CNB Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless noted otherwise, amounts below are in millions of dollars. CNB is a regional bank serving markets in Pennsylvania, Ohio, and western New York.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $34.7 | $29.9 | $94.6 | $86.5 |
| Provision for loan losses | $3.3 | $2.1 | $12.1 | $5.2 |
| Non-interest income | $6.8 | $6.3 | $20.1 | $19.2 |
| Non-interest expense | $28.4 | $21.4 | $72.3 | $64.6 |
| Net income | $7.8 | $10.4 | $24.8 | $29.6 |
| Diluted earnings per share | $0.47 | $0.68 | $1.57 | $1.94 |
- Total revenue (net interest income plus non-interest income) was $41.4 million in Q3, up 14.6%, and $114.7 million for the first nine months, up 8.5% year over year.
- Fully tax-equivalent net interest margin was 3.15% in Q3 and 3.25% year to date, versus 3.72% and 3.75% a year earlier. Excluding PPP-related assets and processing fees, reported adjusted margin was 3.50% for both 2020 periods.
- At September 30, total assets were $4.73 billion, net loans $3.32 billion, deposits $4.02 billion, and shareholders’ equity $415.9 million. Deposits were up 29.7% from year-end 2019; loans increased about $541.8 million.
- Cash and cash equivalents were $555.9 million, compared with $193.0 million at year-end. For the first nine months, operating cash flow was $19.4 million, investing cash outflow $150.4 million, and financing cash inflow $493.9 million.
- Borrowings included $169.3 million of FHLB and other long-term borrowings and $70.6 million of subordinated debentures. Management reported approximately $488 million of FHLB borrowing capacity.
- Allowance for loan losses was $26.9 million, or 0.80% of loans (0.86% excluding PPP loans and deferred fees), versus $19.5 million and 0.69% at year-end. Annualized net charge-offs were 0.20%. Nonperforming assets were $28.0 million, or 0.59% of total assets.
- Regulatory capital ratios included a 14.51% total risk-based capital ratio, 12.05% Tier 1 capital ratio, 9.57% common equity Tier 1 ratio, and 8.39% leverage ratio. Tangible common equity to tangible assets was 6.67% as reported, or 7.00% excluding PPP-related loans.
Material changes versus the prior period
- GAAP net income fell 24.8% in Q3 and 16.1% year to date. Results included $4.7 million of Q3 and $5.2 million of nine-month merger, FHLB prepayment, and branch-closure costs. After-tax, these items reduced earnings by approximately $3.8 million ($0.23 per diluted share) in Q3 and $4.3 million ($0.27 per share) year to date. Excluding those items, diluted EPS was $0.70 in Q3 versus $0.68, and $1.85 year to date versus $1.94.
- Net interest income increased with asset growth, while lower market rates reduced asset yields and margin. Lower deposit costs partially offset that pressure.
- The July 17 acquisition of Bank of Akron added approximately $319.1 million of loans and $419.5 million of deposits. Consideration was approximately $40.8 million; the preliminary purchase accounting recorded $6.0 million of goodwill. Purchase valuations remained subject to final adjustments.
- CNB issued $57.8 million net of costs of 7.125% Series A perpetual preferred stock. It also raised $3.3 million net through common stock issuance; its ATM program was terminated during Q2.
Outlook, management commentary, risks, and unusual items
- Management gave no quantified earnings or financial guidance. It noted that expenses are expected to rise with growth, while its growth strategy is expected to expand earning assets and non-interest income; it expects those gains to more than offset expense increases.
- COVID-19 remains a major source of uncertainty. As of October 31, 2020, 250 loans totaling $169.3 million had remaining payment deferrals. At September 30, CNB reported about $231 million of PPP loans across 2,044 relationships, with approximately $8.5 million of deferred processing fees. The company recognized $683,000 of PPP fees during the first nine months.
- Management identified hotels/motels ($203 million) and restaurants/fast food ($29.7 million) as potentially higher-risk sectors, excluding PPP loans. It cited possible further credit deterioration, additional provisioning, collateral-value declines, liquidity pressure, and operational or cyber risks if the pandemic persists.
- Provision expense increased substantially year over year, reflecting updated economic and COVID-related reserve factors; the COVID-specific qualitative reserve factor was approximately $1.7 million. Management considered the allowance adequate for probable incurred losses. Nonaccrual loans totaled $26.8 million; the increase in nonperforming assets was driven in part by a commercial real estate relationship of approximately $9.7 million.
- CNB delayed adoption of the expected-credit-loss standard under CARES Act relief and estimated prior to adoption that the allowance could increase approximately 20%–30%; the final adjustment may differ.
- Management said liquidity was acceptable and reported excess cash at the Federal Reserve of approximately $509 million. No material negative liquidity impact from COVID-19 had occurred through the first nine months, but management warned that the pandemic could create future pressure.
- Management’s interest-rate model estimated one-year net interest income changes of -3.3% and -5.7% under 100- and 200-basis-point declines, and -3.5% to -3.6% under 300- to 400-basis-point increases. These are model scenarios, not forecasts.
- The filing reported no material changes to previously disclosed risk factors and no pending material legal proceedings, other than routine matters.
Investor verification points
- Track loan deferrals, PPP forgiveness and fee recognition, and subsequent credit performance in COVID-sensitive industries.
- Review trends in nonperforming assets, criticized commercial loans, charge-offs, and allowance coverage as economic conditions evolve.
- Separate recurring operating performance from acquisition, branch-closure, and debt-prepayment costs; compare adjusted measures with GAAP results.
- Monitor post-acquisition integration, final Bank of Akron purchase accounting, and whether expected synergies or costs differ from management’s assumptions.
- Assess the durability of deposit growth, excess liquidity, net interest margin, and capital ratios as PPP balances and unusually high cash levels change.