Item 2. Management’s Discussion and Analysis
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, 2020.
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;
• 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;
• Our ability to realize the expected cost savings and other efficiencies related to our branch optimization and operational efficiency initiatives;
• 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 integrate the operations of businesses we acquire;
• 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 disclosed in the Company’s periodic reports as filed with the Securities and Exchange Commission.
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Many of these risks and uncertainties have been elevated by and may continue to be elevated by the COVID-19 pandemic. The ability to predict the impact of the ongoing COVID-19 pandemic on the Company’s future operating results with any precision is difficult and depends on many factors beyond our control.
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.
General
CB Financial Services, Inc. is a bank holding company established in 2006 and headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly owned bank subsidiary, Community Bank.
The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from 11 branches in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania and five branches in Marshall, Ohio, Upshur and Wetzel Counties in West Virginia. The Bank also has a loan production office in Allegheny County, a corporate center in Washington County and an operations center in Greene County in 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 located in Washington County.
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 June 30, 2021, compared to the financial condition as of December 31, 2020 and the consolidated results of operations for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020.
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, 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, data processing, contracted services, legal and professional fees, advertising, 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 southwestern Pennsylvania and Ohio Valley market areas.
Branch Optimization and Operational Efficiency Update
As previously disclosed by the Company on February 23, 2021, May 27, 2021 and June 10, 2021, the Company announced the implementation of branch optimization and operational efficiency strategic initiatives to improve the Bank’s financial performance and operations in order to position the Bank for continued profitable growth. The Bank intends to optimize its current branch network while expanding technology and infrastructure investments in its remaining locations. The decision was the result of a comprehensive internal study that measured branch performance by comparing financial and non-financial indicators to growth opportunities, while evolving changes in consumer preferences, largely driven by the global pandemic, led to an acceleration of branch optimization efforts. The Bank also completed a comprehensive review of its branch network and operating environment to identify solutions to improve operating performance. This review prioritized profitability, efficiency, infrastructure and client experience improvements, automation in operations, and digital marketing and technology investments.
The Bank continues to make progress related to these initiatives through the consolidation of six branches that was completed on June 30, 2021, reducing the Bank's branch network to 16 branches. The Bank is also in the process of implementing operational efficiencies related to over 185 individualized processes within its branch network and operating environment. In addition, on June 10, 2021, CB Financial, Community Bank, and Citizens Bank of West Virginia, Inc. (“Citizens Bank”) executed a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Citizens Bank has agreed to purchase certain loans and other assets, and assume certain deposits and other liabilities, of the branch offices of Community Bank located in Buckhannon, West Virginia, and in New Martinsville, West Virginia. The Agreement provides for a 5.0% premium to be paid on assumed deposits,
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which will be recognized as income upon the expected close of the transaction in the fourth quarter of 2021, subject to regulatory approval and other closing conditions.
The Company presently expects to incur $7.9 million of non-recurring expenses in 2021 and, as of June 30, 2021, has incurred $5.1 million of expenses related to these items. The expenses include $2.3 million writedown on fixed assets and $1.2 million impairment of intangible assets associated with the branch consolidations and sales.
In addition, as part of the Company's branch optimization and operational efficiency initiatives, the Company incurred $1.6 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 the operational and revenue efficiency initiative of approximately $1.5 million that will be reflected in contracted services. The Company anticipates savings from this initiative ranging from approximately $2.5 million to $3.5 million in 2022 , as well as creating possible 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, alo ng with $3.0 million of ongoing pre-tax cost savings as a result of the branch optimization initiatives. The Company expects these ongoing savings to be incremental to net income beginning in 2022 . This estimated cost excludes 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.
Explanation of Use of Non-GAAP Financial Measures
In addition to financial measures presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”), we present 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.
The 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 21.0%. 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.
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The following table reconciles net interest income, net interest spread and net interest margin on a FTE basis for the periods indicated:
Three Months Ended
Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(Dollars in thousands)
Interest Income (GAAP) $ 10,820 $ 11,727 $ 21,808 $ 24,056
Adjustment to FTE Basis
43 59 89 113
Interest Income (FTE) (Non-GAAP)
10,863 11,786 21,897 24,169
Interest Expense (GAAP) 886 1,406 1,897 3,202
Net Interest Income (FTE) (Non-GAAP)
$ 9,977 $ 10,380 $ 20,000 $ 20,967
Net Interest Rate Spread (GAAP)
2.72 % 3.10 % 2.81 % 3.22 %
Adjustment to FTE Basis
0.02 0.02 0.01 0.01
Net Interest Rate Spread (FTE) (Non-GAAP)
2.74 3.12 2.82 3.23
Net Interest Margin (GAAP)
2.84 % 3.28 % 2.94 % 3.41 %
Adjustment to FTE Basis
0.01 0.02 0.01 0.02
Net Interest Margin (FTE) (Non-GAAP)
2.85 3.30 2.95 3.43
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.
June 30,
2021 December 31, 2020
(Dollars in thousands)
Allowance for Loan Losses (Numerator) $ 11,544 $ 12,771
Total Loans 1,007,446 $ 1,044,753
PPP Loans (49,525) (55,096)
Total Loans, Excluding PPP Loans (Non-GAAP) (Denominator) $ 957,921 $ 989,657
Allowance for Loan Losses to Total Loans (GAAP) 1.15 % 1.22 %
Allowance for Loan Losses to Total Loans, Excluding PPP Loans (Non-GAAP) 1.21 % 1.29 %
Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by period-end common shares outstanding. We believe this non-GAAP measure serves as a useful tool 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.
June 30,
2021 December 31, 2020
(Dollars in thousands, except share and per share data)
Stockholders' Equity (GAAP) $ 132,536 $ 134,530
Goodwill and Other Intangible Assets, Net (15,918) (18,131)
Tangible Common Equity or Tangible Book Value (Non-GAAP) (Numerator) $ 116,618 $ 116,399
Common Shares Outstanding (Denominator) 5,409,077 5,434,374
Book Value per Common Share (GAAP) $ 24.50 $ 24.76
Tangible Book Value per Common Share (Non-GAAP) $ 21.56 $ 21.42
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Consolidated Statements of Financial Condition Analysis
Assets. Total assets increased $44.9 million, or 3.2%, to $1.46 billion at June 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 Securities
• Cash and due from banks increased $11.1 million, or 6.9%, to $172.0 million at June 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 $63.1 million, or 43.4%, to $208.5 million at June 30, 2021, compared to $145.4 million at December 31, 2020. Current period activity included $97.1 million of mortgage-backed securities and U.S. government agency securities purchases, $20.4 million of paydowns on mortgage-backed securities, and $11.9 million of mortgage-backed securities sales, which resulted in the recognition of a $225,000 gain on the sale of securities. The purchases were made to earn a higher yield on excess cash with an expected 6 bps increase in incremental annual net interest margin. The sales recognized gains on higher-interest securities with faster prepayment speeds. In addition, there was a $2.2 million decrease in the market value of the debt securities portfolio and a $233,000 gain in market value in the equity securities portfolio, which is primarily comprised of bank stocks.
Payroll Protection Program (“PPP”) Update
• PPP loans decreased $5.6 million to $49.5 million at June 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 June 30, 2021. $489,000 of net PPP loan origination fees were earned in the second quarter of 2021 compared to $535,000 for the three months ended March 31, 2021.
Loans, Allowance for Loan Losses and Credit Quality
• Total loans held for investment decreased $37.3 million to $1.01 billion at June 30, 2021. This includes the impact of reclassifying $11.4 million of loans to held for sale. Excluding the net decline of $5.6 million in PPP loans in the current period and including $11.4 million of held for sale loans, loans declined $20.3 million. Average loans for the three months ended June 30, 2021 decreased $15.0 million compared to the three months ended March 31, 2021.
• The allowance for loan losses was $11.5 million at June 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 quarter and year-to-date. A $31.7 million decrease in net reservable loans in the current period, which excludes PPP loans and includes the reclassification of $11.4 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 1.15% at June 30, 2021 compared to 1.22% at December 31, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.21% at June 30, 2021 compared to 1.29% at December 31, 2020.
• Nonperforming loans, which includes nonaccrual loans, accruing loans past due 90 days or more, and accruing loans that are considered troubled debt restructurings, were $15.4 million at June 30, 2021 compared to $14.5 million at December 31, 2020. Nonperforming loans to total loans ratio was 1.53% at June 30, 2021 compared to 1.39% at December 31, 2020. The increase in nonperforming loans at June 30, 2021 compared to December 31, 2020 is primarily related to a $2.0 million construction loan secured by a hotel that was placed on nonaccrual.
• The Bank provided borrower support and relief through short-term loan forbearance options by primarily allowing: (a) deferral of three to six months of payments; or (b) for consumer loans not secured by a real estate mortgage, three months of interest-only payments that also extends the maturity date of the loan by three months. In certain circumstances, a second three-month deferral period was granted.
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The following table provides details of loans in forbearance at the dates indicated.
June 30, 2021 March 31, 2021 December 31, 2020
Number
of
Loans Amount % of Portfolio Number
of
Loans Amount % of Portfolio Number
of
Loans Amount % of Portfolio
(Dollars in thousands)
Real Estate:
Residential — — — % 7 1,343 0.4 % 4 749 0.2 %
Commercial 4 6,544 1.8 % 7 13,814 3.7 % 8 19,818 5.3 %
Construction — — — % 1 1,958 2.5 % 1 1,958 2.7 %
Commercial and Industrial 5 1,221 1.0 % 5 1,219 0.9 % 5 1,219 1.0 %
Consumer — — — % 5 106 0.1 % 13 356 0.3 %
Total Loans in Forbearance 9 $ 7,765 0.8 % 25 $ 18,440 1.8 % 31 $ 24,100 2.3 %
Loans in deferral at June 30, 2021 include one commercial real estate loans totaling $3.3 million that is secured by a hotel, and a business relationship that rents equipment, supplies and other materials for events comprised of three commercial real estate loans totaling $3.3 million, and five commercial and industrial loans totaling $1.2 million. These loans ended their forbearance period in July and begin making regularly scheduled payments.
Other
• Premises and equipment decreased $1.6 million to $18.7 million at June 30, 2021 compared to $20.3 million at December 31, 2020. The Company recognized a $2.3 million writedown on fixed assets related to the branch optimization initiative. In addition, $795,000 of premises and equipment was transferred to held for sale related to the signing of the Agreement with Citizens Bank and impending sale of two branches. The Company also recognized $485,000 of depreciation and $280,000 was transferred to Other Assets due to a branch closure and marketing of the property for sale. This was offset by $2.2 million of purchases, primarily related to the operational efficiency initiative.
• Intangible Assets decreased $2.2 million to $8.4 million at June 30, 2021 compared to $6.2 million at December 31, 2020 primarily due to an impairment of $1.2 million and amortization expense of $1.0 million. As a result of signing the Agreement with Citizens Bank and the expected sale of a portion of the deposits associated with the remaining core deposit intangible asset, the Company performed an interim evaluation to determine whether the core deposit intangible was impaired. As a result of the evaluation, the Company determined the carrying amount of the core deposit intangible was impaired $1.2 million.
• Accrued Interest Receivable and Other Assets decreased $1.8 million, or 11.8% to $13.4 million at June 30, 2021, compared to $15.2 million at December 31, 2020 primarily related to the receipt of a $1.3 million federal income tax refund.
Liabilities. Total liabilities increased $46.9 million, or 3.7%, to $1.33 billion at June 30, 2021 compared to $1.28 billion at December 31, 2020.
Deposits
• Total deposits, including deposits held for sale, increased $51.5 million to $1.28 billion as of June 30, 2021 compared to $1.22 billion at December 31, 2020. Noninterest bearing demand deposits, NOW accounts and savings accounts increased $44.0 million, $16.5 million and $12.9 million, respectively, partially offset by a decrease of $17.0 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 in the current year and the proceeds of which were initially deposited at the Bank was approximately $28.7 million. Annualized deposit growth rate was 8.4% including IRS and PPP loan deposits. Average total deposits increased $54.9 million, primarily in noninterest and interest-bearing demand deposits, for the three months ended June 30, 2021 compared to the three months ended March 31, 2021.
Borrowed Funds
• Short-term borrowings decreased $2.0 million, or 4.9%, to $39.1 million at June 30, 2021, compared to $41.1 million at December 31, 2020. At June 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
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from the Bank’s investment portfolio under an agreement to repurchase. $10.1 million was excluded from short-term borrowings at June 30, 2021 and reported as deposits held for sale.
• Other borrowed funds decreased $2.0 million to $6.0 million at June 30, 2021 due to a Federal Home Loan Bank borrowing that matured in the current period.
Stockholders’ Equity. Stockholders’ equity decreased $2.0 million, or 1.5%, to $132.5 million at June 30, 2021, compared to $134.5 million at December 31, 2020.
• Net income was $2.6 million for the six months ended June 30, 2021.
• Accumulated other comprehensive income decreased $1.7 million primarily due to market interest rate conditions on the Company’s debt securities.
• The Company declared and paid $2.6 million in dividends to common stockholders in the current period.
• The Company repurchased $561,000 of its common stock as part of its stock repurchase program.
• Book value per share (GAAP) was $24.50 at June 30, 2021 compared to $24.76 at December 31, 2020, a decrease of $0.26. Tangible book value per share (Non-GAAP) increased $0.14, or 0.7%, to $21.56 compared to $21.42 at December 31, 2020. Refer to Explanation of Use of Non-GAAP Financial Measures in this Report.
Consolidated Results of Operations for the Three Months Ended June 30, 2021 and 2020
Overview. Net loss was $223,000 for the three months ended June 30, 2021, a decrease of $3.1 million compared to net income of $2.9 million for the three months ended June 30, 2020.
Net Interest and Dividend Income. Net interest and dividend income decreased $387,000, or 3.7%, to $9.9 million for the three months ended June 30, 2021 compared to $10.3 million for the three months ended June 30, 2020. Net interest margin (FTE) (Non-GAAP) decreased 45 basis points (“bps”) to 2.85% for the three months ended June 30, 2021 compared to 3.30% the three months ended June 30, 2020. Net interest margin (GAAP) decreased to 2.84% for the three months ended June 30, 2021 compared to 3.28% for the three months ended June 30, 2020. While the Company 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 has decreased primarily due to the low interest rate environment decreasing yields on loans and securities.
Interest and Dividend Income
• Interest and dividend income decreased $907,000, or 7.7%, to $10.8 million for the three months ended June 30, 2021 compared to $11.7 million the three months ended June 30, 2020.
◦ Interest income on loans decreased $641,000, or 6.1%, to $9.9 million for the three months ended June 30, 2021 compared to $10.6 million for the three months ended June 30, 2020. While average loans increased $2.9 million compared to the three months ended June 30, 2020, the average yield decreased 28 bps to 3.93%.
◦ Interest and fee income on PPP loans was $636,000 for the three months ended June 30, 2021 and contributed 3 bps to loan yield, compared to $316,000 for the three months ended June 30, 2020, which decreased loan yield 7 bps in the prior period.
◦ The impact of the accretion of the credit mark on acquired loan portfolios was $153,000 for the three months ended June 30, 2021 compared to $90,000 for the three months ended June 30, 2020, or 6 bps in the current period compared to 4 bps in the prior period.
◦ Interest income on taxable investment securities decreased $305,000, or 32.4%, to $635,000 for the three months ended June 30, 2021 compared to $940,000 for the three months ended June 30, 2020 driven by a $12.6 million decrease in average investment securities balances and 70 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 $67,000, or 79.8% to $151,000 for the three months ended June 30, 2021 compared to $84,000 for the three months ended June 30, 2020. Average other interest-earning assets increased $149.4 million compared to the three months ended June 30, 2020 primarily from buildup of cash as a result of securities activity, PPP loan funds and government stimulus payments deposited with the Bank, although average yield declined 10 bps due to interest rate cuts on interest-earning cash deposits held at other financial institutions.
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Interest Expense
• Interest expense decreased $520,000, or 37.0%, to $886,000 million for the three months ended June 30, 2021 compared to $1.4 million for the three months ended June 30, 2020.
◦ Interest expense on deposits decreased $478,000, or 36.6%, to $827,000 for the three months ended June 30, 2021 compared to $1.3 million for the three months ended June 30, 2020. While average interest-earning deposits increased $47.9 million compared to the three months ended June 30, 2020, interest rate declines for all products driven by pandemic-related interest rate cuts resulted in a 25 bp, or 40.6%, decrease in average cost compared to the three months ended June 30, 2020. In addition, average time deposits and the related average cost decreased $28.3 million and 31 bps, respectively.
◦ Interest expense on other borrowed funds decreased $27,000, or 43.5%, to $35,000 for the three months ended June 30, 2021 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $5.0 million decrease in average balance.
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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. FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21.0% for the periods presented. As such, amounts will not agree to income as reported in the consolidated financial statements. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
Three Months Ended June 30,
2021 2020
Average
Balance Interest
and
Dividends Yield/
Cost (1)
Average
Balance Interest
and
Dividends Yield/
Cost (1)
(Dollars in thousands) (Unaudited)
Assets:
Interest-Earning Assets:
Loans, Net (2)
$ 1,016,868 $ 9,959 3.93 % $ 1,014,000 $ 10,612 4.21 %
Debt Securities
Taxable 124,685 635 2.04 137,268 940 2.74
Tax Exempt 12,276 94 3.06 14,106 130 3.69
Marketable Equity Securities 2,649 24 3.62 2,579 20 3.10
Other Interest-Earning Assets 246,392 151 0.25 97,033 84 0.35
Total Interest-Earning Assets 1,402,870 10,863 3.11 1,264,986 11,786 3.75
Noninterest-Earning Assets 82,794 113,176
Total Assets $ 1,485,664 $ 1,378,162
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits (3)
$ 275,752 55 0.08 % $ 236,312 141 0.24 %
Savings (3)
247,238 25 0.04 227,470 35 0.06
Money Market (3)
199,652 71 0.14 182,656 187 0.41
Time Deposits (3)
177,506 676 1.53 205,847 942 1.84
Total Interest-Bearing Deposits (3)
900,148 827 0.37 852,285 1,305 0.62
Short-Term Borrowings
Securities Sold Under Agreements to Repurchase 49,325 24 0.20 35,642 39 0.44
Other Borrowings 6,000 35 2.34 11,000 62 2.27
Total Interest-Bearing Liabilities 955,473 886 0.37 898,927 1,406 0.63
Noninterest-Bearing Demand Deposits 387,317 317,738
Other Liabilities 7,999 8,815
Total Liabilities 1,350,789 1,225,480
Stockholders' Equity 134,875 152,682
Total Liabilities and Stockholders' Equity $ 1,485,664 $ 1,378,162
Net Interest Income (FTE) (Non-GAAP) (4)
$ 9,977 $ 10,380
Net Interest Rate Spread (FTE) (Non-GAAP) (4)(5)
2.74 % 3.12 %
Net Interest-Earning Assets (6)
$ 447,397 $ 366,059
Net Interest Margin (GAAP) (7)
2.84 3.28
Net Interest Margin (FTE) (Non-GAAP) (4)(7)
2.85 3.30
Return on Average Assets (1)
(0.06) 0.85
Return on Average Equity (1)
(0.66) 7.65
Average Equity to Average Assets 9.08 11.08
Average Interest-Earning Assets to Average Interest-Bearing Liabilities 146.82 140.72
(1) Annualized based on three months ended results.
(2) Net of the allowance for loan losses, and includes nonaccrual loans with a zero yield and loans held for sale.
(3) Includes Deposits Held for Sale
(4) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report.
(5) 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.
(6) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(7) Net interest margin represents annualized net interest income divided by average total interest-earning assets.
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Rate/Volume Analysis . The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21.0%. 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.
Three Months Ended June 30, 2021
Compared to
Three Months Ended June 30, 2020
Increase (Decrease) Due to
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest and Dividend Income:
Loans, net $ 57 $ (710) $ (653)
Debt Securities:
Taxable (81) (224) (305)
Exempt From Federal Tax (16) (20) (36)
Marketable Equity Securities 1 3 4
Other Interest-Earning Assets 97 (30) 67
Total Interest-Earning Assets 58 (981) (923)
Interest Expense:
Deposits 79 (557) (478)
Short-Term Borrowings:
Securities Sold Under Agreements to Repurchase 11 (26) (15)
Other Borrowings (29) 2 (27)
Total Interest-Bearing Liabilities 61 (581) (520)
Change in Net Interest and Dividend Income $ (3) $ (400) $ (403)
Provision for Loan Losses. Provision for loan losses was a recovery of $1.2 million for the three months ended June 30, 2021 compared to a provision of $300,000 for the three months ended June 30, 2020. A $23.4 million decrease in net reservable loans in the current quarter, which excludes PPP loans and includes the reclassification of $11.4 million of loans to held for sale, along with a decrease in specific reserves on impaired loans and improvements in the economic and industry outlook contributed to the recovery in the current period.
Net recoveries for the three months ended June 30, 2021 were $19,000, or (0.01)% of average loans on an annualized basis. Net recoveries for the three months ended June 30, 2020 were $26,000, or (0.01)% of average loans on an annualized basis.
Noninterest Income . Noninterest income decreased $429,000, or 16.2%, to $2.2 million for the three months ended June 30, 2021, compared to $2.6 million for the three months ended June 30, 2020.
• Service fees increased $127,000 to $614,000 for the three months ended June 30, 2021, compared to $487,000 for the three months ended June 30, 2020 due to an increase in customer usage compared to the prior year period when shelter-in-place orders occurred at the onset of the COVID-19 pandemic.
• Insurance commissions increased $96,000 to $1.2 million for the three months ended June 30, 2021 compared to $1.1 million for the three months ended June 30, 2020 primarily due to an increase in commercial-related insurance policy revenue.
• Net gain on sale of loans was $31,000 for the three months ended June 30, 2021 compared to $441,000 for the three months ended June 30, 2020, primarily due to increased mortgage loan production from refinances in the prior year, which were sold to reduce interest rate risk on lower yielding, long-term assets.
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• Net gain on securities was $11,000 for the three months ended June 30, 2021 compared to $517,000 for the three months ended June 30, 2020. The Company recognized a $489,000 net gain on sales of investment securities in the prior period from sales of higher-interest securities with faster prepayment speeds.
• Other income increased to $31,000 for the three months ended June 30, 2021 compared to a $252,000 loss for the three months ended June 30, 2020 due to a $269,000 valuation allowance adjustment on mortgage servicing rights in the prior period primarily due to a decline in the interest rate environment that caused increased prepayment speeds and resulted in a decrease in fair value of the serviced mortgage portfolio.
Noninterest Expense. Noninterest expense increased $4.7 million, or 51.3%, to $13.7 million for the three months ended June 30, 2021 compared to $9.1 million for the three months ended June 30, 2020. Excluding the impact of non-cash charges related to a $2.3 million writedown on fixed assets and $1.2 million intangible asset impairment, noninterest expense increased $1.2 million to $10.3 million for the three months ended June 30, 2021 compared to $9.1 million for the three months ended June 30, 2020. The current period was also impacted by $1.3 million of other branch optimization and operational efficiency strategic expenses.
• The Company incurred a writedown on fixed assets of $2.3 million for the three months ended June 30, 2021 related to the branch consolidation and sale initiative.
• The Company incurred an intangible asset impairment of $1.2 million for the three months ended June 30, 2021. As a result of signing the Agreement with Citizens Bank and the expected sale of a portion of the deposits associated with the remaining core deposit intangible, the Company performed an interim evaluation to determine whether the core deposit intangible was impaired. As a result of the evaluation, the Company determined the carrying amount of the core deposit intangible was impaired $1.2 million.
• Salaries and employee benefits increased $248,000 to $5.1 million for the three months ended June 30, 2021 compared to $4.8 million for the three months ended June 30, 2020. The increase is primarily due to the recognition of $246,000 in severance related to the branch optimization initiative.
• Occupancy expense increased $325,000 to $1.0 million for the three months ended June 30, 2021 compared to $699,000 for the three months ended June 30, 2020. The increase is due to the recognition of a $227,000 lease impairment related to the consolidation of a branch as part of the branch optimization initiative as well as increase in repair and maintenance.
• Contracted services increased $188,000 to $750,000 for the three months ended June 30, 2021 compared to $562,000 for the three months ended June 30, 2020 The current period includes $434,000 of 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. The prior period included expense related to the hiring of temporary employees to assist with PPP loan processing and consultants used to assist in infrastructure improvements.
• Data processing increased $147,000 to $607,000 for the three months ended June 30, 2021 compared to $460,000 for the three months ended June 30, 2020. This is primarily due to $110,000 of deconversion costs associated with the branch sales.
• Federal Deposit Insurance Corporation (“FDIC”) assessment expense increased $86,000 to $249,000 for the three months ended June 30, 2021 compared to $163,000 for the three months ended June 30, 2020. The increase in assessment was due to the net loss recognized for the three months ended September 30, 2020 primarily due to goodwill impairment negatively impacting the assessment rate in the current period.
• Legal fees and professional fees increased $248,000 to $419,000 for the three months ended June 30, 2021 compared to $171,000 for the three months ended June 30, 2020 due to a $209,000 investment banker success-based fee and legal fees related to the Agreement with Citizens Bank for the branch sales.
• Advertising increased $38,000 to $193,000 for the three months ended June 30, 2021 compared to $155,000 for the three months ended June 30, 2020 due to reduced marketing initiatives during the pandemic in the prior year.
Income Taxes. Income tax benefit was $146,000 for the three months ended June 30, 2021 compared to income tax expenses of $695,000 for the three months ended June 30, 2020. This change was primarily related to a pretax loss recognized in the current period as a result of expenses incurred due to branch optimization and operational efficiency strategic initiatives.
Results of Operations for the Six Months Ended June 30, 2021 and 2020
Overview. Net income was $2.6 million for the six months ended June 30, 2021, a decrease of $1.1 million compared to net income of $3.7 million for the six months ended June 30, 2020.
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Net Interest and Dividend Income. Net interest and dividend income decreased $943,000, or 4.5% to $19.9 million for the six months ended June 30, 2021 compared to $20.9 million for the six months ended June 30, 2020. Net interest margin (Non-GAAP FTE) decreased 48 bps to 2.95% for the six months ended June 30, 2021 compared to 3.43% the six months ended June 30, 2020. Net interest margin (GAAP) decreased to 2.94% for the six months ended June 30, 2021 compared to 3.41% for the six months ended June 30, 2020. While the Company 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 has decreased primarily due to the low interest rate environment decreasing yields on loans and securities.
Interest and Dividend Income
• Interest and dividend income decreased $2.2 million, or 9.3%, to $21.8 million for the six months ended June 30, 2021 compared to $24.1 million for the six months ended June 30, 2020.
◦ Interest income on loans decreased $1.3 million or 5.9% to $20.1 million during the six months ended June 30, 2021 compared to $21.3 million for the six months ended June 30, 2020. Although average loans increased $42.0 million, primarily driven by PPP loans, the loan yield for the six months ended June 30, 2021 decreased 42 bps to 4.0% compared to the six months ended June 30, 2020 due to the full year impact of the COVID-19 pandemic-related declines in market interest rates beginning March 31, 2020.
◦ Interest and fee income on PPP loans was $1.3 million for the six months ended June 30, 2021 and contributed 4 bps to loan yield, compared to $316,000 for the six months ended June 30, 2020, which decreased loan yield 4 bps in the prior period.
◦ The impact of the accretion of the credit mark on acquired loan portfolios was $291,000 for the six months ended June 30, 2021 compared to $166,000 for the six months ended June 30, 2020, or 5 bps in the current period compared to 3 bps in the prior period.
◦ Interest income on taxable investment securities decreased $860,000, or 40.2%, to $1.3 million for the six months ended June 30, 2021 compared to $2.1 million for the six months ended June 30, 2020 driven by a $24.2 million decrease in average taxable investment securities and an 82 bps decrease in average yield. The Federal Reserve 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 rate environment, which were replaced by lower-yielding securities.
◦ Interest from other interest-earning assets, which primarily consists of interest-earning cash, decreased $73,000, or 22.7% for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 even though average balances increased $123.5 million primarily related to funds received from deposits and investment security activity. The impact on interest income was primarily due to pandemic-driven declines on market interest rates earned on deposits at other financial institutions, which resulted in a 55 bp decrease in yield.
Interest Expense
• Interest expense decreased $1.3 million, or 40.8%, to $1.9 million for the six months ended June 30, 2021 compared to $3.2 million for the six months ended June 30, 2020.
◦ Interest expense on deposits decreased $1.2 million, or 40.6%, to $1.8 million for the six months ended June 30, 2021 compared to $3.0 million for the six months ended June 30, 2020. While average interest-bearing deposits increased $45.1 million, interest rate declines for all products driven by pandemic-related interest rate cuts, nonrenewal or repricing of higher cost time deposits, and overall efforts to control pricing resulted in a 31 bp decrease in average cost compared to the six months ended June 30, 2020.
◦ Interest expense on other borrowed funds decreased $56,000, or 42.4%, to $76,000 for the six months ended June 30, 2021 compared to $132,000 for the six months ended June 30, 2020 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $5.3 million decrease in average balance.
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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. FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21% for the periods presented. As such, amounts will not agree to income as reported in the consolidated financial statements. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
Six Months Ended June 30,
2021 2020
Average
Balance Interest
and
Dividends Yield/
Cost (1)
Average
Balance Interest
and
Dividends Yield/
Cost (1)
(Dollars in thousands) (Unaudited)
Assets:
Interest-Earning Assets:
Loans, Net (2)
$ 1,024,319 $ 20,131 3.96 % $ 982,331 $ 21,408 4.38 %
Debt Securities
Taxable 123,790 1,281 2.07 147,962 2,141 2.89
Tax Exempt 12,608 192 3.05 15,471 258 3.34
Marketable Equity Securities 2,641 44 3.33 2,573 40 3.11
Other Interest-Earning Assets 204,365 249 0.25 80,821 322 0.80
Total Interest-Earning Assets 1,367,723 21,897 3.23 1,229,158 24,169 3.95
Noninterest-Earning Assets 87,645 113,616
Total Assets $ 1,455,368 $ 1,342,774
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits (3)
$ 267,455 133 0.10 % $ 231,397 408 0.35 %
Savings (3)
243,565 57 0.05 222,899 124 0.11
Money Market (3)
198,530 168 0.17 181,819 436 0.48
Time Deposits (3)
182,283 1,416 1.57 210,648 2,018 1.93
Total Interest-Bearing Deposits (3)
891,833 1,774 0.40 846,763 2,986 0.71
ST Borrowings
Securities Sold Under Agreements to Repurchase 45,232 47 0.21 32,592 84 0.52
Other Borrowings 6,597 76 2.32 11,890 132 2.23
Total Interest-Bearing Liabilities 943,662 1,897 0.41 891,245 3,202 0.72
Noninterest-Bearing Demand Deposits 368,318 289,621
Other Liabilities 8,433 9,306
Total Liabilities 1,320,413 1,190,172
Stockholders' Equity 134,955 152,602
Total Liabilities and Stockholders' Equity $ 1,455,368 $ 1,342,774
Net Interest Income (FTE) (Non-GAAP) (4)
$ 20,000 $ 20,967
Net Interest Rate Spread (FTE) (Non-GAAP) (4)(5)
2.82 % 3.23 %
Net Interest-Earning Assets (6)
$ 424,061 $ 337,913
Net Interest Margin (GAAP) (7)
2.94 3.41
Net Interest Margin (FTE) (Non-GAAP) (4)(7)
2.95 3.43
Return on Average Assets (1)
0.36 0.55
Return on Average Equity (1)
3.92 4.84
Average Equity to Average Assets 9.27 11.36
Average Interest-Earning Assets to Average Interest-Bearing Liabilities 144.94 137.91
(1) Annualized based on six months ended results.
(2) Net of the allowance for loan losses, and includes nonaccrual loans with a zero yield and loans held for sale.
(3) Includes Deposits Held for Sale
(4) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report.
(5) 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.
(6) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(7) Net interest margin represents annualized net interest income divided by average total interest-earning assets.
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Rate Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%. 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.
Six Months Ended June 30, 2021
Compared to
Six Months Ended June 30, 2020
Increase (Decrease) Due to
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest and Dividend Income:
Loans, net $ 829 $ (2,106) $ (1,277)
Debt Securities:
Taxable (316) (544) (860)
Exempt From Federal Tax (45) (21) (66)
Marketable Equity Securities 1 3 4
Other Interest-Earning Assets 251 (324) (73)
Total Interest-Earning Assets 720 (2,992) (2,272)
Interest Expense:
Deposits 151 (1,363) (1,212)
Short-Term Borrowings:
Securities Sold Under Agreements to Repurchase 24 (61) (37)
Other Borrowings (61) 5 (56)
Total Interest-Bearing Liabilities 114 (1,419) (1,305)
Change in Net Interest and Dividend Income $ 606 $ (1,573) $ (967)
Provision for Loan Losses. The provision for loan losses had a $1.2 million recovery for the six months ended June 30, 2021, compared to a $2.8 million provision for the six months ended June 30, 2020. The pandemic resulted in a dramatic increase in unemployment and recessionary economic conditions in the prior year. Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis were increased at the onset of the pandemic, primarily related to economic trends and industry conditions, because of vulnerable industries such as hospitality, oil and gas, retail and restaurants and resulted in the prior year provision. Those qualitative factors have been decreased as the economic impact of the pandemic have eased. In addition, a $14.2 million decrease in net reservable loans compared to June 30, 2020, which excludes PPP loan activity, combined with a decrease in specific reserves on impaired loans and improving economic and industry condition contributed to the recovery of provision in the current period.
Net charge-offs were $27,000 for the six months ended June 30, 2021, or 0.01% net charge-offs to average loans on an annualized basis. Net charge-offs were $19,000 for the six months ended June 30, 2020, or 0.00% net charge-offs to average loans on an annualized basis. Net charge-offs were primarily driven by automobile loans in the consumer loan category in both periods.
Noninterest Income. Noninterest income increased $873,000, or 19.3%, to $5.4 million for the six months ended June 30, 2021, compared to $4.5 million for the six months ended June 30, 2020.
• Service fees increased $68,000 to $1.2 million for the six months ended June 30, 2021, compared to $1.1 million for the six months ended June 30, 2020 due to an increase in customer usage compared to the prior year period when shelter-in-place orders occurred at the onset of the COVID-19 pandemic.
• Insurance commissions increased $408,000, or 17.0%, to $2.8 million for the six months ended June 30, 2021, compared to $2.4 million for the six months ended June 30, 2020 due to an increase contingency fees. Contingency fees are profit sharing commissions that are contingent upon several factors including, but not limited to, eligible written premiums, incurred losses, policy cancellations and stop loss charges.
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• Net gain on sales of loans was $117,000 for the six months ended June 30, 2021 compared to $568,000 for the six months ended June 30, 2020 primarily due to decreased mortgage loan production from refinances, which are sold to reduce interest rate risk on lower yielding, long-term assets.
• Net gain on investment securities was $458,000 for the six months ended June 30, 2021 compared to $79,000 for the six months ended June 30, 2020. In the current period, the Company recognized a $225,000 net gain on sale of debt securities from sales of higher-interest securities with faster prepayment speeds combined with a $233,000 increase in fair value on the equity securities portfolio, primarily comprised of bank stocks, which experienced a recovery in fair value from pandemic related losses. In the prior year, there was a net gain of $489,000 on sales of investment securities from sales of higher-interest securities with faster prepayment speeds that was offset by a $410,000 decrease in fair value in the equity securities portfolio, which is primarily comprised of bank stocks, due to the COVID-19 impacts on the banking industry.
• Other Income was $211,000 for the six months ended June 30, 2021 compared to Other Loss of $238,000 in the six months ended June 30, 2020. In the current period there was a $160,000 reduction in the valuation allowance on mortgage servicing rights compared to a $269,000 valuation allowance adjustment from temporary impairment in the prior period caused by a decline in the interest rate environment that increased prepayment speeds and resulted in a decrease in fair value of the serviced mortgage portfolio. In addition, there was a $53,000 increase in amortization on mortgage servicing rights in the current period.
Noninterest Expense. Noninterest expense increased $5.0 million, or 27.9%, to $23.1 million for the six months ended June 30, 2021 compared to $18.1 million for the six months ended June 30, 2020. This was primarily impacted by a $2.3 million writedown on fixed assets and $1.2 million intangible asset impairment as previously noted. Excluding the impact of these non-cash charges, noninterest expense increased $1.6 million, or 8.8%, to $19.7 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The current period was also impacted by $1.6 million of other branch optimization and operational efficiency strategic expenses.
• Salaries and employee benefits increased $411,000 for the six months ended June 30, 2021 compared to $9.6 million for the six months ended June 30, 2020. The increase is primarily due to an increase in employee benefit expenses due to the prior period impact from a $407,000 one-time payment that offset employee benefits related to the transition from a self-funded to a fully insured plan. The current period was impacted by the recognition of $335,000 in severance related to the branch optimization initiative whereas in the period the Company incurred costs associated with the Community Bank Cares 10% premium pay during the pandemic and the recognition of approximately $236,000 of one-time payments related to the search for a permanent CEO.
• Occupancy expense increased $302,000 to $1.7 million for the six months ended June 30, 2021 compared to $1.4 million for the six months ended June 30, 2020. The increase is due to the recognition of a $227,000 lease impairment related to the consolidation of a branch as part of the branch optimization initiative.
• Equipment expense increased $96,000 to $577,000 for the six months ended June 30, 2021 compared to $481,000 for the six months ended June 30, 2020 as the result of an increase in repairs and maintenance.
• Data processing increased $240,000 to $1.1 million for the six months ended June 30, 2021 compared to $885,000 for the six months ended June 30, 2020 primarily due to $110,000 in deconversion costs associated with the branch sales as well as other technology investments.
• Contracted services increased $497,000 to $1.4 million for the six months ended June 30, 2021 compared to $940,000 for the six months ended June 30, 2020, primarily due to $702,000 of 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. The prior period included expense related to the hiring of temporary employees to assist with PPP loan processing and consultants used to assist in infrastructure improvements.
• FDIC assessment expense increased $178,000 to $499,000 for the six months ended June 30, 2021 compared to $321,000 for the six months ended June 30, 2020.The increase in assessment was due to the net loss recognized for the three months ended September 30, 2020 primarily due to goodwill impairment negatively impacting the assessment rate in the current period.
• Legal fees and professional fees increased $202,000 to $608,000 for the six months ended June 30, 2021 compared to $406,000 for the six months ended June 30, 2020 due to a $209,000 investment banker success-based fee and legal fees related to the Agreement with Citizens Bank for the branch sales.
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• Other noninterest expense decreased $131,000 to $1.9 million for the six months ended June 30, 2021 compared to $2.1 million for the six months ended June 30, 2020 due to a decrease in loan-related expenses from the increased volume of refinancing in the prior period.
Income Taxes. Income tax expense decreased $59,000 to $765,000 for the six months ended June 30, 2021 compared to $824,000 for the six months ended June 30, 2020. This change was primarily due to a decrease in pretax income in the current period as a result of expenses incurred due to branch optimization and operational efficiency strategic initiatives. Branch optimization expenses during the current period were deferred for tax purposes and these items will be recognized in future periods.
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 of this report for a summary of commitments outstanding as of June 30, 2021 and December 31, 2020.
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 typically 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 June 30, 2021 to satisfy its short- and long-term liquidity needs.
The Company’s most liquid assets are cash and due from banks, which totaled $172.0 million at June 30, 2021. 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 $42.4 million at June 30, 2021. In addition, at June 30, 2021, the Company had the ability to borrow up to $430.7 million from the FHLB of Pittsburgh, of which $317.8 million is available. The Company also has the ability to borrow up to $79.8 million million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of both June 30, 2021 and December 31, 2020.
At June 30, 2021, $70.9 million, or 41.0% of total time deposits mature within one year. 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 time deposits. The Company believes, however, based on past experience that a significant portion of its time deposits will remain with it, either as time deposits or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.
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.
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 June 30, 2021, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $9.2 million. The ability to pay future dividends or conduct stock repurchases may be limited under applicable banking regulations and regulatory policies due to expected losses for future periods and/or the inability to upstream funds from the Bank to the Company as a result of lower income or regulatory capital levels.
Capital Management. The Bank is 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 consolidated 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.
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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.
At June 30, 2021 and December 31, 2020, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. At June 30, 2021, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act. In addition, PPP loans received a zero-percent risk weight under the regulatory capital rules regardless of whether they were pledged as collateral to the Federal Reserve Bank's PPP lending facility, but were included in the Bank's leverage ratio requirement due to the Bank not pledging the loans as collateral to the PPP lending facility.
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.
June 30, 2021 December 31, 2020
Amount Ratio Amount Ratio
(Dollars in thousands)
Common Equity Tier 1 (to risk weighted assets)
Actual $ 106,207 11.67 % $ 108,950 11.79 %
For Capital Adequacy Purposes 40,945 4.50 41,598 4.50
To Be Well Capitalized 59,143 6.50 60,086 6.50
Tier 1 Capital (to risk weighted assets)
Actual 106,207 11.67 108,950 11.79
For Capital Adequacy Purposes 54,593 6.00 55,464 6.00
To Be Well Capitalized 72,791 8.00 73,952 8.00
Total Capital (to risk weighted assets)
Actual 117,582 12.92 120,520 13.04
For Capital Adequacy Purposes 72,791 8.00 73,952 8.00
To Be Well Capitalized 90,989 10.00 92,440 10.00
Tier 1 Leverage (to adjusted total assets)
Actual 106,207 7.23 108,950 7.81
For Capital Adequacy Purposes 58,728 4.00 55,765 4.00
To Be Well Capitalized 73,410 5.00 69,706 5.00
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.