CB Financial Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted.
Business context
CB Financial is a community banking and insurance company operating in southwestern Pennsylvania, West Virginia and eastern Ohio. The April 30 acquisition of First West Virginia Bancorp (FWVB) expanded its footprint by eight branches. The company also acquired certain Beynon Insurance assets on August 1.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest and dividend income | $11.8m | $8.2m | $31.2m | $24.0m |
| Net interest income | $10.2m | $7.4m | $27.0m | $21.5m |
| Provision for loan losses | $0.025m | $0.300m | $2.1m | $1.0m |
| Noninterest income | $2.1m | $1.8m | $6.3m | $5.9m |
| Noninterest expense | $9.4m | $5.9m | $25.5m | $18.4m |
| Net income | $2.3m | $2.1m | $4.6m | $5.6m |
| Diluted EPS | $0.42 | $0.50 | $0.95 | $1.36 |
- Q3 net interest margin was 3.61%, versus 3.56% a year earlier; the nine-month margin was 3.56%, versus 3.58%. These are tax-equivalent measures in the MD&A.
- At September 30, total assets were $1.254bn, loans net of allowance were $891.9m, available-for-sale securities were $216.8m, and stockholders’ equity was $133.7m.
- Deposits were $1.063bn; short-term borrowings were $31.6m and other borrowed funds were $23.3m. Cash and due from banks totaled $46.0m.
- Nine-month operating cash flow was $7.0m, versus $9.4m in 2017. Investing activities provided $45.3m, including $20.6m net cash received from the acquisition and securities-sale proceeds; financing activities used $27.0m.
- Loan allowance was $9.3m. Nonperforming loans were $6.8m, or 0.76% of loans; nonperforming assets were $7.7m, or 0.62% of assets.
- The Bank was categorized as well capitalized: common equity Tier 1 was 11.34%, total capital 12.45%, and Tier 1 leverage 7.93% at September 30.
Material changes versus comparable periods
- Q3 net income increased 11% year over year, but diluted EPS declined from $0.50 to $0.42 as average shares increased following the FWVB stock issuance. For the first nine months, net income fell 17%, primarily amid higher expenses and loan-loss provision.
- FWVB materially increased the balance sheet: total assets rose 34% from year-end 2017, deposits 37%, and net loans 21%. The acquired operations contributed approximately $4.6m net interest income and $0.96m net income from May through September.
- Net interest income growth reflected larger loan and securities balances, including acquired assets. Interest expense also rose as interest-bearing deposit costs increased and borrowing costs and balances grew.
- Nine-month provision increased to $2.1m, including a $300,000 provision recorded in Q1 after discovery of a collateral-lien error and $1.2m of charge-offs on three commercial and industrial relationships. Net charge-offs were $1.6m versus $0.7m a year earlier.
- Unrealized losses on available-for-sale securities increased; accumulated other comprehensive loss was $4.1m at September 30, compared with $1.3m at year-end.
Outlook, commentary, risks and unusual items
- Management said liquidity was sufficient for short- and long-term needs. Available sources included $46.0m cash, $88.4m of unpledged securities, and borrowing facilities, subject to collateral and facility terms. Time deposits of $104.4m mature within one year, creating potential replacement-funding needs.
- Management anticipated future revenue and earnings growth from FWVB’s expanded footprint and services, but provided no numerical earnings or revenue guidance. It noted that acquisition integration, interest rates, deposit flows, local economic conditions, credit quality, competition and expense control could affect results.
- FWVB-related expenses were $0.85m for the nine months; the company reported approximately $1.3m cumulative merger-related expenses. Purchase accounting valuations remained preliminary. The Beynon asset purchase price allocation was also preliminary and expected to be finalized in Q4 2018.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21%. The nine-month effective tax rate was 17.4%, versus 29.6% in 2017; management cited the lower statutory rate and tax-exempt bank-owned life insurance income.
- The company disclosed a prior-period loan-collateral error: the loss of a first-lien position led to an additional $300,000 Q1 2018 provision. Management concluded the effects on 2017 and estimated 2018 annual results were immaterial; the nine-month 2018 after-tax impact was a $237,000 reduction in net income, or $0.05 per share.
- Outstanding off-balance-sheet credit commitments and letters of credit totaled $212.1m. The company reported no other pending legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether FWVB integration delivers expected growth and whether remaining purchase-price valuations change recorded goodwill, intangible assets or deferred taxes.
- Loan-credit trends, especially commercial and industrial exposures, charge-offs, nonperforming loans and adequacy of the $9.3m allowance.
- Deposit retention and funding costs, including renewal of $104.4m time deposits due within one year and the effect of further rate increases.
- Whether elevated operating expenses and merger-related costs moderate, and how they affect earnings per share as the enlarged share count persists.
- The final valuation of Beynon assets, the resolution of the disclosed collateral error, and the company’s deferred-tax assessment, including West Virginia state-tax effects.