CB Financial Services, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018, CB Financial reported consolidated results for its Pennsylvania community banking and insurance businesses. Comparisons below are with Q1 2017 for income and cash flow, and December 31, 2017 for balance-sheet changes. Amounts are in U.S. dollars.
Financial performance and condition
- Profit: Net income was $1.36 million, down from $1.70 million; diluted EPS was $0.33 versus $0.42. Pretax income fell to $1.53 million from $2.43 million.
- Revenue and margins: Net interest income rose 8.8% to $7.61 million as loan growth lifted interest income. Interest expense increased 38.1% to $1.10 million. Tax-equivalent net interest margin was 3.53%, versus 3.62% in Q1 2017. Noninterest income was essentially flat at $2.09 million; noninterest expense increased 7.2% to $6.67 million.
- Credit costs: Provision for loan losses increased to $1.50 million from $420,000. Net charge-offs were $1.40 million, compared with $438,000. The allowance for loan losses was $8.90 million, about 1.14% of total loans.
- Balance sheet: Total assets increased 3.4% to $965.8 million. Net loans rose 5.0% to $772.2 million, while deposits declined 2.4% to $754.7 million. Stockholders’ equity was $92.4 million, down 0.9%.
- Funding and liquidity: Short-term borrowings increased $55.7 million to $95.3 million, primarily due to FHLB overnight borrowing supporting loan growth; other borrowed funds were $21.0 million. Cash and due from banks totaled $13.5 million. The company reported $45.4 million of unpledged securities and borrowing capacity through FHLB, Federal Reserve, and bank facilities; it stated liquidity was sufficient.
- Cash flow: Operating activities provided $1.15 million, investing activities used $40.94 million, and financing activities provided $32.65 million. Cash and due from banks declined $7.14 million during the quarter to $13.48 million.
- Capital and credit quality: The Bank was categorized as well capitalized. At March 31, its common equity Tier 1 ratio was 11.71%, total capital ratio 12.95%, and Tier 1 leverage ratio 9.01%. Nonperforming assets were $5.83 million, or 0.60% of assets, down from $7.58 million and 0.81% at year-end.
Material changes and notable items
- In April 2018, the company identified a 2017 collateral-position error on a commercial and industrial loan that left the loan insufficiently secured. It recorded an additional $300,000 pretax provision in Q1. The filing says the correction reduced Q1 net income by $237,000, or $0.06 per share, and that 2017 results had been overstated by the same after-tax amount; management deemed the effect immaterial to 2017 and estimated 2018 annual results.
- Loan growth was concentrated in commercial real estate. A local government depositor withdrew approximately $17 million, contributing to lower deposits and increased reliance on short-term borrowing.
- Available-for-sale securities’ fair value declined, and the quarter included a $1.42 million other comprehensive loss, primarily reflecting unrealized securities losses. The company said it did not consider debt-security unrealized losses other-than-temporary and did not expect to be required to sell the securities before recovery or maturity.
- The federal corporate tax-rate reduction and tax-exempt bank-owned life insurance proceeds reduced the effective tax rate to 10.9%, from 30.0% a year earlier. Management cited 16.7% as the expected 2018 effective rate excluding the discrete Q1 item.
- The company completed its merger with First West Virginia Bancorp on April 30, 2018, after quarter-end. Consideration included 1,317,647 shares and $9.8 million cash; stated merger value was approximately $49 million. The acquired company had approximately $338 million of assets, $98 million of loans, and $284 million of deposits. Q1 financial statements do not include the completed merger’s post-close operations.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management cited loan demand and growth, while noting interest-rate changes, deposit competition and flows, local economic conditions, borrower repayment capacity, real-estate values, credit quality, cost control, regulation, and acquisition integration as risks. The company was preparing for merger integration and a new corporate center, expected to be ready for occupancy in Q2 2018. Off-balance-sheet commitments and letters of credit totaled $175.3 million; management noted that commitment amounts do not necessarily represent future cash requirements. The company reported no pending legal proceedings it believed would materially adversely affect its financial condition, results, or cash flows.
Key facts for investors to verify
- How the collateral-control error was identified, the borrower’s recovery prospects, and whether further provision or control changes are needed.
- Whether higher loan-loss provision and charge-offs persist, particularly in commercial and industrial lending.
- Whether deposit outflows continue and how increased short-term FHLB funding affects funding costs and net interest margin.
- Merger integration costs, purchase accounting, acquired credit quality, and the realized contribution of FWVB after closing.
- Liquidity capacity and capital ratios after the merger and any resulting changes in regulatory requirements or funding needs.