CB Financial Services, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2019; comparisons are primarily with the three and nine months ended September 30, 2018, and with December 31, 2018 for balance-sheet items. CB Financial is a community bank holding company serving southwestern Pennsylvania, West Virginia and Ohio, with a separate insurance brokerage subsidiary. The 2019 year-to-date comparison reflects the full-period effect of the April 2018 FWVB merger.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $11.1 million | $10.2 million | $32.2 million | $27.0 million |
| Noninterest income | $2.2 million | $2.1 million | $6.9 million | $6.3 million |
| Net income | $3.7 million | $2.3 million | $9.7 million | $4.6 million |
| Diluted earnings per share | $0.69 | $0.42 | $1.77 | $0.95 |
| Tax-equivalent net interest margin | 3.74% | 3.61% | 3.67% | 3.56% |
- At September 30, total assets were $1.328 billion, up 3.6% from year-end 2018. Net loans were $922.4 million, up 2.1%; deposits were $1.126 billion, up 3.6%.
- Cash and due from banks rose to $88.4 million from $53.4 million. Stockholders’ equity was $148.1 million, up 7.6%; book value per share was $27.26.
- Cash flows for the first nine months: $12.7 million provided by operations, $8.1 million used in investing, and $30.5 million provided by financing. Cash increased $35.1 million.
- Borrowings comprised $29.1 million of short-term repurchase-agreement funding and $17.0 million of other borrowed funds. The Bank was reported as well capitalized: common equity Tier 1 ratio 11.97%, total capital ratio 13.09%, and Tier 1 leverage ratio 8.09%.
- The quarterly dividend was $0.24 per share; $3.9 million in dividends was paid in the first nine months.
Material changes and management commentary
- Q3 net income increased $1.5 million year over year. Management attributed improvement chiefly to loan growth and higher net interest income, alongside lower noninterest expenses. Q3 noninterest expense fell 9.3% to $8.5 million, notably reflecting reduced occupancy, equipment, FDIC assessment and merger-related costs.
- Year-to-date net income increased $5.0 million. Net interest income rose 19.6%, reflecting higher average loan and securities balances and yields; results also benefited from a lower loan-loss provision than in 2018. Merger-related expenses declined, while salaries, core-deposit-intangible amortization and other merger-related operating costs increased.
- Deposit interest expense continued to rise, with average interest-bearing deposit costs higher year over year. Management noted that higher-cost certificates of deposit may continue to affect funding costs until maturity, despite recent Federal Reserve rate cuts.
- Management said excess cash was being maintained partly to support expected loan demand. It reported sufficient liquidity, citing cash, $45.9 million of unpledged securities, and borrowing capacity, including FHLB, Federal Reserve and unaffiliated-bank facilities.
Risks, contingencies and unusual items
- Nonperforming loans were $7.8 million, or 0.84% of total loans, versus $6.3 million and 0.69% at year-end 2018. Nonperforming assets were $8.0 million, or 0.60% of assets. The allowance for loan losses was $9.75 million; the nine-month provision was $550,000, and net charge-offs were $358,000 versus $1.6 million in 2018.
- A $2.9 million commercial real estate relationship was placed on nonaccrual following alleged fraudulent activity and assigned to a receiver. The Company said the latest appraisal indicated no impairment and that it did not expect a loss.
- Off-balance-sheet credit commitments and letters of credit totaled $205.8 million. The Company said these are evaluated using its credit policies and historically had not produced losses; commitments may expire undrawn and are not necessarily future cash requirements.
- Management disclosed that disclosure controls were not effective at the reasonable-assurance level because material weaknesses in internal control over financial reporting remained. One identified weakness involved review controls and loan-segment classification; remediation steps were underway, but the weakness would not be considered remediated until controls operated effectively for a sufficient period and were tested.
- The filing describes ordinary-course claims and lawsuits but says none was believed likely to have a material adverse effect. Forward-looking risks include local economic conditions, interest rates, deposit flows, loan performance, real estate values, competition, regulation, cost control and acquisition integration.
- The Company adopted lease accounting in 2019, recognizing approximately $1.7 million of right-of-use assets and lease liabilities. It expected a one-time allowance adjustment upon adoption of the new credit-loss standard, but said the amount and overall impact could not yet be determined; the filing reports a delayed effective date for smaller reporting companies of January 1, 2023.
Key facts for investors to verify
- Progress and independent testing of remediation for the disclosed internal-control material weaknesses.
- Developments in the nonaccrual commercial real estate loan, receiver process, collateral valuation and any eventual loss.
- Trends in deposit pricing and retention, especially the $88.2 million of time deposits due within one year and the effect of higher-cost certificates on margins.
- Whether loan growth, cash deployment and credit quality support continued earnings growth; the filing provides no quantified earnings or margin guidance.
- The eventual allowance impact and implementation plans for the expected-credit-loss accounting standard.