CB Financial Services, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. CB Financial is a Pennsylvania bank holding company operating Community Bank in southwestern Pennsylvania and an insurance brokerage subsidiary. Comparisons with Q1 2014 are affected by the FedFirst Financial merger completed in Q4 2014.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparison |
|---|---|---|
| Net income | $2.295 million; diluted EPS $0.56 | $1.079 million; $0.46 diluted EPS in Q1 2014 |
| Net interest income | $7.456 million | $4.108 million in Q1 2014; up 81.5% |
| Net interest margin | 3.89% tax-equivalent | 3.38% in Q1 2014 |
| Noninterest income / expense | $1.826 million / $5.747 million | $0.724 million / $3.457 million in Q1 2014 |
| Provision for loan losses | $300,000 | None in Q1 2014 |
| Total assets | $851.5 million | $846.3 million at December 31, 2014 |
| Deposits | $709.4 million | $697.5 million at December 31, 2014 |
| Loans | $659.6 million net loans, plus $26.1 million held for sale | Net loans were $680.5 million at year-end; including loans held for sale, management reported loans increased 0.8% to $685.7 million |
| Stockholders’ equity | $83.7 million | $81.9 million at December 31, 2014 |
Interest and dividend income was $8.175 million and interest expense was $719,000. The effective tax rate was 29.1%, versus 21.5% in Q1 2014. Management reported annualized return on average assets of 1.09% and return on average equity of 11.20%.
Net cash provided by operating activities was $3.050 million; investing activities used $1.261 million and financing activities provided $2.362 million. Cash and due from banks ended the quarter at $15.9 million. The company reported $21.0 million of unpledged securities, up to $339.3 million of FHLB borrowing capacity (with $29.0 million outstanding), and a $40.0 million Federal Reserve facility with no amount drawn.
Short-term borrowings fell to $24.0 million from $46.7 million at year-end, while other borrowed funds rose to $29.1 million from $15.1 million. Management said some short-term funding was repaid with deposit growth and some was replaced by longer-term borrowing to reduce exposure to rising rates. The Bank was classified as well capitalized; its total capital ratio was 13.33%, Tier 1 leverage ratio 8.85%, and Common Equity Tier 1 ratio 12.42%.
Changes versus prior periods
- Net income rose by $1.2 million year over year, primarily reflecting the FedFirst merger. Average loans increased $304.8 million and average deposits increased $178.2 million, also primarily due to the merger.
- Noninterest income growth largely reflected the acquired insurance brokerage: insurance commissions increased $928,000. Noninterest expense increased 66.2%, including higher payroll, occupancy, equipment, advertising, Pennsylvania shares tax, and merger-related intangible amortization.
- Quarter-end deposits grew 1.7%. Brokered deposits increased $9.2 million, largely through a reciprocal deposit network tied to customer relationships; savings and money market balances also increased. Short-term borrowings decreased as other borrowed funds increased.
- Loan growth was led by consumer lending, mainly indirect auto loans, and residential loans; commercial loans declined. Available-for-sale securities decreased $4.2 million, primarily from maturities and calls used to fund loans.
- Nonperforming loans were $6.812 million, or 1.02% of total loans, versus $7.028 million, or 1.03%, at year-end. Nonperforming assets were $7.389 million, or 0.87% of assets, versus $7.306 million, or 0.86%.
Outlook, risks and unusual items
- No quantitative earnings or financial guidance was provided. Management said it believed liquidity was sufficient for short- and long-term needs and expected sufficient funds to meet current commitments.
- The $300,000 loan-loss provision reflected loan growth, particularly indirect auto loans, and an increase in substandard-rated loans. Net charge-offs were $17,000 in Q1 2015 versus $10,000 in Q1 2014.
- Management identified risks including local economic conditions, interest rates, deposit flows, loan demand and repayment, real estate values, competition, acquisition integration, expense control, and regulatory or legislative changes. It reported no material change in market-risk disclosures from the 2014 Form 10-K.
- Time deposits of $63.1 million, or 42.3% of time deposits, mature within one year. Management cautioned that replacement funding could cost more if deposits do not remain.
- Insurance commissions included $211,000 of contingency fees, typically earned in the first quarter. On April 29, 2015, the Bank sold $26.1 million of residential loans at an approximate $100,000 gain.
- A class action relating to the FedFirst merger was dismissed with prejudice in September 2014; the plaintiff appealed, with oral argument expected in October 2015. The company said it believed the allegations were without merit and reported no other pending legal proceedings expected to materially affect its financial condition or results.
- The filing does not provide a clear quantified outlook for future earnings, loan growth, margins, or credit costs.
Key facts for investors to verify
- How much reported earnings growth and the improved net interest margin are sustainable after the merger-related balance-sheet expansion.
- Whether credit performance supports the allowance, especially in indirect auto, substandard-rated, acquired, and restructured loans.
- The cost and stability of funding, including reciprocal-network deposits, near-term time-deposit maturities, and the shift toward longer-term borrowings.
- Whether insurance commissions and contingency fees recur at comparable levels and how acquired operating costs evolve.
- The outcome and potential financial or legal impact of the appeal in the FedFirst merger litigation.
- Regulatory capital and liquidity trends, and the status of any undrawn borrowing capacity as funding needs change.