Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
This discussion should be read in conjunction with the unaudited
consolidated financial statements, notes and tables included in this report. For further information, refer to the audited consolidated
financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Forward-Looking Statements
This report contains certain “forward-looking statements”
within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the
Company’s current expectations regarding its business strategies, intended results and future performance. Forward-looking
statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends”
and similar expressions. Management’s ability to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include, but are not limited to, the following:
|
|
·
|
General and local economic conditions;
|
|
|
·
|
Changes in interest rates, deposit flows, demand for loans, real estate
values and competition;
|
|
|
·
|
Competitive products and pricing;
|
|
|
·
|
The ability of our customers to make scheduled loan payments;
|
|
|
·
|
Loan delinquency rates;
|
|
|
·
|
Our ability to manage the risks involved in our business;
|
|
|
·
|
Our ability to integrate the operations of businesses we acquire;
|
|
|
·
|
Inflation, market and monetary fluctuations;
|
|
|
·
|
Our ability to control costs and expenses; and
|
|
|
·
|
Changes in federal and state legislation and regulation applicable
to our business.
|
The Company uses the current statutory income tax rate of 21.0%
to value its deferred tax assets and liabilities. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was
enacted. The Tax Act reduced the US federal corporate tax rate from 35% to 21%. As of December 31, 2017, we completed our accounting
for the tax effects of the enactment of the Act. In addition, all deferred tax assets and liabilities including deferred tax assets
and liabilities that were retained from the FWVB merger will be tax effected at the WV state income tax rate of 6.5% times the
appropriate WV state apportionment according to state revenue laws regarding nexus. As of September 30, 2018, deferred tax amounts
are still being evaluated for reasonableness and the WV state deferred tax impact will be finalized in a subsequent period.
We have made a reasonable estimate of the effects on our existing
deferred tax balances as of December 31, 2017. We re-measured all of our deferred tax assets (“DTA”) and liabilities
(“DTL”) based on the rates at which they are expected to reverse in the future. We recognized an income tax benefit
of $89,000 for the year ended December 31, 2017 related to adjusting our net deferred tax liability balance to reflect the new
corporate tax rate.
In addition, DTAs/DTLs related to available for sale (“AFS”)
securities unrealized losses that were revalued as of December 31, 2017 noted above created a “stranded tax effects”
in Accumulated Other Comprehensive Income (“AOCI”) due enactment of the Tax Act. The issue arose due to the nature
of GAAP recognition of tax rate change effects on the AFS DTA/DTL revaluation as an adjustment to income tax provision.
In February 2018, FASB issued ASU 2018-02 -
Income Statement
- Reporting Comprehensive Income (Topic 220).
As disclosed in Note 1 of the Annual Report, the Company early adopted the provisions
of the ASU 2018-02 and recorded a reclassification adjustment of $220,000 from AOCI to retained earnings for stranded tax effects
related to AFS securities resulting from the newly enacted corporate tax rate. The amount of the reclassification was the difference
between the 35% historical Federal corporate tax rate and the newly enacted 21% Federal corporate tax rate. See Statement of Changes
in Stockholders Equity as of December 31, 2017 included in the Annual Report for additional details and reclassification impact
due to impact of the ASU 2018-02
.
The accounting for the effects of the tax rate change on deferred
tax balances is complete and no provisional amounts were recorded for this item.
The Company assumes no obligation to update any forward-looking
statements except as may be required by applicable law or regulation.
General
CB Financial Services, Inc. is a bank holding company established
in 2006 headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly
owned banking subsidiary Community Bank.
The Bank is a Pennsylvania-chartered
commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from sixteen offices in Greene, Allegheny, Washington,
Fayette and Westmoreland Counties in southwestern Pennsylvania,
seven offices in Brooke, Marshall, Ohio, Upshur and Wetzel
Counties in West Virginia, and one office in Belmont County in Ohio.
The Bank is a community-oriented
institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well
as a variety of deposit products for individuals and
businesses in its market area. Property
and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc., the Bank’s
wholly-owned subsidiary that is a full-service, independent insurance agency.
On April 30, 2018, the Company
completed its merger with FWVB. For additional information regarding the merger, refer to Note 2 in the
Notes to Consolidated
Financial Statements
.
On August 1, 2018, the Bank’s insurance
subsidiary, Exchange Underwriters, completed its merger with Beynon Insurance. For additional information regarding the Beynon
merger, refer to Note 1 in the Notes to Consolidated Financial Statements.
Overview
The following discussion and analysis is presented to assist
in the understanding and evaluation of our consolidated financial condition and results of operations. It is intended to complement
the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction
therewith. The
detailed discussion focuses on our consolidated financial condition as of September
30, 2018, compared to the financial condition as of December 31, 2017 and the consolidated results of operations for the three
and nine months ended September 30, 2018 and 2017.
Our results of operations depend primarily on our net interest
income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest
we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest
income and noninterest expense. Noninterest income consists primarily of fees and service charges on deposit accounts, fees and
charges on loans, insurance commissions, income from bank-owned life insurance and other income. Noninterest expense consists primarily
of expenses related to salaries and employee benefits, occupancy and equipment, contracted services, legal fees, other real estate
owned, advertising and promotion, stationery and supplies, deposit and general insurance and other expenses.
Financial institutions like us, in general, are significantly
affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities
are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions, and funds availability.
Our operations and lending are principally concentrated in the southwestern Pennsylvania market area.
Statement of Financial Condition Analysis
Assets.
Total assets increased $319.0 million,
or 34.1%, to $1.3 billion at September 30, 2018 compared to $934.5 million at December 31, 2017.
Cash and due from banks increased $25.3 million, or 122.9%,
to $46.0 million at September 30, 2018 compared to $20.6 million at December 31, 2017. This is primarily the result of deposit
growth.
Investment securities classified as available-for-sale increased
$93.2 million, or 75.5%, to $216.8 million at September 30, 2018 compared to $123.6 million at December 31, 2017. This increase
was primarily the result of securities acquired in the FWVB merger.
Loans, net, increased $156.3 million, or 21.2%, to $891.9 million
at September 30, 2018 compared to $735.6 million at December 31, 2017. This was primarily due to the FWVB acquired loan portfolio
of $95.5 million and net organic loan originations of
$50.8 million in commercial real estate
loans,
$14.7 million in residential mortgage loans, $8.2 million in other loans and $4.9 million in construction loans,
partially offset by a decrease of $15.5 million in
commercial and industrial loans.
Premises and equipment,
net,
increased $7.2
million, or
43.2
%,
to
$23.9
million at September 30, 2018 compared to
$16.7
million
at December 31, 2017. This is due to
the additions related to the eight branch locations from the FWVB merger. In addition,
there was $3.5 million related to the new Barron P. “Pat” McCune Corporate Center (“BPMCC”) that was placed
into service in the second quarter.
Total premises and equipment capitalized for the BPMCC totaled
$6.1 million.
The BPMCC building was previously taken into premises and equipment from a previously defaulted loan relationship
in the first quarter of 2016.
Liabilities.
Total liabilities increased $278.6
million, or 33.1%, to $1.1 billion at September 30, 2018 compared to $841.2 million at December 31, 2017.
Total deposits increased
$289.5 million, or 37.4%, to $1.1 billion at September 30, 2018 compared to $773.3 million at December 31, 2017. There were increases
of $73.7 million in savings accounts, $73.2 million in demand deposits,
$53.4
million
in NOW accounts, $47.4 million in money market accounts and $44.2 million in time deposits, partially offset by a decrease of $2.4
million in brokered deposits. This increase is due to approximately $281.6 million deposits acquired in the FWVB merger on April
30, 2018 and these acquired deposits increased by $10.8 million as of September 30, 2018. This increase is largely the result of
school district and municipal deposits during the current quarter. The legacy Bank deposit portfolio had approximately $2.9 million
decrease in deposits. There was a local government depositor that withdrew funds in the first quarter of 2018 of approximately
$17.0 million and this was mainly offset by current quarter deposits by school districts and local municipalities as a result of
annual property tax remittance. The Bank has been selective on offering promotional interest rates and has concentrated its efforts
on increasing noninterest-bearing accounts by building strong customer relationships.
Short-term borrowings decreased $8.0 million, or 20.3%, to $31.6
million at September 30, 2018 compared to $39.6 million at December 31, 2017. At September 30, 2018, short-term borrowings were
comprised of $31.5 million of securities sold under agreements to repurchase compared to $25.8 million of securities sold under
agreement to repurchase and $13.8 million of FHLB overnight borrowings at December 31, 2017. Approximately $20.0 million of securities
sold under agreements to repurchase were assumed in the FWVB merger. The increase is related to loan originations that exceeded
available cash reserves and an increase in business deposit customers whose funds, above designated target balances, are transferred
into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under
an agreement to repurchase. Other borrowed funds decreased by $1.2 million due to a $3.5 million maturing FHLB long-term borrowing
that was retired in the current period, partially offset by $2.3 million of amortizing fixed-rate FHLB borrowings that were acquired
in the FWVB merger. As a result of current period activity, the weighted average interest rate on long-term borrowings increased
by 37 basis points to 2.29%.
Stockholders’ Equity.
Stockholders’
equity increased $40.4 million, or 43.4%, to $133.7 million at September 30, 2018 compared to $93.3 million at December 31, 2017.
During the period, 1,317,647 shares of CBFV stock were issued to shareholders of FWVB in the merger. The approximate value of this
stock issuance was $42.0 million, partially offset by $515,000 of stock issuance expenses that were charged against equity. Net
income was $4.6 million for the nine months ended September 30, 2018. The Company paid $3.3 million in dividends to stockholders
and the unrealized loss on investment securities increased by $2.7 million due to the addition of the FWVB securities portfolio
of approximately $102.0 million due to merger and current market conditions.
Results of Operations for the Three Months Ended September
30, 2018 and 2017
Overview.
Net income increased $228,000, to $2.3
million for the three months ended September 30, 2018, compared to $2.1 million for the three months ended September 30, 2017.
The quarterly results were impacted by increased net interest income and reduced provision for loan losses in the current quarter.
Net Interest Income.
Net interest income increased
$2.8 million, or 38.3%, to $10.2 million for the three months ended September 30, 2018 compared to $7.4 million for the three months
ended September 30, 2017.
Interest and dividend income increased $3.6 million, or 43.2%,
to $11.8 million for the three months ended September 30, 2018 compared to $8.2 million for the three months ended September 30,
2017. Interest income on loans increased $2.6 million for the three months ended September 30, 2018, compared to the three months
ended September 30, 2017. Average loans increased by $200.2 million for the three months ended September 30, 2018, compared to
the three months ended September 30, 2017. This was primarily due to organic net loan growth and loans acquired in the FWVB merger.
The FWVB merger not only affected the average loan balance, it also contributed to an increase of 18 basis points in loan yield.
The credit mark recorded for the acquired loans in the FWVB merger was approximately $1.3 million. The impact of the accretion
from both the FWVB and FedFirst Financial Corporation (“FFCO”) acquired loan portfolios for the three months ended
September 30, 2018 was $81,000, or 4 basis points, compared to $127,000, or 8 basis points, for the three months ended September
30, 2017. The remaining credit mark balance for both acquired loan portfolios was $1.9 million as of September 30, 2018. Interest
income on taxable securities increased $816,000 mainly due to an increase of $97.5 million in the average balance and 79 basis
points in yield in the current period. This is a result of the FWVB merger. Interest income on securities exempt from federal income
tax increased by $89,000 in the current period. This was due to the FWVB merger that generated an average balance increase of $9.5
million. In addition, other interest and dividend income increased $72,000 as a result of increased interest earned on correspondent
deposit banks and FHLB dividends in the current period.
Interest expense increased $734,000, or 85.3%, to $1.6 million
for the three months ended September 30, 2018 compared to $860,000 for the three months ended September 30, 2017. Interest expense
on deposits increased $678,000 due to an increase in average interest-bearing deposits of $221.6 million, primarily due to increases
in deposits as a result of the FWVB merger. The average cost of interest-bearing deposits increased 20 basis points. This was primarily
related to interest rate hikes by the Federal Reserve Board (“FRB”). Interest expense on short-term borrowings increased
$48,000 primarily due to securities sold under agreement to repurchase and FHLB overnight borrowings that had increases in average
balance of $5.4 million and $3.5 million, respectively during the current quarter due to funding loan growth.
Average Balances and Yields
.
The
following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest
income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing
liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated.
The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest
income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing
a marginal federal income tax rate of 21% for 2018 and 34% for 2017. As such, amounts will not agree to income as reported in the
consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual
loans. Nonaccrual loans are included in average balances only. 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.
|
|
|
(Dollars in thousands) (Unaudited)
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/
Cost
(1)
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/
Cost
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Net
|
|
$
|
884,623
|
|
|
$
|
10,080
|
|
|
|
4.52
|
%
|
|
$
|
684,384
|
|
|
$
|
7,480
|
|
|
|
4.34
|
%
|
|
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
178,284
|
|
|
|
1,202
|
|
|
|
2.70
|
|
|
|
80,791
|
|
|
|
386
|
|
|
|
1.91
|
|
|
Exempt From Federal Tax
|
|
|
46,901
|
|
|
|
394
|
|
|
|
3.36
|
|
|
|
37,390
|
|
|
|
340
|
|
|
|
3.64
|
|
|
Other Interest-Earning Assets
|
|
|
19,285
|
|
|
|
200
|
|
|
|
4.11
|
|
|
|
32,553
|
|
|
|
139
|
|
|
|
1.69
|
|
|
Total Interest-Earning Assets
|
|
|
1,129,093
|
|
|
|
11,876
|
|
|
|
4.17
|
|
|
|
835,118
|
|
|
|
8,345
|
|
|
|
3.96
|
|
|
Noninterest-Earning Assets
|
|
|
111,122
|
|
|
|
|
|
|
|
|
|
|
|
61,859
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,240,215
|
|
|
|
|
|
|
|
|
|
|
$
|
896,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Demand Deposits
|
|
$
|
190,582
|
|
|
|
171
|
|
|
|
0.36
|
%
|
|
$
|
138,742
|
|
|
|
92
|
|
|
|
0.26
|
%
|
|
Savings
|
|
|
206,513
|
|
|
|
143
|
|
|
|
0.27
|
|
|
|
131,420
|
|
|
|
61
|
|
|
|
0.18
|
|
|
Money Market
|
|
|
179,998
|
|
|
|
221
|
|
|
|
0.49
|
|
|
|
135,214
|
|
|
|
88
|
|
|
|
0.26
|
|
|
Time Deposits
|
|
|
210,302
|
|
|
|
863
|
|
|
|
1.63
|
|
|
|
160,456
|
|
|
|
479
|
|
|
|
1.18
|
|
|
Total Interest-Bearing Deposits
|
|
|
787,395
|
|
|
|
1,398
|
|
|
|
0.70
|
|
|
|
565,832
|
|
|
|
720
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
58,454
|
|
|
|
196
|
|
|
|
1.33
|
|
|
|
50,741
|
|
|
|
140
|
|
|
|
1.09
|
|
|
Total Interest-Bearing Liabilities
|
|
|
845,849
|
|
|
|
1,594
|
|
|
|
0.75
|
|
|
|
616,573
|
|
|
|
860
|
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Demand Deposits
|
|
|
254,727
|
|
|
|
|
|
|
|
|
|
|
|
183,061
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
5,333
|
|
|
|
|
|
|
|
|
|
|
|
4,361
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,105,909
|
|
|
|
|
|
|
|
|
|
|
|
803,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
134,306
|
|
|
|
|
|
|
|
|
|
|
|
92,982
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
1,240,215
|
|
|
|
|
|
|
|
|
|
|
$
|
896,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
|
|
|
$
|
10,282
|
|
|
|
|
|
|
|
|
|
|
$
|
7,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.42
|
%
|
|
|
|
|
|
|
|
|
|
|
3.41
|
%
|
|
Net Interest-Earning Assets
(3)
|
|
$
|
283,244
|
|
|
|
|
|
|
|
|
|
|
$
|
218,545
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(4)
|
|
|
|
|
|
|
|
|
|
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
3.56
|
|
|
Return on Average Assets
|
|
|
|
|
|
|
|
|
|
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
0.91
|
|
|
Return on Average Equity
|
|
|
|
|
|
|
|
|
|
|
6.77
|
|
|
|
|
|
|
|
|
|
|
|
8.81
|
|
|
Average Equity to Average Assets
|
|
|
|
|
|
|
|
|
|
|
10.83
|
|
|
|
|
|
|
|
|
|
|
|
10.37
|
|
|
Average Interest-Earning Assets to Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
133.49
|
|
|
|
|
|
|
|
|
|
|
|
135.45
|
|
|
|
(2)
|
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
|
|
|
(3)
|
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|
|
(4)
|
Net interest margin represents net interest income divided by average total interest-earning assets. Interest income and yields
are on a fully tax equivalent basis utilizing a marginal tax rate of 21% and 34% for the three months ended September 30, 2018,
and 2017, respectively.
|
Rate/Volume Analysis
.
The following table presents
the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent yield adjustments
have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2018 and 34% for
2017. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate
column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes
due to rate and the changes due to volume. The total column represents the sum of the prior columns.
|
|
|
(Dollars in thousands) (Unaudited)
|
|
|
|
Three Months Ended September 30, 2018
Compared To
Three Months Ended September 30, 2017
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
2,278
|
|
|
$
|
322
|
|
|
$
|
2,600
|
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
607
|
|
|
|
209
|
|
|
|
816
|
|
|
Exempt From Federal Tax
|
|
|
82
|
|
|
|
(28
|
)
|
|
|
54
|
|
|
Other Interest-Earning Assets
|
|
|
(75
|
)
|
|
|
136
|
|
|
|
61
|
|
|
Total Interest-Earning Assets
|
|
|
2,892
|
|
|
|
639
|
|
|
|
3,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
336
|
|
|
|
342
|
|
|
|
678
|
|
|
Borrowings
|
|
|
22
|
|
|
|
34
|
|
|
|
56
|
|
|
Total Interest-Bearing Liabilities
|
|
|
358
|
|
|
|
376
|
|
|
|
734
|
|
|
Change in Net Interest Income
|
|
$
|
2,534
|
|
|
$
|
263
|
|
|
$
|
2,797
|
|
Provision for Loan Losses.
The provision for loan
losses was $25,000 for the three months ended September 30, 2018 compared to $300,000 for the three months ended September 30,
2017. Net charge-offs for the three months ended September 30, 2018 were $111,000, which included $63,000 of net charge-offs on
automobile loans, compared to $227,000 of net charge-offs for the three months ended September 30, 2017, which included $149,000
of net charge-offs on automobile loans. The decrease in net charge-offs during the current period was mainly attributed to lower
automobile loan charge-offs. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance
for loan losses and the need for additional provisions for loan losses. The decrease in the quarterly provision was primarily due
to reduced charge-offs and loan payoffs mainly offsetting loan growth. This was partially offset by improvements in credit matrix
factors which had a positive impact on the qualitative factors within the allowance calculation.
Noninterest Income
.
Noninterest income increased
$270,000, or 14.9%, to $2.1 million for the three months ended September 30, 2018 compared to $1.8 million for the three months
ended September 30, 2017. Service fees on deposit accounts increased $236,000 due to increased volume in ATM and check card fees
as a result of the FWVB merger in the prior quarter. Insurance commissions from Exchange Underwriters increased $162,000 due to
increased direct bill commercial and personal lines commission and fee income as a result of the EU – Beynon merger and the
revenue recognition standard adopted in the first quarter, partially offset by a decrease in contingency fees received in the current
period. Contingency fees are commissions that are contingent upon several factors including, but not limited to, eligible written
premiums, earned premiums, incurred losses and stop loss charges. The fair value of equity securities increased $35,000 due to
the first quarter adoption of Accounting Standard Update (“ASU”) 2016-01,
Financial Instruments – Overall
(Subtopic 825-10),
which requires equity investments (except those accounted for under the equity method or that are consolidated)
to be measured at fair value with changes in fair value recognized in net income. As required, the $35,000 gain was recognized
due to current market conditions. There was a decrease in the net gains on the sales of residential mortgage loans of $85,000.
The decrease in gains was primarily due to a decrease in the number of loans originated and subsequently sold to the FHLB as part
of the Mortgage Partnership Finance® (“MPF®”) program and an increase in mortgage rates. The MPF® program
enables member financial institutions to offer competitive interest rates for fixed-rate mortgage loans without assuming any of
the interest rate risk associated with a long-term asset. Net gains on the disposal of fixed assets decreased $74,000 due to the
write-off of the leasehold improvements of the former Washington Business Center that was vacated on September 30, 2018.
Noninterest Expense.
Noninterest expense increased
$3.5 million, or 58.8%, to $9.4 million for the three months ended September 30, 2018 compared to $5.9 million for the three months
ended September 30, 2017. Salaries and employee benefits increased $1.2 million primarily due to the addition of FWVB-retained
employee salaries, salary increases related to back office personnel, and health care and retirement benefits expenses mostly related
to the FWVB merger. Other noninterest expense increased $528,000 primarily due to other losses that were written off as a result
of the FWVB merger and systems conversion, loan expenses, office supplies, telephone, travel, and meals and entertainment expenses.
Other real estate owned expense increased $398,000 mainly due to the prior year quarter resolution of loan collection efforts through
the sale of a mineral rights interest for $186,000, bankruptcy court settlement for $86,000 and mortgage insurance proceeds for
$85,000. The aforementioned items were proceeds from previously sold OREO properties. Occupancy increased $329,000 primarily due
to the lease termination of the former FWVB corporate center and increases in depreciation, property contracted services, rent
expense and real estate taxes due to the FWVB merger and completion of the BPMCC in Washington, PA. Equipment expense increased
$322,000 primarily due to equipment maintenance contracts and data processing expense related to the FWVB merger. Amortization
of Core Deposit Intangible (“CDI”) increased $318,000, due to the CDI recorded for the FWVB merger. The Federal Deposit
Insurance Corporation (“FDIC”) assessment expense decreased $37,000 due to an assessment factor decrease by the FDIC
in the computation of the insurance assessment and average asset growth related to the FWVB merger.
Income Tax Expense.
Income taxes decreased $334,000
to $576,000 for the three months ended September 30, 2018 compared to $910,000 for the three months ended September 30, 2017. The
effective tax rate for the three months ended September 30, 2018 was 20.1% compared to 30.6% for the three months ended September
30, 2017. The decrease in income taxes was due to a decrease of $106,000 in pre-tax income and the reduction of the federal statutory
income tax rate from 34% in the prior year quarter to 21% in the current year quarter, due to the enactment of the new federal
tax law titled “Tax Cuts and Jobs Act of 2017” on December 22, 2017.
Results of Operations for the Nine Months Ended September
30, 2018 and 2017
Overview.
Net income decreased $947,000, to $4.6
million for the nine months ended September 30, 2018, as compared to $5.6 million for the nine months ended September 30, 2017.
Net income was mainly impacted by the FWVB merger-related expenses of $854,000 and other one-time discrete items as a result of
the completion of the FWVB merger on April 30, 2018.
Net Interest Income.
Net interest income increased
$5.5 million, or 25.5%, to $27.0 million for the nine months ended September 30, 2018, compared to $21.5 million for the nine months
ended September 30, 2017.
Interest and dividend income increased $7.2 million, or 30.1%,
to $31.2 million for the nine months ended September 30, 2018 compared to $24.0 million for the nine months ended September 30,
2017. Interest income on loans increased $5.4 million primarily due to an increase in average loans outstanding of $151.9 million
for the nine months ended September 30, 2018. The increase in average loans was mainly due to the FWVB merger and organic loan
growth of approximately $62.7 million the current period. This was partially offset by a decrease of $293,000 in accretion on the
acquired loan portfolios credit mark for the nine months ended September 30, 2018. Credit mark accretion of $240,000, or 4 basis
points, was recognized in the nine months ended September 30, 2018, compared to $533,000, or 16 basis points for the nine months
ended September 30, 2017. Interest income on taxable securities increased $1.5 million in the current period. In addition, an increase
of 61 basis points in yield resulted from securities acquired in the FWVB merger. The average balance for taxable securities increased
$60.0 million for the nine months ended September 30, 2018. Interest income on securities exempt from federal tax increased $192,000
due to securities acquired in the FWVB merger with higher prevailing yields. There was an increase of $7.9 million in the average
balance on securities exempt from federal tax and a decrease of 45 basis points in yield as a result of the prior year reduction
in the federal statutory income tax rate from 34% to 21%.
Interest expense increased $1.7 million, or 70.4%, to $4.2 million
for the nine months ended September 30, 2018 compared to $2.5 million for the nine months ended September 30, 2017. Interest expense
on deposits increased $1.3 million due to current year rate increases and an increase in average interest-bearing deposits of $136.1
million which is attributed primarily to the FWVB merger. The average cost of interest-bearing deposits increased 15 basis points.
In addition, interest expense on short-term borrowings increased $414,000 in the current period primarily due to increased interest
rates on FHLB overnight borrowings that had an average balance increase of $26.4 million and on securities sold under agreements
to repurchase.
Average Balances and Yields
.
The
following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest
income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing
liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated.
The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest
income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing
a marginal federal income tax rate of 21% for 2018 and 34% for 2017. As such, amounts will not agree to income as reported in the
consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual
loans. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
|
|
|
(Dollars in thousands) (Unaudited)
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
|
|
Average
Balance
|
|
|
|
Interest
and
Dividends
|
|
|
|
Yield/
Cost
(1)
|
|
|
|
Average
Balance
|
|
|
|
Interest
and
Dividends
|
|
|
|
Yield/
Cost
(1)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, Net
|
|
$
|
825,781
|
|
|
$
|
27,374
|
|
|
|
4.43
|
%
|
|
$
|
673,922
|
|
|
$
|
21,896
|
|
|
|
4.34
|
%
|
|
Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
139,456
|
|
|
|
2,624
|
|
|
|
2.51
|
|
|
|
79,432
|
|
|
|
1,133
|
|
|
|
1.90
|
|
|
Exempt From Federal Tax
|
|
|
44,097
|
|
|
|
1,054
|
|
|
|
3.19
|
|
|
|
36,177
|
|
|
|
987
|
|
|
|
3.64
|
|
|
Other Interest-Earning Assets
|
|
|
14,731
|
|
|
|
408
|
|
|
|
3.70
|
|
|
|
27,643
|
|
|
|
325
|
|
|
|
1.57
|
|
|
Total Interest-Earning Assets
|
|
|
1,024,065
|
|
|
|
31,460
|
|
|
|
4.11
|
|
|
|
817,174
|
|
|
|
24,341
|
|
|
|
3.98
|
|
|
Noninterest-Earning Assets
|
|
|
86,417
|
|
|
|
|
|
|
|
|
|
|
|
58,709
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,110,482
|
|
|
|
|
|
|
|
|
|
|
$
|
875,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Demand Deposits
|
|
$
|
162,210
|
|
|
|
412
|
|
|
|
0.34
|
%
|
|
$
|
127,736
|
|
|
|
239
|
|
|
|
0.25
|
%
|
|
Savings
|
|
|
176,742
|
|
|
|
329
|
|
|
|
0.25
|
|
|
|
128,583
|
|
|
|
177
|
|
|
|
0.18
|
|
|
Money Market
|
|
|
159,225
|
|
|
|
541
|
|
|
|
0.45
|
|
|
|
137,906
|
|
|
|
270
|
|
|
|
0.26
|
|
|
Time Deposits
|
|
|
191,372
|
|
|
|
2,090
|
|
|
|
1.46
|
|
|
|
159,232
|
|
|
|
1,364
|
|
|
|
1.15
|
|
|
Total Interest-Bearing Deposits
|
|
|
689,549
|
|
|
|
3,372
|
|
|
|
0.65
|
|
|
|
553,457
|
|
|
|
2,050
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
77,236
|
|
|
|
838
|
|
|
|
1.45
|
|
|
|
51,505
|
|
|
|
420
|
|
|
|
1.09
|
|
|
Total Interest-Bearing Liabilities
|
|
|
766,785
|
|
|
|
4,210
|
|
|
|
0.73
|
|
|
|
604,962
|
|
|
|
2,470
|
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Demand Deposits
|
|
|
224,883
|
|
|
|
|
|
|
|
|
|
|
|
175,401
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
4,764
|
|
|
|
|
|
|
|
|
|
|
|
3,822
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
996,432
|
|
|
|
|
|
|
|
|
|
|
|
784,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
114,050
|
|
|
|
|
|
|
|
|
|
|
|
91,698
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
1,110,482
|
|
|
|
|
|
|
|
|
|
|
$
|
875,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
27,250
|
|
|
|
|
|
|
|
|
|
|
$
|
21,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread
(2)
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
|
|
|
|
|
|
|
|
|
|
3.43
|
%
|
|
Net Interest-Earning Assets
(3)
|
|
$
|
257,280
|
|
|
|
|
|
|
|
|
|
|
$
|
212,212
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
(4)
|
|
|
|
|
|
|
|
|
|
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
3.58
|
|
|
Return on Average Assets
|
|
|
|
|
|
|
|
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
0.85
|
|
|
Return on Average Equity
|
|
|
|
|
|
|
|
|
|
|
5.42
|
|
|
|
|
|
|
|
|
|
|
|
8.12
|
|
|
Average Equity to Average Assets
|
|
|
|
|
|
|
|
|
|
|
10.27
|
|
|
|
|
|
|
|
|
|
|
|
10.47
|
|
|
Average Interest-Earning Assets to Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
133.55
|
|
|
|
|
|
|
|
|
|
|
|
135.08
|
|
|
|
(2)
|
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
|
|
|
(3)
|
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|
|
(4)
|
Net interest margin represents net interest income divided by average total interest-earning assets. Interest income and yields
are on a fully tax equivalent basis utilizing a marginal tax rate of 21% and 34% for the nine months ended September 30, 2018,
and 2017, respectively.
|
Rate/Volume Analysis
.
The following table presents
the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent yield adjustments
have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2018 and 34% for
2017. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate
column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes
due to rate and the changes due to volume. The total column represents the sum of the prior columns.
|
|
|
(Dollars in thousands) (Unaudited)
|
|
|
|
Nine Months Ended September 30, 2018
Compared To
Nine Months Ended September 30, 2017
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
5,015
|
|
|
$
|
463
|
|
|
$
|
5,478
|
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,046
|
|
|
|
445
|
|
|
|
1,491
|
|
|
Exempt From Federal Tax
|
|
|
199
|
|
|
|
(132
|
)
|
|
|
67
|
|
|
Other Interest-Earning Assets
|
|
|
(204
|
)
|
|
|
287
|
|
|
|
83
|
|
|
Total Interest-Earning Assets
|
|
|
6,056
|
|
|
|
1,063
|
|
|
|
7,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
617
|
|
|
|
705
|
|
|
|
1,322
|
|
|
Borrowings
|
|
|
252
|
|
|
|
166
|
|
|
|
418
|
|
|
Total Interest-Bearing Liabilities
|
|
|
869
|
|
|
|
871
|
|
|
|
1,740
|
|
|
Change in Net Interest Income
|
|
$
|
5,187
|
|
|
$
|
192
|
|
|
$
|
5,379
|
|
Provision for Loan Losses.
The provision for loan
losses increased $1.1 million, to $2.1 million, for the nine months ended September 30, 2018, compared to $1.0 million of provision
for loan losses for the nine months ended September 30, 2017, of which $250,000 was attributed to the FFCO acquired loan portfolio.
Net charge-offs for the nine months ended September 30, 2018 were $1.6 million, which included $263,000 of net charge-offs on automobile
loans, compared to net charge-offs of $721,000 for the nine months ended September 30, 2017, which included $435,000 of net charge-offs
on automobile loans. The increase in net charge-offs for the current year was due to charge-offs of $1.2 million for three commercial
and industrial relationships in the first quarter of 2018. The provision for loan losses was impacted in the current period by
the recording of $2.1 million of provision for the originated loan portfolio due to the above-mentioned loan charge-offs and to
appropriately reflect risk associated with the originated loan portfolio as of September 30, 2018. Additionally, this was due to
growth in the loan portfolio and average loan balances, partially offset by improved credit metrics which had a positive impact
on the qualitative factors within the allowance calculation. The acquired loan portfolio from the FWVB merger recorded an approximate
credit mark of $1.3 million. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance
for loan losses and credit mark on acquired loan portfolios, with the possible need for additional provisions for loan losses.
Noninterest Income
.
Noninterest income increased
$439,000, or 7.5%, to $6.3 million for the nine months ended September 30, 2018 compared to $5.9 million at September 30, 2017.
There was an increase of $487,000 for other commissions due to insurance proceeds recognized by a claim on a bank-owned life insurance
policy due to the death of a former officer of the Bank, current year recognition of an ARC loan referral fee and liquidation of
a partnership interest in the West Virginia Bankers Title Company, an item that was acquired in the FWVB merger. Service fees on
deposit accounts increased $337,000 primarily due to increased ATM fees due to an increased volume of customer transactions and
check card fees related to the FWVB merger. There was a $45,000 increase in insurance commissions from Exchange Underwriters mainly
due to the EU – Beynon merger in the current period. There was a decrease in the net gains on sales of residential mortgage
loans of $283,000. The decrease in gains was primarily due to a decrease in the number of loans originated and subsequently sold
to the FHLB as part of the MPF® program and an increase in mortgage rates. Net gains on the sales of investments decreased
$132,000 due to the sale of equity securities in the prior period. Net gains on disposal of fixed assets decreased $74,000 due
to the write-off of the leasehold improvements of the former Washington Business Center.
Noninterest Expense.
Noninterest expense increased
$7.1 million, or 38.6%, to $25.5 million for the nine months ended September 30, 2018 compared to $18.4 million for the nine months
ended September 30, 2017. Salaries and employee benefits increased $2.8 million, primarily due to additional employees, salary
increases, and retirement benefits as a direct result of the FWVB merger, increased incentive compensation accruals due to the
loan origination semi-annual bonus matrix, employee group health insurance and employee stock options. Merger-related expenses
increased $854,000 due to the FWVB merger. CDI amortization increased $585,000 due to the CDI recorded for the FWVB merger. Other
noninterest expense increased $792,000 primarily due to office supplies, telephone, loan expenses, travel and meals and entertainment.
Equipment and occupancy increased $540,000 and $535,000, respectively, primarily due to equipment purchases and new maintenance
contracts related to the FWVB merger and the BPMCC. Other real estate owned expense increased $380,000 mainly due to the prior
year resolution of loan collection efforts through the sale of a mineral rights interest for $186,000, bankruptcy court settlement
for $86,000 and mortgage insurance proceeds for $85,000. Legal and professional fees increased $132,000 due to increased consultation
fees in connection with Exchange Underwriters. FDIC assessment fees increased $94,000 due to an assessment factor increase by the
FDIC in the computation of the insurance assessment and average asset growth related to the FWVB merger. Advertising increased
$83,000 related to increases in print/media advertising and promotional items to promote the FWVB merger.
Income Tax Expense.
Income taxes decreased $1.4
million to $977,000 for the nine months ended September 30, 2018 compared to $2.3 million for the nine months ended September 30,
2017. The effective tax rate for the nine months ended September 30, 2018 was 17.4% compared to 29.6% for the nine months ended
September 30, 2017. The decrease in income taxes was primarily due to a decrease of $2.3 million in pre-tax income. The expected
effective tax rate for the current year 2018, is 16.9%, which was calculated by excluding the one-time income on a bank-owned life
insurance claim of approximately $421,000, which represents a discrete tax item for the first quarter of 2018. The decrease in
income taxes was mitigated by the enactment of the Tax Cuts and Jobs Act of 2017, which reduced the statutory federal corporate
income tax rate from 34% to 21% effective January 1, 2018.
Off-Balance Sheet Arrangements.
Other than loan commitments and standby and performance letters
of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or
future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital
resources that are material to investors. Refer to Note 10 in the Notes to Consolidated Financial Statements for a summary of commitments
outstanding as of September 30, 2018.
Liquidity and Capital Management
Liquidity.
Liquidity
is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of
funds consist of deposit inflows, loan repayments and maturities, calls and sales of securities. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.
The Company regularly adjusts its investments in liquid assets
based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities,
and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits
with other banks and short- and intermediate-term securities. The Company believes that it had sufficient liquidity at September
30, 2018 to satisfy its short- and long-term liquidity needs.
The Company’s most liquid assets are cash and due from
banks, which totaled $46.0 million at September 30, 2018. The levels of these assets depend on our operating, financing, lending
and investing activities during any given period. Unpledged securities, which provide an additional source of liquidity, totaled
$88.4 million at September 30, 2018. In addition, at September 30, 2018, the Company had the ability to borrow up to $373.0 million
from the FHLB of Pittsburgh, of which $30.8 million was utilized toward standby letters of credit. The Company also has the ability
to borrow up to $108.0 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 $60.0 million and $40.0 million as of September 30,
2018, and December 31, 2017, respectively. There was a total increase of $20.0 million in multiple line of credit agreements due
to the FWVB merger.
At September 30, 2018, time deposits due within one year of
that date totaled $104.4 million, or 50.1% of total time deposits. If these time deposits do not remain with the Company, the Company
will be required to seek other sources of funds. Depending on market conditions, the Company may be required to pay higher rates
on such deposits or other borrowings than it currently pays on these certificates of deposit. The Company believes, however, based
on past experience that a significant portion of its certificates of deposit will remain with it, either as certificates of deposit
or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.
CB Financial is a separate legal entity from the Bank and must
provide for its own liquidity to pay any dividends to its shareholders and for other corporate purposes. Its primary source of
liquidity is dividend payments it receives from the Bank. The Bank’s ability to pay dividends to CB Financial is subject
to regulatory limitations. At September 30, 2018, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $2.6
million.
We are committed to maintaining a strong liquidity position;
therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current
funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLB, will be carefully
considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings
from the FHLB in the future.
Capital Management.
The Company and the Bank are
subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Under the Regulatory Capital Rules, in order to avoid limitations
on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking
organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital
requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer, which is composed of
common equity Tier I capital, began on January 1, 2016 at the 0.625% level and will be phased in over a three year period (increasing
by that amount on each January 1, until it reaches 2.5% on January 1, 2019).
At September 30, 2018 and December 31, 2017, the Company was
categorized as well capitalized under the regulatory framework for prompt corrective action. The following table presents the Bank’s
regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates
indicated.
|
|
|
(Dollars in thousands)
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Common Equity Tier 1 (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
95,054
|
|
|
|
11.34
|
%
|
|
$
|
84,599
|
|
|
|
12.22
|
%
|
|
For Capital Adequacy Purposes
|
|
|
37,711
|
|
|
|
4.50
|
|
|
|
31,159
|
|
|
|
4.50
|
|
|
To Be Well Capitalized
|
|
|
54,471
|
|
|
|
6.50
|
|
|
|
45,008
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
95,054
|
|
|
|
11.34
|
|
|
|
84,599
|
|
|
|
12.22
|
|
|
For Capital Adequacy Purposes
|
|
|
50,281
|
|
|
|
6.00
|
|
|
|
41,546
|
|
|
|
6.00
|
|
|
To Be Well Capitalized
|
|
|
67,041
|
|
|
|
8.00
|
|
|
|
55,395
|
|
|
|
8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
104,339
|
|
|
|
12.45
|
|
|
|
93,257
|
|
|
|
13.47
|
|
|
For Capital Adequacy Purposes
|
|
|
67,041
|
|
|
|
8.00
|
|
|
|
55,395
|
|
|
|
8.00
|
|
|
To Be Well Capitalized
|
|
|
83,802
|
|
|
|
10.00
|
|
|
|
69,243
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage (to adjusted total assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
95,054
|
|
|
|
7.93
|
|
|
|
84,599
|
|
|
|
9.27
|
|
|
For Capital Adequacy Purposes
|
|
|
47,931
|
|
|
|
4.00
|
|
|
|
36,492
|
|
|
|
4.00
|
|
|
To Be Well Capitalized
|
|
|
59,914
|
|
|
|
5.00
|
|
|
|
45,616
|
|
|
|
5.00
|
|