CB Financial Services, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparative financial results are for 2013 unless noted. The company is a Pennsylvania bank holding company operating Community Bank and insurance subsidiary Exchange Underwriters in southwestern Pennsylvania.
Business context and major transaction
On October 31, 2014, CB Financial completed its approximately $54.7 million acquisition of FedFirst Financial Corporation. Consideration included 1,721,967 CB Financial shares and $18.4 million in cash. The acquisition added five branches, expanded the company into Fayette and Westmoreland Counties, and brought in Exchange Underwriters. FedFirst results are included only from November 1 through year-end. Management expects the acquired insurance business to diversify income and support future growth, but provided no quantified earnings guidance.
Financial performance and condition
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Total assets | $846.3 million | $546.5 million | Up 54.9%, primarily from the merger |
| Total loans, net | $680.5 million | $373.8 million | Up 82.1%; substantial acquired balances |
| Total deposits | $697.5 million | $480.3 million | Up 45.2%, primarily from the merger |
| Net interest income | $18.9 million | $15.7 million | Up 20.5% |
| Net interest margin | 3.47% | 3.23% | Improved 24 basis points |
| Noninterest income | $3.8 million | $3.2 million | Up 19.1%; includes insurance commissions |
| Noninterest expense | $16.8 million | $13.4 million | Up 25.8%, including $2.0 million of merger costs |
| Net income | $4.3 million | $4.3 million | Up slightly from $4.256 million |
| Basic earnings per share | $1.63 | $1.73 | Declined despite near-flat net income |
| Return on average assets / equity | 0.72% / 8.60% | 0.79% / 9.43% | Both declined |
| Shareholders’ equity | $81.9 million | $45.0 million | Up 82.0%, largely reflecting merger share issuance |
Interest expense fell as deposits repriced at lower rates, while loan growth and the merger lifted interest income. The $1.6 million income-tax expense included a higher 27.3% effective tax rate, versus 21.4% in 2013, partly because certain merger costs were nondeductible.
Cash flow, funding and capital
- Operating cash flow was negative $2.4 million, compared with positive $8.1 million in 2013. Investing cash outflow was $293.1 million, largely reflecting a $308.4 million net increase in loans; financing cash inflow was $290.9 million, including deposit growth, borrowings and merger share issuance.
- Cash and due from banks ended the year at $11.8 million, down from $16.4 million. Available-for-sale securities were $105.4 million and provided additional liquidity. Management stated liquidity was sufficient for short- and long-term needs.
- Total deposits were $697.5 million. Borrowings were $61.8 million in aggregate at year-end; the filing reports $46.7 million of short-term borrowings and $15.1 million of other borrowed funds. FHLB advances outstanding were reported as $40.9 million, with borrowing capacity of up to $277.9 million; a separate $40.0 million Federal Reserve facility was unused.
- Community Bank was categorized as well capitalized: total risk-based capital was 12.50% and Tier 1 leverage capital was 9.33% at December 31, 2014. New Basel III capital rules took effect January 1, 2015, with the conservation buffer phased in through 2019.
- Funding commitments totaled $113.2 million. Certificates of deposit due within one year were $54.2 million; management expected to retain a significant portion based on past experience and current pricing.
Asset quality, outlook and risks
- Nonperforming assets increased to $7.6 million from $4.2 million, primarily because of troubled debt restructurings acquired in the merger. Nonperforming loans were $7.3 million; $3.7 million of accruing TDRs and $379,000 of loans at least 90 days past due and still accruing were also reported.
- Special-mention and classified loans rose to $28.6 million from $25.5 million. Substandard loans increased to $9.4 million from $956,000, largely due to acquired problem loans. The allowance for loan losses was $5.2 million, or 71.14% of nonperforming loans, versus 136.98% a year earlier. No provision for loan losses was recorded in 2014; net charge-offs were $187,000.
- Credit exposure includes substantial real-estate lending: residential loans were 48.5% and commercial real estate loans 25.4% of total loans. The company also identified indirect auto, commercial lending, and geographic concentration in its southwestern Pennsylvania market as relevant credit risks.
- Management’s strategy is to diversify toward commercial real estate and commercial-and-industrial lending, grow core deposits, maintain conservative underwriting, and expand insurance commissions. Management said return on equity could remain relatively low while it leverages merger-related capital.
- Interest-rate risk is material. The company’s model estimated a 35.0% decline in economic value of equity under an instantaneous +300-basis-point shock; these modeled results depend on assumptions and are not forecasts. Other principal risks include local economic and real-estate conditions, lower natural-gas prices affecting Marcellus Shale activity, competition, deposit retention, regulatory costs, cybersecurity and third-party service interruptions.
- A shareholder class action challenging the FedFirst merger was dismissed with prejudice in September 2014; the plaintiff appealed. Oral argument was expected in October 2015. The company stated it believed the allegations were without merit.
- The filing reports a clean independent auditor’s opinion. Management found disclosure controls effective; the filing did not include management’s internal-control assessment or auditor attestation because of a transition period for newly public companies.
Most important facts for investors to verify
- How acquired FedFirst operations perform over a full year, including whether expected merger synergies and insurance commission growth offset continuing integration and operating costs.
- Whether asset quality stabilizes: track acquired TDRs, substandard loans, foreclosures, charge-offs, and allowance coverage as acquired loans season.
- Reconcile and monitor borrowing composition, maturities, collateral requirements, and liquidity needs alongside the $54.2 million of certificates of deposit due within one year and $113.2 million of commitments.
- Assess earnings per share and returns after the merger’s substantial share issuance, and the effect of the new capital rules on dividends and other capital distributions.
- Follow the merger-litigation appeal and confirm the outcome; also review full audited statements and notes for acquisition accounting, fair-value estimates, and subsequent events.