Item 1. Financial Statements
Item 1. Financial Statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) September 30,
2021 December 31,
2020
(Dollars in thousands, except per share and share data)
ASSETS
Cash and Due From Banks:
Interest Bearing $ 131,835 $ 145,636
Non-Interest Bearing 41,688 15,275
Total Cash and Due From Banks 173,523 160,911
Securities:
Available-for-Sale Debt Securities, at Fair Value 218,529 142,897
Equity Securities, at Fair Value 2,822 2,503
Total Securities 221,351 145,400
Loans Held for Sale 17,407 —
Loans, Net of Allowance for Loan Losses of $ 11,581 and $ 12,771 at September 30, 2021 and December 31, 2020, Respectively
990,018 1,031,982
Premises and Equipment Held for Sale 795 —
Premises and Equipment, Net
18,502 20,302
Bank-Owned Life Insurance
25,190 24,779
Goodwill
9,732 9,732
Intangible Assets, Net
5,740 8,399
Accrued Interest Receivable and Other Assets 12,560 15,215
TOTAL ASSETS
$ 1,474,818 $ 1,416,720
LIABILITIES
Deposits Held for Sale $ 102,647 $ —
Deposits:
Non-Interest Bearing Demand Deposits 373,320 340,569
NOW Accounts 244,004 259,870
Money Market Accounts 190,426 199,029
Savings Accounts 232,679 235,088
Time Deposits 144,727 190,013
Total Deposits 1,185,156 1,224,569
Short-Term Borrowings
42,623 41,055
Other Borrowings
6,000 8,000
Accrued Interest Payable and Other Liabilities 7,405 8,566
TOTAL LIABILITIES
1,343,831 1,282,190
STOCKHOLDERS' EQUITY
Preferred Stock, No Par Value; 5,000,000 Shares Authorized
— —
Common Stock, $ 0.4167 Par Value; 35,000,000 Shares Authorized, 5,680,993 Shares Issued and 5,330,401 and 5,434,374 Shares Outstanding at September 30, 2021 and December 31, 2020, Respectively
2,367 2,367
Capital Surplus
83,130 82,723
Retained Earnings
51,839 51,132
Treasury Stock, at Cost ( 350,592 and 246,619 Shares at September 30, 2021 and December 31, 2020, Respectively)
( 7,483 ) ( 5,094 )
Accumulated Other Comprehensive Income
1,134 3,402
TOTAL STOCKHOLDERS' EQUITY
130,987 134,530
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,474,818 $ 1,416,720
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands, except share and per share data)
INTEREST AND DIVIDEND INCOME
Loans, Including Fees $ 9,718 $ 10,709 $ 29,800 $ 32,050
Investment Securities:
Taxable 843 753 2,124 2,894
Tax-Exempt 71 79 223 291
Dividends 19 19 63 59
Other Interest and Dividend Income 135 96 384 418
TOTAL INTEREST AND DIVIDEND INCOME 10,786 11,656 32,594 35,712
INTEREST EXPENSE
Deposits 715 1,150 2,489 4,136
Short-Term Borrowings 25 28 72 112
Other Borrowings 36 62 112 194
TOTAL INTEREST EXPENSE 776 1,240 2,673 4,442
NET INTEREST AND DIVIDEND INCOME 10,010 10,416 29,921 31,270
Provision (Recovery) For Loan Losses — 1,200 ( 1,200 ) 4,000
NET INTEREST INCOME AFTER PROVISION (RECOVERY) FOR LOAN LOSSES 10,010 9,216 31,121 27,270
NONINTEREST INCOME
Service Fees 602 554 1,762 1,646
Insurance Commissions 1,194 1,079 3,998 3,475
Other Commissions 93 76 431 374
Net Gain on Sales of Loans 49 435 166 1,003
Net Gain (Loss) on Securities 24 ( 59 ) 482 20
Net Gain on Purchased Tax Credits 18 15 53 46
Net Loss on Disposal of Fixed Assets — ( 65 ) ( 3 ) ( 48 )
Income from Bank-Owned Life Insurance 138 140 411 417
Other Income (Loss) 80 ( 2 ) 291 ( 240 )
TOTAL NONINTEREST INCOME 2,198 2,173 7,591 6,693
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,787 5,124 14,757 14,683
Occupancy 615 759 2,349 2,191
Equipment 205 220 782 701
Data Processing 541 482 1,666 1,367
FDIC Assessment 293 172 792 493
PA Shares Tax 224 355 714 963
Contracted Services 1,441 531 2,878 1,471
Legal and Professional Fees 180 161 788 567
Advertising 225 148 558 486
Other Real Estate Owned Income ( 89 ) ( 12 ) ( 153 ) ( 30 )
Amortization of Intangible Assets 446 532 1,481 1,596
Intangible Assets Impairment — 18,693 1,178 18,693
Writedown of Fixed Assets 2 884 2,270 884
Other Expense 903 919 2,830 2,977
TOTAL NONINTEREST EXPENSE 9,773 28,968 32,890 47,042
Income (Loss) Before Income Tax Expense (Benefit) 2,435 ( 17,579 ) 5,822 ( 13,079 )
Income Tax Expense (Benefit) 452 ( 184 ) 1,217 640
NET INCOME (LOSS) $ 1,983 $ ( 17,395 ) $ 4,605 $ ( 13,719 )
EARNINGS (LOSS) PER SHARE
Basic $ 0.37 $ ( 3.22 ) $ 0.85 $ ( 2.54 )
Diluted 0.37 ( 3.22 ) 0.85 ( 2.54 )
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 5,373,032 5,395,342 5,412,989 5,406,710
Diluted 5,390,128 5,395,342 5,420,792 5,406,710
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
Net Income (Loss) $ 1,983 $ ( 17,395 ) $ 4,605 $ ( 13,719 )
Other Comprehensive (Loss) Income:
Change in Unrealized Gain (Loss) on Investment Securities Available-for-Sale ( 733 ) ( 653 ) ( 2,662 ) 2,292
Income Tax Effect 158 137 571 ( 481 )
Reclassification Adjustment for Gain on Sale of Debt Securities Included in Net Income (1)
— — ( 225 ) ( 489 )
Income Tax Effect (2)
— — 48 103
Other Comprehensive (Loss) Income, Net of Income Tax Effect ( 575 ) ( 516 ) ( 2,268 ) 1,425
Total Comprehensive Income (Loss) $ 1,408 $ ( 17,911 ) $ 2,337 $ ( 12,294 )
(1) Reported in Net Gain (Loss) on Securities on the Consolidated Statements of Income (Loss).
(2) Reported in Income Tax Expense (Benefit) on the Consolidated Statements of Income (Loss).
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended September 30, 2021 Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
June 30, 2021 5,680,993 $ 2,367 $ 82,969 $ 51,146 $ ( 5,655 ) $ 1,709 $ 132,536
Comprehensive Income:
Net Income — — — 1,983 — — 1,983
Other Comprehensive Loss — — — — — ( 575 ) ( 575 )
Stock-Based Compensation Expense — — 169 — — — 169
Exercise of Stock Options — — ( 8 ) — 62 — 54
Treasury stock purchased, at cost ( 81,676 shares)
— — — — ( 1,890 ) — ( 1,890 )
Dividends Paid ($ 0.24 Per Share)
— — — ( 1,290 ) — — ( 1,290 )
September 30, 2021 5,680,993 $ 2,367 $ 83,130 $ 51,839 $ ( 7,483 ) $ 1,134 $ 130,987
Three Months Ended September 30, 2020 Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
June 30, 2020 5,680,993 $ 2,367 $ 83,327 $ 68,039 $ ( 5,928 ) $ 4,587 $ 152,392
Comprehensive Loss:
Net Loss — — — ( 17,395 ) — — ( 17,395 )
Other Comprehensive Loss — — — — — ( 516 ) ( 516 )
Restricted Stock Awards Granted — — ( 103 ) — 103 — —
Stock-Based Compensation Expense — — 114 — — — 114
Dividends Paid ($ 0.24 Per Share)
— — — ( 1,296 ) — — ( 1,296 )
September 30, 2020 5,680,993 $ 2,367 $ 83,338 $ 49,348 $ ( 5,825 ) $ 4,071 $ 133,299
The accompanying notes are an integral part of these consolidated financial statements
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Nine Months Ended September 30, 2021 Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
December 31, 2020 5,680,993 $ 2,367 $ 82,723 $ 51,132 $ ( 5,094 ) $ 3,402 $ 134,530
Comprehensive Income:
Net Income — — — 4,605 — — 4,605
Other Comprehensive Loss — — — — — ( 2,268 ) ( 2,268 )
Stock-Based Compensation Expense — — 415 — — — 415
Exercise of Stock Options — — ( 8 ) — 62 — 54
Treasury stock purchased, at cost ( 106,973 shares)
— — — — ( 2,451 ) — ( 2,451 )
Dividends Paid ($ 0.72 Per Share)
— — — ( 3,898 ) — — ( 3,898 )
September 30, 2021 5,680,993 $ 2,367 $ 83,130 $ 51,839 $ ( 7,483 ) $ 1,134 $ 130,987
Nine Months Ended September 30, 2020 Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
December 31, 2019 5,680,993 $ 2,367 $ 82,971 $ 66,955 $ ( 3,842 ) $ 2,646 $ 151,097
Comprehensive Loss:
Net Loss — — — ( 13,719 ) — — ( 13,719 )
Other Comprehensive Income — — — — — 1,425 1,425
Restricted Stock Awards Forfeited — — 96 — ( 96 ) — —
Restricted Stock Awards Granted — — ( 103 ) — 103 — —
Stock-Based Compensation Expense — — 370 — — — 370
Exercise of Stock Options — — 4 — ( 82 ) — ( 78 )
Treasury Stock Purchased, at cost ( 67,816 shares)
— — — — ( 1,908 ) — ( 1,908 )
Dividends Paid ($ 0.72 Per Share)
— — — ( 3,888 ) — — ( 3,888 )
September 30, 2020 5,680,993 $ 2,367 $ 83,338 $ 49,348 $ ( 5,825 ) $ 4,071 $ 133,299
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2021 2020
(Dollars in thousands)
OPERATING ACTIVITIES
Net Income (Loss) $ 4,605 $ ( 13,719 )
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities
Amortization (Accretion) on Securities 38 ( 9 )
Depreciation and Amortization 1,810 2,578
(Recovery) Provision for Loan Losses ( 1,200 ) 4,000
Intangible Asset Impairment 1,178 —
Goodwill Impairment — 18,693
Writedown on Fixed Assets 2,270 884
Lease Impairment 227 —
Gain on Securities ( 482 ) ( 20 )
Gain on Purchased Tax Credits ( 53 ) ( 46 )
Income from Bank-Owned Life Insurance ( 411 ) ( 417 )
Proceeds From Mortgage Loans Sold 8,182 24,317
Originations of Mortgage Loans for Sale ( 15,289 ) ( 23,314 )
Gain on Sale of Loans ( 166 ) ( 1,003 )
(Gain) Loss on Sale of Other Real Estate Owned and Repossessed Assets ( 76 ) 26
Noncash Expense for Stock-Based Compensation 415 370
Decrease (Increase) in Accrued Interest Receivable 517 ( 944 )
Net Loss on Disposal of Fixed Assets 3 48
Increase (Decrease) in Taxes Payable 295 ( 253 )
Payments on Operating Leases ( 251 ) ( 412 )
Decrease in Accrued Interest Payable ( 277 ) ( 252 )
Refund of Federal and State Income Taxes 1,311 —
Other, Net ( 68 ) ( 1,329 )
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,578 9,198
INVESTING ACTIVITIES
Investment Securities Available for Sale:
Proceeds From Principal Repayments and Maturities 29,563 91,219
Purchases of Securities ( 119,924 ) ( 68,851 )
Proceeds from Sale of Securities 11,967 17,893
Net Decrease (Increase) in Loans 33,378 ( 100,436 )
Purchase of Premises and Equipment ( 2,275 ) ( 184 )
Proceeds from Disposal of Premises and Equipment — 26
Proceeds From Sale of Other Real Estate Owned 285 99
Decrease (Increase) in Restricted Equity Securities 533 ( 305 )
NET CASH USED IN INVESTING ACTIVITIES ( 46,473 ) ( 60,539 )
FINANCING ACTIVITIES
Net Increase in Deposits 52,542 80,677
Net Increase in Short-Term Borrowings 12,260 11,490
Principal Payments on Other Borrowed Funds ( 2,000 ) ( 3,000 )
Cash Dividends Paid ( 3,898 ) ( 3,888 )
Treasury Stock, Purchases at Cost ( 2,451 ) ( 1,908 )
Exercise of Stock Options 54 ( 78 )
NET CASH PROVIDED BY FINANCING ACTIVITIES 56,507 83,293
INCREASE IN CASH AND CASH EQUIVALENTS 12,612 31,952
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 160,911 80,217
CASH AND DUE FROM BANKS AT END OF PERIOD $ 173,523 $ 112,169
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2021 2021 2020
(Dollars in thousands)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid For:
Interest on Deposits and Borrowings (Including Interest Credited to Deposits of $ 2,761 and $ 4,382 , Respectively)
$ 2,951 $ 4,694
Income Taxes 1,524 1,785
SUPPLEMENTAL NONCASH DISCLOSURE:
Transfer of Loans to Loans Held for Sale 10,056 —
Transfer of Premises and Equipment to Premises and Equipment Held for Sale and Other Assets 1,075 —
Transfer of Deposits to Deposits Held for Sale 102,647 —
Other Real Estate Acquired in Settlement of Loans 37 115
Right of Use Asset Recognized — 329
Lease Liability Recognized — 329
The accompanying notes are an integral part of these consolidated financial statements
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of CB Financial Services, Inc. (“CB Financial”) and its wholly owned subsidiary, Community Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Exchange Underwriters, Inc. (“Exchange Underwriters”). CB Financial, the Bank and Exchange Underwriters are collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with general practice within the banking industry. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading in any material respect. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Statements of Financial Condition and income and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, other-than-temporary impairment evaluations of securities, goodwill and intangible assets impairment, and the valuation of deferred tax assets.
In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All these adjustments are of a normal, recurring nature, and they are the only adjustments included in the accompanying unaudited interim financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Interim results are not necessarily indicative of results for a full year.
The Company evaluated subsequent events through the date the consolidated financial statements were filed with the SEC and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification ("ASC") 855, Subsequent Events , to be recognizable events.
Nature of Operations
The Company derives substantially all its income from banking and bank-related services which include interest earnings on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest earnings on investment securities and fees generated from deposit services to its customers. The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank. The Bank operates 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 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, a full-service, independent insurance agency.
Reclassifications
Certain comparative amounts for the prior year have been reclassified to conform to the current year presentation. Such reclassifications did not affect net income or stockholders’ equity.
Assets and Liabilities Held for Sale
Assets and liabilities (disposal groups) are classified as held for sale when their carrying amounts will be recovered principally through sale when all of the following criteria are met:
• management, having the authority to approve the action, commits to a plan to sell the disposal group;
• the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups;
• an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated;
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• the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify as a completed sale within one year, except if events or circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year;
• the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
• actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Assets and liabilities held for sale are measured at the lower of carrying amount and fair value, less estimated costs to sell, and are presented separately on the Consolidated Statements of Financial Condition. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Gains are not recognized on the sale of a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less any estimated costs to sell, each reporting period it remains classified as held for sale and reports any subsequent losses as an adjustment to the carrying value of the disposal group. Assets classified as held for sale are no longer depreciated or amortized.
Loans held for sale may consist of residential real estate loans originated and intended for sale in the secondary market. These loans are generally sold with loan servicing rights retained. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on residential real estate loans held for sale are included in noninterest income.
Impairment of Long-Lived Assets
The Company routinely performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable and are in excess of their fair value, less estimated costs to sell. If estimated recoverable amounts are lower than carrying values, assets are considered impaired and reduced to their recoverable amounts with the recognized impairment charges recorded in noninterest expense in the Consolidated Statements of (Loss) Income.
Long-lived assets are tested for impairment individually or as part of an asset group. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
The Company follows ASC 360, Property, Plant and Equipment, which requires three steps to identify, recognize and measure the impairment of a long-lived asset (asset group) to be held and used:
Step 1 – Consider whether Indicators of Impairment are Present.
The following are examples of such events or changes in circumstances.
• A significant decrease in the market price of a long-lived asset (asset group).
• A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition.
• A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator.
• An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group).
• A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group).
• A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Step 2—Test for Recoverability
If indicators of impairment are present, the Company performs a recoverability test comparing the sum of the estimated undiscounted cash flows attributable to the long-lived asset or asset group in question to the carrying amount of the long-lived asset or asset group.
Step 3—Measurement of an Impairment Loss
If the undiscounted cash flows used in the recoverability test are less than the carrying amount of the long-lived asset (asset group), the Company estimates the fair value of the long-lived asset or asset group and recognizes an impairment loss when the carrying amount of the long-lived asset or asset group exceeds the estimated fair value.
An impairment loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group must not reduce the carrying amount of
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that asset below its fair value whenever the fair value is determinable without undue cost and effort. ASC 360 prohibits the subsequent reversal of an impairment loss for an asset held and used.
Recent Accounting Standards
In August 2021, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update ("ASU") 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The SEC rule changes update and expand the statistical disclosures that bank and savings and loan registrants provide to investors, in light of changes in this sector over the past 30 years. The rules also eliminate certain disclosure items that are duplicative of other SEC rules and requirements of U.S. GAAP. The rules replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies, with updated disclosure requirements in a new subpart of Regulation S-K. The rules are intended to help ensure that investors have access to more meaningful, relevant information to facilitate their investment and voting decisions. The amendments are effective prospectively for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect the adoption of this ASU will have a material impact on the Company's consolidated statements of financial condition or results of operation.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The elective guidance in the ASU applies to modifications of contract terms that will directly replace, or have the potential to replace, an affected rate with another interest rate index, as well as certain contemporaneous modifications of other contract terms related to the replacement of an affected rate. The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. The optional expedient allows companies to account for the modification as if it was not substantial (i.e., do not treat as an extinguishment of debt). The ASU is intended to help stakeholders during the global market-wide reference rate transition period. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. While the LIBOR reform may require extensive changes to the contracts that govern LIBOR based products, as well as our systems and processes, we cannot yet determine whether the Company will be able to use the optional expedient for the changes to contract terms that may be required by LIBOR reform and therefore, the Company cannot yet determine the magnitude of the impact or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.
In December 2019, FASB issued ASU 2019-12, Income taxes (Topic 740); Simplifying the Accounting for Income Taxes . ASU 2019-12 provides amendments intended to reduce the cost and complexity in accounting for income taxes while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 removes the following exceptions from ASC 740, Income Taxes: (i) exceptions to the incremental approach for intraperiod tax allocation; (ii) exceptions to accounting for basis differences when a foreign subsidiary becomes an equity method investment or a foreign equity method investment become a subsidiary; and (iii) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 provides the following amendments that simplify and improve guidance with Topic 740: (i) franchise taxes that are based partially on income; (ii) transactions that result in a step up in the tax basis of goodwill; (iii) separate financial statements of legal entities that are not subject to tax; (iv) enacted changes in tax laws in interim periods; and (v) employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this ASU did not have a material impact on the Company's consolidated statements of financial condition or results of operation.
In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU requires that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in
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leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of January 1, 2023. Early adoption will continue to be permitted. The Company is evaluating the impact of this ASU and expects to recognize a one-time adjustment to the allowance for loan losses upon adoption, but we cannot yet determine the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.
Note 2. Impairment of Long-Lived Assets and Assets and Liabilities of Branches Held for Sale
Branch Optimization and Operational Efficiency Initiatives
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 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, 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. As of September 30, 2021, all requisite regulatory approvals had been received.
As a result of the events and changes in circumstances associated with the branch optimization initiatives whereby six branches were consolidated and two others are to be divested, the Company performed assessments of the recoverability of long-lived assets to determine whether their carrying values may not be recoverable. Utilizing guidance in ASC 360, the Company performed the three step process to identify, recognize and measure the impairment of the long-lived assets.
• For the six locations that were consolidated:
◦ Three locations were written down to the fair value of the land based on the appraised value due to plans to raze the buildings.
◦ Two locations are being marketed for sale and were written down to fair value based on appraised value.
◦ One location is leased. Refer to Note 11 for further discussion of the impairment of the right of use asset associated with the operating lease.
• For the two branches to be divested, fair value of the premises and equipment was determined based on the contractual terms of the Agreement, which provide that the premises and equipment will be purchased at the Company's net book value, net of a $ 338,000 contractual discount at the acquisition date.
In total, the Company recognized $ 2,000 and $ 2.3 million in charges on the premises and equipment for the three and nine months ended September 30, 2021, respectively, as Writedown on Fixed Assets in the Consolidated Statements of (Loss) Income.
The branch optimization and operational efficiency initiatives resulted in $ 1.3 million and $ 6.3 million of restructuring-related and other expenses for the three and nine months ended September 30, 2021, respectively. The expenses include the aforementioned $ 2.3 million writedown on fixed assets, a $ 1.2 million impairment of intangible assets associated with the branch sales (refer to Note 14 for further information) for the nine months ended September 30, 2021, as well as $ 1.3 million and $ 2.9 million of expenses related to contracted services, employee severance costs, branch lease impairment (refer to Note 11 for further information), professional fees, data processing fees, legal and other expenses for the three and nine months ended September 30, 2021, respectively.
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Assets and Liabilities of Branches Held for Sale
At September 30, 2021, the Company reclassified the deposits to be assumed to deposits held for sale, loans to be purchased to loans held for sale and premises and equipment to be purchased to premises and equipment held for sale on the Consolidated Statements of Financial Condition.
The assets and liabilities classified as held for sale of the disposal group related to the branch sales are as follows at September 30, 2021.
September 30,
2021
(Dollars in thousands)
Loans Held for Sale
Real Estate:
Residential $ 2,290
Commercial 2,911
Commercial and Industrial 592
Consumer 252
Other 453
Total Loans Held for Sale $ 6,498
Premises and Equipment Held for Sale 795
Deposits Held for Sale
Non-Interest Bearing Demand Deposits $ 15,070
Interest Bearing Demand Deposits 31,502
Money Market Accounts 17,578
Savings Accounts 20,803
Time Deposits 17,694
Total Deposits Held for Sale $ 102,647
Note 3. Earnings (Loss) Per Share
There are no convertible securities which would affect the numerator in calculating basic and diluted earnings (loss) per share; therefore, net income (loss) as presented on the Consolidated Statements of Income (Loss) is used as the numerator.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands, except share and per share data)
Net Income (Loss) $ 1,983 $ ( 17,395 ) $ 4,605 $ ( 13,719 )
Weighted-Average Basic Common Shares Outstanding
5,373,032 5,395,342 5,412,989 5,406,710
Dilutive Effect of Common Stock Equivalents (Stock Options and Restricted Stock)
17,096 — 7,803 —
Weighted-Average Diluted Common Shares and Common Stock Equivalents Outstanding
5,390,128 5,395,342 5,420,792 5,406,710
Earnings (Loss) Per Share:
Basic
$ 0.37 $ ( 3.22 ) $ 0.85 $ ( 2.54 )
Diluted
0.37 ( 3.22 ) 0.85 ( 2.54 )
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The dilutive effect on weighted average diluted common shares outstanding is the result of outstanding stock options and nonvested restricted stock. The following table presents for the periods indicated (a) options to purchase shares of common stock that were outstanding but not included in the computation of earnings per share because the options’ exercise price was greater than the average market price of the common shares for the period, and (b) shares of restricted stock awards that were not included in the computation of diluted earnings per share because the hypothetical repurchase of shares under the treasury stock method exceeded the weighted average nonvested restricted awards, therefore the effects would be anti-dilutive.
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Stock Options 71,741 220,271 199,641 220,271
Restricted Stock 23,000 49,130 32,360 49,130
When there is a net loss for the period, the exercise or conversion of any potential shares increases the number of shares in the denominator and results in a lower loss per share. In that situation, the potential shares are antidilutive and not included in the Company's loss per share calculation. Therefore, if there is a net loss, diluted loss per share is the same as basic loss per share.
Note 4. Securities
The following table presents the amortized cost and fair value of securities available-for-sale at the dates indicated:
September 30, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Available-for-Sale Debt Securities:
U.S. Government Agencies
$ 50,992 $ — $ ( 1,054 ) $ 49,938
Obligations of States and Political Subdivisions
18,356 1,064 — 19,420
Mortgage-Backed Securities - Government-Sponsored Enterprises
140,255 2,205 ( 770 ) 141,690
Corporate Debt 7,482 — ( 1 ) 7,481
Total Available-for-Sale Debt Securities 217,085 3,269 ( 1,825 ) 218,529
Equity Securities:
Mutual Funds
999
Other
1,823
Total Equity Securities 2,822
Total Securities $ 221,351
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December 31, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Available-for-Sale Debt Securities:
U.S. Government Agencies
$ 41,994 $ 12 $ ( 595 ) $ 41,411
Obligations of States and Political Subdivisions
20,672 1,321 — 21,993
Mortgage-Backed Securities - Government-Sponsored Enterprises
75,900 3,593 — 79,493
Total Available-for-Sale Debt Securities 138,566 4,926 ( 595 ) 142,897
Equity Securities:
Mutual Funds
1,019
Other
1,484
Total Equity Securities 2,503
Total Securities $ 145,400
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at the dates indicated:
September 30, 2021
Less than 12 months
12 Months or Greater
Total
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
U.S. Government Agencies
7 $ 25,759 $ ( 239 ) 5 $ 24,179 $ ( 815 ) 12 $ 49,938 $ ( 1,054 )
Mortgage Backed Securities- Government Sponsored Enterprises
10 64,133 ( 770 ) — — — 10 64,133 ( 770 )
Corporate Debt 1 4,950 ( 1 ) — — — 1 4,950 ( 1 )
Total 18 $ 94,842 $ ( 1,010 ) 5 $ 24,179 $ ( 815 ) 23 $ 119,021 $ ( 1,825 )
December 31, 2020
Less than 12 months
12 Months or Greater
Total
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
U.S. Government Agencies
7 $ 32,399 $ ( 595 ) — $ — $ — 7 $ 32,399 $ ( 595 )
Total
7 $ 32,399 $ ( 595 ) — $ — $ — 7 $ 32,399 $ ( 595 )
For debt securities, the Company does not believe that any individual unrealized loss as of September 30, 2021 or December 31, 2020, represents an other-than-temporary impairment. The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate an other-than-temporary impairment. The Company’s management considers the length of time and the extent to which the fair value has been less than cost, and the financial condition of the issuer. The securities that are temporarily impaired at September 30, 2021 and December 31, 2020 relate principally to changes in market interest rates subsequent to the acquisition of the specific securities. The Company does not intend to sell, and it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost or maturity of the security.
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Securities available-for-sale with a fair value of $ 184.4 million and $ 119.7 million at September 30, 2021 and December 31, 2020, respectively, are pledged to secure public deposits, short-term borrowings and for other purposes as required or permitted by law.
The following table presents the scheduled maturities of debt securities as of the date indicated:
September 30, 2021
Amortized
Cost
Fair
Value
(Dollars in thousands)
Due in One Year or Less
$ 2,583 $ 2,620
Due after One Year through Five Years
4,394 4,404
Due after Five Years through Ten Years
70,946 71,437
Due after Ten Years
139,162 140,068
Total
$ 217,085 $ 218,529
The following table presents the gross realized gain and loss on sales of debt securities, as well as gain and loss on equity securities from both sales and market adjustments for the periods indicated. All gains and losses presented in the table below are reported in net gain on securities on the Consolidated Statements of Income (Loss).
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
Debt Securities
Gross Realized Gain $ — $ — $ 225 $ 489
Gross Realized Loss — — — —
Net Gain on Debt Securities $ — $ — $ 225 $ 489
Equity Securities
Net Unrealized Gain (Loss) Recognized on Securities Held $ 18 $ ( 59 ) $ 251 $ ( 469 )
Net Realized Gain Recognized on Securities Sold 6 — 6 —
Net Gain (Loss) on Equity Securities $ 24 $ ( 59 ) $ 257 $ ( 469 )
Net Gain (Loss) on Securities $ 24 $ ( 59 ) $ 482 $ 20
Note 5. Loans and Allowance for Loan Losses
The Company’s loan portfolio is segmented to enable management to monitor risk and performance. Real estate loans are further segregated into three classes. Residential mortgages include those secured by residential properties and include home equity loans,. Commercial mortgages consist of loans to commercial borrowers secured by commercial real estate. Construction loans typically consist of loans to build commercial buildings and acquire and develop residential real estate. The commercial and industrial segment consists of loans to finance the activities of commercial customers. The consumer segment consists primarily of indirect auto loans as well as personal installment loans and personal or overdraft lines of credit.
Residential mortgage loans are typically longer-term loans and, therefore, generally present greater interest rate risk than the consumer and commercial loans. Under certain economic conditions, housing values may decline, which may increase the risk that the collateral values are not sufficient.
Commercial real estate loans generally present a higher level of credit risk than loans secured by residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income-producing properties, and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of commercial real estate loans is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.
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Construction loans are originated to individuals to finance the construction of residential dwellings and are also originated for the construction of commercial properties, including hotels, apartment buildings, housing developments, and owner-occupied properties used for businesses. Construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 to 18 months. At the end of the construction phase, the loan generally converts to a permanent residential or commercial mortgage loan. Construction loan risks include overfunding in comparison to the plans, untimely completion of work, and leasing and stabilization after project completion.
Commercial and industrial loans are generally secured by business assets, inventories, accounts receivable, etc., which present collateral risk.
Consumer loans generally have higher interest rates and shorter terms than residential mortgage loans; however, they have additional credit risk due to the type of collateral securing the loan.
The following table presents the classifications of loans as of the dates indicated.
September 30, 2021 December 31, 2020
Amount
Percent
Amount
Percent
(Dollars in thousands)
Real Estate:
Residential
$ 317,373 31.7 % $ 344,142 32.9 %
Commercial
379,621 37.9 373,555 35.9
Construction
78,075 7.8 72,600 6.9
Commercial and Industrial
102,360 10.2 126,813 12.1
Consumer
112,087 11.2 113,854 10.9
Other
12,083 1.2 13,789 1.3
Total Loans
1,001,599 100.0 % 1,044,753 100.0 %
Allowance for Loan Losses
( 11,581 ) ( 12,771 )
Loans, Net
$ 990,018 $ 1,031,982
The Small Business Administration reopened the Payroll Protection Program ("PPP") the week of January 11, 2021 accepting applications for both First Draw and Second Draw PPP Loans. As of September 30, 2021, as part of this round of PPP, the Bank funded 218 PPP loans totaling $ 34.6 million with net deferred origination fees of $ 1.3 million.
PPP loans decreased $ 22.4 million to $ 32.7 million at September 30, 2021 compared to $ 55.1 million at December 31, 2020. At September 30, 2021, the largest sectors of PPP loans were $ 9.3 million for construction and specialty-trade contractors, $ 5.9 million in loans for health care and social assistance, $ 4.7 million for professional and technical services, $ 2.5 million for manufacturing, $ 3.5 million for restaurant and food services, and $ 1.8 million for wholesale trade.
Net unamortized PPP loan origination fees as of September 30, 2021 and December 31, 2020 were $ 1.0 million and $ 1.1 million, respectively. Net PPP loan origination fees earned were $ 380,000 and $ 1.4 million for the three and nine months ended September 30, 2021, respectively. All PPP loans are classified as commercial and industrial loans held for investment. No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee.
Total unamortized net deferred loan fees were $ 2.1 million and $ 2.0 million at September 30, 2021 and December 31, 2020, respectively.
The following table presents classification of loans held for sale as of September 30, 2021. Loans held for sale includes $ 6.5 million related to the Agreement executed with Citizens Bank and $ 7.4 million of residential real estate loans originated and intended for sale in the secondary market. In addition, a $ 3.6 million nonaccrual and substandard-rated commercial real estate loan secured by a hotel that was transferred into the held for sale portfolio at September 30, 2021 was sold in October 2021 and
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will result in the recognition of an $ 897,000 gain on sale of loans in the fourth quarter of 2021. This loan previously incurred a $ 931,000 charge-off in the prior year. There were no loans held for sale at December 31, 2020.
September 30
2021
(Dollars in thousands)
Real Estate:
Residential $ 9,640
Commercial 6,470
Construction —
Commercial and Industrial 592
Consumer 252
Other 453
Total Loans Held for Sale $ 17,407
The Company uses an eight-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are not considered criticized and are aggregated as “pass” rated. The criticized rating categories used by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are below average quality, resulting in an undue credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as loss are considered uncollectable and of such little value that continuance as an asset is not warranted.
The following table presents loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the dates indicated. At September 30, 2021 and December 31, 2020, there were no loans in the criticized category of Loss within the internal risk rating system.
September 30, 2021
Pass
Special
Mention
Substandard
Doubtful
Total
(Dollars in Thousands)
Real Estate:
Residential
$ 314,266 $ 869 $ 2,238 $ — $ 317,373
Commercial
339,193 28,018 12,410 — 379,621
Construction
66,649 10,785 641 — 78,075
Commercial and Industrial
87,901 12,410 1,513 536 102,360
Consumer
112,017 — 70 — 112,087
Other
12,012 71 — — 12,083
Total Loans
$ 932,038 $ 52,153 $ 16,872 $ 536 $ 1,001,599
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December 31, 2020
Pass
Special
Mention
Substandard
Doubtful
Total
(Dollars in Thousands)
Real Estate:
Residential
$ 340,573 $ 1,115 $ 2,454 $ — $ 344,142
Commercial
320,358 37,482 15,715 — 373,555
Construction
68,343 53 4,204 — 72,600
Commercial and Industrial
113,797 7,787 4,620 609 126,813
Consumer
113,805 — 49 — 113,854
Other
13,711 78 — — 13,789
Total Loans
$ 970,587 $ 46,515 $ 27,042 $ 609 $ 1,044,753
The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated.
September 30, 2021
Loans
Current
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
Or More
Past Due
Total
Past Due
Non-
Accrual
Total
Loans
(Dollars in Thousands)
Real Estate:
Residential
$ 315,124 $ 613 $ — $ — $ 613 $ 1,636 $ 317,373
Commercial
374,315 — — — — 5,306 379,621
Construction
78,075 — — — — — 78,075
Commercial and Industrial
100,817 — — — — 1,543 102,360
Consumer
111,515 484 18 — 502 70 112,087
Other
12,083 — — — — — 12,083
Total Loans
$ 991,929 $ 1,097 $ 18 $ — $ 1,115 $ 8,555 $ 1,001,599
December 31, 2020
Loans
Current
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
Or More
Past Due
Total
Past Due
Non-
Accrual
Total
Loans
(Dollars in Thousands)
Real Estate:
Residential
$ 339,067 $ 2,919 $ 315 $ — $ 3,234 $ 1,841 $ 344,142
Commercial
365,712 1 740 — 741 7,102 373,555
Construction
72,600 — — — — — 72,600
Commercial and Industrial
124,916 — — — — 1,897 126,813
Consumer
112,952 784 61 8 853 49 113,854
Other
13,789 — — — — — 13,789
Total Loans
$ 1,029,036 $ 3,704 $ 1,116 $ 8 $ 4,828 $ 10,889 $ 1,044,753
The decrease in nonaccrual loans at September 30, 2021 compared to December 31, 2020 is primarily related to a $ 3.6 million commercial real estate loan secured by a hotel that was transferred to loans held-for-sale as previously noted, partially offset by a $ 2.0 million commercial real estate loan secured by a hotel that was moved to nonaccrual status in the current period.
Additional interest income that would have been recorded if the loans that were nonaccrual at September 30, 2021 were current was $ 33,000 and $ 136,000 for the three and nine months ended September 30, 2021, respectively, and $ 20,000 and $ 59,000 for the three and nine months ended September 30, 2020, respectively.
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The following table sets forth the amounts and categories of nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings (“TDRs”), which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section. Nonperforming loans do not include loans modified under Section 4013 of the CARES Act and interagency guidance as further explained below.
September 30,
2021 December 31,
2020
(Dollars in Thousands)
Nonaccrual Loans:
Real Estate:
Residential
$ 1,636 $ 1,841
Commercial
5,306 7,102
Construction — —
Commercial and Industrial
1,543 1,897
Consumer
70 49
Total Nonaccrual Loans
8,555 10,889
Accruing Loans Past Due 90 Days or More:
Consumer
— 8
Total Accruing Loans Past Due 90 Days or More
— 8
Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More
8,555 10,897
Troubled Debt Restructurings, Accruing:
Real Estate
Residential
622 650
Commercial
1,713 2,861
Commercial and Industrial
17 80
Total Troubled Debt Restructurings, Accruing
2,352 3,591
Total Nonperforming Loans
10,907 14,488
Other Real Estate Owned:
Residential
36 —
Commercial
— 208
Total Other Real Estate Owned
36 208
Total Nonperforming Assets
$ 10,943 $ 14,696
Nonperforming Loans to Total Loans
1.09 % 1.39 %
Nonperforming Assets to Total Assets
0.74 1.04
The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $ 775,000 and $ 806,000 at September 30, 2021 and December 31, 2020, respectively.
TDRs typically are the result of loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. For a loan modification to be considered a TDR, the borrower must be experiencing financial difficulty and a concession must be granted, except for an insignificant delay in payment. Section 4013 of the CARES Act and regulatory guidance promulgated by federal banking regulators provide temporary relief from accounting and financial reporting requirements for TDRs regarding certain short-term loan modifications related to COVID-19. Specifically, the CARES Act provides that the Bank may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Any modification involving a loan that was not more than 30 days past due as of December 31, 2019 and that occurs beginning on March 1, 2020 and ends on the earlier of January 1, 2022 (as extended by the Consolidated Appropriations Act, 2021) or the date that is 60 days after the termination date of the national emergency related to
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the COVID-19 outbreak qualify for this exception, including a forbearance arrangement, interest rate modification, repayment plan or any other similar arrangement that defers or delays the payment of principal or interest.
Bank regulatory agencies released an interagency statement that offers practical expedients for modifications that occur in response to the COVID-19 pandemic, but it differs with the CARES Act in certain areas. The expedients require a lender to conclude that a borrower is not experiencing financial difficulty if either short-term (e.g., six months or less) modifications are made, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented or the modification or deferral program is mandated by the federal government or a state government. The bank regulatory agencies have subsequently confirmed that their guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act. Both Section 4013 of the CARES Act and the interagency statement can be applied to a second modification that occurs after the first modification provided that the second modification does not qualify as a TDR under Section 4013 of the CARES Act or the interagency statement.
The Bank offered forbearance options for borrowers impacted by COVID-19 that provide a short-term delay in payment 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 . During the forbearance period, the borrower is not considered delinquent for credit bureau reporting purposes. The Company has elected the practical expedients related to TDRs that are available in the CARES Act and interagency guidance as an entity-wide accounting policy and does not consider any of the forbearance agreements TDRs, delinquent, or nonaccrual.
The following table provides details of loans in forbearance as of the dates indicated.
September 30, 2021 December 31, 2020
Number
of
Loans Amount % of Portfolio Number
of
Loans Amount % of Portfolio
(Dollars in thousands)
Real Estate:
Residential — $ — — % 4 $ 749 0.2 %
Commercial — — — % 8 19,818 5.3 %
Construction — — — % 1 1,958 2.7 %
Commercial and Industrial — — — % 5 1,219 1.0 %
Consumer — — — % 13 356 0.3 %
Total Loans in Forbearance — $ — — % 31 $ 24,100 2.3 %
The concessions granted for the TDRs in the portfolio primarily consist of, but are not limited to, modification of payment or other terms, temporary rate modification and extension of maturity date. Loans classified as TDRs consisted of 14 loans totaling $ 2.9 million at September 30, 2021 and 17 loans totaling $ 4.2 million at December 31, 2020, respectively.
The following table presents information at the time of modification related to loans modified in a TDR during the periods indicated. During the three and nine months ended September 30, 2021, there were no loans that were modified that were considered a TDR.
Three Months Ended September 30, 2020
Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance
(Dollars in thousands)
Real Estate:
Commercial 1 $ 504 $ 519 $ —
Commercial and Industrial 1 38 38 —
Total 2 $ 542 557 $ —
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Nine Months Ended September 30, 2020
Number
of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Related
Allowance
(Dollars in thousands)
Real Estate:
Residential 1 $ 234 $ 234 $ —
Commercial 1 504 519 —
Commercial and Industrial 1 38 38 —
Total 3 $ 776 $ 791 $ —
During the three months ended September 30, 2021, no loans that were previously modified in a TDR paid off in full. During the nine months ended September 30, 2021, one residential real estate loan totaling $ 3,000 , one commercial real estate loan totaling $ 698,000 and one commercial and industrial loan totaling $ 8,000 previously modified in a TDR paid off in full. During the three months ended September 30, 2020, no loans previously modified in a TDR paid off in full. During the nine months ended September 30, 2020, one residential real estate loan totaling $ 60,000 previously modified in a TDR paid off in full
No TDRs subsequently defaulted during the three and nine months ended September 30, 2021 and 2020, respectively.
The following table presents a summary of the loans considered to be impaired as of the dates indicated.
September 30, 2021
Recorded
Investment
Related
Allowance
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
With No Related Allowance Recorded:
Real Estate:
Residential
$ 1,146 $ — $ 1,150 $ 1,165 $ 35
Commercial
13,100 — 13,315 13,361 235
Construction
641 — 641 641 16
Commercial and Industrial
2,066 — 2,351 2,922 24
Total With No Related Allowance Recorded
$ 16,953 $ — $ 17,457 $ 18,089 $ 310
With A Related Allowance Recorded:
Real Estate:
Residential
$ — $ — $ — $ — $ —
Commercial
272 199 272 473 16
Construction
— — — — —
Commercial and Industrial
— — — — —
Total With A Related Allowance Recorded
$ 272 $ 199 $ 272 $ 473 $ 16
Total Impaired Loans:
Real Estate:
Residential
$ 1,146 $ — $ 1,150 $ 1,165 $ 35
Commercial
13,372 199 13,587 13,834 251
Construction
641 — 641 641 16
Commercial and Industrial
2,066 — 2,351 2,922 24
Total Impaired Loans
$ 17,225 $ 199 $ 17,729 $ 18,562 $ 326
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December 31, 2020
Recorded
Investment
Related
Allowance
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
With No Related Allowance Recorded:
Real Estate:
Residential
$ 1,183 $ — $ 1,187 $ 1,194 $ 46
Commercial
31,865 — 32,887 37,443 1,418
Construction 4,204 — 4,204 4,013 159
Commercial and Industrial
3,296 — 3,506 3,426 89
Total With No Related Allowance Recorded
$ 40,548 $ — $ 41,784 $ 46,076 $ 1,712
With A Related Allowance Recorded:
Real Estate:
Residential
$ — $ — $ — $ — $ —
Commercial
1,524 293 1,524 1,585 72
Construction — — — — —
Commercial and Industrial
2,069 356 2,069 2,114 57
Total With A Related Allowance Recorded
$ 3,593 $ 649 $ 3,593 $ 3,699 $ 129
Total Impaired Loans
Real Estate:
Residential
$ 1,183 $ — $ 1,187 $ 1,194 $ 46
Commercial
33,389 293 34,411 39,028 1,490
Construction 4,204 — 4,204 4,013 159
Commercial and Industrial
5,365 356 5,575 5,540 146
Total Impaired Loans
$ 44,141 $ 649 $ 45,377 $ 49,775 $ 1,841
The recorded investment of loans evaluated for impairment decreased $ 26.9 million at September 30, 2021 compared to December 31, 2020 and was primarily related to commercial real estate loans. This is primarily the result of no longer evaluating separately for impairment certain commercial real estate loans secured by hotels that have manageable loan-to-value ratios and have exhibited an ability to cash flow during the COVID-19 pandemic, with the expectation that hotel operations strengthen further as occupancy rates increase due to the economy reopening and resumption of travel. In addition, as previously noted, a $ 3.6 million commercial real estate loan was transferred into loans held for sale and was no longer evaluated for impairment at September 30, 2021. The loan was subsequently sold in October 2021.
The following tables present the activity in the allowance for loan losses summarized by primary segments and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated.
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
June 30, 2021 $ 1,588 $ 5,582 $ 1,136 $ 1,152 $ 941 $ — $ 1,145 $ 11,544
Charge-offs
— — — — ( 19 ) — — ( 19 )
Recoveries
2 — — 11 43 — — 56
Provision (Recovery) ( 98 ) 347 ( 71 ) ( 21 ) ( 12 ) — ( 145 ) —
September 30, 2021 $ 1,492 $ 5,929 $ 1,065 $ 1,142 $ 953 $ — $ 1,000 $ 11,581
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Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
December 31, 2020 $ 2,249 $ 6,010 $ 889 $ 1,423 $ 1,283 $ — $ 917 $ 12,771
Charge-offs
— — — — ( 139 ) — — ( 139 )
Recoveries
15 — — 33 101 — — 149
Provision (Recovery) ( 772 ) ( 81 ) 176 ( 314 ) ( 292 ) — 83 ( 1,200 )
September 30, 2021 $ 1,492 $ 5,929 $ 1,065 $ 1,142 $ 953 $ — $ 1,000 $ 11,581
September 30, 2021
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 199 $ — $ — $ — $ — $ — $ 199
Collectively Evaluated for Potential Impairment
$ 1,492 $ 5,730 $ 1,065 $ 1,142 $ 953 $ — $ 1,000 $ 11,382
December 31, 2020
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 293 $ — $ 356 $ — $ — $ — $ 649
Collectively Evaluated for Potential Impairment
$ 2,249 $ 5,717 $ 889 $ 1,067 $ 1,283 $ — $ 917 $ 12,122
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
June 30, 2020 $ 2,688 $ 5,160 $ 820 $ 1,566 $ 1,714 $ — $ 700 $ 12,648
Charge-offs
( 11 ) — — — ( 103 ) — — ( 114 )
Recoveries
1 1 — 6 38 — — 46
Provision (Recovery) ( 506 ) 1,711 71 170 ( 290 ) — 44 1,200
September 30, 2020 $ 2,172 $ 6,872 $ 891 $ 1,742 $ 1,359 $ — $ 744 $ 13,780
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Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
December 31, 2019 $ 2,023 $ 3,210 $ 285 $ 2,412 $ 1,417 $ — $ 520 $ 9,867
Charge-offs
( 36 ) — — — ( 239 ) — — ( 275 )
Recoveries
5 28 — 21 134 — — 188
Provision (Recovery) 180 3,634 606 ( 691 ) 47 — 224 4,000
September 30, 2020 $ 2,172 $ 6,872 $ 891 $ 1,742 $ 1,359 $ — $ 744 $ 13,780
September 30, 2020
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 2,248 $ — $ 607 $ — $ — $ — $ 2,855
Collectively Evaluated for Potential Impairment
$ 2,172 $ 4,624 $ 891 $ 1,135 $ 1,359 $ — $ 744 $ 10,925
The allowance for loan losses was $ 11.6 million at September 30, 2021 compared to $ 12.8 million at December 31, 2020. There was a net recovery of $ 1.2 million of provision for loan losses for the nine months ended September 30, 2021. A $ 20.8 million decrease in net reservable loans in the current year, which excludes PPP loans and includes the reclassification of $ 17.4 million of loans to held for sale that do not require a reserve, as well as a decrease in specifically impaired loans and improving economic and industry conditions, contributed to the net recovery in the current period.
The following table presents the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of the dates indicated. At September 30, 2021 and December 31, 2020, commercial and industrial loans include $ 32.7 million and $ 55.1 million, respectively, of PPP loans collectively evaluated for potential impairment. No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee.
September 30, 2021
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ 1,146 $ 13,372 $ 641 $ 2,066 $ — $ — $ 17,225
Collectively Evaluated for Potential Impairment
316,227 366,249 77,434 100,294 112,087 12,083 984,374
Total Loans
$ 317,373 $ 379,621 $ 78,075 $ 102,360 $ 112,087 $ 12,083 $ 1,001,599
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December 31, 2020
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ 1,183 $ 33,389 $ 4,204 $ 5,365 $ — $ — $ 44,141
Collectively Evaluated for Potential Impairment
342,959 340,166 68,396 121,448 113,854 13,789 1,000,612
Total Loans $ 344,142 $ 373,555 $ 72,600 $ 126,813 $ 113,854 $ 13,789 $ 1,044,753
The following table presents changes in the accretable discount on the loans acquired at fair value at the dates indicated.
Accretable Discount
(Dollars in Thousands)
December 31, 2020 $ 1,194
Accretable Yield
( 385 )
September 30, 2021 $ 809
Note 6. Time Deposits
The following table shows the maturities of time deposits for the next five years and beyond at the date indicated.
September 30, 2021 Time Deposits Time Deposits Held for Sale Time Deposits,
Net
(Dollars in thousands)
One Year or Less
$ 68,228 $ 8,560 $ 59,668
Over One Through Two Years
58,693 4,346 54,347
Over Two Through Three Years
10,758 1,034 9,724
Over Three Through Four Years
11,362 2,415 8,947
Over Four Through Five Years
9,645 1,143 8,502
Over Five Years
3,735 196 3,539
Total
$ 162,421 $ 17,694 $ 144,727
The balance in time deposits, including time deposits held for sale, that meet or exceed the FDIC insurance limit of $250,000 totaled $ 49.1 million and $ 59.2 million as of September 30, 2021 and December 31, 2020, respectively.
The aggregate amount of demand deposits, including demand deposits held for sale, that are overdrawn and have been reclassified as loans was $ 176,000 and $ 231,000 as of September 30, 2021 and December 31, 2020, respectively.
Note 7. Short-Term Borrowings
Borrowings with original maturities of one year or less are classified as short-term and may consist of borrowings with the Federal Home Loan Bank ("FHLB"), securities sold under agreements to repurchase or borrowings on revolving lines of credit with the Federal Reserve Bank or other correspondent banks. Securities sold under repurchase agreements are comprised of customer repurchase agreements, which are overnight sweep accounts with next-day maturities utilized by commercial customers to earn interest on their funds. Securities are pledged as collateral under these agreements in an amount at least equal to the outstanding balance and the collateral pledging requirements are monitored on a daily basis. $ 10.7 million of securities sold under agreements to repurchase are reported as deposits held for sale at September 30, 2021 because the associated deposits will be sold as part of the Agreement with Citizens Bank. See Note 2 for further information.
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The following table sets forth the components of short-term borrowings as of the dates indicated.
September 30, 2021 December 31, 2020
Amount Weighted
Average
Rate Amount Weighted
Average
Rate
(Dollars in thousands)
Securities Sold Under Agreements to Repurchase:
Balance at Period End $ 42,623 0.16 % $ 41,055 0.21 %
Average Balance Outstanding During the Period 43,745 0.22 37,819 0.36
Maximum Amount Outstanding at any Month End 52,777 46,123
Securities Collaterizing the Agreements at Period-End:
Carrying Value 56,351 46,312
Market Value 56,412 47,283
Note 8. Other Borrowed Funds
Other borrowed funds consist of fixed rate advances from the FHLB. The following table sets forth the scheduled maturities of other borrowed funds at the dates indicated.
September 30, 2021 December 31, 2020
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
(Dollars in thousands)
Due in One Year
$ 3,000 2.23 % $ 2,000 2.12 %
Due After One Year to Two Years
3,000 2.41 3,000 2.23
Due After Two Years to Three Years
— — 3,000 2.41
Total
$ 6,000 2.32 % $ 8,000 2.27 %
As of September 30, 2021, the Bank maintained a credit arrangement with a maximum borrowing limit of approximately $ 420.4 million with the FHLB and available borrowing capacity of $ 351.3 million. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on $ 564.1 million of residential and commercial mortgage loans and the Bank’s investment in FHLB stock. Under this arrangement, the Bank had available a variable rate Line of Credit in the amount of $ 150.0 million as of September 30, 2021, of which there was no outstanding balance.
As an alternative to pledging securities, the FHLB periodically provides standby letters of credit on behalf of the Bank to secure certain public deposits in excess of the level insured by the FDIC. If the FHLB is required to make payment for a beneficiary’s draw, the payment amount is converted into a collateralized advance to the Bank. Standby letters of credit issued on our behalf by the FHLB to secure public deposits were $ 60.6 million and $ 90.3 million as of September 30, 2021 and December 31, 2020, respectively.
At September 30, 2021, the Bank maintained a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $ 82.8 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $ 124.9 million of commercial and industrial and consumer indirect auto loans. In addition, the Bank also maintains multiple line of credit arrangements with various unaffiliated banks totaling $ 50.0 million of which no draws had been taken.
At September 30, 2021 and December 31, 2020, CB Financial did not maintain any credit facilities.
Note 9. Fair Value Disclosure
FASB ASC 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.
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The three levels of fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.
Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques.
This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statements of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values for Level 2 securities were primarily determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. There were no transfers into or out of Level 3 during the nine months ended September 30, 2021 or year ended December 31, 2020.
Fair Value
Hierarchy
September 30
2021 December 31
2020
(Dollars in thousands)
Securities:
Available-for-Sale Debt Securities
U.S. Government Agencies Level 2
$ 49,938 $ 41,411
Obligations of States and Political Subdivisions Level 2
19,420 21,993
Mortgage-Backed Securities - Government-Sponsored Enterprises Level 2
141,690 79,493
Corporate Debt Level 2 7,481 —
Total Available-for-Sale Debt Securities 218,529 142,897
Equity Securities
Mutual Funds Level 1
999 1,019
Other Level 1
1,823 1,484
Total Equity Securities 2,822 2,503
Total Securities $ 221,351 $ 145,400
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The following table presents the financial assets on the Consolidated Statements of Financial Condition measured at fair value on a nonrecurring basis as of the dates indicated by level within the fair value hierarchy for only those nonrecurring assets that had a fair value below the carrying amount. The table also presents the significant unobservable inputs used in the fair value measurements.
Financial Asset Fair Value Hierarchy September 30,
2021 Valuation
Techniques Significant Unobservable Inputs Range Weighted Average
(Dollars in thousands)
Impaired Loans Individually Assessed Level 3 $ 73 Appraisal of Collateral (1)
Appraisal Adjustments (2)
0 % to 50 % 50.0 %
Mortgage Servicing Rights Level 3 733 Discounted Cash Flow Discount Rate 9 % to 11 % 10.1 %
Prepayment Speed 10 % to 29 % 19.9 %
Financial Asset Fair Value Hierarchy December 31,
2020 Valuation
Techniques Significant Unobservable Inputs Range Weighted Average
(Dollars in thousands)
Impaired Loans Individually Assessed Level 3 $ 2,944 Appraisal of Collateral (1)
Appraisal Adjustments (2)
0 % to 50 % —
Mortgage Servicing Rights Level 3 656 Discounted Cash Flow Discount Rate 9 % to 11 % 10.0 %
Prepayment Speed 12 % to 27 % 18.7 %
OREO Level 3 34 Appraisal of Collateral (1)
Liquidation Expenses (2)
10 % to 30 % —
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which may include various Level 3 inputs, which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of appraisal adjustments and liquidation expense are presented as a percent of the appraisal.
Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. At September 30, 2021 and December 31, 2020, the fair value of impaired loans consists of the loan balances of $ 272,000 and $ 3.6 million, respectively, less their specific valuation allowances of $ 199,000 and $ 649,000 , respectively.
The fair value of mortgage servicing rights ("MSRs") is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. MSRs are reported in Other Assets in the Consolidated Statements of Financial Condition and are amortized into mortgage servicing income in Other Income in the Consolidated Statements of (Loss) Income.
OREO properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, OREO is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an OREO property is determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy.
Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values.
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Table of Contents
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.
September 30, 2021 December 31, 2020
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(Dollars in thousands)
Financial Assets:
Cash and Due From Banks:
Interest Bearing
Level 1
$ 131,835 $ 131,835 $ 145,636 $ 145,636
Non-Interest Bearing
Level 1
41,688 41,688 15,275 15,275
Securities See Above
221,351 221,351 145,400 145,400
Loans Held for Sale Level 2 17,407 18,304 — —
Loans, Net
Level 3
990,018 1,022,160 1,031,982 1,073,633
Property and Equipment Held for Sale Level 2 795 795 — —
Restricted Stock
Level 2
3,451 3,451 3,984 3,984
Mortgage Servicing Rights Level 3 733 733 656 656
Accrued Interest Receivable
Level 2
3,355 3,355 3,872 3,872
Financial Liabilities:
Deposits Held for Sale Level 2 102,647 107,779 — —
Deposits
Level 2
1,185,156 1,186,603 1,224,569 1,231,606
Short-Term Borrowings Level 2
42,623 42,623 41,055 41,055
Other Borrowed Funds
Level 2
6,000 6,058 8,000 8,067
Accrued Interest Payable
Level 2
490 490 767 767
Note 10. Commitments and Contingent Liabilities
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and performance letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and performance letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments and conditional obligations are evaluated the same as on-balance-sheet instruments but do not have a corresponding reserve recorded. The Company’s opinion on not implementing a corresponding reserve for off-balance-sheet instruments is supported by historical factors of no losses recorded due to these items. The Company is continually evaluating these items for credit quality and any future need for the corresponding reserve.
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Table of Contents
The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated.
September 30,
2021 December 31,
2020
(Dollars in thousands)
Standby Letters of Credit
$ 110 $ 120
Performance Letters of Credit
2,764 2,947
Construction Mortgages
56,809 60,312
Personal Lines of Credit
7,132 6,930
Overdraft Protection Lines
5,895 6,287
Home Equity Lines of Credit
22,797 22,110
Commercial Lines of Credit
74,127 69,738
Total Commitments
$ 169,634 $ 168,444
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Performance letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the letter. For secured letters of credit, the collateral is typically Company deposit instruments or customer business assets.
Note 11. Leases
The Company evaluates contracts at commencement to determine if a lease is present. The Company’s lease contracts are all classified as operating leases and create operating right-of-use (“ROU”) assets and corresponding lease liabilities on the Consolidated Statements of Financial Condition. The leases are primarily ROU assets of land and building for branch and loan production locations. ROU assets are reported in Accrued Interest Receivable and Other Assets and the related lease liabilities in Accrued Interest Payable and Other Liabilities on the Consolidated Statements of Financial Condition.
The following tables present the lease expense, ROU assets, weighted average term, discount rate and maturity analysis of lease liabilities for operating leases for the periods and dates indicated.
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
Operating Lease Expense $ 74 $ 118 $ 257 $ 353
Short-Term Lease Expense 8 — 25 —
Variable Lease Expense 8 10 24 28
Total Lease Expense $ 90 $ 128 $ 306 $ 381
September 30,
2021 December 31,
2020
(Dollars in thousands)
Operating Leases:
ROU Assets $ 741 $ 1,206
Weighted Average Lease Term in Years 7.16 6.95
Weighted Average Discount Rate 2.47 % 2.39 %
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Table of Contents
September 30,
2021
(Dollars in thousands)
Maturity Analysis:
Due in One Year $ 309
Due After One Year to Two Years 178
Due After Two Years to Three Years 113
Due After Three Years to Four Years 90
Due After Four to Five Years 45
Due After Five Years 330
Total $ 1,065
Less: Present Value Discount 106
Lease Liabilities $ 959
Impairment of ROU Assets
ROU assets from operating leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, and are reviewed for impairment when indicators of impairment are present. ASC 360 requires three steps to identify, recognize and measure impairment. If indicators of impairment are present (Step 1), the Company performs a recoverability test (Step 2) comparing the sum of the estimated undiscounted cash flows attributable to the ROU asset in question to the carrying amount. If the undiscounted cash flows used in the recoverability test are less than the carrying amount, the Company estimates the fair value of the ROU asset and recognizes an impairment loss when the carrying amount exceeds the estimated fair value (Step 3).
At June 30, 2021, the Company consolidated six branches as part of its branch optimization initiative. One of the branches was leased and the Company performed the three-step evaluation as outlined above to determine whether the operating lease was impaired. As part of the recoverability test, the Company elected to exclude operating lease liabilities from the carrying amount of the asset group. The undiscounted future cash flows used in the recoverability test were based on assumptions made by the Company rather than market participant assumptions. Since an election was made to exclude operating lease liabilities from the asset or asset group, all future cash lease payments for the lease were also excluded. In addition, the Company elected to exclude operating lease liabilities from the estimated fair value, consistent with the recoverability test When determining the fair value of the ROU asset, the Company estimated what market participants would pay to lease the asset. The ROU asset was valued assuming its highest and best use in its current form.
Based on the analysis, the Company concluded that the ROU asset for this branch was fully impaired as of June 30, 2021, resulting in a remaining ROU carrying value of zero and the recognition of a $ 227,000 impairment for the nine months ended September 30, 2021. The impairment was recognized in Occupancy expense on the Consolidated Statements of Income (Loss).
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Note 12. Other Noninterest Expense
The details of other noninterest expense for the Company’s Consolidated Statements of (Loss) Income for the periods indicated are as follows:
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
Non-Employee Compensation $ 184 $ 155 $ 473 $ 449
Printing and Supplies 55 125 218 365
Postage 86 61 265 176
Telephone 145 108 472 408
Charitable Contributions 45 32 80 98
Dues and Subscriptions 33 36 121 153
Loan Expenses 86 149 288 420
Meals and Entertainment 31 — 91 74
Travel 27 13 77 87
Training 5 10 29 24
Bank Assessment 46 44 134 132
Insurance 54 59 173 173
Miscellaneous 106 127 409 418
Total Other Noninterest Expense $ 903 $ 919 $ 2,830 $ 2,977
Note 13. Segment and Related Information
At September 30, 2021, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services. CB Financial is the parent company of the Bank and Exchange Underwriters, a wholly owned subsidiary of the Bank. Exchange Underwriters has an independent board of directors from the Company and is managed separately from the banking and related financial services that the Company offers. Exchange Underwriters is an independent insurance agency that offers property, casualty, commercial liability, surety and other insurance products.
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The following is a table of selected financial data for the Company’s subsidiaries and consolidated results at the dates and for the periods indicated.
Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated
(Dollars in thousands)
September 30, 2021
Assets $ 1,474,626 $ 4,656 $ 130,994 $ ( 135,458 ) $ 1,474,818
Liabilities 1,352,005 1,672 7 ( 9,853 ) 1,343,831
Stockholders' Equity 122,621 2,984 130,987 ( 125,605 ) 130,987
December 31, 2020
Assets $ 1,416,132 $ 5,379 $ 134,546 $ ( 139,337 ) $ 1,416,720
Liabilities 1,287,148 2,325 16 ( 7,299 ) 1,282,190
Stockholders' Equity 128,984 3,054 134,530 ( 132,038 ) 134,530
Three Months Ended September 30, 2021
Interest and Dividend Income $ 10,768 $ 1 $ 1,311 $ ( 1,294 ) $ 10,786
Interest Expense 776 — — — 776
Net Interest and Dividend Income 9,992 1 1,311 ( 1,294 ) 10,010
Provision for Loan Losses — — — — —
Net Interest and Dividend Income After Provision for Loan Losses 9,992 1 1,311 ( 1,294 ) 10,010
Noninterest Income 975 1,195 28 — 2,198
Noninterest Expense 8,750 1,020 3 — 9,773
Undistributed Net Income of Subsidiary 124 — 654 ( 778 ) —
Income Before Income Tax Expense 2,341 176 1,990 ( 2,072 ) 2,435
Income Tax Expense 393 52 7 — 452
Net Income $ 1,948 $ 124 $ 1,983 $ ( 2,072 ) $ 1,983
Nine Months Ended September 30, 2021
Interest and Dividend Income $ 32,536 $ 4 $ 8,456 $ ( 8,402 ) $ 32,594
Interest Expense 2,673 — — — 2,673
Net Interest and Dividend Income 29,863 4 8,456 ( 8,402 ) 29,921
(Recovery) Provision for Loan Losses ( 1,200 ) — — — ( 1,200 )
Net Interest and Dividend Income After (Recovery) Provision for Loan Losses 31,063 4 8,456 ( 8,402 ) 31,121
Noninterest Income 3,319 3,995 277 — 7,591
Noninterest Expense 29,898 2,983 9 — 32,890
Undistributed Net Income (Loss) of Subsidiary 710 — ( 4,096 ) 3,386 —
Income Before Income Tax Expense 5,194 1,016 4,628 ( 5,016 ) 5,822
Income Tax Expense 888 306 23 — 1,217
Net Income $ 4,306 $ 710 $ 4,605 $ ( 5,016 ) $ 4,605
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Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated
(Dollars in thousands)
Three Months Ended September 30, 2020
Interest and Dividend Income $ 11,639 $ 1 $ 1,310 $ ( 1,294 ) $ 11,656
Interest Expense 1,240 — — — 1,240
Net Interest and Dividend Income 10,399 1 1,310 ( 1,294 ) 10,416
Provision for Loan Losses 1,200 — — — 1,200
Net Interest and Dividend Income After Provision for Loan Losses 9,199 1 1,310 ( 1,294 ) 9,216
Noninterest Income 1,208 1,024 ( 59 ) — 2,173
Noninterest Expense 28,046 919 3 — 28,968
Undistributed Net Income (Loss) of Subsidiary 73 — ( 18,694 ) 18,621 —
(Loss) Income Before Income Tax (Benefit) Expense ( 17,566 ) 106 ( 17,446 ) 17,327 ( 17,579 )
Income Tax (Benefit) Expense ( 166 ) 33 ( 51 ) — ( 184 )
Net (Loss) Income $ ( 17,400 ) $ 73 $ ( 17,395 ) $ 17,327 $ ( 17,395 )
Nine Months Ended September 30, 2020
Interest and Dividend Income $ 35,664 $ 3 $ 2,634 $ ( 2,589 ) $ 35,712
Interest Expense 4,442 — — — 4,442
Net Interest and Dividend Income 31,222 3 2,634 ( 2,589 ) 31,270
Provision for Loan Losses 4,000 — — — 4,000
Net Interest and Dividend Income After Provision for Loan Losses 27,222 3 2,634 ( 2,589 ) 27,270
Noninterest Income (Loss) 3,760 3,426 ( 493 ) — 6,693
Noninterest Expense 44,227 2,806 9 — 47,042
Undistributed Net Income (Loss) of Subsidiary 433 — ( 15,991 ) 15,558 —
(Loss) Income Before Income Tax Expense (Benefit) ( 12,812 ) 623 ( 13,859 ) 12,969 ( 13,079 )
Income Tax Expense (Benefit) 590 190 ( 140 ) — 640
Net (Loss) Income $ ( 13,402 ) $ 433 $ ( 13,719 ) $ 12,969 $ ( 13,719 )
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Note 14. Intangible Assets
The following table presents a summary of intangible assets subject to amortization at the dates indicated.
September 30, 2021 December 31, 2020
Gross Carrying Amount Accumulated Amortization Impairment Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value
(Dollars in thousands)
Core Deposit Intangible $ 14,103 $ ( 8,386 ) $ ( 1,178 ) $ 4,539 $ 14,103 $ ( 7,047 ) $ 7,056
Customer List 1,800 ( 599 ) — 1,201 1,800 ( 457 ) 1,343
Total Intangible Assets $ 15,903 $ ( 8,985 ) $ ( 1,178 ) $ 5,740 $ 15,903 $ ( 7,504 ) $ 8,399
On June 10, 2021, the Agreement was executed with Citizens Bank pursuant to which Citizens Bank has agreed to assume certain deposits of the branch offices of Community Bank located in Buckhannon, West Virginia, and in New Martinsville, West Virginia. In 2018, the Company recorded a core deposit intangible asset related to the acquisition of these two branches as part of the merger with First West Virginia Bancorp, Inc. As a result of signing the Agreement 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. The Company recorded the impairment in Intangible Asset and Goodwill Impairment on the Consolidated Statements of Income (Loss).
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in subsequent fiscal years is as follows as of September 30, 2021.
Amount
(Dollars in thousands)
Remaining in 2021 $ 445
2022 1,782
2023 1,782
2024 1,147
2025 189
2026 and Thereafter 395
Total Estimated Intangible Asset Amortization Expense $ 5,740
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Note 15. Mortgage Servicing Rights
The following table presents MSR activity and net carrying values for the periods indicated.
Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(Dollars in thousands)
Mortgage Servicing Rights:
Balance, Beginning of Period $ 902 $ 1,032 $ 1,029 $ 1,001
Additions 32 73 64 210
Amortization ( 70 ) ( 71 ) ( 229 ) ( 177 )
Balance, End of Period $ 864 $ 1,034 $ 864 $ 1,034
Valuation Allowance:
Balance, Beginning of Period $ ( 213 ) $ ( 340 ) $ ( 373 ) $ ( 71 )
Valuation Allowance Adjustment 82 — 242 ( 269 )
Balance, End of Period $ ( 131 ) $ ( 340 ) $ ( 131 ) $ ( 340 )
Mortgage Servicing Rights, Net Carrying Value $ 733 $ 694 $ 733 $ 694
Amortization of MSRs and the period change in the valuation allowance are reported in Other Income on the Consolidated Statements of Income (Loss).
Real estate loans serviced for others, which are not included in the Consolidated Statements of Financial Condition, totaled $ 96.6 million and $ 105.8 million at September 30, 2021 and December 31, 2020, respectively.
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.