CNB Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in millions unless otherwise stated. CNB is a regional banking company operating across Pennsylvania, Ohio, New York, and Virginia.
Financial performance
- Third quarter: Net interest income was $40.3 million and non-interest income was $8.4 million, for total revenue of $48.7 million. Net income was $14.9 million; net income available to common shareholders was $13.8 million. Diluted EPS was $0.82, versus $0.47 a year earlier. Common dividends were $0.17 per share.
- First nine months: Net interest income was $117.7 million, non-interest income $24.5 million, and total revenue $142.2 million. Net income was $43.1 million; common-shareholder income was $39.9 million. Diluted EPS was $2.36, versus $1.57 in 2020.
- Margins and efficiency: Fully tax-equivalent net interest margin was 3.30% for Q3 and 3.37% for the first nine months, compared with 3.15% and 3.25%, respectively, in 2020. The efficiency ratio was 59.47% for Q3 and 58.53% year to date.
- Credit costs: Credit-loss provision was $1.1 million in Q3 and $5.2 million year to date, compared with $3.3 million and $12.1 million in the comparable 2020 periods. Net charge-offs were $2.3 million year to date, versus $4.7 million.
- Cash flow: For the first nine months, operating activities provided $38.7 million, investing activities used $317.7 million, and financing activities provided $483.4 million. Cash and cash equivalents increased $204.4 million to $737.1 million.
Financial position and liquidity
- Total assets were $5.25 billion at September 30, up from $4.73 billion at year-end 2020. Loans were $3.51 billion, up approximately $139 million; deposits were $4.59 billion, up 9.8% from year-end.
- Cash and cash equivalents were $737.1 million, including $682.5 million of excess liquidity at the Federal Reserve. Management said liquidity needs were adequately supported by cash, deposits, available securities and loan maturities, and borrowing capacity.
- Shareholders’ equity was $437.7 million, compared with $416.1 million at year-end. Regulatory capital ratios included a 16.76% total risk-based capital ratio and a 9.80% common equity tier 1 ratio. Tangible book value per common share, a non-GAAP measure, was $19.87.
- Subordinated notes and debentures totaled $154.2 million, up from $70.6 million at year-end, following issuance of $85 million of 3.25% fixed-to-floating-rate notes due 2031. There were no FHLB advances at quarter-end; available FHLB borrowing capacity was about $879 million.
Material changes and management commentary
- Q3 net income increased 91.5% year over year; nine-month net income increased 73.4%. Management attributed stronger results principally to growth in earning assets, loan growth, lower deposit costs, higher net interest margin, and increased fee income.
- Prior-year comparisons included merger, prepayment-penalty, and branch-closure costs of $4.7 million in Q3 and $5.2 million for the first nine months of 2020; there were none in 2021. The Bank of Akron acquisition, completed in July 2020, also affects comparability.
- PPP loans outstanding were $89.2 million before deferred fees; $6.8 million of PPP processing fees were recognized in the first nine months. Excluding PPP loans and deferred fees, management reported 6.5% loan growth from year-end 2020.
- Non-interest expense rose 16.1% year over year for the first nine months, including higher salaries and benefits and technology spending. Management said growth strategies were expected to increase expenses but also earning assets and revenue, which it expected to more than offset higher costs. No specific earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Management emphasized uncertainty from COVID-19, including possible effects on customers, regional economies, credit quality, and financial markets. Hotels and motels ($199.7 million, or 5.8% of loans excluding PPP) and restaurants/fast food ($31.2 million, or 0.9%) were identified as potentially higher-risk industries.
- Loans with payment deferrals totaled $24.0 million, or 0.7% of loans, at quarter-end. The company expected most to resume regular payments by year-end 2021. Nonperforming assets were $22.1 million, or 0.42% of assets; the allowance was 1.06% of loans, or 1.09% excluding PPP-related loans.
- Interest-rate risk, deposit attrition, competition, credit deterioration, and the adequacy of the credit-loss allowance remain risks. Management noted that modeled interest-rate scenarios were within policy limits, but actual results could differ materially from model estimates.
- On October 15, 2021, after quarter-end, CNB redeemed all $50 million of its 5.75% subordinated notes due 2026 for $50.7 million, including accrued interest, using cash on hand, including proceeds from the 2031 notes.
- The filing reported no material changes to previously disclosed risk factors and no material pending legal proceedings other than routine matters.
Important facts for investors to verify
- Whether loan growth, fee income, and margin performance can be sustained as PPP-related fees run off and excess liquidity remains elevated.
- Trends in deferred-payment loans, criticized and nonperforming credits, commercial real-estate exposures, and the allowance for credit losses.
- The impact of ongoing technology and staffing investment on expenses and efficiency.
- Post-redemption subordinated debt, capital ratios, and liquidity after use of cash to retire the 2026 notes.
- How COVID-19, economic conditions, and interest-rate changes affect borrowers, deposits, funding costs, and future earnings.