CB Financial Services, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. CB Financial Services is a community bank holding company operating Community Bank in southwestern Pennsylvania and West Virginia, alongside an insurance brokerage subsidiary. This unaudited filing covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Earnings and revenue: Net income was $3.05 million, up 7.1% from $2.85 million; diluted EPS was $0.58 versus $0.52. Net interest income was $9.89 million, down 0.8%. Noninterest income fell 17.7% to $2.61 million, largely reflecting the prior-year securities gain and lower loan-sale gains. Total noninterest expense declined 7.9% to $8.66 million. Income before tax was $3.85 million versus $3.76 million.
- Margins: Net interest margin was 3.08% GAAP and 3.10% on a fully tax-equivalent basis, compared with 3.04% and 3.05%, respectively, in Q1 2021. Return on average assets was 0.87% versus 0.81%; return on average equity was 9.50% versus 8.54%.
- Cash flow: Operating activities provided $3.17 million, compared with $4.47 million in Q1 2021. Investing activities used $18.45 million, including $26.83 million of securities purchases; financing activities provided $19.20 million. Cash and due from banks ended at $123.59 million, up $3.91 million from year-end.
- Loans and credit: Gross loans were $1.021 billion, essentially unchanged from year-end; excluding PPP loans, loans increased $16.1 million. The allowance for loan losses was $11.60 million, or 1.14% of loans (1.15% excluding PPP loans). There was no loan-loss provision in either comparative quarter; Q1 2022 recorded $13,000 of net recoveries. Nonperforming loans were $7.30 million, 0.72% of loans, versus $7.27 million and 0.71% at year-end.
- Deposits, borrowings and liquidity: Deposits increased $23.7 million to $1.250 billion. Short-term borrowings were $39.2 million; other borrowings were $17.6 million, including $14.6 million of subordinated debt. Management said liquidity was sufficient. Available sources included $123.6 million of cash, $83.7 million of unpledged securities, $347.8 million of available FHLB capacity, a $102.7 million FRB borrowing capacity, and $50 million of bank credit lines. $72.2 million, or 55.9%, of time deposits mature within one year.
- Capital and equity: Total assets were $1.439 billion, up 0.9% from year-end. Stockholders’ equity declined to $122.2 million from $133.1 million, principally due to a $9.69 million after-tax other comprehensive loss as interest rates reduced securities values, plus share repurchases and dividends. Book value per share was $23.69 versus $25.31; tangible book value was $20.86 versus $22.45. The Bank remained “well capitalized”; its CET1 ratio was 11.99% and total capital ratio 13.20%.
Material changes and notable items
- Available-for-sale debt securities had a $14.16 million gross unrealized loss at March 31, versus $3.82 million at year-end. Management attributed the losses primarily to higher market interest rates and said it did not intend, and was not likely required, to sell the securities before recovery or maturity.
- PPP loans declined to $8.2 million from $24.5 million. Q1 loan interest and fee income included $445,000 from PPP loans.
- Lower deposit costs and operating expenses supported earnings. Management attributed lower expenses in part to branch consolidations and divestitures completed in 2021; new executive hires and strategic initiatives partly offset savings.
- The company repurchased 131,840 shares for $3.38 million during Q1 under its prior program, which was completed February 15. On April 21, 2022, it announced a separate program to repurchase up to $10 million of common stock.
- The company expects to adopt the current expected credit loss standard (CECL) on January 1, 2023. It expects a one-time allowance adjustment but had not determined its amount or overall impact.
Outlook, risks and contingencies
The filing provides no quantitative earnings or revenue guidance. Management stated it expected to have sufficient funds for current funding commitments and described ongoing monitoring of liquidity and interest-rate risk. The filing identifies risks including economic conditions, inflation and market-rate changes, deposit flows, loan demand and repayment, real estate values, competition, regulatory changes, COVID-19 effects, and execution of cost-saving and growth initiatives. Interest-rate simulations estimated that an immediate +300 basis-point shock would increase modeled one-year net interest income 11.2% while reducing economic value of equity 5.7%; a -100 basis-point scenario reduced modeled net interest income 5.5% and EVE 5.1%. Management cautioned that these are assumption-dependent estimates, not forecasts.
Off-balance-sheet commitments totaled $161.4 million, including $74.7 million of commercial lines of credit and $49.8 million of construction mortgages; these 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 concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit growth persists and how the $72.2 million of time-deposit maturities within one year are retained or replaced, including the resulting funding cost.
- Whether securities valuation losses remain unrealized or require recognition through sale or impairment, and how rate movements affect tangible book value and capital.
- Trends in commercial real estate and other criticized loans, nonaccrual balances, the allowance, and the eventual CECL adoption adjustment.
- Whether lower operating costs and improved margins can offset pressure on loan yields, noninterest income, and rising funding costs.
- Completion and funding of the newly announced $10 million repurchase program, alongside dividends, capital needs and regulatory limits on distributions.