CB Financial Services, Inc. — FY2017 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2017; the filing also reports fourth-quarter results. The Company is a Pennsylvania bank holding company operating Community Bank and an insurance agency, Exchange Underwriters, in southwestern Pennsylvania. It reported 16 offices and 201 full-time-equivalent employees.
Financial performance and condition
- FY2017 earnings: Net income was $6.944 million, down 8.4% from $7.580 million in 2016. Diluted earnings per share were $1.69 versus $1.86. Pretax income was $9.818 million; income tax expense was $2.874 million, a 29.3% effective rate.
- Revenue and margins: Interest and dividend income was $32.434 million, up 1.3%; interest expense rose 17.6% to $3.374 million. Net interest income declined 0.3% to $29.060 million. Net interest margin fell to 3.58% from 3.82%; the interest-rate spread was 3.44% versus 3.68%. Noninterest income rose 5.9% to $7.800 million, led by insurance commissions. Noninterest expense increased 5.9% to $25.172 million, including $356,000 of merger costs. The efficiency ratio worsened to 68.29% from 65.13%.
- Fourth quarter: Net income was $1.375 million, versus $2.022 million in Q4 2016. Net interest income was $7.577 million, provision for loan losses $850,000, noninterest income $1.940 million and noninterest expense $6.754 million. Diluted EPS was $0.33 versus $0.49.
- Balance sheet: At year-end, assets were $934.5 million, up 10.4%; net loans were $735.6 million, up 9.1%; deposits were $773.3 million, up 10.8%; and shareholders’ equity was $93.3 million, up 4.2%. Loan growth was concentrated in commercial and industrial (+$27.0 million), construction (+$25.5 million), commercial real estate (+$8.0 million) and residential real estate (+$1.9 million).
- Credit quality: Nonperforming assets declined to $7.6 million from $8.6 million, and nonperforming loans were 0.97% of total loans versus 1.24%. However, criticized and special-mention loans increased 36.2% to $41.6 million, primarily reflecting weaker performance and downgrades in originated commercial and industrial relationships. The allowance was $8.8 million, or 1.18% of loans and 121.31% of nonperforming loans; net charge-offs were $877,000, including $616,000 on auto loans.
- Cash flow and liquidity: Operating cash flow was $11.6 million; investing activities used $85.9 million, largely reflecting loan growth and securities purchases; financing activities provided $80.6 million, principally from deposit growth and increased short-term borrowing. Cash and due from banks ended at $20.6 million. The Company reported $32.3 million of unpledged securities and substantial borrowing capacity; management said liquidity was sufficient for expected needs. Funding commitments totaled $180.8 million.
- Debt and capital: Short-term borrowings were $39.6 million and other borrowed funds $24.5 million, for $64.1 million total. FHLB advances outstanding were $38.3 million, including $24.5 million long-term. The Bank was categorized as well-capitalized: common equity Tier 1 and Tier 1 risk-based ratios were 12.22%, total capital was 13.47%, and Tier 1 leverage was 9.27%. These ratios were below 2016 levels.
Material changes and unusual items
- Net income declined as higher deposit costs and operating expenses offset modestly higher interest income and noninterest income. The margin contracted 24 basis points.
- Deposit growth funded increases in loans, securities and cash. Short-term borrowings also rose by $12.6 million, partly because year-end loan originations exceeded available cash reserves.
- Noninterest income included higher insurance commissions, contingency fees and purchased tax-credit gains, partly offset by lower mortgage-loan sale gains. The Company also recorded $199,000 of investment-security gains.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21%. The Company recorded an $89,000 tax benefit from remeasuring deferred taxes and early-adopted guidance to reclassify $220,000 of stranded tax effects from accumulated other comprehensive income to retained earnings. Management expects the lower tax rate to benefit future earnings.
- Other real estate owned results included nonrecurring matters, including a mineral-rights sale, bankruptcy settlement and mortgage-insurance proceeds. The filing reports $326,000 of real estate owned at year-end.
Outlook, risks and contingencies
- A definitive agreement to acquire First West Virginia Bancorp was signed in November 2017. The proposed transaction was valued at approximately $49.0 million, with estimated $9.8 million cash consideration and approximately 1.318 million shares to be issued. It remained subject to shareholder, regulatory and customary approvals. Management cited expansion into West Virginia and eastern Ohio, additional services and potential revenue and earnings growth; integration, synergies and completion were uncertain.
- Management intends to grow commercial real estate and commercial lending, maintain conservative underwriting, expand core deposits and grow insurance commissions. It said return on equity may remain relatively low until additional capital is leveraged. No specific financial guidance was provided.
- Principal risks include credit deterioration amid commercial and construction loan growth; real-estate and local economic conditions; exposure to natural-gas activity and prices in the Marcellus Shale region; interest-rate sensitivity and deposit-cost pressure; competition; liquidity and regulatory-capital requirements; and cybersecurity, technology and third-party service-provider risks.
- The Company disclosed no material pending legal proceedings beyond ordinary-course matters it considered immaterial. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness under the Company’s emerging-growth-company exemption. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Track whether the First West Virginia Bancorp merger received approvals, closed on the proposed terms and delivered expected integration benefits.
- Monitor criticized/special-mention commercial and industrial credits, auto-loan charge-offs, nonperforming assets and allowance adequacy as lending expands.
- Assess whether margin pressure persists as deposits reprice, and whether growth in deposits and loans can support earnings without increased reliance on borrowings.
- Verify the effect of the 21% federal tax rate on ongoing effective taxes and earnings, separating recurring results from merger and other nonrecurring items.
- Confirm the filing’s deposit figures against the audited statements: the business overview contains a $733.3 million figure, while the balance sheet and MD&A report year-end deposits of $773.3 million.