CB Financial Services, Inc. — Q1 2023 Form 10-Q
Business context and period: Community bank and insurance brokerage operating primarily in southwestern Pennsylvania and the Ohio Valley. This unaudited filing covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022.
Financial performance and position
- Earnings: Net income was $4.16 million, up 36% from $3.05 million in Q1 2022. Diluted EPS was $0.81 versus $0.58. Annualized return on average assets was 1.21% and return on average equity was 14.69%.
- Net interest: Net interest and dividend income increased 17% to $11.58 million. GAAP net interest margin rose to 3.51% from 3.08%; FTE margin was 3.52% versus 3.10%. Interest income rose 34% to $14.24 million, while interest expense increased to $2.66 million from $0.72 million, chiefly as deposit costs repriced higher.
- Other income and expenses: Noninterest income increased 8% to $2.81 million, including $302,000 of gains on bank-owned life insurance claims. Noninterest expense rose 4% to $9.03 million; salaries and benefits and data processing costs increased, partly offset by lower contracted-services expense. Income tax expense was $1.13 million.
- Loans and credit: Total loans grew 2.1% from year-end to $1.072 billion, including $8.9 million of syndicated loans purchased but not settled at quarter-end. The loan allowance was $10.27 million, or 0.96% of loans, compared with $12.82 million, or 1.22%, at year-end. Q1 provision expense was $80,000. Nonperforming loans were $5.41 million, or 0.51% of loans; the filing attributes their net decrease in part to CECL-related removal of prior TDR designations, partly offset by a commercial real estate relationship moving to nonaccrual.
- Cash flow: Operating activities provided $7.23 million; investing activities used $11.06 million, principally reflecting $15.87 million of net loan growth; financing activities provided $3.67 million. Cash and due from banks ended at $103.55 million, down $155,000 from year-end.
- Balance sheet and funding: Assets were $1.431 billion, up 1.5% from year-end. Deposits totaled $1.282 billion, up $13.0 million; noninterest-bearing demand deposits declined $39.5 million while interest-bearing demand and time deposits increased. Short-term borrowings fell to $121,000 from $8.06 million. Other borrowings were $14.65 million. Stockholders’ equity was $117.20 million; book value per share was $22.90 and tangible book value per share was $20.40.
- Capital and liquidity: The Bank was classified as well capitalized. At March 31, its CET1 and Tier 1 risk-based capital ratios were 12.60%, total capital was 13.69%, and Tier 1 leverage was 9.24%. Management said liquidity was sufficient; disclosed available borrowing capacity included $447.8 million from the FHLB, $120.7 million through a Federal Reserve line, and $50 million in unused correspondent-bank lines.
Material changes and notable items
- Q1 loan growth and higher asset yields supported higher net interest income, while deposit interest expense rose sharply as market rates increased.
- The company adopted CECL on January 1, 2023. Adoption reduced the loan allowance by $3.4 million, added $718,000 of allowance for unfunded commitments, and increased retained earnings by $2.1 million net of deferred taxes. Prior-period results remain under the previous accounting method.
- Available-for-sale debt securities had $30.9 million of gross unrealized losses at March 31, mainly attributed to market interest-rate changes. Management said it did not intend, and was not more likely than not required, to sell securities in unrealized-loss positions before recovery or maturity.
- Q1 comprehensive income was $6.18 million, including $2.02 million of after-tax other comprehensive income, principally reflecting changes in debt-security values.
- The company paid $1.28 million in dividends and repurchased 5,686 shares during the quarter. Its $10 million repurchase program expired May 1, 2023.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management identified interest rates, deposit flows and funding costs, loan demand and repayment, economic conditions, real-estate values, competition, credit quality, cost control, regulation, and execution of efficiency initiatives as factors that could affect results. The interest-rate model estimated that an immediate 400-basis-point increase would reduce economic value of equity by 23.2%; a 400-basis-point decrease would reduce modeled net interest income at risk by 13.3%. Management cautioned that these simulations depend on assumptions and are not forecasts.
Undrawn commitments and letters of credit totaled $169.25 million. The company reported $5.66 million of nonperforming assets, including $248,000 of other real estate owned. It stated that it was not party to other pending legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective; internal-control changes in the quarter related to CECL implementation.
Important facts for investors to verify
- Deposit composition and retention: confirm the level and trend of uninsured deposits, deposit repricing, and the $70.7 million of time deposits maturing within one year. The filing’s wording on insured versus uninsured deposit coverage is not fully clear and merits verification.
- Credit quality: monitor commercial real estate exposure, the loan relationship placed on nonaccrual, criticized loans, and whether CECL assumptions and allowance coverage remain appropriate.
- Interest-rate exposure: assess deposit-cost sensitivity and the potential effect of rate changes on net interest income and securities values; modeled results are assumption-dependent.
- Q1 earnings items: distinguish recurring performance from the $302,000 insurance-claim gains, securities losses, loan recoveries, and core-conversion-related costs.
- Funding and liquidity: track loan growth, syndicated-loan settlement and funding, available borrowing capacity, and the use of securities pledged against deposits and borrowings.