CB Financial Services, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2019. CB Financial is a community bank holding company operating through Community Bank in southwestern Pennsylvania, West Virginia and Ohio, and an insurance agency subsidiary. Comparisons with 2018 are affected by the April 30, 2018 First West Virginia Bancorp (FWVB) acquisition; 2019 includes the acquired business for the full periods.
Financial performance and condition
Unless otherwise stated, figures are in millions of dollars. Income-statement comparisons are year over year; balance-sheet comparisons are from December 31, 2018.
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Net interest income | $10.7; +16.7% | $21.1; +26.0% |
| Provision for loan losses | $0.35, down from $0.60 | $0.38, down from $2.10 |
| Noninterest income | $2.4; +12.9% | $4.7; +11.9% |
| Noninterest expense | $9.0; down 4.9% | $18.1; up 12.1% |
| Net income | $3.0, versus $1.0 | $5.9, versus $2.3 |
| Diluted earnings per share | $0.55, versus $0.19 | $1.08, versus $0.51 |
| Net interest margin, tax-equivalent | 3.62%, versus 3.52% | 3.64%, versus 3.53% |
- Total assets were $1.305 billion, up 1.9%; net loans were $926.2 million, up 2.5%; and available-for-sale securities were $236.0 million.
- Deposits were $1.107 billion, up 1.9%. Cash and due from banks declined to $44.4 million from $53.4 million. Stockholders’ equity rose to $145.5 million; book value per share was $26.78. Dividends paid in the first half totaled $2.6 million, or $0.48 per share.
- Cash from operations was $7.8 million for the first half; investing activities used $28.4 million and financing activities provided $11.6 million. Cash and due from banks decreased $9.0 million over the period.
- Short-term borrowings were $27.7 million and other borrowed funds $17.0 million. The Bank was classified as well capitalized: common equity Tier 1 ratio 11.47%, total capital ratio 12.58%, and Tier 1 leverage ratio 7.93%.
Material changes and credit quality
- Higher loan and securities income, supported by FWVB-related balances and organic loan growth, drove net interest income upward. Deposit interest expense also increased as average interest-bearing deposits and their cost rose.
- Q2 expenses fell partly because the prior-year quarter included $769,000 of merger-related costs. First-half expenses rose, reflecting the expanded post-merger organization, higher staffing, core deposit intangible amortization and contracted services. The Beynon Insurance customer-list acquisition also contributed to insurance commissions.
- Total loans were $935.9 million. Nonperforming loans rose to $9.9 million from $6.3 million at year-end; nonperforming loans were 1.06% of total loans, versus 0.69%. The allowance for loan losses was $9.7 million. Management cited increased risk in commercial real estate relationships; one $2.9 million relationship was assigned to a receiver, while another $1.7 million relationship was current after quarter-end and expected to pay off without anticipated loss.
- Unrealized gains on available-for-sale securities improved accumulated other comprehensive income by $4.4 million during the first half. Management attributed temporary unrealized losses in debt securities primarily to interest-rate changes and reported no other-than-temporary impairment identified.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said it believed liquidity was sufficient to meet short- and long-term needs and monitored liquidity daily.
- Available liquidity sources included $44.4 million of cash, $82.9 million of unpledged securities, and borrowing facilities with the FHLB, Federal Reserve and unaffiliated banks. Management noted that $90.0 million of time deposits mature within one year and may need replacement at higher rates if not retained.
- Off-balance-sheet credit commitments totaled $222.7 million, including standby letters of credit, construction mortgages and commercial lines of credit. The company reported no corresponding reserve for these commitments, citing historical experience, while continuing to evaluate credit quality.
- Management cited risks including local economic conditions, interest rates, deposit flows, loan demand and repayment, real estate values, competition, cost control, regulation and acquisition integration. It gave no assurance that forward-looking statements would be achieved.
- Disclosure controls and procedures were deemed ineffective at the reasonable-assurance level. A material weakness related to the precision of management review and a largely manual consolidation process, including loan-segment classification errors, remained. Remediation steps included hiring experienced accounting staff, reviewing responsibilities and loan-classification procedures, and standardizing loan-disclosure reviews; management said the weakness would not be considered remediated until controls were tested and shown to operate effectively.
- The company disclosed an uncertain acquired AMT credit carryforward and a full $1.3 million valuation allowance. It also reported that prior loan-classification errors were assessed as immaterial to the affected prior financial statements. Management reported no pending legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Whether the increase in nonperforming loans and impaired commercial real estate exposures persists, and the outcome of the receiver-managed relationship and expected payoff.
- Whether loan growth and net interest margin can be sustained as deposit costs rise and time deposits mature.
- How much of earnings growth reflects ongoing operations versus acquisition-related scale, prior-year merger expenses, and changes in loan-loss provisions.
- Progress and independent testing of remediation for the disclosed material weakness in internal controls and financial reporting.
- Liquidity and funding needs if deposits run off or commitments are drawn, and the potential impact of the $90.0 million of time deposits maturing within one year.