Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
This discussion should be read in conjunction with the unaudited consolidated financial
statements, notes and tables included in this report. For further information, refer to the audited consolidated financial statements
and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Forward-Looking Statements
This report contains certain “forward-looking statements” within the meaning
of the federal securities laws. These statements are not historical facts, but rather statements based on the Company’s current
expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded
by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.
Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include, but are not limited to, the following:
|
·
|
General and local economic conditions;
|
|
·
|
Changes in 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;
|
|
·
|
Our ability to manage the risks involved in our business;
|
|
·
|
Our ability to integrate the operations of businesses we acquire;
|
|
·
|
Inflation, market and monetary fluctuations;
|
|
·
|
Our ability to control costs and expenses; and
|
|
·
|
Changes in federal and state legislation and regulation applicable to our business.
|
The Company uses the current statutory income tax rate of 21.0% to value its deferred tax assets and liabilities.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act reduces the US federal corporate
tax rate from 35% to 21%. As of December 31, 2017, we have completed our accounting for the tax effects of enactment of the Act.
We have made a reasonable estimate of the effects on our existing deferred tax balances
as of December 31, 2017. We re-measured all of our deferred tax assets (“DTA”) and liabilities (“DTL”)
based on the rates at which they are expected to reverse in the future. We recognized an income tax benefit of $89,000 for the
year ended December 31, 2017 related to adjusting our net deferred tax liability balance to reflect the new corporate tax rate.
In addition, DTAs/DTLs related to available for sale (“AFS”) securities unrealized
losses that were revalued as of December 31, 2017 noted above created a “stranded tax effects” in Accumulated Other
Comprehensive Income (“AOCI”) due enactment of the Tax Act. The issue arose due to the nature of GAAP recognition of
tax rate change effects on the AFS DTA/DTL revaluation as an adjustment to income tax provision.
In February 2018, FASB issued ASU 2018-02 -
Income Statement - Reporting Comprehensive
Income (Topic 220).
As disclosed in Note 1 of the Annual Report, the Company early adopted the provisions of the ASU 2018-02
and recorded a reclassification adjustment of $220,000 from AOCI to retained earnings for stranded tax effects related to AFS securities
resulting from the newly enacted corporate tax rate. The amount of the reclassification was the difference between the 35 percent
historical corporate tax rate and the newly enacted 21 percent corporate tax rate. See Statement of Changes in Stockholders Equity
as of December 31, 2017 included in the Annual Report for additional details and reclassification impact due to impact of the ASU
2018-02
.
The accounting for the effects of the tax rate change on deferred tax balances is complete
and no provisional amounts were recorded for this item.
The Company assumes no obligation to update any forward-looking statements except as
may be required by applicable law or regulation.
General
CB Financial Services, Inc. is a bank holding company established in 2006. CB Financial’s
business activity is conducted through its wholly owned banking subsidiary Community Bank.
The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania.
The Bank operates from 16 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania.
The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans,
and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty,
commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc., the Bank’s wholly-owned
subsidiary that is a full-service, independent insurance agency.
On April 30, 2018, the Company completed its merger with FWVB. For additional information regarding the merger,
refer to Note 2 in the Notes to Consolidated Financial Statements.
Overview
The following discussion and analysis is presented to assist in the understanding and
evaluation of our consolidated financial condition and results of operations. It is intended to complement the unaudited consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed
discussion focuses on our consolidated financial condition as of March 31, 2018 compared to the financial condition as of December
31, 2017 and the consolidated results of operations for the three months ended March 31, 2018 and 2017.
Our results of operations depend primarily on our net interest income. Net interest income
is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing
liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest
expense. Noninterest income consists primarily of fees and service charges on deposit accounts, fees and charges on loans, insurance
commissions, income from bank-owned life insurance and other income. Noninterest expense consists primarily of expenses related
to salaries and employee benefits, occupancy and equipment, contracted services, legal fees, other real estate owned, advertising
and promotion, stationery and supplies, deposit and general insurance and other expenses.
Financial institutions like us, in general, are significantly affected by economic conditions,
competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for
and supply of housing, competition among lenders, interest rate conditions, and funds availability. Our operations and lending
are principally concentrated in the southwestern Pennsylvania market area.
Statement of Financial Condition Analysis
Assets.
Total assets increased $31.4 million, or 3.4%, to $965.8 million
at March 31, 2018 compared to $934.5 million at December 31, 2017.
Investment securities classified as available-for-sale decreased $2.1 million, or 1.7%,
to $121.5 million at March 31, 2018 compared to $123.6 million at December 31, 2017. This decrease was primarily the result of
current market conditions negatively impacting the fair market value of the securities portfolio decreasing the fair market value
by $1.8 million at March 31, 2018, security calls and maturities and security paydowns in the current quarter. Any excess security
funds have been utilized to fund loan growth.
Loans, net, increased $36.6 million, or 5.0%, to $772.2 million at March 31, 2018 compared
to $735.6 million at December 31, 2017. This was primarily due to net originations of $42.2 million on commercial real estate loans,
$5.3 million on residential loans and $1.4 million in consumer loans (mainly indirect auto loans), partially offset by net payoffs
of $11.6 million in construction loans. The net loan payoffs were utilized to fund loan originations during the current period.
Premises and equipment, net, increased $1.6 million, or 9.8%, to $18.4 million at March
31, 2018 compared to $16.7 million at December 31, 2017. This was mainly due to additions related to the new Corporate Center currently
under construction for the Bank. The Corporate Center is located in Washington, PA, just off the Chestnut Street exit of I-70.
This location was a property that was acquired in the first quarter of 2016 as a result of a resolution of a commercial real estate
impaired loan relationship that transferred into other real estate owned. Based on the Company’s strategic plan to expand
the corporation, it was determined that this property go through an extensive remodeling and be ready for occupancy in the second
quarter of 2018.
Liabilities.
Total liabilities increased $32.2 million, or 3.8%, to $873.4
million at March 31, 2018 compared to $841.2 million at December 31, 2017.
Total deposits decreased $18.6 million, or 2.4%, to $754.7 million at March 31, 2018
compared to $773.3 million at December 31, 2017. There were decreases of $23.8 million in NOW accounts, $2.7 million in brokered
deposits, $703,000 in money market accounts and $596,000 in time deposits, partially offset by increases of $6.9 million in demand
deposits and $2.3 million in savings accounts. A local government depositor withdrew funds from the Bank during the current quarter
in the amount of approximately $17.0 million. Due to the evolving interest rate environment and recent interest rate hikes by the
FRB over the past year, the Bank continues to monitor the portfolio of deposit products by being selective on offering promotional
interest rates and has concentrated its efforts on increasing noninterest-bearing accounts by building strong customer relationships.
Short-term borrowings increased $55.7 million, or 140.5%, to $95.3 million at March 31,
2018 compared to $39.6 million at December 31, 2017. At March 31, 2018, short-term borrowings were comprised of $75.7 million of
FHLB overnight borrowings and $19.5 million of securities sold under agreements to repurchase compared to $13.8 million of FHLB
overnight borrowings and $25.8 million of securities sold under agreements to repurchase at December 31, 2017. The increase in
FHLB overnight borrowings is directly related to loan growth in the current period. The decrease in securities sold under agreement
to repurchase is 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 decreased $3.5 million due to a FHLB long-term borrowing maturing and paying off during the current period.
As a result of the FHLB matured long-term borrowing, the weighted average interest rate on long-term borrowings increased 7 basis
points from 1.92% to 1.99% in the current period.
Stockholders’ Equity.
Stockholders’ equity
decreased $838,000, or 0.9%, to $92.4 million at March 31, 2018 compared
to $93.3 million at December 31, 2017. During the period, the increase in unrealized losses on the securities portfolio was $1.5
million and the Company paid $901,000 in dividends to stockholders, partially offset by net income of $1.4 million for the current
period.
Results of Operations for the Three Months Ended March 31, 2018 and 2017
Overview.
Net income decreased $344,000, to $1.4
million, for the three months ended March 31, 2018, compared to $1.7 million for the three months ended March 31, 2017. The quarterly
results benefited from an increase in interest income related to the above mentioned loan growth in the current quarter. Quarterly
pre-tax income decreased by $907,000 due to the increase of $1.1 million in provision for loan losses as a result of loan growth
and resolutions of commercial and industrial impaired loans.
Net Interest Income.
Net interest income increased $613,000, or 8.8%,
to $7.6 million for the three months ended March 31, 2018 compared to $7.0 million for the three months ended March 31, 2017.
Interest and dividend income increased $916,000, or 11.8%, to $8.7 million for the three
months ended March 31, 2018 compared to $7.8 million for the three months ended March 31, 2017. Interest income on loans increased
$829,000 due to an increase in average loans outstanding of $83.8 million for the three months ended March 31, 2018 compared to
the three months ended March 31, 2017. The increase in average loans was due to loan originations within the commercial and residential
loan portfolios, partially offset by decreases in construction and commercial and industrial loans mainly due to loan payoffs.
The overall decrease on the loan yield for average loans was 4 basis points. The main factor contributing to the yield decrease
this quarter was the reduced accretion on the acquired loan portfolio credit mark. The impact of the accretion for the three months
ended March 31, 2018 was 4 basis points compared to 14 basis points for the three months ended March 31, 2017. The remaining credit
mark balance for acquired loans was $699,000 as of March 31, 2018. Since the prior quarter interest rate hike by the Federal Reserve
Board (“FRB”) of 25 basis points in the discount rate, loan demand thrived in the first quarter. Interest income on
taxable securities increased $73,000 mainly due to an increase of $10.2 million in the average balance for taxable securities in
the current period. The increase in the average balance attributed to an increase of 11 basis points in yield on taxable securities.
This is a result of new purchases with higher prevailing yields replacing security calls and maturities with lower yields within
the portfolio. Interest income on securities exempt from federal tax increased $19,000 due to deploying proceeds from security
calls and maturities into higher yielding non-taxable security purchases in the current period. There was an increase of $3.6 million
in the average balance on securities exempt from federal tax and a decrease of 66 basis points in yield as a result of the Tax
Cuts and Jobs Act enacted into federal tax law on December 22, 2017. The reduction of the statutory federal income tax rate from
34% to 21%, has dampened the benefit of tax-exempt yields on securities. In addition, other interest and dividend income increased
$4,000 as a result of increased interest earned with correspondent deposit banks and FHLB dividends in the current period.
Interest expense increased $303,000, or 38.1%, to $1.1 million for the three months ended
March 31, 2018, compared to $796,000 for the three months ended March 31, 2017. Interest expense on short-term borrowings increased
$178,000 due to overnight borrowings primarily from FHLB. Multiple 25 basis point interest rate hikes by the FRB during the prior
year and the continued loan growth have contributed to the increase in average balance for borrowings of $36.0 million at March
31, 2018. Interest expense on deposits increased $133,000 due to an increase in average interest-bearing deposits of $25.7 million,
primarily due to increases in interest-bearing demand deposit, savings and time deposits accounts. The average cost of interest-bearing
deposits increased 7 basis points. This was due to the aforementioned interest rate hikes creating a volatile market on deposit
accounts. Interest expense on other borrowed funds decreased $9,000 primarily due to a maturing FHLB long-term borrowing for $3.5
million that was paid off in the current period partially offset by an increase in interest expense on securities sold under agreement
to repurchase.
Average Balances and Yields
.
The following tables present information regarding average balances of assets and liabilities, the total dollar
amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on
average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances
over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized
or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities
income utilizing a marginal federal
income tax rate of 21% for 2018 and 34% for 2017.
As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are
net of the allowance for loan losses, and include nonaccrual loans. The yields and costs for the periods indicated are derived
by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
|
|
(Dollars in thousands) (Unaudited)
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/
Cost
(1)
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/
Cost
(1)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Net
|
|
$
|
750,760
|
|
|
$
|
8,005
|
|
|
|
4.32
|
%
|
|
$
|
666,961
|
|
|
$
|
7,164
|
|
|
|
4.36
|
%
|
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
86,206
|
|
|
|
434
|
|
|
|
2.01
|
|
|
|
76,044
|
|
|
|
361
|
|
|
|
1.90
|
|
Exempt From Federal Tax
|
|
|
39,205
|
|
|
|
290
|
|
|
|
2.96
|
|
|
|
35,593
|
|
|
|
322
|
|
|
|
3.62
|
|
Other Interest-Earning Assets
|
|
|
7,680
|
|
|
|
66
|
|
|
|
3.49
|
|
|
|
19,567
|
|
|
|
71
|
|
|
|
1.47
|
|
Total Interest-Earning Assets
|
|
|
883,851
|
|
|
|
8,795
|
|
|
|
4.04
|
|
|
|
798,165
|
|
|
|
7,918
|
|
|
|
4.02
|
|
Noninterest-Earning Assets
|
|
|
58,297
|
|
|
|
|
|
|
|
|
|
|
|
56,302
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
942,148
|
|
|
|
|
|
|
|
|
|
|
$
|
854,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Demand Deposits
|
|
$
|
131,600
|
|
|
|
103
|
|
|
|
0.32
|
%
|
|
$
|
118,548
|
|
|
|
70
|
|
|
|
0.24
|
%
|
Savings
|
|
|
134,292
|
|
|
|
62
|
|
|
|
0.19
|
|
|
|
124,533
|
|
|
|
56
|
|
|
|
0.18
|
|
Money Market
|
|
|
137,310
|
|
|
|
119
|
|
|
|
0.35
|
|
|
|
142,557
|
|
|
|
93
|
|
|
|
0.26
|
|
Time Deposits
|
|
|
166,048
|
|
|
|
504
|
|
|
|
1.23
|
|
|
|
157,903
|
|
|
|
436
|
|
|
|
1.12
|
|
Total Interest-Bearing Deposits
|
|
|
569,250
|
|
|
|
788
|
|
|
|
0.56
|
|
|
|
543,541
|
|
|
|
655
|
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
88,753
|
|
|
|
311
|
|
|
|
1.42
|
|
|
|
52,727
|
|
|
|
141
|
|
|
|
1.08
|
|
Total Interest-Bearing Liabilities
|
|
|
658,003
|
|
|
|
1,099
|
|
|
|
0.68
|
|
|
|
596,268
|
|
|
|
796
|
|
|
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Demand Deposits
|
|
|
187,693
|
|
|
|
|
|
|
|
|
|
|
|
164,459
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
3,457
|
|
|
|
|
|
|
|
|
|
|
|
3,482
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
849,153
|
|
|
|
|
|
|
|
|
|
|
|
764,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
92,995
|
|
|
|
|
|
|
|
|
|
|
|
90,258
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
942,148
|
|
|
|
|
|
|
|
|
|
|
$
|
854,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
|
|
|
$
|
7,696
|
|
|
|
|
|
|
|
|
|
|
$
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
|
|
|
3.48
|
%
|
Net Interest-Earning Assets
(3)
|
|
$
|
225,848
|
|
|
|
|
|
|
|
|
|
|
$
|
201,897
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(4)
|
|
|
|
|
|
|
|
|
|
|
3.53
|
|
|
|
|
|
|
|
|
|
|
|
3.62
|
|
Return on Average Assets
|
|
|
|
|
|
|
|
|
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
0.81
|
|
Return on Average Equity
|
|
|
|
|
|
|
|
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
|
7.66
|
|
Average Equity to Average Assets
|
|
|
|
|
|
|
|
|
|
|
9.87
|
|
|
|
|
|
|
|
|
|
|
|
10.56
|
|
Average Interest-Earning Assets to Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
134.32
|
|
|
|
|
|
|
|
|
|
|
|
133.86
|
|
|
(2)
|
Net interest rate spread represents
the difference between the weighted average yield on interest-earning assets and the
weighted average cost of interest-bearing liabilities.
|
|
(3)
|
Net interest-earning assets represent
total interest-earning assets less total interest-bearing liabilities.
|
|
(4)
|
Net interest margin represents net
interest income divided by average total interest-earning assets. Interest income and
yields are on a fully tax equivalent basis utilizing a marginal tax rate of 21%.
|
Rate/Volume Analysis
.
The following table presents the effects of changing rates and volumes on our net interest income for the
periods indicated. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal
federal income tax rate of 21% for 2018 and 34% for 2017. The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents
the sum of the prior columns.
|
|
(Dollars in thousands) (Unaudited)
|
|
|
Three Months Ended March 31, 2018
Compared To
Three Months Ended March 31, 2017
|
|
|
Increase (Decrease) Due to
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
908
|
|
|
$
|
(67
|
)
|
|
$
|
841
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
51
|
|
|
|
22
|
|
|
|
73
|
|
Exempt From Federal Tax
|
|
|
31
|
|
|
|
(63
|
)
|
|
|
(32
|
)
|
Other Interest-Earning Assets
|
|
|
(61
|
)
|
|
|
56
|
|
|
|
(5
|
)
|
Total Interest-Earning Assets
|
|
|
929
|
|
|
|
(52
|
)
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
36
|
|
|
|
97
|
|
|
|
133
|
|
Borrowings
|
|
|
117
|
|
|
|
53
|
|
|
|
170
|
|
Total Interest-Bearing Liabilities
|
|
|
153
|
|
|
|
150
|
|
|
|
303
|
|
Change in Net Interest Income
|
|
$
|
776
|
|
|
$
|
(202
|
)
|
|
$
|
574
|
|
Provision for Loan Losses.
The provision for loan losses was $1.5 million
for the three months ended March 31, 2018 compared to $420,000 for the three months ended March 31, 2017. Net charge-offs for the
three months ended March 31, 2018 were $1.4 million, which includes $122,000 of net charge-offs on automobile loans, compared to
$438,000 of net charge-offs for the three months ended March 31, 2017, which includes $237,000 of net charge-offs on automobile
loans. The increase in net charge-offs during the current period was due to charge-offs of $496,000, $443,000 and $238,000 for
three commercial and industrial relationships, $27,000 for residential mortgage loans and $19,000 for consumer loans. The provision
for loan losses was impacted in the current quarter by the recording of $1.5 million of provision for the originated loan portfolio
due to the above-mentioned loan charge-offs and to appropriately reflect risk associated with the originated loan portfolio as
of March 31, 2018. Additionally, this was due to growth in the loan portfolio and average loan balances, partially offset by the
local economy which had a positive impact on the quantitative factors within the allowance calculation. Management analyzes the
loan portfolio on a quarterly basis to determine the adequacy of the allowance for loan losses and the need for additional provisions
for loan losses. It was determined that an increase in the current quarter provision was needed for the three months ended March
31, 2018 compared to the three months ended March 31, 2017.
Noninterest Income
.
Noninterest income
increased $10,000, or 0.5% to $2.1 million for the three months ended
March 31, 2018 remaining constant at $2.1 million for the three months ended March 31, 2017. Other commissions increased $329,000
mainly due to insurance proceeds recognized by a claim on a bank-owned life insurance policy due to the death of a former vice
president of the Bank. This increase was mainly offset by the following: Insurance commissions from Exchange Underwriters decreased
$155,000 due to decreases in contingency fees of $128,000 and commissions and fees income of $27,000, which was primarily related
to commercial lines commissions. Contingency fees are commissions that are contingent upon several factors including, but not limited
to, eligible written premiums, earned premiums, incurred losses and stop loss charges. Net gains on the sales of investments decreased
$52,000 due to sales of equity securities in the prior quarter. There was a decrease in the net gains on the sales of residential
mortgage loans of $82,000. The decrease in gains was primarily due to rising interest rates and the decrease in the number of loans
subsequently sold to the FHLB as part of the MPF® program. The fair value of equity securities decreased $25,000 due to the
current quarter adoption of Accounting Standard Update (“ASU”) 2016-01,
Financial Instruments – Overall (Subtopic
825-10),
which requires equity investments (except those accounted for under the equity method or are that consolidated) to
be measured at fair value with changes in fair value recognized in net income. As required the $25,000 loss was recognized due
to current market conditions.
Noninterest Expense.
Noninterest expense
increased
$450,000, or 7.2%, to $6.7 million for the three months ended March 31, 2018 compared to $6.2 million for the three months ended
March 31, 2017. Salaries and employee benefits increased $206,000 primarily due to hiring of additional employees to ramp up for
the intended merger with FWVB and PB, normal salary increases, group health insurance and retirement benefits expense. This increase
was partially offset by a decrease in bank-owned life insurance split dollar accrual expense due to the claim recognized on the
death of a former vice president of the Bank. Equipment increased $59,000 related to Fiserv, our core data processing program.
The Federal Deposit Insurance Corporation (“FDIC”) assessment expense increased $55,000 due to the increase in average
assets and a factor increase by the FDIC in the computation of the insurance assessment. Other noninterest expense increased $55,000
primarily due to telephone, non-employee compensation related to stock option and restricted stock awards expenses, increased
loan expenses due to loan originations, and travel expense. Merger related expense of $24,000 was recognized in the current quarter
mainly due to merger planning software and employee travel to Progressive Bank. Occupancy increased $22,000 primarily due to a
branch remodeling project. PA Shares Tax expense increased $9,000 due to increased equity compared to the prior quarter. Contracted
services increased $7,000 related to winter maintenance expenses. Advertising increased $6,000 due to current marketing and advertising
initiatives.
Income Tax Expense.
Income taxes
decreased $563,000 to $167,000 for the three months ended March 31,
2018 compared to $730,000 for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31,
2018 was 10.9% compared to 30.0% for the three months ended March 31, 2017. The expected effective tax rate for the current year
2018, is 16.7%, which was calculated by excluding the one-time income on a bank-owned life insurance claim of approximately $421,000,
which represents a discrete tax item for Q1 2018. The decrease in income taxes was due to the direct result of the enactment of
the Tax Cuts and Jobs Act of 2017, which reduced the corporate statutory federal income tax rate from 34% to 21% effective January
1, 2018, the above mentioned bank-owned life insurance proceeds and a decrease of $907,000 in pre-tax income.
Off-Balance Sheet Arrangements.
Other than loan commitments and standby and performance letters of credit, we do not
have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our
financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are
material to investors. Refer to Note 10 in the Notes to Consolidated Financial Statements for a summary of commitments outstanding
as of March 31, 2018.
Liquidity and Capital Management
Liquidity.
Liquidity is the ability to meet current
and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows,
loan repayments and maturities, calls and sales of securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Company regularly adjusts its investments in liquid assets based upon its assessment
of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives
of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other
banks and short- and intermediate-term securities. The Company believes that it had sufficient liquidity at March 31, 2018 to satisfy
its short- and long-term liquidity needs at that date.
The Company’s most liquid assets are cash and due from banks, which totaled
$13.5
million at March 31, 2018. The levels of these assets depend on our operating, financing, lending and investing activities during
any given period. Unpledged securities, which provide an additional source of liquidity, totaled $45.4 million at March 31, 2018.
In addition, at March 31, 2018, the Company had the ability to borrow up to $294.0 million from the FHLB of Pittsburgh, of which
$75.7 million was outstanding and $37.6 million was utilized toward standby letters of credit. The Company also has the ability
to borrow up to $99.7 million from the FRB through its Borrower-In-Custody line of credit agreement and $40.0 million from multiple
line of credit arrangements with various banks, none of which were outstanding.
At March 31, 2018, time deposits due within one year of that date totaled
$72.4
million, or 44.2% of total time deposits. If these time deposits do not remain with the Company, the Company will be required to
seek other sources of funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or
other borrowings than it currently pays on these certificates of deposit. The Company believes, however, based on past experience
that a significant portion of its certificates of deposit will remain with it, either as certificates of deposit or as other deposit
products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.
CB Financial is a separate legal entity from the Bank and must provide for its own liquidity
to pay any dividends to its shareholders and for other corporate purposes. Its primary source of liquidity is dividend payments
it receives from the Bank. The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations. At March
31, 2018, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $2.7 million.
We are committed to maintaining a strong liquidity position; therefore, we monitor our
liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments.
The marginal cost of new funding, however, whether from deposits or borrowings from the FHLB, will be carefully considered as we
monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the
FHLB in the future.
Capital Management.
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Under the Regulatory Capital Rules, in order to avoid limitations
on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking
organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital
requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer, which is composed of
common equity Tier I capital, began on January 1, 2016 at the 0.625% level and will be phased in over a three year period (increasing
by that amount on each January 1, until it reaches 2.5% on January 1, 2019).
At March 31, 2018 and December 31, 2017, the Company was categorized as well capitalized
under the regulatory framework for prompt corrective action. The following table presents the Bank’s regulatory capital amounts
and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated.
|
|
(Dollars in thousands)
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
Common Equity Tier 1 (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
84,013
|
|
|
|
11.71
|
%
|
|
$
|
84,599
|
|
|
|
12.22
|
%
|
For Capital Adequacy Purposes
|
|
|
32,293
|
|
|
|
4.50
|
|
|
|
31,159
|
|
|
|
4.50
|
|
To Be Well Capitalized
|
|
|
46,645
|
|
|
|
6.50
|
|
|
|
45,008
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
84,013
|
|
|
|
11.71
|
|
|
|
84,599
|
|
|
|
12.22
|
|
For Capital Adequacy Purposes
|
|
|
43,057
|
|
|
|
6.00
|
|
|
|
41,546
|
|
|
|
6.00
|
|
To Be Well Capitalized
|
|
|
57,409
|
|
|
|
8.00
|
|
|
|
55,395
|
|
|
|
8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
92,908
|
|
|
|
12.95
|
|
|
|
93,257
|
|
|
|
13.47
|
|
For Capital Adequacy Purposes
|
|
|
57,409
|
|
|
|
8.00
|
|
|
|
55,395
|
|
|
|
8.00
|
|
To Be Well Capitalized
|
|
|
71,761
|
|
|
|
10.00
|
|
|
|
69,243
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage (to adjusted total assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
84,013
|
|
|
|
9.01
|
|
|
|
84,599
|
|
|
|
9.27
|
|
For Capital Adequacy Purposes
|
|
|
37,287
|
|
|
|
4.00
|
|
|
|
36,492
|
|
|
|
4.00
|
|
To Be Well Capitalized
|
|
|
46,609
|
|
|
|
5.00
|
|
|
|
45,616
|
|
|
|
5.00
|
|