UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: June 30, 2006
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ___________
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Commission file number: 000-51351
CB FINANCIAL CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
-------------------
NORTH CAROLINA 20-2928613
-------------- ----------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
3710 NASH STREET NORTH
POST OFFICE BOX 8189 (ZIP 27893)
WILSON, NORTH CAROLINA 27896-1120
---------------------------------
(Address of principal executive offices)
(252) 243-5588
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 4, 2006, there were 1,014,228 shares of the issuer's common stock
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
-1-
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Financial Condition
June 30, 2006 and December 31, 2005 .........................3
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 2006 and 2005.....4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005......................5
Notes to Consolidated Financial Statements...................6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................13
ITEM 3 - CONTROLS AND PROCEDURES.........................................17
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS...............................................18
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............18
ITEM 6 - EXHIBITS........................................................18
SIGNATURES....................................................................21
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
================================================================================
June 30, 2006 December 31,
(Unaudited) 2005*
--------- ---------
(Amounts in thousands,
except share data)
ASSETS
Cash and due from banks $ 4,100 $ 4,903
Interest-earning deposits in banks 5,504 4,607
Federal funds sold 4,247 --
CD's with other banks 964 5,453
Investment securities available for sale, at fair value 22,660 13,441
Investment securities held to maturity, at amortized cost -- 6,083
Loans 115,756 114,468
Allowance for loan losses (1,587) (1,775)
--------- ---------
NET LOANS 114,169 112,693
Accrued interest receivable 756 628
Stock in Federal Home Loan Bank of Atlanta, at cost 594 529
Premises and equipment 2,336 1,757
Bank-owned life insurance 1,364 1,338
Real estate owned 75 117
Other assets 1,827 1,222
--------- ---------
TOTAL ASSETS $ 158,596 $ 152,771
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand $ 10,509 $ 11,638
Savings 1,132 1,129
Money market and NOW 34,006 35,107
Time 90,368 81,195
--------- ---------
TOTAL DEPOSITS 136,015 129,069
Short term borrowings -- 1,055
Long term borrowings 11,405 11,488
Accrued interest payable 261 238
Accrued expenses and other liabilities 185 479
--------- ---------
TOTAL LIABILITIES 147,866 142,329
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, 20,000,000 shares authorized, none issued -- --
Common stock, no par value, 80,000,000 shares authorized;
1,014,228 shares issued and outstanding 9,640 9,640
Retained earnings 1,418 960
Accumulated other comprehensive loss (328) (158)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 10,730 10,442
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 158,596 $ 152,771
========= =========
*Derived from audited financial statements.
See accompanying notes
-3-
CB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(In thousands, except share and per share data)
INTEREST INCOME
Loans $ 2,376 $ 1,470 $ 4,607 $ 2,856
Investments 224 136 424 254
Federal funds sold 70 42 122 79
Interest-earning bank deposits 50 24 103 44
Other interest and dividends 37 34 105 65
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 2,757 1,706 5,361 3,298
---------- ---------- ---------- ----------
INTEREST EXPENSE
Money market, NOW and savings deposits 211 206 492 399
Time deposits 949 383 1,719 728
Borrowings 152 14 292 28
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,312 603 2,503 1,155
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,445 1,103 2,858 2,143
PROVISION FOR LOAN LOSSES 332 85 727 198
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,113 1,018 2,131 1,945
---------- ---------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts 139 104 267 223
Mortgage operations 96 36 163 86
Other income 18 72 57 120
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME 253 212 487 429
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 549 393 1,088 768
Occupancy and equipment 112 43 189 85
Data processing expenses 145 87 258 164
Other (Note D) 245 196 418 333
---------- ---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 1,051 719 1,953 1,350
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 315 511 665 1,024
INCOME TAXES 92 176 207 377
---------- ---------- ---------- ----------
NET INCOME $ 223 $ 335 $ 458 $ 647
========== ========== ========== ==========
NET INCOME PER COMMON SHARE
Basic $ .22 $ .33 $ .45 $ .64
Diluted .21 .32 .44 .64
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,014,228 1,007,714 1,014,228 1,007,714
Diluted 1,049,108 1,031,801 1,046,817 1,030,099
See accompanying notes.
-4-
CB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
================================================================================
Six months ended
June 30,
--------------------------
2006 2005
-------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 458 $ 647
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 88 79
Provision for loan losses 727 198
Provision for losses on real estate owned 10 --
Gain on sale of real estate owned -- (30)
Loss from sale of REO 32 69
Earnings on life insurance (26) (26)
Deferred income tax benefit (188) --
Change in assets and liabilities:
Increase in accrued interest receivable (128) (20)
Increase in other assets (311) (19)
Increase in accrued interest payable 23 12
Increase (decrease) in accrued expenses and other liabilities (294) 201
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 391 1,111
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net maturities of CD's with other banks 4,489 1,070
Purchase of available-for-sale securities (5,139) (3,022)
Maturities, sales and calls of available for sale investments 1,709 1,437
Purchase of held to maturity securities -- (1,224)
Net increase in loans (2,203) (3,006)
Purchase of FHLB stock (65) (168)
Purchases of premises and equipment (649) (26)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (1,858) (4,939)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Federal Home Loan Bank advances (83) (167)
Net decrease in short term borrowings (1,055) --
Increase in deposits 6,946 7,136
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,808 6,969
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,341 3,141
CASH AND CASH EQUIVALENTS, BEGINNING 9,510 10,794
-------- --------
CASH AND CASH EQUIVALENTS, ENDING $ 13,851 $ 13,935
======== ========
Supplemental disclosure of cash flow information
Interest Paid $ 2,480 $ 1,143
-------- --------
Taxes Paid $ 779 $ 244
-------- --------
See accompanying notes.
-5-
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE A - BASIS OF PRESENTATION
In management's opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the three and
six month periods ended June 30, 2006 and 2005, in conformity with accounting
principles generally accepted in the United States of America. The consolidated
financial statements include the accounts of CB Financial Corporation (the
"Company") and its wholly-owned subsidiary, Cornerstone Bank. Operating results
for the six month period ended June 30, 2006 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 2006.
In June 2005, the shareholders of Cornerstone Bank (the "Bank") approved an
Agreement and Plan of Reorganization pursuant to which the Bank became a
wholly-owned banking subsidiary of CB Financial Corporation, a North Carolina
corporation formed as a holding company for the Bank. At the closing of the
holding company reorganization (the "Reorganization"), one share of CB Financial
Corporation's no par value common stock was exchanged for each of the
outstanding shares of Cornerstone Bank's $5.00 par value common stock. The
Company currently has no operations and conducts no business on its own other
than its ownership of the Bank and the common shares of Financial Capital Trust
I, a Connecticut statutory trust to facilitate the issuance of $5 million of
trust preferred securities.
The organization and business of Cornerstone Bank, accounting policies followed
by the Bank and other information are contained in the notes to the consolidated
financial statements filed as part of the Company's 2005 annual report on Form
10-KSB. This quarterly report should be read in conjunction with such annual
report.
NOTE B - STOCK BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment," ("SFAS No. 123R") which was issued by the FASB in
December 2004. SFAS No. 123R revised SFAS No. 123 "Accounting for Stock Based
Compensation," and supersedes APB No. 25, "Accounting for Stock Issued to
Employees," (APB No. 25) and its related interpretations. SFAS No. 123R requires
recognition of the cost of employee services received in exchange for an award
of equity instruments in the financial statements over the period the employee
is required to perform the services in exchange for the award (presumptively the
vesting period). SFAS No. 123R also requires measurement of the cost of employee
services received in exchange for an award based on the grant-date fair value of
the award. SFAS No. 123R also amends SFAS No. 95 "Statement of Cash Flows," to
require that excess tax benefits be reported as financing cash inflows, rather
than as a reduction of taxes paid, which is included within operating cash
flows.
The Company adopted SFAS No. 123R using the modified prospective application as
permitted under SFAS No. 123R. Accordingly, prior period amounts have not been
restated. Under this application, the Company is required to record compensation
expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption.
Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value
method as prescribed by APB No. 25 and thus recognized no compensation expense
for options granted with exercise prices equal to the fair market value of the
Company's common stock on the date of grant.
-6-
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
STOCK OPTION PLANS
The Company has an Employee Stock Option Plan (the "Employee Plan") and a
Director Stock Option Plan (the "Director Plan") in effect at June 30, 2006. All
options outstanding under both plans as of December 31, 2005 were fully vested
and no new options were issued during the six-month period ending June 30, 2006.
Therefore, no option related compensation cost has been charged against income
for the six months ended June 30, 2006.
In 2003, the Company implemented the Employee Plan and the Director Plan
(together, the "Plans") that were approved by shareholders in 2002. Each plan
makes available options to purchase 76,461 shares of the Company's common stock
for an aggregate number of common shares reserved for options equal to 152,922.
No options were granted prior to 2003. On August 31, 2003, options to purchase
125,682 shares of common stock were granted. All options granted originally were
scheduled to vest over five years, with 20% vesting on the first anniversary of
the grant date, and 20% vesting annually thereafter. During 2005, an amendment
was made to the grants providing for accelerated vesting of all options,
resulting in all options being immediately vested. All unexercised options
expire ten years after the date of grant. Options granted under the Plans can
have a term of up to ten years from the date of grant, provided however, that in
the case of an employee who owns shares representing more than 10% of the
outstanding common stock at the time an Incentive Stock Option (ISO) is granted,
the term of such ISO shall not exceed five years. Vesting of options is
determined at the time of grant and ranges from immediate to ten years. Options
under the Employee Plan must be granted at a price that shall be the average of
the highest and lowest selling price on such exchange date or, if no sales on
such date, shall be the mean between the bid and asked price. In the case of the
employee who owns shares representing more than 10% of the Company's outstanding
shares of common stock at the time the ISO is granted, the exercise price shall
not be less than 110% of the market value of the optioned shares at the time the
ISO is granted. The weighted average exercise price of all options granted under
the Plans is $10.43.
The fair market value of each option award is estimated on the date of grant
using the Black-Scholes option pricing model. No options were granted for the
six months ended June 30, 2006 and June 30, 2005. The risk-free interest rate is
based upon a U.S. Treasury instrument with a life that is similar to the
expected life of the option grant. Expected volatility is an estimate based upon
approximate volatility of community bank stocks. The expected term of the
options is an estimate based on the period between the initial full vesting term
and expiration of the options. The expected dividend yield of zero is based upon
the previous dividend history of the Company. No post-vesting restrictions exist
for these options.
-7-
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
STOCK OPTION PLANS (CONTINUED)
A summary of option activity under the Plans as of June 30, 2006 and changes
during the six month period ended June 30, 2006 is presented below:
Weighted
Shares Weighted Average
Available Average Remaining Aggregate
Shares For Future Shares Exercise Contractual Intrinsic
In Plans Grants Outstanding Price Term Value
-------- -------- -------- ------ ------ --------
At December 31, 2005 152,922 30,547 122,375 $10.43 7.7 $559,254
Exercised -- -- -- -- -- --
Authorized -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Granted -- -- -- -- -- --
-------- -------- -------- ------ ------ --------
At June 30, 2006 152,922 30,547 122,375 $10.43 7.2 $804,002
======== ======== ======== ====== ====== ========
Exercisable at June 30, 2006 122,375 $10.43 7.2 $804,002
======== ====== ====== ========
No options were exercised for the six months ended June 30, 2006.
Had compensation costs for the Company's stock option plan been determined using
the fair value method, the Company's pro forma net income would have been
affected as presented below for the quarter and six months ended June 30, 2005.
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2005
-------- --------
(Amounts in thousands,
except per share data)
Net income:
As reported $ 335 647
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects (13) (26)
-------- --------
Pro forma $ 322 $ 621
======== ========
Basic net income per share:
As reported $ .33 $ .64
Pro forma .32 .62
Diluted net income per share:
As reported $ .33 $ .63
Pro forma .31 .61
-8-
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the "Purchase Plan") is a voluntary plan that
enables full-time employees of the Bank to purchase shares of the Company's
common stock based on their continued service over a specified period of time.
The Purchase Plan is administered by a committee of the Board of Directors,
which has a broad discretionary authority to administer the Purchase Plan. The
Company's Board of Directors may amend or terminate the Purchase Plan any time.
The Purchase Plan is intend to be qualified as an employee stock purchase plan
under Section 423 of the Internal Revenue Code of 1986, as amended.
Once a year, participants in the Purchase Plan purchase the Company's common
stock at the lesser of : (a) eighty-five percent (85%) of the fair market value
of the common stock on the date of grant, or (b) eighty-five percent (85) of the
fair market value of the common stock on the purchase date. Participants are
permitted to purchase shares under the Purchase Plan up to a maximum purchase
amount not to exceed $25,000 in fair market value.
The fair value of each option grant under the Purchase Plan was estimated on the
date of grant using the same option valuation model used for options granted
under the Plans and assumes that service period requirements will be achieved.
If such requirements are not met, no compensation cost is recognized and any
recognized compensation is reversed. There were no options granted under the
Purchase Plan during the three months ended June 30, 2006. For options granted
under the Purchase Plan during the six months ended June 30, 2006, we have used
the following assumptions in our determination of fair value:
expected-volatility of 5.21%; expected dividends of zero, and risk free interest
rate of 4.38%. The expected term for options granted under the Purchase Plan is
1 year at the grant date, .50 years at June 30, 2006.
There were no outstanding options under the Purchase Plan as of December 31,
2005. On January 1, 2006, the Company granted 8,000 options which are scheduled
to vest on December 31, 2006. The aggregate intrinsic value of these options
totaled approximately $18,000 as of the grant date and $34,000 as of June 30,
2006, respectively.
The weighted-average grant-date fair value of options granted during the six
months ended June 30, 2006 was $2.87. No options were exercised under the
Purchase Plan during the six months ended June 30, 2006 and June 30, 2005. As of
June 30, 2006, there was approximately $23,000 of unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Purchase Plan; that cost is expected to be recognized over the remaining
quarters of 2006.
-9-
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE C - LOANS
Following is a summary of activity in the allowance for loan losses for the
periods indicated:
Six Months Ended
June 30,
2006 2005
------- -------
(Dollars in thousands)
Allowance for loan losses at beginning of period $ 1,775 $ 1,216
Provision for loan losses 727 198
Loans charged-off (1,046) (11)
Recoveries 131 7
------- -------
Allowance for loan losses at end of period $ 1,587 $ 1,410
======= =======
Allowance for loan losses as a percent of loans
at period end 1.37% 1.53%
At June 30, 2006, the Company had loan commitments outstanding of $325,000,
pre-approved but unused lines of credit totaling $34.7 million and commercial
and standby letters of credit of $38,500. In management's opinion, these
commitments represent no more than normal lending risk to the Company and will
be funded from normal sources of liquidity.
NOTE D - OTHER NON-INTEREST EXPENSE
The major components of other non-interest expense are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands)
Postage, printing and office supplies $ 18 $ 33 $ 46 $ 47
Advertising and promotion 40 25 65 40
Professional services 71 47 107 89
Other 116 91 200 157
---- ---- ---- ----
Total $245 $196 $418 $333
==== ==== ==== ====
-10-
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE E - COMPREHENSIVE INCOME
A summary of comprehensive income is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
(Dollars in thousands)
Net income $ 223 $ 335 $ 458 $ 647
Other comprehensive income (loss):
Net increase (decrease) in the
fair value of investment securities
available for sale, net of tax (145) 30 (170) (60)
------------- ------------- ------------- --------------
Total comprehensive income $ 78 $ 365 $ 288 $ 587
============= ============= ============= ==============
NOTE F - PER SHARE RESULTS
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Bank relate to outstanding
stock options, including those outstanding under the Employee Stock Option Plan,
the Director Stock Option Plan; and the Employee Stock Purchase Plan, and are
determined using the treasury stock method.
The basic and diluted weighted average shares outstanding are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2006 2005 2006 2005
------------- ------------- ------------- --------------
Weighted average outstanding
shares used for basic EPS 1,014,228 1,007,714 1,014,228 1,007,714
Plus incremental shares from assumed exercise of:
Stock options 34,761 24,087 32,841 22,385
Employee stock purchase plan options 350 -- 108 --
------------- ------------- ------------- --------------
Weighted average outstanding
shares used for diluted EPS 1,049,108 1,031,801 1,046,817 1,030,099
============= ============= ============= ==============
No adjustments were required to be made to net income in the computation of
diluted earnings per share.
-11-
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE F - PER SHARE RESULTS (CONTINUED)
Stock Dividend
The Board of Directors of the Company approved a 21-for-20 stock split to be
effected in the form of a 5% stock dividend payable on August 31, 2006 to
shareholders of record on July 21, 2006. All references to per share results and
weighted average common and common equivalent shares outstanding have been
adjusted to reflect the effects of this stock dividend.
NOTE G - RECLASSIFICATIONS
Certain amounts presented on the accompanying consolidated financial statements
as of June 30, 2005 have been reclassified to conform to the presentation as of
June 30, 2006. The reclassifications had no effect on the net income or total
stockholders' equity as previously reported.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of CB Financial Corporation and its wholly owned bank subsidiary,
Cornerstone Bank (the "Company"). This quarterly report on Form 10-QSB to
shareholders may contain certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company that are subject to various factors which could
cause actual results to differ materially from those estimates. Factors which
could influence the estimates include changes in national, regional and local
market conditions, legislative and regulatory conditions, and the interest rate
environment.
FINANCIAL CONDITION AT
JUNE 30, 2006 AND DECEMBER 31, 2005
During the first six months of 2006, the Company's total assets increased to
$158.6 million, an increase of $5.9 million or 3.9% from total assets at
December 31, 2005 of $152.7 million. This increase in assets was mainly
attributable to increases in liquid investments and loans. The growth in total
assets was funded principally by inflows of customer deposits, which increased
by $6.9 million or 5.3% to $136.0 million, up from $129.1million at December 31,
2005. Liquid investments, consisting of cash and due from banks,
interest-earning deposits in other banks, federal funds sold, time deposits and
investment securities totaled $37.4 million, or 23.6% of total assets and 27.5%
of total deposits at June 30, 2006, representing an increase of $2.9 million
from $34.5 million at December 31, 2005. Loans increased to $115.7 million, up
from $114.5 million at December 31, 2005. Total stockholders' equity increased
from $10.4 million at December 31, 2005 to $10.7 million at June 30, 2006 as a
result of retention of net income of $458,000 during the six month period. At
June 30, 2006, both the Bank and Company's capital exceeded the levels that are
deemed to be "well-capitalized" under applicable regulatory capital
requirements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2006 AND 2005
Overview. The Company earned net income of $223,000, or $.21 per diluted share,
for the quarter ended June, 2006, as compared to net income of $335,000, or $.33
per diluted share, for the second quarter of 2005. This decrease of $112,000, or
$0.12 per diluted share in net operating results, was attributable to increases
in the provision for loan losses and in non-interest expenses. The provision for
loan losses increased from $85,000 in 2005 to $332,000 for the second quarter of
2006, while non-interest expense increased from $719,000 to $1,051,000 during
the same time period. The variances are discussed in detail below.
Total Interest Income. Total interest income increased to $2.8 million for the
quarter ended June 30, 2006, a $1.1 million or 64.7% increase from the $1.7
million earned in second quarter of 2005. Total interest income benefited from
the growth in the level of average earning assets from year to year and an
increase in interest rates. Average total interest-earning assets increased by
$23.9 million, or 19.9% annualized, compared to the three months ended June 30,
2005, while the average balance of total interest-bearing liabilities increased
by $26.4 million, or 28.8% annualized during the same period. Our balance sheet
is asset sensitive and has benefited from 8 prime rate increases since June 30,
2005 totaling 2.00%. This rate sensitivity has contributed to the increase in
the net interest spread. Additionally, the management of the rates applicable to
interest-bearing liabilities has resulted in the increased amount of net
interest income.
-13-
Provision for Loan Losses. The Bank recorded a $332,000 provision for loan
losses, after $523,000 in charge-offs in the second quarter of 2006, compared to
the $85,000 provision made in the same quarter of 2005 after charge-offs of
$11,000. Provisions for loan losses are charged to income to bring the allowance
for loan losses to a level deemed appropriate by management. In evaluating the
allowance for loan losses, management considers factors that include an analysis
of the risk characteristics of various classifications of loans, previous loan
loss experience, specific loans which have loan loss potential, delinquency
trends, estimated fair values of underlying collateral, current economic
conditions, the views of the Bank's regulators (who have the authority to
require additional reserves), and geographic and industry loan concentrations.
In the second quarter of 2006 the provision for loan losses was made principally
in response to risk changes in the portfolio and charge-offs. The allowance for
loan losses was $1,587,000, representing 1.37% of loans outstanding, down from
1.53% of total loans outstanding at June 30, 2005. Nonperforming loans totaled
$1,492,000 and $598,000 at June 30, 2006 and June 30, 2005, respectively. In
October of 2005, federal bankruptcy laws were changed and many bankruptcies
occurred in advance of the change. In Wilson County, over one thousand cases
were filed, 11 of which were Cornerstone customers. The increase in the Bank's
nonperforming loans was mainly attributable to these 11 bankruptcies. Most of
these had not been past due prior to the filing.
Non-Interest Income. Non-interest income increased $41,000 to $253,000 for the
quarter ended June 30, 2006, as compared with $212,000 for the three months
ended June 30, 2005. Service charges on deposit accounts, which represent a
relatively stable and predictable source of non-interest income, totaled
$139,000 for second quarter of 2006 as compared with $104,000 for the second
quarter of 2005, with the increase resulting principally from deposit growth
from period to period. Through associations with certain mortgage lending
companies, the Bank originates a full range of competitively priced residential
and commercial long-term mortgages, at both fixed and variable rates, earning
fees for loans originated. The Bank had income from mortgage operations of
$96,000 in the second quarter of 2006, an increase of $60,000 from the $36,000
earned during the second quarter of 2005.
Non-Interest Expenses. Non-interest expenses totaled $1,051,000 for the three
months ended June 30, 2006, an increase or $332,000, or 46.2%, from total
non-interest expenses of $719,000 for the three months ended June 30, 2005. This
increase is mainly attributable to increased compensation and benefits
associated with the increase in the number of employees, occupancy expense
related to a new branch opened in November 2005 and the increase in the
information systems expense related to the increase in customer transactions.
Income Taxes. The Bank provided $92,000 for income taxes during the three months
ended June 30, 2006. The Bank had $176,000 in income tax expense for the three
months ended June 30, 2005. The decrease in the effective tax rate from 34.4% to
29.2% is primarily attributable to the continued investment in non-taxable
assets, such as municipal securities.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2006 AND 2005
Overview. The Bank earned net income of $458,000 or $.44 per diluted share, for
the six months ended June 30, 2006, as compared net income of $647,000 or $.63
per diluted share, for the six months ended June 30, 2005. This decrease of
$189,000 or $.19 per diluted share in net operating results was principally
attributable to the increase in provision for loan losses and in non-interest
expenses. The provision for loan losses increased from $198,000 in 2005 to
$727,000 for the first six months of 2006, while non-interest expense increased
from $1,350,000 to $1,953,000 during the same time period. The variances are
discussed in detail below.
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Net Interest Income. Net interest income increased to $2,858,000 for the six
months ended June 30, 2006, a $715,000 or 33.3% increase from the $2,143,000
earned in first six months of 2005. Total interest income benefited from growth
in the level of average earning assets and an increase in interest rates.
Average total interest-earning assets increased by $31.8 million, or 26.7%
annualized, during the six months ended June 30, 2006 as compared to the six
months ended June 30, 2005, while the average balance of total interest-bearing
liabilities increased by $38.7 million, or 41.8% annualized, during the same
period. Our balance sheet is asset sensitive and has benefited from 8 prime rate
increases since June 30, 2005 totaling 2.00%. This rate sensitivity has
contributed to the increase in the net interest spread. Additionally, the
management of the rates applicable to interest-bearing liabilities has resulted
in the increased amount of net interest income.
Provision for Loan Losses. The Bank recorded a $727,000 provision for loan
losses in the first six months of 2006 after charge-offs of $1,045,000, compared
to the $198,000 provision made in the same period of 2005 after charge-offs of
$11,000. Provisions for loan losses are charged to income to bring the allowance
for loan losses to a level deemed appropriate by management. In evaluating the
allowance for loan losses, management considers factors that include an analysis
of the risk characteristics of various classifications of loans, previous loan
loss experience, specific loans which have loan loss potential, delinquency
trends, estimated fair values of underlying collateral, current economic
conditions, the views of the Bank's regulators (who have the authority to
require additional reserves), and geographic and industry loan concentrations.
In the first six months of 2006 the provision for loan losses was made
principally in response to 11 bankruptcy filings made at the end of October
2005. In October of 2005, federal bankruptcy laws were changed and many
bankruptcies occurred in advance of the change. In Wilson County, over one
thousand cases were filed, 11 of which were Cornerstone customers. Additionally,
some of the provision was in response to growth in loans, as total loans
outstanding increased by $1.2 million and in response to risk changes in the
portfolio and charge-offs. During the first six months of 2006, the provision
was also made principally in response to growth in loans. The allowance for loan
losses was $1,587,000 at June 30, 2006, representing 1.37% of loans outstanding,
down from $1,775,000, or 1.53% of total loans outstanding, at June 30, 2005.
Nonperforming loans totaled $1,492,000 and $589,000 at June 30, 2006 and June
30, 2005, respectively.
Non-Interest Income. Non-interest income increased $58,000 to $487,000 for the
six months ended June 30, 2006, as compared with $429,000 for the six months
ended June 30, 2005. Service charges on deposit accounts, which represent a
relatively stable and predictable source of non-interest income, totaled
$267,000 for the first six months of 2006 as compared with $223,000 for the
first six months of 2005, with the increase resulting principally from deposit
growth from period to period. Through associations with certain mortgage lending
companies, the Bank originates a full range of competitively priced residential
and commercial long-term mortgages, at both fixed and variable rates, earning
fees for loans originated. The Bank had income from mortgage operations of
$163,000 in the first six months of 2006, an increase of $77,000 from the
$86,000 earned during the first six months of 2005.
Non-Interest Expenses. Non-interest expenses totaled $1,953,000 for the six
months ended June 30, 2006, an increase of $603,000, or 44.7%, from total
non-interest expenses of $1,350,000 for the six months ended June 30, 2005. This
increase is mainly attributable to increased compensation and benefits
associated with the increase in the number of employees, occupancy expense
related to a new branch opened in November 2005 and the increase in the
information systems expense related to the increase in customer transactions.
Income Taxes. The Bank provided $207,000 for income taxes during the six months
ended June 30, 2006. The Bank had $377,000 in income tax expense for the six
months ended June 30, 2005. The decrease in the effective tax rate from 36.8% to
31.1% is primarily attributable to the continued investment in non-taxable
assets, such as municipal securities.
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LIQUIDITY
Our liquidity is a measure of our ability to fund loans, withdrawals and
maturities of deposits, and other cash outflows in a cost effective manner. Our
principal sources of liquidity are deposits, scheduled payments and prepayments
of loan principal, maturities of investment securities, access to liquid
deposits, and funds provided by operations. While scheduled loan payments and
maturing investments are relatively predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Liquid assets (consisting of cash and due from banks, interest-earning deposit
with other banks, federal funds sold and investment securities classified as
available for sale) comprised 21.0% of our total assets at June 30, 2006. We
have traditionally been a net seller of federal funds, as our liquidity has
exceeded our need to fund new loan demand. Should the need arise, we would have
the capability to sell securities classified as available for sale or to borrow
funds as necessary. We have established credit lines with other financial
institutions to purchase up to $15.3 million in federal funds. As a member of
the Federal Home Loan Bank of Atlanta ("FHLB of Atlanta") we may obtain
longer-term advances up to 10% of our assets. As of June 30, 2006, we had $6.3
million in advances outstanding with the FHLB of Atlanta. Management believes
that our current sources of funds provide adequate liquidity for our current
cash flow needs.
CAPITAL
A significant measure of the strength of a financial institution is its capital
base. Our federal regulators have classified and defined capital into the
following components: (1) Tier I capital, which includes common stockholders'
equity and qualifying preferred equity, and (2) Tier II capital, which includes
a portion of the allowance for loan losses, certain qualifying long-term debt
and preferred stock which does not qualify as Tier I capital. Minimum capital
levels are regulated by risk-based capital adequacy guidelines, which require a
financial institution to maintain capital as a percent of its assets and certain
off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A financial institution is required to maintain, at a
minimum, Tier I capital as a percentage of risk-adjusted assets of 4.0% and
combined Tier I and Tier II capital as a percentage of risk-adjusted assets of
8.0%. In addition to the risk-based guidelines, federal regulations require that
we maintain a minimum leverage ratio (Tier I capital as a percentage of tangible
assets) of 4.0%. As of June 30, 2006, the Bank's regulatory capital ratios
exceeded the levels above which an institution is considered to be "well
capitalized" and were as follows:
o Tier 1 Capital as a Percentage of Risk-Adjusted Assets 13.45%
o Total Capital as a Percentage of Risk-Adjusted Assets 14.70%
o Tier 1 Leverage Ratio 10.25%
Management expects that the Bank will remain "well-capitalized" for regulatory
purposes, although there can be no assurance that additional capital will not be
required in the near future due to greater-than-expected growth, or otherwise.
-16-
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the Company. These
forward-looking statements involve risks and uncertainties and are based on the
beliefs and assumptions of management of the Company and on the information
available to management at the time that these disclosures were prepared. These
statements can be identified by the use of words like "expect," "anticipate,"
"estimate" and "believe," variations of these words and other similar
expressions. Readers should not place undue reliance on forward-looking
statements as a number of important factors could cause actual results to differ
materially from those in the forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, (1)
competition in the Bank's markets, (2) changes in the interest rate environment,
(3) general national, regional or local economic conditions may be less
favorable than expected, resulting in, among other things, a deterioration in
credit quality and the possible impairment of collectibility of loans, (4)
legislative or regulatory changes, including changes in accounting standards,
(5) significant changes in the federal and state legal and regulatory
environment and tax laws, (6) the impact of changes in monetary and fiscal
policies, laws, rules and regulations and (7) other risks and factors identified
in the Company's other filings with the SEC. The Company undertakes no
obligation to update any forward-looking statements.
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of our published financial
statements and other disclosures included in this report. The Company's Board of
Directors, operating through its audit committee which is composed entirely of
independent outside directors, provides oversight to the Company's financial
reporting process.
The Company's management, under the supervision and with the participation of
the Chief Executive Officer and the Principal Accounting Officer of the Company
(its principal executive officer and principal financial officer, respectively),
have concluded based on their evaluation as of the end of the period covered by
this Report that the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in the
reports filed or submitted by it under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the applicable rules and forms, and include controls and procedures
designed to ensure that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including the Chief Executive Officer and the Principal Accounting Officer of
the Company, as appropriate to allow timely decisions regarding required
disclosure.
The Company made certain enhancements to internal controls, primarily in
information technology and lending operations, during the period covered by this
Report as a result of comments received from a regulatory exam.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the opinion of management, neither the Company nor the Bank is involved in
any pending legal proceedings other than routine litigation incidental to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Company's Stockholders was held on May 25, 2006. Of
1,014,228 shares entitled to vote at the meeting, 605,465 shares were
represented in person or by proxy. The following matters were voted on at the
meeting:
PROPOSAL 1: To elect three members of the Board of Directors for a
three-year term until the Annual Meeting of Shareholders in
2008. Votes for each nominee were as follows:
Name For Withheld
- ----------------- ------- -----
Thomas E. Brown III 601,094 4,371
Judy A. Muirhead 601,094 4,371
David W Woodard 600,863 4,602
The following directors continue in office after the meeting:
John C. Anthony Gregory A. Turnage S. Christopher Williford
Norman B. Osborn Robert E. Kirkland III W. Coalter Paxton III
PROPOSAL 2: To ratify the appointment of Dixon Hughes PLLC as the Bank's
independent auditor for the year ending December 31, 2006.
For Against Withheld
--- ------- --------
604,645 96,754 0
ITEM 6. EXHIBITS
Exhibit Name Description
- ------------ -----------
Exhibit (2) Articles of Share Exchange and Agreement and Plan of
Reorganization dated May 26, 2005, incorporated herein by
reference to Exhibit (2) to the Form 8-K filed with the SEC on
June 10, 2005
Exhibit 3(i) Articles of Incorporation, incorporated herein by reference to
Exhibit 3(i) to the Form 8-K filed with the SEC on June 10,
2005
Exhibit 3(ii) Bylaws, incorporated herein by reference to Exhibit 3(ii) to
the Form 8-K filed with the SEC on June 10, 2005
Exhibit 4(i) Specimen Stock Certificate, incorporated herein by reference
to Exhibit 4 to the Form 8-K filed with the SEC on June 10,
2005
Exhibit 4(ii) Indenture dated July 12, 2005 between the Company and U.S.
Bank National Association, as trustee, incorporated herein by
reference to Exhibit 4(i) to the Form 8-K filed with the SEC
on July 15, 2005
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Exhibit Name Description
- ------------ -----------
Exhibit 4(iii) Amended and Restated Declaration of Trust dated July 12, 2005
by and among the Company, as sponsor, U.S. Bank National
Association, as institutional trustee, and the Administrators
named therein, incorporated herein by reference to Exhibit
4(ii) to the Form 8-K filed with the SEC on July 15, 2005
Exhibit 4(iv) Form of Junior Subordinated Debenture (included as an exhibit
to Exhibit 4(ii) above), incorporated herein by reference to
Exhibit 4(iii) to the Form 8-K filed with the SEC on July 15,
2005
Exhibit 4(v) Form of Capital Security Certificate (included as an exhibit
to Exhibit 4(iii) above), incorporated herein by reference to
Exhibit 4(iv) to the Form 8-K filed with the SEC on July 15,
2005
Exhibit 4(vi) Guarantee Agreement dated July 12, 2005 between the Company
and U.S. Bank National Association, incorporated herein by
reference to Exhibit 4(v) to the Form 8-K filed with the SEC
on July 15, 2005
Exhibit 10(i) Employment Agreement with Norman B. Osborn, incorporated
herein by reference to Exhibit 10(i) to the Form 10-SB of
Cornerstone Bank filed with the FDIC on April 30, 2001
Exhibit 10(ii) Employment Agreement with Robert W. Kernodle, incorporated
herein by reference to Exhibit 10(ii) to the Form 10-SB of
Cornerstone Bank filed with the FDIC on April 30, 2001
Exhibit 10(iii) Employment Agreement with G. Brooks Batchelor, incorporated
herein by reference to Exhibit 10(iii) to the Form 10-SB of
Cornerstone Bank filed with the FDIC on April 30, 2001
Exhibit 10(iv) Employment Agreement with Robert H. Ladd III, incorporated
herein by reference to Exhibit 10(iv) to the Form 10-SB of
Cornerstone Bank filed with the FDIC on April 30, 2001
Exhibit 10(v) Director Stock Option Plan, incorporated herein by reference
to Exhibit 10(v) to the Form 10-SB of Cornerstone Bank filed
with the FDIC on April 30, 2001
Exhibit 10(vi) Employee Stock Option Plan, incorporated herein by reference
to Exhibit 10(vi) to the Form 10-SB of Cornerstone Bank filed
with the FDIC on April 30, 2001
Exhibit 10(vii) Cornerstone Bank 2005 Employee Incentive Compensation Plan,
incorporated by reference to Exhibit 10(vii) to the Form
10-KSB of Cornerstone Bank filed with the FDIC on March 29,
2005
Exhibit 10(viii) Cornerstone Bank 2005 Management Team Incentive Compensation
Plan, incorporated by reference to Exhibit 10(viii) to the
Form 10-KSB of Cornerstone Bank filed with the FDIC on March
29, 2005
Exhibit 10(ix) Cornerstone Bank 2005 Chief Executive Officer Incentive
Compensation Plan, incorporated by reference to Exhibit 10(ix)
to the Form 10-KSB of Cornerstone Bank filed with the FDIC on
March 29, 2005
-19-
Exhibit Name Description
- ------------ -----------
Exhibit 10(x) Lease Agreement dated September 2, 2005 by and between CB
Financial Corporation and Cornerstone Bank, as lessee, and H/C
Wilson, Inc., as lessor, incorporated herein by reference to
Exhibit 10.1 to the Form 8-K filed with the SEC on September
9, 2005
Exhibit 11 Statement Regarding Computation of Per Share Earnings
Exhibit 31.1 Certification of Norman B. Osborn
Exhibit 31.2 Certification of Dora Kicklighter
Exhibit 32 Certification of Periodic Financial Report Pursuant to 18
U.S.C. ss. 1350
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SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CB FINANCIAL CORPORATION
Date: August 14, 2006 By: /s/ Norman B. Osborn
--------------------------------------------
Norman B. Osborn
President and Chief Executive Officer
Date: August 14, 2006 By: /s/ Dora Kicklighter
--------------------------------------------
Dora Kicklighter
Principal Accounting Officer
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