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

CB Financial Services, Inc. Announces Fourth Quarter and Full Year 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 fourth quarter and year-to-date 2021 financial results.

(1) Refer to Explanation of Use of Non-GAAP Financial Measures and reconciliation of net income (loss) and adjusted earnings per common share - diluted in this Press Release.

2021 Fourth Quarter Financial Highlights

(Comparisons to three months ended December 31, 2020 unless otherwise noted)

• Net income was $7.0 million, compared to $3.1 million, largely due to the $5.2 million gain recognized from the sale of branches.
  • Adjusted net income (non-GAAP) was $2.8 million, compared to $3.1 million.
• Earnings per diluted common share (EPS) increased to $1.31 from $0.57.
  • Adjusted earnings per common share - diluted (non-GAAP) was $0.53, compared to $0.58.
• Return on average assets (annualized) of 1.87%, compared to 0.87%.
  • Adjusted return on average assets (annualized) (non-GAAP) of 0.76%, compared to 0.88%.
• Return on average equity (annualized) of 20.95%, compared to 9.13%.
  • Adjusted return on average equity (annualized) (non-GAAP) of 8.55%, compared to 9.25%.
• Net interest margin (NIM) improved quarter over quarter to 2.95% from 2.88% for the three months ended September 30, 2021. NIM was 3.21% for the prior year period.
• Net interest and dividend income was $10.2 million, compared to $10.6 million.
• Non-interest income increased to $8.7 million, compared to $2.8 million, primarily due to the $5.2 million gain on sale of branches.

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

• Total loans, including Payroll Protection Program ("PPP") loans, were $1.02 billion, a decrease of $24.0 million.
  • Total loans held for investment, excluding PPP loans, increased $27.4 million, or 11.3% annualized, to $996.3 million compared to $968.9 million at September 30, 2021 and included 35.9% and 13.2% annualized growth in consumer and commercial real estate loans, respectively. Total loans, excluding PPP loans, were $989.7 million at December 31, 2020.
• Nonperforming loans to total loans was 0.71%, a decrease of 68 bps, compared to 1.39%.
• Total deposits were $1.23 billion, an increase of $2.0 million, inclusive of selling $102.8 million of deposits of two branches in December 2021.
• Total assets increased to $1.43 billion, compared to $1.42 billion.
• Book value per share was $25.31, compared to $24.76 and $24.57 at September 30, 2021.
  • Tangible book value per share (Non-GAAP) increased to $22.45, compared to $21.42 and $21.67 at September 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 substantially completed this project, highlighted by:

• The consolidation of six branches that was completed on June 30, 2021 and the sale of two branches that was completed in December 2021 that resulted in a gain on sale of $5.2 million. $6.1 million of loans and $102.8 million of deposits were sold as part of the sale of the branches. The Company anticipates $3.0 million of ongoing pre-tax cost savings as a result of the branch optimization initiatives.
• The identification and enhancement of over 185 individualized processes within its branch network and operating environment designed to improve the Bank's infrastructure, client experience, efficiency and profitability. The project was expensed in 2021. The majority of process improvements have been implemented with the remaining items to be implemented in 2022. CB anticipates cost savings from the operational efficiency 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.

Management Commentary

President and CEO John H. Montgomery stated, "The fourth quarter was highlighted by the sale of two branches, which resulted in a $5.2 million gain for the bank while completing the optimization initiative announced early in 2021. We undertook that initiative with the primary goals of reducing our expenses while also positioning the bank for growth and I am proud of our team for succeeding on both fronts. With the optimization effort now substantially complete, we intend to focus all our energy on continuing the growth we saw take hold during the second half of 2021. Despite the reduction of our deposit balances resulting from the sale of two branches, we were still able to grow our loan book 11.3% in the current quarter, which is a result we're proud of. Our loan book experienced solid demand across nearly all our end markets, fueled by the continuing economic recovery in our geographic region."

Mr. Montgomery continued, "As we enter 2022, we are well-positioned for a rising rate environment. We are squarely focused on capturing growth opportunities and are investing in our business in support of that. A key component of our optimization initiative was the reduction of low return uses of capital so that capital could be repurposed for higher growth investment. With that in mind, we expect to bring on a Chief Commercial Banking Officer and a Director of Client Experience and Retail Banking during the first quarter. Set against the backdrop of reduced annual expense levels and rising interest rates, our expectation is for continued growth and expansion of profitability. 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 February 28, 2022, to stockholders of record as of the close of business on February 18, 2022.

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 January 21, 2022, the Company had repurchased 191,314 shares at an average price of $23.34 per share for a total of $4.5 million.

2021 Fourth Quarter Financial Review

Net Interest and Dividend Income

• Net interest and dividend income decreased $403,000, or 3.8%, to $10.2 million for the three months ended December 31, 2021 compared to $10.6 million for the three months ended December 31, 2020.
• Net interest margin (FTE) (Non-GAAP) decreased 26 basis points ("bps") to 2.96% for the three months ended December 31, 2021 compared to 3.22% for the three months ended December 31, 2020. Net interest margin (GAAP) decreased to 2.95% for the three months ended December 31, 2021 compared to 3.21% for the three months ended December 31, 2020. While CB has further controlled its deposit cost structure as deposit balances increased and benefited from non-renewal 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. The fourth quarter of 2021 was aided by the full payoff of a $3.1 million nonperforming commercial real estate loan in the hotel portfolio, which resulted in the recognition of $201,000 of interest income. Net interest margin (GAAP) for the three months ended September 30, 2021 was 2.88%.
• Interest and dividend income decreased $792,000, or 6.7%, to $11.0 million for the three months ended December 31, 2021 compared to $11.8 million for the three months ended December 31, 2020.
  • Interest income on loans decreased $929,000, or 8.6%, to $9.9 million for the three months ended December 31, 2021 compared to $10.8 million for the three months ended December 31, 2020. The average balance of loans decreased $28.1 million and the average yield decreased 26 bps to 3.92% compared to the three months ended December 31, 2020. Interest and fee income on PPP loans was $391,000 for the three months ended December 31, 2021 and contributed 4 bps to loan yield, compared to $768,000 for the three months ended December 31, 2020, which contributed 3 bps to loan yield. The impact of the accretion of the credit mark on acquired loan portfolios was $83,000 for the three months ended December 31, 2021 compared to $141,000 for the three months ended December 31, 2020, or 3 bps in the current period compared to 5 bps in the prior period.
  • Interest income on taxable investment securities increased $141,000, or 19.4%, to $866,000 for the three months ended December 31, 2021 compared to $725,000 for the three months ended December 31, 2020 driven by a $72.3 million increase in average balance partially offset by a 49 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 pay-downs on mortgage-backed securities in the declining interest rate environment, which, in combination with excess liquidity, were replaced with purchases of lower-yielding securities.
• Interest expense decreased $389,000, or 34.7%, to $732,000 for the three months ended December 31, 2021 compared to $1.1 million for the three months ended December 31, 2020.
  • Interest expense on deposits decreased $400,000, or 38.6%, to $636,000 for the three months ended December 31, 2021 compared to $1.0 million for the three months ended December 31, 2020. While average interest-earning deposit balances increased $17.5 million compared to the three months ended December 31, 2020, controlling the deposit cost structure as deposit balances increased combined with non-renewal or repricing of higher-cost time deposit resulted in a 19 bp, or 40.4%, decrease in average cost compared to the three months ended December 31, 2020. The average balance of time deposits and the related average cost decreased $38.9 million and 32 bps, respectively.

Provision for Loan Losses

There was a $75,000 provision for loan losses for the three months ended December 31, 2021 compared to no provision for loan losses for the three months ended December 31, 2020. The provision was primarily due to loan growth in the current period, exclusive of PPP loan forgiveness, offset by adjustments in the qualitative factors driven by improving economic and industry conditions.

Noninterest income

Noninterest income increased $5.9 million, or 212.8%, to $8.7 million for the three months ended December 31, 2021, compared to $2.8 million for the three months ended December 31, 2020. The increase was largely due to a gain of $5.2 million from the sale of two branches during the quarter. In addition, net gain on sale of loans increased $589,000 to $977,000 for the three months ended December 31, 2021 compared to $388,000 for the three months ended December 31, 2020 primarily due to the sale of a nonperforming commercial real estate loan in the hotel portfolio that resulted in the recognition of an $897,000 gain. The loan previously incurred a $931,000 charge-off in the fourth quarter of 2020.

Noninterest Expense

Noninterest expense increased $247,000, or 2.5%, to $10.0 million for the three months ended December 31, 2021 compared to $9.7 million for the three months ended December 31, 2020. Contracted services increased $556,000 to $1.1 million for the three months ended December 31, 2021 compared to $577,000 for the three months ended December 31, 2020 primarily due to $859,000 in expenses associated with the engagement of a third-party workflow optimization expert to assist in implementing robotic process automations and more effective sales management designed to improve operational efficiencies in the near and long-term and engagement of other third party specialists to assist in core platform improvements and efficiencies.

Statement of Financial Condition Review

Assets

Total assets increased $8.8 million, or 0.6%, to $1.43 billion at December 31, 2021, compared to $1.42 billion at December 31, 2020.

• Cash and due from banks decreased $41.2 million, or 25.6%, to $119.7 million at December 31, 2021, compared to $160.9 million at December 31, 2020. The change is primarily related to securities purchases and sale of branches, partially offset by net repayments on loans.
• Securities increased $79.6 million, or 54.7%, to $225.0 million at December 31, 2021, compared to $145.4 million at December 31, 2020. Current period activity included $135.0 million of purchases, $38.4 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 sales recognized gains on higher-interest securities with faster prepayment speeds. The purchases were made to earn a higher yield on excess cash. In addition, there was a $5.5 million decrease in the market value of the debt securities portfolio and a $295,000 gain in market value in the equity securities portfolio, which is primarily comprised of bank stocks.

Payroll Protection Program ("PPP") Update

• PPP loans decreased $30.6 million to $24.5 million at December 31, 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.
• $678,000 of net PPP loan origination fees were unearned at December 31, 2021 compared to $1.1 million at December 31, 2020. $321,000 of net PPP loan origination fees were earned for the three month ended December 31, 2021 compared to $604,000 for the three months ended December 31, 2020 and $380,000 for the three months ended September 30, 2021.

Loans and Credit Quality

• Total loans held for investment decreased $24.0 million, or 2.3%, to $1.02 billion at December 31, 2021 compared to $1.04 billion at December 31, 2020. Excluding the net decline of $30.6 million in PPP loans in the current period, loans increased $6.6 million. Compared to September 30, 2021, loans held for investment, excluding PPP loans, increased $27.4 million, or 11.3% annualized, primarily from increases of $12.5 million in commercial real estate loans, $10.1 million in consumer loans driven by efficiencies in the indirect auto loan process that did not sacrifice credit quality, and $7.0 million in net construction loan disbursements.
• The allowance for loan losses was $11.6 million at December 31, 2021 compared to $12.8 million at December 31, 2020. There was a net recovery of $1.1 million of provision for loan losses in the current year primarily due to a decrease in specific reserves on impaired loans and improving economic and industry conditions resulting in a decrease in qualitative factors. As a result, the allowance for loan losses to total loans was 1.13% at December 31, 2021 compared to 1.22% at December 31, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.16% at December 31, 2021 compared to 1.29% at December 31, 2020.
• Net charge-offs for the three months ended December 31, 2021 were $74,000, or 0.03% of average loans on an annualized basis. Net charge-offs for the three months ended December 31, 2020 were $1.0 million, or 0.39% of average loans on an annualized basis. In the prior period, there was a $931,000 charge-off on a commercial real estate loan related to a hotel. This loan was subsequently sold and resulted in the recognition of an $897,000 gain on sale in the current period. Net charge-offs for the year ended December 31, 2021 were $64,000, or 0.01% of average loans on an annualized basis. Net charge-offs for the year ended December 31, 2020 were $1.1 million, or 0.11% 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, were $7.3 million at December 31, 2021 compared to $14.5 million at December 31, 2020. The decrease is primarily attributable to the full payoff and sale in the current year of two of the Bank's larger nonperforming commercial real estate loans that were secured by hotels. Nonperforming loans to total loans ratio was 0.71% at December 31, 2021 compared to 1.39% at December 31, 2020.

Liabilities

Total liabilities increased $10.2 million, or 0.8%, to $1.29 billion at December 31, 2021 compared to $1.28 billion at December 31, 2020.

Deposits

• Despite the impact of the sale of $102.8 million of deposits from the sale of two branches completed in December 2021, total deposits increased $2.0 million to $1.23 billion as of December 31, 2021 compared to $1.22 billion at December 31, 2020. Noninterest bearing demand deposits, NOW accounts and savings accounts increased $45.2 million, $12.6 million and $4.4 million, respectively, partially offset by a decrease of $53.3 million in time deposits.

Borrowed Funds

• Short-term borrowings decreased $1.8 million, or 4.4%, to $39.3 million at December 31, 2021, compared to $41.1 million at December 31, 2020. At December 31, 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.
• Other borrowed funds increased $9.6 million to $17.6 million at December 31, 2021 due to the issuance of subordinated debt in December 2021 with net proceeds of $14.6 million partially offset by $5.0 million of Federal Home Loan Bank borrowings that matured in the current period. The Company intends to utilize the subordinated debt proceeds to continue to proactively repurchase shares or for other general corporate matters.

Stockholders' Equity

Stockholders' equity decreased $1.4 million, or 1.0%, to $133.1 million at December 31, 2021, compared to $134.5 million at December 31, 2020. The Company paid $5.2 million in dividends and repurchased $4.1 million of its common stock as part of its stock repurchase program. In addition, accumulated other comprehensive income decreased $4.3 million primarily due to the effect of market interest rate conditions on the Bank's debt securities. This was partially offset by $11.6 million of net income.

Book value per share

Book value per common share was $25.31 at December 31, 2021 compared to $24.76 at December 31, 2020, an increase of $0.55. Book value per share increased $0.74 compared to $24.57 at September 30, 2021.

Tangible book value per common share (Non-GAAP) was $22.45 at December 31, 2021, compared to $21.42 at December 31, 2020, an increase of $1.03. Tangible book value per share increased $0.78 compared to $21.67 at September 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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