CNB Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. CNB is a Pennsylvania-based financial holding company whose principal businesses are community banking, wealth and asset management, and consumer lending through Holiday Financial Services. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $47.3 | $46.3 | $94.9 | $88.9 |
| Provision for credit losses | $2.4 | $2.9 | $3.7 | $4.5 |
| Non-interest income | $8.3 | $8.1 | $16.3 | $17.8 |
| Non-interest expense | $36.0 | $32.6 | $70.0 | $64.5 |
| Net income | $13.8 | $15.4 | $30.3 | $30.7 |
| Net income available to common shareholders | $12.8 | $14.4 | $28.2 | $28.5 |
| Diluted EPS | $0.61 | $0.85 | $1.33 | $1.69 |
Q2 total revenue (net interest income plus non-interest income) was $55.6 million, up from $54.4 million. Q2 net interest margin was 3.62% GAAP and 3.60% on a fully tax-equivalent basis, versus 3.74% and 3.73%, respectively, a year earlier. For the first six months, fully tax-equivalent margin was 3.69%, versus 3.61%. Q2 efficiency ratio rose to 64.78% from 59.89%.
- Balance sheet at June 30: Total assets $5.66 billion; loans $4.46 billion gross and $4.42 billion net; deposits $4.93 billion; shareholders’ equity $549.6 million.
- Growth and funding: Deposits increased 6.7% from year-end 2022, while loans excluding syndicated and remaining PPP balances grew 4.9% year to date. Noninterest-bearing demand deposits declined; savings and time deposits increased. Brokered deposits were $179.4 million, compared with $24.1 million at year-end, and reciprocal deposits were $463.4 million, compared with $4.6 million.
- Liquidity and debt: Cash and cash equivalents were $125.2 million. Management reported $2.31 billion of net available borrowing capacity and total on-hand and contingent liquidity equal to 2.4 times adjusted uninsured deposits. Short-term borrowings were zero, down from $132.4 million at year-end. Subordinated debentures and notes totaled approximately $104.7 million.
- Cash flows, six months: Operating activities provided $16.4 million; investing activities used $161.4 million, mainly reflecting loan growth; financing activities provided $163.9 million, including deposit growth and repayment of short-term borrowings. Cash increased $18.9 million.
- Capital and securities: Total risk-based capital ratio was 15.73%; common equity tier 1 was 11.20%. Tangible common equity to tangible assets was 7.97%. Unrealized losses on available-for-sale and held-to-maturity securities were approximately $94.8 million, or 17.3% of equity; management stated regulatory capital ratios would remain above well-capitalized thresholds if those losses were fully recognized.
Material changes versus comparable periods
- Q2 net income available to common shareholders fell 11%; diluted EPS declined from $0.85 to $0.61. Management attributed the EPS decline to higher deposit costs and dilution from the September 2022 common-stock offering, which issued 4.26 million shares.
- Interest income rose with loan growth and higher rates, but deposit and other funding costs increased sharply. Q2 interest expense was $25.1 million, versus $3.4 million a year earlier; the cost of interest-bearing liabilities increased to 2.40% from 0.35%.
- Six-month net interest income increased 6.7%, but higher operating expenses and lower non-interest income offset much of the improvement. Technology expense was a key contributor to expense growth.
- Loans grew in expansion markets including Cleveland, Roanoke, and Buffalo. Nonperforming assets were $24.1 million, or 0.43% of assets, versus $23.5 million and 0.43% at year-end. The allowance was 1.02% of loans.
Outlook, risks and contingencies
- No specific earnings, margin, loan-growth, or other quantitative guidance is provided. Management expects expenses to rise with growth, while stating its growth strategy is expected to increase earning assets and revenue sufficiently to offset expense increases in 2023 and beyond.
- Management highlighted uncertainty from economic conditions, inflation, higher interest rates, tighter credit, deposit competition, and banking-industry stresses. The filing warns that deposit outflows, funding-cost increases, weaker liquidity or capital markets, and potential regulatory changes could adversely affect results.
- Interest-rate sensitivity modeling showed estimated one-year net interest income changes of +2.0% for a 100-basis-point rise, +0.1% for a 200-basis-point rise, and -2.1% for a 300-basis-point rise; declines of 100, 200, and 300 basis points indicated -4.8%, -7.8%, and -14.0%, respectively. Management cautioned that actual results may differ.
- Commercial office loans totaled $118.1 million (2.6% of loans); three customer relationships totaling $1.8 million were on nonaccrual. Management said none were classified by regulators as high-volatility commercial real estate loans.
- Modified loans to borrowers experiencing financial difficulty totaled $18.4 million for the six-month period; $1.5 million of modified construction/land-development loans were past due over 89 days. Management cited continued macroeconomic uncertainty in estimating expected credit losses.
- Off-balance-sheet commitments included variable-rate commitments to extend credit of $474.0 million, unused variable-rate lines of $764.5 million, and standby letters of credit totaling approximately $18.4 million. Management said ordinary-course litigation is not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether deposit pricing and funding mix stabilize, particularly given the sharp increase in interest expense and brokered and reciprocal deposits.
- Whether loan growth continues without deterioration in delinquency, criticized-loan, nonaccrual, or charge-off trends, including in commercial real estate and expansion markets.
- How securities-related unrealized losses, deposit behavior, and the availability of contingent funding affect liquidity and capital under stress.
- Whether technology and other operating-cost increases translate into the revenue growth management anticipates, and whether margins and efficiency recover.
- Confirm the status and cost of the share-repurchase plan, which had 273,541 shares remaining under authorization at June 30, 2023.