CB Financial Services, Inc. — 2019 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2019. CB Financial Services is a Pennsylvania bank holding company operating Community Bank, with 24 offices across southwestern Pennsylvania, West Virginia and eastern Ohio, and an insurance subsidiary. The 2018 First West Virginia Bancorp acquisition expanded the company’s footprint; 2019 results include a full year of the acquired operations, compared with only about eight months in 2018.
Financial performance and position
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Total assets | $1.322 billion | $1.282 billion | Up 3.1% |
| Net loans | $942.6 million | $903.3 million | Up 4.4% |
| Total deposits | $1.118 billion | $1.087 billion | Up 2.9% |
| Net interest income | $43.2 million | $37.7 million | Up 14.6% |
| Net income | $14.3 million | $7.1 million | Up 103.2% |
| Diluted earnings per share | $2.63 | $1.40 | Up from prior year |
| Net interest margin, FTE | 3.64% | 3.59% | Up 5 basis points |
| Return on average assets / equity | 1.09% / 9.89% | 0.61% / 5.91% | Improved year over year |
| Allowance for loan losses | $9.9 million | $9.6 million | 1.04% of loans, versus 1.05% |
Interest and dividend income rose 17.0% to $51.0 million, reflecting loan growth and higher asset yields. Interest expense increased 32.1% to $7.9 million, largely as average interest-bearing deposits grew and their cost rose. Noninterest income increased 13.1% to $9.4 million, including $4.5 million of insurance commissions. Noninterest expense rose 2.7% to $35.8 million. The efficiency ratio improved to 68.10% from 75.85%.
Cash flow and liquidity. Operating cash flow was $17.9 million, versus $13.7 million in 2018. Investing activities used $11.0 million, compared with $27.5 million provided in 2018; financing activities provided $20.0 million, versus $8.4 million used. Cash and due from banks ended the year at $80.2 million. The Bank reported $44.5 million of unpledged securities and substantial borrowing capacity, including an FHLB facility with a $374.8 million maximum limit. Management said liquidity was sufficient. The Bank had $14.0 million of long-term FHLB advances and $30.6 million of repurchase-agreement borrowings at year-end.
Capital. Stockholders’ equity was $151.1 million, up 9.8%. The Bank was classified as well-capitalized: total risk-based capital was 12.54%, common equity Tier 1 was 11.43%, and the Tier 1 leverage ratio was 7.85%.
Material changes and unusual items
- Net income growth reflects both the full-year contribution of the 2018 FWVB acquisition and a lower loan-loss provision ($725,000 versus $2.5 million). The comparison is therefore not solely organic growth.
- The effective tax rate fell to 10.8% from 17.9%. A fourth-quarter tax benefit of $1.3 million resulted from reversing the valuation allowance on acquired alternative minimum tax credit carryforwards after revised tax guidance and management’s updated realizability assessment. Fourth-quarter net income was $4.7 million; income tax benefit for the quarter was $617,000.
- Loan mix shifted further toward commercial real estate: commercial real estate loans were $351.4 million, or 37.0% of total loans, up from $307.1 million, or 33.6%. Residential real estate loans were 36.5% of the portfolio.
- Nonperforming assets declined to $5.6 million from $7.2 million, primarily due to an $851,000 payoff of a residential troubled debt restructuring and dispositions of other real estate owned. Nonperforming loans were 0.57% of total loans, versus 0.69%.
- Net charge-offs were $416,000, down from $1.8 million in 2018, when three commercial and industrial relationships generated $1.2 million of charge-offs. However, substandard loans rose to $7.4 million from $3.4 million, and total special-mention and classified loans increased to $32.7 million from $31.7 million.
- Management restructured part of the investment portfolio, including sales, repayments and calls, and purchases. It reported no investment securities considered other-than-temporarily impaired in 2019.
- The company adopted lease accounting guidance, recognizing approximately $1.7 million of right-of-use assets and lease liabilities at adoption. It also repurchased 2,150 shares in November under a newly approved $5.0 million buyback program.
Outlook, commentary and risks
The filing provides no quantified earnings or revenue guidance. Management’s strategy is to grow commercial real estate and commercial and industrial lending while maintaining conservative underwriting, expand core deposits, and increase insurance brokerage income. Management also said return on equity could remain relatively low until it leverages capital raised in connection with the merger.
Key disclosed risks include sensitivity of net interest income and securities values to interest-rate changes; the concentration of lending in real estate and the local tri-state economy; commercial real estate and business credit risk; competition for loans and deposits; and exposure to natural-gas exploration and prices in the Marcellus Shale region. The company also cited deposit retention and funding needs, regulatory and compliance costs, cybersecurity and third-party service-provider risks, and the transition away from LIBOR. It had $240.1 million of off-balance-sheet lending commitments and letters of credit at year-end; actual funding may be lower because commitments can expire undrawn.
Management identified the allowance for loan losses, fair-value estimates, deferred tax assets and goodwill and intangible-asset impairment as areas requiring significant judgment. The company disclosed prior-period errors involving a commercial loan collateral position and loan classifications, which management assessed as immaterial to the affected prior financial statements. The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Pending legal proceedings were described as routine and immaterial in aggregate.
Important facts for investors to verify
- How much of the 2019 earnings increase is attributable to the full-year acquisition contribution, lower credit costs and the $1.3 million tax valuation-allowance reversal.
- Whether the increase in substandard loans signals further deterioration, particularly in commercial real estate and commercial lending, and whether the allowance remains adequate.
- The effect of higher deposit costs and maturing time deposits on funding costs and net interest margin; $83.6 million of time deposits were due within one year.
- Progress in realizing the acquired tax credit carryforwards by the stated deadline and the assumptions supporting their recognition.
- Use of the $5.0 million share-repurchase authorization, capital distribution capacity, and the company’s ability to sustain dividends while funding growth.
- Exposure to interest-rate movements, LIBOR transition, local energy-sector conditions, and the large volume of unfunded loan commitments.