three months ended September 30, 2021 compared to $1.2 million for the three months ended September 30, 2020. Specific loan loss reserves on impaired loans decreased in the current quarter. This was partially offset by an increase in loan balances that require a loan loss reserve, which excludes PPP loans and loans held for sale.

Noninterest income

Noninterest income increased $25,000, or 1.2%, to $2.2 million for the three months ended September 30, 2021, and remained consistent with $2.2 million for the three months ended September 30, 2020. The increase was largely due to lower net gains on securities and loans compared to the prior period, offset by an increase in other income due to the recognition of a $269,000 valuation allowance adjustment on mortgage servicing rights in the prior period and increase in service fees.

Noninterest Expense

Noninterest expense decreased $19.2 million, or 66.3%, to $9.8 million for the three months ended September 30, 2021 compared to $29.0 million for the three months ended September 30, 2020. The decrease was largely due to an $18.7 million goodwill impairment and an $884,000 writedown on fixed assets recognized in the prior year period.

Statement of Financial Condition Review

Assets

Total assets increased $58.1 million, or 4.1%, to $1.47 billion at September 30, 2021, compared to $1.42 billion at December 31, 2020. The change is primarily due to higher cash and due from banks and securities.

• Cash and due from banks increased $12.6 million, or 7.8%, to $173.5 million at September 30, 2021, compared to $160.9 million at December 31, 2020. The change is primarily due to an increase in deposits as further described below in the Liabilities section.
• Securities increased $76.0 million, or 52.3%, to $221.4 million at September 30, 2021, compared to $145.4 million at December 31, 2020. Current period activity included $119.9 million of purchases, $29.6 million of paydowns, and $12.0 million of sales, primarily of mortgage-backed securities, which resulted in the recognition of a $231,000 gain. The purchases were made to earn a higher yield on excess cash. The sales recognized gains on higher-interest securities with faster prepayment speeds. In addition, there was a $2.9 million decrease in the market value of the debt securities portfolio and a $251,000 gain in market value in the equity securities portfolio, which is primarily comprised of bank stocks.

Payroll Protection Program ("PPP") Update

• PPP loans decreased $22.4 million to $32.7 million at September 30, 2021 compared to $55.1 million at December 31, 2020, which includes $34.6 million in originations in the current period offset by loan forgiveness.
• $1.1 million of net PPP loan origination fees were unearned at December 31, 2020. Due to activity in the current period, $1.4 million of net PPP loan origination fees were unearned at September 30, 2021. $380,000 of net PPP loan origination fees were earned in the third quarter of 2021 compared to $489,000 for the three months ended June 30, 2021.

Loans and Credit Quality

• Total loans held for investment decreased $43.2 million to $1.00 billion at September 30, 2021. This includes the impact of reclassifying $17.4 million of loans to held for sale. Excluding the net decline of $22.4 million in PPP loans in the current period and including $17.4 million of held for sale loans, loans declined $3.4 million. Compared to June 30, 2021, total loans, including loans held for sale and excluding PPP loans, increased $17.0 million, primarily from $23.1 million in commercial real estate loan growth.
• The allowance for loan losses was $11.6 million at September 30, 2021 compared to $12.8 million at December 31, 2020. There was a net recovery of $1.2 million of provision for loan losses in the current year primarily due to a decrease in specific reserves on impaired loans and improvements in the economic and industry outlook combined with a decrease in loan balances that require a loan loss reserve, which excludes PPP loans and loans held for sale. A $20.8 million decrease in net reservable loans in the current period, which excludes PPP loans and includes the reclassification of $17.4 million of loans to held for sale that do not require a reserve, as well as a decrease in specifically impaired loans and improving economic and industry conditions contributed to the net recovery in the current period. As a result, the allowance for loan losses to total loans was 1.16% at September 30, 2021 compared to 1.22% at December 31, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.20% at September 30, 2021 compared to 1.29% at December 31, 2020.
• Net recoveries for the three months ended September 30, 2021 were $37,000, or (0.01)% of average loans on an annualized basis. Net charge-offs for the three months ended September 30, 2020 were $68,000, or 0.03% of average loans on an annualized basis. Net recoveries for the nine months ended September 30, 2021 were $10,000, or 0.00% of average loans on an annualized basis. Net charge-offs for the nine months ended September 30, 2020 were $87,000, or 0.01% of average loans on an annualized basis.
• Nonperforming loans, which includes nonaccrual loans, accruing loans past due 90 days or more, and accruing loans that are considered troubled debt restructurings within the loans held for investment portfolio, were $10.9 million at September 30, 2021 compared to $14.5 million at December 31, 2020. Nonperforming loans to total loans ratio was 1.09% at September 30, 2021 compared to 1.39% at December 31, 2020. A $3.6 million nonaccrual commercial real estate loan under agreement to sell and transferred into the held for sale portfolio at September 30, 2021 was sold in October and will result in the recognition of an $897,000 gain on sale of loans in the fourth quarter of 2021. This loan previously incurred a $931,000 charge-off in the prior year.
• There were no loans in forbearance at September 30, 2021 compared to 9 loans totaling $7.8 million at June 30, 2021, and 31 loans totaling $24.1 million at December 31, 2020. The remaining loans exited forbearance in July and begun making regularly scheduled payments.

Liabilities

Total liabilities increased $61.6 million, or 4.8%, to $1.34 billion at September 30, 2021 compared to $1.28 billion at December 31, 2020.

Deposits

• Total deposits, including deposits held for sale, increased $63.2 million to $1.29 billion as of September 30, 2021 compared to $1.22 billion at December 31, 2020. Noninterest bearing demand deposits, NOW accounts and savings accounts increased $47.8 million, $15.6 million and $18.4 million, respectively, partially offset by a decrease of $27.6 million in time deposits. IRS and stimulus-related payments totaled $29.9 million in the first quarter and the impact of the PPP loans that were originated and the proceeds of which were initially deposited at the Bank was approximately $28.7 million. Annualized deposit growth rate was 6.9% including IRS and PPP loan deposits. Average total deposits decreased $5.7 million, primarily in time deposits, for the three months ended September 30, 2021 compared to the three months ended June 30, 2021.

Borrowed Funds

• Short-term borrowings increased $1.6 million, or 3.9%, to $42.6 million at September 30, 2021, compared to $41.1 million at December 31, 2020. At September 30, 2021 and December 31, 2020, short-term borrowings were comprised entirely of securities sold under agreements to repurchase, which are related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank's investment portfolio under an agreement to repurchase. $10.7 million was excluded from short-term borrowings at September 30, 2021 and reported as deposits held for sale.
• Other borrowed funds decreased $2.0 million to $6.0 million at September 30, 2021 due to a Federal Home Loan Bank borrowing that matured in the current period.

Stockholders' Equity

Stockholders' equity decreased $3.5 million, or 2.6%, to $131.0 million at September 30, 2021, compared to $134.5 million at December 31, 2020. Accumulated other comprehensive income decreased $2.3 million primarily due to market interest rate conditions on the Bank's debt securities. In addition, the Company repurchased $2.5 million of its common stock as part of its stock repurchase program.

Book value per share

Book value per share was $24.57 at September 30, 2021 compared to $24.76 at December 31, 2020, a decrease of $0.19. Book value per share increased $0.07 compared to $24.50 at June 30, 2021.

Tangible book value per share (Non-GAAP) was $21.67 at September 30, 2021, compared to $21.42 at December 31, 2020, an increase of $0.25. Tangible book value per share increased $0.11 compared to $21.56 at June 30, 2021. Refer to "Explanation of Use of Non-GAAP Financial Measures" at the end of this Press Release.

About CB Financial Services, Inc.

CB Financial Services, Inc. is the bank holding company for Community Bank, a Pennsylvania-chartered commercial bank. Community Bank operates its branch network in southwestern Pennsylvania and West Virginia. Community Bank offers a broad array of retail and commercial lending and deposit services and provides commercial and personal insurance brokerage services through Exchange Underwriters, Inc., its wholly owned subsidiary.

For more information about CB Financial Services, Inc. and Community Bank, visit our website at www.communitybank.tv.

Statement About Forward-Looking Statements

Statements contained in this press release that are not historical facts may constitute forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 and such forward-looking statements are subject to significant risks and uncertainties. The Company intends such forward-looking statements to be covered by the safe harbor provisions contained in the Act. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, general and local economic conditions, the scope and duration of economic contraction as a result of the COVID-19 pandemic and its effects on the Company's business and that of the Company's customers, changes in market interest rates, deposit flows, demand for loans, real estate values and competition, competitive products and pricing, the ability of our customers to make scheduled loan payments, loan delinquency rates and trends, our ability to manage the risks involved in our business, our ability to control costs and expenses, inflation, market and monetary fluctuations, changes in federal and state legislation and regulation applicable to our business, actions by our competitors, and other factors that may be disclosed in the Company's periodic reports as filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

Explanation of Use of Non-GAAP Financial Measures

In addition to financial measures presented in accordance with generally accepted accounting principles ("GAAP"), we use, and this Press Release contains or references, certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information in understanding our underlying results of operations or financial position and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Non-GAAP adjusted items impacting the Company's financial performance are identified to assist investors in providing a complete understanding of factors and trends affecting the Company's business and in analyzing the Company's operating results on the same basis as that applied by management. Although we believe that these non-GAAP financial measures enhance the understanding of our business and performance, they should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein.

Tangible book value per common share is a non-GAAP measure and is calculated based on tangible common equity divided by period-end common shares outstanding. Tangible common equity to tangible assets is a non-GAAP measure and is calculated based on tangible common equity divided by tangible assets. We believe these non-GAAP measures serve as useful tools to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company's total value.

Interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a fully tax-equivalent ("FTE") basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory income tax rate of 21 percent. We believe the presentation of net interest income on a FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. The following table reconciles net interest income, net interest spread and net interest margin on a FTE basis for the periods indicated:

Adjusted efficiency ratio excludes the effect of certain non-recurring or non-cash items and represents adjusted noninterest expense divided by adjusted operating revenue. The Company evaluates its operational efficiency based on its adjusted efficiency ratio and believes it provides additional perspective on its ongoing performance as well as peer comparability.

Allowance for loan losses to total loans, excluding PPP loans, is a non-GAAP measure that serves as a useful measurement to evaluate the allowance for loan losses without the impact of SBA guaranteed loans.

 

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