CB Financial Services, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company operates Community Bank in southwestern Pennsylvania and West Virginia, plus an insurance brokerage subsidiary. Unless otherwise stated, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest and dividend income | $10.16 | $9.93 | $20.06 | $19.91 |
| Provision (recovery) for loan losses | $3.78 | ($1.20) | $3.78 | ($1.20) |
| Noninterest income | $2.11 | $2.22 | $4.72 | $5.39 |
| Noninterest expense | $8.41 | $13.72 | $17.07 | $23.12 |
| Net income (loss) | $0.12 | ($0.22) | $3.17 | $2.62 |
| Diluted EPS | $0.02 | ($0.04) | $0.61 | $0.48 |
| Net interest margin, GAAP | 3.12% | 2.84% | 3.10% | 2.94% |
Q2 net interest income increased 2.3%; six-month income rose 0.7%. Lower deposit costs supported margin improvement, while loan yields and average loan balances declined. Six-month net income improved despite the higher credit provision, as expenses fell substantially.
Financial position, cash flow and capital
- At June 30, total assets were $1.386 billion, down 2.7% from year-end 2021. Net loans were $1.015 billion, up modestly; total deposits were $1.215 billion, down $11.4 million.
- Cash and due from banks was $81.1 million, down $38.6 million from year-end. Available-for-sale debt securities were $210.8 million at fair value, down from $222.1 million.
- Six-month operating cash flow was $5.3 million; investing cash use was $19.0 million and financing cash use was $24.8 million. Cash declined $38.6 million to $81.1 million.
- Borrowings at period-end included $32.2 million short-term (repurchase agreements), $3.0 million of FHLB advances and $14.6 million subordinated debt. Total liabilities were $1.273 billion.
- Stockholders’ equity was $113.8 million, down $19.4 million. Accumulated other comprehensive loss increased to $17.4 million, largely reflecting lower fair values of securities as rates rose. Book value per share was $22.18; tangible book value per share was $19.43.
- The Bank was categorized as well capitalized. Its June 30 ratios included common equity Tier 1 of 11.83%, total capital of 13.08%, and Tier 1 leverage of 8.33%.
Material changes and notable items
- A $3.8 million loan-loss provision included a $2.7 million charge-off on a commercial and industrial borrower ceasing operations; the borrower’s revolving line had a $2.7 million outstanding balance. The allowance rose to $12.8 million, or 1.25% of loans.
- Net charge-offs were $2.5 million for the six months, versus net charge-offs of $27,000 in the prior-year period. Nonperforming loans declined to $5.8 million, or 0.57% of loans, from $7.3 million, or 0.71%, at year-end.
- Noninterest expense fell 26.2% for the first half, primarily because the 2021 period included branch-related fixed-asset writedowns and intangible impairment, and because branch optimization reduced staffing and occupancy costs. These prior-year items were $2.3 million and $1.2 million, respectively, in Q2 2021.
- Six-month noninterest income decreased 12.5%, including a $206,000 securities loss versus a $458,000 gain a year earlier; insurance commissions increased $363,000. No loans were sold in the 2022 first half.
- Unrealized losses on available-for-sale debt securities totaled $22.3 million at June 30, versus $3.8 million at year-end. Management attributed the losses principally to higher market interest rates and said it did not intend, and did not expect to be required, to sell the securities before recovery or maturity.
- The company repurchased $4.0 million of shares in the first half and paid $2.5 million in dividends. A new $10 million repurchase authorization was approved in April; $9.4 million remained available at June 30.
Outlook, liquidity and risks
No specific earnings or revenue guidance was provided. Management stated it believed liquidity was sufficient for short- and long-term needs and expected to meet current funding commitments. Sources included $81.1 million of cash, $18.2 million of unpledged securities, $434.4 million available from the FHLB, a $106.2 million Federal Reserve borrowing capacity, and $50.0 million of bank lines. However, $72.9 million, or 58.2%, of time deposits mature within one year; replacement funding could cost more.
Management highlighted sensitivity to economic conditions, inflation, market interest rates, deposit flows, loan demand and borrower repayment capacity, as well as competition, regulation, and the ability to realize savings from branch optimization. The rate-risk model estimated that an immediate 300-basis-point increase could raise one-year net interest income at risk 13.0% while reducing economic value of equity 7.8%; these are model estimates, not forecasts. The company expects to adopt CECL on January 1, 2023 and anticipates a one-time allowance adjustment, but could not yet estimate its size or overall effect.
Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no pending legal proceeding believed likely to materially affect the company.
Important facts for investors to verify
- Whether the $2.7 million commercial loan charge-off is isolated and how credit quality, criticized loans and the allowance develop.
- How unrealized securities losses and interest-rate changes affect tangible book value, capital, and any potential need to sell securities.
- Deposit retention and pricing as time deposits mature, and the impact of higher funding costs on net interest margin.
- The final CECL transition adjustment and its effect on reserves, earnings and regulatory capital.
- Whether loan growth, insurance commissions and cost savings can offset credit costs and changes in rates; the filing provides no formal earnings guidance.