CB Financial Services, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company operates Community Bank and an insurance agency in southwestern Pennsylvania, West Virginia, and Ohio. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
- Q2 earnings: Net interest income was $9.17 million, up 28.6% year over year. Net income was $0.97 million versus $1.80 million; diluted EPS was $0.19 versus $0.44. The quarter included $0.77 million of merger-related expense and a $0.60 million loan-loss provision.
- First-half earnings: Net interest income was $16.78 million versus $14.13 million. Net income was $2.33 million versus $3.51 million; diluted EPS was $0.51 versus $0.85. The six-month provision was $2.10 million versus $0.72 million, and merger-related expense was $0.79 million.
- Revenue and expenses: Q2 interest and dividend income was $10.69 million and noninterest income $2.13 million. Noninterest expense rose 50.6% to $9.49 million, reflecting merger costs, added staff, and intangible amortization. For the first half, noninterest income was $4.21 million and noninterest expense $16.16 million.
- Margins and returns: Tax-equivalent net interest margin was 3.52% in Q2 versus 3.56% a year earlier, and 3.53% for the first half versus 3.59%. First-half return on average assets was 0.45%, compared with 0.82%.
- Balance sheet: Total assets were $1.232 billion at June 30, up 31.8% from year-end 2017. Net loans were $882.3 million, up 19.9%; deposits were $1.025 billion, up 32.5%; stockholders’ equity was $133.7 million. The increases largely reflect the First West Virginia Bancorp (FWVB) acquisition.
- Funding and liquidity: Short-term borrowings were $47.2 million and other borrowed funds $23.3 million. Cash and due from banks totaled $24.2 million; unpledged securities were $131.6 million. Management stated liquidity was sufficient. First-half operating cash flow was $3.8 million versus $6.6 million; cash ended the period at $24.2 million.
- Capital and credit quality: The Bank was categorized as well capitalized. At June 30, common equity Tier 1 and Tier 1 risk-based capital ratios were each 12.03%; total risk-based capital was 13.13%; Tier 1 leverage was 9.23%. Nonperforming loans were 0.81% of loans, and nonperforming assets 0.66% of assets.
Material changes and unusual items
- FWVB acquisition closed April 30, 2018, adding eight branches and expanding the company’s West Virginia and eastern Ohio presence. Consideration was approximately $51.3 million, including $9.8 million cash and 1,317,647 shares. FWVB contributed approximately $0.39 million net income from May 1 through June 30. Preliminary purchase accounting recorded $10.5 million goodwill and $12.8 million core deposit intangibles.
- Management cited loan growth and credit concerns in explaining the higher provision. First-half net charge-offs were approximately $1.5 million, including charge-offs on three commercial and industrial relationships.
- The company disclosed a prior-period loan collateral error: loss of a first-lien position led to a $0.30 million pretax provision in Q1 2018. The filing says 2017 results had been overstated by $0.237 million after tax, and the six-month 2018 results were reduced by the same amount after tax; management judged the error immaterial to 2017 and estimated 2018 annual results.
- The federal corporate tax rate reduction and tax-exempt bank-owned life insurance income reduced the reported effective tax rate. The first-half effective rate was 14.7%; management estimated an expected 2018 rate of 17.4% excluding a one-time life-insurance claim. West Virginia state tax effects remained under evaluation.
- Available-for-sale securities had $4.15 million of gross unrealized losses at June 30. Management attributed these primarily to interest-rate changes and stated it did not intend, and was not more likely than not required, to sell the securities before recovery or maturity.
- After quarter-end, Exchange Underwriters merged with Beynon Insurance on August 1 for approximately $1.8 million; the price was expected to be allocated to a customer-list intangible.
Outlook, risks, and contingencies
The filing provides no formal earnings or revenue guidance. Management anticipated future growth from the expanded FWVB footprint and services, while noting integration, expense control, credit quality, interest rates, deposit flows, local economic conditions, competition, and regulatory changes as risks. Time deposits of $95.8 million mature within one year; retention or replacement funding could affect funding costs. The company reported $192.3 million of unused credit commitments and letters of credit, which are not equivalent to expected cash outflows. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated no pending legal proceeding was expected to have a material adverse effect.
Important facts for investors to verify
- Whether FWVB integration delivers the anticipated growth and how merger-related and ongoing operating costs develop.
- Credit trends, especially commercial and industrial exposures, charge-offs, the allowance for loan losses, and acquired-loan fair-value marks.
- Deposit retention and repricing, near-term time-deposit maturities, borrowing needs, and the effect of higher rates on funding costs and net interest margin.
- Final purchase-price allocation and West Virginia deferred-tax calculations, including the expected tax rate.
- The collateral-control error’s remediation and whether subsequent disclosures indicate any further financial impact.
- Changes in unrealized securities losses, liquidity availability, and regulatory capital ratios.