CB Financial Services, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three and six months ended June 30, 2016, compared with 2015; balance-sheet comparisons are to December 31, 2015. CB Financial operates Community Bank and an insurance agency in southwestern Pennsylvania. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Interest and dividend income | $7.950 | $7.939 | $16.073 | $16.114 |
| Net interest income | $7.248 | $7.268 | $14.668 | $14.724 |
| Provision for loan losses | $0.300 | $0.375 | $1.150 | $0.675 |
| Noninterest income | $1.868 | $1.806 | $3.715 | $3.632 |
| Noninterest expense | $6.088 | $5.535 | $11.602 | $11.282 |
| Net income | $1.938 | $2.240 | $3.983 | $4.535 |
| Diluted earnings per share | $0.48 | $0.55 | $0.98 | $1.11 |
- Q2 tax-equivalent net interest margin was 3.82%, versus 3.78%; first-half margin was 3.86%, versus 3.83%. Net interest income in the table above is the GAAP amount.
- At June 30, assets were $828.0 million, down 0.3% from year-end; net loans were $671.8 million, down 0.8%. Deposits were $675.3 million, down 0.6%. Stockholders’ equity was $89.5 million, up 3.0%.
- Borrowings included $31.5 million in short-term borrowings and $28.0 million in FHLB advances; these balances were broadly stable against year-end. Cash and due from banks was $13.2 million.
- First-half operating cash flow was $6.4 million, compared with $46.0 million in 2015; investing activities provided $2.2 million and financing activities used $6.7 million. Cash increased $1.9 million to $13.2 million.
- The Bank was categorized as well capitalized. At June 30, actual ratios were 13.09% common equity Tier 1, 13.09% Tier 1 risk-based capital, 14.27% total risk-based capital, and 9.70% Tier 1 leverage.
Material changes and management commentary
- Net income fell 13.5% in Q2 and 12.2% for the first half. Q2 pre-tax income declined $436,000, primarily reflecting a $553,000 increase in noninterest expense. First-half pre-tax income declined $768,000.
- Q2 noninterest expense rose 10.0%, including higher salaries and employee-benefit costs, other expenses, and the absence of prior-year gains on sales of foreclosed property. First-half expense rose 2.8%; this included higher compensation and miscellaneous costs, partly offset by a $566,000 gain associated with foreclosure properties.
- Noninterest income increased modestly, mainly from increased gains on residential mortgage loan sales; insurance commissions declined because of lower contingency fees. Q2 also included $58,000 in investment-security sale gains, which management said were intended to offset a capital-loss carryforward deferred tax asset acquired in the merger.
- First-half loan-loss provision increased to $1.15 million from $675,000, and net charge-offs rose to $450,000 from $184,000. Management cited growth in commercial and indirect auto lending, charge-offs, and increased special-mention loans. At June 30, nonperforming assets were $7.2 million (0.87% of assets), down from $11.0 million (1.32%) at year-end; nonperforming loans were 1.02% of total loans, down from 1.56%.
- Deposits declined amid runoff in time deposits, municipal and school-district balances, and oil-and-gas-related deposits. Management noted that $55.7 million of time deposits matured within one year and could require replacement funding at higher rates. The company stated it believed liquidity was sufficient, citing cash, $19.6 million of unpledged securities and available borrowing facilities.
- Two commercial properties with a combined $3.2 million balance were foreclosed and transferred to real estate owned; an approximately $566,000 valuation gain was recognized, supported by independent appraisals. One property was sold and the other transferred to premises and equipment for a planned headquarters renovation.
Outlook, risks and contingencies
The filing provides no earnings or financial guidance. Management said it monitors liquidity daily and expects sufficient funds for current commitments, while considering funding costs and potential additional FHLB borrowing. Forward-looking results are subject to local economic conditions, interest rates, deposit flows, loan demand and credit performance, real-estate values, competition, cost control, regulation, and the integration of acquired businesses.
Off-balance-sheet commitments totaled $108.7 million, including standby and performance letters of credit and unused lending lines; contractual amounts are not necessarily expected cash requirements. The company reported no pending legal proceeding it believed would materially adversely affect its financial condition, results, or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether credit costs and special-mention loan growth continue, and how the allowance and charge-offs evolve.
- Whether deposits—particularly time, municipal, school-district, and oil-and-gas-related balances—stabilize, and the cost of replacement funding.
- Whether elevated expenses persist and whether mortgage-sale gains and insurance contingency commissions are repeatable.
- The outcomes and carrying values of the foreclosed commercial properties, including the planned headquarters renovation and the recognized valuation gain.
- Liquidity and capital headroom, including the availability and terms of borrowing facilities and the effects of the phased-in capital conservation buffer.