CB Financial Services, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
For the quarter ended March 31, 2017. CB Financial is a Pennsylvania bank holding company operating Community Bank, with 16 offices in southwestern Pennsylvania, and the Exchange Underwriters insurance agency. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial results and condition
- Earnings: Net income was $1.704 million, or $0.42 per basic and diluted share, versus $2.045 million, or $0.50 per share, in Q1 2016. Pretax income was $2.434 million; income tax expense was $0.730 million.
- Income and margins: Interest and dividend income was $7.791 million; reported net interest income was $6.995 million, down 5.7% year over year. Net interest margin was 3.62% on a tax-equivalent basis, versus 3.90%. Noninterest income rose 12.3% to $2.076 million, while noninterest expense rose 12.7% to $6.217 million.
- Credit costs: Loan-loss provision was $0.420 million, versus $0.850 million. Net charge-offs were $0.438 million, compared with $0.367 million. The allowance for loan losses was $7.785 million, or about 1.15% of gross loans.
- Cash flow: Operating activities provided $3.833 million; investing activities used $3.196 million; financing activities provided $20.676 million. Cash and due from banks increased $21.313 million to $35.595 million.
- Balance sheet and funding: Total assets were $868.823 million, up 2.7% from year-end 2016. Net loans were $666.798 million, down 1.1%; deposits were $725.461 million, up 3.9%. Short-term borrowings were $24.828 million and other borrowed funds were $24.500 million. Stockholders’ equity was $90.574 million.
- Capital and liquidity: The Bank was categorized as well capitalized. Its common equity Tier 1 and total capital ratios were 13.48% and 14.73%, respectively; its Tier 1 leverage ratio was 9.70%. Management stated liquidity was sufficient. Available funding sources included FHLB, Federal Reserve and bank credit facilities, subject to their terms and collateral requirements.
Material changes versus comparable periods
- Net income fell about 16.7% year over year. Net interest income declined as average loan balances and loan yields fell, including lower accretion on acquired loans; interest expense rose with deposit growth and higher deposit costs.
- Noninterest income benefited from a $0.214 million increase in insurance commissions, including $0.099 million of contingency fees, and $0.052 million of investment-sale gains. Management said the securities sales generated gains intended to use an acquired capital-loss carryforward.
- Noninterest expense increased $0.703 million. A major comparison effect was the prior-year $0.566 million gain on resolution of two commercial real estate problem loans, which reduced Q1 2016 other-real-estate-owned expense.
- Compared with December 31, 2016, deposits increased $27.243 million, while net loans declined $7.296 million, principally from commercial real estate and consumer loan paydowns. Premises and equipment increased, mainly due to construction of a new operations center.
- Nonperforming assets declined to $7.849 million from $8.601 million at year-end; nonperforming loans were 1.11% of total loans, versus 1.24%.
Outlook, commentary and risks
The filing provides no earnings or revenue guidance. Management reported deficient loan demand in Q1 following recent Federal Reserve rate increases and said it was monitoring deposit pricing and funding costs. The bank continued a promotional 25-month certificate program at 1.25% to attract deposits and retain maturing certificates.
Management identified risks including local and general economic conditions, interest rates, deposit flows, loan demand and repayment, real estate values, competition, expense control, acquisition integration, and regulatory or legislative changes. A proposed reduction in the federal corporate tax rate could require an initial charge to reduce deferred tax assets, followed by lower tax expense; management said the proposal was too preliminary to assess its impact. The filing also notes $164.825 million of unused credit commitments and letters of credit, which may be drawn but are not necessarily future cash requirements. No pending legal proceeding was identified as expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the rise in noninterest income, particularly Exchange Underwriters’ contingency fees, is repeatable.
- How loan demand, net interest margin and deposit pricing respond to interest-rate changes and competition.
- Credit trends, including commercial real estate and acquired-loan performance, charge-offs and allowance adequacy.
- Execution and cost of the new operations center, and the impact of the prior-year real estate gain on comparisons.
- Deposit retention and liquidity needs, including upcoming time-deposit maturities and availability of secured borrowing facilities.
- Potential deferred-tax effects if corporate tax law changes, and the ultimate effects of accounting standards the company was still evaluating.