CB Financial Services, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company operates Community Bank, serving southwestern Pennsylvania and West Virginia, and an insurance brokerage subsidiary.
Financial performance and position
- Third-quarter results: Net income was $2.7 million, down 32% from $3.9 million a year earlier; diluted EPS was $0.52 versus $0.77. Net interest income was $10.7 million, down 2.7%. GAAP net interest margin declined to 3.13% from 3.29% (FTE: 3.14% versus 3.30%).
- Nine-month results: Net income rose to $9.6 million from $7.1 million; diluted EPS increased to $1.87 from $1.37. Net interest income increased 7.6% to $33.4 million. GAAP net interest margin improved to 3.31% from 3.17% (FTE: 3.32% versus 3.18%).
- Interest income and costs: Nine-month interest and dividend income grew 33.8% to $45.3 million, led by loan growth and higher yields. Interest expense rose 326% to $11.9 million, principally as deposit rates repriced; average interest-bearing deposit cost increased to 1.61% from 0.35%. The higher funding cost constrained Q3 margin and earnings.
- Noninterest items and expenses: Nine-month noninterest income was broadly flat at $7.5 million. Insurance commissions increased, while prior-year branch-sale gains did not recur. Noninterest expense rose 8.2% to $28.0 million, including higher salaries, core-processing and interactive teller machine costs.
- Loans and credit: Total loans increased 5.0% from year-end to $1.10 billion, driven by commercial and industrial, commercial real estate and residential lending; consumer loans declined after the company discontinued indirect auto lending in June. Nonperforming loans fell to $3.3 million, or 0.30% of loans, from $5.8 million, or 0.55%. The loan allowance was $10.8 million, 0.98% of loans, versus $12.8 million, 1.22%, at year-end. Nine-month provision for credit losses was $917,000 versus $3.8 million in 2022, when a large commercial loan charge-off drove provision expense.
- Cash flow and liquidity: Operating activities provided $17.7 million in the first nine months; investing used $44.4 million and financing used $24.4 million. Cash and due from banks declined $51.1 million to $52.6 million, largely as funds supported loan growth. Deposits declined $32.2 million to $1.24 billion. Management stated liquidity was sufficient; available sources included $20.8 million of unpledged securities, $415.3 million of available FHLB capacity, a $109.2 million FRB line and unused bank lines totaling $50.0 million.
- Debt and capital: Borrowings totaled $34.7 million, including $20.0 million of FHLB advances with a 24-month term and 4.92% rate; there were no short-term borrowings. Stockholders’ equity was $114.8 million. The Bank remained “well capitalized”; actual CET1, total capital and leverage ratios were 12.77%, 13.90% and 9.37%, respectively. Book value per share was $22.43 and tangible book value per share was $20.10.
- Cash distributions: The company paid $3.8 million in dividends during the nine months, or $0.75 per share. Its share repurchase program expired May 1, 2023.
Material changes, outlook and risks
- CECL adoption on January 1, 2023 reduced the loan allowance by $3.4 million and increased the unfunded-commitment allowance by $718,000, producing a $2.1 million after-tax increase to retained earnings. The company recorded $917,000 of credit-loss provision for the nine-month period.
- Available-for-sale debt securities had $37.8 million of gross unrealized losses against $208.4 million amortized cost at September 30. Management attributed losses principally to market interest rates, reported no identified credit impairment, and said it did not intend, and was not more likely than not required, to sell the securities before recovery or maturity. Accumulated other comprehensive loss was $29.7 million.
- Interest-rate risk remains significant: the company’s model estimated that an immediate 400-basis-point increase would reduce economic value of equity by 21.0%, while modeled one-year net interest income declined 0.3%. A 400-basis-point decrease was modeled to reduce net interest income 11.5%. These are scenario estimates, not forecasts.
- Liquidity and funding risks include deposit competition and maturities: $83.4 million, or 47.0% of time deposits, mature within one year. Management noted replacement funding could cost more. At period-end, 60.5% of deposits were FDIC-insured and 16.9% were collateralized; 22.6% were uninsured.
- Cybersecurity incident: After quarter-end, a third-party vendor notified the Bank of a MOVEit-related data incident. The Bank estimated approximately 33% of customers and 26% of accounts were affected, notified affected customers and informed regulators. Potentially exposed data included personal and account identifiers. The company had incurred costs and could incur further expenses, but did not then expect a material adverse effect; the full scope was still under evaluation.
- The filing provides no specific earnings or financial guidance. Management cited economic conditions, interest rates, deposit flows, credit quality, competition, expense control, regulation and execution of efficiency initiatives among factors that could affect results. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether deposit pricing, deposit mix and funding needs continue to pressure net interest margin and earnings.
- Deposit retention and renewal outcomes for the $83.4 million of time deposits maturing within one year, and the availability and cost of contingent borrowing sources.
- Loan growth quality and trends in criticized, delinquent and nonperforming loans, particularly commercial real estate and commercial lending; also review the assumptions underlying the CECL allowance.
- How unrealized securities losses and accumulated other comprehensive loss evolve, including any need to sell securities before recovery.
- The final scope, remediation costs, customer impacts and any legal or regulatory consequences of the vendor cybersecurity incident.
- Whether operating costs, including staffing, data processing and technology investments, are offset by revenue growth and expected efficiency benefits.