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: September 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)
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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
(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 November 10, 2006, there were 1,064,253 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
September 30, 2006 and December 31, 2005 ..........................3
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 2006 and 2005.....4
Consolidated Statements of Cash Flows
Nine Months Ended September 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 6 - Exhibits..........................................................18
Signatures....................................................................21
- 2 -
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
================================================================================
September 30, 2006 December 31,
(Unaudited) 2005*
------------- -------------
(Amounts in thousands,
except share data)
ASSETS
Cash and due from banks $ 3,371 $ 4,903
Interest-earning deposits in banks 4,552 4,607
Federal funds sold 8,529 --
CD's with other banks 1,140 5,453
Investment securities available for sale, at fair value 27,698 13,441
Investment securities held to maturity, at amortized cost -- 6,083
Loans 115,635 114,468
Allowance for loan losses (1,644) (1,775)
------------- -------------
NET LOANS 113,991 112,693
Accrued interest receivable 818 628
Stock in Federal Home Loan Bank of Atlanta, at cost 594 529
Premises and equipment 2,330 1,757
Bank-owned life insurance 1,377 1,338
Real estate owned 451 117
Other assets 1,654 1,222
------------- -------------
TOTAL ASSETS $ 166,505 $ 152,771
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 12,493 $ 11,638
Savings 1,048 1,129
Money market and NOW 34,536 35,107
Time 95,123 81,195
------------- -------------
TOTAL DEPOSITS 143,200 129,069
Short term borrowings -- 1,055
Long term borrowings 11,405 11,488
Accrued interest payable 263 238
Accrued expenses and other liabilities 416 479
------------- -------------
TOTAL LIABILITIES 155,284 142,329
------------- -------------
Stockholders' equity:
Preferred stock, 20,000,000 shares authorized, none issued -- --
Common stock, no par value, 80,000,000 shares authorized;
1,064,253 issued and outstanding at September 30, 2006
and 1,014,228 issued and outstanding at December 31, 2005 10,508 9,640
Retained earnings 950 960
Accumulated other comprehensive loss (237) (158)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 11,221 10,442
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 166,505 $ 152,771
============= =============
*Derived from audited financial statements.
See accompanying notes
- 3 -
-4-
CB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(In thousands, except share and per share data)
INTEREST INCOME
Loans $ 2,468 $ 1,752 $ 7,075 $ 4,608
Investments 286 157 710 411
Federal funds sold 77 30 200 109
Interest-earning bank deposits 11 41 97 85
Other interest and dividends 82 20 203 85
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 2,924 2,000 8,285 5,298
---------- ---------- ---------- ----------
INTEREST EXPENSE
Money market, NOW and savings deposits 196 221 688 620
Time deposits 1,119 509 2,838 1,237
Borrowings 153 92 445 120
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,468 822 3,971 1,977
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,456 1,178 4,314 3,321
PROVISION FOR LOAN LOSSES 11 217 738 415
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,445 961 3,576 2,906
---------- ---------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts 117 115 384 338
Mortgage operations 74 42 237 128
Other income 32 46 89 166
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME 223 203 710 632
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 635 441 1,722 1,209
Occupancy and equipment 85 52 274 137
Data processing expenses 132 105 390 269
Other (Note D) 219 174 638 507
---------- ---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 1,071 772 3,024 2,122
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 597 392 1,262 1,416
INCOME TAXES 202 136 409 513
---------- ---------- ---------- ----------
NET INCOME $ 395 $ 256 $ 853 $ 903
========== ========== ========== ==========
Net Income Per Common Share
Basic $ .37 $ .24 $ .80 $ .85
Diluted .36 .24 .77 .84
Weighted Average Shares Outstanding
Basic 1,064,253 1,057,029 1,064,253 1,057,029
Diluted 1,106,008 1,085,159 1,102,347 1,080,243
See accompanying notes.
- 4 -
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CB FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
================================================================================
Nine Months Ended
September 30,
--------------------
2006 2005
-------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 853 $ 903
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 122 125
Compensation expense as result of vesting acceleration of stock purchase plan 17 --
Provision for loan losses 738 415
Provision for losses on real estate owned 10 --
Gain on sale of real estate owned -- (30)
Loss from sale of real estate owned 49 --
Earnings on life insurance (39) (39)
Change in assets and liabilities:
Increase in accrued interest receivable (190) (153)
Increase in other assets (383) (33)
Increase in accrued interest payable 25 72
Increase (decrease) in accrued expenses and other liabilities (63) 314
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,139 1,574
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net maturities of CD's with other banks 4,313 2,937
Purchase of available-for-sale securities (11,442) (6,050)
Investment in CB Capital Trust -- (155)
Maturities, sales and calls of available for sale investments 3,123 2,280
Purchase of held to maturity securities -- (4,210)
Net increase in loans (2,711) (17,557)
Purchase of FHLB stock (65) (517)
Proceeds from sale of real estate owned 282 69
Purchases of premises and equipment (678) (161)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (7,178) (23,364)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease/increase in Federal Home Loan Bank advances (83) 5,750
Increase in Junior Subordinated debentures -- 5,155
Net decrease/increase in short term borrowings (1,055) 1,000
Cash dividends paid for fractional shares resulting from stock dividend
(12) --
Increase in deposits 14,131 9,238
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,981 21,143
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,942 (647)
CASH AND CASH EQUIVALENTS, BEGINNING 9,510 10,794
-------- --------
CASH AND CASH EQUIVALENTS, ENDING $ 16,452 $ 10,147
======== ========
Supplemental disclosure of cash flow information
Interest Paid $ 3,946 $ 1,905
-------- --------
Taxes Paid $ 779 $ 320
-------- --------
- 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
nine month periods ended September 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 nine month period ended September 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 September 30,
2006. All options outstanding under both plans as of December 31, 2005 were
fully vested and no new options were issued during the nine-month period ending
September 30, 2006. Therefore, no option related compensation cost has been
charged against income for the nine months ended September 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 80,284 shares of the Company's common stock
for an aggregate number of common shares reserved for options equal to 160,568.
No options were granted prior to 2003. On August 31, 2003, options to purchase
131,955 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 there are 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
outstanding under the Plans is $9.93.
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
nine months ended September 30, 2006 and September 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 September 30, 2006 and
changes during the nine month period ended September 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 -- -- -- -- -- --
Stock dividend 7,646 1,539 6,107
----------- ---------- ------------- ---------- ----------- ----------
At September 30, 2006 160,568 32,086 128,482 $ 9.93 6.9 $ 908,368
=========== ========== ============= ========== =========== ==========
Exercisable at September 30,
2006 128,482 $ 9.93 6.9 $ 908,368
============= ========== =========== ==========
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 nine months ended September 30,
2005.
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
-------------- ----------------
(Amounts in thousands,
except per share data)
Net income:
As reported $ 256 903
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects (13) (39)
-------------- ---------------
Pro forma $ 243 $ 864
============== ===============
Basic net income per share:
As reported $ .24 $ .85
Pro forma .23 .82
Diluted net income per share:
As reported $ .24 $ .84
Pro forma .22 .80
- 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 intended 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 September 30, 2006. For options
granted under the Purchase Plan during the nine months ended September 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, .25 years remaining at September 30, 2006.
There were no outstanding options under the Purchase Plan as of December 31,
2005. On January 1, 2006, the Company granted 8,400 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 $40,800 as of September
30, 2006, respectively.
The weighted-average grant-date fair value of options granted during the nine
months ended September 30, 2006 was $2.73. No options were exercised under the
Purchase Plan during the nine months ended September 30, 2006 and September 30,
2005. For the nine months ended September 30, 2006, approximately $17,000 has
been recognized as compensation expense related to proportionate vesting of the
Purchase Plan. As of September 30, 2006, there was approximately $5,700 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 final quarter 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:
Nine Months Ended
September 30,
2006 2005
------- -------
(Dollars in thousands)
Allowance for loan losses at beginning of period $ 1,775 $ 1,216
Provision for loan losses 738 415
Loans charged-off (1,126) (10)
Recoveries 257 7
------- -------
Allowance for loan losses at end of period $ 1,644 $ 1,628
======= =======
Allowance for loan losses as a percent of loans
at period end 1.42% 1.52%
At September 30, 2006, the Company had loan commitments outstanding of $565,000,
pre-approved but unused lines of credit totaling $35.5 million and commercial
and standby letters of credit of $46,500. 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 Nine Months Ended
September 30, September 30,
-------------------- ------------------
2006 2005 2006 2005
-------- -------- -------- --------
(Dollars in thousands)
Postage, printing and office supplies $ 24 $ 25 $ 74 $ 72
Advertising and promotion 26 21 91 61
Professional services 49 45 156 134
Other 120 83 317 240
-------- -------- -------- --------
Total $ 219 $ 174 $ 638 $ 507
======== ======== ======== ========
- 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 Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
(Dollars in thousands)
Net income $ 395 $ 256 $ 853 $ 903
Other comprehensive income (loss):
Net increase (decrease) in the
fair value of investment securities
available for sale, net of tax 91 (32) 90 (92)
Decrease from transfer of securities
held to maturity to available for
sale. -- -- (82) --
------------- ------------- -------------- --------------
Total comprehensive income $ 486 $ 224 $ 861 $ 811
============= ============= ============= ==============
CB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
2006 2005 2006 2005
------------- ------------- ------------- --------------
Weighted average outstanding
shares used for basic EPS 1,064,253 1,057,029 1,064,253 1,057,029
Plus incremental shares from
assumed exercise of:
Stock options 40,010 28,130 36,691 23,214
Employee stock purchase plan options 1,745 - 1,403 -
------------- ------------- ------------- --------------
Weighted average outstanding
shares used for diluted EPS 1,106,008 1,085,159 1,102,347 1,080,243
============= ============= ============= ==============
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 September 30, 2005 have been reclassified to conform to the presentation
as of September 30, 2006. The reclassifications had no effect on the net income
or total stockholders' equity as previously reported.
NOTE H - RECENT ACCOUNTING PRONOUNCEMENTS
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN No.
48) was issued in June 2006 to clarify the accounting for uncertainty in income
taxes recognized in the financial statements in accordance with SFAS No. 109
"Accounting for Income Taxes". The interpretation defines a criterion than an
individual tax position must meet for any part of the benefit of that position
to be recognized in the financial statements. It also provides guidance on
measurement, derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The Interpretation is effective
for fiscal years beginning after December 15, 2006. The Company does not expect
adoption of FIN No. 48 to have a material effect on the consolidated financial
statements.
Also in September 2006, FASB issued SFAS No. 158 "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS No. 158), an
amendment of FASB Statements No. 87, 88, 106, and 132 (R). For fiscal years
ending after December 15, 2006, SFAS No. 158 requires an employer to recognize
the funded status of a benefit plan on its balance sheet and to recognize the
gains or losses and prior service costs, not already recognized, as a component
of other comprehensive income, net of taxes. SFAS No. 158 also requires that the
defined benefit plan assets and obligations be measured as of the date of the
employer's fiscal year-end balance sheet effective for fiscal years ending after
December 15, 2008. The Company does not expect the adoption of SFAS No. 158 to
have a material effect on the consolidated financial statements.
- 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 consolidated 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.
COMPARISON OF FINANCIAL CONDITION AT
September 30, 2006 and December 31, 2005
During the first nine months of 2006, the Company's total assets increased to
$166.5 million, an increase of $13.7 million or 9.0% from total assets at
December 31, 2005 of $152.8 million. This increase in assets was mainly
attributable to increases in liquid investments and, to a lesser extent, loans.
The growth in total assets was funded principally by inflows of customer
deposits, which increased by $14.1 million or 10.9% to $143.2 million, up from
$129.1 million 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 $45.3 million, or 27.2% of total
assets and 31.6% of total deposits at September 30, 2006, representing an
increase of $10.8 million from $34.5 million at December 31, 2005. Loans
increased to $115.6 million, up from $114.5 million at December 31, 2005. The
low loan growth has resulted primarily from relatively high loan payoffs. Total
stockholders' equity increased from $10.4 million at December 31, 2005 to $11.2
million at September 30, 2006 primarily as a result of retention of net income
of $853,000 during the nine month period. At September 30, 2006, both the Bank
and Company's capital exceeded the levels that are deemed to be
"well-capitalized" under applicable regulatory capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED
September 30, 2006 and 2005
Overview. The Company earned net income of $395,000, or $.36 per diluted share,
for the quarter ended September, 2006, as compared to net income of $256,000, or
$.24 per diluted share, for the third quarter of 2005. This increase of
$139,000, or $0.12 per diluted share in net operating results, was primarily
attributable to an increase in net interest income and a reduction in the
provision for loan losses. Additional information on the components of net
income are provided below.
Net Interest Income. Net interest income for the three month period ended
September 30, 2006 was $1.46 million, an increase of $278,000, or 23.6%, from
the $1.18 million in the three month period ended September 30, 2005. Total
interest income increased to $2.9 million for the quarter ended September 30,
2006, a $924,000 or 46.2% increase from the $2.0 million earned in the third
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 $28.5 million, or 22.7%
annualized, compared to the three months ended September 30, 2005, while the
average balance of total interest-bearing liabilities increased by $32.8
million, or 30.8% annualized during the same period. Our balance sheet is asset
sensitive, with approximately 85% of loans having the prime rate as their
repricing index. With six prime rate increases totaling 1.50% since September
30, 2005, this rate sensitivity has also contributed to the increase in net
interest income.
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Provision for Loan Losses. The Bank recorded an $11,000 provision for loan
losses, after $80,000 in charge-offs in the third quarter of 2006, compared to
the $217,000 provision made in the same quarter of 2005 after zero charge-offs.
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. The third quarter
2006 provision for loan losses was small relative to other periods as total
loans outstanding actually declined by $121,000 during the quarter.
As of September 30, 2006, the allowance for loan losses was $1,644,000,
representing 1.42% of loans outstanding, down from 1.52% of total loans
outstanding at September 30, 2005. Nonperforming loans totaled $1,536,000 and
$665,000 at September 30, 2006 and September 30, 2005, respectively.
Non-Interest Income. Non-interest income increased $20,000 to $223,000 for the
quarter ended September 30, 2006, as compared with $203,000 for the three months
ended September 30, 2005. Service charges on deposit accounts, which represent a
relatively stable and predictable source of non-interest income, totaled
$117,000 for third quarter of 2006 as compared with $115,000 for the third
quarter of 2005. 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 $74,000 in
the third quarter of 2006, an increase of $32,000 from the $42,000 earned during
the third quarter of 2005.
Non-Interest Expenses. Non-interest expenses totaled $1,071,000 for the three
months ended September 30, 2006, an increase or $299,000, or 38.7%, from total
non-interest expenses of $772,000 for the three months ended September 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 Company provided $202,000 for income taxes during the three
months ended September 30, 2006. The Company had $136,000 in income tax expense
for the three months ended September 30, 2005. The decrease in the effective tax
rate from 34.7% to 33.8% is primarily attributable to the continued investment
in municipal securities.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED
September 30, 2006 and 2005
Overview. The Company earned net income of $853,000 or $.77 per diluted share,
for the nine months ended September 30, 2006, as compared to net income of
$903,000 or $.84 per diluted share, for the nine months ended September 30,
2005. This decrease of $50,000 or $.06 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 $415,000 in 2005 to $738,000 for the first nine months of 2006, while
non-interest expense increased from $2,122,000 to $3,024,000 during the same
time period. The variances are discussed in detail below.
The annualized returns on average assets and average equity were 0.72% and
10.61%, respectively, for the nine months ended September 30, 2006. This
compares to an annualized 0.95% return on average assets and a 12.12% return on
average equity for the nine month period ended September 30, 2005.
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Net Interest Income. Net interest income increased to $4,314,000 for the nine
months ended September 30, 2006, a $993,000 or 29.9% increase from the
$3,321,000 earned in first nine 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 $30.3 million, or
25.0% annualized, during the nine months ended September 30, 2006 as compared to
the nine months ended September 30, 2005, while the average balance of total
interest-bearing liabilities increased by $37.6 million, or 38.6% annualized,
during the same period. Our balance sheet is asset sensitive, with approximately
85% of loans having the prime rate as their repricing index. With six prime rate
increases totaling 1.50% since September 30, 2005, this rate sensitivity has
also contributed to the increase in net interest income.
Provision for Loan Losses. The Bank recorded a $738,000 provision for loan
losses in the first nine months of 2006 after charge-offs of $1,126,000,
compared to the $415,000 provision made in the same period of 2005 with $10,000
in charge-offs. 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 nine 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.
The allowance for loan losses was $1,644,000 at September 30, 2006, representing
1.42% of loans outstanding, as compared to $1,628,000, or 1.52% of total loans
outstanding, at September 30, 2005. Nonperforming loans totaled $1,536,000 and
$665,000 at September 30, 2006 and September 30, 2005, respectively.
Non-Interest Income. Non-interest income increased $78,000 to $710,000 for the
nine months ended September 30, 2006, as compared with $632,000 for the nine
months ended September 30, 2005. Service charges on deposit accounts, which
represent a relatively stable and predictable source of non-interest income,
totaled $384,000 for the first nine months of 2006 as compared with $338,000 for
the first nine 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 $237,000 in the first nine months of 2006, an increase of $109,000
from the $128,000 earned during the first nine months of 2005.
Non-Interest Expenses. Non-interest expenses totaled $3,024,000 for the nine
months ended September 30, 2006, an increase of $902,000, or 42.5%, from total
non-interest expenses of $2,122,000 for the nine months ended September 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 $409,000 for income taxes during the nine months
ended September 30, 2006. The Bank had $513,000 in income tax expense for the
nine months ended September 30, 2005. The decrease in the effective tax rate
from 36.2% to 32.4% 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 deposits
with other banks, federal funds sold and investment securities classified as
available for sale) comprised 27.2% of our total assets at September 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 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 September 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 September 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 13.49%
o Total Capital as a Percentage of Risk-Adjusted Assets 14.74%
o Tier 1 Leverage Ratio 10.17%
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 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
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
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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
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: November 10, 2006 By: /s/ Norman B. Osborn
-------------------------------------
Norman B. Osborn
President and Chief Executive Officer
Date: November 10, 2006 By: /s/ Dora Kicklighter
-------------------------------------
Dora Kicklighter
Principal Accounting Officer
- 20 -