CB Financial Services, Inc. — Q2 2017 Form 10-Q
Business context and period. The company is a Pennsylvania bank holding company operating Community Bank and insurance brokerage subsidiary Exchange Underwriters in southwestern Pennsylvania. This unaudited filing covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016. Dollar figures below are in millions unless noted.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $7.135 | $7.248 | $14.130 | $14.668 |
| Provision for loan losses | $0.300 | $0.300 | $0.720 | $1.150 |
| Noninterest income | $1.966 | $1.868 | $4.042 | $3.715 |
| Noninterest expense | $6.304 | $6.088 | $12.521 | $11.602 |
| Net income | $1.801 | $1.938 | $3.505 | $3.983 |
| Diluted earnings per share | $0.44 | $0.48 | $0.85 | $0.98 |
- Q2 net interest margin was 3.56%, versus 3.82% a year earlier; six-month margin was 3.59%, versus 3.86%. These are tax-equivalent measures reported in MD&A.
- At June 30, assets totaled $872.4 million, up 3.1% from year-end; net loans were $674.3 million, essentially flat, and available-for-sale securities were $116.5 million, up 9.7%.
- Deposits increased 4.1% to $727.1 million. Short-term borrowings declined to $25.5 million and other borrowed funds to $24.5 million. Total liabilities were $780.5 million; stockholders’ equity was $91.9 million.
- Six-month operating cash flow was $6.5 million, investing cash flow was negative $14.1 million, and financing cash flow was positive $22.0 million. Cash and due from banks rose to $28.7 million from $14.3 million at year-end.
- Bank regulatory capital remained well above “well-capitalized” thresholds: common equity Tier 1 and Tier 1 risk-based ratios were 13.44%; total capital was 14.69%; Tier 1 leverage was 9.58%.
Changes, commentary and risks
- Six-month net income fell 12.0% year over year. Lower net interest income and higher noninterest expense more than offset increased noninterest income and a lower loan-loss provision. Q2 net income declined 7.1% year over year.
- Interest expense rose as deposit balances and funding costs increased; management cited Federal Reserve rate increases. Acquired-loan credit-mark accretion also declined year over year, to $0.406 million for the first half from $0.773 million.
- Insurance commissions increased, including contingency fees. Management described these fees as dependent on factors including premiums and incurred losses. The filing does not provide a specific earnings outlook or quantitative guidance.
- Noninterest expense growth included costs associated with the new Operations Center and accelerated depreciation on improvements at the former facility. The prior-year first half included a $0.566 million gain from resolution of two problem commercial real estate loans, contributing to the year-over-year expense comparison.
- Credit indicators improved from year-end: nonperforming loans were $7.5 million, or 1.10% of loans, versus $8.4 million, or 1.24%; nonperforming assets were 0.90% of assets versus 1.02%. The allowance for loan losses was $8.1 million, about 1.18% of total loans. Management noted that additional provision may be needed as acquired loans pay down, depending on credit analysis.
- Liquidity resources included $28.7 million of cash, $36.0 million of unpledged securities, FHLB borrowing capacity, an $87.9 million Federal Reserve line, and $40.0 million of other bank lines. Management said liquidity was sufficient. Time deposits of $46.1 million mature within one year, creating potential replacement-funding and rate-cost exposure.
- Off-balance-sheet commitments and letters of credit totaled $169.9 million, up from $138.5 million at year-end. The company said these are evaluated using its credit policies and that no corresponding reserve was recorded, citing historical absence of losses.
- Management identified economic and local-market conditions, interest rates, deposit flows, loan demand and performance, competition, expense control, regulation, and acquisition integration as risks. A proposed federal corporate tax-rate reduction could require a charge to deferred tax assets, but the proposal was preliminary and its impact could not be assessed.
- After quarter-end, the company received approximately $218,000 of mortgage-insurance proceeds related to an acquired loan; it expected to record the gain in Q3 2017. Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no pending legal proceeding believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether net interest margin and funding costs stabilize as rates and deposit mix change.
- Whether contingency insurance commissions recur, and how much they contribute to noninterest income.
- Credit trends in commercial and industrial, commercial real estate, and acquired loan portfolios, including allowance adequacy and charge-offs.
- Whether Operations Center-related costs and other expense increases persist, and how the $218,000 insurance recovery is recorded.
- Deposit retention and refinancing needs for near-term time-deposit maturities, as well as the use and availability of borrowing facilities.
- Potential consequences of tax-law changes and the company’s material off-balance-sheet commitments.