CB Financial Services, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company is a Pennsylvania community bank holding company operating Community Bank and insurance subsidiary Exchange Underwriters in southwestern Pennsylvania. The FedFirst merger closed October 31, 2014, so 2015 results include the acquired business while the 2014 comparison largely predates the merger.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest and dividend income | $7.95 million | $4.61 million | $24.06 million | $13.82 million |
| Net interest income | $7.29 million | $4.19 million | $22.01 million | $12.48 million |
| Provision for loan losses | $0.30 million | — | $0.98 million | — |
| Noninterest income | $1.91 million | $0.86 million | $5.54 million | $2.35 million |
| Noninterest expense | $5.86 million | $4.03 million | $17.14 million | $11.54 million |
| Net income | $2.13 million | $0.74 million | $6.66 million | $2.56 million |
| Diluted EPS | $0.52 | $0.32 | $1.64 | $1.09 |
Tax-equivalent net interest margin was 3.83% in both the quarter and nine-month 2015 periods, versus 3.37% and 3.38%, respectively, in 2014. Q3 return on average assets was 1.02% and return on average equity 9.84%; nine-month figures were 1.06% and 10.54%.
At September 30, 2015, total assets were $824.1 million, down 2.6% from year-end 2014. Net loans were $661.2 million, deposits $689.9 million, total borrowings $42.9 million, and stockholders’ equity $86.3 million. Cash and due from banks was $15.5 million. The nine-month cash flow statement reported $49.3 million of operating cash flow, including $53.5 million of mortgage-loan sale proceeds; investing activities used $16.5 million and financing activities used $29.0 million.
Changes and drivers
- Quarterly net income rose $1.4 million year over year; management attributed the increase primarily to post-merger earnings and $368,000 of prior-year merger costs. Nine-month net income increased $4.1 million, also reflecting acquired operations and $1.0 million of merger costs in the 2014 comparison.
- Net interest income growth was driven mainly by merger-related increases in average loans and deposits. For Q3, average loans increased $274.6 million; average interest-bearing deposits rose $180.0 million. Deposit and borrowing costs declined modestly despite larger average balances.
- Noninterest income benefited from acquired insurance operations: insurance commissions increased $769,000 in Q3 and $2.6 million year to date. Nine-month insurance commissions included $340,000 of contingent fees. Noninterest expense also increased substantially with the expanded business, including staffing, occupancy, technology, and core-deposit-intangible amortization.
- Net loans declined $19.2 million from year-end, primarily after $38.2 million of residential mortgage sales, partly offset by growth in consumer and commercial real estate loans. The company said proceeds helped repay borrowings and fund commercial originations.
- Deposits declined $7.5 million from year-end. Money-market, NOW, and time deposits fell, partly offset by higher brokered deposits and savings balances. Management linked some declines to seasonal school-district balances and oil-and-gas-related deposits.
Outlook, risks, and contingencies
- No numerical earnings or growth guidance is provided. Management stated it believed liquidity was sufficient for short- and long-term needs and expected funds to meet current commitments.
- Available liquidity included $15.5 million of cash, $18.1 million of unpledged securities, FHLB borrowing capacity, and additional Federal Reserve and bank credit lines. $62.9 million of time deposits mature within one year; management noted replacement funding could cost more.
- The Bank was categorized as well capitalized. At September 30, 2015, its reported total risk-based capital ratio was 13.89%, Tier 1 risk-based ratio 12.91%, and leverage ratio 9.41%.
- Credit quality weakened on several measures: nonaccrual loans rose to $5.7 million from $3.0 million at year-end; nonperforming loans increased to $9.8 million from $7.0 million; and nonperforming assets rose to $10.2 million from $7.3 million. The provision reflected charge-offs, commercial and indirect-auto growth, and more substandard loans. The allowance was $5.9 million, or about 0.88% of total loans.
- Unfunded credit commitments and letters of credit totaled $127.1 million. Management said contractual commitments do not necessarily represent future cash needs because many may expire undrawn.
- Risks cited include local economic conditions, interest rates, competition, deposit flows, borrower repayment, real-estate values, acquisition integration, expense control, and regulatory changes. Management reported no material change in market-risk disclosures and no material change in internal control over financial reporting.
- A class action relating to the FedFirst merger was dismissed with prejudice; the Maryland Court of Special Appeals affirmed dismissal on October 29, 2015. The plaintiff could still seek review by the state’s highest court. The company reported no other pending legal matter believed likely to have a material adverse effect.
Key investor verification points
- Separate merger-driven growth from underlying organic performance; 2015 and 2014 comparison periods are not fully comparable.
- Track delinquency, nonaccrual and criticized loans, charge-offs, and adequacy of the allowance as the loan mix and commercial/indirect-auto portfolios change.
- Assess sustainability of insurance commissions, including the $340,000 of year-to-date contingent fees, and whether merger-related expense increases persist.
- Monitor deposit retention, reciprocal/brokered funding, near-term time-deposit maturities, and reliance on repurchase agreements and borrowing facilities.
- Reconcile reported operating cash flow with mortgage-loan sales and originations; assess liquidity and capital under changing interest-rate and credit conditions.
- Confirm whether the merger litigation proceeds to further appeal and review subsequent filings for updates or new contingencies.