Business context and reporting period
CB Financial Services, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company operates Community Bank, serving southwestern Pennsylvania, and Exchange Underwriters, an insurance agency. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Financial results and condition
- Third quarter: Net income was $2.064 million, up 31% from $1.575 million a year earlier; diluted EPS was $0.50 versus $0.38. Net interest income under GAAP was $7.353 million, up 5.4%; noninterest income was $1.818 million, essentially unchanged; and noninterest expense was $5.897 million, down 4.3%.
- Nine months: Net income was $5.569 million versus $5.558 million; diluted EPS was $1.36 in both periods. GAAP net interest income declined 0.7% to $21.483 million, while noninterest income rose 5.9% to $5.860 million and noninterest expense rose 3.7% to $18.418 million.
- Margins and returns: Tax-equivalent net interest margin was 3.56% in Q3, down from 3.68%; for the nine months it was 3.58%, down from 3.80%. Q3 return on average assets/equity was 0.91%/8.81%, compared with 0.76%/6.95%; nine-month figures were 0.85%/8.12%, compared with 0.89%/8.34%. Tax-equivalent net interest income differs from GAAP: $7.485 million for Q3 and $21.871 million year to date.
- Balance sheet: Assets were $908.3 million, up 7.4% from year-end 2016. Net loans were $695.7 million, up 3.2%; deposits were $762.4 million, up 9.2%; and stockholders’ equity was $93.2 million, up 4.1%. Cash and due from banks totaled $43.7 million.
- Borrowings and liquidity: Short-term borrowings were $24.7 million and other borrowed funds were $24.5 million, compared with $27.0 million and $28.0 million, respectively, at year-end. Management said liquidity was sufficient. The company reported $20.0 million of unpledged securities, FHLB and Federal Reserve borrowing facilities, and $40.0 million of bank lines with no draws outstanding on the latter facilities.
- Cash flow: For the nine months, operating cash flow was $9.4 million, investing cash flow was negative $35.6 million, and financing cash flow was positive $55.6 million. Cash increased $29.5 million, primarily alongside deposit growth. Dividends paid were $2.7 million.
Material changes versus comparable periods
- Q3 earnings improved with higher loan-related interest income, a lower loan-loss provision ($0.300 million versus $0.450 million), and lower noninterest expense. Management attributed the expense decline in part to recoveries from prior loan-collection matters; it identified those proceeds as nonrecurring.
- For the nine months, provision for loan losses fell to $1.020 million from $1.600 million, while net charge-offs increased to $0.667 million from $0.625 million. Management cited improved credit quality and loan payoffs in explaining the lower provision.
- Deposit growth supported liquidity and asset growth, including higher cash and securities. It included a $27.1 million increase in school district and municipal deposits. Interest expense rose as interest-bearing deposits grew and deposit costs increased.
- Construction loans increased materially, from $10.6 million at year-end to $29.0 million. Commercial and industrial loans rose to $85.7 million from $80.8 million.
- Nonperforming assets declined to $7.8 million from $8.6 million at year-end; nonperforming loans were 1.05% of total loans versus 1.24%. The allowance for loan losses was $8.2 million, compared with $7.8 million.
Outlook, commentary and risks
The filing provides no specific earnings or financial guidance. Management expected funding commitments to be met and stated that liquidity was adequate, while noting that deposit retention, loan demand and funding costs depend on market conditions. The company was categorized as well capitalized; the Bank’s actual common equity Tier 1, total capital and leverage ratios were 13.18%, 14.43% and 9.48%, respectively.
Management cited economic conditions, interest rates, deposit flows and competition, borrower repayment capacity, real estate values, credit quality, cost control, regulation and acquisition integration as risks. It also noted that a potential corporate tax-rate reduction could require an initial charge to reduce deferred tax assets; the effect could not yet be determined. Off-balance-sheet commitments and letters of credit totaled $178.1 million, up from $138.5 million at year-end; management said many commitments may expire undrawn. The filing reported no pending legal proceeding believed likely to have a material adverse effect and no material change in market-risk disclosures. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether deposit growth—particularly municipal and school district balances—persists, and how deposit repricing affects funding costs and net interest margin.
- Whether construction and commercial loan growth is accompanied by stable credit performance; monitor delinquencies, criticized loans, charge-offs and allowance adequacy.
- How much Q3 profitability benefited from nonrecurring loan-collection proceeds and whether those gains recur.
- The scale and potential funding needs of the $178.1 million in commitments, and the maturity and retention of time deposits due within one year.
- The effect of evolving tax legislation on deferred tax assets and future tax expense.