CB Financial Services, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2015; filed August 7, 2015. CB Financial is a Pennsylvania bank holding company operating Community Bank and an insurance brokerage subsidiary. Its community banking business serves southwestern Pennsylvania. The October 2014 FedFirst merger added five branches and expanded its market reach, making year-over-year results materially affected by the acquired business.
Financial results and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net interest income | $7.27 | $4.18 | $14.72 | $8.29 |
| Provision for loan losses | $0.38 | — | $0.68 | — |
| Noninterest income | $1.81 | $0.77 | $3.63 | $1.50 |
| Noninterest expense | $5.54 | $4.05 | $11.28 | $7.50 |
| Net income | $2.24 | $0.74 | $4.54 | $1.82 |
| Diluted earnings per share | $0.55 | $0.31 | $1.11 | $0.77 |
- Q2 net interest margin was 3.78%, versus 3.40% a year earlier; first-half margin was 3.83%, versus 3.39%. These margins use tax-equivalent interest income.
- At June 30, total assets were $836.8 million, down 1.1% from year-end 2014. Net loans were $657.5 million, down $23.0 million; deposits were $695.5 million, down $2.0 million. Stockholders’ equity was $84.7 million, up 3.4%.
- Cash and due from banks totaled $35.4 million, up from $11.8 million at year-end. First-half operating cash flow was $46.0 million, including substantial proceeds from residential loan sales; investing activities used $8.6 million and financing activities used $13.7 million.
- Short-term borrowings were $22.8 million, down from $46.7 million at year-end; other borrowed funds were $29.0 million, up from $15.1 million. Total deposits and borrowings were not presented as a single debt measure.
- The Bank’s regulatory capital ratios were 12.84% for Common Equity Tier 1, 12.84% for Tier 1 risk-based capital, 13.81% for total risk-based capital, and 9.06% for Tier 1 leverage. The Bank was categorized as well capitalized.
Material changes versus comparable periods
- Q2 net income increased $1.5 million and first-half net income increased $2.7 million year over year. Management attributed the improvement principally to the FedFirst merger and, for comparison, $665,000 of merger-related costs in the 2014 periods.
- Higher average loan balances following the merger drove most of the increase in interest income and net interest income. Insurance commissions also rose following the acquisition of Exchange Underwriters.
- Expense growth reflected acquired employees and branches, core deposit intangible amortization, technology and processing costs, and other merger-related operating costs. The 2015 periods also included a loan-loss provision, while 2014 had none.
- Loans declined from year-end mainly because the Company sold $38.2 million of acquired residential mortgages, largely long-term fixed-rate loans outside its usual lending area. Consumer loans, mainly indirect auto, and commercial real estate loans increased.
- Cash rose partly due to $45.8 million of residential loan-sale proceeds, including $38.2 million from acquired loans, and a $1.2 million federal tax refund. Securities declined $8.1 million as maturities and calls were used partly to repay borrowings.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management said liquidity was sufficient and expected funds to meet current commitments; it planned to use loan-sale proceeds to fund commercial loan originations and repay a $12 million borrowing in Q3.
- Management cited loan growth, charge-offs and an increase in substandard loans as reasons for the 2015 loan-loss provisions. Net charge-offs were $167,000 in Q2 and $184,000 for the first half.
- Nonperforming assets were $7.74 million, or 0.92% of assets, versus $7.31 million, or 0.86%, at year-end. Nonperforming loans were 1.12% of total loans, compared with 1.03%. Accruing troubled debt restructurings totaled $4.19 million.
- First-half insurance commissions included $338,000 of contingent fees dependent on factors including premiums and incurred losses. The quarter recorded a $28,000 net loss on loan sales, primarily associated with the acquired mortgage sale.
- Available liquidity included $35.4 million of cash, $24.4 million of unpledged securities, and borrowing capacity under FHLB and Federal Reserve facilities. Time deposits of $61.5 million mature within one year; management noted replacement funding could cost more.
- Off-balance-sheet credit commitments totaled $136.4 million, including commercial lines, standby letters of credit and construction mortgages; actual draws may be lower because commitments can expire unused.
- A shareholder class action related to the FedFirst merger was dismissed with prejudice, but the plaintiff appealed; oral argument was expected in October 2015. The Company said it believed the claims were without merit.
- Forward-looking results are exposed to local economic conditions, rates, deposit and loan demand, borrower repayment, real estate values, competition, acquisition integration, expense control and regulatory changes. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the year-over-year earnings improvement is sustainable and attributable to ongoing operations rather than merger-related scale and comparison effects?
- Whether loan quality, criticized loans, nonperforming assets and the allowance for loan losses remain adequately managed as commercial and indirect-auto lending grows.
- Whether acquired mortgage sales, loan mix changes and planned commercial originations affect future yields, credit risk and net interest margin.
- The renewal and pricing of maturing time deposits, brokered or reciprocal deposits, and borrowings, including the planned $12 million repayment.
- The outcome and potential cost of the appealed merger-related shareholder litigation, and the realization of contingent insurance commissions.