CB Financial Services, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. CB Financial is a Pennsylvania bank holding company operating Community Bank in southwestern Pennsylvania and an insurance agency subsidiary. Unless otherwise noted, dollar amounts are in millions.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $6.976 | $7.287 | $21.643 | $22.011 |
| Provision for loan losses | $0.450 | $0.300 | $1.600 | $0.975 |
| Noninterest income | $1.821 | $1.905 | $5.537 | $5.537 |
| Noninterest expense | $6.165 | $5.860 | $17.767 | $17.142 |
| Net income | $1.575 | $2.128 | $5.558 | $6.663 |
| Diluted EPS | $0.38 | $0.52 | $1.36 | $1.64 |
| Net interest margin, tax-equivalent | 3.68% | 3.83% | 3.80% | 3.83% |
- At September 30, total assets were $833.6 million, net loans $671.9 million, deposits $678.3 million, total liabilities $743.5 million, and equity $90.1 million. Versus December 31, 2015, assets rose 0.3%, net loans declined 0.7%, deposits declined 0.1%, and equity increased 3.7%.
- Cash and due from banks totaled $14.9 million. Nine-month operating cash flow was $8.2 million versus $49.3 million in 2015; investing activities used $2.1 million and financing activities used $2.5 million. Cash increased $3.6 million over the period.
- Borrowings totaled $61.6 million: $33.6 million short-term and $28.0 million in other borrowed funds, principally fixed-rate FHLB advances. The Bank reported regulatory capital ratios of 13.26% CET1, 14.49% total capital, and 9.87% Tier 1 leverage, and was categorized as well capitalized.
Changes and drivers versus comparable periods
- Q3 net income fell $0.553 million, or about 26%, and nine-month net income fell $1.105 million, or about 17%. Lower net interest income, higher credit provisions, and increased operating expenses were principal factors.
- Q3 net interest income declined 4.3%; management attributed the pressure chiefly to lower loan yields in a competitive, low-rate environment. Q3 loan yield declined 23 basis points year over year; the tax-equivalent net interest margin fell 15 basis points.
- The nine-month provision rose to $1.6 million from $0.975 million. Management cited growth in special-mention loans, indirect auto loan growth and charge-offs, and an additional provision on acquired loans. Nine-month net charge-offs were $0.624 million, including $0.476 million of auto loan charge-offs.
- Noninterest expense increased 5.2% in Q3 and 3.6% year to date. Higher salaries and benefits, occupancy, and equipment costs contributed; occupancy costs included accelerated depreciation on improvements at the existing operations center ahead of a new center under construction.
- Noninterest income was flat year to date: lower insurance commissions and contingency fees were offset in part by higher gains on residential mortgage loan sales and investment securities. Q3 insurance commissions declined $0.096 million.
- Net loans were down $4.9 million from year-end. Construction loans fell $11.4 million, partly offset by $8.9 million growth in consumer loans, mainly indirect auto lending. Nonperforming assets declined to $7.8 million (0.94% of assets) from $11.0 million (1.32%) at year-end; nonperforming loans were 1.08% of total loans versus 1.56%.
Outlook, risks, and unusual items
- No specific earnings or financial guidance was provided. Management said it believed liquidity was sufficient for short- and long-term needs and anticipated sufficient funds for current funding commitments.
- Liquidity sources included $14.9 million of cash, $3.6 million of unpledged securities, and borrowing facilities: up to $287.7 million from FHLB, $86.1 million from the Federal Reserve, and $40.0 million from other banks. The filing reports $30.1 million of FHLB borrowing outstanding and $9.9 million of FHLB capacity used for a standby letter of credit.
- Time deposits of $52.2 million mature within one year. Management noted possible deposit outflows and the risk that replacement deposits or borrowings could cost more. Deposit competition, local economic conditions, interest rates, real estate values, borrower repayment capacity, regulation, expense control, and acquisition integration were identified as risks.
- A $0.566 million pretax gain from valuation of two foreclosed commercial properties benefited nine-month results. One property was sold; the other was transferred for future company operations. Investment securities sales generated gains of $0.022 million in Q3 and $0.080 million year to date, described as intended to use a merger-acquired capital loss carryforward.
- Off-balance-sheet credit commitments totaled $113.2 million, including $54.7 million of commercial lines of credit and $10.9 million of standby letters of credit. The company said these commitments generally may expire undrawn and reported no corresponding reserve, citing historical absence of losses.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It disclosed no pending legal proceedings believed to have a material adverse effect.
Investor verification priorities
- Review credit quality by loan category, particularly the rise in special-mention loans, indirect auto charge-offs, acquired-loan allowances, and the composition of nonperforming assets and TDRs.
- Assess sustainability of net interest income and margin, including loan repricing, deposit costs, FHLB borrowing costs, and the effect of acquired-loan discount accretion.
- Check deposit retention and liquidity needs as $52.2 million of time deposits mature within a year, and confirm the availability and collateral terms of borrowing lines.
- Separate recurring earnings from the $0.566 million foreclosed-property valuation gain, securities-sale gains, and other period-specific items; review ongoing costs for the new operations center.
- Compare operating cash flow across periods in light of the large year-over-year difference and the changes in mortgage-loan sale proceeds and tax payments.