CB Financial Services, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Figures are unaudited and in U.S. dollars. CB Financial is a community bank holding company operating through Community Bank and an insurance brokerage, Exchange Underwriters, in southwestern Pennsylvania and the Ohio Valley.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Interest and dividend income | $12.30 million | $8.71 million | +41.2% |
| Net interest income | $10.43 million | $7.61 million | +37.1% |
| Provision for loan losses | $25,000 | $1.50 million | Down $1.48 million |
| Noninterest income | $2.32 million | $2.09 million | +11.0% |
| Noninterest expense | $9.08 million | $6.67 million | +36.2% |
| Income before taxes | $3.64 million | $1.53 million | +$2.12 million |
| Net income | $2.93 million | $1.36 million | +$1.57 million |
| Diluted EPS | $0.54 | $0.33 | +$0.21 |
The fully tax-equivalent net interest margin was 3.66%, versus 3.53%; net interest rate spread was 3.45%, versus 3.36%. Return on average assets was 0.93% (0.59% prior year), and return on average equity was 8.53% (5.93%). The effective tax rate was 19.7%, compared with 10.9%; the prior-year rate was affected by a $421,000 BOLI insurance claim.
Financial position, cash flow and liquidity
- Total assets were $1.303 billion, up $21.3 million (1.7%) from year-end. Net loans were $899.4 million, down $3.9 million; available-for-sale securities were $224.7 million.
- Deposits were $1.105 billion, up $18.8 million (1.7%). Cash and due from banks rose $23.0 million to $76.3 million. Short-term borrowings were $30.7 million and other borrowed funds were $17.0 million.
- Stockholders’ equity was $141.7 million, up $4.1 million; book value per share was $26.09. The company paid $1.3 million in dividends, or $0.24 per share.
- For the quarter, operating cash flow was $1.2 million, investing cash flow was $7.5 million, and financing cash flow was $14.2 million. Cash increased $23.0 million to $76.3 million.
- Management said liquidity was sufficient for short- and long-term needs. Additional sources included $85.0 million of unpledged securities and borrowing facilities; $37.7 million of FHLB capacity was used to support standby letters of credit. The filing also reports $107 million of FRB capacity and $60 million of bank lines, with no draws on those facilities.
- The Bank was categorized as well capitalized. At March 31, its common equity Tier 1 and Tier 1 risk-based ratios were 11.74%, total capital ratio was 12.86%, and Tier 1 leverage ratio was 7.93%.
Material changes and comparison context
- Year-over-year growth reflects the April 30, 2018 acquisition of First West Virginia Bancorp (FWVB), which added approximately $334 million of assets, eight branches and substantial loans and deposits. Accordingly, Q1 2019 and Q1 2018 are not fully comparable.
- Management attributed higher net interest income principally to the acquired business and organic growth. Average net loans increased $147.6 million, while interest-bearing deposit costs rose as average balances and rates increased.
- Noninterest expense increased $2.4 million, driven chiefly by acquired staff, branches and core-deposit-intangible amortization. Noninterest income growth included insurance commissions from the Beynon customer-list acquisition and higher deposit-service fees.
- Credit provision declined markedly from Q1 2018, when it included an additional $300,000 provision related to a previously identified collateral-position error. Net charge-offs were $172,000 in Q1 2019, compared with $1.4 million in Q1 2018.
- Loans totaled $908.8 million before the allowance, down $4.1 million from year-end. Construction loans increased $11.1 million while commercial and industrial loans declined $7.8 million. Nonperforming assets were $5.8 million (0.44% of assets), down from $7.2 million (0.56%) at year-end; nonperforming loans were 0.62% of total loans.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management stated it expected sufficient funding to meet commitments, while noting deposit flows, loan demand, rates and competition affect liquidity and funding costs.
- Management cited economic conditions, interest rates, deposit flows, loan demand, real-estate values, borrower repayment, competition, acquisition integration, cost control and regulation as factors that could cause actual results to differ from forward-looking statements.
- Off-balance-sheet credit commitments totaled $208.6 million, including standby letters of credit of $38.1 million, construction mortgages of $47.8 million and commercial lines of credit of $82.2 million. Many commitments may expire undrawn; the company reported no corresponding reserve and said it continues to assess credit quality.
- Internal controls: Management concluded disclosure controls were not effective at the reasonable-assurance level and identified a material weakness in controls over review of consolidated financial results and loan-segment classifications. A separate material weakness reported in the 2018 Form 10-K also remained. Loan classifications were corrected; management reported remediation actions but said the weakness would not be considered remediated until controls operate effectively and are tested.
- The company disclosed a $21.7 million loan-classification error affecting commercial and industrial, commercial real estate and residential real estate segments at year-end 2018. Management considered it immaterial to those financial statements, but the control deficiency created a reasonable possibility that a material misstatement might not be detected timely.
- A $1.3 million acquired alternative minimum tax credit carryforward was fully valuation-allowed because of uncertainty over its usability after 2021. The company also adopted lease accounting in 2019, recognizing approximately $1.9 million of right-of-use assets and lease liabilities.
- Management reported no pending legal proceeding believed likely to have a material adverse effect. It stated there was no material change in market-risk disclosures from the 2018 Form 10-K.
Important facts for investors to verify
- How much of earnings growth is sustainable after separating FWVB acquisition effects, loan-yield accretion and the unusually low loan-loss provision.
- Whether deposit repricing and funding costs continue to rise, and how that affects net interest margin and liquidity.
- Trends in criticized loans, nonaccruals, charge-offs and the allowance, particularly across commercial real estate and commercial and industrial exposures.
- Progress and independent testing of remediation for both reported material weaknesses, including the loan-classification review process.
- Execution and returns from the FWVB and Beynon acquisitions, including ongoing integration costs and intangible amortization.
- Renewal or funding of time deposits: $88.1 million, or 40.4% of time deposits, matured within one year of March 31, 2019.