CB Financial Services, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2022. CB Financial is a Pennsylvania-based bank holding company operating Community Bank in southwestern Pennsylvania and West Virginia, alongside an insurance brokerage subsidiary.
Financial performance and condition
- Quarterly earnings: Net income was $3.93 million, compared with $1.98 million in Q3 2021; diluted EPS was $0.77 versus $0.37. Net interest income increased 10.0% to $11.02 million. Net interest margin was 3.29% GAAP and 3.30% fully tax-equivalent (FTE), versus 2.88% and 2.89%, respectively.
- Nine-month earnings: Net income was $7.09 million versus $4.61 million; diluted EPS was $1.37 versus $0.85. Net interest income rose 3.8% to $31.07 million. GAAP and FTE net interest margins were 3.17% and 3.18%, compared with 2.92% and 2.93%.
- Income and expenses: Nine-month interest and dividend income increased to $33.86 million, while interest expense was $2.79 million. Noninterest income was $7.46 million, slightly below the prior-year $7.59 million. Noninterest expense fell to $25.89 million from $32.89 million, partly because 2021 included branch-related asset write-downs and impairment, and because of lower costs following branch optimization.
- Loans and credit: Loans totaled $1.043 billion, up 2.2% from year-end 2021; excluding the $23.8 million decline in PPP loans, loans increased $45.9 million. The allowance was $12.85 million, or 1.23% of loans. Nonperforming loans were $5.88 million, or 0.56% of loans, down from $7.27 million and 0.71% at year-end.
- Balance sheet and funding: Total assets were $1.426 billion, essentially unchanged from December 31, 2021. Deposits grew $49.2 million to $1.276 billion. Cash and due from banks was $122.8 million; short-term borrowings declined $21.2 million to $18.1 million. Other borrowings were $17.6 million, including $14.6 million of subordinated debt and $3.0 million of FHLB borrowings.
- Cash flow: For the nine months, operating activities provided $9.05 million; investing activities used $25.77 million; financing activities provided $19.85 million. Cash and due from banks increased $3.13 million to $122.80 million.
- Equity and securities: Stockholders’ equity fell 19.8% to $106.7 million. Accumulated other comprehensive loss widened to $26.65 million, principally reflecting falling fair values of available-for-sale debt securities as interest rates rose. Those securities had $33.97 million of gross unrealized losses at quarter-end. Book value per share was $20.94 and tangible book value per share was $18.25, down from $25.31 and $22.45 at year-end 2021.
Material changes and unusual items
- A $2.7 million charge-off on a commercial and industrial loan to a borrower ceasing operations contributed to the $3.78 million nine-month loan-loss provision; the comparable 2021 period had a $1.20 million provision recovery. Q3 provision was zero.
- Q3 noninterest income included a $439,000 gain from selling former branch properties; the nine-month gain was $431,000. Insurance commissions increased, while securities results weakened: the nine-month securities loss was $252,000 versus a $482,000 gain in 2021.
- The company repurchased $4.68 million of stock during the nine months and paid $3.70 million in dividends. A new $10 million repurchase authorization began in May 2022; 57,710 shares had been repurchased under it through September 30.
Outlook, risks and contingencies
- The filing provides no numerical earnings or margin guidance. Management stated it believed liquidity was sufficient for short- and long-term needs and that it anticipated sufficient funds for current funding commitments.
- Liquidity sources included $122.8 million in cash, $14.2 million in unpledged securities, $429.1 million of available FHLB capacity, up to $105.5 million of FRB borrowing capacity, and $50 million in bank credit lines. Management noted that $76.9 million, or 63.6%, of time deposits mature within one year and could require replacement funding at higher rates.
- The Bank was categorized as well capitalized. At September 30, its CET1, total capital and Tier 1 leverage ratios were 12.02%, 13.27% and 8.51%, respectively.
- Key exposures include interest-rate movements, deposit pricing and retention, loan demand and credit performance, local economic conditions, real estate values, competition, inflation and regulatory changes. Management’s interest-rate model estimated that an immediate +300-basis-point shock would reduce economic value of equity by 15.3%, while modeled net interest income at risk increased 2.1%; these are scenario estimates, not forecasts.
- The company was preparing for adoption of the current expected credit loss standard (CECL) on January 1, 2023. Management expected a one-time allowance adjustment but could not yet estimate its size or overall financial-statement impact.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company disclosed ordinary-course claims and lawsuits, but no pending legal proceeding believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether deposit costs continue to rise and how deposit retention and upcoming time-deposit maturities affect funding costs and net interest margin.
- Credit trends behind the commercial and industrial charge-off, changes in criticized loans, and the adequacy of the allowance.
- The effect of continued rate changes on securities values, accumulated other comprehensive loss, capital and reported book value.
- The final CECL transition adjustment, and whether share repurchases and dividends remain consistent with regulatory capital and liquidity needs.