Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the unaudited consolidated financial statements, notes and tables included in this report. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Forward-Looking Statements
This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the Company’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include, but are not limited to, the following:
• General and local economic conditions;
• The scope and duration of economic contraction as a result of the COVID-19 pandemic and its effects on the Company’s business and that of the Company’s customers;
• Government action in response to the COVID-19 pandemic and its effects on the Company's business and that of the Company's customers;
• Our ability to realize the expected cost savings and other efficiencies related to our branch optimization and operational efficiency initiatives;
• Changes in market interest rates, deposit flows, demand for loans, real estate values and competition;
• Competitive products and pricing;
• The ability of our customers to make scheduled loan payments;
• Loan delinquency rates and trends;
• Our ability to manage the risks involved in our business;
• Our ability to integrate the operations of businesses we acquire;
• Our ability to control costs and expenses;
• Inflation, market and monetary fluctuations;
• Changes in federal and state legislation and regulation applicable to our business;
• Actions by our competitors; and
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• Other factors disclosed in the Company’s periodic reports as filed with the Securities and Exchange Commission.
Many of these risks and uncertainties have been elevated by and may continue to be elevated by the COVID-19 pandemic. The ability to predict the impact of the ongoing COVID-19 pandemic on the Company’s future operating results with any precision is difficult and depends on many factors beyond our control.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.
General
CB Financial Services is a bank holding company established in 2006 and headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly owned bank subsidiary, Community Bank.
The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from 11 branches in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania and five branches in Marshall, Ohio, Upshur and Wetzel Counties in West Virginia. The Bank also has a loan production office in Allegheny County, a corporate center in Washington County and an operations center in Greene County in Pennsylvania. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc., the Bank’s wholly owned subsidiary that is a full-service, independent insurance agency located in Washington County.
Overview
The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of September 30, 2021, compared to the financial condition as of December 31, 2020 and the consolidated results of operations for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges on deposit accounts, insurance commissions, income from bank-owned life insurance and other income. Noninterest expense consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contracted services, legal and professional fees, advertising, deposit and general insurance and other expenses.
Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in southwestern Pennsylvania and Ohio Valley market areas.
Branch Optimization and Operational Efficiency Update
As previously disclosed by the Company on February 23, 2021, May 27, 2021 and June 10, 2021, the Company announced the implementation of branch optimization and operational efficiency strategic initiatives to improve the Bank’s financial performance and operations in order to position the Bank for continued profitable growth. The Bank intends to optimize its current branch network while expanding technology and infrastructure investments in its remaining locations. The decision was the result of a comprehensive internal study that measured branch performance by comparing financial and non-financial indicators to growth opportunities, while evolving changes in consumer preferences, largely driven by the global pandemic, led to an acceleration of branch optimization efforts. The Bank also completed a comprehensive review of its branch network and operating environment to identify solutions to improve operating performance. This review prioritized profitability, efficiency, infrastructure and client experience improvements, automation in operations, and digital marketing and technology investments.
The Bank continues to make progress related to these initiatives through the consolidation of six branches that was completed on June 30, 2021, reducing the Bank's branch network to 16 branches. The Bank is also in the process of implementing operational efficiencies related to over 185 individualized processes within its branch network and operating environment. In addition, on June 10, 2021, CB Financial, Community Bank, and Citizens Bank of West Virginia, Inc. (“Citizens Bank”) executed a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Citizens Bank has agreed to purchase certain loans and other assets, and assume certain deposits and other liabilities, of the branch offices of Community Bank located in Buckhannon, West
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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.
The Company presently expects to incur $7.9 million of non-recurring expenses in 2021 and, as of September 30, 2021, has incurred $6.3 million of expenses related to these items. The expenses include a $2.3 million writedown on fixed assets and a $1.2 million impairment of intangible assets associated with the branch consolidations in the second quarter and the pending branch sales expected to be finalized in the fourth quarter. In addition, as part of the Company's branch optimization and operational efficiency initiatives, the Company incurred $2.9 million of expenses related to contracted services, employee severance costs, branch lease impairment, professional fees, data processing fees, legal and other expenses.
The majority of the remaining expenses to be recognized in 2021 are related to approximately $600,000 in contracted services aimed at improving the operational and revenue efficiency at the bank in the long-term. The Company anticipates cost savings from this initiative ranging from approximately $2.5 million to $3.5 million in 2022 , as well as expected enhanced revenue and fee generating capacity in future years.
In addition, the Company expects an annual reduction in pre-tax operating expenses in 2021 of approximately $1.0 million, alo ng with $3.0 million of ongoing pre-tax cost savings as a result of the branch optimization initiatives. The Company expects these estimated cost savings to be incremental to net income beginning in 2022 . These estimated cost savings exclude the favorable impact of the expected premium from sale of branches expected to be recognized in the fourth quarter of 2021 and currently estimated to be $5.1 million.
Explanation of Use of Non-GAAP Financial Measures
In addition to financial measures presented in accordance with U.S. GAAP, we present certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information in understanding our underlying results of operations or financial position and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Non-GAAP adjusted items impacting the Company's financial performance are identified to assist investors in providing a complete understanding of factors and trends affecting the Company’s business and in analyzing the Company’s operating results on the same basis as that applied by management. Although we believe that these non-GAAP financial measures enhance the understanding of our business and performance, they should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein.
The interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a fully tax-equivalent (“FTE”) basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory income tax rate of 21.0%. We believe the presentation of net interest income on a FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.
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The following table reconciles net interest income, net interest spread and net interest margin on a FTE basis for the periods indicated:
Three Months Ended
Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(Dollars in thousands)
Interest Income (GAAP) $ 10,786 $ 11,656 $ 32,594 $ 35,712
Adjustment to FTE Basis
41 53 131 165
Interest Income (FTE) (Non-GAAP)
10,827 11,709 32,725 35,877
Interest Expense (GAAP) 776 1,240 2,673 4,442
Net Interest Income (FTE) (Non-GAAP)
$ 10,051 $ 10,469 $ 30,052 $ 31,435
Net Interest Rate Spread (GAAP)
2.77 % 3.03 % 2.80 % 3.15 %
Adjustment to FTE Basis
0.01 0.02 0.01 0.02
Net Interest Rate Spread (FTE) (Non-GAAP)
2.78 3.05 2.81 3.17
Net Interest Margin (GAAP)
2.88 % 3.19 % 2.92 % 3.34 %
Adjustment to FTE Basis
0.01 0.02 0.01 0.01
Net Interest Margin (FTE) (Non-GAAP)
2.89 3.21 2.93 3.35
Allowance for loan losses to total loans, excluding PPP loans, is a non-GAAP measure that serves as a useful measurement to evaluate the allowance for loan losses without the impact of SBA guaranteed loans.
September 30,
2021 December 31, 2020
(Dollars in thousands)
Allowance for Loan Losses (Numerator) $ 11,581 $ 12,771
Total Loans 1,001,599 $ 1,044,753
PPP Loans (32,703) (55,096)
Total Loans, Excluding PPP Loans (Non-GAAP) (Denominator) $ 968,896 $ 989,657
Allowance for Loan Losses to Total Loans (GAAP) 1.16 % 1.22 %
Allowance for Loan Losses to Total Loans, Excluding PPP Loans (Non-GAAP) 1.20 % 1.29 %
Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by period-end common shares outstanding. We believe this non-GAAP measure serves as a useful tool to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company’s total value.
September 30,
2021 December 31, 2020
(Dollars in thousands, except share and per share data)
Stockholders' Equity (GAAP) $ 130,987 $ 134,530
Goodwill and Other Intangible Assets, Net (15,472) (18,131)
Tangible Common Equity or Tangible Book Value (Non-GAAP) (Numerator) $ 115,515 $ 116,399
Common Shares Outstanding (Denominator) 5,330,401 5,434,374
Book Value per Common Share (GAAP) $ 24.57 $ 24.76
Tangible Book Value per Common Share (Non-GAAP) $ 21.67 $ 21.42
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Consolidated Statements of Financial Condition Analysis
Assets. Total assets increased $58.1 million, or 4.1%, to $1.47 billion at September 30, 2021, compared to $1.42 billion at December 31, 2020. The change is primarily due to increases in cash and due from banks and in securities.
Cash and Securities
• Cash and due from banks increased $12.6 million, or 7.8%, to $173.5 million at September 30, 2021, compared to $160.9 million at December 31, 2020. The change is primarily due to an increase in deposits as further described below in the Liabilities section.
• Securities increased $76.0 million, or 52.3%, to $221.4 million at September 30, 2021, compared to $145.4 million at December 31, 2020. Current period activity included $119.9 million of purchases, $29.6 million of paydowns, and $12.0 million of sales, primarily of mortgage-backed securities, which resulted in the recognition of a $231,000 gain. The purchases were made to earn a higher yield on excess cash. The sales recognized gains on higher-interest securities with faster prepayment speeds. In addition, there was a $2.9 million decrease in the market value of the debt securities portfolio and a $251,000 gain in market value in the equity securities portfolio, which is primarily comprised of bank stocks.
Payroll Protection Program (“PPP”) Update
• PPP loans decreased $22.4 million to $32.7 million at September 30, 2021 compared to $55.1 million at December 31, 2020, which includes $34.6 million in originations in the current period offset by loan forgiveness.
• $1.1 million of net PPP loan origination fees were unearned at December 31, 2020. Due to activity in the current period, $1.0 million of net PPP loan origination fees were unearned at September 30, 2021. $1.4 million of net PPP loan origination fees were recognized for the nine months ended September 30, 2021, including $380,000 for the three months ended September 30, 2021 compared to $489,000 for the three months ended June 30, 2021.
Loans, Allowance for Loan Losses and Credit Quality
• Total loans held for investment decreased $43.2 million to $1.00 billion at September 30, 2021. This includes the impact of reclassifying $17.4 million of loans to held for sale. Excluding the net decline of $22.4 million in PPP loans in the current period and including $17.4 million of held for sale loans, loans declined $3.4 million. Compared to June 30, 2021, total loans, including loans held for sale and excluding PPP loans, increased $17.0 million, primarily from $23.1 million in commercial real estate loan growth. Average loans for the three months ended September 30, 2021 decreased $12.4 million compared to the three months ended June 30, 2021.
• The allowance for loan losses was $11.6 million at September 30, 2021 compared to $12.8 million at December 31, 2020. There was a net recovery of $1.2 million of provision for loan losses in the current year. A $20.8 million decrease in net reservable loans in the current period, which excludes PPP loans and includes the reclassification of $17.4 million of loans to held for sale that do not require a reserve, as well as a decrease in specifically impaired loans and improving economic and industry conditions contributed to the net recovery in the current period. As a result, the allowance for loan losses to total loans was 1.16% at September 30, 2021 compared to 1.22% at December 31, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.20% at September 30, 2021 compared to 1.29% at December 31, 2020.
• Net recoveries for the three months ended September 30, 2021 were $37,000, or (0.01)% of average loans on an annualized basis. Net charge-offs for the three months ended September 30, 2020 were $68,000, or 0.03% of average loans on an annualized basis. Net recoveries for the nine months ended September 30, 2021 were $10,000, or 0.00% of average loans on an annualized basis. Net charge-offs for the nine months ended September 30, 2020 were $87,000, or 0.01% of average loans on an annualized basis. Net charge-offs were primarily driven by indirect automobile loans in the consumer loan category in the prior period.
• Nonperforming loans, which includes nonaccrual loans, accruing loans past due 90 days or more, and accruing loans that are considered troubled debt restructurings within the loans held for investment portfolio, were $10.9 million at September 30, 2021 compared to $14.5 million at December 31, 2020. Nonperforming loans to total loans ratio was 1.09% at September 30, 2021 compared to 1.39% at December 31, 2020. A $3.6 million nonaccrual commercial real estate loan under agreement to sell and transferred into the held for sale portfolio at September 30, 2021 was sold in October 2021 and will result in the recognition of an $897,000 gain on sale of loans in the fourth quarter of 2021. This loan previously incurred a $931,000 charge-off in the prior year.
• The Bank provided borrower support and relief through short-term loan forbearance options by primarily allowing: (a) deferral of three to six months of payments; or (b) for consumer loans not secured by a real estate mortgage, three
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months of interest-only payments that also extends the maturity date of the loan by three months. In certain circumstances, a second three-month deferral period was granted.
The following table provides details of loans in forbearance at the dates indicated.
September 30, 2021 June 30, 2021 December 31, 2020
Number
of
Loans Amount % of Portfolio Number
of
Loans Amount % of Portfolio Number
of
Loans Amount % of Portfolio
(Dollars in thousands)
Real Estate:
Residential — — — % — — — % 4 749 0.2 %
Commercial — — — % 4 6,544 1.8 % 8 19,818 5.3 %
Construction — — — % — — — % 1 1,958 2.7 %
Commercial and Industrial — — — % 5 1,221 1.0 % 5 1,219 1.0 %
Consumer — — — % — — — % 13 356 0.3 %
Total Loans in Forbearance — $ — — % 9 $ 7,765 0.8 % 31 $ 24,100 2.3 %
Other
• Premises and equipment decreased $1.8 million to $18.5 million at September 30, 2021 compared to $20.3 million at December 31, 2020. The Company recognized a $2.3 million writedown on fixed assets related to the branch optimization initiative. In addition, $795,000 of premises and equipment was transferred to held for sale related to the signing of the Agreement with Citizens Bank and the impending sale of the two related branches. The Company also recognized $727,000 of depreciation expense and $280,000 was transferred to Other Assets due to a branch closure and marketing of the property for sale. This was offset by $2.3 million of purchases, primarily related to the operational efficiency initiative.
• Intangible Assets decreased $2.7 million to $5.7 million at September 30, 2021 compared to $8.4 million at December 31, 2020 primarily due to an impairment of $1.2 million and amortization expense of $1.5 million. As a result of signing the Agreement with Citizens Bank and the expected sale of a portion of the deposits associated with the remaining core deposit intangible asset, the Company performed an interim evaluation to determine whether the core deposit intangible was impaired. As a result of the evaluation, the Company determined the carrying amount of the core deposit intangible was impaired $1.2 million.
• Accrued Interest Receivable and Other Assets decreased $2.7 million, or 17.7% to $12.6 million at September 30, 2021, compared to $15.2 million at December 31, 2020 primarily related to the receipt of a $1.3 million federal income tax refund, decrease in prepaid expenses which are mainly paid in advance near the beginning of the year, decrease in restricted stock due to a decline in standby letters of credit usage with the FHLB, and decrease in accrued interest receivable due to customer's first repaying unpaid interest when their forbearance periods ended.
Liabilities. Total liabilities increased $61.6 million, or 4.8%, to $1.34 billion at September 30, 2021 compared to $1.28 billion at December 31, 2020.
Deposits
• Total deposits, including deposits held for sale, increased $63.2 million to $1.29 billion as of September 30, 2021 compared to $1.22 billion at December 31, 2020. Noninterest bearing demand deposits, NOW accounts and savings accounts increased $47.8 million, $15.6 million and $18.4 million, respectively, partially offset by a decrease of $27.6 million in time deposits. IRS and stimulus-related payments totaled $29.9 million in the first quarter and the impact of the PPP loans that were originated in the current year and the proceeds of which were initially deposited at the Bank was approximately $28.7 million. Annualized deposit growth rate was 6.9%. Average total deposits decreased $5.7 million, primarily in time deposits, for the three months ended September 30, 2021 compared to the three months ended June 30, 2021.
Borrowed Funds
• Short-term borrowings increased $1.6 million, or 3.9%, to $42.6 million at September 30, 2021, compared to $41.1 million at December 31, 2020. At September 30, 2021 and December 31, 2020, short-term borrowings were comprised entirely of securities sold under agreements to repurchase, which are related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing
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securities from the Bank’s investment portfolio under an agreement to repurchase. $10.7 million was excluded from short-term borrowings at September 30, 2021 and reported as deposits held for sale.
• Other borrowed funds decreased $2.0 million to $6.0 million at September 30, 2021 due to a Federal Home Loan Bank borrowing that matured in the current period.
Stockholders’ Equity. Stockholders’ equity decreased $3.5 million, or 2.6%, to $131.0 million at September 30, 2021, compared to $134.5 million at December 31, 2020.
• Net income was $4.6 million for the nine months ended September 30, 2021.
• Accumulated other comprehensive income decreased $2.3 million primarily due to market interest rate conditions on the Company’s debt securities.
• The Company declared and paid $3.9 million in dividends to common stockholders in the current period.
• The Company repurchased $2.5 million of its common stock as part of its stock repurchase program.
• Book value per share (GAAP) was $24.57 at September 30, 2021 compared to $24.76 at December 31, 2020, a decrease of $0.19. Tangible book value per share (Non-GAAP) increased $0.25, or 1.2%, to $21.67 compared to $21.42 at December 31, 2020. Refer to Explanation of Use of Non-GAAP Financial Measures in this Report.
Consolidated Results of Operations for the Three Months Ended September 30, 2021 and 2020
Overview. Net income was $2.0 million for the three months ended September 30, 2021, an increase of $19.4 million compared to a net loss of $17.4 million for the three months ended September 30, 2020. Prior year results were impacted by the following:
• The Company conducted a goodwill impairment analysis and, due to the macroeconomic impacts of the pandemic and the overall industry-wide decline in value of stocks and earnings expectations in the banking sector at that time, including the Company's stock, the Company determined its goodwill was no longer supported by its estimate of the Company’s fair value. Therefore, $18.7 million of goodwill was deemed impaired and written off. This non-cash expense was deemed non-core and had no impact on tangible equity, cash flows, liquidity or regulatory capital.
• The Company incurred a non-cash impairment of fixed assets of $884,000 as a result of the Monessen branch closure whereby the property was written down to fair value. The impairment charge primarily related to the write off of the unamortized purchase accounting adjustment associated with the branch, which was the former headquarters of FedFirst Financial Corporation acquired through merger in 2014.
Net Interest and Dividend Income. Net interest and dividend income decreased $406,000, or 3.9%, to $10.0 million for the three months ended September 30, 2021 compared to $10.4 million for the three months ended September 30, 2020. Net interest margin (FTE) (Non-GAAP) decreased 32 basis points (“bps”) to 2.89% for the three months ended September 30, 2021 compared to 3.21% the three months ended September 30, 2020. Net interest margin (GAAP) decreased to 2.88% for the three months ended September 30, 2021 compared to 3.19% for the three months ended September 30, 2020. While the Company has further controlled its deposit cost structure as deposit balances increased and benefited from nonrenewal or repricing of higher cost time deposits, the net interest margin has decreased primarily due to the low interest rate environment decreasing yields on loans and securities.
Interest and Dividend Income
• Interest and dividend income decreased $870,000, or 7.5%, to $10.8 million for the three months ended September 30, 2021 compared to $11.7 million the three months ended September 30, 2020.
◦ Interest income on loans decreased $991,000, or 9.3%, to $9.7 million for the three months ended September 30, 2021 compared to $10.7 million for the three months ended September 30, 2020. The average balance of loans decreased $31.0 million and the average yield decreased 28 bps to 3.85% compared to the three months ended September 30, 2020.
◦ Interest and fee income on PPP loans was $484,000 for the three months ended September 30, 2021 and contributed 4 bps to loan yield, compared to $454,000 for the three months ended September 30, 2020, which decreased loan yield 11 bps.
◦ The impact of the accretion of the credit mark on acquired loan portfolios was $94,000 for the three months ended September 30, 2021 compared to $127,000 for the three months ended September 30, 2020, or 4 bps in the current period compared to 5 bps in the prior period.
◦ Interest income on taxable investment securities increased $90,000, or 12.0%, to $843,000 for the three months ended September 30, 2021 compared to $753,000 for the three months ended September 30, 2020 driven by a $74.4 million increase in average investment securities balances and 73 bps decrease in average yield. The Federal
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Reserve’s pandemic-driven decision to drop the benchmark interest rate in March 2020 resulted in significant calls of U.S. government agency securities and paydowns on mortgage-backed securities in the declining interest rate environment, which were replaced with lower-yielding securities or maintained in cash.
◦ Other interest and dividend income, which primarily consists of interest-bearing cash, increased $39,000, or 40.6% to $135,000 for the three months ended September 30, 2021 compared to $96,000 for the three months ended September 30, 2020. While the average yield remained comparable to the three months ended September 30, 2020, the average other interest-earning assets increased $41.3 million compared to the three months ended September 30, 2020 primarily from buildup of cash as a result of securities activity, PPP loan funds and government stimulus payments deposited with the Bank.
Interest Expense
• Interest expense decreased $464,000, or 37.4%, to $776,000 for the three months ended September 30, 2021 compared to $1.2 million for the three months ended September 30, 2020.
◦ Interest expense on deposits decreased $435,000, or 37.8%, to $715,000 for the three months ended September 30, 2021 compared to $1.2 million for the three months ended September 30, 2020. While average interest-earning deposits increased $33.7 million compared to the three months ended September 30, 2020, interest rate declines for all products driven by pandemic-related interest rate cuts resulted in a 21 bp, or 39.5%, decrease in average cost compared to the three months ended September 30, 2020. In addition, average time deposits and the related average cost decreased $29.5 million and 37 bps, respectively.
◦ Interest expense on other borrowed funds decreased $26,000, or 41.9%, to $36,000 for the three months ended September 30, 2021 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $5.0 million decrease in average balance.
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Average Balances and Yields . The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21.0% for the periods presented. As such, amounts will not agree to income as reported in the consolidated financial statements. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
Three Months Ended September 30,
2021 2020
Average
Balance Interest
and
Dividends Yield/
Cost (1)
Average
Balance Interest
and
Dividends Yield/
Cost (1)
(Dollars in thousands) (Unaudited)
Assets:
Interest-Earning Assets:
Loans, Net (2)
$ 1,004,474 $ 9,740 3.85 % $ 1,035,426 $ 10,744 4.13 %
Debt Securities
Taxable 197,763 843 1.71 123,332 753 2.44
Tax Exempt 11,647 90 3.09 13,054 97 2.97
Marketable Equity Securities 2,655 19 2.86 2,580 19 2.95
Other Interest-Earning Assets 164,447 135 0.33 123,171 96 0.31
Total Interest-Earning Assets 1,380,986 10,827 3.11 1,297,563 11,709 3.59
Noninterest-Earning Assets 88,291 115,567
Total Assets $ 1,469,277 $ 1,413,130
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits (3)
$ 275,411 48 0.07 % $ 245,977 99 0.16 %
Savings (3)
251,801 21 0.03 230,567 32 0.06
Money Market (3)
198,167 55 0.11 185,644 140 0.30
Time Deposits (3)
168,654 591 1.39 198,184 879 1.76
Total Interest-Bearing Deposits (3)
894,033 715 0.32 860,372 1,150 0.53
Short-Term Borrowings
Securities Sold Under Agreements to Repurchase 40,818 25 0.24 42,512 28 0.26
Other Borrowings 6,000 36 2.38 11,000 62 2.24
Total Interest-Bearing Liabilities 940,851 776 0.33 913,884 1,240 0.54
Noninterest-Bearing Demand Deposits 387,746 337,441
Other Liabilities 8,019 8,477
Total Liabilities 1,336,616 1,259,802
Stockholders' Equity 132,661 153,328
Total Liabilities and Stockholders' Equity $ 1,469,277 $ 1,413,130
Net Interest Income (FTE) (Non-GAAP) (4)
$ 10,051 $ 10,469
Net Interest Rate Spread (FTE) (Non-GAAP) (4)(5)
2.78 % 3.05 %
Net Interest-Earning Assets (6)
$ 440,135 $ 383,679
Net Interest Margin (GAAP) (7)
2.88 3.19
Net Interest Margin (FTE) (Non-GAAP) (4)(7)
2.89 3.21
Return on Average Assets (1)
0.54 (4.90)
Return on Average Equity (1)
5.93 (45.13)
Average Equity to Average Assets 9.03 10.85
Average Interest-Earning Assets to Average Interest-Bearing Liabilities 146.78 141.98
PPP Loans $ 40,313 $ 484 4.76 $ 70,571 $ 454 2.56
(1) Annualized based on three months ended results.
(2) Net of the allowance for loan losses, and includes nonaccrual loans with a zero yield and loans held for sale.
(3) Includes Deposits Held for Sale
(4) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report.
(5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(6) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(7) Net interest margin represents annualized net interest income divided by average total interest-earning assets.
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Rate/Volume Analysis . The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21.0%. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.
Three Months Ended September 30, 2021
Compared to
Three Months Ended September 30, 2020
Increase (Decrease) Due to
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest and Dividend Income:
Loans, net $ (288) $ (716) $ (1,004)
Debt Securities:
Taxable 360 (270) 90
Exempt From Federal Tax (11) 4 (7)
Marketable Equity Securities 1 (1) —
Other Interest-Earning Assets 33 6 39
Total Interest-Earning Assets 95 (977) (882)
Interest Expense:
Deposits 36 (471) (435)
Short-Term Borrowings:
Securities Sold Under Agreements to Repurchase (1) (2) (3)
Other Borrowings (30) 4 (26)
Total Interest-Bearing Liabilities 5 (469) (464)
Change in Net Interest and Dividend Income $ 90 $ (508) $ (418)
Provision for Loan Losses. There was no provision for loan losses for the three months ended September 30, 2021 compared to $1.2 million for the three months ended September 30, 2020. Specific loan loss reserves on impaired loans decreased in the current quarter, but was partially offset by an increase in loan balances that require a loan loss reserve, which excludes PPP loans and loans held for sale. The $1.2 million provision in the prior period was primarily due to two commercial real estate loans secured by hotels that were impacted by the COVID-19 pandemic and were driving factors in a $2.3 million increase in specific reserves. This was partially offset by a reduction in the qualitative factors related to economic trends and industry conditions due to improving macroeconomic conditions after the second quarter 2020 pandemic-related shutdown.
Noninterest Income . Noninterest income increased $25,000, or 1.2%, to $2.2 million for the three months ended September 30, 2021, and remained consistent with $2.2 million for the three months ended September 30, 2020.
• Service fees increased $48,000 to $602,000 for the three months ended September 30, 2021, compared to $554,000 for the three months ended September 30, 2020 due to an increase in customer account usage compared to the prior year period.
• Insurance commissions increased $115,000 to $1.2 million for the three months ended September 30, 2021 compared to $1.1 million for the three months ended September 30, 2020 primarily due to an increase in commercial-related insurance policy revenue.
• Net gain on sale of loans was $49,000 for the three months ended September 30, 2021 compared to $435,000 for the three months ended September 30, 2020, primarily due to increased mortgage loan production from refinances in the prior year, which were sold to reduce interest rate risk on lower yielding, long-term assets. In addition, in the current quarter, the Bank sold a substandard commercial real estate loan, which resulted in a $78,000 loss on sale.
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• Other income was $80,000 for the three months ended September 30, 2021 compared to a $2,000 loss for the three months ended September 30, 2020 due to an $82,000 valuation allowance adjustment on mortgage servicing rights in the current period.
Noninterest Expense. Noninterest expense decreased $19.2 million, or 66.3%, to $9.8 million for the three months ended September 30, 2021 compared to $29.0 million for the three months ended September 30, 2020. Excluding the impact of non-cash charges related to an $18.7 million goodwill impairment and $884,000 writedown on fixed assets in the prior year period, noninterest expense increased $380,000 to $9.8 million for the three months ended September 30, 2021 compared to $9.4 million for the three months ended September 30, 2020. The current period was impacted by $1.3 million of other branch optimization and operational efficiency strategic expenses.
• Salaries and employee benefits decreased $337,000 to $4.8 million for the three months ended September 30, 2021 compared to $5.1 million for the three months ended September 30, 2020. The decrease is primarily due the branch optimization initiative as well as $113,000 of one-time payments in the prior period related to the transition and retention of a permanent CEO.
• Occupancy expense decreased $144,000 to $615,000 for the three months ended September 30, 2021 compared to $759,000 for the three months ended September 30, 2020. The decrease is primarily due to the branch optimization initiative and the recognition in the prior year period of a one-time $84,000 early lease termination payment from the Bethlehem branch closure.
• Contracted services increased $910,000 to $1.4 million for the three months ended September 30, 2021 compared to $531,000 for the three months ended September 30, 2020 The current period includes $1.2 million of expenses associated with the engagement of a third-party workflow optimization expert to assist in implementing robotic process automations and more effective sales management designed to improve operational efficiencies in the near and long-term and engagement of other third party specialists to assist in core platform improvements and efficiencies. The prior period included expenses related to the hiring of temporary employees to assist with PPP loan processing and consultants used to assist in infrastructure improvements.
• Data processing increased $59,000 to $541,000 for the three months ended September 30, 2021 compared to $482,000 for the three months ended September 30, 2020. This is primarily due to technology investments associated with the branch optimization and efficiency initiative.
• Federal Deposit Insurance Corporation (“FDIC”) assessment expense increased $121,000 to $293,000 for the three months ended September 30, 2021 compared to $172,000 for the three months ended September 30, 2020. The increase in assessment was due to an increase in deposits as well as a net loss recognized during the assessment period and the increase in nonperforming loans negatively impacting the assessment rate in the current period.
• Legal and professional fees increased $19,000 to $180,000 for the three months ended September 30, 2021 compared to $161,000 for the three months ended September 30, 2020 due to a legal fees associated with the branch optimization initiative in the current period surpassing fees in the prior period associated with the retention of a permanent CEO.
• Advertising increased $77,000 to $225,000 for the three months ended September 30, 2021 compared to $148,000 for the three months ended September 30, 2020 due to increased marketing initiatives in the current period associated with the Bank's 120 th anniversary.
• Amortization of intangible assets decreased $86,000 to $446,000 for the three months ended September 30, 2021 compared to $532,000 for the three months ended September 30, 2020 primarily due to current year impairment in core deposit intangible asset from the announcement of the branch sales, which reduced the remaining amount of intangible assets to amortize.
Income Taxes. Income tax expense was $452,000 for the three months ended September 30, 2021 compared to income tax benefit of $184,000 for the three months ended September 30, 2020. This change was primarily related to pretax income in the current period. While the goodwill impairment charge in the prior period was non-tax deductible, income tax benefit for the three months ended September 30, 2020 was impacted by a $338,000 benefit related to the reversal of a deferred tax liability associated with goodwill. Due to goodwill being partially impaired, a proportional amount of the deferred tax liability was reversed.
Results of Operations for the Nine Months Ended September 30, 2021 and 2020
Overview. Net income was $4.6 million for the nine months ended September 30, 2021, an increase of $18.3 million compared to net loss of $13.7 million for the nine months ended September 30, 2020. Prior year results were impacted by the following:
• The Company conducted a goodwill impairment analysis and, due to the macroeconomic impacts of the pandemic and the overall industry-wide decline in value of stocks and earnings expectations in the banking sector at that time,
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including the Company's stock, the Company determined its goodwill was no longer supported by its estimate of the Company’s fair value. Therefore, $18.7 million of goodwill was deemed impaired and written off. This non-cash expense was deemed non-core and had no impact on tangible equity, cash flows, liquidity or regulatory capital.
• The Company incurred a non-cash impairment of fixed assets of $884,000 as a result of the Monessen branch closure whereby the property was written down to fair value. The impairment charge primarily related to the write off of the unamortized purchase accounting adjustment associated with the branch, which was the former headquarters of FedFirst Financial Corporation acquired through merger in 2014.
Net Interest and Dividend Income. Net interest and dividend income decreased $1.3 million, or 4.3% to $29.9 million for the nine months ended September 30, 2021 compared to $31.3 million for the nine months ended September 30, 2020. Net interest margin (Non-GAAP FTE) decreased 42 bps to 2.93% for the nine months ended September 30, 2021 compared to 3.35% the nine months ended September 30, 2020. Net interest margin (GAAP) decreased to 2.92% for the nine months ended September 30, 2021 compared to 3.34% for the nine months ended September 30, 2020. While the Company has further controlled its deposit cost structure as deposit balances increased and benefited from nonrenewal or repricing of higher cost time deposits, the net interest margin decreased primarily due to the low interest rate environment decreasing yields on loans and securities.
Interest and Dividend Income
• Interest and dividend income decreased $3.1 million, or 8.7%, to $32.6 million for the nine months ended September 30, 2021 compared to $35.7 million for the nine months ended September 30, 2020.
◦ Interest income on loans decreased $2.3 million or 7.0% to $29.8 million during the nine months ended September 30, 2021 compared to $32.1 million for the nine months ended September 30, 2020. Although average loans increased $17.5 million, primarily driven by PPP loans, the loan yield for the nine months ended September 30, 2021 decreased 37 bps to 3.92% compared to the nine months ended September 30, 2020 due to the full year impact of the COVID-19 pandemic-related declines in market interest rates beginning in March 2020.
◦ Interest and fee income on PPP loans was $1.8 million for the nine months ended September 30, 2021 and contributed 3 bps to loan yield, compared to $770,000 for the nine months ended September 30, 2020, which decreased loan yield 7 bps in the prior period.
◦ The impact of the accretion of the credit mark on acquired loan portfolios was $385,000 for the nine months ended September 30, 2021 compared to $293,000 for the nine months ended September 30, 2020, or 5 bps in the current period compared to 4 bps in the prior period.
◦ Interest income on taxable investment securities decreased $770,000, or 26.6%, to $2.1 million for the nine months ended September 30, 2021 compared to $2.9 million for the nine months ended September 30, 2020 driven by a $9.0 million increased in average taxable investment securities and an 86 bps decrease in average yield. The Federal Reserve pandemic-driven decision to drop the benchmark interest rate in March 2020 resulted in significant calls of U.S. government agency securities and paydowns on mortgage-backed securities in the declining rate environment, which were replaced by lower-yielding securities.
◦ Interest from other interest-earning assets, which primarily consists of interest-earning cash, decreased $34,000, or 8.1% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 even though average balances increased $95.9 million primarily related to funds received from deposit and loan activity. The impact on interest income was primarily due to pandemic-driven declines on market interest rates earned on deposits at other financial institutions, which resulted in a 32 bp decrease in yield.
Interest Expense
• Interest expense decreased $1.8 million, or 39.8%, to $2.7 million for the nine months ended September 30, 2021 compared to $4.4 million for the nine months ended September 30, 2020.
◦ Interest expense on deposits decreased $1.6 million, or 39.8%, to $2.5 million for the nine months ended September 30, 2021 compared to $4.1 million for the nine months ended September 30, 2020. While average interest-bearing deposits increased $41.2 million, interest rate declines for all products driven by pandemic-related interest rate cuts, nonrenewal or repricing of higher cost time deposits, and overall efforts to control pricing resulted in a 28 bp decrease in average cost compared to the nine months ended September 30, 2020.
◦ Interest expense on other borrowed funds decreased $82,000, or 42.3%, to $112,000 for the nine months ended September 30, 2021 compared to $194,000 for the nine months ended September 30, 2020 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $5.2 million decrease in average balance.
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Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21% for the periods presented. As such, amounts will not agree to income as reported in the consolidated financial statements. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
Nine Months Ended September 30,
2021 2020
Average
Balance Interest
and
Dividends Yield/
Cost (1)
Average
Balance Interest
and
Dividends Yield/
Cost (1)
(Dollars in thousands) (Unaudited)
Assets:
Interest-Earning Assets:
Loans, Net (2)
$ 1,017,632 $ 29,872 3.92 % $ 1,000,157 $ 32,152 4.29 %
Debt Securities
Taxable 148,718 2,124 1.90 139,691 2,894 2.76
Tax Exempt 12,284 282 3.06 14,660 354 3.22
Marketable Equity Securities 2,645 63 3.18 2,575 59 3.06
Other Interest-Earning Assets 190,913 384 0.27 95,040 418 0.59
Total Interest-Earning Assets 1,372,192 32,725 3.19 1,252,123 35,877 3.83
Noninterest-Earning Assets 87,863 114,271
Total Assets $ 1,460,055 $ 1,366,394
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits (3)
$ 270,136 181 0.09 % $ 236,293 506 0.29 %
Savings (3)
246,340 78 0.04 225,473 156 0.09
Money Market (3)
198,408 223 0.15 183,103 576 0.42
Time Deposits (3)
177,690 2,007 1.51 206,463 2,898 1.87
Total Interest-Bearing Deposits (3)
892,574 2,489 0.37 851,332 4,136 0.65
ST Borrowings
Securities Sold Under Agreements to Repurchase 43,745 72 0.22 35,923 112 0.42
Other Borrowings 6,396 112 2.34 11,591 194 2.24
Total Interest-Bearing Liabilities 942,715 2,673 0.38 898,846 4,442 0.66
Noninterest-Bearing Demand Deposits 374,865 305,677
Other Liabilities 8,293 9,025
Total Liabilities 1,325,873 1,213,548
Stockholders' Equity 134,182 152,846
Total Liabilities and Stockholders' Equity $ 1,460,055 $ 1,366,394
Net Interest Income (FTE) (Non-GAAP) (4)
$ 30,052 $ 31,435
Net Interest Rate Spread (FTE) (Non-GAAP) (4)(5)
2.81 % 3.17 %
Net Interest-Earning Assets (6)
$ 429,477 $ 353,277
Net Interest Margin (GAAP) (7)
2.92 3.34
Net Interest Margin (FTE) (Non-GAAP) (4)(7)
2.93 3.35
Return on Average Assets (1)
0.42 (1.34)
Return on Average Equity (1)
4.59 (11.99)
Average Equity to Average Assets 9.19 11.19
Average Interest-Earning Assets to Average Interest-Bearing Liabilities 145.56 139.30
PPP Loans $ 51,579 $ 1,797 4.66 $ 39,241 $ 770 2.62
(1) Annualized based on nine months ended results.
(2) Net of the allowance for loan losses, and includes nonaccrual loans with a zero yield and loans held for sale.
(3) Includes Deposits Held for Sale
(4) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report.
(5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(6) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(7) Net interest margin represents annualized net interest income divided by average total interest-earning assets.
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Rate Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.
Nine Months Ended September 30, 2021
Compared to
Nine Months Ended September 30, 2020
Increase (Decrease) Due to
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest and Dividend Income:
Loans, net $ 528 $ (2,808) $ (2,280)
Debt Securities:
Taxable 179 (949) (770)
Exempt From Federal Tax (55) (17) (72)
Marketable Equity Securities 2 2 4
Other Interest-Earning Assets 273 (307) (34)
Total Interest-Earning Assets 927 (4,079) (3,152)
Interest Expense:
Deposits 213 (1,860) (1,647)
Short-Term Borrowings:
Securities Sold Under Agreements to Repurchase 22 (62) (40)
Other Borrowings (91) 9 (82)
Total Interest-Bearing Liabilities 144 (1,913) (1,769)
Change in Net Interest and Dividend Income $ 783 $ (2,166) $ (1,383)
Provision for Loan Losses. The provision for loan losses had a $1.2 million recovery for the nine months ended September 30, 2021, compared to a $4.0 million provision for the nine months ended September 30, 2020. The pandemic resulted in a dramatic increase in unemployment and recessionary economic conditions in the prior year. Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis were increased at the onset of the pandemic, primarily related to economic trends and industry conditions, because of vulnerable industries such as hospitality, oil and gas, retail and restaurants and resulted in the prior year provision. The prior year also included the impacts from an increase in specific reserves primarily due to two commercial real estate loans secured by hotels that were impacted by the COVID-19 pandemic. Those qualitative factors were decreased as the economic impacts of the pandemic eased. In addition, a $11.0 million decrease in net reservable loans compared to September 30, 2020, which excludes PPP loan activity and loans held for sale, combined with a decrease in specific reserves on impaired loans and improving economic and industry condition contributed to the recovery of provision in the current period.
Noninterest Income. Noninterest income increased $898,000, or 13.4%, to $7.6 million for the nine months ended September 30, 2021, compared to $6.7 million for the nine months ended September 30, 2020.
• Service fees increased $116,000 to $1.8 million for the nine months ended September 30, 2021, compared to $1.6 million for the nine months ended September 30, 2020 due to an increase in customer account usage compared to the prior year period when shelter-in-place orders occurred at the onset of the COVID-19 pandemic.
• Insurance commissions increased $523,000, or 15.1%, to $4.0 million for the nine months ended September 30, 2021, compared to $3.5 million for the nine months ended September 30, 2020 due to an increase contingency fees as well as commercial-related insurance policy revenue. Contingency fees are profit sharing commissions that are contingent upon several factors including, but not limited to, eligible written premiums, incurred losses, policy cancellations and stop loss charges.
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• Net gain on sales of loans was $166,000 for the nine months ended September 30, 2021 compared to $1.0 million for the nine months ended September 30, 2020 primarily due to decreased mortgage loan production from refinances, which are sold to reduce interest rate risk on lower yielding, long-term assets. In addition, in the current year, the Bank sold a substandard commercial real estate loan, which resulted in a $78,000 loss on sale.
• Net gain on securities was $482,000 for the nine months ended September 30, 2021 compared to $20,000 for the nine months ended September 30, 2020. In the current period, the Company recognized a $231,000 net gain on sale of debt and equity securities primarily from sales of higher-interest securities with faster prepayment speeds combined with a $251,000 increase in fair value on the equity securities portfolio, primarily comprised of bank stocks, which experienced a recovery in fair value from pandemic related losses. In the prior year, there was a net gain of $489,000 on sales of investment securities from sales of higher-interest securities with faster prepayment speeds that was offset by a $469,000 decrease in fair value in the equity securities portfolio due to the COVID-19 impacts on the banking industry.
• Other Income was $291,000 for the nine months ended September 30, 2021 compared to Other Loss of $240,000 in the nine months ended September 30, 2020. In the current period there was a $242,000 reduction in the valuation allowance on mortgage servicing rights compared to a $269,000 valuation allowance adjustment from temporary impairment in the prior period caused by a decline in the interest rate environment that increased prepayment speeds and resulted in a decrease in fair value of the serviced mortgage portfolio. In addition, there was a $52,000 increase in amortization on mortgage servicing rights in the current period.
Noninterest Expense. Noninterest expense decreased $14.2 million, or 30.1%, to $32.9 million for the nine months ended September 30, 2021 compared to $47.0 million for the nine months ended September 30, 2020. The current year was largely impacted by a $2.3 million writedown on fixed assets and $1.2 million intangible asset impairment as discussed previously whereas the prior year was impacted by $18.7 million goodwill impairment and an $884,000 writedown on fixed assets as previously noted. Excluding the impact of these non-cash charges, noninterest expense increased $2.0 million, or 7.2%, to $29.4 million for the nine months ended September 30, 2021 compared to $27.5 million the nine months ended September 30, 2020. The current period was also impacted by $2.9 million of other branch optimization and operational efficiency strategic expenses.
• Salaries and employee benefits increased $74,000 for the nine months ended September 30, 2021 compared to $14.7 million for the nine months ended September 30, 2020. The increase is primarily due to an increase in employee benefit expenses due to the prior period impact from a $407,000 one-time payment that offset employee benefits related to the transition from a self-funded to a fully insured health insurance plan. The current period was impacted by the recognition of $335,000 in severance related to the branch optimization initiative whereas in the prior period the Company incurred costs associated with the Community Bank Cares 10% premium pay during the pandemic and the recognition of approximately $388,000 of one-time payments related to the transition and retention of a permanent CEO.
• Occupancy expense increased $158,000 to $2.3 million for the nine months ended September 30, 2021 compared to $2.2 million for the nine months ended September 30, 2020. The increase is due to the recognition of a $227,000 lease impairment related to the consolidation of a branch as part of the branch optimization initiative in the current period compared to an $84,000 early lease termination payment from a branch closure in the prior period.
• Equipment expense increased $81,000 to $782,000 for the nine months ended September 30, 2021 compared to $701,000 for the nine months ended September 30, 2020 as the result of an increase in repairs and maintenance.
• Data processing increased $299,000 to $1.7 million for the nine months ended September 30, 2021 compared to $1.4 million for the nine months ended September 30, 2020 primarily due to $110,000 in deconversion costs associated with the branch sales as well as other technology investments associated with the branch optimization and efficiency initiative.
• Contracted services increased $1.4 million to $2.9 million for the nine months ended September 30, 2021 compared to $1.5 million for the nine months ended September 30, 2020, primarily due to $1.9 million of expenses associated with the engagement of a third-party workflow optimization expert to assist in implementing robotic process automations and more effective sales management designed to improve operational efficiencies in the near and long-term and engagement of other third party specialists to assist in core platform improvements and efficiencies. The prior period included expense related to the hiring of temporary employees to assist with PPP loan processing, consultants used to assist in infrastructure improvements, and $177,000 of consulting fees associated with the search for a permanent CEO.
• FDIC assessment expense increased $299,000 to $792,000 for the nine months ended September 30, 2021 compared to $493,000 for the nine months ended September 30, 2020.The increase in assessment was due to the net losses recognized during the assessment period and an increase in nonperforming loans negatively impacting the assessment rate in the current period.
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• Legal and professional fees increased $221,000 to $788,000 for the nine months ended September 30, 2021 compared to $567,000 for the nine months ended September 30, 2020 due to a $209,000 investment banker success-based fee and legal fees related to the Agreement with Citizens Bank for the branch sales. The prior period included fees associated with the retention of a permanent CEO.
• Other real estate owned income increased $123,000 to $153,000 for the nine months ended September 30, 2021 compared to $30,000 for the nine months ended September 30, 2020 primarily due to an $80,000 gain on sale of a property sold in the current period.
• Amortization of intangible assets decreased $115,000 to $1.5 million for the nine months ended September 30, 2021 compared to $1.6 million for the nine months ended September 30, 2020 primarily due to current period impairment in core deposit intangible asset from the announcement of the branch sales, which reduced the remaining amount of intangible assets to amortize.
• Other noninterest expense decreased $147,000 to $2.8 million for the nine months ended September 30, 2021 compared to $3.0 million for the nine months ended September 30, 2020 due to a decrease in loan-related expenses from the increased volume of refinancing in the prior period.
Income Taxes. Income tax expense increased $577,000 to $1.2 million for the nine months ended September 30, 2021 compared to $640,000 for the nine months ended September 30, 2020. This change was primarily due to an increase in pretax income in the current period. While the goodwill impairment charge in the prior period was non-tax deductible, income tax benefit for the three months ended September 30, 2020 was impacted by a $338,000 benefit related to the reversal of a deferred tax liability associated with goodwill. Due to goodwill being partially impaired, a proportional amount of the deferred tax liability was reversed.
Off-Balance Sheet Arrangements.
Other than loan commitments and standby and performance letters of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 10 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of September 30, 2021 and December 31, 2020.
Liquidity and Capital Management
Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments and maturities, calls and sales of securities. While maturities and scheduled amortization of loans and securities are typically predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities. The Company believes that it had sufficient liquidity at September 30, 2021 to satisfy its short- and long-term liquidity needs.
The Company’s most liquid assets are cash and due from banks, which totaled $173.5 million at September 30, 2021. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. Unpledged securities, which provide an additional source of liquidity, totaled $37.0 million at September 30, 2021. In addition, at September 30, 2021, the Company had the ability to borrow up to $420.4 million from the FHLB of Pittsburgh, of which $351.3 million is available. The Company also has the ability to borrow up to $82.8 million million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of both September 30, 2021 and December 31, 2020.
At September 30, 2021, $68.2 million, or 42.0% of total time deposits mature within one year. If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than it currently pays on these time deposits. The Company believes, however, based on past experience that a significant portion of its time deposits will remain with it, either as time deposits or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.
We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLB, will be carefully considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the FHLB in the future.
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CB Financial is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders and for other corporate purposes. Its primary source of liquidity is dividend payments it receives from the Bank. The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations. At September 30, 2021, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $7.4 million. The ability to pay future dividends or conduct stock repurchases may be limited under applicable banking regulations and regulatory policies due to expected losses for future periods and/or the inability to upstream funds from the Bank to the Company as a result of lower income or regulatory capital levels.
Capital Management. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.
At September 30, 2021 and December 31, 2020, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. At September 30, 2021, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act. In addition, PPP loans received a zero-percent risk weight under the regulatory capital rules regardless of whether they were pledged as collateral to the Federal Reserve Bank's PPP lending facility, but were included in the Bank's leverage ratio requirement due to the Bank not pledging the loans as collateral to the PPP lending facility.
The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated.
September 30, 2021 December 31, 2020
Amount Ratio Amount Ratio
(Dollars in thousands)
Common Equity Tier 1 (to risk weighted assets)
Actual $ 107,277 11.53 % $ 108,950 11.79 %
For Capital Adequacy Purposes 41,870 4.50 41,598 4.50
To Be Well Capitalized 60,479 6.50 60,086 6.50
Tier 1 Capital (to risk weighted assets)
Actual 107,277 11.53 108,950 11.79
For Capital Adequacy Purposes 55,826 6.00 55,464 6.00
To Be Well Capitalized 74,435 8.00 73,952 8.00
Total Capital (to risk weighted assets)
Actual 118,858 12.77 120,520 13.04
For Capital Adequacy Purposes 74,435 8.00 73,952 8.00
To Be Well Capitalized 93,044 10.00 92,440 10.00
Tier 1 Leverage (to adjusted total assets)
Actual 107,277 7.38 108,950 7.81
For Capital Adequacy Purposes 58,133 4.00 55,765 4.00
To Be Well Capitalized 72,666 5.00 69,706 5.00
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.